INTRODUCTION Definition an attributes of a corporation

A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence. A corporation, being a creature of law, "owes its life to the state, its birth being purely dependent on its will," it is "a creature without any existence until it has received the imprimatur of the state acting according to law." A corporation will have no rights and privileges of a higher priority than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs. (Tanyag v. Benguet Corporation) A corporation has four (4) attributes (!) ($) (&) (4) "t is an artificial being# %reated by operation of law# 'ith right of succession# (as the powers, attributes, and properties as expressly authorized by law or incident to its existence.

CLASSIFICATION OF PRIVATE CORPORATIONS Stock !" Non-Stock Corporations

Stock Definition Non-Stock

%orporations which have capital stoc) All other private corporations (*&) divided into shares and are authorized to distribute to the +ne where no part of its income is holders of shares dividends or distributable as dividends to its allotments of the surplus profits on the members, trustees or officers. (*,-) basis of the shares (*&) .rimarily to ma)e profits for its shareholders /ay be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic service, or similar purposes li)e trade, industry, agricultural and li)e chambers, or any combination thereof. (*,,) 'hatever incidental profit made is not distributed among its members but is

Purpose

Distribution of Profits

.rofit is distributed to shareholders

used for furtherance of its purpose. A+" or by0laws may provide for the distribution of its assets among its members upon its dissolution. 1efore then, no profit may be made by members. Co#position Scope of ri$%t to !ote 2toc)holders 3ach stoc)holder votes according to the proportion of his shares in the corporation. 4o shares may be deprived of voting rights except those classified and issued as "preferred" or "redeemable" shares, and as otherwise provided by the %ode. (2ec. 5) /ay be denied by the A+" or the by0 laws. (2ec. ,8) /ay be authorized by the by0laws, with the approval of and under the conditions prescribed by the 23%. (2ec. ,8) /embers 3ach member, regardless of class, is entitled to one (!) vote 647322 such right to vote has been limited, broadened, or denied in the A+" or by0 laws. (2ec. ,8)

Votin$ b& pro'& Votin$ b& #ai(

%annot be denied. (2ec. 9,) 4ot possible.

)%o e'ercises Corporate 1oard of :irectors or ;rustees Po*ers +,.o!ernin$ /oar

/embers of the corporation

1oard of :irectors or ;rustees, 1oard of ;rustees, which may consist consisting of 90!9 directors < trustees. of more than !9 trustees unless otherwise provided by the A+" or by0 laws. (Sec, 92) or :irectors < trustees shall hold office for 1oard classified in such a way that the ! year and until their successors are term of office of !<& of their number elected and =ualified (2ec. $&). shall expire every year. 2ubse=uent elections of trustees comprising !<& of the board shall be held annually, and trustees so elected shall have a term of & years. (Sec. 92) +fficers are elected by the 1oard of :irectors (2ec. $9), except in close corporations where the stoc)holders themselves may elect the officers. (2ec. 8-) +fficers may directly elected by the members 647322 the A+" or by0laws provide otherwise. (2ec. 8$)

Ter# of trustees

irectors

E(ection of officers

P(ace of #eetin$s

Any place within the .hilippines, if >enerally, the meetings must be held provided for by the by0laws (2ec. 8&) at the principal office of the corporation, if practicable. "f not, then anyplace in the city or municipality where the principal office of the corporation is located. (2ec. 9!)

Transferabi(it& of interest ;ransferable. or #e#bers%ip

>enerally non0transferable since membership and all rights arising therefrom are personal. (owever, the A+" or by0laws can provide otherwise. (2ec. 8?) See Sec. 94.

Distribution of assets in case of isso(ution

CIR VS. CLUB FILIPINO (5 SCRA 321; 1962) FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar restaurant, which is incident to the operation of the club and its gold course. The club is operated mainly with funds derived from membership fees and dues. The !" see#s to tax the said restaurant as a business. $%&': The Club was organi(ed to develop and cultivate sports of all class and denomination for the healthful recreation and entertainment of its stoc#holders and members. There was in fact, no cash dividend distribution to its stoc#holders and whatever was derived on retail from its bar and restaurants used were to defray its overhead expenses and to improve its golf course. For a stoc# corporation to exist, ) re*uisites must be complied with: +,- a capital stoc# divided into shares +)- an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. !n the case at bar, nowhere in the A.! or by/laws of Club Filipino could be found an authority for the distribution of its dividends or surplus profits.

FOR0ATION AND OR.ANI1ATION OF CORPORATION Re3uire#ents in t%e for#ation of a corporation

)%o #a& for# a corporation (See SEC. 10) INCORPORATORS Definition RE2UIRE0ENTS stoc)holders or members mentioned in the articles of incorporation as originally forming and composing the corporation and who are signatories thereof stoc)holders or members mentioned in the articles of incorporation as originally forming CO00ENTS compare with %orporators which include all stoc)holders or members, whether incorporators or @oining the corporation after its incorporation.

and composing the corporation and who are signatories thereof C%aracteristic natural persons excludes corporations and partnerships may be more than !9 for non0stoc) corp. except educational corp. does not prevent the Aone0man (person) corporationB wherein the other incorporators may have only nominal ownership of only one share of stoc)# not necessarily illegal

Nu#ber

not less than 9# not more than !9

A$e Resi ence

of legal age ma@ority should be residents of the .hilippines residence a re=uirement# citizenship re=uirement only in certain areas such as public utilities, retail trade ban)s, investment houses, savings and loan associations, schools

Steps in t%e for#ation of a corporation

Mutual Agreement to perform certain acts required for organizing a corporation

,/ )/ 0/ 1/ 2/

+rganize and establish a corporation %omply with re=uirements of corporation code %ontribute capital<resources /ode of use of capital<resource and control<management of capital<resource distribution<disposition of capital<resource (embodied in constitutive documents)

STEPS a" Pro#otiona( Sta$e 4See SEC" ," Definitions5 Promoter

CO00ENTS

brings together persons who become interested in the enterprise aids in procuring subscriptions and sets in motion the machinery which leads to the formation of the corporation itself formulates the necessary initial business and financial plans and, if necessary, buys the rights and property which the business may need, with the understanding that the corporation when formed, shall ta)e over the same.

b. Draftin$ artic(es of incorporation

(2ee 23%. !4) c" Fi(in$ of artic(es6 pa&#ent of fees"

4see c%art be(o*5

A+" C the treasurerDs affidavit duly signed C ac)nowledged must be filed w< the 23% C the corresponding fees paid failure to file the A+" will prevent due incorporation of the proposed corporation C will not give rise to its @uridical personality. "t will not even be a de facto corp. 6nder present 23% rules, the A+" once filed , will be published in the 23% 'ee)ly 1ulletin at the expense of the corp. (23% %ircular E 4, !8,$).

" E'a#ination of artic(es6 appro!a( or re7ection b& SEC"

Process a) 23% shall examine them in order to determine whether they are in conformity w< law. b) "f not, the 23% must give the incorporators a reasonable time w<in w<c to correct or modify the ob@ectionable portions. Grounds for re ection or disappro!al of A"#$ a) A+" <amendment not substantially in accordance w< the form prescribed b) purpose<s are patently unconstitutional, illegal, immoral, or contrary to government rules C regulations# c) ;reasurerDs Affidavit is false# d) re=uired percentage of ownership has not been complied with (2ec. !-) e) corp.Ds establishment, organization or operation will not be consistent w< the declared national economic policies (to be determined by the 23%, after consultation w< 1+", 43:A or any appropriate government agency 00 .: 8?$0A as amended by .: !-9,, 2ec. 5 ())) :ecisions of the 23% disapproving or re@ecting A+" may be appealed to the %A by petition for review in accordance w< the F+%.

e" Issuance of certificate of incorporation"

Certificate of Incorporation *i(( be issue if8 a) 23% is satisfied that all legal re=uirements have been complied with# and b) there are no reasons for re@ecting or disapproving the A+".

"t is only upon such issuance that the corporation ac=uires @uridical personality. (2ee 2ec. !8. %ommencement of corporate existence) 2hould it be subse=uently found that the incorporators were guilty of fraud in procuring the certificate of incorporation, the same may be revo)ed by the 23%, after proper notice C hearing.

%. &rafting articles of incorporation (See SEC. 1')

CONTENTS OF AOI Corporate Na#e CO00ENTS

3ssential to its existence since it is through it that the corporation can sue and be sued and perform all legal acts A corporate name shall be disallowed by the 23% if the proposed name is either (!) identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law# or patently deceptive, confusing or contrary to existing laws. (2ec. !,)

($)

L9CEU0 OF T:E P:ILS" VS" CA (219 SCRA 610) ;he policy underlying the prohibition against the registration of a corporate name which is Aidentical or deceptively or confusingly similarB to that of any existing corporation or which is Apatently deceptive or patently confusingB or Acontrary to existing laws is !. the avoidance of fraud upon the public which would have occasion to deal with the entity concerned# $. the prevention of evasion of legal obligations and duties, and &. the reduction of difficulties of administration and supervision over corporations. Purpose C(ause

A corporation can only have one (!) primary purpose. (owever, it can have several secondary purposes. A corporation has only such powers as are expressly granted to it by law C by its articles of incorporation, those which may be incidental to such conferred powers , those reasonably necessary

to accomplish its purposes C those which may be incident to its existence. %orporation may not be formed for the purpose of practicing a profession li)e law, medicine or accountancy

Principa( Office

must be within the .hilippines specify city or province street<number not necessary important in determining venue in an action by or against the corp., or on determining the province where a chattel mortgage of shares should be registered cannot specify term which is longer than 9? years at a time may be renewed for another 9? years, but not earlier than 9 years prior to the original or subse=uent expiry date 647322 there are @ustifiable reasons for an earlier extension. names, nationalities C residences of the incorporators# names, nationalities C residences of the directors or trustees who will act as such until the first regular directors or trustees are elected# treasurer who has been chosen by the pre0incorporation subscribers<members to receive on behalf of the corporation, all subscriptions <contributions paid by them. amount of its authorized capital stoc) in lawful money of the .hilippines number of shares into which it is divided in case the shares are par value shares, the par value of each, names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated for a non0stoc) corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each $9G of $9G rule to be certified by ;reasurer paid up capital should not be less than .9,??? %lasses of shares into w<c the shares of stoc) have been divided# preferences of C restrictions on any such class# and any denial or restriction of the pre0emptive right of stoc)holders should also be expressly stated in said articles. "f the corporation is engaged in a wholly or partially nationalized business or activity, the A+" must contain a prohibition against a transfer of stoc) which would reduce the Hilipino ownership of its stoc) to less than the re=uired minimum.

Ter# of E'istence

Incorporators an Directors

Capita( Stock

Ot%er #atters

An& corporation #a& be incorporate as a c(ose corporation; e'cept8 a) mining or oil companies# b) stoc) exchanges# c) ban)s# d) insurance companies# e) public utilities# f) educational institutions# C g) corporations declared to be vested w< public interest

De Facto Corporations8 Re3uisites (ser of Corporate Po)ers

)%at is a < e facto= corporation> A Ide factoD corporation is a defectively organized corporation, which has all the powers and liabilities of a Ide @ureD corporation and, except as to the 2tate, has a @uridical personality distinct and separate from its shareholders, provided that the following re=uisites are concurrently present (!) ;hat there is an apparently valid statute under which the corporation with its purposes may be formed# ($) ;hat there has been colorable compliance with the legal re=uirements in good faith# and, (&) ;hat there has been use of corporate powers, i.e., the transaction of business in some way as if it were a corporation. Can a corporation transact business as a < e facto= corporation *%i(e app(ication is sti(( pen in$ *it% SEC> 4o. "n the case of (all v. .iccio ( 86 P i!. 60"# 19$0), where the supposed corporation transacted business as a corporation pending action by the 23% on its articles of incorporation, the %ourt held that there was no Ide factoD corporation on the ground that the corporation cannot claim to be in Igood faithD to be a corporation when it has not yet obtained its certificate of incorporation.

*ormation under apparentl+ !alid statute.

MUNICIPALITY OF MALABANG V. BENITO +29 SCRA 533; 1969) 3.4 a corporation organi(ed under a statute subse*uently declared void ac*uires status as 5de facto6 corporation.

4o. A corporation organi(ed under a statute subse*uently declared invalid cannot ac*uire the status of a 5de facto6 corporation unless there is some other statute under which the supposed corporation may be validly organi(ed. $ence, in the case at bar, the mere fact that the municipality was organi(ed before the statute had been invalidated cannot conceivably ma#e it a 5de facto6 corporation since there is no other valid statute to give color of authority to its creation.

Colora%le compliance )it, t,e legal requirements in good fait,.

BERGERON V. HOBBS +71 N.W. 1056, 65 Am. St. Rep. 85) The constitutive documents of the proposed corporation were deposited with the "egister of 'eeds but not on file in said office. .ne of the re*uirements for valid incorporation is the filing of constitutive documents in the "egister of 'eeds. 3as there 5colorable6 compliance enough to give the supposed corporation at least the status of a 5de facto6 corporation7 4o. The filing of the constitutive documents in the "egister of 'eeds is a condition precedent to the right to act as a corporate body. As long as an act, re*uired as a condition precedent, remains undone, no immunity from individual liability is secured. HARRIL V. DAVIS +168 F. 187; 1909) The constitutive documents were filed with the cler# of the Court of Appeals but not with the cler# of court in the 8udicial district where the business was located. Ar#ansas law re*uires filing in both offices. 3as there 5colorable6 compliance enough to give the supposed corporation at least the status of a 5de facto6 corporation7 4o. 4either the hope, the belief, nor the statement by parties that they are incorporated, nor the signing of the articles of incorporation which are not filed, where filing is re*uisite to create the corporation, nor the use of the pretended franchise of the nonexistent corporation, will constitute such a corporation de facto as will exempt those who actively and #nowingly use s name to incur legal obligations from their individual liability to pay them. There could be no incorporation or color of it under the law until the articles were filed +re*uisites for valid incorporation-.

HALL v. PICCIO +29 SCRA 533; 1969) !n the case of $all v. 9iccio, where the supposed corporation transacted business as a corporation pending action by the S%C on its articles of incorporation, the Court held that there was no 5de facto6 corporation on the ground that the corporation cannot claim to be in 5good faith6 to be a corporation when it has not yet obtained its certificate of incorporation.
NOTE8 ;he validity of incorporation cannot be in=uired into collaterally in any private suit to which such corporation may be a party. 2uch in=uiry must be through a =uo warranto proceeding made by the 2olicitor >eneral. (2ec. $?)

CORPORATION /9 ESTOPPEL +Sec. 21)

Distin$uis% a e facto corporation fro# a corporation b& estoppe("
;he Ide factoD doctrine differs from the estoppel doctrine in that where all the re=uisites of a Ide factoD corporation are present, then the defectively organized corporation will have the status of a Ide @ureD corporation in all cases brought by and against it, except only as to the 2tate in a direct proceeding. +n the other hand, if any of the re=uisites are absent, then the estoppel doctrine can apply only if under the circumstances of the particular case then before the court, either the defendant association is estopped from defending on the ground of lac) of capacity to be sued, or the defendant third party had dealt with the plaintiff as a corporation and is deemed to have admitted its existence.

(:e facto J has status of Ide @ureD corpo, except separate personality against 2tate, provided all re=uisites are present)

)%at are t%e effects of a Corporation b& Estoppe( in suits brou$%t8

(!) a$ainst t%e Corporation> %onsidered a corporation in suits brought against it if it held itself out as such and denies capacity to be sued# ($) a$ainst t%ir part&> ;hird party cannot deny existence of corporation if it dealt with it as such.

EMPIRE vs. STUART +46 Mich. 482, 9 N.W. 527; 1881) Company was sued on a promissory note. !ts defense was that at the time of its issuance, it was defectively organi(ed and therefore could not be sued as such. The Corporation cannot repudiate the transaction or evade responsibility when sued thereon by setting up its own mista#e affecting the original organi(ation.

LOWELL-WOODWARD vs. WOODS +104 !". 729; 1919) Corporation sued a partnership on a promissory note. The latter as defense alleged that the plaintiff was not a corporation. .ne who enters into a contract with a party described therein as a corporation is precluded, in an action brought thereon by such party under the same designation, from denying its corporate existence.

ASIA BANKING VS STANDARD PRODUCTS +46 #hi$. 145; 1924) The corporation sued another corporation a promissory note. The defense was that the plaintiff was not able to prove the corporate existence of both parties. The defendant is estopped from denying its own corporate existence. !t is also estopped from denying the other6s corporate existence. The general rule is that in the absence of fraud, a person who has contracted or otherwise dealt with an association is such a way as to recogni(e and in effect admit its legal existence as a corporate body is thereby estopped from denying its corporate existence. CRANSON VS IBM +234 M%. 477, 200 A. 2% 33 ; 1964) ! : sued Cranson in his personal capacity regarding a typewriter bought by him as 9resident of a defectively organi(ed company whose Articles were not yet filed when the obligation was contracted. ! :, having dealt with the defectively organi(ed company as if it were properly organi(ed and having relied on its credit instead of Cranson6s, is estopped from asserting that it was not incorporated. !t cannot sue Cranson personally. SALVATIERRA VS GARLITOS +103 #hi$. 757; 1958) Salvatierra leased his land to the corporation. $e filed a suit for accounting, rescission and damages against the corporation and its president for his share of the produce. ;udgment against both was obtained. 9resident complains for being held personally liable. $e is liable. An agent who acts for a non/existent principal is himself the principal. !n acting on behalf of a corporation which he #new to be unregistered, he assumed the ris# arising from the transaction. ALBERT VS UNIVERSITY PUBLISHING CO., INC. +&!". 30, 1965)

:ariano Albert entered into a contract with <niversity 9ublishing Co., !nc. through ;ose :. Aruego, its 9resident, whereby <niversity would pay plaintiff for the exclusive right to publish his revised Commentaries on the "evised 9enal Code. The contract stipulated that failure to pay one installment would render the rest of the payments due. 3hen <niversity failed to pay the second installment, Albert sued for collection and won. $owever, upon execution, it was found that <niversity was not registered with the S%C. Albert petitioned for a writ of execution against ;ose :. Aruego as the real defendant. <niversity opposed, on the ground that Aruego was not a party to the case. The Supreme Court found that Aruego represented a non/existent entity and induced not only Albert but the court to believe in such representation. Aruego, acting as representative of such non/existent principal, was the real party to the contract sued upon, and thus assumed such privileges and obligations and became personally liable for the contract entered into or for other acts performed as such agent. The Supreme Court li#ewise held that the doctrine of corporation by estoppel cannot be set up against Albert since it was Aruego who had induced him to act upon his +Aruego=s- willful representation that <niversity had been duly organi(ed and was existing under the law.

/9-LA)S 4Sec" @A B @C5

)%en a opte 8 4a5 officia( Fe=uirement No (ater t%an one 4?5 #ont% after receipt fro# SEC notice of issuance of Cert" of incorporation" of

Affirmative vote of stoc)holders representing at least ma@ority of outstanding capital stoc) (2toc) %orp.) or members (4on02toc)) /ust be signed by stoc)holders or members voting for them

+b- Prior to incorporation

Fe=uirement )%ere kept8 )%en effecti!e8 Approval of all incorporators# must be signed by all of them

(!) "n the principal office of the corporation # and ($) 2ecurities and 3xchange %ommission +nly upon the 23%Ds issuance of a certification that the by0laws are not inconsistent with the %orporation %ode.

Specia( corporations8 1y0laws and<or amendments thereto must be accompanied by a certificate of the appropriate government agency to the effect that such by0laws < amendments are in accordance with law.

ban)s or ban)ing institutions building and loan associations trust companies insurance companies public utilities educational institutions other special corporations governed by special laws

Contents of /&-(a*s 0 2ub@ect to the provisions of the %onstitution, this %ode, other special laws, and the articles of incorporation, a private corporation may provide in its by0laws for !) $) &) 4) 9) 5) -) ,) 8) the time, place and manner of calling and conducting regular or special meetings of the directors or trustees# the time and manner of calling and conducting regular and special meetings of the stoc)holders or members# the re=uired =uorum in meetings of stoc)holders or members and the manner of voting herein# the form for proxies of stoc)holders and members and the manner of voting them# the =ualifications, duties and compensation of directors or trustees, employees# officers and

the time for holding the annual election of directors or trustees and the mode or manner of giving notice thereof# the manner of election or appointment and the term of office of all officers other than directors or trustees# the penalties for violation of the by0laws# in the case of stoc) corporations, the manner of issuing certificates# and

!?) such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.

FLEISCHER V. BOTICA NOLASCO CO. +47 #hi$. 583; 1925) As a general rule, the by/laws of a corporation are valid if they are reasonable and calculated to carry into effect the ob8ective of the corporation and are not contradictory to the general policy of the laws of the land. <nder a statute authori(ing by/laws for the transfer of stoc#, a corp. can do no more than prescribe a general mode of transfer on the corp. boo#s and cannot 8ustify an restriction upon the right of sale. GOVT. OF P.I. V. EL HOGAR '( ! p)*+i(i*" i" the ,-.$!/( !$$*/i"0 the 12%, ,- +*te *3 !,(*$4te m!5*)it-, t* c!"ce$ (h!)e( +!$i67

4o. !t is a patent nullity, being in direct conflict with Sec. ,>? of the Corp. &aw which prohibits forced surrender of unmatured stoc#s except in case of dissolution. '( ! p)*+i(i*" i" the ,-.$!/( 3i8i"0 the (!$!)- *3 6i)ect*)( +!$i67 @es. Since the Corporation &aw does not prescribe the rate of compensation, the power to fix compensation lies with the corporation. '( ! p)*+i(i*" )e94i)i"0 pe)(*"( e$ecte6 t* the 1*!)6 *3 %i)ect*)( t* */" !t $e!(t # 5,000 (h!)e( +!$i67 @es. The Corporation &aw gives the corporation the power to provide *ualifications of its directors. CITIBANK, N.A. v. CHUA (220 SCRA 75) 3here the S%C grants a license to a foreign corporation, it is deemed to have approved its foreign/enacted by/laws. Sec. 1A of the Corporation Code which states that by/laws are not valid without S%C approval applies only to domestic corporations. A board resolution appointing an attorney/in/fact to represent the corporation during pre/ trial is not necessary where the by/laws authori(e an officer of the corporation to ma#e such appointment.

LOYOLA GRAND VILLAS v. CA (276 SCRA 681) !SS<%: 3hether the failure of a corporation to file its by/laws within one +,- month from the date of its incorporation, as mandated by Art. 1A of the Corporation Code, results in the corporation=s automatic dissolution. "<&!4B: 4o. Failure to file by/laws does not result in the automatic dissolution of the corporation. !t only constitutes a ground for such dissolution. +C3. Ch4"0 ! 1i* +. 'AC, 163 SCRA 534) !ncorporators must be given the chance to explain their neglect or omission and remedy the same.

T:E CORPORATE ENTIT9 T%e T%eor& of Corporate Entit&

)%en oes t%e corporation=s e'istence as a (e$a( entit& co##ence>

6pon issuance by the 23% of the certificate of incorporation (2ec. !8)

)%at ri$%ts oes t%e corporation ac3uire>

;he right to !) $) &) 4) sue and be sued# hold property in its own name# enter into contracts with third persons# C perform all other legal acts.

2ince corporate property is owned by the corporation as a @uridical person, the stoc)holders have no claim on it as owners, but have merely an expectancy or inchoate right to the same should any of it remain upon the dissolution of the corporation after all corporate creditors have been paid. %onversely, a corporation has no interest in the individual property of its stoc)holders, unless transferred to the corporation. Femember that the liability of the stoc)holders is limited to the amount of shares.

SAN JUAN STRUCTURAL & STEEL FABRICATORS v. CA (296 SCRA 631) A corporation is a 8uridical person separate and distinct from its stoc#holders or members. Accordingly, the property of the corporation is not the property of its stoc#holders or members and may not be sold by the stoc#holders or members without express authori(ation from the corporation=s oard of 'irectors. !n this case, the sale of a piece of land belonging to :otorich Corporation by the corporation treasurer +Bruenberg- was held to be invalid in the absence of evidence that said corporate treasurer was authori(ed to enter into the contract of sale, or that the said contract was ratified by :otorich. %ven though Bruenberg and her husband owned CC.>AAD of :otorich, her act could not bind the corporation since she was not the sole controlling stoc#holder. STOCKHOLDERS OF F. GUAN ON V. REGISTER OF DEEDS (6 SCRA 373) 9roperties registered in the name of the corporation are owned by it as an entity separate and distinct from its members. 3hile shares of stoc# constitute personal property, they do not represent property of the corporation. A share of stoc# only typifies an ali*uot part of the corporation=s property or the right to share in its proceeds to that extent when distributed according to law and e*uity, but its holder is not the owner of any part of the capital of the corporation. 4or is he entitled to the possession of any definite portion of its property or assets. The act of li*uidation made by the stoc#holders of the corp of the latter6s assets is not and cannot be considered a partition of community property, but rather a transfer or conveyance of the title of its assets to the individual stoc#holders. Since the purpose of the li*uidation, as well as the distribution of the assets, is to transfer their title from the corporation to the stoc#holders in proportion to their shareholdings, that transfer cannot be effected without the corresponding deed of conveyance from the corporation to the stoc#holders. !t is, therefore, fair and logical to consider the certificate of li*uidation as one in the nature of a transfer or conveyance.

CARAM V. CA +151 SCRA 373; 1987) The case of the unpaid compensation for the preparation of the pro8ect study. The petitioners were not involved in the initial stages of the organi(ation of the airline. They were merely among the financiers whose interest was to be invited and who were in fact persuaded, on the strength of the pro8ect study, to invest in the proposed airline. There was no showing that the Airline was a fictitious corp and did not have a separate 8uridical personality to 8ustify ma#ing the petitioners, as principal stoc#holders thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be liable for its corporate acts as duly authori(ed by its officers and directors. Branting that the petitioners benefited from the services rendered, such is no 8ustification to hold them personally liable therefor. .therwise, all the other stoc#holders of the corporation, including those who came in late, and regardless of the amount of their shareholdings, would be e*ually and personally liable also with the petitioner for the claims of the private respondent. PALAY V. CLAVE +124 SCRA 640; 1983) The case of the reliance on a default provision of the contract granting automatic extra/8udicial rescission. The court found no badges of fraud on the part of the president of the corporation. The .' had literally and mista#enly relied on the default provision of the contract. As president and controlling stoc#holder of the corp, no sufficient proof exists on record that he used the corp to defraud private respondent. $e cannot, therefore, be made personally liable because he appears to be the controlling stoc#holder. :ere ownership by a single stoc#holder or by another corporation of all or nearly all of the capital stoc# of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. MAGSAYSAY V. LABRADOR +180 SCRA 266) The case of the assignment by Senator :agsaysay of a certain portion of his shareholdings in S< !C granting his sisters the right to intervene in a case filed by the widow against S< !C. The words Ean interest in the sub8ect,E to allow petitioners to intervene, mean a direct interest in the cause of action as pleaded, and which would put the intervenor in a legal position to litigate a fact alleged in the complaint, without the establishment of which plaintiff could not recover. $ere, the interest, of petitioners, if it exists at all, is indirect, contingent, remote, con8ectural, conse*uential and collateral. At the very least, their interest is purely inchoate, or in sheer expectancy of a right in the management of the corporation and to share in the profits thereof and in the properties and assets thereof on dissolution, after payment of the corporate debts and obligations.

3hile a share of stoc# represents a proportionate or ali*uot interest in the property of the corp, it does not vest the owner thereof with any legal right or title to any of the property, his interest in the corporate property being e*uitable and beneficial in nature. Shareholders are in no legal sense the owners of corporate property, which is owned by the corp as a distinct legal person.

PIERCIN. T:E CORPORATE VEIL

28 )%at is t%e t%eor& of corporate entit&>
A ;hat a corporation has a personality distinct from its stoc)holders, and is not affected by the personal rights, obligations and transactions of the latter.

28 )%en Can t%e Vei( of Corporate Entit& be Pierce >

A ;he veil of corporate fiction may be pierced when it is used as a shield to further an end subversive of @ustice, or for purposes that could not have been intended by law that created it or to defeat public convenience, @ustify wrong, protect fraud or defend crime or to perpetuate fraud or confuse legitimate issues or to circumvent the law or perpetuate deception or as an alter ego, ad@unct or business conduit for the sole benefit of the stoc)holders.

28 )%at are t%e effects of isre$ar in$ t%e corporate !ei(>

(!) 2toc)holders would be personally liable for the acts and contracts of the corporation whose existence at least for the purpose of the particular situation involved is ignored. ($) %ourt is not denying corporate existence for all purposes but merely refuses to allow the corporation to use the corporate privilege for the particular purpose involved.

Contrar+ to la) - pu%lic polic+. e!asion of lia%ilit+ to go!ernment

STATE V. STANDARD OIL +49 2hi*, St., 137, N.:. 279, 15; 1892) 3here all or a ma8ority of stoc#holders comprising a corporation do an act which is designed to affect the property and business of the company, as if it had been a formal resolution of its oard of 'irectors and the acts done is ultra vires, the act should be regarded as the act of the corporation, and may be challenged by the state in a *uo warrranto proceeding. LAGUNA TRANS V. SSS +107 #hi$. 833; 1960) 3here the corporation was formed by and consisted of the members of a partnership whose business and property was conveyed to the corporation for the purpose of continuing its business, such corporation is presumed to have assumed partnership debts.

MARVEL BLDG. CORP. V. DAVID +94 #hi$. 376; 1954) The fact that: certificates in possession of Castro were endorsed in blan#F Castro had enormous profits and had motive to hide themF other subscribers had no incomes of sufficient magnitudeF and directors never metF

shows that other shareholders may be considered dummies of Castro. $ence, corporate veil may be pierced.

E!asion of lia%ilit+ to creditors

TAN BOON BEE CO. V. JARENCIO +163 SCRA 205; 1988) Tan C +T- supplies paper to Braphics 9ublishing !nc +B- but the latter fails to pay. B=s printing machine levied upon to satisfy claim but 9A'C., another corpo intercedes, saying it is the owner of the machine, having leased such to B. 9rinting machine was allowed by the Court to satisfy B=s liability. oth B and 9A'C.=s corporate entities pierced because they have: the same board of directors, 9A'C. owns 2GD of B, 9A'C. never engaged in the business of printing. .bviously, the board is using 9A'C. to shield B from fulfilling liability to T. NAMARCO v. AFC!"# +19 SCRA 962; 1967) Associated Financing Corp. +AFC-, through its pres. F. Sycip +who together with wife, own ?AD of AFC- contracts with 4A:A"C. for an exchange of sugar +raw v. refined-. 4 delivers, AFC doesn=t since it did not have sugar to supply in the first place. 4 sues to recover sum of money plus damages. Sycip held 8ointly and severally liable with AFC. AFC=s corporate veil was pierced because it was used as Sycip=s alter ego, corpo used merely as an instrumentality, agency or conduit of another to evade liability. JACINTO V. CA +198 SCRA 211) ;acinto, presidentHB: and owner of 2)D of corpo, owes :etro an# sum of money, signs trust receipts therefor. ;acinto absconds. ;acinto ordered to 8ointly and severally pay :etro an#. Corpo veil pierced because it was used as a shield to perpetuate fraud andHor confuse legitimate

issues. There was no clear cut delimitation between the personality of ;acinto and the corporation.

E!asion of lia%ilit+ - o%ligation to emplo+ees

CLAPAROLS V. CIR +65 SCRA 613; 1975) oth predecessor and successor were owned and controlled by petitioner and there was no brea# in the succession and continuity of the same business. All the assets of the dissolved 9lant were turned over to the emerging corporation. The veil of corporate fiction must be pierced as it was deliberately and maliciously designed to evade its financial obligation to its employees. INDOPHIL TE$TILE MILL WORKERS UNION V. CALICA +205 SCRA 698) "ule: The doctrine of piercing the veil of corporate entity applies when corporate fiction is used to defeat public convenience, 8ustify wrong, protect fraud or defend crime, or when it is made as a shield to confuse the legitimate issues or where a corporation is the mere alter ego or business conduit of a person, or where the corporation is so organi(ed and controlled and its affairs are so conducted as to ma#e it merely an instrumentality, agency, conduit or ad8unct of another corporation. Case at bar: <nion sought to pierce corporate veil alleging that the creation of Acrylic is a devise to evade the application of the C A !ndophil had with them +or it sought to include the other union in its bargaining leverage-. SC: &egal corporate entity is disregarded only if it is sought to hold the officers and stoc#holders directly liable for a corporate debt or obligation. <nion does not see# to impose such claim against Acrylic. :ere fact that businesses were related, that some of the employees of !ndophil are the same persons manning and providing for auxiliary services to the other company, and that physical plants, officers and facilities are situated in the same compound / not sufficient to apply doctrine. NAFLU V. OPLE +143 SCRA 125; 1986) &ibraH'olphin Barments was but an alter ego of &awman !ndustrial, therefore, the former must bear the conse*uences of the latter=s unfair acts. !t cannot deny reinstatement of petitioners simply because of cessation of &awman=s operations, since it was in fact an illegal loc#/out, the company having maintained a run/away shop and transferred its machines and assets there. $ere, the veil of corporate fiction was pierced in order to safeguard the right to self/ organi(ation and certain vested rights which had accrued in favor of the union. Second corporation sought the protective shield of corporate fiction to achieve an illegal purpose.

ASIONICS PHILS. v. NLRC (290 SCRA 164) A corporation is invested by law with a personality separate and distinct from those of the persons composing it as well as from that of any other legal entity to which it may be related. :ere ownership by a single stoc#holder or by another corporation of all or nearly all of the capital stoc# of a corporation is not of itself sufficient ground for disregarding the separate corporate personality. 3here there is nothing on record to indicate the 9resident and ma8ority stoc#holder of a corporation had acted in bad faith or with malice in carrying out the retrenchment program of the company, he cannot be held solidarily and personally liable with the corporation.

E!asion of lia%ilit+ on contract

VILLA-REY TRANSIT V. FERRER (25 SCRA 849; 1968) ;ose :. Iillarama, operator of a bus company, Iilla "ey Transit, which was authori(ed to operate 0) units from 9angasinan to :anila and vice/versa, sold ) C9Cs to 9antranco. .ne of the conditions included in the contract of sale was that the seller +Iillarama- Eshall not, for a period of ,G years from the date of the sale, apply for any T9< service identical or competing with the buyer +9antranco-.E arely 0 months after the sale, a corporation called Iilla "ey Transit, !nc. was organi(ed, with the wife of ;ose :. Iillarama as one of the incorporators and who was subse*uently elected as treasurer of the Corporation. arely a month after its registration with the S%C, the corporation bought 2 C9Cs and 1C buses from one Ialentin Fernando, and applied with the 9ublic Service Commission +9SC- for approval of the sale. efore the 9SC could ta#e final action on the said application, however, ) of the 2 C9Cs were levied upon pursuant to a writ of execution issued by the CF! in favor of %usebio Ferrer, 8udgment creditor, against Ialentin Fernando, 8udgment debtor. 'uring the public sale conducted, Ferrer was the highest bidder, and a certificate of sale was issued in his name. Shortly thereafter, he sold the said C9Cs to 9antranco, and they 8ointly submitted their contract of sale to the 9SC for approval. The 9SC issued an order that pending resolution of the applications, 9antranco shall have the authority to provisionally operate the service under the ) C9CS that were the sub8ect of the contract between Ferrer and 9antranco. Iilla "ey Transit too# issue with this, and filed a complaint for annulment of the sheriff=s sale of the C9Cs and prayed that all the orders of the 9SC relative to the dispute over the C9Cs in *uestion be annulled. 9antranco filed a third/party complaint against ;ose :. Iillarama, alleging that Iillarama and Iilla "ey Transit are one and the same, and that Iillarama andHor the Corporation is *ualified from operating the C9Cs by virtue of the agreement entered into between Iillarama and 9antranco. Biven the evidence, the Court found that the finances of Iilla/"ey, !nc. were managed as if they were the private funds of Iillarama and in such a way and extent that Iillarama appeared

to be the actual owner of the business without regard to the rights of the stoc#holders. Iillarama even admitted that he mingled the corporate funds with his own money. These circumstances negate Iillarama=s claim that he was only a part/time Beneral :anager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive clause with 9antranco applies. A s%&&%" '() *!+ '(,% -s% !. ( /!"#!"(+% %*+0+) (s ( '%(*s !. %v(10*2 +3% !b&02(+0!* !. 30s /!v%*(*+. W3%"% +3% C!"#!"(+0!* 0s s-bs+(*+0(&&) +3% (&+%" %2! !. !*% !. +3% #("+0%s +! +3% /!v%*(*+ !" +3% "%s+"0/+0v% (2"%%'%*+, 0+ /(* b% %*4!0*%1 ."!' /!'#%+0*2 50+3 +3% /!v%*(*+%%.

Close Corporations
CEASE V. CA +93 SCRA 483; 1979) The Cease plantation was solely composed of the assets and properties of the defunct Tiaong plantation whose license to operate already expired. The legal fiction of separate corporate personality was attempted to be used to delay and deprive the respondents of their succession rights to the estate of their deceased father. 3hile originally, there were other incorporators of Tiaong, it has developed into a closed family corporation +Cease-. The head of the corporation, Cease, used the Tiaong plantation as his instrumentality. !t was his business conduit and an extension of his personality. There is not even a showing that his children were subscribers or purchasers of the stoc#s they own. DELPHER TRADES V. CA +157 SCRA 349; 1988) The 'elpher Trades Corp. is a business conduit of the 9achecos. 3hat they really did was to invest their properties and change the nature of their ownership from unincorporated to incorporated form by organi(ing 'elpher and placing the control of their properties under the corporation. This saved them inheritance taxes. This is the reverse of CeaseF however, it does not modify the other cases. !t stands on its own because of the facts.

Parent-Subsi iar& Re(ations%ip

28 )%at is t%e $enera( ru(e $o!ernin$ parent-subsi iar& re(ations%ip>
A ;he mere fact that a corporation owns all or substantially all of the stoc)s of another corporation is not alone sufficient to @ustify their being treated as one entity.

28

)%en #a& it be isre$ar e b& t%e courts>

(!) if the subsidiary was formed for the payment of evading the payment of higher taxes ($) where it was controlled by the parent that its separate identity was hardly discernible (&) parent corporations may be held responsible for the contracts as well as the torts of the subsidiary

28 )%at are t%e criteria b& *%ic% t%e subsi iar& can be consi ere a #ere instru#enta(it& of t%e parent co#pan&>
!. $. &. 4. 9. 5. -. ,. 8. !?. !!. the parent corp. owns all or most of the capital stoc) of the subsidiary. the parent and subsidiary have common directors and officers the parent finances the subsidiary the parent subscribes to all the capital stoc) of the subsidiary or otherwise causes its incorporation the subsidiary has grossly inade=uate capital the parent pays the salaries and other expenses or losses of the subsidiary the subsidiary has substantially no business except with the parent corp. or no assets except those conveyed to or by the parent corp. in the papers of the parent corp. or in the statements of its officers, the subsidiary is described as a department or division of the parent corp. or its business or financial responsibility is referred as the parentDs own the parent uses the property of the subsidiary as its own the directors or the executives of the subsidiary do not act independently in the interest of the subsidiary but ta)e their orders from the parent corp. in the latterDs interest the formal legal re=uirements of the subsidiary are not observed

6G(""%++ vs. S!-+3%"* R(0&5()7

%&ote' Sir (ac) *ai+ t at ,e -u*t not *top a.ter ,e/ve gone t roug t e 11 point* in or+er to +eter-ine , et er or not t ere i* a *u0*i+iary or in*tru-enta!ity. 1e -u*t go .urt er an+ con*i+er ot er circu-*tance* , ic -ay e!p +eter-ine c!ear!y t e true nature o. t e re!ation* ip. 222 3-)

GARRETT VS. SOUTHERN RAILWAY +173 F. S4pp. 915, :.%. ;e"". 1959) This case involved a 3or#ers Compensation claim by a wheel moulder employed by &enoir Car 3or#s. The plaintiff sought to claim from Southern "ailway Company, which ac*uired the entire capital stoc# of &enoir Car 3or#s. 9laintiff contended that Southern so completely dominated &enoir that the latter was a mere ad8unct or instrumentality of Southern. The general rule is that stoc# ownership alone by one corporation of the stoc# of another does not thereby render the dominant corporation liable for the torts of the subsidiary, unless the separate corporate existence of the subsidiary is a mere sham, or unless the control of the subsidiary is such that it is but an instrumentality or ad8unct of the dominant corporation.

!n the case, it was found that there were two distinct operations. There was no evidence that Southern dictated the management of &enoir. !n fact, evidence shows that :arius, the manager of the subsidiary, was in full control of the operation. $e established prices, handled negotiations in C As, etc. &enoir paid local taxes, had local counsel and maintain a 3or#men6s Compensation Fund. There was also no evidence that &enoir was run solely for the benefit of Southern. !n fact, a substantial part of its re*uirements in the field of operation of &enoir was bought elsewhere. &enoir sold substantial *uantities to other companies. 9olicy decisions remained in the hands of :arius. $ence, the complaint against Southern "ailway was dismissed. KOPPEL VS. YATCO +77 #hi$. 496; 1946) This case involved a complaint for the recovery of merchant sales tax paid by Joppel +9hilippines-, !nc. under protest to the Collector of !nternal "evenue. Although the Court of First !nstance did not deny legal personality to Joppel +9hilippines-, !nc. for any and all purposes, it dismissed the complaint saying that in the transactions involved in the case, the public interest and convenience would be defeated and would amount to a perpetration of tax evasion unless resort was had to the doctrine of Edisregard of the corporate fiction.E The facts show that CC.2D of the shares of stoc#s of J/9hil were owned by J/<SA. J/ 9hil. acted as a representative of J/<SA and not as an agent. J/9hil. also bore alone its own incidental expenses +e.g. Cable expenses- and also those of its KprincipalL. :oreover, J/9hil6s share in the profits was left in the hands of J/<SA. Clearly, J/9hil was a mere branch or dummy of J/<SA, and was therefore liable for merchant sales tax. To allow otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of no mean proportion and the conse*uent commission of a grave in8ustice to the Bovernment. :oreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be done directly. LIDDELL & CO. VS. CIR +2 SCRA 632; 1961) &iddel :otors !nc. was an alter ego of &iddel M Co. At the time of its incorporation, C>D of the &iddel !nc.6s stoc# belonged to Fran# &iddel. As to &iddel :otors, Fran# supplied the original capital funds. The bul# of the business of &iddel !nc. was channeled through &iddel :otors. Also, &iddel :otors pursued no other activities except to secure cars, truc#s and spare parts from &iddel !nc. and then sell them to the general public. To allow the taxpayer to deny tax liability on the ground that the sales were made through another and distinct corporation when it is proved that the latter is virtually owned by the former or that they were practically one and the same is to sanction the circumvention of tax laws. YUTIVO VS. CTA +1 SCRA 160; 1961) Southern :otors was actually owned and controlled by @utivo as to ma#e it a mere subsidiary or branch of the latter created for the purpose of selling vehicles at retail. @utivo financed principally, if not wholly, the business of Southern :otors and actually exceeded the

credit of the latter . At all times, @utivo, through the officers and directors common to it and the Southern :otors exercised full control over the cash funds, policies, expenditures and obligations of the latter. $ence, Southern :otors, being a mere instrumentality or ad8unct of @utivo, the CTA correctly disregarded the technical defense of separate corporate identity in order to arrive at the true tax liability of @utivo. LA CAMPANA VS. KAISAHAN +93 #hi$. 160; 1953) The &a Campana Baugau 9ac#ing and &a Campana Coffee Factory were operating under one single business although with ) trade names. !t is a settled doctrine that the fiction of law of having the corporate identity separate and distinct from the identity of the persons running it cannot be invo#ed to further the end subversive of the purpose for which it was created. !n the case at bar, the attempt to ma#e the two businesses appear as one is but a device to defeat the ends of the law governing capital and labor relations and should not be permitted to prevail.

PRO0OTER=S CONTRACTS PRIOR TO INCORPORATION Liabi(it& of Corporation for Pro#oter=s Contracts

'hile a corporation could not have been a party to a promoterKs contract since it did yet exist at the time the contract was entered into and thus could not possibly have had an agent who could legally bind it, the corporation may ma)e the contracts its own and become bound thereon if, after incorporation, it (!) ($) Adopts or ratifies the contract# or Accepts its benefits with )nowledge of the terms thereof.

"t must be noted, however, that the contract must be adopted in its entirety# the corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. /oreover, the contract must be one which is within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.

M/ARTHUR V. TIMES PRINTING CO. +48 Mi"". 319, 51 N.W. 216; 1892) !t is not a re*uisite that a corporation=s adoption or acceptance of a promoter=s contract be expressed, but it may be inferred from acts or ac*uiescence on the part of the corporation, or its authori(ed agents, as any similar original contract might be shown. The right of agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. The agreement must be one which the corporation itself could ma#e and one which the usual agents of the company have express or implied authority to enter into.

CLIFTON v. TOMB +21 F. 26 893; 1921) 3hatever may be the proper legal theory by which a corporation may be bound by contract +ratification, adoption, novation, a continuing offer to be accepted or re8ected by corporation-, it is necessary in all cases that the corporation should have full #nowledge of facts, or at least should be put upon such notice as would lead, upon reasonable in*uiry, to #nowledge of the facts. CAGAYAN FISHING DEV. CO. v. SANDIKO +65 #hi$. 223; 1937) A promoter could not have acted as agent for a corporation that had no legal existence. A corporation, until organi(ed, has no life therefore no faculties. The corporation had no 8uridical personality to enter into a contract. A$(* (ee C!)!m +. CA the the the the

Corporate Ri$%ts un er Pro#oter=s Contracts

2hould the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified the contract may either sue for (!) ($) 2pecific performance# or :amages resulting from breach of contract.

;he fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.

BUILDERS DUNTILE CO. v. DUNN +229 -. 569, 17 S.W. 26 715; 1929) 3hen the corporation was formed, the incorporators too# upon themselves the whole thing, and ratified all that had been done on its behalf. Though there was no formal assignment of the contract to the corporation, the acts of the incorporators were an adoption of the contract. Therefore the corporation has the right to sue for damages for the breach of contract. RI AL LIGHT V. PSC +25 SCRA 285; 1968) The incorporation of +:orong- and its acceptance of the franchise as shown by this action in prosecuting the application filed with the Commission for approval of said franchise, not only perfected a contract between the municipality and :orong but also cured the deficiency pointed out by the petition. The fact that :orong did not have a corporate existence on the day the franchise was granted does not render the franchise invalid, as :orong later obtained its certificate of incorporation and accepted the franchise.

Persona( Liabi(it& of Pro#oter on Pre-Incorporation Contracts

.ENERAL RULE8 EDCEPTION8 .romoters are personally liable on their contracts made on behalf of a corporation to be formed. "f there is an express or implied agreement to the contrary. "t must be noted that the fact that the corporation when formed has adopted or ratified the contract does notrelease the promoter from responsibility unless a novation was intended.

WELLS VS. FAY & EGAN CO. +143 <!. 732, 85 S.:. 873; 1915) !ndividual promoters cannot escape liability where they buy machinery, receive them in their possession and authori(e one member to issue a note, in contemplation of organi(ing a corporation which was not formed. +see Campos= notes p. )2>/)2C-. The agent is personally liable for contracts if there is no principal. The ma#ing of partial payments by the corporation, when later formed, does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another, the acceptance of which by the creditor does not release the debtors from liability over the balance. $ence, there is no adoption or ratification. HOW & ASSOCIATES INC. VS. BOSS +222 F. S4pp. 936; 1963) The rule is that if the contract is partly to be performed before incorporation, the promoters solely are liable. %ven if the promoter signed Eon behalf of corporation to be formed, who will be obligor,E there was here an intention of the parties to have a present obligor, because three/fourths of the payment are to be made at the time the drawings or plans in the architectural contract are completed, with or without incorporation. A purported adoption by the corporation of the contract must be expressed in a novation or agreement to that effect. The promoter is liable unless the contract is to be construed to mean: ,- that the creditor agreed to loo# solely to the new corporation for paymentF or )- that the promoter did not have any duty toward the creditor to form the corporation and give the corporation the opportunity to assume and pay the liability. 8UAKER HILL VS. PARR +148 C*$*. 45, 364 #. 26 1056; 1961) The promoters here are not liable because the contract imposed no obligation on them to form a corporation and they were not named there as obligorsHpromissors. The creditor/plaintiff was aware of the inexistence of the corporation but insisted on naming it as obligor because the planting season was fast approaching and he needed to dispose of the seedlings. There was no intent here by plaintiff/creditor to loo# to the promoters for the performance of the obligation. This is an exception to the general rule that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed.

Fi uciar& re(ations%ip bet*een corporation an pro#oter

OLD DOMINION VS. BIGELOW +203 M!((. 159, 89 N.:. 193; 1909) A promoter, notwithstanding his fiduciary duties to the corporation, may still sell properties to it, but he must pursue one of four courses to ma#e the contract binding. These are: ,- provide an independent board of officers in no respect directly or indirectly under his control, and ma#e full disclosure to the corporation through themF )- ma#e full disclosure of all material facts to each original subscriber of shares in the corporationF 0- procure a ratification of the contract after disclosing its circumstances by vote of the stoc#holders of the completely established corporationF or 1- be himself the real subscriber of all the shares of the capital stoc# contemplated as a part of the promotion scheme. The promoter is liable, even if owning all the stoc# of the corporation at the time of the transaction, if further original subscription to capital stoc# contemplated as an essential part of the scheme of promotion came in after such transaction.

CORPORATE PO)ERS .enera( Po*ers of Corporation 4Sec" -A5

;o sue and be sued in its corporate name# +f succession by its corporate name for the period of time stated in the articles of incorporation and the certificate of incorporation# ;o adopt and use a corporate seal# ;o amend its articles of incorporation in accordance with the provisions of this %ode# ;o adopt by0laws not contrary to law, morals, or public policy, and to amend or repeal the same in accordance with this %ode# "n case of stoc) corporations, to issue of sell stoc)s to subscribers and to sell treasury stoc)s in accordance with the provisions of this %ode# and to admit members to the corporation if it be a non0stoc) corporation# ;o purchase, receive, ta)e, grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily re=uire, sub@ect to the limitations prescribed by law and the %onstitution#

%/"0E' T ere are t,o %2) genera! re*triction* on t e po,er o. t e corp. to ac4uire an+ o!+ propertie*'

+,- t at t e property -u*t 0e rea*ona0!e an+ nece**ari!y

re4uire+ 0y t e tran*action o. it* !a,.u! 0u*ine**, an+

+)- t at t e po,er * a!! 0e *u05ect to t e !i-itation* pre*cri0e+

0y ot er *pecia! !a,* an+ t e Con*titution.) ;o adopt any plan of merger or consolidation as provided in this %ode# ;o ma)e reasonable donations, including those for the public welfare of for hospital, charitable, cultural, scientific, civic, or similar purposes .rovided that no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity#

;o establish pension, retirement and other plans for the benefit of its directors, trustees, officers and employees# and ;o exercise such other powers as may be essential or necessary to carry out its purpose or purposes as stated in its articles of incorporation.

Specific Po*ers of Corporation

3xtension or shortening of the corporate term (2ec. &-) "ncrease or decrease of the capital stoc) (2ec. &,) "ncur, create or increase bonded indebtedness (2ec. &,) :enial of the pre0emptive right (2ec. &8) 2ale or other disposition of substantially all its assets. (2ec. 4?)

A sale is deemed to substantially cover all the corporate property and assets if such sale renders the corporation incapable of continuing the business or accomplishing the purpose for which it was incorporated.

Ac=uisition of its own shares. (2ec. 4!) "nvestment in another corporation or business. (2ec. 4$) :eclaration of dividends. (2ec. 4&) 3ntering into management contracts. (2ec. 44)

I#p(ie Po*ers
6nder 2ec. &5, a corporation is given such powers as are essential or necessary to carry out its purpose or purposes as stated in the articles of incorporation. ;his phrase gives rise to such a wide range of implied powers, that it would not be at all difficult to defend a corporate act versus an allegation that it is ultra vires. A corporation is presumed to act within its powers and when a contract is not its face necessarily beyond its authority# it will, in the absence of proof to the contrary, be presumed valid.

T%e U(tra Vires Doctrine

B!ac)/* 6a, 7ictionary 7e.inition' 8!tra vire* acts are those acts beyond the scope of the powers of the corporation, as defined by its charter or laws of state of incorporation. ;he term has a broad application and includes not only acts prohibited by the charter, but acts which are in excess of powers granted and not prohibited, and generally applied either when a corporation has no power whatever to do an act, or when the corporation has the power but exercises it irregularly.

28 )%at are t%e conse3uences of ultra !ires acts>

;he corporation may be dissolved under a =uo warrranto proceeding. ;he %ertificate of Fegistration may be suspended or revo)ed by the 23%. .arties to the ultra vires contract will be left as they are, if the contract has been fully executed on both sides. 4either party can as) for specific performance, if the contract is executory on both sides. ;he contract, provided that it is not illegal, will be enforced, where one party has performed his part, and the other has not with the latter having benefited from the formerDs performance. Any stoc)holder may bring an individual or derivative suit to en@oin a threatened ultra vires act or contract. "f the act or contract has already been performed, a derivative suit for damages against the directors maybe filed, but their liability will depend on whether they acted in good faith and with reasonable diligence in entering into the contracts. 'hen the suit against the in@ured party who had no )nowledge that the corporation was engaging in an act not included expressly or impliedly in its purposes clause. 6ltra vires acts may become binding by the ratification of all the stoc)holders, unless third parties are pre@udiced thereby, or unless the acts are illegal.

REPUBLIC OF THE PHILS. v. ACOJE MINING (7 SCRA 361; 1963-

"esolution adopted by the company to open a post office branch at the mining camp and to assume sole and direct responsibility for any dishonest, careless or negligent act of its appointed postmaster is 4.T <&T"A I!"%S because the act covers a sub8ect which concerns the benefit, convenience, and welfare of the company6s employees and their families. 3hile as a rule an ultra vires act is one committed outside the ob8ect for which a corporation is created as defined by the law of its organi(ation and therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be performed outside of the scope of the powers expressly conferred if they are necessary to promote the interest or welfare of the corporation. CARLOS v. MINDORO SUGAR CO. (57 SCRA 343, 1932) The .' of the 9hil Trust Co. adopted a resolution which authori(ed its president to purchase at par and in the name of the corp. bonds of :SC. These bonds were later resold and guaranteed by 9TC to third persons. 9TC paid plaintiff the corresponding interest payments until ;uly ,, ,C)> when it alleged that it is not bound to pay such interest or to redeem the obligation because the guarantee given for the bonds was illegal and void. $eld: The act of guaranty by 9TC was well within its corporate powers. Furthermore, having received money or property by virtue of the contract which is not illegal, it is estopped from denying liability. %ven if the then prevailing law +Corp. &aw- prohibited 9TC from guaranteeing bonds with a total value in excess of its capital, with all the :SC properties transferred to 9TC based on the deed of trust, sufficient assets were made available to secure the payment of the corresponding liabilities brought about by the bonds. GOV9T v. EL HOGAR (50 #hi$ 399; 1932) (;hi( c!(e i( !" e8!mp$e *3 h*/ the imp$ie6 p*/e)( c*"cept m!- ,e 4(e6 t* 54(ti3- ce)t!i" !ct( *3 ! c*)p*)!ti*".) A *uo warranto proceeding instituted by the Bov=t against %l $ogar, a building and loan ass=n to deprive it of its corp. franchise. ,. %l $ogar held title to real property for a period in excess of 2 years in good faith, hence this cause will not prosper. ). %l $ogar owned a lot and bldg. at a business district in :anila allegedly in excess of its reasonable re*uirements, held valid bec, it was found to be necessary and legally ac*uired and developed. 0. %l $ogar leased some office space in its bldg.F it administered and managed properties belonging to delin*uent S$sF and managed properties of its S$s even if such were not mortgaged to them.

$eld: first two valid, but the third is ultra vires bec. the administration of property in that manner is more befitting of the business of a real estate agent or trust company and not of a building and loan ass=n. 1. Compensation to the promoter and organi(er allegedly excessive and unconscionable. $eld: Court cannot dwell on the issue since the promoter is not a party in the proceeding and it is the corp. or its S$s who may bring a complaint on such. 2. !ssuance of special shares did not affect %l $ogar=s character as a building and loan ass=n nor ma#e its loans usurious. A. Corporate policy of using a depreciation rate of ,G D per annum is not excessive, bec. accdg. to the SC, the by/laws expressly authori(es the .' to determine each year the amount to be written down upon the expenses of installation and the property of the corp. ?. The Corp. &aw does not expressly grant the power of maintaining reserve funds but such power is implied. All business enterprises encounter periods of gains and losses, and its officers would usually provide for the creation of a reserve to act as a buffer for such circumstances. >. That loans issued to member borrowers are being used for purposes other than the bldg. of homes not invalid bec. there is no statute which expressly declares that loans may be made by these ass=ns solely for the purpose of bldg. homes. C. Sec. ,?0 of the Corp. &aw provides that Eany personE may become a S$ on a bldg. and loan ass=n. The word EpersonE is used on a broad sense including not only natural persons but also artificial persons. BISSEL v. MICHIGAN SOUTHERN ( 22 N= 258; 1860) Two railroad corporations contend that they transcended their own powers and violated their own organic laws. $ence, they should not be held liable for the in8ury of the plaintiff who was a passenger in one of their trains. $eld: The contract between the two corporations was an ultra vires act. $owever, it is not one tainted with illegality, therefore, the accompanying rights and obligations based on the contract of carriage between them and the plaintiff cannot be avoided by raising such a defense. PIROVANO v. DELA RAMA STEAMSHIP 6:; P30& <<= , >:=?7 This case involved the issue of whether or not the defendant corporation performed an ultra vires act by donating the life insurance proceeds to the minor children of 9irovano, the deceased president of the defendant company under whose management the company grew and progressed to become a multi/million peso corporation.

$eld:

4..

The A.! of the corporation provided two relevant items: K+,- to invest and deal with moneys of the company not immediately re*uired, in such manner as from time to time may be determinedF and +)- to aid in any other manner any person, association or corporation of which any obligation or in which any interest is held by this corporation or in the affairs of prosperity of which this corporation has a lawful interest.L From this, it is obvious that the corporation properly exercised within its chartered powers the act of availing of insurance proceeds to the heirs of the insured and deceased officer. HARDEN v. BENGUET CONSOLIDATED (58 #hi$ 141) A contract between enguet and alatoc provided that enguet will bring in capital, e*pt. and technical expertise in exchange for capital shares in alatoc. $arden was a S$ of alatoc and he contends that this contract violated the Corp.&aw which restricts the ac*uisition of interest by a mining corp. in another mining corp. $eld: $arden has no standing bec. if any violation has been committed, the same can be enforced only in a criminal prosecution by an action of *uo warranto which may be maintained only by the Attorney/Beneral.

CONTROL AND 0ANA.E0ENT A((ocation of Po*er an Contro(

28 )%at are t%e t%ree (e!e(s of corporate contro(Epo*er>
Boar+ o. +irector* or tru*tee*2 responsible for corporate policies and the general management of the business and affairs of the corporation. 9..icer*2 execute the policies laid down by the board. Stoc) o!+er* or -e-0er*2 have residual power over fundamental corporate changes li)e amendments of articles of incorporation.

)%o E'ercises Corporate Po*ers

1oard of directors or trustees

28 )%at are t%e po*ers of t%e /OD>
;he 1+: is responsible for corporate policies and the general management of the business affairs of the corporation. %See Citi0an) v C ua) 4a5 Aut%orit& 4Sec. 2') 4b5 Re3uire#ents (i) (ii) (iii) (iv) Lualifying share (Sec. 24) Fesidence (Sec. 24) 4ationality :is=ualifications (Sec. 2:) / conviction by final @udgment of offense punishable M 5 yrs. prison / violation of %orporation code within 9 years prior to date of election or appointment

4c5

:o* e(ecte 4Sec. 2') ;he formula for determining the number of shares needed to elect a given number of directors is as follows N O P x 4! 4Q! Q!

N O being the number of shares needed to elect a given number of directors P O being the total number of shares present or represented at the meeting 4! O being the number of directors desired to be elected 4 O being the total number of directors to be elected 4 5 :o* re#o!e 4Sec. 23) 1y a vote of the 2(s holding or representing at least $<& of the outstanding capital stoc), or by a vote of at least $<& of the members entitled to vote, provided that such removal ta)es place at either a regular meeting of the corporation or at a special meeting called for the purpose. "n both cases, there must be previous notice to the 2(s < members of the intention to propose such removal at the meeting. Femoval may be with or without cause. (owever, removal without cause may not be used to deprive minority 2(s or members of the right of representation to which they may be entitled under 2ec. $4 of the %ode. 4e5 :o* !acanc& fi((e 4Sec. 24) ;. vacancy +ue to re-ova! or e<piration o. ter-' /ust be filled by the 2(s in a regular or special meeting called for that purpose.

;. =vacancy= +ue to increa*e +nly by means of an election at a regular or special 2(s

in nu-0er o. +irector* same or tru*tee*' directors or trustees

meeting duly called for the purpose, or in the meeting authorizing the increase of if so stated in the notice of the meeting.

A!! ot er vacancie*'

/ay be filled by the vote of at least a ma@ority of the remaining directors or trustees, if still constituting a =uorum.

&ote' 4f5

:irectors or trustees so elected to fill vacancies shall be elected only for the unexpired term of their predecessors in office.

:o* co#pensate 4Sec. 50) ;. provi+e+ in 0y2!a,*' ;. not provi+e+ in 0y2!a,*' ;hat compensation stated in the by0laws. :irectors shall not receive any compensation other than reasonable per diems, as directors. >o,ever, compensation other than per diems may be granted to directors by a ma@ority vote of the 2(s at a regular or special stoc)holdersK meeting.

&ote' "n no case shall the total yearly compensation of directors, as such directors, exceed !?G of the net income before income tax of the corporation during the preceding year. (g) /atters re=uiring 1oard of :irectorsK action su%sequent discussion under &uties of &irectors and Controlling

4%5 Liabi(it& 4See Stoc6,olders.)

%i) ;n genera! %Sec. "1) %ii) Bu*ine** 5u+g-ent ru!e %iii) 7ea!ing* ,it t e corporation %Sec. "2) %iv) Contract* 0et,een corporation* ,it inter!oc)ing +irector* %Sec. "") (v) (vi) 4i5 7i*!oya!ty %Sec. "4) 1atere+ *toc)* %Sec. 6$)

E'ecuti!e Co##ittee 4Sec. 57) See *u0*e4uent +i*cu**ion un+er Boar+ Co--ittee*.

RAMIRE VS. ORIENTALIST CO AND FERNANDE +38 #hi$. 634; 1918) !n this case, the board of directors, before the financial inability of the corporation to proceed with the pro8ect was revealed, had already recogni(ed the contracts as being in existence and had proceed with the necessary steps to utili(e the films. The subse*uent action by the stoc#holders in not ratifying the contract must be ignored. The functions of the stoc#holders are limited of nature. The theory of a corporation is that the stoc#holders may have all the profits but

shall return over the complete management of the enterprise to their representatives and agents, called directors. Accordingly, there is little for the stoc#holders to do beyond electing directors, ma#ing by/laws, and exercising certain other special powers defined by law. !n conformity with this idea, it is settled that contracts between a corporation and a third person must be made by directors and not stoc#holders. LOPE VS. ERICTA +45 SCRA 539; 1972) !n this case, the oard of "egents of the <niversity of the 9hilippines terminated the ad interim appointment of 'r. lanco as 'ean of the College of %ducation by not acting on the matter. !n the transcript of the meeting which was latter agreed to be deleted, it was found out that the .", consisting of ,) members, voted 2 in favor of 'r. lanco=s appointment 0 voted against, and 1 abstained. The core of the issue is 3.4 the 1 abstentions will be counted in favor of 'r. lanco=s appointment or against it. The SC held that such abstentions be counted as negative vote considering that those who abstained, 0 of which members of the Screening Committee, intended to re8ect 'r. lanco=s appointment. ACHARY VS. MILLIN +294 Mic. 622; 1940) The issue in this case is regarding the validity of the director=s meeting at the company=s laboratory on 'ecember >, ,C0? wherein Nachary was removed as president of the company. Nachary that he was not notified of the meeting thus, the action was void. .n the other hand, the defendants contend that the notice re*uirement was waived by Nachary=s presence at the meeting. The SC held that the validity of the meeting was not affected by the failure to give notice as re*uired by the by/laws, provided that the parties were personally present. Since all the parties were present at the meeting of 'ecember >, and understood that the meeting was to be a directors= meeting, then the action ta#en is final and may not be voided by any informality in connection with its being called. PNB VS. CA +83 SCRA 238; 1978) The action was brought by the mortgagor +Tapnio- against 94 for damages in connection with the failure of the latter=s board of directors to act expeditiously on the proposed lease of the former=s sugar *uota to one Tua(on. The Supreme Court held that while the 94 has the ultimate authority to approve or disapprove the proposed lease since the *uota was mortgaged to 94 , the latter certainly cannot escape liability for observing, for the protection of the interest of the private respondents, that degree of care, precaution and vigilance which the circumstances 8ustly demand in approving or disapproving the lease of the said sugar *uota.

Corporate officers and agents

4a5 0ini#u# set of officers an t%eir 3ua(ifications 4 Sec. 27) ;he minimum set of officers are (!) president (who shall be a director)# ($) secretary (who shall be a resident and Hilipino citizen)# and (&) treasurer (who may or may not be a director) ;he by0laws, however, may provide for other officers. Any $ or more positions may be held concurrently by the same person, except that no one shall act as (a) president and secretary, or (b) president and treasurer at the same time. 4b5 Dis3ua(ifications 4Sec. 28) 0 %onviction by final @udgment of an offense punishable by imprisonment M 5 yrs. 0 4c5 Riolation of %orporation %ode committed within 5 yrs. prior to the date of election or appointment

Liabi(it& in $enera( 4Sec. 51) See +i*cu**ion un+er 7utie* o. 7irector* an+ Contro!!ing Stoc) o!+er*. .

4 5 Dea(in$s *it% t%e corporation 4Sec. 52) 0 >enerally voidable (See +i*cu**ion un+er 7utie* o. 7irector* an+ Contro!!ing Stoc) o!+er*)

)%at is t%e octrine of apparent aut%orit&>

;he doctrine of apparent authority provides that a corporation will be liable to innocent third persons for the acts of its agent where the representation was made by the agent in the course of business and acting within his<her general scope of authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his<her principal or some other person for his<her own ultimate benefit.

FIRST PHILIPPINE INTERNATIONAL BANK & RIVERA v. CA +&!"4!)- 24, 1996) The authority of a corporate officer in dealing with third persons may be actual or apparent. The doctrine of Eapparent authority,E with special reference to ban#s, was laid out in #)46e"ti!$ 1!"> +. CA (223 SCRA 350) where it was held that: A ban# is liable for the wrongful acts of its officers done in the interest of the ban# or in the course of dealings of the officers in their representative capacity but not for acts outside the scope of their authority. A ban# holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds they may thus be enabled to perpetrate in the apparent scope of

their employmentF nor will it be permitted to shrin# from its responsibility for such frauds, even though no benefit may accrue to the ban# therefrom. Accordingly, a ban# is liable to innocent third persons where the representation is made in the course of its business by its agent acting within the general scope of his authority even though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a fraud upon his principal or some other person for his own ultimate benefit. Application of these principles is especially necessary because ban#s have a fiduciary relationship with the public and their stability depends on the confidence of the people in their honesty and efficiency. Such faith will be eroded where ban#s do not exercise strict care in the selection and supervision of its employees, resulting in pre8udice to their depositors. YU CHUCK V. KONG LI PO +46 #hi$. 608; 1924) The power to bind a corporation by contract lies with its board of directors or trustees. Such power may be expressly or impliedly be delegated to other officers and agents of the corporation. !t is also well settled that except where the authority of employing servants or agents is expressly vested in the board, officers or agents who have general control and management of the corporation=s business, or at least a specific part thereof, may bind the corporation by the employment of such agents and employees as are usual and necessary in the conduct of such business. Those contracts of employment should be reasonable. Case at bar: contract of employment in the printing business was too long and onerous to the business +0/year employmentF shall receive salary even if corp. is insolvent-. THE BOARD OF LI8UIDATORS V. HEIRS OF MA$IMO KALAW +20 SCRA 987; 1967) Jalaw was a corporate officer entrusted with general management and control of 4AC.C.. $e had implied authority to ma#e any contract or do any act which is necessary for the conduct of the business. $e may, without authority from the board, perform acts of ordinary nature for as long as these redound to the interest of the corporation. 9articularly, he contracted forward sales with business entities. &ong before some of these contracts were disputed, he contracted by himself alone, without board approval. All of the members of the board #new about this practice and have entrusted fully such decisions with Jalaw. $e was never *uestioned nor reprimanded nor prevented from this practice. !n fact, the board itself, through its acts and by ac*uiescence, have laid aside the by/law re*uirement of prior board approval. Thus, it cannot now declare that these contracts +failures- are not binding on 4AC.C.. AMBOANGA TRANSPO V. BACHRACH MOTORS +52 #hi$. 244; 1928) A chattel mortgage, although not approved by the board of directors as stipulated in the by/laws, shall still be valid and binding when the corporation, through the board, tacitly approved and ratified it. The following acts of the board constitute implied ratification:

,. %r*uiaga is one of the largest stoc#holder, and was the all/in/one officer +he was the 9resident, B:, Attorney, Auditor, etc.). Two other directors approved his actions and expressed satisfaction with the advantages obtained by him in securing the chattel mortgage. 0. The corporation too# advantage of the benefits of the chattel mortgage. There were even partial payments made with the #nowledge of the three directors. ACUNA V. BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION +20 SCRA 526; 1967) Acuna entered into an agreement with Ierano, manager of 9".C.:A, in which the former would be constituted as the latter=s agent in :anila. Acuna diligently went about his business and even used personal funds for the benefit of the corporation. 'uring the face/to/face meeting with the board, Acuna was assured that there need not be any board approval for his constitution as agent for it would only be a mere formality. &ater on, the board disapproved the agency and did not pay him. The SC ruled that the agreement was valid due to the ratification of the corp. proven by these acts: ,. $e was assured by the board that no board approval was necessary. ). $e delivered 9 )G,GGG, performed his wor# with the #nowledge of the board. 0. 'ue to ac*uiescence, the board cannot disown or disapprove the contract.

1oard Committees
;he 1y0laws of the corporation may create an executive committee, composed of not less than & members of the 1oard, to be appointed by the 1oard. ;he executive committee may act, by ma@ority vote of all its members, on such specific matters within the competence of the board, as may be delegated to it in either (!) the 1y0laws, or ($) on a ma@ority vote of the board. (owever, the following acts may never be delegated to an executive committee (!) ($) (&) (4) approval of any action for which shareholdersK approval is also re=uired# the filling of vacancies in the board (re.er to Sec. 29)# the amendment or repeal of by0laws or the adoption of new by0laws# the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable# and (9) a distribution of cash dividends to the shareholders.

HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. +181 F. 289; 1910) !n this case, the %xecutive Committee: a- removed the Treasurer and appointed a new one b- fixed the annual salary of the members of the %xecutive Committee

c- amended the by/laws by giving the 9resident the sole authority to call a stoc#holder=s meeting and a board of directors meeting d- amended the composition of the %xeCom by limiting it to 8ust ) persons. W!( the(e !cti*"( +!$i67 4o, because the %xecutive Commmittee usurped the powers vested in the board and the stoc#holders. !f their actions was valid, it would put the corp. in a situation wherein only two men, acting in their own pecuniary interests, would have absorbed the powers of the entire corporation. EFull powersE should be interpreted only in the ordinary conduct of business and not total abdication of board and stoc#holders= powers to the %xeCom. EF<&& 9.3%"SE does not mean unlimited or absolute power.

Stoc6,olders or Mem%ers
"n the following basic changes in the corporation, although action is usually initiated by the board of directors or trustees, their decision is not final, and approval of the stoc)holders or members would be necessary (!) ($) (&) (4) (9) Amendment of articles of incorporation# "ncrease and decrease of capital stoc)# "ncurring, creating or increasing bonded indebtedness# 2ale, lease, mortgage or other disposition of substantially all corporate assets# "nvestment of funds in another business or corporation or for a purpose other than the primary purpose for which the corporation was organized# (5) Adoption, amendment and repeal of by0laws# (-) /erger and consolidation# (,) :issolution of corporation "n all of these cases, even non0voting stoc)s, or non0voting members, as the case may be, will be entitled to vote. (Sec. 6)

BOARD OF DIRECTORS AND ELECTION COMMITTEE OF SMB VS. TAN +105 #hi$. 426; 1959) :eeting was invalid for lac# of notice. y/laws provide for a 2/day notice before meeting. :arch )A posting not enough for :arch )> election.

JOHNSTON VS. JOHNSTON +61 2.<. N*. 39, 6160; 1965) As a general rule, a *uorum at a stoc#holders= meeting, once reached, cannot be nullified by a subse*uent wal#out.

$owever, the proceedings can be nullified if the wal#out was for a reasonable and 8ustifiable cause. !n this case, F. &ogan ;ohnston, who owned andHor represented more than 2GD of the corporation=s outstanding shares, was prohibited from voting the shares of the Silos family +which he had validly purchased- and of the minor children of Albert S. ;ohnston +of whom he was guardian- on the ground that such shares must first be registered in the names of the wards, thereby prompting the wal#out. The Court of Appeals held that the wal#out was neither unreasonable nor un8ustifiable. !t noted however that there was no formal declaration of a *uorum before the withdrawal from the meeting by F. &ogan ;ohnston. PONCE VS. ENCARNACION +94 #hi$. 81; 1953) <pon good cause, such as a Chairman of the oard failing to call a meeting, either by his absence or neglect, the Court may grant a stoc#holder the authority to call such a meeting. DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL +26 SCRA 225; 1968) The Corporation &aw says that every director must own at least one +,- share of the capital stoc# of the corporation. GOKONGWEI VS. SEC +89 SCRA 336; 1979) Section ), of the Corporation &aw provides that a corporation may prescribe in its by/ laws the *ualifications, duties, and compensation of its directors. A stoc#holder has no vested right to be elected director for he impliedly contracts that the will of the ma8ority shall govern. Amended by/laws are valid for the corporation has its inherent right to protect itself.

RO$AS V. DELA ROSA +49 #hi$. 609; 1926) <nder the &aw, directors can only be removed from office by a vote of the stoc#holders representing )H0 of subscribed capital stoc#, while vacancies can be filled by a mere ma8ority. A director cannot be removed by a mere ma8ority by disguising it as filling a vacancy. ANGELES V. SANTOS +64 #hi$. 697; 1937) Court may appoint a receiver when corporate remedy is unavailable when board of directors perform acts harmful to the corporation. Benerally, stoc#holders cannot sue on behalf of the corporation. The exception is when the defendants are in complete control of the corporation. CAMPBELL V. LEOW9S INC. +134 A. 26 852; 1957)

The stoc#holders have an implied power to remove a director for cause. %ven when there is cumulative voting, stoc#holders can still remove directors for cause. DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. +27 SCRA 247; 1969) A corporation may use its funds to invest in another corporation without the approval of the stoc#holders if done in pursuance of a corporate purpose. $owever, if it is purely for investment, the vote of the stoc#holders is necessary.

VOTIN.
P(e $ors; #ort$a$ors; e'ecutors; recei!ers; an a #inistrators 4Sec. 77)
0 .ledgors or mortgagors have the right to attend and vote at stoc)holdersK meetings. 3<ception' "f the pledgee or mortgagee is expressly given by the pledgor or mortgagor such right in writing which is recorded on the appropriate corporate boo)s. 0 3xecutors, administrators, receivers and other legal representatives duly appointed by the court may attend and vote in behalf of the stoc)holders or members without need of any written proxy.

Foint o*ners of stock (Sec. $6)

0 >enerally, consent of all co0owners shall be necessary.

Treasur& s%ares (Sec. $:)

0 ;reasury shares have no voting right for as long as such shares remain in the ;reasury.

Pro'ies (Sec. $8)

0 .roxies must be in writing, signed by the stoc)holder<member, filed before the scheduled meeting with the corporate secretary. 0 6nless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. 4o proxy shall be valid and effective for a period longer than five (9) years at any one time. 0 Roting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. $9) 2 "t must be noted however that directors or trustees cannot vote by proxy at board meetings. (Sec. 2$) 0 4ote that in 2ec. ,8, non0stoc) corporations are permitted to waive the right to use proxies via their A+" or by0laws.

Votin$ trust (Sec. $9)

0 Roting trusts must be in writing, notarized, specifying the terms and conditions thereof, certified copy filed with 23%. Hailure to comply with this re=uirement renders the agreement ineffective and unenforceable. 0 As a general rule, voting trusts are valid for a period not exceeding 9 years at any one time, and automatically expire at the end of the agreed period unless expressly renewed. >o,ever, in the case of a voting trust specifically re=uired as a condition in a loan agreement, said voting trust may exceed 9 years but shall automatically expire upon payment of the loan. 0 Roting trusts may be voted by proxy unless the agreement provides otherwise. (Sec. $9)

Poo(in$ a$ree#ent - .ooling agreements refer to agreements between $ or more 2(s to vote their
shares the same way. ;hey are different from voting trust agreements in that they do not involve a transfer of stoc)s but are merely private agreements between $ or more 2(s to vote in the same way. 0 2ec. !??, par. $ of the %orporation %ode provides for pooling and voting agreements in close corporations. Although there is no e=uivalent provision for widely0held corporations, Sustice and .rof. %ampos are of the opinion that 2(s of widely0held corporations should not be precluded from entering into voting agreements if these are otherwise valid and are not intended to commit any wrong or fraud on the other 2(s that are not parties to the agreement.

Non-!otin$ s%ares (Sec. 6) - .referred or redeemable shares. ITF s%ares An Eor s%ares (Sec. $6) 0 Any one of the @oint owners can vote said shares or appoint a proxy thereof.

De!ices Affectin$ Contro( Pro9+ &e!ice

S%/ =@. #)*8ie(. O Stoc#holders and members may vote in person or by proxy in all meetings of stoc#holders or members. 9roxies shall be in writing, signed by the stoc#holder or member and

filed before the scheduled meeting with the corporate secretary. <nless otherwise provided in the proxy, it shall be valid only for the meeting for which it is intended. 4o proxy shall be valid and effective for a period longer than five +2- years at any one time. Ch!)!cte)? agency relationshipF revocable at will +by express revocation, by attending the meeting- and by death, except when coupled with interest or is a security. IN RE GIANT PORTLAND CEMENT CO. +21 A.26 697; 1941) %ven if stoc#s are sold, the stoc#holder of record remains the owner of the stoc#s and has the voting right until the by/law re*uiring recording of transfer in the transfer boo# is complied with. Thus, a proxy given by the stoc#holder of record even if he has already sold the shareHs of stoc# remains effective. STATE E$ REL EVERETT TRUST V PACIFIC WA$ED PAPER, (159 A.@.R. 297; 1945) The general rule is that a proxy is revocable even though by its express terms it is irrevocable. The exceptions are: +a- when authority is coupled with interestF +b- where authority is given as part of a security and is necessary to effectuate such a security. !t is coupled with interest when there is interest in the share themselves +such as a right of first refusal in case of sale- and the rights inherent in the shares +such as voting rightsF capacity to obtain ma8ority-. DUFFY V LOFT (17 %e$. Ch. 376, 152 A. 849; 1930) 3here a stoc#holder6s meeting was validly convened, the proxies must be deemed present even if the proxies were not presented, provided: +a- their existence is establishedF +b- the agents were so designated to attend and act in S$6s behalfF +c- the agents were present in the meeting.
28 Is it !a(i for t%e corporation to pa& t%e e'penses for pro'& so(icitation> A "n the case of Fosenfeld v. Hairchild 3ngine and Airplane %orp. ( 128 &.3. 2+ 291# 19$$), it was held that in a contest over policy (as opposed to a purely personal power contest), corporate directors have the right to ma)e reasonable and proper expenditures, sub@ect to the scrutiny of the courts when duly challenged, from the corporate treasury for the purpose of persuading the 2(s of the correctness of their position and soliciting their support for policies which the directors believe, in all good faith, are in the best interests of the corporation. ;he 2(s, moreover, have the right to reimburse successful contestants for the reasonable and 0ona .i+e expenses incurred by them in any such policy contest, sub@ect to li)e court scrutiny. (owever, where it is established that such monies have been spent for personal power, individual gain or private advantage, and not in the belief that such expenditures are in the best interest of the stoc)holders and the corporation, or where the fairness and reasonableness of the amounts allegedly expended are duly and successfully challenged, the courts will not hesitate to disallow them.

ROSENFELD V. FAIRCHILD +128 N.:. 26 291; 1955)

!n a contest over policy, as compared to a purely personal power contest, corporate directors have the right to ma#e reasonable and proper expenditures. "eason: in these days of giant corporations with vast numbers of S$6s, if directors are not allowed to authori(e reasonable expenses in soliciting proxies, corporate business may be hampered by difficulty in procuring *uorumF or corporations may be at the mercy of persons see#ing to wrest control for their purposes if the directors may not freely answer their challenge. ut corp expense may be disallowed by courts where money was shown to have been spent for personal power, individual gain or private advantage, or where fairness and reasonableness of amount spent has been successfully challenged.

:oting 0rust
A Roting ;rust Agreement (R;A) is an agreement whereby the real ownership of the shares is separated from the voting rights, the usual aim being to insure the retention of incumbent directors and remove from the stoc)holders the power to change the management for the duration of the trust.

Ad!antages
Accumulates power. 2mall shareholders are given the chance to have a representation in the 1+: or at least a spo)esperson during stoc)holdersD meetings. %ontinuity of management. /ore effective than proxies because it is irrevocable. 3nsures that the re=uired number of stoc)holders is met thereby facilitating smooth corporate operations.

&isad!antages
2toc)holders give up rights (voting and na)ed title) 2usceptible to abuse 4ot used in widely held corporations

;ig,ts gi!en up %+ t,e s,are,older in a :0A in e9c,ange for t,e fiduciar+ o%ligation of t,e trustee$
Roting rights .roprietary rights<na)ed title<legal ownership "ncidental rights such as to attend meetings, to be elected, to receive dividends)

;ig,ts retained %+ t,e s,are,older

1eneficial or e=uitable ownership Fight to revo)e R;A in case of breach by trustee Fegain full ownership after the lapse of the period Fight to an accounting by the trustee after the period of the R;A

<o) is a !oting trust created=

(!) A R;A is prepared in writing, notarized, and filed with the corporation and 23%. ($) ;he certificates of stoc) covered by the R;A are cancelled and new ones (voting trust certificates) are issued in the name of the trustee<s stating that they are issued pursuant to the R;A. (&) ;he transfer is noted in the boo)s of the corporation. (4) ;he trustee<s execute and deliver to transferors the voting trust certificates. (&ote t at t e*e certi.icate* * a!! 0e tran*.era0!e in t e *a-e -anner an+ ,it t e *a-e e..ect a* certi.icate* o. *toc).) (9) At the end of the period of the R;A ( or t e .u!! pay-ent o. t e !oan to , ic t e ?TA i* -a+e a con+ition, a* t e ca*e -ay 0e ), in the absence of any express renewal, the voting trust certificates as well as the certificates of stoc) in the name of the trustee<s shall be deemed cancelled and new certificates of stoc) shall be reissued in the name of the transferors.

EVERETT V. ASIA BANKING +49 #hi$. 512; 1926) This case illustrates how ITA can give rise to effective control and how it can be abused. .riginal stoc#holders can set aside the ITA when their rights are trampled upon by the trustee. MACKIN, ET AL. V. NICOLLET HOTEL +25 F. 26 783; 1928) !nvalidating circumstances of a ITA are: 3ant of consideration Ioting power not coupled with interest Fraud !llegal or improper purpose

NIDC V. A8UINO +163 SCRA 153; 1988) A ITA transfers only voting or other rights pertaining to the shares sub8ect of the agreement, or control over the stoc#. Stoc#holders of a corp. that lost all its assets through foreclosures cannot go after those properties. 94 /4!'C ac*uired those properties not as trustees but as creditors.

Pooling and !oting agreements

)%at are t%e a !anta$esE isa !anta$es of a poo(in$ a$ree#ent>
Ad!antages$ !. there is a commitment to agree to a certain manner of voting $. minority stoc)holders are able to control the corpo

&isad!antages$ !. possibility of disagreement thus the need for an arbitration clause $. there is no compelling reason for stoc)holders to act together

)%at ri$%ts oes a s%are%o( er $i!e upE retain *it% a poo(in$ a$ree#ent>
2hareholders retain their right to vote because the parties are not constituted as agents. (owever, the will of the parties may not be carried out due to non0compliance with the pooling agreement.

RINGLING v. RINGLING +29 %e$. Ch. 318, 49 A. 26 603; 1946) Benerally, agreements and combinations to vote stoc# or control corporate fiction M policy are valid if they see# without fraud to accomplish only what parties might do as stoc#holders and do not attempt it by illegal proxies, trusts or other means in contravention of statutes or law. BUCK RETAIL STORE v. HARKERT +62 N.W. 26 288; 1954) Stoc#holders6 control agreements are valid where it is for the benefit of corporation where it wor#s no fraud upon creditors or other stoc#holders and where it violates no statute or recogni(ed public policy. MC8UADE v. STONEHAM +189 N.:. 234; 1934) An agreement among stoc#holders to divest directors of their power to discharge an unfaithful employee is illegal as against public policy. Stoc#holders may not by agreement among themselves control the directors in the exercise of the 8udgment vested in them by virtue of their office to elect officers and fix salaries. CLARK v. DODGE +199 N.:. 641; 1936) !f the enforcement of a particular contract damages nobody/not even the public, there is no reason for holding it illegal. Test is 3.4 it causes damage to the corporation and stoc#holders.

Cumulati!e !oting (see sec. 2')

0et%o s of Votin$
,. Strai$%t !otin$8 "f A has !?? shares and there are 9 directors to be elected, he shall multiply !?? by five (e=uals 9??) and distribute e=ually among the five candidates without preference

).

Cu#u(ati!e !otin$ 4one can i ate5

"f A has !?? shares and there are 9 directors to be elected, he shall multiply !?? by five (e=uals 9??) and he can vote the 9?? for only one candidate.

0.

Cu#u(ati!e !otin$8 "f A has !?? shares, there are 9 directors to be elected, and he only 4#u(tip(e can i ates5 wants to vote for two nominees, he can divide 9?? votes between the two, giving each one $9? votes.

:o* to co#pute !otes nee e to $et a irector e(ecte b& cu#u(ati!e !otin$8
,. Fre&=s for#u(a (minimum no. of votes to elect one director) NO E of shares re=uired PO E of outstanding votes TO E of directors to be elected N O U PUU Q ! TQ! ). /aker B Car&=s for#u(a (minimum no. of votes needed to elect multiple directors) NO E of shares re=uired PO E of shares represented at meeting :O E of directors the minority wants to elect :DO total E of directors to be elected NO P x : Q ! :K Q !

/"0ES
7evels playing field or at least ensures that the minority can elect at least one representative to the board of directors (1+:) %annot of itself give the minority control of corporate affairs, but may affect and limit the extent of the ma@orityDs control 1y0laws cannot provide against cumulative voting since this right is mandated by law in 2ection $4.

Classification of s,ares (see sec. >)

T&pe of s%ares
,. ). Co##on Preferre share with right to vote share has preference over dividends and distribution of assets upon li=uidation# right to vote may be restricted (2ec. 5)

0.

Re ee#ab(e

share is purchased or ta)en up by the corporation upon the expiration of a fixed period (2ec. ,)# right to vote may be restricted (2ec. 5)

/"0ES
2toc) can also be both preferred and redeemable. 3ven though the right to vote of preferred and redeemable shares may be restricted, owners of these shares can still vote on certain matter provided for in 2ec. 5. 23% re=uires that where no dividends are declared for three consecutive years, in spite of available profits, preferred stoc)s will be given the right to vote until dividends are declared.

GOTTSCHALK V. AVALON REALTY +23 N.W. 26 606; 1946) 9rovision granting right to vote to preferred stoc# previously prohibited from voting, constitutes diminution of the voting power of common stoc#. 9rovision in the articles of incorporation granting holders of preferred stoc# right to vote in case of default in payment of dividends after ;uly ,, ,C2, was construed as denial by necessary implication of the right to vote even prior to ;uly ,, ,C2,.

;estriction on transfer of s,ares

.eculiar to close corporations. /ost common restriction granting first option to the other stoc)holders and<or the corporation to ac=uire the shares of a stoc)holder who wishes to sell them. Festrictions on shares of stoc) must conform to the re=uirements in 2ec. 8, ;his gives to the corporation and<or to its current management the power to prevent the transfer of shares to persons who they may see as having interests adverse to theirs.

Prescri%ing qualifications for directors. founder?s s,ares

Directors 4See Sec. 25@ 28@ '8)
As long as the =ualifications imposed are reasonable and not meant to un@ustly or unfairly deprive the minority of their rightful representation in the 1+:, such provisions are within the power of the ma@ority to provide in the by0laws.

According to @o)ong,ei v*. S3C, aside from prescribing =ualifications, by0laws can also provide for the dis=ualification of anyone in direct competition with the corporation.

Foun er=s s%ares

See Sec. : .or +e.inition 3xception to the rule in sec. 5 that non0voting shares shall be limited to preferred and redeemable shares "f founderDs shares en@oy the right to vote, this privilege is limited to 9 years upon 23%Ds approval, so as to prevent the perpetual dis=ualification of other stoc)holders.

Management contracts (sec. '')

%ontract to manage the day0to0day affairs of the corporation in accordance with the policies laid down by the board of the managed corporation. 1+: can and usually delegate many of its functions but it canDt abdicate its responsibility to act as a governing body by giving absolute power to officers or others, by way of a management contract or otherwise. "t must retain its control over such officers so that it may recall the delegation of power whenever the interests of the corporation are seriously pre@udiced thereby.

SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY +41 F. 26 588; 1930) Although corporations may, for a limited period, delegate to a stranger certain duties usually performed by the officers, there are duties, the performance of which may not be indefinitely delegated to outsiders.

(/(S(AA :"0#/G A/& B(";(M ;EB(#;EME/0S (Sec. 27@ 48 Cfor close corporationsD)
"ncreases veto power of the minority in some cases. "n exchange for the numerical ma@ority in the 1+:, minority can as) for a stronger veto power in ma@or corporate decisions.

BENITENDI VS. KENTON HOTEL +60 N.:. 26 829; 1945) A re*uirement that there shall be no election of directors at all unless every single vote be cast for the same nominees, is in direct opposition to the statutory rule that the receipt of plurality of the votes entitles a nominee to election. +See Sec. )1-

"e*uiring unanimity before the .' can ta#e action on any corporate matter ma#es it impossible for the directors to act on any matter at all. !n all acts done by the corporation, the ma8or number must bind the lesser, or else differences could never be determined nor settled. The State has decreed that every stoc# corporation must have a representative government, with voting conducted conformably to the statutes, and the power of decision lodged in certain fractions, always more than half, of the stoc#. This whole concept is destroyed when the stoc#holders, by agreement, by/law or certificates of corporation provides for unanimous action, giving the minority an absolute, permanent and all/inclusive power of veto. The re*uirement of unanimous vote to amend by/laws is valid. .nce proper by/laws have been adopted, the matter of amending them is no concern of the State.
De!ice Fa!orab(e To8
/"4+F";P assures them of representation on the board /"4+F";P so long as they hold more common stoc) as opposed to the ma@ority who holds more preferred stoc)

Li#itations
%anDt give minority control of corp. affairs .referred and redeemable stoc) can still vote on certain matters as provided in 2ec. 5 or as may be provided by the corp.

Cu#u(ati!e !otin$ C(assification of s%ares

Restriction on transfer of s%ares Gapp(icab(e on(& to c(ose corporations Prescribin$ 3ua(ifications for irectors6 foun er=s s%ares 0ana$e#ent contracts

/AS+F";P they can choose See Sec. 98 whether to )eep or release shares and they can prevent opposition from ac=uiring shares /AS+F";P theyDre the ones who can prescribe the =ualifications in the by0laws /AS+F";P allows them to delegate certain functions and duties without losing control over the corporation Lualifications must be reasonable and do not deprive minority of representation on the board %annot exceed five years 1+: must retain control over corp. policies 1+: must have power to recall contract

Unusua( !otin$ an 3uoru# /"4+F";P gives them stronger veto power in certain corp. affairs re3uire#ents

2ub@ect to the limitations in 2ec. !?&.

0EETIN.S 0eetin$s of Directors E Trustees

HINDS8 /eetings of the 1oard of :irectors or ;rustees may be either regular or special. (Sec. 49)

RE.ULAR8 SPECIAL8 NOTICE8

(eld monthly, unless otherwise provided in the by0laws. (Sec. $") At any time upon call of the president or as provided in the by0 laws.

/ust be sent at least ? a& prior to the scheduled meeting, unless otherwise provided by the by0laws. &ote' &otice -ay 0e ,aive+ e<pre**!y or i-p!ie+!y. %Sec. $")

):ERE8 2UORU08

Anywhere in or outside the .hilippines, unless the by0laws provide otherwise. >enerally, a ma@ority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a =uorum for the transaction of corporate business. (Sec. 2$) 3<ception*' (!) "f the A+" or by0laws provide for a greater ma@ority# ($) "f the meeting is for the election of officers, which re=uires the vote of a ma@ority of all the members of the 1oard

):O PRESIDES8

;he president, unless the by0laws provide otherwise. (Sec. $4)

0eetin$s of Stock%o( ers E 0e#bers

HINDS8 /eetings of stoc)holders or members may be either regular or special. (Sec. 49) RE.ULAR8 (eld annually on a date fixed in the by0laws. "f no date is fixed, on any date in April of every year as determined by the 1oard of :irectors or trustees.

/otice$ 'ritten, and sent to all stoc)holders or members of record at least , *eeks prior to the meeting, unless a different period is re=uired by the by0laws. SPECIAL8 At any time deemed necessary or as provided in the by0laws.

/otice$ 'ritten, and sent to all stoc)holders or members of record at least ? *eek prior to the meeting, unless otherwise provided in the by0laws. &ote' ):ERE8 &otice o. any -eeting -ay 0e ,aive+ e<pre**!y or i-p!ie+!y 0y any S> or -e-0er. %Sec. $0)

"n the city of municipality where the principal office of the corporation is located, and if practicable in the principal office of the corporation. /etro /anila is considered a city or municipality. (Sec. $1)

2UORU08

>enerally, a =uorum shall consist of the stoc)holders representing a ma@ority of the outstanding capital stoc), or a ma@ority of the members. 3<ception' "f otherwise provided for in the %ode or in the by0laws.

):O PRESIDES8

;he president, unless the by0laws provide otherwise. (Sec. $4)

):AT IS T:E EFFECT IF A STOCH:OLDERIS 0EETIN. IS I0PROPERL9 :ELD OR CALLED> >enerally, the proceedings had and<or any business transacted shall be void. (owever, the proceedings and<or transacted business may still be deemed valid if (!) 2uch proceedings or business are within the powers or authority of the corporation# and ($) All the stoc)holders or members of the corporation were present or duly represented at the meeting. (Sec. $1)

DUTIES OF DIRECTORS AND CONTROLLIN. STOCH:OLDERS Duties an Liabi(ities of Directors

):AT IS T:E --FOLD DUT9 T:AT DIRECTORS O)E TO T:E CORPORATION> (!) :iligence ($) 7oyalty (&) +bedience 90e+ience 0 directors must act only within corporate powers and are liable for damages if they acted beyond their powers unless in good faith. Assuming that they acted within their powers, liability may still arise if they have not observed due diligence or have been disloyal to the corporation.

):EN DOES LIA/ILIT9 ON T:E PART OF DIRECTORS; TRUSTEES OR OFFICERS ARISE> "n general, liability of directors, trustees or officers arises when they either (!) willfully and )nowingly vote for or assent to patently unlawful acts of the corporation# or ($) are guilty of gross negligence of bad faith in directing the affairs of the corporation# or (&) ac=uire any personal or pecuniary interest in conflict with their duty as such directors or trustees.

"n such cases, the directors or trustees shall be liable @ointly and severally for all damages resulting therefrom suffered by the corporation, its stoc)holders or members and other persons. 'hen a director, trustee or officer attempts to ac=uire or ac=uires, in violation of his duty, any interest adverse to the corporation in respect of any matter which has been reposed in him in confidence, as to which e=uity imposes a disability upon him to deal in his own behalf, he shall be liable as a trustee for the corporation and must account for the profits which would otherwise have accrued to the corporation. (Sec. "1) "n addition to this general liability, the %orporation %ode provides for specific rules to govern the following situations (!) ($) (&) (4) 2elf0dealing directors (Sec. "2) %ontracts between interloc)ing directors (Sec. "") :isloyalty to the corporation (Sec. "4) 'atered stoc)s (Sec. 6$)

Dut& of Di(i$ence8 /usiness Fu $#ent Ru(e"

):AT IS T:E /USINESS FUD.0ENT RULE> As a general rule, directors and trustees of the corporation cannot be held liable for mista)es or errors in the exercise of their business @udgment, provided they have acted in good faith and with due care and prudence. %ontracts intra vire* entered into by the board of directors are binding upon the corporation, and the courts will not interfere unless such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority. (owever, if due to the fault or negligence of the directors the assets of the corporation are wasted or lost, each of them may be held responsible for any amount of loss which may have been proximately caused by his wrongful acts or omissions. 'here there exists gross negligence or fraud in the management of the corporation, the directors, besides being liable for damages, may be removed by the stoc)holders in accordance with 2ec. $, of the %ode. (Ca-po* A Ca-po*) @3&3RA6 R863' %ontracts intra vire* entered into by 1o: are binding upon the corporation and courts will not interfere. 3BC3PT;9&' 'hen such contracts are so unconscionable and oppressive as to amount to a wanton destruction of the rights of the minority.

):AT HIND OF DILI.ENCE IS EDPECTED OF DIRECTORS> :irectors are expected to manage the corporation with reasonable diligence, care and prudence, i.e. the degree of care and diligence which men prompted by self0interest generally exercise in their own affairs. ;hus, they can be held liable not only for willful dishonesty but also for negligence. Although they are not expected to interfere with the day0to0day administrative details of the business of the corporation, they should )eep themselves sufficiently informed about the general condition of the business.

):AT FACTORS S:OULD /E CONSIDERED IN DETER0ININ. ):ET:ER REASONA/LE DILI.ENCE :AS /EEN EDERCISED> ;he nature of the business, as well as the particular circumstances of each case. ;he court should loo) at the facts as they exist at the time of their occurrence, not aided or enlightened by those which subse=uently too) place. (7itwin v. Allen)

OTIS AND CO. VS PENNSYLVANIA RAILROAD CO. +155 F. 26 522; 1946) !f in the course of management, the directors arrive at a decision for which there is a reasonable basis and they acted in good faith, as a result of their independent 8udgment, and uninfluenced by any consideration other than what they honestly believe to be for the best interest of the railroad, it is not the function of the court to say that it would have acted differently and to charge the directors for any loss or expenditures incurred. !n the present case, the bond issue was ade*uately deliberated and planned, properly negotiated and executedF there was no lac# of good faithF no motivation of personal gain or profitF there was no lac# of diligence, s#ill or care in selling the issue at the price approved by the Commission and which resulted in a saving of approximately PC: to the corporation. MONTELIBANO VS. BACOLOD-MURCIA MILLING CO. +5 SCRA 36; 1962) The acolod/:urcia :illing Co. adopted a resolution which granted to its sugar planters an increase in their share in the net profits in the event that the sugar centrals of 4egros .ccidental should have a total annual production exceeding one/third of the production of all sugar central mills in the province. &ater, the company amended its existing milling contract with its sugar planters, incorporating such resolution. The company, upon demand, refused to comply with the contract, stating that the stipulations in the resolution were made without consideration and that such resolution was, therefore, null and void !, i"iti*, being in effect a donation that was 4$t)! +i)e( and beyond the powers of the corporate directors to adopt. This is an action by the sugar planters to enforce the contract. The terms embodied in the resolution were supported by the same cause and consideration underlying the main amended milling contractF i.e., the premises and obligations underta#en thereunder by the planters, and particularly, the extension of its operative period for an additional ,2 years over and beyond the thirty years stipulated in the contract. As the resolution in *uestion was passed in good faith by the board of directors, it is valid and binding, and whether or not it will cause losses or decrease the profits of the central, the court has no authority to review them. They hold such office charged with the duty to act for the corporation according to their best 8udgment, and in so doing, they cannot be controlled in the reasonable exercise and performance of such duty. !t is a well/#nown rule of law that *uestions of policy or of management are left solely to the honest decision of officers and directors of a corporation, and the court is without authority to substitute its 8udgment of the board of directorsF the board is the business manager of the corporation, and so long as it acts in good faith, its orders are not reviewable by the courts.

LITWIN 6ROSEMARIN ET. AL., INTERVENORS7 VS. ALLEN ET. AL. +25 N.=.S. 26 667; 1940) FACTS: Alleghany Corp. bought terminals in Jansas City and St. ;oseph. !t needed to raise money to pay the balance of the purchase price but could not directly borrow money due to a borrowing limitation in its charter. Thus, it sold :issouri 9acific bonds to ;.9. :organ and Co. worth P!.:. ;.9. :organ, in turn, sold P0: worth of the bonds to Buaranty Trust Company. <nder the contract, the seller was given an option to repurchase at same price within six months. $%&': .ption given to seller is invalid. !t is against public policy for a ban# to sell securities and buy them bac# at the same priceF similarly, it is against public policy for the ban# to buy securities and give the seller the option to buy them bac# at the same price because the ban# incurs the entire ris# of loss with no possibility of gain other than the interest derived from the securities during the period that the ban# holds them. $ere, if the mar#et price of the securities rise, the holder of the repurchase option would exercise it to recover the securities at a lower price at which he sold them. !f the mar#et price falls, the seller holding the option would not exercise it and the ban# would sustain the loss. 'irectors are not in a position of trustees of an express trust who, regardless of good faith, are personally liable. !n this case, the directors are liable for the transaction because the entire arrangement was improvident, ris#y, unusual and unnecessary so as to be contrary to fundamental conceptions of prudent ban#ing practice. @et, the advice of counsel was not sought. Absent a showing of exercise of good faith, the directors are thus liable. WALKER VS. MAN, ET. AL. +253 N.=.S. 458; 1931) FACTS: Frederic# Southac# and Alwyn all loaned Avram P)GT evidenced by a promissory note executed by Avram and endorsed by &acey. The loan was not authori(ed by any meeting of the board of directors and was not for the benefit of the corporation. The note was dishonored but defendant/directors did not protest the note for non/paymentF thus, &acey, the indorser who was financially capable of meeting the obligation, was subse*uently discharged. $%&': 'irectors are charged not with misfeasance, but with non/feasance, not only with doing wrongful acts and committing waste, but with ac*uiescing and confirming the wrong doing of others, and with doing nothing to retrieve the waste. 'irectors have the duty to attempt to prevent wrongdoing by their co/directors, and if wrong is committed, to rectify it. !f the defendant #new that an unauthori(ed loan was made and did not ta#e steps to salvage the loan, he is chargeable with negligence and is accountable for his conduct. STEINBERG VS. VELASCO +52 #hi$. 953; 1929) FACTS: The board of directors of Sibuguey Trading Company authori(ed the purchase of 00G shares of stoc# of the corporation and declared payment of 90T as dividends to stoc#holders. The directors from whom 0GG of the stoc#s were bought resigned before the board approved the purchase and declared the dividends. At the time of purchase of stoc#s and

declaration of dividends, the corporation had accounts payable amounting to 9C,)1, and accounts receivable amounting to 9,),2,), but the receiver who made diligent efforts to collect the amounts receivable was unable to do so. !t has been alleged that the payment of cash dividends to the stoc#holders was wrongfully done and in bad faith, and to the in8ury and fraud of the creditors of the corporation. The directors are sought to be made personally liable in their capacity as directors. $%&': Creditors of a corporation have the right to assume that so long as there are outstanding debts and liabilities, the .' will not use the assets of the corporation to buy its own stoc#, and will not declare dividends to stoc#holders when the corporation is insolvent. !n this case, it was found that the corporation did not have an actual ,*"! 3i6e surplus from which dividends could be paid. :oreover, the Court noted that the oard of 'irectors purchased the stoc# from the corporation and declared the dividends on the stoc# at the same oard meeting, and that the directors were permitted to resign so that they could sell their stoc# to the corporation. Biven all of this, it was apparent that the directors did not act in good faith or were grossly ignorant of their duties. %ither way, they are liable for their actions which affected the financial condition of the corporation and pre8udiced creditors. BARNES V. ANDREWS +298 F. 614; 1924) A complaint was filed against a corporate director for failing to give ade*uate attention +he relied solely on the 9resident6s updates on the status of the corp- to the affairs of a corporation which suffered depletion of funds. The director was not liable. The court said that despite being guilty of misprision in his office, still the plaintiff must clearly show that the performance of the director6s duties would have avoided the losses. 3hen a business fails from general mismanagement, business incapacity, or bad 8udgment, it is difficult to con8ecture that a single director could turn the company around, or how much dollars he could have saved had he acted properly. FOSTER V. BOWEN +41 N.:. 26 181; 1942) Cushing, a director and in charge of leasing a roller s#ating rin# of the corp, leased the same to himself. :inority stoc#holders filed suit against owen, the corporation=s 9resident, to recover for company losses arising out of an alleged breach of fiduciary duty. owen was held to be not liable because: +,- Cushing=s acts were not actually dishonest or fraudulentF +)- Cushing performed personal wor# such as #eeping the facility in repair which redounded to the benefit of the company and even increased its incomeF +0- owen did not profit personally through Cushing=s leaseF and +1- the issue of the possible illegality of the lease was put before the oard of 'irectors, but the oard did not act on it but instead moved on to the next item on the agenda. Absent any bad faith on owen=s part, and a showing that it was a reasonable exercise of 8udgment to ta#e no action on the lease agreement at the time it was entered into, owen was not liable.

LOWELL HOIT & CO. V. DETIG +50 N.:. 26 602; 1943) &owell $oit filed action against directors of a cooperative grain company for an alleged willful conversion by the manager of grain stored in the company facility. The court said that the directors were not personally liable. There was no evidence that the directors had #nowledge of the transaction between the manager and &owell $oit. The court will treat directors with leniency with respect to a single act of fraud on the part of a subordinate officerHagent. ut directors could be held liable if the act of fraud was habitual and openly committed as to have been easily detected upon proper supervision. To hold directors liable, he must have participated in the fraudulent actF or have been guilty of lac# of ordinary and reasonable supervisionF or guilty of lac# of ordinary care in the selection of the officerHagent. BATES V. DRESSER +40 S.Ct.247; 1920) Coleman, an employee of the ban#, was able to divert ban# finances for his benefit, resulting in huge losses to the ban#. The receiver sued the president and the other directors for the loss. The court said that the directors were not answerable as they relied in good faith on the cashier6s statement of assets and liabilities found correct by the government examiner, and were also encouraged by the attitude of the president that all was well +the president had a si(able deposit in the ban#-. ut the president is liable. $e was at the ban# dailyF had direct control of recordsF and had #nowledge of incidents that ordinarily would have induced scrutiny.

0,e selfEdealing director

):AT IS A SELF-DEALIN. DIRECTOR> 4Sec" -,5 A self0dealing director is one who enters into a contract with the corporation of which he is a director. ):AT IS T:E NATURE OF CONTRACTS ENTERED INTO /9 SELF-DEALIN. DIRECTORS> Roidable at the option of the corporation, whether or not it suffered damages. "t is possible that the self0dealing director may have the greatest interest in its welfare and may be willing to deal with it upon reasonable terms. (owever, such contract may be upheld by the corporation if all of the following conditions are present (!) ;he presence of the self0dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a =uorum for such meeting# ($) ;he vote of such self0dealing director or trustee was not necessary for the

approval of the contract# (&) ;he contract is fair and reasonable under the circumstances# (4) "n the case of an officer, the contract has been previously authorized by the 1oard of :irectors. "n the event that either of or both conditions (!) and ($) are absent ( i.e., t e pre*ence o. t e +irectorCtru*tee ,a* nece**ary .or a 4uoru- an+Cor i* vote ,a* nece**ary .or t e approva! o. t e contract), the contract may be ratified by a $<& vote of the +%2 or all of the members, in a meeting called for the purpose. Hull disclosure of the adverse interest of the directors or trustees involved must be made at such meeting. DOCTRINE A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to his corporation. "n case his interests conflict with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit. As corporate managers, directors are committed to see) the maximum amount of profits for the corporation. ;his trust relationship "is not a matter of statutory or technical law. "t springs from the fact that directors have the control and guidance of corporate affairs and property and hence of the property interests of the stoc)holders." %Pri-e 1 ite Ce-ent Corp. v. ;AC, 220 SCRA 10"# 199")

PALTING V. SAN JOSE PETROLEUM +%ec. 17, 1966) The articles of inc. of respondent included a provision that relieves any director of all responsibility for which he may otherwise be liable by reason of any contract entered into with the corp., whether it be for his benefit or for the benefit of any other person, firm, association or partnership in which he may be interested, except in case of fraud. SCA This is in direct contravention of the Corp &aw, of the traditional fiduciary relationship between directors and the S$. The implication is that they can do anything short of fraud, even to their benefit, and with immunity.
&ote' T i* ca*e ,a* +eci+e+ in 1966 un+er t e Corporation 6a,, , ic provi*ion* on *e!.2+ea!ing +irector*. a+ no

MEAD V. MCCULLOUGH +21 #hi$. 95; 1911) Iss-%A validity of sale of corp. property and assets to the directors who approved the same. Ben "ule: 3hen purely private corporations remain solvent, its directors are agents or trustees for the S$. %xception: when the corp. becomes insolvent, its directors are trustees of all the creditors, whether they are members of the corp. or not, and must manage its property and assets with strict regard to their interestF and if they are themselves creditors while the insolvent corp is under their management, they will not be permitted to secure to themselves by purchasing the corp property or otherwise any personal advantage over the other creditors.

%xception to %xception: A director or officer may in good faith and or an ade*uate consideration purchase from a ma8ority of the directors or S$ the property even of an insolvent corp, and a sale thus made to him is valid and binding upon the minority. !n the case at bar, the sale was held to be valid and binding. Company was losing. 1 directors present during meeting all voted for the sale. They li#ewise constitute ma8ority of S$. Contract was found to be fair and reasonable. PRIME WHITE CEMENT CORP. V. IAC +220 SCRA 103; 1993) 9rime 3hite Cement Corp. +through the 9resident and Chairman of the oard- and Ale8andro Te, a director and auditor of the corporation, entered into a dealership agreement whereby Te was obligated to act as the corporation=s exclusive dealer andHor distributor of its cement products in the entire :indanao area for 2 years. Among the conditions in the dealership agreement were that the corporation would sell to and supply Te with )G,GGG bags of white cement per month, and that Te would purchase the cement from the corporation at a price of 9 C.?G per bag. "elying on the conditions contained in the dealership agreement, Te entered into written agreements with several hardware stores which would enable him to sell his allocation of )G,GGG bags per month. $owever, the oard of 'irectors subse*uently imposed new conditions, including the condition that only >,GGG bags of cement would be delivered per month. Te made several demands on the corporation to comply with the dealership agreement. $owever, when the corporation refused to comply with the same, Te was constrained to cancel his agreements with the hardware stores. 4otwithstanding the dealership agreement with Te, the corporation entered into an exclusive dealership agreement with a certain 4apoleon Co for mar#eting of corporation=s products in :indanao. The lower court held that 9rime 3hite was liable to Te for actual and moral damages for having been in breach of the agreement which had been validly entered into. .n appeal, the Supreme Court held that the dealership agreement is not valid and enforceable, for not having been fair and reasonable: the agreement protected Te from any mar#et increases in the price of cement, to the pre8udice of the corporation. The dealership agreement was an attempt on the part of Te to enrich himself at the expense of the corporation. Absent any showing that the stoc#holders had ratified the dealership agreement or that they were fully aware of its provisions, the contract was not valid and Te could not be allowed to reap the fruits of his disloyalty.

(sing inside information

USE OF INSIDE INFOR0ATION8 Do irectors an officers of a co#pan& o*e an& ut& at a(( to stock%o( ers in re(ation to transactions *%ereb& t%e officers an irectors bu& for t%e#se(!es s%ares of stock fro# t%e stock%o( ers>

/"4+F";P F673

P32. :irectors and officers have an obligation to the stoc)holders individually as well as collectively. 4+. :irectors and officers owe no fiduciary duty at all to stoc)holders, but may deal with them at armDs length. 4o duty of disclosure of facts )nown to director or officer exists. 4ondisclosure constitute constructive fraud.

/AS+F";P F673 the cannot

2.3%"A7 HA%;2 :+%;F"43 "; :3.34:2. 'here special circumstances or facts are present which ma)e in ine=uitable to withhold information from the stoc)holder, the duty to disclose arises, and concealment is fraud. "n the case of Go6ong)ei !. SEC (,8 2%FA &&5# !8-8), the 2upreme %ourt, =uoting from the 62 case of Pepper v. 6itton %&?, 6.2. $890&!&# !8&8) stated that a director cannot, "by the intervention of a corporate entity violate the ancient precept against serving two masters V (e cannot utilize his inside information and his strategic position for his own preferment. (e cannot violate rules of fair play by doing indirectly through the corporation what he could not do directly. (e cannot use his power for his personal advantage and to the detriment of the stoc)holders and creditors no matter how absolute in terms that power may be and no matter how meticulous he is to satisfy technical re=uirements. Hor that power is at all times sub@ect to the e=uitable limitation that it may not be exercised for the aggrandizement, preference, or advantage of the fiduciary to the exclusion or detriment of the cestuis."

Seizing Corporate "pportunit+ (Sec. "4)

"f a director ac=uires for himself, by virtue of his office, a business opportunity which should belong to the corporation, thereby obtaining profits to the pre@udice of the corporation, he must account to the corporation for all such profits by refunding the same. >o,ever, if his act was ratified by $<& stoc)holdersK vote, he need not refund said profits. ;his provision applies even though the director may have ris)ed his own funds in the venture. &ote' ;his provision is to be distinguished from 2ec. &$ on contracts of self0dealing directors contracts of self0dealing directors are voidable at the option of the corporation even if it has not suffered any in@ury# on the other hand, 2ec. &4 applies only if the corporation has been pre@udiced by the contract.

SINGER VS. CARLISLE +27 N.=.S. 26 190; 1941) !n this case, it was held that the general allegations in the complaint of conspiracy of the directors to obtain corporate opportunity were deficient. The complaint should state specific transactions.

'irectorship in ) competing corporations does not in and of itself constitute a wrong. !t is only when a business opportunity arises which places the director in a position of serving two masters, and when, dominated by one, he neglects his duty to the other, that a wrong has been done. IRVING TRUST CO. VS. DEUTSCH +79 @. :6. 1243; 1935) Fiduciary duty applies even if the corporation is unable to enter into transactions itself. LITWIN V ALLEN +25 N.=.S. 26 667; 1940) !n this case, it was held that the common stoc# purchased by the defendants wasn6t a business opportunity for the corporation. $aving fulfilled their duty to the corporation in accordance with their best 8udgment, the defendant directors were not precluded from a transaction for their own account and ris#.

#nterloc6ing directors
):AT IS AN INTERLOCHIN. DIRECTOR> An interloc)ing director is one who occupies a position in $ companies dealing with each other. ):AT IS T:E RULE ON CONTRACTS INVOLVIN. INTERLOCHIN. DIRECTORS> 3<cept in ca*e* o. .rau+, and provided the contract is fair and reasonable under the circumstances, a contract between $ or more corporations having interloc)ing directors shall not be invalidated on that ground alone. ;his practice is tolerated by the %ourts because such an arrangement oftentimes presents definite advantages to the corporations involved. (owever, if the interest of the interloc)ing director in one corporation is substantial (i.e., *toc) o!+ing* e<cee+20D o. t e 9CS) and his interest in the other corporation or corporations is merely nominal, he shall be sub@ect to the conditions stated in 2ec. &$, i.e., for the contract not to be voidable, the following conditions must be present (!) ;he presence of the self0dealing director or trustee in the board meeting for which the contract was approved was not necessary to constitute a =uorum for such meeting# ($) ;he vote of such self0dealing director or trustee was not necessary for the approval of the contract# (&) ;he contract is fair and reasonable under the circumstances# (4) "n the case of an officer, the contract has been previously authorized by the 1oard of :irectors. "n the event that either of or both conditions (!) and ($) are absent ( i.e., t e pre*ence o. t e +irectorCtru*tee ,a* nece**ary .or a 4uoru- an+Cor i* vote ,a* nece**ary .or t e approva! o. t e contract), the contract may be ratified by a $<& vote of the +%2 or all of the members, in a meeting called for the purpose. Hull disclosure of the adverse interest of the directors or trustees involved must be made at such meeting.

&ote' ;he "nvestment (ouse 7aw prohibits a director or officer of an investment house to be concurrently a director or officer of a ban), except as otherwise authorized by the /onetary 1oard. "n no event can a person be authorized to be concurrently an officer of an investment house and of a ban) except where the ma@ority or all of the e=uity of the former is owned by the ban). (..:. !$8, 2ec. 5, as amended) ;he "nsurance %ode li)ewise prohibits a person from being a director and<or officer of an insurance company and an ad@ustment company. (2ec. !,-)

GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC +121 N.:. 378; 1918) :aynard, president and chief stoc#holder of Blobe but nominal S$ in <tica Bas, obtained a cheap, ,G/year contract for <tica to supply power. :aynard did not vote during the meeting for the approval of the contract. C!" <$*,e (ee> t* e"3*)ce c*"t)!ct7 The Supreme Court held that Blobe could not enforce the contract and that said contract was voidable at the election of <tica. !t was found that based on the facts of the case, the contract was clearly one/sided. :aynard, although he did not vote, exerted a dominating influence to obtain the contract from beginning to end. The director/trustee has a constant duty not to see# harsh advantage in violation of his trust.

Fatered stoc6s (Sec. 6$)

Any director or officer of the corporation (!) consenting to the issuance of stoc)s for a consideration less than its par or issued value or for a consideration in any form other than cash, valued in excess of its fair value, or ($) who, having )nowledge thereof, does not forthwith express his ob@ection in writing and file the same with the corporation secretary shall be solidarily liable with the stoc)holders concerned to the corporation and its creditors for the difference between the fair value received at the time of the issuance of the stoc) and the par or issued value of the same.

*i9ing compensation of directors and officers

.ENERAL RULE8 3N%3.;"+42 Directors as suc% are not entit(e to co#pensation for perfor#in$ ser!ices or inari(& attac%e to t%eir office" (!) "f the articles of incorporation or the by0laws expressly so provide# ($) "f a contract is expressly made in advance. T%e stock%o( ers on(& 4#a7orit& of t%e OCS5

):O FIDES T:E CO0PENSATION> 3N%3.;"+4

.er diems, which can be fixed by the directors themselves

APPLICA/ILIT9 OF CO0PENSATION8 On(& to future an NOT past ser!ices" 0ADI0U0 A0OUNT ALLO)ED /9 LA)8 ;otal yearly income of the directors shall not exceed !?G of the net income before income tax of the corporation during the preceding year (2ec. &?)

GOVBT OF THE PHILIPPINES VS. EL HOGAR FILIPINO +50 #hi$. 399; 1927) The compensation provided in sec. C) of the by/laws of %l $ogar Filipino which stipulated that 2D of the net profit shown by the annual balance sheet shall be distributed to the directors in proportion to the attendance at board meetings is valid. The Corporation &aw does not prescribe the rate of compensation for the directors of a corporation. The power to fix it , if any is left to the corporation to be determined in its by/laws. !n the case at bar, the provision in *uestion even resulted in extraordinarily good attendance. BARRETO VS. LA PREVISORA FILIPINA This action was brought by the directors of defendant corporation to recover ,D from each of the plaintiffs of the profits of the corporation for ,C)C pursuant to a by/law provision which grants the directors the right to receive a life gratuity or pension in such amount for the corporation. The SC held that the by/law provision is not valid. Such provision is ultra vires for a mutual loan and building association to ma#e. !t is not merely a provision for the compensation of directors. The authority conferred upon corporations refers only to providing compensation for the future services of directors, officers, and employees after the adoption of the by/law in relation thereto. The by/law can=t be held to authori(e the giving of continuous compensation to particular directors after their employment has terminated for past services rendered gratuitously by them to the corporation. CENTRAL COOPERATIVE E$CHANGE INC VS. TIBE +33 SCRA 596; 1970) The *uestioned resolutions which appropriated the funds of the corporation for different expenses of the directors are contrary to the by/laws of the corporationF thus they are not within the board=s power to enact. Sec. > of the by/laws explicitly reserved to the stoc#holders the power to determine the compensation of members of the board and they did restrict such compensation to actual transportation expenses plus an additional 90G per diems and actual expenses while waiting. $ence, all other expenses are excluded. %ven without the express reservation, directors presumptively serve without pay and in the absence of any agreement in relation thereto, no claim can be asserted therefore. FOGELSON VS. AMERICAN WOOLEN CO. +170 F. 26. 660; 1948) A retirement plan which provides a very large pension to an officer who has served to within one year of the retirement age without any expectation of receiving a pension would seem

analogous to a gift or bonus. The si(e of such bonus may raise a 8ustifiable in*uiry as to whether it amounts to wasting of the corporate property. The disparity also between the president=s pension plan and that of even the nearest of the other officers and employees may also be in*uired upon by the courts. KERBS VS. CALIFORNIA EASTERN AIRWAYS +90 A. 26 652; 1952) This is an appeal filed to en8oin the California %astern Airways from putting into effect a stoc# option plan and a profit/sharing plan. The SC held that the stoc# option plan was deficient as it was not reasonably created to insure that the corporation would receive contemplated benefits. A validity of a stoc# option plan depends upon the existence of consideration and the inclusion of circumstances which may insure that the consideration would pass to the corporation. The options provided may be exercised i" t*t* immediately upon their issuance within a A month period after the termination of employment. !n short, such plan did not insure that any optionee would remain with the corporation. 3ith regard to the profit/sharing plan, it was held valid because it was reasonable and was ratified by the stoc#holders pending the action.

C(ose Corporations
2ec. 8- provides that the A+" of a close corp. may specify that it shall be managed by the stoc)holders rather than the 1o:. 2o long as this provision continues in effect 4o stoc)holderDs meeting need be called to elect directors# >enerally, stoc)holders deemed to be directors for purposes of this %ode, unless the context clearly re=uires otherwise# 2toc)holders shall be sub@ect to all liabilities of directors. ;he A+" may li)ewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stoc)holders instead of by the 1o:.

Hurther, 2ec. !?? provides that for stoc)holders managing corp. affairs ;hey shall be personally liable for corporate torts (unli)e ordinary directors liable only upon finding of negligence) "f however there is reasonable ade=uate liability insurance, in@ured party has no right of action v. stoc)holders0managers

Dut& of Contro((in$ Interest

A 2(<director is still entitled to vote in a stoc)holderDs meeting even if his interest is adverse to a corporation. 1ut a stoc)holder able to control a corp. is still sub@ect to the duty of good faith to the corp. and the minority. .ersons with management control of corporation hold it in behalf of 2(s and can not regard such as their own personal property to dispose at their whim. T e ... act* are !ega!' ;ransfer of managerial control through 1o: resignation C seriatim election of successors if concomitant with the sale and actual transfer of ma@ority interest or that which constitutes voting control# :isposal by controlling 2( of his stoc) at any time C at such price he chooses

T e ... are i!!ega!' 2elling corp. office or management control by itself, that is 4+; accompanied by stoc)s or stoc)s are insufficient to carry voting control# ;ransferring office to persons who are )nown or should be )nown as intending to raid the corporate treasury or otherwise improperly benefit themselves at the expense of the corp. ("nsuranshares %orp. R. 4orthern Hiscal)# Feceiving a bonus or premium specifically in consideration of their agreement to resign C install the nominees of the purchaser of their stoc), above and beyond the price premium normally attributable to the control stoc) being sold#

INSURANSHARES CORP. V. NORTHERN FISCAL CORP. +35 F. S4pp. 22; 1940The corp. is suing its former directors to recover damages as a result of the sale of its control to a group +corporate raiders- who proceeded to rob it of most of its assets mainly mar#etable securities. Are previous directors who sold corp. control liable7 @es, they are under duty not to sell to raiders. .wners of corp. control are liable if under the circumstances, the proposed transfer are such as to awa#en a suspicion or put a prudent man on his guard. As in this case, control was bought for so much aside from being warned of selling to parties they #new little about, and also from fair notice that such outsiders indeed intended to raid the corp.

Dut& to Cre itors

@enera! ru!e' %orporate creditors can run after the corp. itself only, and not the directors for mismanagement of a solvent corp.

"f corp. becomes insolvent, directors are deemed trustees of the creditors and should therefore manage its assets with due consideration to the creditorDs interest. "f directors are also creditors themselves, they are prohibited from gaining undue advantage over other creditors.

Persona( Liabi(it& of Directors

In *%at instances oes persona( (iabi(it& of a corporate irector; trustee or officer !a(i (& attac% to$et%er *it% corporate (iabi(it&> 'hen the director < trustee < officer ". (!) assents to a patently unlawful act of the corporation# ($) is in bad faith or gross negligence in directing the affairs of the corporation# (&) creates a conflict of interest, resulting in damages to the corporation, its stoc)holders or other persons %onsents to the issuance of watered stoc)s, or who, having )nowledge thereof, does not forthwith file with the corporate secretary his written ob@ection thereto# Agrees to hold himself personally and solidarily liable with the corporation# "s made, by a specific provision of law, to personally answer for his corporate action. (Tra-at Eercanti!e v. CA, 2"8 SCRA 14)

"". """. "R.

UICHICO v. NLRC +<.R. N*. 121434, &4"e 2, 1997) !n labor cases, particularly, corporate directors and officers are solidarily liable with the corporation for the termination of employment of corporate employees done with malice or in bad faith. !n the instant case, there was a showing of bad faith: the oard "esolution retrenching the respondents on the feigned ground of serious business losses had no basis apart from an unsigned and unaudited 9rofit and &oss Statement which had no evidentiary value whatsoever.

CORPORATE /OOHS AND RECORDS AND T:E RI.:T OF INSPECTION

Corporate /ooks an Recor s

):AT /OOHS AND RECORDS 0UST A CORPORATION HEEP> 4Sec. :4) (!) ($) (&) (4) Fecord of all business transactions# /inutes of all meetings of stoc)holders or members# /inutes of all meetings of 1oard of :irectors or ;rustees# 2toc) and ;ransfer boo)

):AT IS A STOCH AND TRANSFER /OOH> (Sec. :$) A stoc) and transfer boo) is a record of all stoc)s in the names of the stoc)holders alphabetically arranged. "t li)ewise contains the following information "nstallments paid and unpaid on all stoc) for which subscription has been made, and the date of any installment# A statement of every alienation, sale or transfer of stoc) made, the date thereof, and by whom and to whom made# 2uch other entries as the by0laws may prescribe

;he stoc) and transfer boo) shall be )ept in the principal office of the corporation or in the office of its stoc) transfer agent, and shall be open for inspection by any director or stoc)holder of the corporation at reasonable hours on business days. ):AT IS A STOCH TRANSFER A.ENT> (Sec. :$) A stoc) transfer agent is one who is engaged principally in the business of registering transfers of stoc)s in behalf of a stoc) corporation. (e or she must be licensed by the 23%# however, a stoc) corporation is not precluded from performing or ma)ing transfer of its own stoc)s, in which case all the rules and regulations imposed on stoc) transfer agents, except the payment of a license fee, shall be applicable. ):O IS T:E CUSTODIAN OF CORPORATE RECORDS> "n the absence of any provision to the contrary, the corporate secretary is the custodian of corporate records. %orollarily, he )eeps the stoc) and transfer boo) and ma)es the proper and necessary entries. (Torre*, et a!. v*. CA, $-, 2%FA -8&# !88-)

/asis of t%e Ri$%t of Inspection

+rdinary stoc)holders, the beneficial owners of the corporation, usually have no say on how business affairs of the corp. are run by the directors. ;he law therefore gives them the right to )now not only the financial health of the corp. but also how its affairs are managed so that if they find it unsatisfactory, they can see) the proper remedy to protect their investment. ):AT IS T:E NATURE OF T:E RI.:T TO INSPECT> .F3R34;"R3 deterrent to an ill0intentioned management )nowing its acts

are sub@ect to scrutiny# and F3/3:"A7 A dissatisfied 2( may avail of this right as a preliminary step towards see)ing more direct and appropriate remedies against mismanagement.

)%at Recor s Co!ere

!. Recor s of ALL business transactions T%is includes boo) of inventories and balances, @ournal, ledger, boo) for copies of letters and telegrams, financial statements, income tax returns, vouchers, receipts, contracts, papers pertaining to such contracts, voting trust agreements (sec. 98) $. /&-(a*s T%ese are expressly re=uired to be open to inspection by 2(<members during office hours (2ec. 45). &ote' T ere i* no *i-i!ar provi*ion a* to A9;, 0ut t e*e are .i!e+ ,it t e S3C any,ay. &. 0inutes of irector=s #eetin$s ;his is to inform stoc)holders of 1oard policies. 2uch right arises only upon approval of the minutes, however. 4. 9. 0inutes of stock%o( ersI #eetin$s Stock an transfer books ;hese are records of all stoc)s in the names of the stoc)holders alphabetically arranged. contain all names of the stoc)holders of record. 6seful for proxy solicitation for elections. 23% has however ruled that a 2( cannot demand that he be furnished such a list but he is free to examine corp. boo)s. 5. 0ost recent financia( state#ent 2ec. -9 of the %ode provides that within !? days from the corporationKs receipt of a written re=uest from any stoc)holder or member, the corporation must furnish the re=uesting party with a copy of its most recent financial statement, which shall include a balance sheet as of the end of the last taxable year and a profit or loss statement for said taxable year. Note8 6nder the 2ecrecy of 1an) :eposits Act, records of ban) deposits of the corporation are 4+; open to inspection, 3N%3.; under the following circumstances (!) 6pon written consent of concerned depositor (pre*u-a0!y t e corporation)# ($) "n cases of impeachment# (&) 6pon court order in cases of bribery or dereliction of duty of a public official# and (4) "n cases where the money deposited < invested is the sub@ect matter of litigation

(9) 6pon order of a competent court in cases of unexplained wealth under FA &?!8 or the Anti0>raft and %orrupt .ractices Act (5) 6pon order of the +mbudsman

E'tent an Li#itations on Ri$%t

!. ;he exercise of this right is sub@ect to reasonable limitations similar to a citizenDs exercise of the right to information. +therwise, the corp. might be impaired, its efficiency in operations hindered, to the pre@udice of 2(s. 2uch limitations to be valid must be reasonable and not inconsistent with law ( 2ec. &5W9X and 45). A corp. may regulate time and manner of inspection but provisions in its by0law which gives directors absolute discretion to allow or disallow inspection are prohibited. Li#itations as to ti#e an p(ace8 3xercise of right only at F3A2+4A173 (+6F2 on 162"4322 :AP2. 2uch business days should be ;(F+6>(+6; ;(3 P3AF. 1o: cannot limit such to merely a few days within the year. (.ardo v. (ercules 7umber) 4. 9. 5. -. 1y0laws cannot prescribe that authority of president must first be obtained. "nspection should be made in such a manner as not to impede the efficient operations P(ace of inspection8 .rincipal office of the corp. 2( cannot demand that such records be ta)en out of the principal office. As to purpose8 .F326/.;"+4 that 2(Ds purpose is proper. %orp. cannot refuse on the mere belief that his motive is improper (sec -4). 16F:34 +H .F++H lies with corp. which should show that purpose was illegal. ;o be legitimate, the purpose for inspection must be >3F/A43 to the "4;3F32; of the stoc)holder as such, and it is not contrary to the interests of the corporation. 6egiti-ate' &ot !egiti-ate' in=uiry about failure to declare dividends for mere satisfaction or speculation.

$. &.

1elief in good faith that a corp. is being mismanaged may be given due course even if later, this is proven unfounded. "f motive can be clearly shown as inimical to corp., right may be denied.

)%o 0a& E'ercise Ri$%t

E!er& irector; trustee; stock%o( er; #e#ber may exercise right personally or through an agent who can better understand and interpret records (impartial source, expert accountant, lawyer). As to VTA8 both voting trustee and transferor S: of parent corp" o!er subsi iar&8 "f the two are operated as 23.AFA;3 entities &9 rig t o. in*pection

"f they are +43 A4: ;(3 2A/3 with respect to management and control, and inspection is demanded due to mismanagement of subsidiary by the parentDs directors who are also directors of the subsidiary 1it rig t o. in*pection "f the subsidiary is wholly0owned by the parent, and its boo)s C records are in the possession and control of the parent corporation

1it rig t o. in*pection %@o)ong,ei v. S3C)

Re#e ies a!ai(ab(e if Inspection Refuse

):AT RE0EDIES ARE AVAILA/LE IF INSPECTION IS REFUSED /9 T:E CORPORATION> (!) 'rit of mandamus. &9T3' 1rit * a!! not i**ue , ere it i* * o,n t at t e petitioner/* purpo*e i* i-proper an+ ini-ica! to t e intere*t* o. t e corporation. 1rit * ou!+ 0e +irecte+ again*t t e corporation. T e *ecretary an+ t e pre*i+ent -ay 0e 5oine+ a* party +e.en+ant*. ($) "n@unction (&) Action for damages against the officer or agent refusing inspection. Also, penal sanctions such as fines and < or imprisonment (2ec. -4# 2ec. !44) 1 at +e.en*e* are avai!a0!e to t e o..icer or agentF %1) T e per*on +e-an+ing a* i-proper!y u*e+ any in.or-ation *ecure+ t roug any prior e<a-ination# or %2) 1a* not acting in goo+ .ait # or %") T e +e-an+ ,a* not .or a !egiti-ate purpo*e.

PARDO V. HERCULES LUMBER +47 #hi$. 965; 1924)

.'H.fficers may deny inspection when sought at unusual hours or under improper conditions. ut they cannot deprive the stoc#holders of the right altogether. !n CA , by/law provided that the inspection be made available only for a few days in a year, chosen by the directors. This is void. GON ALES V. PNB +122 SCRA 490; 1983) B ac*uired , share of stoc# purposely to be able to exercise right to inspection with respect to transactions before he became a S$. B not in good faith. $is obvious purpose was to arm himself with materials which he can use against the ban# for acts done by the latter when B was a total stranger to the same. "ight not available here. VERAGUTH V. ISABELA SUGAR CO. +57 #hi$. 266; 1932) There was nothing improper in the secretary6s refusal since the minutes of these prior meetings have to be verified, confirmed and signed by the directors then present. $ence, Ieraguth has to wait until after the next meeting. GOKONGWEI V. SEC +Ap)i$ 11, 1979) The law ta#es from the S$ the burden of showing impropriety of purpose and places upon the corporation the burden of showing impropriety of purpose and motive. Considering that the foreign subsidiary is wholly owned by S:C and therefore under its control, it would be more in accord with e*uity, good faith and fair dealing to construe the statutory right of Bo#ongwei as petitioner as S$ to inspect the boo#s and records of such wholly subsidiary which are in S:C6s possession and control.

DERIVATIVE SUITS Nature an /asis of eri!ati!e suit

Suits of stock%o( ersE #e#bers base persons8 a. b. c. on *ron$fu( or frau u(ent acts of irectors or ot%er

In i!i ua( suits 0 wrong done to stoc)holder personally and not to other stoc)holders %e<. 1 en rig t o. in*pection i* +enie+ to a *toc) o!+er) C(ass suit 0 wrong done to a group of stoc)holders %e<. Pre.erre+ *toc) o!+er*G rig t* are vio!ate+) Deri!ati!e suit 0 wrong done to the corporation itself

%ause of action belongs to the corp. and not the stoc)holder 1ut since the directors who are charged with mismanagement are also the ones who will decide '+4 the corp. will sue, the corp. may be left without redress# thus, the stoc)holder is given the right to sue on behalf of the corporation. An effective remedy of the minority against the abuses of management An individual stoc)holder is permitted to bring a derivative suit to protect or vindicate corporate rights, whenever the officials of the corp. refuse to sue or are the ones to be sued or hold the control of the corp. 2uing stoc)holder is merely the nominal party and the corp. is actually the party in interest. A 2( can only bring suit for an act that too) place when he was a stoc)holder# not before. (Bitong v. CA, 292 SCRA $0")

Re3uire#ents Re(atin$ to Deri!ati!e Suits

):AT ARE T:E LE.AL PRINCIPLES CONCERNIN. DERIVATIVE SUITS> !) $) 2toc)holder< member must have exhausted all remedies within the corp. 2toc)holder< member must be a stoc)holder< member at the time of acts or transactions complained of or in case of a stoc)holder, the shares must have devolved upon him since by operation of law, unless such transaction or act continues and is in@urious to the stoc)holder. Any benefit recovered by the stoc)holder as a result of bringing derivative suit must be accounted for to the corp. who is the real party in interest. "f suit is successful, plaintiff entitled to reimbursement from corp. for reasonable expenses including attorneysK fees.

&) 4)

EVANGELISTA VS. SANTOS +86 #hi$. 387; 1950) The in8ury complained of is against the corporation and thus the action properly belongs to the corporation rather than the stoc#holders. !t is a derivative suit brought by the stoc#holder as a nominal party plaintiff for the benefit of the corporation, which is the real party in interest. !n this case, plaintiffs brought the suit not for the benefit of the corporation=s interest, but for their own. 9laintiffs here as#ed that the defendant ma#e good the losses occasioned by his mismanagement and to pay them the value of their respective participation in the corporate assets on the basis of their respective holdings. 9etition dismissed for venue improperly laid.

REPUBLIC BANK VS. CUADERNO +19 SCRA 671; 1967) !n a derivative suit, the corporation is the real party in interest, and the stoc#holder merely a nominal party. 4ormally, it is the corp. through the board of directors which should bring the suit. ut as in this case, the members of the board of directors of the ban# were the nominees and creatures of respondent "oman and thus, any demand for an intra/corporate remedy would be futile, the stoc#holder is permitted to bring a derivative suit. Should the corporation be made a party7 The %nglish practice is to ma#e the corp. a party plaintiff while the <S practice is to ma#e it a party defendant. 3hat is important though is that the corporation should be made a party in order to ma#e the court=s ruling binding upon it and thus bar any future re/litigation of the issues. :is8oinder of parties is not a ground to dismiss the action. REYES VS. TAN +3 SCRA 198; 1961) The importation of textiles instead of raw materials, as well as the failure of the board of directors to ta#e actions against those directly responsible for the misuse of the dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a breach of trust was committed which 8ustified the suit by a minority stoc#holder of the corporation. The claim that plaintiff ;ustiniani did not ta#e steps to remedy the illegal importation for a period of two years is also without merit. 'uring that period of time plaintiff had the right to assume and expect that the directors would remedy the anomalous situation of the corporation brought about by their wrong/doing. .nly after such period of time had elapsed could plaintiff conclude that the directors were remiss in their duty to protect the corporation property and business. BITONG v. CA (292 SCRA 503) The power to sue and be sued in any court by a corporation even as a stoc#holder is lodged in the oard of 'irectors that exercises its corporate powers and not in the president or officer thereof. !t was ;AJA=s oard of 'irectors, not Senator %nrile, which had the power to grant itong authority to institute a derivative suit for and in its behalf. The basis of a stoc#holder=s suit is always one in e*uity. $owever, it cannot prosper without first complying with the legal re*uisites for its institution. The most important of these is the,*"! 3i6e ownership by a stoc#holder of a stoc# in his own right at the time of the transaction complained of which invests him with standing to institute a derivative action for the benefit of the corporation.

FINANCIN. T:E CORPORATION Sources of Financin$

):ERE CAN CAPITAL TO FINANCE T:E CORPORATION /E SOURCED> !) %ontributions (stoc)holders)# investment $) 7oans or advances (creditors) &) .rofits (corporation itself) also )nown as stoc)holder e=uity<e=uity

Capita( Structure
):AT IS 0EANT /9 CAPITAL STRUCTURE> ;his refers to the aggregate of the securities 00 instruments which represent relatively long0term investment 00 issued by the corporation. ;here are basically $ )inds of securities * are* o. *toc) and +e0t *ecuritie*.

Capita( an Capita( Stock Distin$uis%e

CAPITAL STOCK DEFINITION the amount fixed, usually by the corporate charter, to be subscribed and paid in or secured to be paid in by the S$S of a corporation, and upon which the corporation is to conduct its operation C.4STA4T, unless amended by the A.! CAPITAL actual property of the corporation, including cash, real, and personal property. !ncludes all corporate assets, less any loss which may have been incurred in the business. F&<CT<AT!4B

CONSTANCY

S%ares of Stock8 Hin s

CO00ON &E*#/#0#"/ 2toc) which entitles the owner of such stoc)s to an e=ual pro rata division of profits PREFERRED 2toc) which entitles the holder to some preference either in the dividends or distribution of assets upon li=uidation, or in both PAR NO PARG TREASUR9 2hares that have been issued and fully paid but subse=uently reac=uired by the issuing corporation by lawful means. REDEE0A/LE FOUNDER=S 2hares issued by 2pecial shares the corporation whose that may be exclusive rights ta)en up by the and privileges corporation upon are determined expiration of a by the A+". fixed period. regar+!e** o. t e e<i*tence o. unre*tricte+ retaine+ earning*

:AA(E

:epends if 2tated par itDs par or no value par

Hixed in the Ralue not A+", and fixed in the indicated in A+", and the stoc) therefore not certificate. indicated in /ay be sold the stoc) at a value certificate. higher, but .rice may not lower, be set by than that 1+:, 2(Ds fixed in the or fixed in A+". the A+" eventually. :epends if :epends if 4o voting 6sually denied itDs common itDs common rights for as voting rights. or or preferred. long as such preferred. stoc) remains in the treasury (2ec. 9-)

:"0#/G ;#G<0S

6sually %an vote only vested with under certain the exclusive circumstances right to vote

P;E*E;E/C E (P"/ A#B(#&A0#" /

4o advantage, priority, or preference over any other 2( in the same class

Hirst crac) at dividends < profits < distribution of assets

&9T3' 9n!y pre.erre+ an+ re+ee-a0!e * are* -ay 0e +eprive+ o. t e rig t to vote. %Sec. 6, Corporation Co+e) 3BC3PT;9&' A* ot er,i*e provi+e+ in t e Corporation Co+e. H &o2par va!ue * are* -ay not 0e i**ue+ 0y t e .o!!o,ing entitie*' 0an)*, tru*t co-panie*, in*urance co-panie*, pu0!ic uti!itie*, 0ui!+ing A !oan a**ociation %Sec. 6)

Nature of Subscription Contract

):AT IS A SU/SCRIPTION CONTRACT> "t is any contract for the ac=uisition of unissued stoc) in an existing corporation or a corporation still to be formed. ;his is notwithstanding the fact that the parties refer to it as a purchase or some other contract. %Sec. 60) ):AT IS T:E NATURE OF A SU/SCRIPTION CONTRACT> 2ubscriptions constitute a fund to which the creditors have a right to loo) for satisfaction of their claims. ;he assignee in insolvency can maintain an action upon any unpaid stoc) subscription in order to realize assets for the payment of its debts. A subscription contract is "4:"R"2"173 %Sec. 64). A subscription contract subsists as a liability from the time that the subscription is made until such time that the subscription is fully paid.

GARCIA V. LIM CHU SING +59 #hi$. 562; 1934)

A share of stoc# or the certificate thereof is not an indebtedness to the owner nor evidence of indebtedness and therefore, it is not a credit. Stoc#holders as such are not creditors of the corporation. The capital stoc# of a corporation is a trust fund to be used more particularly for the security of the creditors of the corporation who presumably deal with it on the credit of its capital.

PreEincorporation su%scription
F673 'hen a group of persons sign a subscription contract, they are deemed not only to ma)e a continuing offer to the corporation, but also to have contracted with each other as well. ;hus, no one may revo)e the contract even prior to incorporation without the consent of all the others. ):EN IS A PRE-INCORPORATION SU/SCRIPTION IRREVOCA/LE> !) Hor a period of at least 5 months from the date of subscription#

3BC3PT;9&S'

(!) unless all of the other subscribers consent to the revocation# or ($) unless the incorporation of said corporation fails to materialize within the said period or within a longer may be stipulated in the contract of subscription

period as

$) After the A+" have been submitted to the 23% (2ec. 5!)

UTAH HOTEL CO V. MADSEN +43 At!h 285, 134 #!c. 557; 1913)
Sec 00) in express terms confers powers upon the stoc#holders Kto regulate the mode of ma#ing subscriptions to its capital stoc# and calling in the same by/laws or by express contract.L Since it may be done by express contract, this shows that it was intended that a contract to that effect may be entered into even before the corporation is organi(ed, and the contract agreement is enforced if the corporation is in fact organi(ed.

WALLACE V. ECLIPSE POCAHONTAS COAL CO +98 S.:. 293; 1919)

.ne who has paid his subscription to the capital stoc# of the corporation may compel the issuance of proper certificates therefor.

PostEincorporation su%scription
&9T3' 6nder the %orporation %ode, there is no longer any distinction between a subscription and a purchase. ;hus, a subscriber is liable to pay for the shares even if the corporation has become insolvent.

T%e Pree#pti!e Ri$%t to S%ares

):AT IS T:E PRE-E0PTIVE RI.:T> "t is the option privilege of an existing stoc)holder to subscribe to a proportionate part of shares subse=uently issued by the corporation, before the same can be disposed of in favor others. ):9 A PRE-E0PTIVE RI.:T> ;o protect existing stoc)holder e=uity. "f the right is not recognized, the 2(Ds interest in the corporation will be diluted by the subse=uent issuance of shares.

1asis of ;ig,t. Common Aa) ;ule

6nder the prevailing view in common law, the preemptive right is limited to shares issued in pursuance of an increase in the authorized capital stoc) and does not apply to additional issues of originally authorized shares which form part of the existing capital stoc). ;his common law principle which was generally understood to be applicable in this @urisdiction has now to give way to the express provisions of the %orporation %ode on the matter.

E9tent and Aimitations of Preempti!e ;ig,t under t,e Code

):AT IS T:E EDTENT OF T:E PRE-E0PTIVE RI.:T> All stoc)holders of a stoc) corporation shall en@oy pre0emptive right to subscribe to all issues or dispositions of shares of any class, in proportion to their respective shareholdings. 3<ception' 'hen such right is denied by the A+" or an amendment thereto. LI0ITATIONS8 T%e pre-e#pti!e ri$%t oes not e'ten to8 4Sec" -J5 !) $) "nitial .ublic +fferings (".+s)# "ssuance of shares in exchange for property needed for corporate purposes, including cases wherein an absorbing corporation issues new stoc)s to the 2(Ds in pursuance to the merger agreement (2ec. &8) 'hyY (a) 1ecause it is beneficial for the corporation to save its cash# (b) A swap is more expedient than determining the monetary e=uivalent of the property.

&)

"ssuance of shares in payment of a previously contracted debt (2ec. &8) 'hyY (a) ;he obligation is extinguished outright# (b) %orporation does not have to shell out money to fulfill its obligations# (c) /oney that would have otherwise been used for interest payments can be channelled to more productive corporate activities.

&ote' ;n &o*. %2) an+ %"), *uc act* re4uire approva! o. 2C" o. t e 9CS or 2C" o. tota! -e-0er*.

#n Close Corporations
"n close corporations, the preemptive rights extends to A77 stoc) to be issued, including re0 issuance of treasury shares, 3BC3PT if provided otherwise by the A+". (Sec. 102). 4ote that the limitations in 2ec. &8 do not apply.

Fai!er of Preempti!e ;ig,t

;he waiver of the preemptive right must appear in the Articles of "ncorporation or an amendment thereto in order to be binding on A77 stoc)holders, particularly future stoc)holders. (2ec. &8) "f it appears merely in a waiver agreement and 4+; in the A+", and was unanimously agreed to by all existing stoc)holders ;he existing stoc)holders cannot later complain since they are all bound to their private agreement. (owever, future stoc)holders will 4+; be bound to such an agreement. Any stoc)holder who has not exercised his preemptive right within a reasonable time will be deemed to have waived it.

F,en t,e issue is in %reac, of trust

;he issue of shares may still be ob@ectionable if the :irectors have acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to Afreeze outB the minority interest.

;emedies ),en rig,t !iolated-denied

):AT ARE T:E RE0EDIES ):EN T:E PRE-E0PTIVE RI.:T IS UNLA)FULL9 DENIED> (!) "n@unction# ($) /andamus# (&) %ancellation of the shares ( &9T3' 0ut on!y i. no innocent "r+ partie* are pre5u+ice+) (4) "n certain cases, a derivative suit

STOKES V. CONTINENTAL TRUST CO. +78 N.:. 1090; 1906)

The directors were under the legal obligation to give the S$/plaintiff an opportunity to purchase at the price fixed before they could sell his property to a third party. y selling to strangers without first offering to sell to him, the defendant wrongfully deprived him of his property and is liable for such damages as he actually sustained.

THOM V. BALTIMORE TRUST +148 At$. 234; 1930)

!ndependently of the charters, the S$s of a corporation have a preferential right to purchase new issues of shares, to the proportional extent of their respective interests in the

capital stoc# then outstanding, when the privilege can be exercised consistently with the ob8ect which the disposition of the additional stoc# is legally designed to accomplish. !n the present case, every S$ of the ban#, for each of the shares, was to receive , ,H) shares of the stoc# co. +share in exchange for property-. !t would not be feasible to consummate a transfer based upon such consideration if the preemptive right were to be held enforceable with respect to every new issue of stoc# regardless of the ob8ect of the disposition.

FULLER V. KROGH +113 N.W. 26 25; 1962)

9reemptive right is not to be denied when the property is to be ta#en as consideration for the stoc# except in those peculiar circumstances when the corporation has great need for the particular property, and the issuance of stoc# is the only practical and feasible method by which the corp. can ac*uire it for the best interest of the S$s. Bround: practical necessity. Bc3. Sec. 39C

DUNLAY V. M. GARAGE AND REPAIR +170 N.:. 917; 1930)

!f the issue of shares is reasonably necessary to raise money to be issued in the business of the corporation rather than the expansion of such business beyond original limits, the original S$s have no right to count on obtaining and #eeping their proportional part of original stoc#. ut even if preemptive right does not exist, the issue of shares may still be ob8ectionable if the directors have acted in breach of trust and their primary purpose is to perpetuate or shift control of the corporation, or to 5free(e out6 minority interest.

ROSS TRANSPORT V. CROTHERS +45 A. 26 267; 1946)

The doctrine of preemptive right is not affected by the identity of the purchasers. 3hat it is concerned with is who did not get it. ut when officers and directors sell to themselves and thereby gain an advantage, both in value and in voting power, another situation arises. !n the case at bar, the directors were not able to prove good faith in the purchase and e*uity of transaction, since the corp. was a financial success. There was constructive fraud upon the other S$s.

Debt Securities 1orro)ings

1orrowings are usually represented by promissory notes, bonds or debentures. +ftentimes, a financial institution will be willing to lend large amounts to private corporations only on the condition that such institution will have some representation on the 1oard of :irectors. ;he role of such representative is to see to it that his institutionKs investment is protected from mismanagement or unfavorable corporate policies.

1onds and &e%entures

1+4:2 secured by a mortgage or pledge of corporate property

must be registered with the 23%, as provided by 2ec. &, of the

%orporation %ode :3134;6F32 issued on the general credit of the corporation not secured by any collateral# ;(3F3H+F3, are not bonded indebtedness in the true sense, and stoc)holder approval is 4+; re=uired (a!t oug it ,ou!+ genera!!y 0e a goo+ i+ea to o0tain it)

Con!erti%le securities. stoc6 options

&9T3' 8n+er t e S3C ru!e*, *toc) option -u*t .ir*t 0e approve+ 0y t e S3C. A!*o, i. t e *toc) option i* grante+ to non2*toc) o!+er*, or to +irector*, o..icer*, or -anaging group*, t ere -u*t .ir*t 0e S> approva! o. 2C" o. t e 9CS 0e.ore t e -atter i* *u0-itte+ to t e S3C .or approva!. 9. cour*e it goe* ,it out *aying t at t e corporation -u*t *et a*i+e enoug o. t e 5unior *ecuritie* in ca*e t e o!+er* o. t e option +eci+e to e<erci*e *uc option.

MERRITT-CHAPMAN & SCOTT CORP. VS. NEW YORK TRUST CO. +184 F. 26 954; 1950)
!f the corporation is allowed to declare stoc# dividends without ta#ing account of the warrant holders +who have not yet exercised their warrant-, the percentage of interest in the common stoc# capital of the corporation which the warrant holders would ac*uire, should they choose to do so, could be substantially reducedHdiluted. Thus, the corporation is wrong in contending that a warrant holder must first exercise his warrant before they may be issued stoc# dividend.

<+%rid securities
1ecause preferred shares and bonds are created by contract, it is possible to create stoc) which approximates the characteristics of debt securities. (ybrid securities, as the name implies, therefore combine the features of preferred shares and bonds. :etermining the true nature of the security is crucial for tax purposes. ;he American courts use the following criteria

+,- "s the corporation liable to pay bac) the investor at a fixed maturity dateY +)- "s interest payable unconditionally at definite intervals, or is it dependent on earningsY +0- :oes the security ran) at least e=ually with the claims of other creditors, or is it subordinate
to themY

):AT IS T:E NATURE OF T:E SECURIT9 AND T:E PA90ENT 0ADE> /ONDS F<A0 #S PA#&= 0" F<"M PA#&= F<E/ PA#&= /A0(;E 0AGA1#A#0H MA0(;#0H &A0E= ;A/I "/ &#SS"A(0#"/ "nterest %reditor0investor 'hether the corporation has profits or not 3xpense %an be deducted for tax purposes Pes :ividends 2toc)holder +nly if there are profits 4ot an expense %A44+; be deducted 4o STOCH

Fan)ed together with other 2uperior to stoc)holders, corporate creditors inferior to corporate creditors

JOHN KELLY VS. CIR TALBOT MILLS VS. CIR +326 A.S. 521; 1946)
!n the Jelly case, the annual payments made were interest on indebtedness +therefore, a bond is held- because there were sales of the debentures as well as exchanges of preferred stoc# for debentures, a promise to pay a certain annual amount if earned, a priority for the debentures over common stoc# and a definite maturity date in the reasonable future. !n the Talbot :ills case, the annual payments made were dividends and not interest +therefore, shares are held-, because of the presence of fluctuating annual payments with a )D minimum, and the limitation of the issue of notes to stoc#holders in exchange only for stoc#. esides, it is the Tax Court which has final determination of all tax issues which are not clearly delineated by law.

JORDAN CO. VS. ALLEN +85 F. S4pp. 437; 1949)

The payments made, regardless of what they are called, are in fact dividends +on stoc#sbecause of the absence of a maturity date and the right to enforce payment of the principal sum by legal action, among other factors. The following criteria should be used in determining whether a payment is for interest or dividends: +,- maturity date and the right to enforce collectionF +)- treatment by the partiesF +0- ran# on dissolutionF +1- uniform rate of interest payable or income payable only out of profitsF +2- participation in management and the right to vote.

!t must be noted that these criteria are not of e*ual importance and cannot be relied upon individually. %.g. treatment accorded the issuance by the parties cannot be sufficient as this would allow taxpayers to avoid taxes by merely naming payments as interest.

0,e trust indenture

(ere, the bond issue usually involves & parties

+,- debtor0corporation +)- creditor0bondholder +0- trustee representative of all the bondholders

ALADDIN HOTEL CO. VS. BLOOM +200 F. 26 627; 1953)

The rights of bondholders are to be determined by their contract and courts will not ma#e or rema#e a contract merely because one of the parties may become dissatisfied with its provisions. !f the contract is legal, the courts will interpret and enforce it. !n the deed of trust and bonds in this case, there are provisions empowering bondholders of )H0 of the principal amount or more, by agreement with the company, to modify and extend the date of payment of the bonds provided such extension affected all bonds ali#e. 3hen this was done, the bondholders only followed such provisions in good faith. The company benefited because of such move, and the bondholders were not necessarily pre8udiced, as defendants ;oneses in this case were themselves owners of ?)D of the bond issue.

CONSIDERATION FOR ISSUANCE OF S:ARES For# of Consi eration

):AT FOR0S OF CONSIDERATION ARE ACCEPTA/LE FOR ISSUANCE OF S:ARES> cash# property actually received by the corporation must be necessary or convenient for its use and lawful purposes# labor performed for or services actually rendered to the corporation (&9T3' Iuture *ervice* are &9T accepta0!eJ)#

previously incurred indebtedness by the corporation# amounts transferred from unrestricted retained earnings to stated capital# outstanding shares exchange for stoc)s in the event of reclassification or conversion

):AT FOR0S ARE UNACCEPTA/LE> future services promissory notes value less than the stated par value

:O) IS T:E ISSUED PRICE OF NO-PAR S:ARES FIDED> "t may be fixed as follows (!) "n the A+"# or ($) 1y the 1+: pursuant to authority conferred upon it by the A+" or the by0 laws# or (&) "n the absence of the foregoing, by the 2(s representing at least a ma@ority of the outstanding capital stoc) at a meeting duly called for the purpose (Sec. 62) IF T:E CONSIDERATION FOR S:ARES IS OT:ER T:AN CAS:; :O) IS T:E VALUE T:EREOF DETER0INED> "t is initially determined by the incorporators or the 1oard of :irectors, sub@ect to approval by the 23%. (Sec. 62)

)atere Stocks
):AT IS )ATERED STOCH> 2toc)s issued as fully paid up in consideration of property at an overvaluation. +ftentimes, the consideration received is less than the par value of the share. &9T3' &o2par * are* CA& 0e ,atere+ *toc)' , en t ey are i**ue+ .or !e** t an t eir i**ue+ va!ue a* .i<e+ 0y t e corp. in accor+ance ,it !a,.

):AT ARE T:E )A9S /9 ):IC: )ATERED STOCH CAN /E ISSUED> (!) ($) >ratuitously, under an agreement that nothing shall be paid to the corporation# 6pon payment of less than its par value in money or for cost at a discount#

(&) (4)

6pon payment with property, labor or services, whose value is less than the par value of the shares# and "n the guise of stoc) dividends representing surplus profits or an increase in the value of property, when there are no sufficient profits or sufficient increases in value to @ustify it.

):AT IS T:E LIA/ILIT9 OF DIRECTORS FOR T:E ISSUANCE OF )ATERED STOCH> :irectors and officers who consented to the issuance of watered stoc)s are *o!i+ari!y !ia0!e with the holder of such stoc)s to the corp. and its creditors for the difference between the fair value received at the time of the issuance and the par or issued value of the share. ;he liability will be to all creditors, whether they became such prior or subse=uent to the issuance of the watered stoc). Feliance by the creditors on the alleged valuation of corporate capital is immaterial and fraud is not made an element of liability. &9T3' ;n t e P i!ippine*, it i* t e *tatutory o0!igation t eory t at i* contro!!ing %c.. Sec. 6$).

PRIVATE TRIPLE$ SHOE V. RICE & HUTCHINSTC CL > DTRIPLE$ SHOE V. RICE & HUTCHINSD +72 A.@.R. 932; 1930)
!n this case, the stoc#s issued to the 'illman faction were no par value shares, the consideration for which were never fixed as re*uired by law. $ence, their issuance was void. :oreover, the stoc#s were issued to the 'illmans for services rendered and to be rendered. Future services are not lawful consideration for the issuance of stoc#.

PRIVATE MCCARTY V. LANGDEAUTC CL > DMCCARTY V. LANGDEAUD +337 S.W. 26 407; 1960)
:cCarty agreed to purchase shares of a corp. with a downpayment of only P)G, with the balance due to be evidenced by a note. :cCarty failed to pay a big portion of the balance. The Court affirmed the 8udgement against :cCarty for the balance due on the contract. :cCarty contends that the contract is void. ut the law only prohibits the issuance of stoc#. !f it is understood that the stoc# will not be issued to the subscriber until the note is paid, the contract is valid and not illegal. !f a security such as a note, which is not a valid consideration, is accepted, the law does not say that such note, or the stoc# issued for it, shall be void. 3hat is void by express provision of law is the fictitious increase of stoc# or indebtedness. The law was designed for the protection of the corporation and its creditors. !t emphasi(es the stoc#holder6s obligations to ma#e full and lawful payment in accord with its mandate, rather than furnish him with a defense when he has failed in

that obligation. !ts purpose is to give integrity to the corporation6s capital. 4one of these ob8ects would be promoted by declaring a note given by a subscriber for stoc# uncollectible in the hands of a bona fide stoc#holder.

RHODE V. DOCK-HOP CO. +12 A.@.R. 437; 1920)

This case involves an action to collect unpaid balances on par value of shares. !t was held that innocent transferees of watered stoc# cannot be held to answer for the deficiency of the stoc#s even at the suit of the creditor of the company. The creditor6s remedy is against the original owner of the watered stoc#.

PRIVATE BING CROSBY V. EATONTC CL > DBING CROSBY V. EATOND +297 #. 26 5; 1956)
A subscriber to shares who pays only part of what he agreed to pay is liable to creditors for the balance. $olders of watered stoc# are generally held liable to the corporation6s creditors for the difference between the par value of the stoc# and the amount paid in. <nder the misrepresentation theory, the creditors who rely on the misrepresentation of the corporation6s capital stoc# are entitled to recover the KwaterL from holders of the watered stoc#. "eliance of creditors on the misrepresentation is material. $owever, under the statutory obligation theory, reliance of creditors on the capital stoc# of the corporation is irrelevant. (;t -u*t
0e note+ t at ere in t e P i!ippine*, it i* t e *tatutory o0!igation t eory , ic i* prevai!ing.)

Issuance of Certificate Certificate of stoc6

%+4:";"+4 H+F "226A4%3 payment of full amount of subscription price plus interest, if any is due %Sec. 64)

%3F;"H"%A;"+4 ;(A; person named therein is a holder or owner of a stated number of shares in the corporation. "4:"%A;32 !. )ind of shares $. date of issuance &. par value, if par value shares 2ignatures of the proper officers, usually president or secretary, as well as the corporate seal

13AF2

A/+64; "2263:

Hor no more than the number of shares authorized in articles of incorporation# excess would be void

/ature and function of a certificate of stoc6

A certificate of stoc) is not necessary to render one a stoc)holder in a corporation. 4evertheless, a certificate of stoc) is the paper representation or tangible evidence of the stoc) itself and of the various interests therein. ;he certificate is not stoc) in the corporation but is merely evidence of the holderKs interest and status in the corporation, his ownership of the shares represented thereby, but is not in law the e=uivalent of such ownership. "t expresses the contract between the corporation and the 2(, but it is not essential to the existence of a share in stoc) or the creation of the relation of shareholder to the corporation. (Tan v. S3C, 206 SCRA :40)

;equisites for !alid issuance of formal certificate of stoc6 (Sec. 6")

4?5 T%e certificates #ust be si$ne b& t%e Presi ent E Vice-Presi ent; countersi$ne b& t%e secretar& or assistant secretar&; an sea(e *it% t%e sea( of t%e corporation" A mere typewritten statement advising a 2( of the extent of his ownership in a corporation without =ualification and<or authentication cannot be considered as a formal certificate of stoc). (Bitong v. CA, 292 SCRA $0") 4,5 De(i!er& of t%e certificate ;here is no issuance of a stoc) certificate where it is never detached from the stoc) boo)s although blan)s therein are properly filled up if the person whose name is inserted therein has no control over the boo)s of the company. (Bitong v. CA, 292 SCRA $0") (&) Par !a(ue of par !a(ue s%ares E Fu(( subscription of no par !a(ue s%ares #ust be fu((& pai " (4) Surren er of t%e ori$ina( certificate if t%e person re3uestin$ t%e issuance of a certificate is a transferee fro# a S:"

BITONG V. CA +292 SCRA 503)

Stoc# issued without authority and in violation of law is void and confers no rights on the person to whom it is issued and sub8ects him to no liabilities. 3here there is an inherent lac# of power in the corporation to issue the stoc#, neither the corporation nor the person to whom the stoc# is issued is estopped to *uestion its validity since an estoppel cannot operate to create stoc# which under the law cannot have existence.

Unpai Subscriptions
6npaid subscriptions are not due and payable until a call is made by the corporation for payment. (Sec. 6:) An obligation arising from non0payment of stoc) subscriptions to a corporation cannot be offset against a money claim of an employee against the employer. (Apo+aca v. &6RC, 1:2 SCRA 442) Interest on all unpaid subscriptions shall be at the rate of interest fixed in the by0 laws. "f there is none, it shall be the legal rate. (Sec. 66)

:o* Pa&#ent of S%ares Enforce

:O) ARE UNPAID SU/SCRIPTIONS COLLECTED> (!) %all for payment as necessary, i.e. the 1+: declares the unpaid subscriptions due and payable (Sec. 6:)# ($) :elin=uency sale (Sec. 68# to 0e +i*cu**e+ in t e ne<t *ection) (&) %ourt action for collection (Sec. :0)

VELASCO VS POI AT +37 #hi$. 802; 1918)

9oi(at subscribed to )G shares but only paid for 2. oard made a call for payment through a resolution. 9oi(at refused to pay. Corporation became insolvent. Assignee in insolvency sued 9oi(at whose defense was that the call was invalid for lac# of publication. !t was held that the oard call became immaterial in insolvency which automatically causes all unpaid subscriptions to become due and demandable.

LINGAYEN GULF ELECTRIC VS BALTA AR +93 #hi$. 404; 1953)

Company6s president subscribed to shares and paid partially. The oard made a call for payment through a resolution. $owever, the president refused to pay, prompting the corporation to sue. The defense was that the call was invalid for lac# of publication.

!t was held that the call was void for lac# of publication re*uired by law. Such publication is a condition precedent for the filing of the action. The ruling in 9oi(at does not apply since the company here is solvent.

DA SILVA VS ABOITI +44 #hi$. 755; 1923)

'a Silva subscribed to A2G shares and paid for )GG. The company notified him that his shares will be declared delin*uent and sold in a public auction if he does not pay the balance. 'a Silva did not pay. The company advertised a notice of delin*uency sale. 'a Silva sought an in8unction because the by/laws allegedly provide that unpaid subscriptions will be paid from the dividends allotted to stoc#holders. The Court held that by/laws provide that unpaid subscriptions may be paid from such dividends. Company has other remedies provided for by law such as a delin*uency sale or specific performance.

NATIONAL E$CHANGE VS DE$TER +51 #hi$. 601; 1928)

'exter subscribed to 0GG shares. The subscription contract provided that the shares will be paid solely from the dividends. Company became insolvent. Assignee in insolvency sued 'exter for the balance. 'exter=s defense was that under the contract, payment would come from the dividends. 3ithout dividends, he cannot be obligated to pay. The Court held that the subscription contract was void since it wor#s a fraud on creditors who rely on the theoretical capital of the company +subscribed shares-. <nder the contract, this theoretical value will never be reali(ed since if there are no dividends, stoc#holders will not be compelled to pay the balance of their subscriptions.

LUMANLAN VS CURA +59 #hi$. 746; 1934)

&umanlan had unpaid subscriptions. Company6s receiver sued him for the balance and won. 3hile the case was on appeal, the company and &umanlan entered into a compromise whereby &umanlan would directly pay a creditor of the company. !n exchange, the company would forego whatever balance remained on the unpaid subscription. &umanlan agreed since he would be paying less than his unpaid subscription. Afterwards, the corporation still sued him for the balance because the company still had unpaid creditors. &umanlan6s defense was the compromise agreement. The Court held that the agreement cannot pre8udice creditors. The subscriptions constitute a fund to which they have a right to loo# to for satisfaction of their claims. Therefore, the corporation has a right to collect all unpaid stoc# subscriptions and any other amounts which may be due it, notwithstanding the compromise agreement.

Ri$%ts an Ob(i$ations of :o( ers of Unpai but Non- e(in3uent Stock

):AT ARE T:E RI.:TS OF UNPAID S:ARES> (olders of subscribed shares not fully paid which are not delin=uent shall have all the rights of a stoc)holder. (Sec. :2)

FUA CUN V. SUMMERS +44 #hi$. 704; 1923)

Chua Soco bought 2GG shares of China an#ing Corp. at par value of 9,GG.GG, paying the sum of 9)2,GGG.GG, 2GD of the subscription price. Chua mortgaged the said shares in favor of plaintiff Fua Cun to secure a promissory note for the sum of 9)2,GGG.GG. !n the meantime, Chua Soco=s interest in the 2GG shares were attached and levied upon to satisfy his debt with China an#ing Corp. Fua Cun brought an action to have himself declared to hold priority over the claim of China an#, to have the receipt for the shares delivered to him, and to be awarded damages for wrongful attachment, on the ground that he was owner of )2G shares by virtue of Chua Soco=s payment of half of the subscription price. The Court held that payment of half the subscription price does not ma#e the holder of stoc# the owner of half the subscribed shares. 9laintiff=s rights consist in an e*uity in 2GG shares and upon payment of the unpaid portion of the subscription price he becomes entitled to the issuance of certificate for the said 2GG shares in his favor.

BALTA AR V. LINGAYEN GULF ELECTRIC POWER +14 SCRA 522; 1965)

alta(ar, et al. subscribed to a certain number of shares of &ingayen Bulf %lectric 9ower. They had made only partial payment of the subscription but the corporation issued them certificates corresponding to shares covered by the partial payments. Corporation wanted to deny voting rights to all subscribed shares until total subscription is paid. The Court held that shares of stoc# covered by fully paid capital stoc# shares certificates are entitled to vote. Corporation may choose to apply payments to subscription either as: +a- full payment for corresponding number of stoc# the par value of which is covered by such paymentF or +b- as payment pro/rata to each subscribed share. The corporation chose the first option, and, having done so, it cannot unilaterally nullify the certificates issued. N*te? ;he C!mp*(e( !)e *3 the *pi"i*" th!t D 64 *3 C*)p*)!ti*" C*6e m!>e( the @i"0!-e" <4$3 i"!pp$ic!,$e !t p)e(e"t.

NAVA V. PEERS MARKETING +74 SCRA 65; 1976)

Teofilo Co subscribed to >G shares of 9eers :ar#eting Corp. at 9,GG.GG a share for a total of 9>,GGG.GG. $e, however, paid only 9),GGG.GG corresponding to )G shares or )2D of total subscription. 4ava bought )G shares from Co and sought its transfer in the boo#s of the corporation. The corporation refused to transfer said shares in its boo#s.

!t was held that the transfer is effective only between Co and 4ava and does not affect the corporation. The F4! C4" ruling applies. @i"0!-e" <4$3 does not apply because, unli#e in &ingayen Bulf, no certificate of stoc# was issued to Co.

Effect of e(in3uenc&
):AT IS DELIN2UENT STOCH> 4Sec. 6:) 2toc) that remains unpaid &? days after the date specified in the subscription contract or the date stated in the call made by the 1oard. ):AT ARE T:E EFFECTS OF DELIN2UENC9> !. $. ;he holder thereof loses all his rights as a stoc)holder except only the rights to dividends# :ividends will not be paid to the stoc)holder but will be applied to the unpaid balance of his subscription plus costs and expenses. Also, stoc) dividends will be withheld until full payment is made. 2uch stoc)holder cannot vote at the election of directors or at any meeting on any matter proper for stoc)holder action. 2toc)holder cannot be counted as part of the re=uired =uorum. 2toc)holder cannot be voted for as director of the corporation.

&. 4. 9.

):AT IS T:E PROCEDURE FOR T:E CONDUCT OF A DELIN2UENC9 SALE> (Sec. 68) (!) Issuance of /oar reso(ution ;he 1+: issues a resolution ordering the sale of delin=uent stoc), specifically stating the amount due on each subscription plus all accrued interest, and the date, time and place of the sale. &ote' T e *a!e * a!! not 0e !e** t an "0 +ay* nor -ore t an 60 +ay* .ro- t e +ate t e *toc)* 0eco-e +e!in4uent. 4,5 Notice of sa(e an pub(ication 4otice of the date of delin=uency sale and a copy of the resolution is sent to every delin=uent stoc)holder either personally or by registered mail. ;he notice is li)ewise published once a wee) for $ consecutive wee)s in a newspaper of general circulation in the province or city where the principal office of the corporation is located. 4-5 Sa(e at pub(ic auction "f the delin=uent stoc)holder fails to pay the corporation on or before the date specified for the delin=uency sale, the delin=uent stoc) is sold at public auction to such bidder who shall offer to pay the full amount of the balance on the subscription together with accrued interest, costs of advertisement

and expenses of sale, for the s#a((est nu#ber of s%ares or fraction of a s%are" 4@5 Transfer an issuance of certificate of stock ;he stoc) so purchased is transferred to such purchaser in the boo)s of the corporation and a certificate of stoc) covering such shares is issued. "f there is no bidder at the public auction who offers to pay the full amount of the balance on the subscription and its attendant costs, the corporation may bid for the shares, and the total amount due shall be credited as paid in full in the boo)s of the corporation. ;itle to all the shares of stoc) covered by the subscription shall be vested in the corporation as treasury shares and may be disposed of by said corporation in accordance with the %ode. &ote t at t i* i* *u05ect to t e re*triction* i-po*e+ 0y t e Co+e on corporation* a* regar+* t e ac4ui*ition o. t eir o,n * are*. %See t e +i*cu**ion un+er 7ivi+en+* an+ Purc a*e 0y Corporation o. it* 9,n S are*.) CAN A DELIN2UENC9 SALE /E 2UESTIONED> (Sec. 69) Pes. ;his is done by filing a complaint within 5 months from the date of sale, and paying or tendering to the party holding the stoc) the sum for which said stoc) was sold, with interest at the legal rate from the date of sale. 4o action to recover delin=uent stoc) sold can be sustained upon the ground of irregularity or defect in the notice of sale, or in the sale itself of the delin=uent stoc) unless these re=uirements are complied with.

Lost or Destro&e Certificate

):AT IS T:E PROCEDURE FOR T:E ISSUANCE OF NE) CERTIFICATES TO REPLACE T:OSE STOLEN; LOST OR DESTRO9ED> (Sec. 85)

+,- Fi(e an affi a!it in trip(icate *it% t%e corporation" ;he affidavit must state the
following

+a+b+c+d-

%ircumstances as to how the certificates were 27:# 4umber of shares represented# and 2erial number of the certificate 4ame of issuing corporation

+)- T%e corporation *i(( pub(is% notice after the affidavit and other information and
evidence have been verified with the boo)s of the corporation, ( &ote o,ever t at t i* i* not-an+atory. T e corporation a* t e +i*cretion to +eci+e , et er to pu0!i* or not.) ;he notice will contain the following information (a) (b) (c) (d) 4ame of the corporation 4ame of the registered owner# 2erial number of the certificate# 4umber of shares represented by the certificate#

(e) 3ffect of expiration of ! year period from publication and failure to present contest within that period.

+0- SLD certificate is re#o!e fro# t%e books if after one year from date of last
publication, no contest is presented. &9T3' +ne0year period will not be re=uired if the applicant files a bond good for ! year. (4) T%e corporation *i(( t%en issue ne* certificates" (owever, if a contest has been presented to the corporation, or if an action is pending court regarding the ownership of the 27: certificate, the issuance of the new certificate shall be suspended until the final decision by the court. &9T3' S ou!+ corporation i**ue ne, certi.icate* ,it out t e con+ition* 0eing .u!.i!!e+ an+ a t ir+ party prove* t at e i* t e rig t.u! o,ner o. t e * are*, t e corporation -ay 0e e!+ !ia0!e to t e !atter 3?3& ;I it acte+ in goo+ .ait . &9T3' 3ven i. t e a0ove proce+ure ,a* .o!!o,e+, i. t ere ,a* .rau+, 0a+ .ait , or neg!igence on t e part o. t e corporation an+ it* o..icer*, t e corporation -ay 0e e!+ !ia0!e.

TRANSFER OF S:ARES
:O) ARE S:ARES OF STOCH TRANSFERRED> 1y delivery of the certificate<s indorsed by the owner or his attorney0in0fact or other person legally authorized to ma)e the transfer. (Sec. 6") ):AT ARE T:E RE2UISITES FOR A VALID TRANSFER> (!) :elivery# ($) "ndorsement by the owner or his attorney0in0fact or other persons legally authorized to ma)e the transfer "ndorsement of the certificate of stoc) is a mandatory re=uirement of law for an effective transfer of a certificate of stoc). (RaKon v. CA, 20: SCRA 2"4) (&) Fecording of the transfer in the boo)s of the corporation ( *o a* to -a)e t e tran*.er va!i+ a* again*t t ir+ partie*) 6ntil registration is accomplished, the transfer, though valid between the parties, cannot be effective as against the corporation. ;hus, the unrecorded transferee cannot en@oy the status of a 2( he cannot vote nor be voted for, and he will not be entitled to dividends.

RURAL BANK OF SALINAS, INC. V. CA +210 SCRA 510)

A corporation, either by its board, its by/laws or the act of its officers, cannot create restrictions in stoc# transfers.

TAN V. SEC +206 SCRA 740)

A by/law which prohibits a transfer of stoc# without the consent or approval of all the S$s or of the 9resident or oard of 'irectors is illegal as constituting undue limitation on the right of ownership and in restraint of trade +citi"0 F$ei(he) +. 1*tic! N*$!(c* C*., '"c., 47 #hi$. 583) 3hile Sec. 1? +C- of the Corporation Code grants to stoc# corporations the authority to determine in the by/laws the Emanner of issuing certificatesE of shares of stoc#, however, the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of the right of S$s to transfer their shares. To uphold the cancellation of a stoc# certification as null and void for lac# of delivery of the cancelled EmotherE certificate whose endorsement was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of stoc# in violation of the Corporation Code as the only law governing transfer of stoc#s.

USON V. DIOSOMITO +61 #hi$. 535; 1935)

Toribia <son filed a civil action for debt against Iicente 'ioisomito. <pon institution of said action, an attachment was duly issued and '=s property was levied upon, including ?2 shares of the 4orth %lectric Co., which stood in his name on the boo#s of the company when the attachment was levied on ,> ;anuary ,C0). The sheriff sold said shares at a public auction with <son being the highest bidder. ;ollye claims to be the owner of said certificate of soc# issued to him by the co. on ,0 February ,C00. There is no dispute that 'iosomito was the original owner of said shares, which he sold to arcelon. $owever, arcelon did not present these certificates to the corporation for registration until ,C months after the delivery thereof by arcelon, and C months after the attachment and levy on said shares. The transfer to ;ollye was made 2 months after the issuance of a certificate of stoc# in arcelon=s name. '( ! ,*"! 3i6e t)!"(3e) *3 the (h!)e( *3 c*)p., "*t )e0i(te)e6 *) "*te6 *" the ,**>( *3 the c*)p., +!$i6 !( !0!i"(t ! (4,(e94e"t $!/34$ !tt!chme"t *3 (!i6 (h!)e(, )e0!)6$e(( *3 /hethe) the !tt!chi"0 c)e6it*) h!6 !ct4!$ "*tice *3 (!i6 t)!"(3e) *) "*t. 4., it is not valid. The transfer of the ?2 shares in the 4orth %lectric Co., !nc made by the defendant 'iosomito as to the defendant arcelon was not valid as to the plaintiff. Toribia <son, on ,> ;an. ,C0), the date on which she obtained her attachment lien on said shares of stoc# which still stood in the name of 'iosomito on the boo#s of the corp. Sec. 02 says that 4o transfer, however, is valid, except as between the parties, until the transfer is entered and noted

upon the boo#s of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred. All transfers of shares not so entered are invalid as to attaching or execution creditors of the assignors, as well as to the corporation and to subse*uent purchasers in good faith, and indeed, as to all persons interested, except the parties to such transfers.

/o registration of transfer of unpaid s,ares

4o shares of stoc) against which the corporation holds any unpaid claim shall be transferable in the boo)s of the corporation. (Sec. 6")

;emed+ if registration refused

;he proper remedy is a petition for a writ of mandamus to compel the corporation to record the transfer or issue a new certificate in favor of the transferee, as the case may be. ;he writ will be granted provided it is shown that he transferee has no other plain, speedy and ade=uate remedy and that there are no unpaid claims against the stoc)s whose transfer is sought to be recorded. "t must be noted that unless the latter fact is alleged, mandamus will be denied due to failure to state a cause of action. (Ca-po* A Ca-po*)

RURAL BANK OF SALINAS, INC. V. CA +210 SCRA 510)

The right of a transfereeHassignee to have stoc#s transferred to his name is an inherent right flowing from his ownership of the stoc#s. Thus, whenever a corporation refuses to transfer and register stoc#, mandamus will lie to compel the officers of the corporation to transfer said stoc# in the boo#s of the corporation. This is because the corporation=s obligation to register is ministerial. +N*te, h*/e+e), th!t i" (4ch c!(e(, the pe)(*" )e94e(ti"0 the )e0i(t)!ti*" m4(t ,e the p)im! 3!cie */"e) *3 the (h!)e(. C3. @im ;!- +. CA, 293 SCRA 634)

TORRES V. CA +278 SCRA 793)

!t is the corporate secretary=s duty and obligation to register valid transfers of stoc#s and if said corporate officer refuses to comply, the transferor S$ may rightfully bring suit to compel performance. N*te? '" thi( c!(e, &460e ;*))e( h!6 "* )i0ht t* e"te) the !((i0"me"t( (c*"+e-!"ce() *3 hi( (h!)e( him(e$3 i" the c*)p*)!ti*"E( (t*c> !"6 t)!"(3e) ,**> (i"ce he /!( "*t c*)p*)!te (ec)et!)-.

RIVERA V. FLORENDO +144 SCRA 647; 1986)

!samu A#asa#o, a ;apanese national who was allegedly the real owner of the shares of stoc# in the name of one A*uilino "ivera, a registered S$ of Fu8uyama $otel and "estaurant, !nc., sold )22G shares of the same to :ilagros Tsuchiya along with the assurance that Tsuchiya

would be made 9resident of the corporation after the purchase. "ivera assured her that he would sign the stoc# certificates because A#asa#o was the real owner. $owever, after the sale was consummated and the consideration paid, "ivera refused to ma#e the indorsement unless he is also paid. Tsuchiya, et al. attempted several times to have the shares registered but were refused compliance by the corp. They filed a special action for mandamus and damages. The Supreme Court held that mandamus was improper in this case since the shares of stoc# were not even indorsed by the registered owner who was specifically resisting the registration thereof in the boo#s of the corporation. The rights of the parties would have to be threshed out in an ordinary action.

Restrictions on Transfer6 C(ose Corporations

.enera( ru(e8 Shares of stoc) are freely transferable, without restriction. E'ception8 "n close corporations, restrictions may be placed on the transfer of shares. 2uch restrictions must appear in the A+" and in the by0laws, as well as in the certificate of stoc). +therwise, the restriction shall not be binding on any purchaser thereof in good faith. ;he restrictions imposed shall be no more onerous than granting the existing stoc)holders or the corporation the option to purchase the shares of the transferring stoc)holder with such reasonable terms, conditions or period stated therein. "f this option is not exercised upon the expiration of the period, the transferring stoc)holder may sell his shares to any third person. (Sec. 98) ):AT IS T:E EFFECT OF ISSUANCE OR TRANSFER OF STOCH IN /REAC: OF T:E RESTRICTIONS> ;he corporation may, at its option, refuse to register the transfer of stoc) in the name of the transferee. (Sec. 99.4) (owever, this shall not be applicable if the transfer, though otherwise contrary to subsections (!), ($) and (&) of 2ec. 88, has been consented to by all the stoc)holders of the close corporation, or if the close corporation has amended its A+" in accordance with ;itle N"" of the %ode. Hor his part, the transferee may rescind the transfer or recover from the transferor under any applicable warranty, whether express or implied.

UNAUT:ORI1ED TRANSFERS

Certificates indorsed in %lan6. ),en quasiEnegotia%le

A possessor, even without authority, may transfer good title to a bona fide purchaser if the real owner endorses the certificate in blan) the conveyance is for purposes other than transfer that relying on the stoc) certificate, the purchaser believes the possessor to be the owner thereof or has authority to transfer the same. ;his proceeds from the theory of =uasi0negotiability which provides that in endorsing a certificate in blan), the real owner clothes the possessor with apparent authority, thus, estopping him later from asserting his rights over the shares of stoc) against a bona fide purchaser. Luasi0negotiability does not apply in cases where the real owner a. b. did not entrust the certificate to anyone# and is not otherwise guilty of estoppel

Ior e<a-p!e, in ca*e t e tran*.er i* -a+e 0y a .in+er or a t ie..

*orged 0ransfers
A corporation does not incur any misrepresentation in the issuance of a certificate made pursuant to a forged transfer. "t can always recall from the person the certificate issued, for cancellation. "n case where the certificate so issued comes into the hands of a bona fide purchaser for value from the original purchaser, the corporation is estopped from denying its liability. "t must recognize both the original and the new certificate. 1ut if recognition results to an over0issuance of shares, only the original certificate may be recognized, without pre@udice to the right of the bona fide purchaser to sue the corporation for damages.

SANTAMARIA VS. HONGKONG +89 #hi$. 780; 1951)

Santamaria secured her order for a number of shares with Campos Co. with her stoc# certificate representing her shares with atangas :inerals. The said certificate was originally issued in the name of her bro#er and endorsed in blan# by the latter. As Campos failed to ma#e good on the order, Santamaria demanded the return of the certificate. $owever, she was informed that $ong#ong an# had ac*uired possession of it inasmuch as it was covered by the pledge made by Campos with the ban#. Thereafter, she instituted an action against $ong#ong an# for the recovery of the certificate. Trial court decided in her favor. The ban# appealed. '((4e(? 1) W2N S!"t!m!)i! /!( ch!)0e!,$e /ith "e0$i0e"ce /hich 0!+e )i(e t* the c!(e 2) W2N the 1!"> /!( *,$i0!te6 t* i"94i)e i"t* the */"e)(hip *3 the ce)ti3ic!te

+,- The facts of the case 8ustify the conclusion that she was negligent. She delivered the certificate, which was endorsed in blan#, to Campos without having ta#en any precaution. She did not as# the atangas :inerals to cancel it and instead, issue another in her name. !n failing to do so, she clothed Campos with apparent title to the shares represented by the certificate. y her misplaced confidence in Campos, she made possible the wrong done. She was therefore estopped from asserting title thereto for it is well/settled that Kwhere one of the innocent parties must suffer by reason of a wrongful or unauthori(ed act, the loss must fall on the one who first trusted the wrongdoer.L +)- The sub8ect certificate is what is #nown as a street certificate. <pon its face, the holder is entitled to demand its transfer into his name from the issuing corporation. The ban# is not obligated to loo# beyond the certificate to ascertain the ownership of the stoc#. A certificate of stoc#, endorsed in blan#, is deemed *uasi/negotiable, and as such, the transferee thereof is 8ustified in believing that it belongs to the transferor.

DE LOS SANTOS VS. MCGRATH +96 #hi$. 577; 1955)

'e los Santos filed a claim with the Alien 9roperty Custodian for a number of shares of the &epanto corporation. $e contended that said shares were bought from one Campos and $ess, both of them dead. The 9hilippine Alien 9roperty Administrator re8ected the claim. $e instituted the present action to establish title to the aforementioned shares of stoc#. The <S Attorney Beneral, the successor of the Alien 9roperty Administrator, opposed the action on the ground that the said shares of stoc# were bought by one :adrigal, in trust for the true owner, :atsui, and then delivered to the latter indorsed in blan#. '((4e? F!6 6e $*( S!"t*( i" 3!ct p4)ch!(e6 the (h!)e( *3 (t*c>7 'e los Santos6 sole evidence that he purchased the said shares was his own unverified testimony. The alleged vendors of the stoc#s who could have verified the allegation, were already dead. Further, the receipt that might have proven the sale, was said to have been lost in a fire. .n the other hand, it was shown that the shares of stoc# were registered in the records of &epanto in the name of :adrigal, the trustee of :atsuiF that :atsui was subse*uently given possession of the corresponding stoc# certificates, though endorsed in blan#F and, that :atsui had neither sold, conveyed nor alienated these to anybody. !t is the rule that if the owner of the certificate has endorsed it in blan#, and is stolen, no title is ac*uired by an innocent purchaser of value. This is so because even though a stoc# certificate is regarded as *uasi/negotiable, in the sense that it may be transferred by endorsement, coupled with delivery, the holder thereof ta#es it without pre8udice to such rights or defenses as the registered owner or credit may have under the law, except in so far as such rights or defenses are sub8ect to the limitations imposed by the principles governing estoppel.

Co((atera( Transfers
2hares of stoc) are personal property. ;hus, they can either be pledged or mortgaged. (owever, such pledge or mortgage cannot have any legal effect if it is registered only in the corporate boo)s. 'here a certificate is delivered to the creditor as a security, the contract is considered a pledge, and the %ivil %ode will apply. "f the certificate of stoc) is not delivered to the creditor, it must be registered in the registry of deeds of the province where the principal office of the corporation is located, and in case where the domicile of the stoc)holder is in a different province, then registration must also be made there. "n a situation where, the chattel mortgage having been registered, the stoc) certificate was not delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the bona fide purchaser for value is bound by the registration in the chattel mortgage registry. "t is said that such a rule tends to impair the commercial value of stoc) certificates.

CHUA GUAN VS. SAMAHANG MAGSASAKA +62 #hi$. 473; 1935)

To guarantee payment of a debt, Co mortgaged his shares of Samahang :agsasa#a stoc# to Chiu. The said mortgage was duly registered in the City of :anila. Chiu later assigned his rights in the mortgage to Buan who soon foreclosed the same after Co failed to pay. Buan won in the public bidding. $e re*uested the corporation that new certificates be issued in his name. The corporation refused because apparently prior to Buan6s demand, several attachments against the shares covered by the certificates had been recorded in its boo#s. %i6 the ch!tte$ m*)t0!0e i" the )e0i(t)- *3 6ee6( *3 M!"i$! 0!+e c*"(t)4cti+e "*tice t* the !tt!chi"0 c)e6it*)(7 The Chattel :ortgage &aw provides two ways of executing a valid chattel mortgage: ,the possession of mortgaged property is delivered and retained by the mortgageeF and, )- without delivery, the mortgage is recorded in the register of deeds. ut if chattel mortgage of shares may be made validly, the next *uestion then becomes: where should such mortgage be properly registered7 !t is the general rule that the situs of shares is the domicile of the owner. !t is also generally held that for the purpose of execution, attachment, and garnishment, it is the domicile of the corporation that is decisive. Boing by these principles, it is deemed reasonable that chattel mortgage of shares be registered both at the owner6s domicile and in the province where the corporation has its principal office. !t should be understood that the property mortgaged is not the certificate but the participation and share of the owner in the assets of the corporation. !t is recogni(ed that this method of hypothecating shares of stoc# in a chattel mortgage is rather tedious and cumbersome. ut the remedy lies in the legislature. N*te? ;he p)*+i(i*" *3 the Ch!tte$ M*)t0!0e @!/ (Act N*. 1508) p)*+i6i"0 3*) 6e$i+e)- *3 m*)t0!0e6 p)*pe)t- t* the m*)t0!0ee !( ! m*6e

*3 c*"(tit4ti"0 ! ch!tte$ m*)t0!0e i( "* $*"0e) +!$i6 i" +ie/ *3 the Ci+i$ C*6e p)*+i(i*" 6e3i"i"0 (4ch !( ! p$e60e.

NON-TRANSFERA/ILIT9 IN NON-STOCH CORPORATIONS

Although shares of stoc) are as a rule freely transferable, membership in a non0stoc) corporation is personal and non0transferable, unless the articles of incorporation or by0laws provide otherwise. ;he court may not strip him of his membership without cause. (Sec. 90)

DIVIDENDS AND PURC:ASE /9 CORPORATION OF ITS O)N S:ARES For# of Di!i en s

IN ):AT FOR0S CAN DIVIDENDS /E ISSUED> 1. 2. 3. Cas% Propert& scrip 0 certificate issued to 2(s instead of cash dividends which entitles them to a certain amount in the future Stock i!i en s 2toc) dividends are distribution to the 2(s of the companyDs own stoc). 2toc) dividends cannot be declared without first increasing the capital stoc) unless unissued shares are available. 4ew shares are issued to the 2(s in proportion to their interest. 4o new income unless sold for cash. %ivil fruits belong to the usufructuary and not to the na)ed owner. %an only be issued to 2(s. 'henever fractional shares result, corp may pay in cash or issue fractional share warrants.

DIFFERENTIATE /ET)EEN CAS: DIVIDENDS AND STOCH DIVIDENDS" Cas% Di!i en Votin$ re3uire#ents for issuance Effect on stock e(in3uent 1oard of :irectors Stock Di!i en 1oard of :irectors Q $<& +%2

2hall be applied to the unpaid 2hall be withheld from the balance on the subscription delin=uent stoc)holder until

plus costs and expenses. Can t%is be issue E'ecuti!e Co##ittee> b& 4o. (Sec. "$)

his unpaid subscription is fully paid. 4o, since this re=uires 2( approval. (Sec. "$)

NIELSON v LEPANTO +26 SCRA 540; 1968) Stoc# dividends are issued only to S$s This is so because only stoc#holders are entitled to dividends. A stoc# dividend really adds nothing to the interest of each stoc#holderF the proportional interest of each stoc#holder remains the same. !f a stoc#holder is deprived of his stoc# dividends / and this happens if the shares of stoc# forming part of the stoc# dividends are issued to a non/stoc#holder / then the proportion of the stoc#holder=s interest changes radically. Stoc# dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits.
FRO0 ):ERE CAN DIVIDENDS /E SOURCED> :ividends can be sourced only out of the unrestricted retained earnings of the corporation. Unrestricte retaine earnin$s is defined as "the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the stoc)holders as dividends." (S3C Ru!e* @overning Re+ee-a0!e an+ Trea*ury S are*, 1982) Retaine earnin$s has been defined as "net accumulated earnings of the corporation out of transactions with individuals or firms outside the corporation." (Si--on*, S-it , Li--e!, ;nter-e+iate Accounting, 19::, e+. P. 6"$) ;he term implies the limitation that no corporation can declare dividends unless its legal or stated capital is maintained. "t does not include premium on par stoc) i.e. difference between par value and selling price of stoc) by corp since this is regarded as paid0in capital# but 23% allowed declaration of stoc) dividends out of such premiums transactions involving treasury stoc)s which are considered expansions and contractions of paid0in capital# donations as additional paid0 in capital# increase in value of existing assets, being merely unrealized capital element

"f subscribed shares have not been fully paid, the unpaid portion of subscribed capital stoc) is an asset, and as long as the net capital asset (after payment of liabilities) including this unpaid portion is at least e=ual to the total par value of the subscribed shares, any excess would be surplus or earnings from which dividends may be declared. (owever, if a deficit exists, subse=uent profits must first be applied to cover the deficit. Festrictions on dividend distribution include

1+:Ds appropriation of certain earnings for certain purposes# Agreements with creditors, bondholders and preferred 2(s re=uiring retention of certain percent of corporate earnings to protect their interest and to secure redemption of their securities upon maturity# 23%0imposed restrictions pursuant to law, li)e those imposed on ban)s and insurance companies# Festriction on the retained earnings e=uivalent to the cost of treasury shares held by the corporation, which is lifted only after such shares are reissued or retired (Sec. 19$, P7 612)

BERKS BROADCASTING v CRAUMER +52 A.26 571; 1947) 'ividends can only be declared only from the surplus, i.e. the excess in the value of the assets over the liabilities and the issued capital stoc#. To do otherwise would be illegal The ob8ect of the prohibition is to protect the creditors in view of the limited liability of the S$s and also to protect the S$s by preserving the capital so that the purposes of the corp. may be performed. Surplus must be bona fide i.e. founded upon actual earnings or profits and not to be dependent for its existence upon a theoretical estimate of an appreciation in the value of the company6s assets. The prohibition does not apply, however, to stoc# dividends because creditors and S$s will not be affected by their declaration since they do not decrease the company6s assets.

LICH V UNITED STATES RUBBER +39 F. S4pp. 675; 1941)

'ividends on non/cumulative preferred stoc# are payable only out of net profits and for the years in which said net profits are actually earned. The right to dividends is conditional upon: +,- accrual of net profits, and +)- retention in the business. !f the annual net earnings of a corp. are 8ustifiably applied to legitimate corp. purposes, such as payment of debts, reduction of deficits and restoration of impaired capital, the right of non/cumulative preferred stoc#holders to the payments of dividends is lost. !f they are applied against prior losses and thereby completely absorbed, there are no net profits from which dividends may be lawfully paid.

SO0E RULES ON DIVIDEND DECLARATION8 1. 1+: has discretion whether or not to declare dividends and in what form. 3<ception' 2toc) dividends, in which case a $<& vote of +%2 is necessary.

(owever, such discretion cannot be abused and the 1+: cannot accumulate surplus profits unreasonably on the excuse that it is needed for expansion or reserves. 2. 1+: should declare dividends when surplus profits of the corporation exceed !??G of the corporationKs paid0in capital stoc). E9ceptions$ (a) 'hen @ustified by definite corporate expansion pro@ects or programs approved by the 1oard# (b) 'hen creditors prohibit dividend declaration without their consent as a condition for the loan, and such consent has not yet been secured# (c) 'hen retention is necessary under special circumstances obtaining in the corporation, e.g. when there is a need for special reserve for probable contingencies. (Sec. 4") 4. 5. ;he corporation may be sub@ected to additional tax when it fails to declare dividends, thereby unreasonably accumulating profits. (See Sec. 2$, &;RC) ;he dividends received are based on stoc) held whether or not paid. (owever, if the stoc)s are delin=uent, the amount will first be applied to the payment of the delin=uency plus costs and expenses# stoc) dividends will not be given to a delin=uent 2(.

KEOGH v ST. PAUL MILK +285 N.W. 809; 1939) The mere fact that a large corporate surplus exists is not enough to warrant e*uitable interventionF the test is good faith and reasonableness of the policy of retaining the profits. $owever, where dividends are withheld for an unlawful purpose O to deprive a S$ of his right to a 8ust proportion of the corporation=s profit, the court may compel the corporation to declare dividends. DODGE v FORD MOTOR CO +170 N.W. 668; 1919) This case involves an action against the Ford :otor Company to compel declaration of dividends. At the time this complaint was made, Ford had concluded its most prosperous year of business, and the demand for its cars at the price of the previous year continued. 3hile it had been the practice, under similar circumstances, to declare larger dividends, the corporation refused to declare any special dividends. The oard 8ustified its refusal to declare larger dividends on the expansion plans of the company by erecting a smelting plant, but maintaining the selling price of its cars +instead of reducing it as had been the practice in previous years-.

The plaintiffs contend that such a proposal would be tantamount to the business being conducted as a semi/eleemosynary +or charitable- institution instead of a business institution. The court pointed out that a business corporation is organi(ed and carried on primarily for the profit of S$s. The discretion of the directors is to be exercised in the choice of means to attain that end and does not extend to a change in the end itself O reduction of profits or to devote profits to another purpose. 3hile the Court noted the capable management of the affairs of the corporation and therefore was not convinced that the motives of the directors were pre8udicial to the company=s interests, it li#ewise noted that the annual dividends paid were very small in relation to the profits that the company had been ma#ing. !t therefore affirmed the amount fixed by the lower court to be distributed to the stoc#holders. N*te? #)*3. &!ci"t* i( *3 the *pi"i*" th!t /h!t h!ppe"e6 i" thi( c!(e i( p*((i,$e 4"6e) the p)e(e"t C*6e, e+e" /ith*4t ch!"0i"0 the A2'.

Preference as to Di!i en s
Feview discussion under )inds of stoc).

WABASH RAILWAY CO. V. BARCLAY +67 A.@.R. 762; 1930)

!n the A.! and the certificate of stoc# of Stoc# A, it was stated that the holders of said stoc#s are entitled to receive to receive preferential dividends of 2D per fiscal year, non/ cumulative, before dividends are paid to other stoc#s. From ,C,2 to ,C)A, no dividends were declared. The net earnings were instead used for the improvements and additions to property and e*uipment. 'ue to this, the corporation became prosperous and proposed to pay dividends to A M common stoc#. 9laintiffs filed this case in order to collect the dividends for fiscal years ,C,2/,C)A before the other classes of stoc# are paid. We)e the C$!(( A (t*c>h*$6e)( e"tit$e6 t* 6i+i6e"6( 3*) F= 1915 t* 19267 4o, they were not. y the plain meaning of the words in the A.! and the certificates of stoc#, the holders are not entitled to dividends unless directors declare so. !t is li#ewise generally understood that in cases where the company=s net earnings are applied for improvements and no dividend is declared, the claim for such year is gone in case of non/ cumulative stoc#, and cannot be later asserted.

BURK V. OTTAWA GAS & ELECTRIC CO. +123 #!c. 875; 1912)
An action was brought by the preferred S$s of .ttawa against the directors of .ttawa to +,- re*uire the directors to account for all the property and assets of the corporation, +)- declare

such dividends from the net profits of the business of such co. as should have been declared since , ;an. ,CGA, and +0- restrain the officers and directors during the pendency of the action from paying out any of the money or disposing of the assets of the company except such amounts as should be necessary to pay the actual necessary current expenses of conducting the business of the corporation. The .' maintained that the corporation=s funds were exhausted by expenditures for the extension of the co6s plant, hence it was unable to declare dividends. %xpenditures were said to be necessary and for the betterment of the plant. We)e the c*)p 34"6( /e)e /)*"034$$- 6i+e)te6, !"6 /e)e p)e3e))e6 SF( e"tit$e6 t* 6i+i6e"6(7 The case was remanded to the trial court, with instructions to ma#e further findings to protect the preferred S$s in their rights. The fair interpretation of the contract between .ttawa and its S$S is that if in any year net profits are earned, a dividend is to be declared. To hold otherwise, meaning if the .' had absolute discretion when to declare dividends and when not to, when the corporation has funds for such dividends, would result in temptation to unfair dealing, giving one party the option to pay the other or not. !n the case at bar, the accumulated profits would be lost forever since the dividends were non/cumulative. 9referred S$s, however, are not generally creditors until dividends are declared. !n the case at bar, if dividends should have been declared to such S$s, they are considered creditors from that time.

)%en Ri$%t to Di!i en s Vests6 Ri$%ts of Transferee

):EN DOES T:E RI.:T TO DIVIDENDS VEST> As soon as the 1o: has declared dividends. Hrom this time, it becomes a debt owed by the corporation, and therefore can no longer be revo)ed (/c7aran v. %rescent .lanning). 3BC3PT;9&' "f the declaration has not yet been announced or communicated to the stoc)holders. &9T3' 1 en no +ivi+en+* are +ec!are+ .or " con*ecutive year*, pre.erre+ S>* are given t e rig t to vote .or +irector* unti! +ivi+en+* are +ec!are+. &9T3' T e e<tent o. t e S>/* * are in t e +ivi+en+* ,i!! +epen+ on t e capita! contri0ution# &9T t e nu-0er o. * are* e a*.

MCLARAN V. CRESCENT PLANNING MILL CO. +93 S.W. 819; 1906)

C9: Corp., having a surplus of P)C,GGG, declared a AD cash dividend payable in four installments. The first installment was paid by the oard after which an error was discovered in the computation of the assets: from the initial recogni(ed surplus of P)C,GGG to PA,GGG. :ainly for this reason, the oard adopted a resolution rescinding the dividends payable on the three other installments despite the solvency of the corp and the existence of ample funds to pay said dividends. The original 9 was $umber, a S$, and was substituted by :c&aran, the administrator of his estate when he died. The defendant corp maintained that there was no valid declaration of dividends because the corporation failed to set aside funds to pay for the same. A cash dividend, properly declared, cannot be revo#ed by the subse*uent action of the corp. for by its declaration, the corp had become the debtor of the S$ and it goes without saying that the debtor cannot revo#e, recall or rescind the debt or otherwise absolve itself from its payment by a unilateral action or without the consent of the creditor. Thus, the rescission by the .' of the subse*uent installments was of no force. 'ividends are defined as portions of profitsHsurplus funds of the corp. which have been actually set apart by a valid board resolution or by the S$ at a corp. mtg. for distribution among S$ according to their respective interests. The mere declaration of the dividend, without more, by competent authority under proper circumstances, creates a debt against the corporation in favor of the stoc#holders the same as any other general creditor of the corporation. y the mere declaration, the dividend becomes immediately fixed and absolute in the stoc#holder and from henceforth the right of each individual stoc#holder is changed by the act of declaration from that of partner and part owner of the corporate property to a status absolutely, adverse to every other stoc#holder and to the corporation itself, insofar as his p)* )!t! proportion of the dividend is concerned.

Liabi(it& for I((e$a( Di!i en s

):AT ARE ILLE.AL DIVIDENDS> "llegal dividends are dividends declared in violation of law. ):AT ARE T:E EFFECTS OF T:E ILLE.AL DECLARATION OF DIVIDENDS> (!) "f the directors acted wilfully, or with negligence or in bad faith, they will be liable to the corporation. "f the corporation has become insolvent, they are liable to the corporationKs creditors for the amount of dividends based out of capital. (Ba*e+ on Sec. "1) ($) "f the directors cannot be held liable because they acted with due diligence and in good faith, in the absence of an express provision of law, an innocent stoc)holder is not liable to return the dividends received by him out of capital, unless the corporation was insolvent at the time of payment. (Ea5ority vie,# Ca-po*)

Purc%ase b& Corporation of its o*n s%ares

):AT ARE T:E RE2UISITES FOR AC2UISITION /9 T:E CORPORATION OF ITS O)N S:ARES> 4Sec" @?5 !. $. unrestricted retained earnings to cover the shares to be ac=uired# legitimate corporate purpose

FOR ):AT PURPOSES CAN A CORPORATION AC2UIRE ITS O)N S:ARES> 4Sec" @?5 !. $. ;o eliminate fractional shares arising out of stoc) dividends# ;o collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delin=uency sale, and to purchase delin=uent shares sold during said sale# ;o pay dissenting or withdrawing stoc)holders entitled to payment for their shares under the %orporation %ode %Apprai*a! Rig t).

&.

Appraisal ;ig,t (Sec. 81)

):AT IS T:E APPRAISAL RI.:T> ;he appraisal right refers to the right of a stoc)holder who dissented and voted against a proposed fundamental corporate action to get out of the corporation by demanding payment of the fair value of his shares. IN ):AT INSTANCES CAN T:E APPRAISAL RI.:T /E EDERCISED> ;he %orporation %ode lists 4 instances (!) "n case any amendment to the A+" has the effect of changing or restricting the rights of any 2( or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or of extending or shortening the term of corporate existence (Sec. 81)# ($) "n 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 this %ode (Sec. 81# Sec. 40)# (&) "n case of merger or consolidation (Sec. 81)# (4) "n case the corporation invests its funds in any other corporation or business or for any purpose other than the primary purpose for which it was organized (Sec. 42)

):AT ARE T:E RE2UISITES FOR T:E EDERCISE OF T:E APPRAISAL RI.:T> 4Sec. 32) (!) 2( must have voted against he proposed corporate action# ($) 'ritten demand on the corporation for payment of the fair value of his shares# (&) 2uch demand must have been made within &? days after the date on which the vote was ta)en# (4) 2urrender of the stoc) certificate<s representing his shares# (9) 6nrestricted retained earnings in the boo)s of the corporation to cover such payment. ):AT IS T:E EFFECT OF DE0AND FOR PA90ENT IN ACCORDANCE )IT: T:E APPRAISAL RI.:T> 4Sec. 35) All rights accruing to the shares, including voting and dividend rights, are suspended in accordance with the %orporation %ode, e<cept for the right of the 2( to receive payment of the fair value thereof. 2uch suspension shall be from the time of demand until either (!) abandonment of the corporate action involved# or ($) the purchase of the said shares by the corporation. (owever, if said dissenting 2( is not paid the value of his shares within &? days after the award, his voting and dividend rights shall immediately be restored. ):AT ARE T:E DUTIES OF T:E DISSENTIN. STOCH:OLDER IN RELATION TO T:E EDERCISE OF T:E APPRAISAL RI.:T> ;he dissenting 2( must submit the certificates of stoc) representing his shares to the corporation for notation thereon that such shares are dissenting shares within !? days after demanding payment for his shares. Hailure to do so shall, at the option of the corporation, terminate his rights under ;itle N of the %orporation %ode. (Sec. 86)

):AT ARE T:E EFFECTS OF TRANSFER OF T:E CERTIFICATES /EARIN. T:E NOTATION T:AT T:E9 REPRESENT DISSENTIN. S:ARES> "f the certificates are conse=uently cancelled, the rights of the transferor as a dissenting 2( cease and the transferee has all the rights of a regular stoc)holder. All dividend contributions which would have accrued on the shares will be paid to the transferee. (Sec. 86)

A0END0ENTS OF C:ARTER
The charter of a private corporation consists of its articles of incorporation as well as the Corporation Code and such other law under which it is organi(ed.

A#en #ent b& Le$is(ature

2ub@ect to the limitation that no accrued rights or liabilities be impaired, the legislature has the power to ma)e changes in existing corporations through an amendment to the %orporation %ode.

A#en #ent b& Stock%o( ers

+ne of the powers expressly granted by law to all corporations is the power to amend its articles of incorporation. ;his, in effect, is a grant of power to owners of $<& of the outstanding stoc)s to change the basic agreement between the corporation and its stoc)holders, ma)ing such change binding on all the stoc)holders, sub@ect only to the right of appraisal, if proper.

):AT ARE T:E LI0ITATIONS ON T:E PO)ER TO A0END> .6F.+23 R+;3 (!) must be legitimate $<& of +%2 < membership

;he appraisal right must be recognized in case the amendment has the effect of changing rights of any stoc)holder or class of shares, or of authorizing preferences in any respect superior to those of outstanding shares of any class, or extending or shortening the term of corporate existence. 3xtension of corporate term cannot exceed 9? yrs. in any one instance A copy of the amended articles should be filed with the 23%, and with the proper governmental agencies, as appropriate (e.g., in the case of ban)s, public utilities, etc.) +riginal and amended articles should contain all matters re=uired by law to be set out in said articles. An amendment to increase<decrease capital stoc) as well as to extend<shorten corporate term cannot be made under 2ec. !5, but must be made under 2ec. &-0&,, respectively, both of which re=uire a meeting# and

($) (&)

(4) (9)

(5)

Amendment must be in the form prescribed by the %ode

ON ):AT .ROUNDS A0END0ENTS>

CAN

T:E

SEC

DISAPPROVE

T:E

PROPOSED

;he same grounds as for the disapproval of the original articles ( Sec. 1:) 4ot substantially in accordance with the form prescribed by the %ode# .urpose(s) patently unconstitutional, illegal, immoral, or contrary to government rules and regulations# ;reasurerDs Affidavit concerning amount of capital stoc) subscribed<paid is false# Fe=uired percentage of ownership of capital stoc) to be owned by citizens of the .hils. has not been complied with as re=uired by the %onstitution or existing laws# Absence of a favorable recommendation from the appropriate government agency.

Amendment c,anging stoc6,older?s rig,ts

;he law expressly allows amendments which would change or restrict existing rights of stoc)holders or any class of shares. (Sec. 81)

MARCUS V. RH MACY +74 N.:. 26 228; 1947)

The oard of 'irectors gave notice to S$ that among the matters to be acted upon in its annual meeting would be a proposal to amend certificate of incorporation to add to the rights of preferred stoc#holders, voting rights e*ual to those of common stoc#holders. :arcus, ob8ected and demanded payment for the common stoc# owned by her. The Court held that :arcus may invo#e her appraisal right. The aggregate number of shares having voting rights e*ual to those of common shares was substantially increased and thereby the voting power of each common share outstanding prior to the meeting was altered or limited by the resulting p)* )!t! diminution of its potential worth as a factor in the management of the corporate affairs. Considering that she held diminished voting powerF that she notified the corpo of her ob8ectionF that her shares were voted against the amendmentQthese were sufficient to *ualify her to invo#e her statutory appraisal right.

Effecti!it+ of amendment
Amendments ta)e effect only from the approval by the 23%. (owever, such approval or re@ection must be made within six months of filing of amendment# otherwise

it shall ta)e effect even w<o such approval (as of the date of filing), unless cause of delay is attributable to the corporation. (Sec. 16)

Special amendments

;ncrea*e o. capita! *toc)

After the authorized capital stoc) has been fully subscribed and the corporation needs to increase its capital, it will have to amend its articles to increase its capital stoc). A corporation does not have the implied power to increase capital stoc)# such a power can only be granted by law. ;he power to increase or decrease capital stoc) must be exercised in accordance with the provisions of 2ec. &, of the %ode.

Re+uction o. capita! *toc)

Feduction of capital stoc) is not allowed if it will pre@udice the rights of corporate creditors.

PHILIPPINE TRUST CO. V. RIVERA +44 #hi$. 469; 1923)

!t is established doctrine that subscriptions to the capital of a corporation constitute a fund to which creditors have a right to loo# for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stoc# subscription in order to reali(e assets for the payment of its debts. A corporation has no power to release an original subscriber to its capital stoc# from the obligation of paying for his shares, without valuable consideration for such releaseF and as against creditors a reduction of the capital stoc# can ta#e place only in the manner and under the conditions prescribed by the statute or charter or the articles of incorporation.

C ange in corporate terThe Code allows a corporation not only to extend but also to shorten its term of existence. As in the case of increaseHdecrease of capital stoc#, change must be approved at a members6Hstoc#holders6 meeting by )H0 of the membersHoutstanding capital stoc#.

Amendments in close corporations

;o recall, the provisions re=uired to be contained in the A+" of a close corporation

+,- All issued stoc) of all classes should be held by not more than $?# +)- All issued stoc) shall be sub@ect to one or more specified restrictions on
transfer permitted by law#

+0- %orporation should not be listed in the stoc) exchange or ma)e any public
offering of its stoc). "f any of these are deleted, then the corporation will cease to be a close corporation and will lose the special privileges of such corporations. ;hereafter, it will be governed by the general provisions of the %ode. 2ince such amendment involves a change in the nature of the corporation, even non0voting stoc)s are given a voice in the decision. A stoc)holdersD meeting is re=uired and a $<& vote must approve the amendment, unless otherwise provided by the articles of incorporation.

DISSOLUTION 0o es of Disso(ution
:O) 0A9 A CORPORATION /E DISSOLVED>

+,- Fai(ure to or$aniKe an co##ence business (Sec. 22)# +)- Cessation of business for L &ears (Continuou* inoperation# Sec. 22)# +0- E'piration of ori$ina(; e'ten e ; or s%ortene ter#6

+1- Vo(untar& isso(ution (Sec. 1182119)#

(a) )%ere no cre itors are affecte (Sec. 118) ;his is effected by ma@ority vote of the 1+: and a $<& vote of the +%2 or members. (&ote t e *pecia! notice re4uire-ent*.) ;he copy of the resolution authorizing the dissolution shall be certified by a ma@ority of the 1+: and countersigned by the secretary of the corporation. ;(3 23% shall thereupon issue the certificate of dissolution. (b) )%ere cre itors are affecte (Sec. 119) (!) Fi(in$ of petition for isso(ution *it% SEC A petition for dissolution must be filed with the 23% after having been signed by a ma@ority of the 1+:, verified by the president or secretary or one of the directors, and resolved upon by the affirmative vote of $<& of the +%2 or members. ;he petition must set

forth all claims and demands against the corporation, and the fact that the dissolution was approved by the 2(s with the re=uisite $<& vote. ($) Fi'in$ of ate b& SEC for fi(in$ of ob7ections to petition "f the petition is sufficient in form and substance, the 23% shall fix a date on or before which ob@ections thereto may be filed by any person. Date8 not less than &? days nor more than 5? days after the entry of the order (&) Pub(ication of or er 1efore the date fixed by the 23%, the 23% order shall be published and posted accordingly. Ne*spaper8 +nce a wee) for & wee)s in a newspaper of general circulation published in the municipality or city where the corporationKs principal office is situated, or there be no such newspaper, in a newspaper of general circulation in the .hilippines Hor & consecutive wee)s in & public places in the city or municipality where the corporationKs principal office is situated

Postin$8

4@5 :earin$ of t%e petition for isso(ution 6pon 9 days notice, given after the date on which the right to file ob@ections to the order has expired, the 23% shall proceed to hear the petition and try any issue made by the ob@ections filed. "f no ob@ection is sufficient, and the material allegations are true, the 23% shall render @udgment dissolving the corporation and directing such disposition of its assets as @ustice re=uires. &ote' T e S3C -ay appoint a receiver to co!!ect *uc a**et* an+ pay t e +e0t* o. t e corporation.

(&) In!o(untar& isso(ution (Sec. 121)

+a- Fevocation of %ertificate of Fegistration by 23% (Sec. 121)

A corporation may be dissolved by the 23% upon filing of a verified complaint and after proper notice and hearing on grounds provided by existing laws, rules and regulations.

+b- Luo 'arranto proceedings (See Sec. $0, P7 9022A an+ Ru!e 66, Ru!e* o.
Court. Previou*!y, t e S3C a+ e<c!u*ive 5uri*+iction over 4uo ,arranto procee+ing* invo!ving corporation. 8n+er t e Securitie* Regu!ation Co+e or RA 8:99, o,ever, t e 5uri*+iction o. t e S3C over a!! ca*e* enu-erate+ un+er Sec. $ o. P7 9022A ave 0een tran*.erre+ to t e Regiona! Tria! Court*. ;he $roun s for involuntary dissolution of a corporation under 4uo ,arranto proceedings are (!) 'hen the corporation has offended against a provision of an act for its creation or renewal# ($) 'hen it has forfeited its privileges and franchises by non0user# (&) 'hen it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchises# (4) 'hen it misused a right, privilege or franchise conferred upon it by law, or when it has exercised a right, privilege or franchise in contravention of law (P&B v. CI;, 209 SCRA 294# 1992) (4) S%ortenin$ of corporate ter# (Sec. 120) &9T3' T e *i-p!e*t an+ -o*t e<pe+ient ,ay o. e..ecting +i**o!ution i* 0y * ortening t e corporate ter- an+ ,aiting .or *uc terto e<pire.

&issolution of close corporations

"n close corporations, any stoc)holder may, by written petition to the 23%, compel the dissolution of such corporation when (!) Any of the acts of the directors, officers, or those in control of the corporation is "llegal# Hraudulent# :ishonest# +ppressive or unfairly pre@udicial to the corporation or any other 2(#

($) %orporate assets are being misapplied or wasted. (Sec. 10$)

Effects of Disso(ution
):AT ARE T:E EFFECTS OF DISSOLUTION> %orporation ceases to be a @uridical person and conse=uently can no longer continue transacting its business. %orporate existence continues for & years following dissolution for the ff. purposes only

+a- winding up of affairs# and +b- li=uidation of corporate assets.

%orporation can no longer continue its business, except for winding up. %orporation %A44+; even be a +e .acto corporation. %orporate existence may be sub@ect to %+77A;3FA7 attac).

NOTE that the subse=uent dissolution of a corporation #a& not remove or impair any right or remedy in favor of or against, nor any liability incurred by, any corporation, its stoc)holders, members, directors, trustees or officers. (Sec. 14$)

Aoss of uridical personalit+

NATIONAL ABACA V. PORE +2 SCRA 989; 1961)

9laintiff 4ational Abaca Corporation filed a complaint against 9ore for the recovery of a sum of money advanced to her for the purchase of hemp. She moved to dismiss the complaint by citing the fact that 4ational Abaca had been abolished by %. 0?) dated 4ov. )1, ,C2G. 9laintiff ob8ected to such by saying that it shall nevertheless be continued as a corporate body for a period of 0 years from the effective date of said order for the purpose of prosecuting and defending suits by or against it and to enable the oard of &i*uidators to close its affairs. C!" !" !cti*" c*mme"ce6 /ithi" 3 -e!)( !3te) the !,*$iti*" *3 p$!i"ti33 c*)p*)!ti*" ,e c*"ti"4e6 ,- the (!me !3te) the e8pi)!ti*" *3 (!i6 pe)i*67 The Corp. &aw allows a corporation to continue as a body for 0 years after the time when it would have been dissolved for the purposes of prosecuting and defending suits by or against it. ut at any time during the 0 years, the corporation should convey all its property to trustees so that the latter may be the ones to continue on with such prosecution, with no time limit on its hands. Since the case against 9ore was strong, the corp.=s amended complaint was admitted and the case was remanded to the lower court.

CLEMENTE V. CA +242 SCRA 717) The termination of the life of a 8uridical entity does not by itself cause the extinction or diminution of the right and liabilities of such entity nor those of its owners and creditors. !f the 0/year extended life has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the board of directors or trustees itself may be permitted to so continue as EtrusteesE by legal implication to complete the corporate li*uidation. !n the absence of a board of directors or trustees, those having any pecuniary interest in the assets, including not only the shareholders but li#ewise the creditors of the corporation, acting for and in its behalf, might ma#e proper representations with the S%C, which has primary and sufficiently broad 8urisdiction in matters of this nature, for wor#ing out a final settlement of the corporate concerns.
E9ecutor+ contracts
;he prevailing view is that executory contracts are not extinguished by dissolution. 2ec. !49 of the %ode states that "4o right or remedy in favor of or against any corporationV.nor any liability incurredVVshall be removed or impaired either by the subse=uent dissolution of said corp. or by any subse=uent amendment or repeal of this %ode or of any part thereof."

Li3ui ation
):AT IS LI2UIDATION> (Sec. 122) 7i=uidation, or winding up, refers to the collection of all assets of the corporation, payment of all its creditors, and the distribution of the remaining assets, if any, among the stoc)holders thereof in accordance with their contracts, or if there be no special contract, on the basis of their respective interests. ):AT ARE T:E 0ET:ODS OF LI2UIDATIN. A CORPORATION> AND ):O 0A9 UNDERTAHE T:E LI2UIDATION OF A CORPORATION> !. Li3ui ation b& t%e corporation itse(f t%rou$% its boar of irectors Although there is no express provision authorizing this method, neither is there any provision in the %ode prohibiting it. $. Con!e&ance of a(( corporate assets to trustees *%o *i(( take c%ar$e of (i3ui ation. "f this method is used, the &0year limitation will not apply provided the designation of the trustees is made within said period. ;here is no time limit

within which the trustee must finish li=uidation, and he may sue and be sued as such even beyond the &0year period unless the trusteeship is limited in its duration by the deed of trust. (See &atG! A0aca Corp. v. Pore, *upra) &. Li3ui ation is con ucte b& t%e recei!er *%o #a& be appointe SEC upon its ecreein$ t%e isso(ution of t%e corp" b& t%e

As with the previous method, the three0year rule shall not apply. (owever, the mere appointment of a receiver, without anything more, does not result in the dissolution of the corporation nor bar it from the exercise of its corporation rights. FOR :O) LON. 0A9 T:E LI2UIDATION OF A CORPORATION /E UNDERTAHEN> >enerally, a corporation may be continued as a body corporate for the purpose of li=uidation for & years after the time when it would have so dissolved. (Sec. 122) (owever, it was held in the case of C!e-ente v. CA %*upra) that if the &0year period has expired without a trustee or receiver having been expressly designated by the corporation itself within that period, the 1+: itself may be permitted to so continue as "trustees" by legal implication to complete the corporate li=uidation. ):AT CAN AND S:OULD /E DONE DURIN. T:E PERIOD OF LI2UIDATION> 4Sec. 122) 4?5 4,5 4-5 4@5 %ollection of corporate assets and property# %onveyance of all corporate property to trustees for the benefit of 2(s, members, creditors, and other persons in interest# .ayment of corporationKs debts and liabilities# :istribution of assets and property

&istri%ution of assets after pa+ment of de%ts

.ENERAL RULE8 4o corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. (Sec. 122) "n cases of decrease of capital stoc), and as otherwise allowed by the %orporation %ode

EDCEPTION8

):AT :APPENS IF AN ASSET CANNOT /E DISTRI/UTED TO T:E PERSON ENTITLED TO IT> Any asset distributable to any creditor or stoc)holder or member who is un)nown or cannot be found shall be escheated to the city or municipality where such assets are located. (Sec. 122)

CHINA BANKING V. MICHELIN & CIE. +58 #hi$. 261; 1933)

The appointment of a receiver by the court to wind up the affairs of the corporation upon petition of voluntary dissolution does not empower the court to hear and pass on the claims of the creditors of the corporation at first hand. !n such cases, the receiver does not act as a receiver of an insolvent corporation. Since Eli*uidationE as applied to the settlement of the affairs of a corporation consists of ad8usting the debts and claims, that is, of collecting all that is due the corporation, the settlement and ad8ustment of claims against it and the payment of its 8ust debts, all claims must be presented for allowance to the receiver or trustees or other proper persons during the winding/up proceedings within the 0 years provided by the Corporation &aw as the term for the corporate existence of the corporation, and if a claim is disputed so that the receiver cannot safely allow the same, it should be transferred to the proper court for trial and allowance, and the amount so allowed then presented to the receiver or trustee for payment. The rulings of the receiver on the validity of claims submitted are sub8ect to review by the court appointing such receiver though no appeal is ta#en to the latter ruling, and during the winding/up proceedings after dissolution, no creditor will be permitted by legal process or otherwise to ac*uire priority, or to enforce his claim against the property held for distribution as against the rights of other creditors. N*te? A"6e) the C*)p*)!ti*" C*6e, it i( the S:C /hich m!!pp*i"t the )ecei+e).

RP V. MARSMAN DEVELOPMENT COMPANY +44 SCRA 418; 1972)

'efendant corp. was a timber license holder with concessions in Camarines 4orte. !nvestigations led to the discovery that certain taxes were due on it. !" assessed :arsman 0 times for unpaid taxes. Atty. :oya, in behalf of the corp., received the first ) assessments. $e re*uested for reinvestigations. As a result, corp. failed to pay within the prescribed period. 4umerous !" warnings were given. After 0 years of futile notifications, !" sued the corp. Although :arsman was extra8udicially dissolved, with the 0/year rule, nothing however bars an action for recovery of corporate debts against the li*uidators. !n fact, the ,st assessment was given before dissolution, while the )nd and 0rd assessments were given 8ust A months after dissolution +within the 0/year rule-. Such facts definitely established that the Bovernment was a creditor of the corp. for whom the li*uidator was supposed to hold assets of the corp.

TAN TIONG BIO V. CIR +<.R. N*. @.15778; Ap)i$ 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund, once they pass into the hands of the stoc#holders. The dissolution of a corp. does not extinguish the debts due or owing to it. An indebtedness of a corp. to the government for income and excess profit taxes is not extinguished by the dissolution of the corp. The hands of government cannot, of course, collect

taxes from a defunct corporation, it loses thereby none of its rights to assess taxes which had been due from the corporation, and to collect them from persons, who by reason of transactions with the corporation hold property against which the tax can be enforced and that the legal death of the corporation no more prevents such action than would the physical death of an individual prevent the government from assessing taxes against him and collecting them from his administrator, who holds the property which the decedent had formerly possessed. Thus, petitioners can be held personally liable for the corporation=s taxes, being successors/in/interest of the defunct corporation.

&istri%ution of assets of nonEstoc6 corporations

):AT ARE T:E RULES FOR DISTRI/UTION OF ASSETS OF NON-STOCH CORPORATIONS> 4Sec. 4'E47) (!) ($) All liabilities and obligations of the corporation shall be paid, satisfied, and discharged, or ade=uate provision shall be made therefor. Assets held by the corporation upon a condition re=uiring return, transfer or conveyance, and which condition occurs by reason of the dissolution, shall be returned, transferred or conveyed in accordance with such re=uirements. Assets received and held by the corporation sub@ect to limitations permitting their use only for charitable, religious, benevolent, education or similar purposes, but not sub@ect to condition ($) above, shall be transferred or conveyed to one or more corporations, societies or organization engaged in activities in the .hilippines substantially similar to those of the dissolving corp. according to a plan of distribution adopted pursuant to 2ec. 89 of the %ode. Assets other than those mentioned in preceding paragraphs shall be distributed in accordance with the A+" or by0laws. "n any other case, assets may be distributed to such persons, societies, organizations or corporations, whether or not organized for profit, as may be specified in a plan of distribution adopted pursuant to 2ec. 89.

(&)

(4) (9)

Z ;he p(an of istribution of assets may be adopted by a ma@ority vote of the 1oard of trustees and approval of $<& of the members having voting rights present or represented by proxy at the meeting during which said plan is adopted. "t must be noted that the plan of distribution of assets must not be inconsistent with the provisions of ;itle N" of the %ode.

CORPORATE CO0/INATIONS

Tec%ni3ues to ac%ie!e corporate co#binations

):AT ARE T:E TEC:NI2UES TO AC:IEVE A CORPORATE CO0/INATION>

+,- /erger (A Q 1 O A) +)- %onsolidation (A Q 1 O %) +0- 2ale of substantially all corporate assets and purchase thereof by another
corporation#

+1- Ac=uisition of all < substantially all of the stoc) of one corporation from its
2(s in exchange for the stoc) of the ac=uiring corporation

0er$er or Conso(i ation

):AT IS T:E PROCEDURE FOR 0ER.ER OR CONSOLIDATION> (!) 1oard of :irectors of the constituent corporations must prepare and approve a plan of merger or consolidation. ($) $<& vote of +%2 of the constituent corporations. (&) 3xecution of the Articles of /erger<%onsolidation, to be signed by the .res<R. and certified by the secretary < assistant secretary. (4) 2ubmission to the 23% for approval. ):AT ARE T:E EFFECTS OF 0ER.ER OR CONSOLIDATION> (Sec. 80) (!) ;he constituent corporation shall become a single corporation ;. -erger' t e *urviving corporation +e*ignate+ in t e p!an o. -erger

;. con*o!i+ation' t e con*o!i+ate+ corporation +e*ignate+ in t e p!an o. Con*o!i+ation. ($) ;he separate existence of the constituent corporations shall cease, except that of the surviving or consolidated corporation. (&) ;he surviving or consolidated corporation shall possess all rights, privileges, immunities and powers and shall be sub@ect to all the duties and liabilities of a corporation organized under the %orporation %ode.

(4) ;he surviving or consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities and franchises of each of the constituent corporations# 4L5 All property (rea! or per*ona!) and all receivables due on whatever account (inc!u+ing *u0*cription* to * are* an+ ot er c o*e* in action) , and all and every other interest of, or belong to, or due to each constituent corporation, shall be deemed transferred and vested in such surviving or consolidated corporation *it%out furt%er act or ee " (5) ;he surviving or consolidated corporation shall be responsible and liable for all the liabilities and obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation had itself incurred such liabilities or obligations# and any pending claim, action or proceeding brought by or against any of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. (&ote' T e -erger or con*o!i+ation +oe* not i-pair t e rig t* o. cre+itor* or !ien* upon t e property o. any *uc con*tituent corporation*.)

LO ANO V. DE LOS SANTOS +274 SCRA 452) Consolidation becomes effective not upon mere agreement of the members but only upon issuance of the certificate of consolidation by the S%C. There can be no intra/corporate nor partnership relation between ) 8eepney drivers= and operators= associations whose plans to consolidate into a single common association is still a proposal.
):AT ARE T:E RULES .OVERNIN. 0ER.ER OR CONSOLIDATION INVOLVIN. A FOREI.N CORPORATION LICENSED IN T:E P:ILIPPINES> 4Sec. 152) A foreign corporation authorized to transact business in the .hilippines may merge or consolidate with any domestic corporation if such is permitted under .hilippine law and by the law of its incorporation. ;he re=uirements on merger or consolidation as provided in the %orporation %ode must be complied with. 'henever a foreign corporation authorized to transact business in the .hilippines is a party to a merger or consolidation in its home country or state, such foreign corporation shall file a copy of the articles or merger or consolidation with the 23% and the appropriate government agencies within 5? days after such merger or consolidation becomes effective. 2uch copy of the articles must be duly authenticated by the proper officials of the country or state under the laws of which merger or consolidation was effected. "f the absorbed corporation in such a merger < consolidation happens to be the foreign corporation doing business in the .hilippines, it shall file a petition for withdrawal of its license in accordance with 2ec. !&5.

Sa(e of substantia((& a(( corporate assets

):EN IS A SALE OR OT:ER DISPOSITION DEE0ED TO COVER SU/STANTIALL9 ALL T:E CORPORATE PROPERT9 AND ASSETS> "f by the sale the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated. (Sec. 40)

):AT ARE T:E RE2UIRE0ENTS> 4Sec. '0) (!) /a@ority vote of 1+: Q $<& vote of +%2 or members at a meeting duly called for the purpose# ($) %ompliance with the laws on illegal combinations and monopolies &ote, however, that after such approval by the 2(s, the 1+: may nevertheless, in its discretion, abandon such sale or other disposition without further action or approval by the 2(s. ;his, of course, is sub@ect to the rights of third parties under any contract relating thereto.

):EN IS S: APPROVAL NOT NECESSAR9 FOR T:E A/OVE DISPOSITION>

+,- "f the disposition is necessary in the usual and regular course of business# or +)- "f the proceeds of the disposition be appropriated for the conduct of its
remaining business (2ec. 4?) IS T:E APPRAISAL RI.:T AVAILA/LE TO DISSENTIN. STOCH:OLDERS> Pes. (owever, it must be stressed that this right is generally available only to dissenting stoc)holders of the se((in$ corporation, not the purchasing corporation. (;t can 0e argue+, t oug , t at in in*tance* , erein t e purc a*e con*titute* an inve*t-ent in a purpo*e ot er t an it* pri-ary purpo*e, *toc) o!+er*G approva! o. *uc inve*t-ent i* nece**ary, an+ anyone , o o05ect* t ereto ,i!! ave t e apprai*a! rig t un+er Sec. 42. )

E'c%an$e of stocks
"n this method, all or substantially all the stoc)holders of the "ac=uired" corporation are made stoc)holders of the ac=uiring corporation. 'ith the exchange, the ac=uired corporation becomes a subsidiary of the ac=uiring corporation. Although this method does not combine the $ businesses under a single corporation as in merger and sale of assets, from the point of view of the ac=uiring (parent) corporation, there is hardly any difference between owing the ac=uired corporationKs business directly and operating it through a controlled subsidiary. "n fact, the parent

corporation would have the power to buy all the subsidiaryKs assets and dissolve it, achieving the same result as in the other methods of combination. (Ca-po* A Ca-po*)

FOREI.N CORPORATIONS
):AT IS A FOREI.N CORPORATION> %Sec. 12") A corporation formed and organized under laws other than those of the .hilippines, regardless of the citizenship of the incorporators and stoc)holders. 2uch corporation must have been organized and must operate in a country which allows Hilipino citizens and corporations to do business there. ;n ti-e* o. ,ar' Ior purpo*e* o. *ecurity o. t e *tate, t e citiKen* ip o. t e contro!!ing *toc) o!+er* +eter-ine* t e corporation/* nationa!ity.

IN ):AT )A9S CAN A FOREI.N CORPORATION DO /USINESS IN T:E P:ILS"> (!) 'holly0owned subsidiary# or ($) 1ranch office# or (&) Soint venture with a local partner.

Per#itte areas of in!est#ent

?MMN E2UIT98 /ass media, except recording ;he practice of a profession (law, medicine, etc.) +peration of rural ban)s %ooperatives .rivate security agencies 2mall0scale mining 6tilization of marine resources +wnership, operation, and management of coc)pits# /anufacture, repair, stoc)piling of nuclear, biological, chemical, and radiological weapons#

&ote' Retai! tra+e i* no !onger re4uire+ to 0e 100D Ii!ipino2o,ne+ on account o. t e Retai! Tra+e 6i0era!iKation Act. CLN-,LN E2UIT98 "nter0island shipping (R.A. 19":, Sec. 8)

.rivate recruitment %ontracts for construction and repair of locally0funded public wor)s 3<cept' Pu0!ic ,or)* t at ,ou!+ .a!! un+er t e Bui!+2 9perate2Tran*.er 6a,, a* ,e!! a* t o*e t at are .oreign2.un+e+ CMN--MN E2UIT98 AMN-@MN E2UIT98 Advertising +ther industries.

):AT IS T:E SO-CALLED O.RANDFAT:ER RULEO> 'here a domestic corporation which has both .hilippine and foreign stoc)holders is an investor in another domestic corporation which has also both .hilippine and foreign stoc)holders, the so0called "grandfather rule" is used to determine whether or not the latter corporation is =ualified to engage in a partially nationalized business, i.e. by determining the extent of .hilippine e=uity therein. 6nder present 23% rules, if the percentage of Hilipino ownership in the first corporation is at least 5?G, then said corporation will be considered as a .hilippine national and all of its investment in the second corporation would be treated as Hilipino e=uity. +n the other hand, if the .hilippine e=uity in the first corporation is less than 5?G, then only the number of shares corresponding to such percentage shall be counted as of .hilippine nationality. (See S3C Ru!e pro-u!gate+ on 28 Ie0. 196:, cite+ in 9pinion M 18, Serie* o. 1989, 7epart-ent o. (u*tice, +ate+ 19 (anuary 1989.) /"0E$ T e rea+er ,ou!+ 0e ,e!!2a+vi*e+ to cro**2re.erence t i* +e.inition o. t e =gran+.at er ru!e= ,it a tru*te+ co--entary.

Le$a( Re3uire#ents Prior to Transaction of /usiness &ocumentar+ ;equirements (Sec. 12$)

4?5 /OI certificate ;he 1+" certificate is issued upon a finding of the 1oard of "nvestments that the business operations of the foreign corp. will contribute to the sound and balanced development of the national economy on a self0sustaining basis. (See 9-ni0u* ;nve*t-ent* Co+e, Sec. 48249) &9T3' App!ication*, i. not acte+ upon ,it in 10 +ay* .ro- o..icia! acceptance t ereo., * a!! 0e con*i+ere+ auto-atica!!y approve+J %Art. $", 9-ni0u* ;nve*t-ent* Co+e) 4,5 SEC (icense to o business (Sec. 12$) Application under oath setting forth the information specified in 2ec. !$9#

Additional information as may be necessary or appropriate to enable the 23% to determine whether the corporation is entitled to a license to transact business in the .hilippines, and to determine and assess the fees payable# :uly executed certificate under oath by authorized official<s of the @urisdiction of the companyKs incorporation, attesting to the fact that the laws of the country of the applicant allow Hilipino citizens and corporations to do business therein, and that the applicant is an existing corporation in good standing# 2tatement under oath of the president or any other person authorized by the corporation showing that the applicant is solvent and in good financial condition, and setting forth the assets and liabilities of the corporation within ! year immediately prior to the application.

4-5 Certificate fro# appropriate $o!ern#ent a$enc& &9T3' Certain *ector* *uc a* 0an)ing, in*urance, etc. re4uire prior approva! .ro- t e govern-ent agencie* concerne+. %Sec. 1:)

&eposit requirement (Sec. 126)

'ithin 5? days after the issuance of the license, the licensee shall deposit with the 23% securities with an actual mar)et value of at least . !??,???.??. ;hese securities are for the benefit of present and future creditors, and shall consist of any of the following 1onds or other evidence of indebtedness of the >overnment or its instrumentalities, etc.# 2hares of stoc) in "registered enterprises" as defined in F.A. 9!,5# 2hares of stoc) in domestic corporations registered in the stoc) exchange# 2hares of stoc) in domestic insurance companies and ban)s.

+nce the licensee ceases to do business in the .hilippines, these deposited securities shall be returned, upon the licenseeKs application and proof to the satisfaction of the 23% that the licensee has no liability to .hilippine residents or the .hilippine government. &ote' Ioreign 0an)ing an+ in*urance corporation* are t e e<ception* to t i* re4uire-ent.

&esignation of a resident agent %Sec. 128)

;he designation of a resident agent is a condition precedent to the issuance of the license to transact business in the .hilippines. ):O8 PURPOSE8 A resident of the .hilippines. ;o be served any summons and other legal processes which may be served in all actions or other legal proceedings against such corporation. 2ervice upon such resident shall be admitted and held as valid as if served upon the duly authorized officers of the foreign corporation at its home office.

La*s app(icab(e to forei$n corporations

Horeign corporations lawfully doing business in the .hilippines are bound by all laws, rules and regulations applicable to domestic corporations of the same class. 3<ception*' (!) As regards the creation, formation, organization or dissolution of the corporation# ($) As regards the fixing of relations, liabilities, responsibilities, or duties of stoc)holders, members, or officers or corporations to each other or to the corporation (Sec. 129)

Effects of License

Fai(ure

to

Secure

SEC

):AT ARE T:E EFFECTS OF FAILURE TO SECURE A LICENSE>

+,- ;he corporation will not be permitted to maintain agency in the .hilippines# +)- ;he corporation will be sub@ect to penalties and fines# +0- ;he corporation will not be permitted to maintain or intervene in any action before
.hilippine courts or administrative agencies# it can be 263:.

#solated transactions

MARSHALL WELLS V. ELSER +46 #hi$. 71; 1924)

:arshall 3ells, a corporation organi(ed under the State of .regon, sued a domestic corp. for the unpaid balance on a bill of goods. 'efendant demurred to the complaint on the ground that it did not show that plaintiff had complied with the law regarding corp. desiring to do business in the 9hil., nor that the plaintiff was authori(ed to do business in the 9hil. The Supreme Court, in ruling for :arshall 3ells, stated that the ob8ect of the statute was to sub8ect the foreign corp. doing business in the 9hil. to the 8urisdiction of its courts. The ob8ect of the statute was not to prevent it from performing single acts but to prevent it from ac*uiring a domicile for the purpose without ta#ing the steps necessary to render it amenable to suit in the local courts. The implication of the law is that it was never the purpose of the &egislature to exclude a foreign corp. which happens to obtain an isolated order for business from the 9hil., from securing redress in 9hil. Courts, and thus, in effect to permit persons to avoid their contract made with such foreign corporation.

ATLANTIC MUTUAL V. CEBU STEVEDORING +<.R. N*. 18961; A40. 31, 1966)
A foreign corp. engaged in business in the 9hil. can maintain suit in this 8urisdiction if it is duly licensed. !f a foreign corp. is not engaged in business in the 9hil., it can maintain such suit if the transaction sued upon is singular and isolated, in which no license is re*uired. !n either case, the fact of compliance with the re*uirement of license, or the fact that the suing corp. is exempt therefrom, as the case may be, cannot be inferred from the mere fact that the party suing is a foreign corp. The *ualifying circumstance, being an essential part of the element of the plaintiff6s capacity to sue, must be affirmatively pleaded. !n short, facts showing foreign corporation6s capacity to sue should be pleaded.

Curing of defect

HOME INSURANCE V. EASTERN SHIPPING +123 SCRA 424; 1983)

A contract entered into by a foreign insurance corp. not licensed to do business in the 9hil. is not necessarily void and the lac# of capacity to sue at the time of execution of the contract is cured by its subse*uent registration.

Protection of intellectual propert+ rig,ts

GENERAL GARMENTS CORP. V. DIR. OF PATENTS +41 SCRA 50; 1971)

'omestic corporation Beneral Barments registered K9uritanL trademar# for its men6s wear. <S corporation 9uritan Sportswear petitioned the 9hil. 9atent .ffice for cancellation of said trademar#, alleging its ownership and prior use in the 9hil. The Supreme Court held that a foreign corp. which does not do business in the 9hil. and is unlicensed but is widely #nown in the 9hil. through the use of its products here has legal right to maintain an action to protect its reputation, corporate name and goodwill. The right to use the corporate name is a property right which the corp. may assert and protect in any of the courts of the world.

LE CHEMISE LACOSTE V. FERNANDE +129 SCRA 377; 1984)

A foreign corporation not doing business in the 9hil. needs no license to sue in the 9hil. for trademar# violations. 3here a violation of our unfair trade laws which provide a penal sanction is alleged, lac# of capacity to sue of in8ured foreign corp. becomes immaterial +because a criminal offence is essentially an act against the State-.
NOTE8 Sec" ?AM of R"A" P,J- ("ntellectual .roperty %ode) provides that any foreign national or @uridical person who meets the re=uirements of 2ec. & of the Act (i.e., i* a nationa! or i* +o-ici!e+ in a country party to any convention, treaty or agree-ent re!ating to inte!!ectua! property rig t* or t e repre**ion o. un.air co-petition, to , ic t e P i!ippine* i* a!*o a party, or e<ten+* reciproca! rig t* to P i!ippine nationa!* 0y !a,) and does not engage in business in the .hilippines may bring a civil or administrative action for opposition, cancellation, infringement, unfair competition, or false designation of origin and false description, whether or not it is licensed to do business in the .hilippines under existing laws.

)%at Constitutes Transactin$ /usiness

'(A; "2 %+42":3F3: A2 4+; :+"4> 162"4322, A4: ;(3F3H+F3 4+; 261S3%; ;+ ;(3 7"%342"4> F3L6"F3/34;Y /ere investment as a shareholder and the exercise of the rights as such investor# (aving a nominee director or officer represent the foreign investorsD interests# Appointing a representative or distributor in the .hilippines who transacts business in his own name and for his own account 3<a-p!e' Ru*tan/* e<c!u*ive +i*tri0utor* ip o. 6aco*te t2* irt*

.ublication of a general advertisement# &9T3' 8n+er t e Co+e o. Co--erce, t e pu0!ication o. an a+ i* pri-a .acie evi+ence %or at !ea*t create* a pre*u-ption) o. +oing 0u*ine** in t e P i!ippine*.

/aintaining stoc) of goods for processing by another entity in the .hilippines# %onsignment of e=uipment to be used in processing products for export# %ollecting information in the .hilippines# .erforming services incidental to an isolated contract of sale 3<a-p!e' ;n*ta!!ing -ac inery *o!+ 0y a .oreign corporation to a P i!ippine 0uyer

):AT IS T:E TEST OF DOIN. /USINESS IN T:E P:ILIPPINES> 'hether or not there is continuity of transactions which are in pursuance of the normal business of the corporation. (/etholatum v. /angaliman)

MENTHOLATUM V. MANGALIMAN +72 #hi$. 525; 1941)

The true test as to whether a foreign corporation is doing business in the 9hilippines seems to be whether the foreign corp. is continuing the body or substance of the business for which it was organi(ed or whether it has substantially retired from it and turned it over to another. The term implies a continuity of dealings and arrangements and contemplates performance of actsHwor#s or the exercise of the functions normally incident to and in progressive prosecution of the purpose and ob8ect of its organi(ation.

FACILITIES MANAGEMENT CORP. V. DE LA OSA +89 SCRA 131; 1979)

The Court of !ndustrial "elations ordered Facilities :anagement Corporation +F:C- to pay 'ela .sa his overtime compensation, swing shift and graveyard shift premiums. F:C filed a petition for review on certiorari on the issue of whether the C!" can validly affirm a 8udgment against persons domiciled outside and not doing business in the 9hil. and over whom it did not ac*uire 8urisdiction. The Supreme Court held that the petitioner may be considered as doing business in the 9hilippines within the scope of Sec. ,1, "ule ,1 of the "ules of Court:
Sec. ,1. Se)+ice 4p*" p)i+!te 3*)ei0" c*)p. / !f the defendant is a foreign corp., or a non/resident 8oint stoc# corporation or association, doing business in the 9hil., service may be made on its resident agent, on the government official designated by law to the effect, or to an y of its officers or agents within the 9hilippines.

F:C had appointed ;aime Catuira as its agent with authority to execute %mployment Contracts and receive, on behalf of the corp., legal services from, and be bound by processes of the 9hil. Courts, for as long as he remains an employee of F:S. !f a foreign corp. not engaged in business in the 9hil., through an Agent, is not barred from see#ing redress from courts in the 9hil., that same corp. cannot claim exemption done against a person or persons in the 9hil..
NOTE8 6nder Sec" ?,; Ru(e ?@ of t%e ?JJC Ru(es of Ci!i( Proce ure , the term "doing business" has been replaced with the phrase " %as transacte business;O thereby allowing suits based on isolated transactions.

MERRILL LYNCH FUTURES INC. V. CA +211 SCRA 824)

:errill &ynch Futures, !nc. +:&F- filed a complaint against the spouses &ara for the recovery of a debt. :&F is a non/resident foreign corp. not doing business in the 9hil., organi(ed under the laws of 'elaware, <SA. !t is a futures commission merchant duly licensed to act as such in the futures mar#ets and exchanges in the <S, essentially functioning as a bro#er executing orders to buy and sell futures contract received from its customers on <S futures exchanges. (F4t4)e( c*"t)!ct i( ! c*"t)!ct4!$ c*mmitme"t t* ,4- !"6 (e$$ ! (t!"6!)6iGe6 94!"tit- *3 ! p!)tic4$!) item !t ! (peci3ie6 34t4)e (ett$eme"t 6!te !"6 !t ! p)ice !0)ee6 4p*" /ith the p4)ch!(e *) (!$e ,ei"0 e8ec4te6 *" ! )e04$!te6 34t4)e( e8ch!"0e.) The spouses refused to pay and moved to dismiss the case alleging that plaintiff had no legal capacity to sue because +,- :&F is doing business in the country without a licenseF and +)the transactions were made with :errill &ynch 9ierce, Fenner and Smith and not with plaintiff :&F. '((4e? C!" M@F (4e i" #hi$ippi"e c*4)t( t* e(t!,$i(h !"6 e"3*)ce it( )i0ht( !0!i"(t (p*4(e( i" $i0ht *3 the 4"6e"i!,$e 3!ct th!t it h!6 t)!"(!cte6 ,4(i"e(( /ith*4t ! $ice"(e7

&egal capacity to sue may be understood in two senses: +,- That the plaintiff is prohibited or otherwise incapacitated by law to institute suit in the 9hil. Courts, or +)- although not otherwise incapacitated in the sense 8ust stated, that it is not a real party in interest. The Court finds that the &aras were transacting with :&F fully aware of its lac# of license to do business in the 9hils., and in relation to those transactions had made payments and the spouses are estopped to impugn :&F=s capacity to sue them. The rule is that a party is estopped to challenge the personality of a corp after having ac#nowledged the same by entering into a contract with it. The principle is applied to prevent a person contracting with a foreign corporation from later ta#ing advantage of its noncompliance with the statutes, chiefly in cases where such person has received the benefits of the contract.

PACIFIC VEGETABLE OIL V. SINGSON +<.R. N*. 7917; Ap)i$ 29, 1955)
This is an action instituted by the plaintiff, a foreign corporation, against the defendant to recover a sum of money for damages suffered by the plaintiff as a conse*uence of the failure of the defendant to deliver copra which he sold and bound himself to deliver to the plaintiff. 'efendant filed a motion to dismiss on the ground that the plaintiff failed to obtain a license to transact business in the 9hil and, conse*uently, it had no personality to file an action. F!( !ppe$$!"t t)!"(!cte6 ,4(i"e(( i" the #hi$ippi"e( i" c*"temp$!ti*" *3 $!/7 Contrary to the findings of the trial court, the copra in *uestion was actually sold by the defendant to the plaintiff in the <S, the agreed price to be covered by an irrevocable letter of credit to be opened at the an# of California, and delivery to be made at the port of destination. !t follows that the appellant corporation has not transacted business in the 9hil in contemplation of Sec. A> and AC which re*uire any foreign corporation to obtain a license before it could transact business, or before it could have personality to file a suit in the 9hil.. !t was never the purpose of the &egislature to exclude a foreign corporation which happens to obtain an isolated order of business from the 9hil., from securing redress in the 9hil. Courts, and thus, in effect, to permit persons to avoid their contracts made with such foreign corp.. The lower court erred in holding that the appellant corporation has no personality to maintain the present action.

AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE +80 SCRA 635; 1977)
Aetna as subrogee of !. Shalom sued 9acific Star &ine +9S&-, the common carrier for the loss of &inen M Cotton piece goods due to pilferage and damage amounting to <SP),0GG.GG. 9S& contends that Aetna has no license to transact insurance business in the 9hilippines as gathered from the !nsurance Commission and S%C . !t also argues that since said company has filed ,0 other civil suits, they should be considered as doing business here and not merely having entered into an isolated transaction.

ased on rulings in :entholatum and %astboard 4avigation, the Supreme Court held that Aetna is not transacting business in the 9hilippines for which it needs to have a license. The contract was entered into in 4ew @or# and payment was made to the consignee in the 4ew @or# branch. :oreover, Aetna was not engaged in the business of insurance in the 9hilippines but was merely collecting a claim assigned to it by consignee. ecause it was not doing business in the 9hilippines, it was not sub8ect to Sec. A>/AC of the Corporation &aw and therefore was not barred from filing the instant case although it had not secured a license to transact insurance business in the 9hilippines.

TOPWELD MANUEL VS. ECED +138 SCRA 120; 1985)

Topweld entered into ) separate contracts with foreign entities: a license and technical assistance agreement with !"T!, and a distributor agreement with %C%', SA. 3hen Topweld found out that the foreign corporations were loo#ing into replacing Topweld as licensee and distributor, the latter went to court to as# for a writ of preliminary in8unction to restrain the foreign corporations from negotiating with 0rd parties as violative of "A 2112 +1-. Although !"T! and %C%' were doing business in the 9hilippines, since they had not secured a license from .!, the foreign corporations were not bound by the re*uirement on termination and Topweld could not invo#e the same against the former. :oreover, it was incumbent upon Topweld to #now whether or not !"T! and %C%' were properly authori(ed to engage in such agreements. The Supreme Court held that both parties were guilty of violating "A 2112. eing in p!)i 6e$ict*, Topweld was not entitled to the relief prayed for.

ANTAM CONSOLIDATED VS. CA +143 SCRA 289; 1986)

Sto#ely Ian Camp !nc. filed a complaint against anahaw, Antam, Tambunting and <nicorn for the collection of a sum of money for failure to deliver 2GG tons of crude coconut oil. Antam et al as#ed for dismissal of case on ground that Sto#ely was a foreign corporation not licensed to do business in the 9hilippines and therefore had no personality to maintain the suit. The SC held that the transactions entered into by Sto#ely with Antam et al +0 transactions, either as buyer or seller- were not a series of commercial dealings which signify an intent on the part of the respondent to do business in 9hilippines but constitute an isolated transaction. The records show that the )nd and 0rd transactions were entered into because Antam wanted to recover the loss it sustained from the failure of the petitioners to deliver the crude oil under the first transaction and in order to give the latter a chance to ma#e good on their obligation. There was only one agreement between the parties, and that was the delivery of the 2GG tons of crude coconut oil.

:o* Courts Ac3uire Furis iction o!er Forei$n Corporations

As a rule, @urisdiction over a foreign corporation is ac=uired by the courts through service of summons on its resident agent. "f there is no assigned resident agent, the government official designated by law can receive the summons on their behalf and transmit the same to them by registered mail within !? days. ;his will complete the service of the summons. 2ummons can also be served on any of the corporationKs officers or agents within the .hilippines. %See Sec. 128# Ru!e 14, Sec. 12, Ru!e* o. Court. &ote t at , i!e Sec. 128 pre*uppo*e* t at t e .oreign corporation a* a !icen*e, Ru!e 14 +oe* not -a)e *uc an a**u-ption.) 4ote that if there is a designated agent, summons served upon the government official is not deemed a valid process. Sohnlo ;rading case holds that the service on the attorney of an H% who was also charged with the duty of settling claims against it is valid since no other agent was duly appointed. 2ervice on +fficers or Agents of an foreign corporationDs domestic subsidiary will only vest @urisdiction if there is sufficient ground to disregard the separate personalities.

GENERAL CORPORATION OF THE PHILIPPINES VS UNION INSURANCE +87 #hi$. 313; 1950) Beneral Corporation and :ayon investment sued <nion !nsurance and Firemen6s Fund !nsurance +FF!- for the payment of ,) marine insurance policies. The summons was served on <nion which was then acting as FF!6s settling agent in the country. At that time, it was not yet registered and authori(ed to transact business in the 9hilippines.
'((4e? %i6 the t)i!$ c*4)t !c94i)e +!$i6 54)i(6icti*" *+e) FF'7 @es. The service of summons for FF! on its settling agent was legal and gave the court 8urisdiction upon FF!. Section ,1, "ule ? of ".C embraces <nion in the phrase, Kor agents within the 9hilippinesL. The law does not ma#e distinctions as to corporations with or without authority to do business in the 9hilippines. The test is whether a foreign corporation was actually doing business here. .therwise, a foreign corporation doing business illegally because of its refusal or neglect to obtain the corresponding authority to do business may successfully though unfairly plead such neglect or illegal act so as to avoid service and thereby impugn the 8urisdiction of the courts.

)it% ra*a( of Forei$n Corporation (Sec. 1"6)

:O)8 1y filing a petition for withdrawal of license RE2UISITES FOR ISSUANCE OF CERTIFICATE OF )IT:DRA)AL8

(!) All claims which have accrued in the .hilippines have been paid, compromised and settled# ($) All taxes, imposts, assessments, and penalties, if any, lawfully due to the .hilippine >overnment or any of its agencies or political subdivisions have been paid# and (&) ;he petition for withdrawal of license has been published once a wee) for & consecutive wee)s in a newspaper of general circulation in the .hilippines.

Re!ocation an Suspension of License

%Sec. 1"4)

'(A; AF3 ;(3 >F+64:2 H+F F3R+%A;"+4 +F 262.342"+4 +H A 7"%3423 +H A H+F3">4 %+F.+FA;"+4Y (!) ($) (&) (4) Hailure to file its annual report or pay any fees as re=uired by the %orporation %ode# Hailure to appoint and maintain a resident agent in the .hilippines as re=uired# Hailure, after change of resident agent or of his address, to submit to the 23% a statement of such change# Hailure to submit to the 23% an authenticated copy of any amendment to its A+" or by0laws or of any articles of merger or consolidation within the time prescribed by the %ode# A misrepresentation of any material matter in any application, report, affidavit or other document submitted by such corporation pursuant to ;itle NR# Hailure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the .hilippine government or any of its agencies or political subdivisions# ;ransacting business in the .hilippines outside of the purpose<s for which such corporation is authorized under its license# ;ransacting business in the .hilippine as agent of or acting for and in behalf of any foreign corporation or entity not duly licensed to do business in the .hilippines# or Any other ground as would render it unfit to transact business in the .hilippines.

(9)

(5)

(-) (,)

(8)

SPECIAL AND 0ISCELLANEOUS PROVISIONS E ucationa( corporations

+Sec. 106.108)

3ducational corporations other than government0run institutions are governed first by special laws, second, by the special provisions of the %orporation %ode, and lastly, by the general provisions of the %orporation %ode. (Sec. 106) At least 5?G of the authorized capital stoc) of educational corporations must be owned by Hilipino citizens, and %ongress may re=uire increased Hilipino e=uity participation therein. (1it t e e<ception o. e+ucationa! in*titution* e*ta0!i* e+ 0y re!igiou* group* an+ -i**ion 0oar+*, , ic are not *u05ect to t i* e4uity re4uire-ent.) (owever, control and administration of educational institutions must be vested exclusively in citizens of the .hilippines. (Art. B;?, Sec. 4 %2), 198: Con*titution) ;his means that no alien may be elected as a member of the 1+: nor appointed as .rincipal or officer thereof. +nce a school, college or university has been granted government recognition by the :3%2, it must incorporate within 8? days from the date of such recognition, unless it is expressly exempt by :3%2 for special reasons. (Act 2:06, Sec. $) "n addition, it must file a copy of its A+" and by0laws with the :3%2. 'ithout the favorable recommendation of the :3%2 2ecretary, the 23% will not accept or approve such articles. (Sec. 10:, Corporation Co+e)

Re(i$ious corporations

+Sec. 109.116)

Feligious corporations are governed by ;itle N""", %hapter "" of the %orporation %ode and by the general provisions of the %ode on non0stoc) corporations insofar as they may be applicable. (Sec. 109)

Corporation sole (Sec. 110211$)

A corporation sole is an incorporated office, composed of a single individual who may be a bishop, priest, minister or presiding officer of a religious sect, denomination or church. "ts purpose is to administer and manage as trustee the property and affairs of such religious sect, denomination or church, within the territorial @urisdiction of such office. (Sec. 110# Sec. 111 %")) "n case of death, resignation, transfer or removal of the person in office, his successor replaces him and continues the corporation sole. ;he property is not owned but is merely administered by the corporation sole, and ownership pertains to the church or congregation he represents. +n the other hand, he is the person authorized by law as the administrator thereof and the court may ta)e @udicial notice of such fact and of the fact that the parish priests have no control over such property. "n determining whether the constitutional provision re=uiring 5?G Hilipino capital for corporation ownership of private agricultural lands, the 2upreme %ourt has held that it is the nationality of the constituents of the diocese, and not the nationality of the actual incumbent of the office, which must be ta)en into consideration. ;hus, where at least 5?G of the constituents are Hilipinos, land may be registered in the name of the corporation sole, although the holder of the office is an alien. ;his ruling is based on the fact that the corporation sole is not the owner but merely the administrator of the property, and that he holds it in trust for the faithful of the diocese concerned. (See @ana v. Ro-an Cat o!ic Arc 0i* op o. Eani!a, 4" 9.@. &o. 8, "22$# 194:)

;eligious societies (Sec. 116)

"n contrast to a corporation sole, religious societies are composed of more than one person. ;he re=uirements for incorporation of such societies are set forth in 2ec. !!5 of the %ode.

C(ose Corporations

%Sec. 96210$)

):AT ARE T:E RE2UISITES OF A CLOSE CORPORATION> (Sec. 96) A close corporation, within the meaning of the %orporation %ode, is one whose articles of incorporation provide that (!) All the corporationKs issued stoc) of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons not exceeding $?# ($) All the issued stoc) of all classes shall be sub@ect to one or more specified restrictions on transfer permitted by ;itle N"" of the %ode# and (&) ;he corporation shall not list in any stoc) exchange or ma)e any public offering of any of its stoc) of any class. &ote*' A narrow distribution of ownership does not, by itself, ma)e a close corporation. (San (uan Structura! an+ Stee! Ia0ricator* v. CA, 296 SCRA 6"1) A corporation shall not be deemed a close corporation when at least $<& of its voting stoc) or voting rights is owned or controlled by another corporation which is not a close corporation.

CAN A CORPORATION T:AT IS NOT A CLOSE CORPORATION /E A STOCH:OLDER IN A CLOSE CORPORATION> P32, provided that said corporation owns less than $<& of voting stoc) or voting rights. ):AT ENTITIES 0A9 NOT /E OR.ANI1ED AS CLOSE CORPORATIONS> 4 Sec. 96) /ining +il 2toc) 3xchange 1an) "nsurance .ublic 6tilities 3ducational "nstitutions %orporations declared vested with public interest

DISTIN.UIS: CLOSE CORPORATIONS FRO0 RE.ULAR CORPORATIONS" C(ose Corporation No" of stock%o( ers 0ana$e#ent 0eetin$s 2uoru# an Votin$ Pre-e#pti!e ri$%t /u&-back of s%ares Reso(ution of ea (ocks 4ot more than $? (Sec. 96) %an be managed by the stoc)holders (Sec. 9:) ORe$u(arO Corporation 4o limit /anaged by 1oard of :irectors

/ay be dispensed with (Sec. 101) Actual meetings are re=uired. >reater =uorum and voting re=uirements allowed. (Sec. 9:) 3xtends to all stoc), including:oes not extend to treasury treasury shares (Sec. 102) shares. /ust be M par value (Sec. 10$) 23% has the power to arbitrate disputes in case of deadloc)s, upon written petition by any stoc)holder. (Sec. 104) ;his includes the power to appoint a provisional director, as well as to dissolve the corporation. /ay be petitioned by any>enerally re=uires a $<& vote of stoc)holder whenever any of thethe stoc)holders and a ma@ority acts of the directors or officers orvote of the 1+:. those in control of the corporation is illegal, fraudulent, dishonest,(&ote o,ever t at in ca*e o. oppressive or unfairly pre@udicial toinvo!untary +i**o!ution un+er the corporation or any stoc)holder,Sec. 121, a corporation -ay 0e or whenever corporate assets are+i**o!ve+ 0y t e S3C upon being misapplied or wasted. (Sec. .i!ing o. a veri.ie+ co-p!aint 10$) an+ a.ter proper notice an+ earing.) /ay be [ par value

Disso(ution

):AT IS A PROVISIONAL DIRECTOR> 4Sec. 10') A provisional director is an impartial person who is neither a stoc)holder nor a creditor of the corporation or of any subsidiary or affiliate of the corporation, and whose =ualifications, if any, may be determined by the 23%. (e is not a receiver of the corporation and does not have the title and powers of a custodian or receiver. (owever, he has all the rights and powers of a duly0elected director of the corporation, including the right to notice of and to vote at meetings of directors, until such time as he shall be removed by order of the 23% or by all the stoc)holders. (Sec. 104) CO0PARE APPRAISAL RI.:T AND )IT:DRA)AL RI.:T IN CLOSE CORPORATIONS" 4Sec. 107)

)it% ra*a( Ri$%t ;ype of involved corporation %lose corporation Hor any reason (Sec. 10$)

Appraisa( Ri$%t "Fegular" corporation +nly the grounds enumerated in 2ec. ,! and 2ec. 4$ /ay be [ par or issued value

'hen availed of

Hair value of shares

/ust be M par or issued value (Sec. 10$)

0isce((aneous Pro!isions

+Sec. 137.149)

;he 23% has the power to issue rules and regulations reasonably necessary to enable it to perform its duties under the %ode, particularly in the prevention of fraud and abuses on the part of the controlling stoc)holders, members, directors, trustees or officers. (Sec. 14") 'henever the 23% conducts any examination of the operations, boo)s and records of any corporation, the results thereof must be )ept strictly confidential, unless the law re=uires them to be made public or where they are necessary evidence before any court. (Sec. 142) All domestic and foreign corporations doing business in the .hilippines must submit an annual report to the 23% of its operations, with a financial statement of its assets and liabilities and such other re=uirements as the 23% may impose. (Sec. 141) 4o right or remedy in favor of or against, nor any liability incurred by, any corporation, its stoc)holders, members, directors, trustees or officers, may be removed or impaired by the subse=uent dissolution of said corporation or by any subse=uent amendment or repeal of the %ode. (Sec. 14$) Riolations of the %orporation %ode not otherwise specifically penalized therein are punishable by a fine of not less than . !,???.?? but not more than . !?,???.?? or by imprisonment for not less than &? days but not more than 9 years, or both, in the discretion of the court. "f the violation is committed by a corporation, the same may be dissolved in appropriate proceedings before the 23%. (Sec. 144)