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THE CORPORATION CODE OF THE PHILIPPINES

CHAPTER 1: INTRODUCTION

incident to its existence.

KINDS OF BUSINESS ORGANIZATION

B.

ATTRIBUTES (CARP)

1.

1.

CREATED BY OPERATION OF LAW the formal requirement


of the States consent through compliance with the
requirements imposed by law is necessary for its creation
such that the mere agreement of the persons composing it or
intending to organize it does not warrant the grant of its
independent existence as a juridical entity;

SOLE PROPRIETORSHIP one conducted for profit by a


lone or single individual who owns all assets, personally owes
and answers all the liabilities or suffers all the losses and
enjoys all the profits to the exclusion of others.

ADVANTAGES
Eliminates
the
bureaucratic
process common in corporations
where the board of directors
must sit as a body to have a
valid transaction. The proprietor
makes his own decisions and
can act without delay.
Proprietor owns all the profits
without having to share the
same
2.

DISADVANTAGES
Unlimited personal liability of the
2.
proprietor

ARTIFICIAL BEING it has a juridical personality, separate


and distinct from the persons composing it.

3.

RIGHT OF SUCCESSION unlike in a partnership, the death,


incapacity or civil interdiction of one or more of its
stockholder does not result in its dissolution;

Capital
is
limited
by
the 4.
proprietors personal resources

POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY


AUTDHORIZED BY LAW it can exercise only such powers
and can hold only such properties as are granted to it by the
enabling statutes unlike natural persons who can do anything
as they please.

PARTNERSHIP a contract where two or more persons bind


themselves to contribute money, property or industry to a
common fund with the intention of dividing the profits among
themselves (Art. 1767, Civil Code).

LBC EXPRESS, INC. VS. COURT OF APPEALS (236 SCRA 602


[Sept. 21, 1994]) Private respondent Carloto, incumbent
President-Manager of private respondent Rural Bank of Labason,
alleged that he was instructed to go to Manila to follow up on the
3. JOINT VENTURE a one-time grouping of two or more
Banks plan of payment of rediscounting obligations with Central
persons, natural or juridical, in a specified undertaking.
Banks main office, where he purchased a round trip ticket and
phone his sister to send him P1,000 for his pocket money which
PARTNERSHIP
JOINT VENTURE
Has a personality separate and Does not acquire a separate and LBC failed to deliver and eventually Carloto was not able to submit
the rediscounting documents and the Bank was made to pay the
distinct from the partners
distinct personality from the
Central Bank P32,000 s penalty interest and alleged that he
venturers
suffered embarrassment and humiliation. Respondent Rural Bank
Has for its object a general Object is an undertaking of a was later on joined as one of the plaintiff and prayed for the
business of particular kind, particular or single transaction
reimbursement of P32,000. Carloto and the Bank were awarded
moral and exemplary damages of P10,000 and P5,000,
although
there
may
be
respectively.
partnership
for
a
single
transaction
Corporations, generally are not
allowed
to
enter
into
partnerships*

Corporations
ventures

may

enter

joint ISSUE: WON Rural Bank of Labason, Inc. being an artificial person
should be awarded moral damages?

*A corporation is generally not allowed to enter into partnerships


because (1) the identity of the corporation is lost or merged with
that of another; and (2) the discretion of the officials is placed in
other hands other than those permitted by the law in its creation.
EXCEPTION to the rule is when the following conditions are met:
a. The articles of incorporation expressly authorized the
corporation to enter into contracts of partnership;
b. The agreement or articles of partnership must provide that all
the partners will manage the partnership; and
c. The articles of partnership must stipulate that all the partners
are and shall be jointly and severally liable for all obligations of
the partnership
4.

CORPORATION 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 (Sec. 1, Corporation Code [CC])
CHAPTER 2: DEFINITION AND ATTRIBUTES

A.

HELD: No. Moral damages are granted in recompense for physical


suffering, mental anguish, fright, serious anxiety, besmirched
reputation, wounded feelings, oral shock, social humiliation and
social injury. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no
emotions, no senses; therefore, it cannot experience physical
suffering and mental anguish. Mental suffering can be
experienced only by one having a nervous system and it flows
from real ills, sorrows and grieves of life all of which cannot be
suffered by respondent bank as an artificial person.
BEDROCK RULE: Under Article 2219 of the Civil Code, for cases
of libel, slander and other forms of defamation, a corporation is
entitled to moral damages.
C.

ADVANTAGES OF THE CORPORATE FORM OF BUSINESS

1.

CAPACITY TO ACT AS A SINGLE UNIT any number of


persons may unite in a single enterprise without using their
names, without difficulty or inconvenience, and with the
valuable right to contract, to sue and be sued, and to hold or
convey property, in the corporate name;
LIMITED SHAREHOLDERS LIABILITY the limit of his
liability since stockholders are not personally liable for the
debts of the corporation;
CONTINUITY OF EXISTENCE rights and obligations of a
corporation are not affected by the death, incapacity or
replacement of the individual members;
FEASIBILITY OF GREATER UNDERTAKING it enables the

2.

DEFINITION

3.
Sec. 2. Corporation Defined 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 4.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

5.

6.

7.

D.
1.
2.

3.
4.
5.
6.

7.
8.

individuals to cooperate in order to furnish the large amounts


of capital necessary to finance large scale enterprises;
TRANSFERABILITY OF SHARES unless reasonably
restricted, shares of stocks, being personal properties, can be
transferred by the owner without the consent of the other
stockholders;
CENTRALIZED MANAGEMENT the vesting of powers of
management and appointing officers and agents in board of
directors gives to a corporation the benefit of a centralized
administration which is a practical business necessity in any
large organization; and
STANDARDIZED
METHOD
OF
ORGANIZATION,
MANAGEMENT AND FINANCE which are provided under a
well-drawn general corporation law. The corporation statutes
enter into the charter contract and these are constantly being
interpreted by courts. An established system of management
and protection of shareholders and creditors rights has thus
been and are being evolved.
DISADVANTAGES
To have a valid and binding corporate act, formal
proceedings, such as board meetings are required;
The business transactions of a corporation is limited to the
State of its incorporation and may not act as such corporation
in other jurisdiction unless it has obtained a license or
authority from the foreign state;
The shareholders limited liability tends to limit the credit
available to the corporation as a separate legal entity;
Transferability of shares may result to uniting incompatible
and conflicting interests;
The minority shareholders have practically no say in the
conduct of corporate affairs;
In large scale enterprises, stockholders voting rights may
become merely fictitious and theoretical because of
disinterest in management, wide-scale ownership and
inaccessible place of meeting;
Double taxation may be imposed on corporate income; and
Corporations are subject to governmental regulations,
supervision and control including submission of reportorial
requirements not otherwise imposed in other business form.

Limited liability only to the


extent of their subscription or
their promised contribution.

The term of corporate existence


is limited only to fifty years and
unless extended by amendment,
it shall be considered nonexistent except for the purpose
of liquidation.
Cannot be dissolved by mere
agreement of the stockholders.
The consent of the State is
necessary for it to cease as a
body corporate.
F.

GOVERNMENT
CORPORATIONS

POWERS

consent of the other partners


(Art. 1830, par. 6 & 7)
All partners, including industrial
ones (except a limited partner)
are liable pro rata with all their
property and after all the
partnership property has been
exhausted, for all partnership
liability (Art. 1813)
May exist for an indefinite period
subject only to the causes of
dissolution provided for by the
law of its creation (Art. 1824)

Partners may dissolve their


partnership at will or at any time
they deem it fit (Art. 1830, par.
1(b) and par. 2)

IN

RELATION

TO

The Corporation Code places all corporations registered under its


provision to be under the control and supervision of the Securities
and Exchange Commission (Sec. 19 and 144). Its powers and
functions are clearly spelled out in PD 902-A, as amended by RA
No. 8799, otherwise known as the Securities Regulation Code.
CHAPTER 3: CLASSIFICATION OF CORPORATION
A.

CLASSES OF CORPORATIONS UNDER THE


CORPORATION CODE

Sec. 3. Classes of corporations. - Corporations formed or


organized under this Code may be stock or non-stock corporations.
E. CORPORATION VS. PARTNERSHIP
Corporations which have capital stock divided into shares and are
authorized to distribute to the holders of such shares dividends or
CORPORATION
PARTNERSHIP
allotments of the surplus profits on the basis of the shares held are
Created by operation of law (Sec. Created by mere agreement of stock corporations. All other corporations are non-stock corporations.
2&4, Corp Code)
the parties (Art. 1767, Civil Code)
There must be at least 5 Maybe formed by two or more REQUISITES TO BE CLASSIFIED STOCK CORPORATIONS:
incorporations (Sec. 10), except natural persons (Art. 1767)
1. They have a capital stock dividend into shares; and
2. That they are authorized to distribute dividends or allotments
corporation
sole
which
is
as surplus profits to its stockholders on the basis of the
incorporated
by
one
single
shares held by each of them.
individual (Sec. 110)
Can exercise only such powers
and functions expressly granted
to it by law and those that are
necessary or incidental to its
existence (Sec. 2, 45)
Unless
validly
delegated
expressly
or
impliedly,
a
corporation must transact its
business through the board of
directors (Sec. 23)
Right of succession, it continues
to exist despite the death,
withdrawal, incapacity or civil
interdiction of the stockholders or
members. (Sec. 3)
Transferability of shares without
the
consent
of
the
other
stockholders. (Sec. 63)

Can do anything by agreement of


the parties provided only that it
is not contrary to law, morals,
good customs or public order.
(Art. 1306)
In the absence of an agreement
to the contrary, any one of the
parties in the partnership form of
business may validly bind the
partnership (Art. 1308, par. 1)
Based on mutual rust and the
death, incapacity, insolvency,
civil
interdiction
or
mere
withdrawal of one of the parties
would result in its dissolution
(Art. 1830, par. 6 & 7)
A partner cannot transfer his
rights
or
interests
in
the
partnership so as to make the
transferee a partner without the

SIGNIFICANT DISTINCTION: Although a non-stock corporation


exists for purposes other than for profit, it does not follow that
they cannot make profits as an incident to their operations. But a
significant distinction is that profits obtained by a non-stock
corporation cannot be distributed as dividends but are used
merely for the furtherance of their purpose or purposes.
COLLECTOR OF INTERNAL REVENUE VS. CLUB FILIPINO,
INC. DE CEBU (5 SCRA 312; May 31, 1968) Herein respondent
Club operates a clubhouse, a bowling alley, a golf course and a
bar restaurant where it sells wines, liquors, soft-drinks, meals and
short orders to its members and their guests. The bar and
restaurant was a necessary incident to the operation of the Club
and its golf course is operated mainly with funds derived from
membership fees and dues. Whatever profits it had were used to
defray its overhead expenses and to improve its golf course. In
1951, as a result of capital surplus arising from the revaluation of
its real properties, the Club declared stock dividends. In 1952, the
BIR assessed percentage taxes on the gross receipt of the Clubs
bar and restaurant pursuant to Sec. 182 of the Tax Code: unless
otherwise provided, every person engaging in a business on which
the percentage tax is imposed shall pay in full a fixed annual tax

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

of P10 for each calendar year or a fraction thereof and under


Sec. 191: keepers of restaurant, refreshment parlors and other
eating places shall pay a tax of 3% of their gross receipts
ISSUE: WON the Club is liable for the assessment?
HELD: No. It has been held that the liability for fixed and
percentage taxes does not ipso facto attach by mere reason of the
operation of a bar and restaurant. For the liability to attach, the
operator thereof must be engaged in the business as a bar keeper
and restauranteur. Business, in the ordinary sense, is restricted to
activities or affairs where profit is the purpose or livelihood is the
motive, and the term business when used without qualification,
should be construed in its plain and ordinary meaning; restricted
to activities for profit or livelihood.
The fact that the Club derived profits from the operation of its bar
and restaurant does not necessarily convert it into a profit making
enterprise. The bar and restaurant are necessary adjunct of the
Club to foster its purpose and the profits derived therefrom are
necessarily incidental to the primary object of developing and
cultivating sports for the healthful recreation and entertainment of
the stockholders and members. That a club makes profit does not
make it a profit-making club.
ISSUE2: Is the Club a stock corporation?
HELD: No. The fact that the capital of the Club is divided into
shares does not detract from the finding of the trial court that it is
not engaged in the business of operator of bar and restaurant.
What is determinative of whether or not the Club is engaged in
such business is its object or purpose as stated in its articles and
by-laws.
Moreover, for a stock corporation to exists, two requisites
must be complied with: (1) a capital stock divided into
shares; and (2) an authority to distribute to the holders of
such shares, dividends or allotments of surplus profits on
the basis of the shares held. In the case at bar, nowhere it its
AOI or by-laws could be found an authority for the distribution of
its dividends or surplus profits. Strictly speaking, it cannot
therefore, be considered as stock corporation, within the
contemplation of the Corporation Code.
B.

CORPORATIONS
CHARTER

CREATED

BY

SPECIAL

LAW

OR

Officers and employees of GOCCs created by special laws are


governed by the law of their creation, usually the Civil Service
Law. Their subsidiaries, organized under the provisions of the
Corporation Code are governed by the Labor Code. The test in
determining whether they are governed by the Civil Service Law is
the manner of their creation.
PNOC-EDC VS. NLRC (201 SCRA 487; Sept. 11, 1991) Danilo
Mercado, an employee of herein petitioner was dismissed on the
ground of dishonesty and violation of company rules and
regulations. He filed an illegal dismissal complaint before herein
respondent NLRC who ruled on his favour, despite the motion to
dismiss of petitioner that the Civil Service Commission has
jurisdiction over the case.
ISSUE: WON NLRC has jurisdiction over the case?
HELD: Yes. Employees of GOCCs, whether created by special law
or formed as subsidiaries under the Corporation Law are governed
by the Civil Service Law and not the Labor Code, under the 1973
Constitution has been supplanted by the present Constitution.
Thus, under the present state of the law, the test in
determining whether a GOCC is subject to the Civil Service
Law is the manner of its creation, such that government
corporations created by special charter are subject to its
provisions while those incorporated under the General
Corporation Law are not within its coverage.
PNOC has its special charter, but its subsidiary, PNOC-EDC, having
been incorporated under the General Corporation Law was held to
be a GOCC whose employees are subject to the provisions of the
Labor Code.
C.

OTHER CLASSES OF CORPORATIONS

1.

PUBLIC AND PRIVATE CORPORATIONS

PUBLIC CORPORATION: those formed or organized for the


government of a portion of the State or any of its political
subdivisions and which have for their purpose the general good
and welfare.

Sec. 4. Corporations created by special laws or charters. Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them It is to be observed, however, that the mere fact that the
or applicable to them, supplemented by the provisions of this Code, undertaking in which a corporation is engaged in is one which the
State itself might enter into as part of its public work does not
insofar as they are applicable.
make it a public one. Nor is the fact that the State has granted
property or special privileges to a corporation render it public.
Likewise, the fact that some or all of the stocks in the corporation
Among these corporations created by special law are the
are held by the government does not make it a public corporation.
Philippine National Oil Company, the National Development
Company, the Philippine Export and Foreign Loan Guarantee
Corporation and the GSIS. All these are government owned or
The TRUE TEST to determine the nature of a corporation is found
controlled, operating under a special law or charter such that
in the relation of the body to the State. Strictly speaking, a
registration with the SEC is not required for them to acquire legal
public corporation is one that is created, formed or organized for
and juridical personality. They owe their own existence as such
political or governmental purposes with political powers to be
not by virtue of their compliance with the requirements of
exercised for purposes connected with the public good in the
registration under the Corporation Code but by virtue of the law
administration of the civil government.
specially creating them.
They are primarily governed by the special law creating them. But
unless otherwise provided by such law, they are not immune from
suits, it is thus settled that when the government engages in a
particular business through the instrumentality of a corporation, it
divests itself pro hoc vice of its sovereign character so as to
subject itself to the rules governing private corporations (PNB vs.
Pabolar 82 SCRA 595)

The GOCCs are regarded as private corporations despite common


misconceptions.
NATIONAL COAL COMPANY VS. COLLECTOR OF INTERNAL
REVENUE (146 Phil. 583) Herein plaintiff brought an action for
the purpose of recovering a sum of money allegedly paid by it
under protest to the herein defendant, a specific tax on some tons

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

of coal. It claimed exemption from taxes under Sec. 1469 of the


Administrative Code which provides that on all coal and coke
shall be collected per metric ton, fifty centavos. Of the 30,000
shares issued by the corporation, the Philippine government is the
owner of 29,809 or substantially all of the shares of the company.
ISSUE: WON the plaintiff corporation is a public corporation?
HELD: No. The plaintiff is a private corporation. The mere fact
that the government happens to be a majority stockholder
does not make it a public corporation. As a private
corporation, it has no greater rights, powers and privileges than
any other corporation which might be organized for the same
purpose under the Corporation Law, and certainly, it was not the
intention of the Legislature to give it a preference or right or
privilege over other legitimate private corporation in the mining of
coal.
PRIVATE CORPORATIONS: those formed for some private
purpose, benefit, aim or end. They are created for the immediate
benefit and advantage of the individuals or members composing it
and their franchise may be considered as privileges conferred by
the State to be exercised and enjoyed by them in the form of the
corporation.
2.

ECCLESIASTICAL AND LAY CORPORATIONS

ECCLESIASTICAL OR RELIGIOUS CORPORATIONS: are


composed exclusively of ecclesiastics organized for spiritual
purposes or for administering properties held for religious ones.
They are organized to secure public worship or perpetuating the
right of a particular religion.
LAY CORPORATIONS: are those organized for purposes other
than religion. They may further be classified as:
a. ELEEMOSYNARY: created for charitable and benevolent
purposes such as those organized for the purpose of maintaining
hospitals and houses for the sick, aged or poor.
b. CIVIL: organized not for the purpose of public charity but for
the benefit, pecuniary or otherwise, of its members.
3.

DOMESTIC AND FOREIGN CORPORATIONS

DOMESTIC CORPORATIONS: are those organized or created


under or by virtue of the Philippine laws, either by legislative act
or under the provisions of the General Corporation Law.
FOREIGN CORPORATIONS: are those formed, organized or
existing under any laws other than those of the Philippines and
whose laws allow Filipino citizens and corporations to do business
in its own country or state (Sec. 123, Corporation Code).
The second part of the definition is, however, somehow misplaced
since any corporation for that matter, which is not registered
under Philippine laws is a foreign corporation. Such second part
was inserted only for the purpose of qualifying a foreign
corporation to secure a license and to do business in the
Philippines.
6.

PARENT OR HOLDING COMPANIES AND SUBSIDIARIES


AND AFFILIATES

PARENT OR HOLDING COMPANY: a corporation who controls


another corporation, or several other corporations known as its
subsidiaries. Holding companies have been defined as
corporations that confine their activities to owning stock in, and
supervising management of other companies. A holding company
usually owns a controlling interest (more than 50% of the voting
stock) in the companies whose stocks it holds. As may be
differentiated from investment companies which are active in the
sale or purchase of shares of stock or securities, parent or holding
companies have a passive portfolio and hold the securities merely
for purposes of control and management.
SUBSIDIARY CORPORATIONS: those which another corporation
owns at least a majority of the shares, and thus have control.
A subsidiary has an independent and separate juridical
personality, distinct from that of its parent company, hence any
claim or suit against the latter does not bind the former or vice
versa.

AGGREGATE AND SOLE CORPORATIONS

AGGREGATE CORPORATIONS: are those composed of a number


of individuals vested with corporate powers.
CORPORATION SOLE: those consist of one person or individual
only and who are made as bodies corporate and politic in order to
give them some legal capacity and advantage which, as natural
persons, they cannot have. Under the Code, a corporation sole
may be formed by the chief archbishop, bishop, priest, minister,
rabbi, or other presiding elder or religious denominations, sects or
churches.
4.

5.

CLOSE AND OPEN CORPORATION

CLOSE CORPORATIONS: are those whose shares of stock are


held by a limited number of persons like the family or other
closely-knit group. There are no public investors and the
shareholders are active in the conduct of the corporate affairs;
recognized under Sec. 96 of the Corporation Code.
OPEN CORPORATIONS: are those formed to openly accept
outsiders as stockholders or investors. They are authorized and
empowered to list in the stock exchange and to offer their shares
to the public such that stock ownership can widely be dispersed.

AFFILIATES: are those corporations which are subject to common


control and operated as part of a system. They are sometimes
called sister companies since the stockholdings of a corporation
is not substantial enough to control the former. Example: 15% of
ABCD Company is held by A Corp, 18% by B Corp, and another
15% by C Corp. A, B and C are affiliates.
7.

QUASI-PUBLIC CORPORATIONS

These are private corporations which have accepted from the


state the grant of a franchise or contract involving the
performance of public duties. The term is sometimes applied to
corporations which are not strictly public in the sense of being
organized for governmental purposes, but whose operations
contribute to the convenience or welfare of the general public,
such as telegraph and telephone companies, water and electric
companies. More appropriately, they are known as public service
corporations.
8.

DE JURE, DE FACTO AND CORPORATION BY ESTOPPEL

DE JURE CORPORATIONS: are juridical entities created or


organized in strict or substantial compliance with statutory
requirements of incorporation and whose rights to exist as such

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

cannot be successfully attacked even by the State in a quo


warranto proceeding. They are, in effect, incorporated by strict
adherence to the provisions of the law of their creation.
DE FACTO CORPORATIONS: are those which exist by the virtue
of an irregularity or defect in the organization or constitution or
from some omission to comply with the conditions precedent by
which corporations de jure are created, but there was colorable
compliance with the requirements of the law under which they
might be lawfully incorporated for the purposes and powers
assumed, and user of the rights claimed to be conferred by law.
Its existence can only be attacked by a direct action of quo
warranto proceedings.
CORPORATION BY ESTOPPEL: those which are so defectively
formed as not to be either de jure or de facto corporations but
which are considered as corporations in relation only to those who
cannot deny their corporate existence due to their agreement,
admission or conduct.

CHAPTER 4: FORMATION AND ORGANIZATIONS OF


CORPORATIONS
1.

PROMOTIONAL STAGE

This is undertaken by the organizers or promoters who bring


together persons interested in the business venture. They enter
into contract either in their own names or in the name of the
proposed corporation.
LIABILITY OF PROMOTERS:
GENERAL RULE: a promoter, although he may assume to act for
and on behalf of a projected corporation and not for himself, will
be held personally liable on contracts made by him for the benefit
of a corporation he intends to organize. The personal liability
continues even after the formation of the corporation unless there
is novation or other agreement to release him from liability. As
such, the promoter may do either of the following options:
a. He may make a continuing offer on behalf of the corporation,
which, if accepted after incorporation, will become a contract. In
this case, the promoter does not assume any personal liability,
whether or not the corporation will accept the offer;
b. He may make a contract at the time binding himself, with the
understanding that if the corporation, once formed, accepts or
adopts the contract, he will be relieved of responsibility; or
c. He may bind himself personally and assume responsibility of
looking to the proposed corporation, when formed, for
reimbursement.
2.

PROCESS OF INCORPORATION

Includes the drafting of the Articles of Incorporation, preparation


and submission of additional and supporting documents, filing
with the SEC, and the subsequent issuance of the Certificate of
Incorporation.

as otherwise prescribed by this Code or by special law:


1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose,
the articles of incorporation shall state which is the primary purpose
and which is/are the secondary purpose or purposes: Provided, That a
non-stock corporation may not include a purpose which would change
or contradict its nature as such;
3. The place where the principal office of the corporation is to be
located, which must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than
five (5) nor more than fifteen (15);
7. The names, nationalities and residences of persons who shall act
as directors or trustees until the first regular directors or trustees are
duly elected and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital
stock in lawful money of the Philippines, the number of shares into
which it is divided, and in case the share are par value shares, the par
value of each, the 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;
9. If it be a non-stock corporation, the amount of its capital, the
names, nationalities and residences of the contributors and the
amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles
of incorporation of any stock corporation unless accompanied by a
sworn statement of the Treasurer elected by the subscribers showing
that at least twenty-five (25%) percent of the authorized capital stock
of the corporation has been subscribed, and at least twenty-five
(25%) of the total subscription has been fully paid to him in actual
cash and/or in property the fair valuation of which is equal to at least
twenty-five (25%) percent of the said subscription, such paid-up
capital being not less than five thousand (P5,000.00) pesos.
Sec. 15. Forms of Articles of Incorporation . - Unless
otherwise prescribed by special law, articles of incorporation of all
domestic corporations shall comply substantially with the
following form:
a.

PREFATORY PARAGRAPH

xxx
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a
majority of whom are residents of the Philippines, have
this day voluntarily agreed to form a (stock) (non-stock)
corporation under the laws of the Republic of the
Philippines
xxx

It must specify the nature of the corporation being organized in


order to prevent difficulties of administration and supervision.
Thus, the corporation should indicate whether it is a stock or a
non-stock corporation, a close corporation, corporation sole or a
Sec. 14. Contents of the articles of incorporation. - All
religious corporation.
corporations organized under this code shall file with the Securities
and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the
incorporators, containing substantially the following matters, except b. CORPORATE NAME
CONTENTS OF THE ARTICLES OF INCORPORATION

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

xxx
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
".............................................., INC. or CORPORATION";

4.
5.

xxx
The name of the corporation is essential to its existence since it is
through it that it can act and perform all legal acts. Each
corporation should therefore, have a name by which it is to sue
and be sued and do all legal acts.
A corporation, once formed, cannot use any other name, unless it
has been amended in accordance with law as this would result in
confusion and may open the door to fraud and evasion as well as
difficulties of administration and supervision.
Thus, the organizers must make sure that the name they intend to
use as a corporate name is not similar or confusingly similar
to any other name already registered and protected by law since
the SEC would refuse registration if such be the case.

6.

7.
8.
9.
10.

Sec. 18. Corporate name. - No corporate name may be allowed by


the Securities and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is
11.
patently deceptive, confusing or contrary to existing laws. When a
change in the corporate name is approved, the Commission shall
issue an amended certificate of incorporation under the amended
name.
12.
The SEC, in implementing the above provision on corporate name,
thus requires that a Verification Slip from the Records Division
of the Commission be submitted showing that the proposed name
is legally permissible. If the corporate name is available for use,
the SEC will allow the incorporators to reserve it for a nominal
fee for a specific period until the AOI is filed with the SEC.

13.

SEC Memorandum Circular No. 14-2000 dated October 24, 2000,


provides:
In implementing Section 18 of the Corporation Code of the
Philippines (BP 68), the following revised guidelines in the
approval of corporate and partnership names are hereby adopted
for the information and guidelines of all concerned:
1.

2.

3.

The corporation name shall contain the word


"Corporation" or its abbreviation "Corp." or
"Incorporated", or "Inc.".
The partnership name shall contain the word "Company" or
"Co.". For limited partnership, the word "Limited" or "Ltd."
shall be included. In case of professional partnership, the
word "Company" need not be used.
Terms descriptive of a business in the name shall be
indicative of the primary purpose. If there are two (2)
descriptive terms, the first shall refer to the primary purpose
and the second shall refer to one of the secondary purposes.
The name shall not be identical, misleading or
confusingly similar to one already registered by
another corporation or partnership with the Commission or
a sole proprietorship registered with the Department of Trade
and Industry.
If the proposed name is similar to the name of a
registered firm, the proposed name must contain at
least one distinctive word different from the name of
the company already registered. (The Book of Sir Ladia,
2007 Edition, provides that there must be two other words
different and distinct from the name of the company already
registered or protected by law).

14.

15.

Business or tradename of any firm which is different from its


corporate or partnership name shall be indicated in the
articles of incorporation or partnership of said firm.
Tradename or trademark duly registered with the Intellectual
Property Office cannot be used as part of a corporate or
partnership name without the consent of the owner of such
tradename of trademark.
If the name or surname of a person is used as part of a
corporate or partnership name, the consent of said
person or his heirs must be submitted except of that
person is a stockholder, member, partner of a declared
national hero. If such person cannot be identified or
non-existent, an explanation for the use of such name
shall be required.
The meaning of initials in the name shall be disclosed
in writing by the registrant.
Name containing a term descriptive of a business different
from the business of a registered company whose name also
bears similar term(s) used by the former may be allowed.
The name should not be patently deceptive, confusing
or contrary to existing laws.
The name which contains a word identical to a word in
a registered name shall not be allowed if such word is
coined or already appropriated by a registered firm,
regardless of the number of the different words in the
proposed name, unless there is consent from the
registered firm of this firm is one of the stockholders
of partners of the entity to be registered.
The name of an internationally known foreign
corporation or one similar to it may not be used by a
domestic corporation without the consent of the
former.
The term "Philippines" when used as part of the name
of a subsidiary corporation of a foreign corporation
shall be in parenthesis: i.e. "(Philippines)" or "(Phil.)".
The following words shall not be used as part of a
corporate or partnership names:
a.
As provided by special laws:
1.
"Finance", "Financing" or "Finance and
Investment" by corporations or partnerships not
engaged in the financing business (R.A. 5980, as
amended)
2.
"Engineer", "Engineering" or "Architects" as
part of the corporate name (R. A. 546 and R.A. 1582)
3.
"Bank", "Banking", "Banker", Building and
Loan Association", Trust Corporation", "Trust
Company" or words of similar import by corporations
or associations not engaged in banking business.
(R.A. 337, as amended)
4.
"United Nations" in full or abbreviated form
cannot be part of a corporate or partnership name
(R.A. 226)
5.
"Bonded" for corporations or partnerships
with unlicensed warehouse (R.A. 245)
b.
As a matter of policy:
1.
"Investment(s)"
by
corporations
or
partnership not organized as investment house
company or holding company.
2.
"National" by all stock corporations and
partnership.
3.
"Asean", "Calabarzon" and "Philippines
2000".
The name of a dissolved firm shall not be allowed to be used
by other firms within three (3) years after the approval of the
dissolution of the corporation by the Commission, unless
allowed by the last stockholders representing at least
majority of the outstanding capital stock of the dissolved firm.
Registrant corporations or partnership shall submit a letter
undertaking to change their corporate or partnership name in
case another person or firm has acquired a prior right to the
use of the said firm name or the same is deceptively or
confusingly similar to one already registered unless this

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

undertaking is already included as one of the provisions of


the articles of incorporation or partnership of the registrant.1
RED LINE TRANSPORTATION CO. VS. RURAL TRANSIT CO.
(60 Phil. 549; Sept. 6, 1934) A certificate of public convenience
was issued in the name of Rural Transit Co. by the Public Service
Commission despite opposition of herein petitioner-appellant Red
Line Transportation Co.. It appears that Red Line Transit Co. is
being used as a trade name of Bahrach Motors Co.
ISSUE: Who is the real party in interest, Rural Transit Co. which
appears in the face of the application? Or Bahrach Motors, Inc.
using the name of the former as a trade name?
HELD: Bahrach Motors, Inc.. There is no law that empowers PSC
or any court in this jurisdiction to authorize one corporation to
assume the name of another corporation as a trade name. Both
Rural Transit and Bahrach are Philippine corporations and the very
law of their creation and continued existence requires each to
adopt and certify a distinctive name.
The incorporators constitute a body politic and corporate under
the name state in the certificate (Sec. 11, Act. No. 1459). A
corporation has the power of succession in its corporate name
(Sec. 13). The name of a corporation is therefore essential to its
existence. It cannot change its name except in the manner
provided by law. By that name alone it is authorized to transact
business.
The law gives a corporation on express or implied authority to
assume another name that is unappropriated; still less that of
another corporation, which is expressly set apart from it and
protected by law. If any corporation should assume at pleasure as
an unregistered trade name, the name of another corporation, this
practice would result in confusion of administration and
supervision. The policy of the law as expressed in our corporation
statute and the Code of Commerce is clearly against such a
practice.

UNIVERSAL MILLS CORP. VS. UNIVERSAL TEXTILE MILLS


INC. (78 SCRA 62; July 28, 1977) In 1953, Universal Textile Mills,
Inc. (UTMI) was organized. In 1954, Universal Hosiery Mills
Corporation (UHMC) was also organized. Both are actually distinct
corporations but they engage in the same business (fabrics). In
1963, UHMC petitioned to change its name to Universal Mills
Corporation (UMC). The Securities and Exchange Commission
(SEC) granted the petition.

Subsequently, a warehouse owned by UMC was gutted by fire.


News about the fire spread and investors of UTMI thought that it
was UTMIs warehouse that was destroyed. UTMI had to make
clarifications that it was UMCs warehouse that got burned.
Eventually, UTMI petitioned that UMC should be enjoined from
using its name because of the confusion it brought. The SEC
granted UTMIs petition. UMC however assailed the order of the
SEC as it averred that their tradename is not deceptive; that
UTMIs tradename is qualified by the word Textile, hence, there
can be no confusion,
ISSUE: WON the SEC is correct?

1 http://www.disini.ph/res_sec__mc142000.html

HELD: Yes. There is definitely confusion as it was evident from the


facts where the investors of UTMI mistakenly believed that it was
UTMIs warehouse that was destroyed. Although the corporate
names are not really identical, they are indisputably so similar
that it can cause, as it already did, confusion. The SEC did not act
in abuse of its discretion when it ordered UMC to drop its name
because there was factual evidence presented as to the
confusion. Further, when UMC filed its petition for change of
corporate name, it made an undertaking that it shall change its
name in the event that there is another person, firm or entity who
has obtained a prior right to the use of such name or one similar
to it. That promise is still binding upon the corporation and its
responsible officers
LYCEUM OF THE PHILIPPINES VS. COURT OF APPEALS (219
SCRA 610; March 5, 1993) - Lyceum of the Philippines Inc.
previously obtained from the SEC a favourable decision on the
exclusive use of Lyceum against Lyceum of Baguio, Inc.. such
decision assailed by the latter before the SC which was denied for
lack of merit.
Armed with the Resolution of the Supreme Court, the Lyceum of
the Philippines then wrote all the educational institutions it could
find using the word "Lyceum" as part of their corporate name, and
advised them to discontinue such use of "Lyceum." Unheeded,
Lyceum of the Philippines instituted before the SEC an action to
enforce what Lyceum of the Philippines claims as its proprietary
right to the word "Lyceum." The SEC rendered a decision
sustaining petitioner's claim to an exclusive right to use the word
"Lyceum." The hearing officer relied upon the SEC ruling in the
Lyceum of Baguio, Inc. case.
On appeal, however, by Lyceum Of Aparri, Lyceum Of Cabagan,
Lyceum Of Camalaniugan, Inc., Lyceum Of Lallo, Inc., Lyceum Of
Tuao, Inc., Buhi Lyceum, Central Lyceum Of Catanduanes, Lyceum
Of Southern Philippines, Lyceum Of Eastern Mindanao, Inc. and
Western Pangasinan Lyceum, Inc.,, which are also educational
institutions, to the SEC En Banc, the decision of the hearing officer
was reversed and set aside. The SEC En Banc did not consider the
word "Lyceum" to have become so identified with Lyceum of the
Philippines as to render use thereof by other institutions as
productive of confusion about the identity of the schools
concerned in the mind of the general public. Unlike its hearing
officer, the SEC En Banc held that the attaching of geographical
names to the word "Lyceum" served sufficiently to distinguish the
schools from one another, especially in view of the fact that the
campuses of Lyceum of the Philippines and those of the other
Lyceums were physically quite remote from each other.
On appeal, the CA affirmed the decision of the CA en banc, and
denied reconsideration.
ISSUE: WON private respondents can be directed to delete the
word lyceum from their corporate names?
HELD: No. The policy underlying the prohibition in Section 18
against the registration of a corporate name which is "identical or
deceptively or confusingly similar" to that of any existing
corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of
fraud upon the public which would have occasion to deal
with the entity concerned, the evasion of legal obligations
and duties, and the reduction of difficulties of
administration and supervision over corporations.
Herein, the Court does not consider that the corporate names of
the academic institutions are "identical with, or deceptively or
confusingly similar" to that of Lyceum of the Philippines Inc. True
enough, the corporate names of the other schools (defendant
institutions) entities all carry the word "Lyceum" but confusion and
deception are effectively precluded by the appending of
geographic names to the word "Lyceum." Thus, the "Lyceum of
Aparri" cannot be mistaken by the general public for the Lyceum
of the Philippines, or that the "Lyceum of Camalaniugan" would be

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

confused with the Lyceum of the Philippines. Further,


etymologically, the word "Lyceum" is the Latin word for the Greek
lykeion which in turn referred to a locality on the river Ilissius in
ancient Athens "comprising an enclosure dedicated to Apollo and
adorned with fountains and buildings erected by Pisistratus,
Pericles and Lycurgus frequented by the youth for exercise and by
the philosopher Aristotle and his followers for teaching."
In time, the word "Lyceum" became associated with schools and
other institutions providing public lectures and concerts and public
discussions. Thus today, the word "Lyceum" generally refers to a
school or an institution of learning. Since "Lyceum" or "Liceo"
denotes a school or institution of learning, it is not unnatural to
use this word to designate an entity which is organized and
operating as an educational institution. To determine whether a
given corporate name is "identical" or "confusingly or deceptively
similar" with another entity's corporate name, it is not enough to
ascertain the presence of "Lyceum" or "Liceo" in both names. One
must evaluate corporate names in their entirety and when the
name of Lyceum of the Philippines is juxtaposed with the names of
private respondents, they are not reasonably regarded as
"identical" or "confusingly or deceptively similar" with each other.
ISSUE2: WON the word Lyceum has acquired a secondary
meaning although originally generic?
HELD: No. The Court of Appeals recognized this issue and
answered it in the negative: "Under the doctrine of secondary
meaning, a word or phrase originally incapable of
exclusive appropriation with reference to an article in the
market, because geographical or otherwise descriptive
might nevertheless have been used so long and so
exclusively by one producer with reference to this article
that, in that trade and to that group of the purchasing
public, the word or phrase has come to mean that the
article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the
distinctiveness into which the name or phrase has evolved
through the substantial and exclusive use of the same for
a considerable period of time. . . . No evidence was ever
presented in the hearing before the Commission which sufficiently
proved that the word 'Lyceum' has indeed acquired secondary
meaning in favor of the appellant. If there was any of this kind,
the same tend to prove only that the appellant had been using the
disputed word for a long period of time.
The number alone of the private respondents in the present case
suggests strongly that the Lyceum of the Philippines' use of the
word "Lyceum" has not been attended with the exclusivity
essential for applicability of the doctrine of secondary meaning. It
may be noted also that at least one of the private respondents,
i.e., the Western Pangasinan Lyceum, Inc., used the term
"Lyceum" 17 years before Lyceum of the Philippines registered its
own corporate name with the SEC and began using the word
"Lyceum." It follows that if any institution had acquired an
exclusive right to the word "Lyceum," that institution would have
been the Western Pangasinan Lyceum, Inc. rather than Lyceum of
the Philippines. Hence, Lyceum of the Philippines is not entitled to
a legally enforceable exclusive right to use the word "Lyceum" in
its corporate name and that other institutions may use "Lyceum"
as part of their corporate names.
PHILIPS EXPORT B.V. et. al. VS. COURT OF APPEALS (206
SCRA 457; Feb. 21, 1992) Petitioner is the registered owner of
the trademark PHILIPS and PHILIPS SHIELD EMBLEM issued by the
Philippine Patent Office. Philips Electric Lamp Inc. and Philips
Industrial Development Inc., also petitioners, are the authorized
users of such trademark.
Petitioner filed a case with SEC praying for a writ of injunction to
prohibit herein respondent Standard Philips Corporation from
using the word PHILIPS in its corporate name, which was denied.
On appeal, the CA affirmed the SEC.

ISSUE: WON Standard Philips should be directed to delete the


word PHILIPS from its corporate name?

HELD: Yes. As early as Western Equipment and Supply Co. v.


Reyes, 51 Phil. 115 (1927), the Court declared that a
corporation's right to use its corporate and trade name is
a property right, a right in rem, which it may assert and
protect against the world in the same manner as it may
protect its tangible property, real or personal, against
trespass or conversion. It is regarded, to a certain extent,
as a property right and one which cannot be impaired or
defeated by subsequent appropriation by another
corporation in the same field (Red Line Transportation Co. vs.
Rural Transit Co., September 8, 1934, 20 Phil 549).

A name is peculiarly important as necessary to the very


existence of a corporation (American Steel Foundries vs.
Robertson, 269 US 372, 70 L ed 317, 46 S Ct 160; Lauman vs.
Lebanon Valley R. Co., 30 Pa 42; First National Bank vs. Huntington
Distilling Co. 40 W Va 530, 23 SE 792). Its name is one of its
attributes, an element of its existence, and essential to its identity
(6 Fletcher [Perm Ed], pp. 3-4). The general rule as to
corporations is that each corporation must have a name by
which it is to sue and be sued and do all legal acts. The
name of a corporation in this respect designates the
corporation in the same manner as the name of an
individual designates the person (Cincinnati Cooperage Co.
vs. Bate. 96 Ky 356, 26 SW 538; Newport Mechanics Mfg. Co. vs.
Starbird. 10 NH 123); and the right to use its corporate name
is as much a part of the corporate franchise as any other
privilege granted (Federal Secur. Co. vs. Federal Secur. Corp.,
129 Or 375, 276 P 1100, 66 ALR 934; Paulino vs. Portuguese
Beneficial Association, 18 RI 165, 26 A 36).
A corporation acquires its name by choice and need not select a
name identical with or similar to one already appropriated by a
senior corporation while an individual's name is thrust upon him
(See Standard Oil Co. of New Mexico, Inc. v. Standard Oil Co. of
California, 56 F 2d 973, 977). A corporation can no more use a
corporate name in violation of the rights of others than an
individual can use his name legally acquired so as to
mislead the public and injure another (Armington vs. Palmer,
21 RI 109. 42 A 308).
The statutory prohibition (under Sec. 18 of the Corporation Code)
cannot be any clearer. To come within its scope, two requisites
must be proven, namely:
(1) that the complainant corporation acquired a prior right over
the use of such corporate name; and
(2) the proposed name is either:
(a) identical; or
(b) deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
The right to the exclusive use of a corporate name with
freedom from infringement by similarity is determined by
priority of adoption. In this regard, there is no doubt with
respect to Petitioners' prior adoption of' the name ''PHILIPS" as
part of its corporate name. Petitioners Philips Electrical and Philips
Industrial were incorporated on 29 August 1956 and 25 May 1956,
respectively, while Respondent Standard Philips was issued a
Certificate of Registration on 12 April 1982, twenty-six (26) years
later. Petitioner PEBV has also used the trademark "PHILIPS" on
electrical lamps of all types and their accessories since 30
September 1922.
The second requisite no less exists in this case. In determining
the existence of confusing similarity in corporate names,

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

the test is whether the similarity is such as to mislead a


person, using ordinary care and discrimination. In so doing,
the Court must look to the record as well as the names
themselves. While the corporate names of Petitioners and Private
Respondent are not identical, a reading of Petitioner's corporate
names, to wit: PHILIPS EXPORT B.V., PHILIPS ELECTRICAL LAMPS,
INC. and PHILIPS INDUSTRIAL DEVELOPMENT, INC., inevitably
leads one to conclude that "PHILIPS" is, indeed, the dominant
word in that all the companies affiliated or associated with the
principal corporation, PEBV, are known in the Philippines and
abroad as the PHILIPS Group of Companies.

Purpose of distinguishing the corporation from partnerships and


other business organizations.

Respondents argue that there were no evidence presented that


there was actual confusion. It is settled, however, that proof of
actual confusion need not be shown. It suffices that
confusion is probably or likely to occur (6 Fletcher [Perm Ed],
pp. 107-108, enumerating a long line of cases).

c.

Moreover, Given Private Respondent's underlined primary purpose


in its AOI, nothing could prevent it from dealing in the same line of
business of electrical devices, products or supplies which fall
under its primary purposes. Besides, there is showing that Private
Respondent not only manufactured and sold ballasts for
fluorescent lamps with their corporate name printed thereon but
also advertised the same as, among others, Standard Philips (TSN,
before the SEC, pp. 14, 17, 25, 26, 37-42, June 14, 1985; pp. 1619, July 25, 1985). As aptly pointed out by Petitioners, [p]rivate
respondent's choice of "PHILIPS" as part of its corporate name
[STANDARD PHILIPS CORPORATION] . . . tends to show said
respondent's intention to ride on the popularity and established
goodwill of said petitioner's business throughout the world" (Rollo,
p. 137). The subsequent appropriator of the name or one
confusingly similar thereto usually seeks an unfair advantage, a
free ride of another's goodwill (American Gold Star Mothers, Inc. v.
National Gold Star Mothers, Inc., et al, 89 App DC 269, 191 F 2d
488).
In allowing Private Respondent the continued use of its corporate
name, the SEC maintains that the corporate names of Petitioners
PHILIPS ELECTRICAL LAMPS. INC. and PHILIPS INDUSTRIAL
DEVELOPMENT, INC. contain at least two words different from that
of the corporate name of respondent STANDARD PHILIPS
CORPORATION, which words will readily identify Private
Respondent from Petitioners and vice-versa.
True, under the Guidelines in the Approval of Corporate and
Partnership Names formulated by the SEC, the proposed name
"should not be similar to one already used by another corporation
or partnership. If the proposed name contains a word already used
as part of the firm name or style of a registered company; the
proposed name must contain two other words different
from the company already registered" (Emphasis ours). It is
then pointed out that Petitioners Philips Electrical and Philips
Industrial have two words different from that of Private
Respondent's name.
What is lost sight of, however, is that PHILIPS is a trademark or
trade name which was registered as far back as 1922. Petitioners,
therefore, have the exclusive right to its use which must be free
from any infringement by similarity. A corporation has an
exclusive right to the use of its name, which may be
protected by injunction upon a principle similar to that
upon which persons are protected in the use of
trademarks and tradenames (18 C.J.S. 574). Such principle
proceeds upon the theory that it is a fraud on the corporation
which has acquired a right to that name and perhaps carried on its
business thereunder, that another should attempt to use the same
name, or the same name with a slight variation in such a way as
to induce persons to deal with it in the belief that they are dealing
with the corporation which has given a reputation to the name (6
Fletcher [Perm Ed], pp. 39-40, citing Borden Ice Cream Co. v.
Borden's Condensed Milk Co., 210 F 510). Notably, too, Private
Respondent's name actually contains only a single word, that is,
"STANDARD", different from that of Petitioners inasmuch as the
inclusion of the term "Corporation" or "Corp." merely serves the

The fact that there are other companies engaged in other lines of
business using the word "PHILIPS" as part of their corporate
names is no defense and does not warrant the use by Private
Respondent of such word which constitutes an essential feature of
Petitioners' corporate name previously adopted and registered
and-having acquired the status of a well-known mark in the
Philippines and internationally as well (Bureau of Patents Decision
No. 88-35 [TM], June 17, 1988, SEC Records).
PURPOSE CLAUSE

xxx
SECOND: That the purpose or purposes for which such
corporation is incorporated are: (If there is more than one
purpose, indicate primary and secondary purposes);
xxx
The statement of the objects or purpose or powers in the charter
results practically in defining the scope of authority of the
corporate enterprise or undertaking. This statement both congers
and also limits the actual authority of the corporate
representatives.
The reasons for requiring a statement of the purposes or
objects:
1. In order that the stockholder who contemplates on an
investment in a business enterprise shall know within what lines
of business his money is to be put at risks;
2. So that the board of directors and management my now
within what lines of business they are authorized to act; and
3. So that anyone who deals with the company may ascertain
whether a contract or transaction into which he contemplates
entering is one within the general authority of the management.
SECONDARY PURPOSE: Although the Corporation Code does not
restrict nor limit the number of purpose or purposes which a
corporation may have, Sec. 14 thereof, requires that if it has more
than one purpose, the primary purpose as well as the secondary
ones must be indicated therein.
PROHIBITION: The following are prohibited by special laws for
having any other purpose not peculiar to them:
1. Educational, religious, and other non-stock corporations cannot
include any other purpose which would change or contradict its
nature or to engage in any enterprise to make profits for is
members;
2. Insurance companies cannot engage in commercial banking at
the same time, and vice-versa; and
3. Stock brokers can have no other line of business not peculiar to
them.
RESTRICTIONS AND/OR ADDITIONAL REQUIREMENTS:
1. As a general rule, the purpose or purposes must be lawful.
Hence, the SEC is duty bound to determine the legality of the
corporate purpose/s before it issues the certificate of registration;
2. A corporation may not be formed for the purpose of practicing a
profession like law, medicine or accountancy, either directly or
indirectly. These are reserved exclusively for professional
partnerships;
3. The retail trade, where the corporate capital is less than $2.5M,
or its peso equivalent are reserved exclusively for Filipinos, or for
corporations or partnerships wholly owned by such citizen.
4. As a general rule, corporations with foreign equity are not
allowed to engage in restaurant business but corporations with
such foreign equity can purse such undertaking if it is incidental or

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

in connection with hotel or inn-keeping business.


5. Management consultants, advisers and/or specialists, must
submit the personal information sheet of the incorporators and
directors in order that the SEC may be able to find out or
determine whether or not the applicant corporation is qualified to
act as such.
6. As a matter of policy, financing companies are required by the
SEC to submit certain additional documents together with their
applications for registration to verify compliance with RA 8556.
7. For bonded warehousing companies, an undertaking to comply
with the General Bonded Warehousing Act must be submitted
along with the AOI.
8. In case the applicant proposes to engage in the business of
hospital and/or clinic, the purpose clause must contain the
following proviso: Provided that purely medical or surgical
services in connection therewith shall be performed by duly
qualified physician and surgeon who may or may not be freely and
individually contracted by the parties.
9. In the case of Customs Brokerage business, the applicant must
submit the license of at least two customs broker connected with
the applicant corporation;
10. Transfer Agents, Broker and Clearing Houses must submit the
certificate of admission to the profession of the CPA of any officer
of the corporation;
11. Carriage of mails cannot be a purpose of a corporation unless
a special franchise has been granted to it.
12. If the corporate purpose or objective includes any purpose
under the supervision of another government agency,
prior clearance and/or approval of the concerned
government agencies or instrumentalities will be required
pursuant to the last paragraph of Sec. 17 of the Code.
GENERAL LIMITATIONS:
1. The purpose or purposes must be lawful;
2. The purpose must be specific or stated concisely although in
broad or general terms;
3. If there is more than one purpose, the primary as well as the
secondary ones must be specified; and
4. The purposes must be capable of being lawfully combined.
d.

PRINCIPAL OFFICE
xxx

THIRD: That the principal office of the corporation is


located in the City/Municipality
of............................................, Province
of................................................., Philippines
xxx
It must be located within the Philippines. The AOI must not only
specify the province, but also the City or Municipality where it is
located. In this regard, it is to be observed that the principal office
may be in one place but the business operations are actually
conducted in other areas. The law does not, of course, require a
statement of the place of corporate operations and, therefore,
may be dispensed with.
The principal office serves as the residence of the corporation,
and is thus important in: (1) venue of actions; (2) registration of
chattel mortgage of shares; (3) validity of meetings of
stockholders or members in so far as venue thereof is concerned.
CLAVECILLA RADIO SYSTEM VS. ANTILLON (19 SCRA 379;
Feb. 18, 1967) The New Cagayan Grocery filed a complaint
against CRS for some irregularities in the transmission of a
message which changed the context and purport causing
damages. The complaint was filed in the City Court of Cagayan de

10

Oro.
ISSUE: WON the action will prosper?
HELD: No. The action was based on tort and not upon a written
contract and as such, under the Rules of Court, it should be filed
in the municipality where the defendant or any of the defendants
resides or may be served with summons.
Settled is the principle in corporation law that the residence of a
corporation is the place where the principal office is
established. Since it is not disputed that CRS has its principal
office in Manila, it follows that the suit against it may properly be
filed in the City of Manila.
The fact that CRS maintains branch office in some parts of the
country does not mean that it can be sued in any of these places.
To allow such would create confusion and work untold
inconveniences to the corporation.
e.

TERM OF EXISTENCE
xxx

FOURTH: That the term for which said corporation is to


exist is............... years from and after the date of
issuance of the certificate of incorporation;
xxx
Sec. 11. Corporate term. - A corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless
sooner dissolved or unless said period is extended. The corporate
term as originally stated in the articles of incorporation may be
extended for periods not exceeding fifty (50) years in any single
instance by an amendment of the articles of incorporation, in
accordance with this Code; Provided, That no extension can be made
earlier than five (5) years prior to the original or subsequent expiry
date(s) unless there are justifiable reasons for an earlier extension as
may be determined by the Securities and Exchange Commission
The corporate term is necessary in determining at what point in
time the corporation will cease to exist or have lost its juridical
personality. Once it ceases to exist, its legal personality also
expires and could not thereafter, act in its own name for the
purpose of prosecuting it business.
EXTENSION: can be made not earlier than 5 years prior to the
expiry date unless there are justifiable reasons.
f.

INCORPORATORS

xxx
FIFTH: That the names, nationalities and residences of the
incorporators of the corporation are as follows:
NAME
.....................
.....................
.....................
.....................
.....................

NATIONALITY
.............................
.............................
.............................
.............................
.............................
xxx

RESIDENCE
............................
............................
............................
............................
............................

Sec. 5. Corporators and incorporators, stockholders and


members. - Corporators are those who compose a corporation,
whether as stockholders or as members. Incorporators are those
stockholders or members mentioned in the articles of incorporation

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

as originally forming and composing the corporation and who are private corporation. EXCEPTIONS:
signatories thereof.
1. Educational corporations registered as non-stock corporations
whose number of trustees, though not less than 5 and not more
Corporators in a stock corporation are called stockholders or than 15 should be divisible by 5.
shareholders. Corporators in a non-stock corporation are called 2. In close corporations where all stockholders are considered as
members of the board of directors (Sec. 97) thereby effectively
members.
allowing 20 members in the board.
CORPORATORS apply to all who compose the corporation at any
given time and need not be among those who executed the AOI at
the start of its formation or organization.
INCORPORATORS are those mentioned in the AOI as originally
forming the corporation and who are signatories in the AOI.
An incorporator may be considered as a corporator as long as he
continues to be a stockholder or a member, but not all corporators
are incorporators.

The by-laws of a corporation may provide for additional


qualifications and disqualifications of its members of the board of
directors or trustees. However, it may not do away with the
minimum disqualifications laid down by the Code. The minimum
qualifications of directors and trustees in a domestic corporation
are provided under the 2nd par. Of Sec. 23:
Sec. 23. The board of directors or trustees
xxx
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director, which share shall stand in
his name on the books of the corporation. Any director who ceases to
be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members
thereof. a majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.

Sec. 10. Number and qualifications of incorporators. - Any


number of natural persons not less than five (5) but not more than
fifteen (15), all of legal age and a majority of whom are residents of
the Philippines, may form a private corporation for any lawful purpose
or purposes. Each of the incorporators of a stock corporation must
own or be a subscriber to at least one (1) share of the capital stock of
the corporation.
QUALIFICATIONS OF DIRECTORS/TRUSTEES:

1. Must own at least 1 share in their own names or a member (in


the case of trustees);

QUALIFICATIONS OF INCORPORATORS:
1. Must be natural persons. It implies that a corporation or a
partnership cannot become incorporators. EXCEPTION: (1)
cooperatives; (2) corporations primarily organized to hold equities
in rural banks and may rightfully become incorporators thereof. It
must be noted likewise that the law does not preclude firms and
other entities from becoming stockholders or subscribers to the
shares of a stock corporation. Thus, while they cannot qualify as
incorporators, they can become corporators or stockholders.
2. Of Legal Age. Minors cannot be incorporators. They may,
however, become stockholders provided they are legally
represented by parents, guardians or administrators.
3. Must own at least 1 share.
4. Majority must be residents of the Philippines. The law does not
provide for citizenship requirements. EXCEPT: in certain areas of
activity or industry wherein ownership of shares of stock are
reserved wholly or partially to Filipino citizens. Hence, all
incorporators may be foreigners provided majority of them are
residents. Note that the requirement is residence and not
citizenship.
g.

xxx
SIXTH: That the number of directors or trustees of the
corporation shall be............; and the names, nationalities
and residences of the first directors or trustees of the
corporation are as follows:
NATIONALITY
.............................
.............................
.............................
.............................
.............................
xxx

Sec. 27. Disqualification of directors, trustees or officers. - No


person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the date of his
election or appointment, shall qualify as a director, trustee or officer
of any corporation.
DISQUALIFICATIONS:
1. Imprisonment for a period exceeding 6 years;
2. Violation of the Corporation Code within 5 years prior to the
date of election or appointment;
3. Such other disqualifications that may be provided in the bylaws.

DIRECTORS/TRUSTEES

NAME
.....................
.....................
.....................
.....................
.....................

2. Majority must be resident of the Philippines. Even aliens may be


elected as directors, provided that the majority of such directors
are residents of the Philippines. EXCEPT: in activities exclusively
reserved to Filipino citizens like the management of educational
institutions and those governed by the Retail Trade Law.

RESIDENCE
............................
............................
............................
............................
............................

DIRECTORS compose the governing board in stock corporations.


TRUSTEES refer to non-stock corporations.

JOHN GOKONGWEI, JR., Petitioner,


vs.
SECURITIES AND EXCHANGE COMMISSION, SAN MIGUEL
CORPORATION, ANDRES M. SORIANO, JOSE M. SORIANO, ENRIQUE
ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B.
CONDE, MIGUEL ORTIGAS, EMIGDIO TANJUATCO and EDUARDO
VISAYA, Respondents
(GR No. L-52129; April 21, 1980)
FACTS: Petitioner, stockholder of San Miguel Corp. filed a petition
with the SEC for the declaration of nullity of the by-laws etc.
against the majority members of the BOD and San Miguel. The
amended by-laws provided for the disqualification of competitors
from nomination and election in the Board of Directors of SMC.
This was denied by the SEC.

There must be at least 5 but not more than 15 directors in a

11

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

ISSUE: Is the disqualification valid?


HELD: Yes. The Court held that a corporation has authority
prescribed, by law, the qualifications of directors. It has the
inherent power to adopt by-laws for its internal government, and
to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the
management of its affairs. A corporation, under the
Corporation law, may prescribe in its by-laws the
qualifications, duties and compensation of directors,
officers, and employees. Any person who buys stock in a
corporation does so with the knowledge that its affairs are
dominated by a majority of the stockholders and he impliedly
contracts that the will of the majority shall govern in all matters
within the limits of the acts of incorporation and lawfully enacted
by-laws and not forbidden by law. Any corporation may amend its
by-laws by the owners of the majority of the subscribed stock. It
cannot thus be said that petitioners has the vested right, as a
stock holder, to be elected director, in the face of the fact that the
law at the time such stockholder's right was acquired contained
the prescription that the corporate charter and the by-laws shall
be subject to amendment, alteration and modification. A Director
stands in a fiduciary relation to the corporation and its
shareholders,
which
is
characterized
as
a
trust
relationship. An amendment to the corporate by-laws
which renders a stockholder ineligible to be director, if he
be also director in a corporation whose business is in
competition with that of the other corporation, has been
sustained as valid. This is based upon the principle that where
the director is employed in the service of a rival company, he
cannot serve both, but must betray one or the other. The
amendment in this case serves to advance the benefit of the
corporation and is good. Corporate officers are also not permitted
to use their position of trust and confidence to further their
private needs, and the act done in furtherance of private needs is
deemed to be for the benefit of the corporation. This is called the
doctrine of corporate opportunity.
h.

NINTH: That the above-named subscribers have paid at


least twenty-five (25%) percent of the total subscription as
follows:
Name of Subscriber
..............................
..
..............................
..
..............................
..
..............................
..
..............................
..

Amount Subscribed
..............................

Total Paid-Up
..................

..............................

..................

..............................

..................

..............................

..................

..............................

..................

(Modify Nos. 8 and 9 if shares are with no par value. In


case the corporation is non-stock, Nos. 7, 8 and 9 of the
above articles may be modified accordingly, and it is
sufficient if the articles state the amount of capital or
money contributed or donated by specified persons,
stating the names, nationalities and residences of the
contributors or donors and the respective amount given by
each.)
xxx
The Corporation Code requires the AOI to state the authorized
capital stock, the number of shares and/or kind of shares into
which the authorized capital is divided, the par value of each
share, if there by any, the names, nationalities and residences of
the original subscribers, and the amount subscribed and paid by
each. At least 25% of the subscribed capital must be paid and in
no case may the paid-up capital be less than P5,000.
AUTHORIZED CAPITAL signifies the MAXIMUM amount fixed in
the articles to be subscribed and paid-in or secured to be paid by
the subscribers. It may also refer to the maximum number of
shares that a corporation can issue.

CAPITALIZATION

xxx
SEVENTH: That the authorized capital stock of the
corporation is................................................
(P......................) PESOS in lawful money of the
Philippines, divided into.............. shares with the par
value of.................................. (P.......................) Pesos
per share.
(In case all the share are without par value):

SUBSCRIBED CAPITAL STOCK is the total number of shares and


its total value for which there are contracts for their acquisition or
subscription. It is in effect, the stockholders equity account
showing that part of the authorized capital stock which has been
paid or promised to be paid, or that portion of the authorized
capital stock which has been subscribed by the subscribers or
stockholders.

That the capital stock of the corporation


is.......................... shares without par value. (In case
some shares have par value and some are without par
value): That the capital stock of said corporation consists
of....................... shares of which...................... shares
are of the par value of............................. (P.....................)
PESOS each, and of which............................... shares are
without par value.

PAID UP CAPITAL STOCK or paid-in capital is the actual amount


or value which has been actually contributed or paid to the
corporation in consideration of the subscriptions made thereon. It
may be in the form of cash, property or in the form of services
actually rendered to the corporation as provided under Sec. 62 of
the Corporation Code:

EIGHTH: That at least twenty five (25%) per cent of the


authorized capital stock above stated has been subscribed
as follows:
Name of Subscriber
Subscribed
........................
......
........................
......
........................
......
........................
......
........................
......

12

Nationality

No of Shares

Amount

..............

................ .....................

..............

................ .....................

..............

................ .....................

..............

................ .....................

..............

................ .....................

Sec. 62. Consideration for stocks. - Stocks shall not be issued for
a consideration less than the par or issued price thereof.
Consideration for the issuance of stock may be any or a combination
of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the
stock issued;
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated
capital; and
6. Outstanding shares exchanged for stocks in the event of

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

reclassification or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the board
of directors, subject to approval by the Securities and Exchange
Commission.

liable to the corporation or to its creditors in respect thereto:


Provided; That shares without par value may not be issued for a
consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.

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


Shares of stock shall not be issued in exchange for promissory notes insuring compliance with constitutional or legal requirements.
or future service.
Except as otherwise provided in the articles of incorporation and
The same considerations provided for in this section, insofar as they stated in the certificate of stock, each share shall be equal in all
may be applicable, may be used for the issuance of bonds by the respects to every other share.
corporation.
Where the articles of incorporation provide for non-voting shares in
The issued price of no-par value shares may be fixed in the articles of the cases allowed by this Code, the holders of such shares shall
incorporation or by the board of directors pursuant to authority nevertheless be entitled to vote on the following matters:
conferred upon it by the articles of incorporation or the by-laws, or in
the absence thereof, by the stockholders representing at least a 1. Amendment of the articles of incorporation;
majority of the outstanding capital stock at a meeting duly called for 2. Adoption and amendment of by-laws;
the purpose.
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
SHARES OF STOCKS AND THEIR CLASSIFICATIONS
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation
SHARES OF STOCK designate the units into which the
or other corporations;
proprietary interest in a corporation is divided. They represent the
7. Investment of corporate funds in another corporation or business in
proportionate integers or units, the sum of which constitutes the
capital stock of the corporation. It is likewise the interest or right
accordance with this Code; and
which the owner, called the stockholders or shareholder, has in
8. Dissolution of the corporation.
the management of the corporation, and in the surplus profits and
in case of distribution, in all of its assets remaining after the
Except as provided in the immediately preceding paragraph, the vote
payment of its debts.
necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
CERTIFICATE OF STOCK is a document or instrument evidencing
the interest of a stockholder in the corporation.
PURPOSE OF CLASSIFICATION:
Sec. 6. Classification of shares. - The shares of stock of stock
corporations may be divided into classes or series of shares, or both,
any of which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting
rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code:
Provided, further, That there shall always be a class or series of
shares which have complete voting rights. Any or all of the shares or
series of shares may have a par value or have no par value as may be
provided for in the articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public utilities, and
building and loan associations shall not be permitted to issue no-par
value shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which
are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value.
The board of directors, where authorized in the articles of
incorporation, may fix the terms and conditions of preferred shares of
stock or any series thereof: Provided, That such terms and conditions
shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.

1. To specify and define the rights and privileges of the


stockholders;
2. For regulation and control of the issuance of sale of corporate
securities for the protection of purchasers and stockholders.
3. As a management control device.
4. To comply with statutory requirements particularly those which
provide for certain limitations on foreign ownership.
5. To better insure return on investment which can be affected
through the issuance of redeemable shares or preferred shares,
i.e., granting the holders thereof, preference as to dividends
and/or distribution of assets in case of liquidation; and
6. For flexibility in price, particularly, no par shares may be issued
or sold from time to time at different prices depending on the net
worth of the company since they do not purport to represent an
actual or fixed value.
COMMON STOCKS are the most commonly issued shares of
stock of a corporation. Although no clear cut definition can be
found, it has been described as one which entitles it owner to an
equal or pro-rata division of profits, if there are any, but without
any preference or advantage in that respect over any other
stockholder or class of stockholders.
A common share usually carries with it the right to vote, and
frequently, the exclusively right to do so. However, where the AOI
is silent, all issued and outstanding shares shall be considered to
have the right to vote and be voted for.

Shares of capital stock issued without par value shall be deemed fully PREFERRED STOCK is a stock that gives the holder preference
over the holder of common stocks with respect to the payment of
paid and non-assessable and the holder of such shares shall not be

13

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

dividends and/or with respect to distribution of capital upon


liquidation. LIMITATIONS imposed by the Code in the issuance of
preferred stocks: (1) They can be issued only with a stated par
value; and (2) The preference must be stated in the AOI and in the
certificate of stock otherwise each share shall be, in all respect,
equal to every other share.

Such preference must also be stated in the contract, accordingly


giving them the preference to the distribution of corporate assets
upon liquidation or termination of corporate existence. If the
preferred shares are cumulative, they have the right to any
arrears in arrears in priority to any distribution of assets to the
common stockholders.

a. PREFERENCE AS TO DIVIDENDS

PAR AND NON-PAR VALUE SHARES

They have the privilege of being paid dividends first before any
other stockholders are paid theirs. The guaranty is not absolute so
as to create a relation of debtor and creditor between the
corporation and the holders of such stock. The amount of
preference is stated in the contract of subscription and is usually a
fixed percentage or by specified amount indicated therein.
Participating and Non-Participating Preferred Shares

Par Value Shares are those whose values are fixed in the AOI. Its
par value is the minimum subscription or original issue price of
the shares and indicates the amount which the original
subscribers are supposed to contribute to the capital, which,
however, may not reflect the true value of the shares because the
same may fluctuate depending on the liability and networth of the
enterprise.

If the preferred shares are participating, they are entitled to


participate in dividends with the common shareholders beyond
their stated preference. Non-participating preferred shares on the
other hand are entitled to its fixed priority or preference only.

Watered Stocks are those issued at less than par value where the
stockholders will remain liable for the difference between what he
paid and the actual par value thereof (Sec. 65).

Cumulative and Non-cumulative Preference Shares


Cumulative preferred shares are those that entitle the owner
thereof to payment not only of current dividends but also back
dividends not previously paid whether or not, during the past
years, dividends were declared or paid. In light of the provision of
the Code stating that all shares are equal in all respects unless
otherwise stated in the AOI, a preferred share to be considered
cumulative, the same must be provided for and specified in the
certificate.
Non-cumulative preferred shares are those which grant the
holders of such shares only to the payment of current dividends
but not back dividends, when and if dividends are paid, to the
extent agreed upon before any other stockholders are paid the
same. This type may be divided into three groups:
1. Discretionary dividend type depends on the judgment or
discretion of the board of directors. Unless there is grave abuse of
discretion as to result in oppression, fraud or unfair discrimination,
the dividend right of stockholders of a particular year cannot be
made up in subsequent years;
2. Mandatory if earned impose a positive duty on directors to
declare dividends every year when profits are earned. In effect,
directors cannot withhold dividends if there are profits.
3. Earned cumulative or dividend credit type gives the holder
the right to arrears in dividends if there were profits earned during
the previous years. In effect, their right to receive dividends is
merely postponed on a later date. The moment dividends are
declared, back dividends earned in previous years but not
declared as such must first be paid to this type of preferred
shareholders before the common shareholders receive theirs.
DIFFERENCE
WITH
CUMULATIVE
PREFERRED:
Cumulative
preferred are entitled to dividends whether or not there are
profits. Earned cumulative or dividend credit type is entitled only
to arrears if there are profits in those years.

b. Voting Right of Preferred Shares

No Par Value Shares are those whose issued price are not stated
in the certificate of stock but may be fixed in the AOI, or by the
BOD when so authorized the articles or the by-laws, or in the
absence thereof, the stockholders themselves. They do not
purport to represent ay stated proportionate interest in the capital
measured by value, but only an aliquot part of the whole number
of shares of the corporation issuing it.
The Code allows the issuance of no par value shares, subject to
the following limitations provided in Sec. 6:
1. Such shares once issued, are deemed fully paid and thus, nonassessable;
2. The consideration for its issuance should not be less than P5;
3. The entire consideration constitutes capital, hence, not
available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance
companies, public utilities and building and loans associations.
Advantages of no-par value shares:
1. Flexibility in price no par shares may be issued from time to
time at different prices with the exception only that it shall not be
issued at less than P5;
2. The issuance thereof practically results to the evasion of the
danger of liability upon watered stock in case of overvaluation of
the consideration paid for it;
3. There is a disappearance of personal liability on the part of the
holder for unpaid subscription since they are already deemed fully
paid and non-assessable.
VOTING AND NON-VOTING SHARES
Voting shares as the name suggests, gives the holder thereof the
right to vote and participate in the management of the
corporation, through the election of the BOD, or in any matter
requiring stockholders approval.

Preferred shares, along with redeemable shares, are usually


denied voting rights as they are allowed to be denied of such as
provided in Sec. 6, but this right must clearly be withheld.
However, even if deprived, preferred shareholders have the right
to vote in matters enumerated in the penultimate paragraph of
Sec. 6.

However, voting shares may practically be denied the right to


vote where there exist founders shares.

c. Preference Upon Liquidation

Only preferred and redeemable shares may be denied the right to

14

Non-voting shares do not grant the holder thereof, a voice in the


election of directors and some other matter requiring
stockholders vote.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

vote. But, even if denied such right, they may still vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation
FOUNDERS SHARES are shares issued to the founders of the
corporation which are granted certain right and privileges such as
the exclusive right to vote and be voted for in the election of
directors.
Sec. 7. Founders' shares. - Founders' shares classified as such in
the articles of incorporation may be given certain rights and
privileges not enjoyed by the owners of other stocks, provided that
where the exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not to exceed five
(5) years subject to the approval of the Securities and Exchange
Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission.
The period of 5 years is non-extendable because it may result in
the almost perpetual disqualification of other stockholders to elect
or be elected as members of the BOD resulting to the lack of
proper representation thereat.
REDEEMABLE SHARES are those subject to redemption as may
be provided in the subscription contract, which are usually
attached to preferred shares and other debt securities like bonds.
Sec. 8. Redeemable shares. - Redeemable shares may be issued
by the corporation when expressly so provided in the articles of
incorporation. They may be purchased or taken up by the corporation
upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and
upon such other terms and conditions as may be stated in the articles
of incorporation, which terms and conditions must also be stated in
the certificate of stock representing said shares
These types of shares grants the corporation the right to
repurchase the shares at its option or at the option of the holder
based on the face or issued value plus specified premium, such
redemption may be optional or mandatory at a fixed or future
date.
Such repurchase may also be made regardless if there are
unrestricted retained earnings. (see Power to Acquire Own
Shares)
TREASURY SHARES
Sec. 9. Treasury shares. - Treasury shares are shares of stock
which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may again
be disposed of for a reasonable price fixed by the board of directors.
Treasury shares, as provided in Sec. 9, are reacquired but not
retired. They may be issued for a price, even less than par, and
the purchaser will not be liable to the creditors of the corporation
for the difference of the purchase price and its par value. They
may also be declared as dividends since they are properties of the
corporation.

15

Such shares do not have the right to share in dividends nor the
right to vote.
COMMISSIONER OF INTERNAL REVENUE VS. MANNING (66
SCRA 14; Aug. 6, 1975) Julius Reese owned 24,700 of the 25,000
authorized capital stock of Manta Trading and Supply Co., the rest
are owned by herein respondents. Upon Reese death, his shares
was held in trust by the law firm Ross, Carrascoso and Janda for
the private respondent, who were to continue management of the
corporation. These shares considered by the respondents as
treasury shares, prior to full payment, were declared as stock
dividends. Such declaration was assessed by the BIR as
distribution of assets subject to income tax.
ISSUE: WON the subject shares are treasury shares?
HELD: No. Treasury shares are stocks issued and fully paid
for and reacquired by the corporation either by purchase,
donation, forfeiture or other means and do not have the
status of outstanding shares. They may be re-issued or
sold again and while held by the company participates
neither in dividends, because dividends cannot be
declared by the corporation to itself, nor in meeting of the
corporation as voting stock for otherwise equal
distribution of voting powers among stockholders will be
effectively lost and the directors will be able to perpetuate
their control of the corporation, though it still represent a
paid for interest in the property of the corporation. These
features of a treasury stock are lacking in the questioned shares.
In this case, and under the terms of the trust agreement, the
shares of stock of Reese participated in dividends which the
trustee received and the said shares were voted upon by the
trustee in all corporate meetings. They were not, therefore,
treasury shares. The 24,700 shares were outstanding shares of
Reeses estate until they were fully paid. Such being the case,
their declaration as treasury stock dividend was a complete
nullity.
CAPITAL REQUIREMENTS
Sec. 12. Minimum capital stock required of stock
corporations. - Stock corporations incorporated under this Code
shall not be required to have any minimum authorized capital stock
except as otherwise specifically provided for by special law, and
subject to the provisions of the following section
Sec. 13. Amount of capital stock to be subscribed and paid
for the purposes of incorporation. - At least twenty-five percent
(25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation, and at
least twenty-five (25%) per cent of the total subscription must be
paid upon subscription, the balance to be payable on a date or dates
fixed in the contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment by the board
of directors: Provided, however, That in no case shall the paid-up
capital be less than five Thousand (P5,000.00) pesos
From the above provisions, it can be said that there is no
minimum capital requirement in order that a corporation may be
duly incorporated except in special cases and provided that at
least P5,000 should be paid-in, which effectively would make the
P5,000 the minimum capital requirement.
The 25% minimum paid-in capital can be paid by any shareholder,
meaning that it is not particularly required that each subscriber
pay 25% of their subscription.
There are instances where the SEC, by virtue of an existing law,
rules and regulations or policies, requires the payment of more
than the amount provided in the Code, such as Financing

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Companies where the required minimum paid-up capital be


P10,000,000 (within Metro Manila), P5,000,000 (other cities), and
P2,000,000 (municipalities).
i.

RESTRICTIONS AND PREFERENCES

Corporations are not required to provide for certain restrictions


and preferences regarding the transfer, sale or assignment of
shares in the AOI except in close corporations which would subject
their shares to specific restrictions as required in Sec. 96 of the
Code. They are not, however, restrained or prohibited from doing
so
If the corporation desires to grant such options, restrictions and/or
preferences, the same must be indicated in the AOI AND in all of
the stock certificates. Failure to provide the same in the AOI would
not bind the purchasers in good faith despite the fact that the said
restriction and/or preference is indicated in the by-laws of the
corporation.
In a close corporation, however, such restrictions and preferences
must not only appear in the articles of incorporation and in the
stock certificates BUT ALSO be embodied in the by-laws of that
close corporation otherwise it may not bind purchasers in good
faith.
j.

THE TREASURER

xxx
TENTH: That...................................... has been elected by
the subscribers as Treasurer of the Corporation to act as
such until his successor is duly elected and qualified in
accordance with the by-laws, and that as such Treasurer,
he has been authorized to receive for and in the name and
for the benefit of the corporation, all subscription (or fees)
or contributions or donations paid or given by the
subscribers or members.
xxx
k.

m. TREASURERS AFFIDAVIT
xxx
TREASURER'S AFFIDAVIT
REPUBLIC OF THE PHILIPPINES )
CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )
I,..................................., being duly sworn, depose and
say:
That I have been elected by the subscribers of the
corporation as Treasurer thereof, to act as such until my
successor has been duly elected and qualified in
accordance with the by-laws of the corporation, and that
as such Treasurer, I hereby certify under oath that at least
25% of the authorized capital stock of the corporation has
been subscribed and at least 25% of the total subscription
has been paid, and received by me, in cash or property, in
the amount of not less than P5,000.00, in accordance with
the Corporation Code.
.......................................
(Signature of Treasurer)
xxx
n.

NOTARIAL ACKNOWLEDGMENT
xxx
SUBSCRIBED AND SWORN to before me, a Notary Public,
for and in the City/Municipality of.................................
Province of........................................., this............ day
of........................, 19.......; by...........................................
with Res. Cert. No..................... issued at................
on....................., 19.........
NOTARY PUBLIC
My commission expires on.........................., 19.......

NO TRANSFER CLAUSE

xxx
ELEVENTH: (Corporations which will engage in any
business or activity reserved for Filipino citizens shall
provide the following):
"No transfer of stock or interest which shall reduce the
ownership of Filipino citizens to less than the required
percentage of the capital stock as provided by existing
laws shall be allowed or permitted to recorded in the
proper books of the corporation and this restriction shall
be indicated in all stock certificates issued by the
corporation."
xxx
This indicates the treasurer who has been elected as such until his
successor has been elected and qualified and who is authorized to
receive for and in the name of the corporation all subscriptions,
contributions or donations paid or given by the subscribers or
members.

Doc. No...............;
Page No...............;
Book No..............;
Series of 19.....
xxx
GROUNDS FOR DISAPPROVAL
Sec. 17. Grounds when articles of incorporation or
amendment may be rejected or disapproved. - The Securities
and Exchange Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not in compliance
with the requirements of this Code: Provided, That the Commission
shall give the incorporators a reasonable time within which to correct
or modify the objectionable portions of the articles or amendment.
The following are grounds for such rejection or disapproval:

(Names and signatures of the incorporators)


xxx

1. That the articles of incorporation or any amendment thereto is not


substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules
and regulations;
3. That the Treasurer's Affidavit concerning the amount of capital
stock subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned
by citizens of the Philippines has not been complied with as required
by existing laws or the Constitution.

The signatures are important as the AOI serves as a contract


between the signatories thereof, by and among themselves, with
the corporation, and the latter with the State.

No articles of incorporation or amendment to articles of incorporation


of banks, banking and quasi-banking institutions, building and loan
associations, trust companies and other financial intermediaries,

l.

THE EXECUTION CLAUSE


xxx
IN WITNESS WHEREOF, we have hereunto signed these
Articles of Incorporation, this..............day
of....................., 19.......... in the City/Municipality
of......................................., Province
of................................................, Republic of the
Philippines.

16

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

insurance companies, public utilities, educational institutions, and


other corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.
After filing of the AOI, the SEC will examine and process them to
determine compliance with the requirements enumerated in Sec.
14 and if the form prescribed under Sec. 15 is complied with.
Only substantial and not strict compliance is required.

it into being have any power to bind it by contract, unless so


authorized by the charter, there is no corporation, nor does it
possess franchise or faculties for it to exercise, until it acquires
complete existence.
If the company could not and did not acquire the four parcels of
and here involved, it follows that it did not have the resultant right
to dispose the same to the defendant.
D.

DEFECTIVELY FORMED CORPORATIONS

The above grounds are not exclusive. There may be other reasons
for rejection or disapproval such as the corporate name is not
legally permissible or that the minimum capital requirement is not
sufficient.

A corporation de jure is one created in strict or substantial


compliance to the governing corporation statutes and whose right
to exist and act as such could not be attacked in a either
collaterally or through a direct proceeding for that purpose even
by the State.

3.

1.

COMMENCEMENT OF CORPORATE EXISTENCE

Corporate existence is reckoned from the time of the issuance


of its CERTIFICATE OF INCORPORATION or registration. It is
only from this time that it acquires juridical personality and legal
existence, EXCEPT:
a. Corporations by Estoppel;
b. Those created by special laws;
c. Those organized as Cooperatives
covered by Bureau of
Cooperatives and Home Owners Associations covered by Home
Insurance Guaranty Corporation.
d. Corporation Sole which is reckoned from the filing of verified
articles. (Sec. 112)
Sec. 19. Commencement of corporate existence. - A private
corporation formed or organized under this Code commences to have
corporate existence and juridical personality and is deemed
incorporated from the date the Securities and Exchange Commission
issues a certificate of incorporation under its official seal; and
thereupon the incorporators, stockholders/members and their
successors shall constitute a body politic and corporate under the
name stated in the articles of incorporation for the period of time
mentioned therein, unless said period is extended or the corporation
is sooner dissolved in accordance with law.
CAGAYAN FISHING DEVELOPMENT CO. VS. SANDIKO (65 Phil.
233; Dec. 23, 1937) On May 31, 1930, Manuel Tabora executed a
Deed of Sale where he sold four parcels of land in favor of herein
petitioner Cagayan Fishing Development Co., said to be under the
process of incorporation. Plaintiff company filed its AOI with the
Bureau of Commerce and Industry on Oct. 22, 1930. A year later,
before the issuance of the certificate of incorporation, the BD of
the company adopted a resolution to sell the four parcels of land
to Teodoro Sandiko for P42,000.
ISSUE: WON the subsequent sale to Sandiko is valid?
HELD: No. A duly organized corporation has the power to
purchase and hold real property as the purpose for which such
corporation was formed may permit and for this purpose may
enter into such contract as may be necessary. But before a
corporation may be said to be lawfully organized many
thing have to be done. Among which, the law requires the
filing of the AOI.
It cannot be denied that the plaintiff was not incorporated when it
entered into the contract of sale. It was not even a de facto
corporation at that time. Not being in legal existence then, it did
not possess juridical personality to enter into the contract.
Corporations are creatures of the law, and can only come into
existence in the manner prescribed by the law. That a corporation
should have a full and complete organization and existence as an
entity before it can enter into a contract or transact any business,
would seem to be self-evident. A corporation, until organized, has
no being, franchises or faculties. Nor do those engaged in bringing

17

DE FACTO CORPORATIONS

A de facto corporation is one that is so defectively created as not


to be a de jure corporation but nevertheless exists, for all practical
purposes, as a corporate body, by virtue of its bona fide attempt
to incorporate under existing statutory authority, coupled with the
exercise of corporate powers.
REQUISITES:
a. There is a valid statute under which the corporation could
have been created as a de jure corporation (or according to
some, an apparently valid statute);
b. An attempt, in good faith, to form a corporation according to
the requirements of law which goes far enough to amount to
a colourable compliance with the law;
c. A user of corporate powers, the transaction of business in
some way as if it were a corporation;
d. Good faith in claiming to be and doing business as a
corporation.
Sec. 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this
Code, and its right to exercise corporate powers, shall not be inquired
into collaterally in any private suit to which such corporation may be
a party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding
ATTACK: From the above provision, the only purpose of
determining whether it is a de facto or de jure corporation is the
applicability of the rules on collateral and direct attack. Such that
a de jure is impregnable to either, while a de facto corporations
existence can only be questioned in a direct proceeding by the
State through a quo warranto. A de facto corporations corporate
existence however cannot be attacked collaterally.
THE MUNICIPALITY OF MALABANG, LANAO DEL SUR, and
AMER MACAORAO BALINDONG, petitioners,
vs.
PANGANDAPUN BENITO, HADJI NOPODIN MACAPUNUNG, HADJI
HASAN MACARAMPAD, FREDERICK V. DUJERTE MONDACO ONTAL,
MARONSONG ANDOY, MACALABA INDAR LAO. Respondents
GR No. L-28113; March 28, 1969)
FACTS: The Municipality of Balabagan was created from the
barrios and sitios of the Municipality of Malabang by virtue of EO
No 386 issued by President Garcia by virtue of Sec. 68 of the
Revised Administrative Code. Following the decision of the Court
in Pelaez vs. Auditor General, which declared Sec. 68
unconstitutional and that the President had no power to create a
municipality, herein petitioners sought to nullify EO 386 and to
restrain the respondents, who are officers of Balabagan, to vacate
said their office and desist from performing their functions.
Respondents argue that it is at least a de facto corporation and
the ruling in Pelaez is not applicable to it, having been organized
under color of a statute before it was declared unconstitutional, its
officers having been either elected or appointed, and the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

municipality itself having discharged corporate functions for the


past five years. That as a de facto corporation, its existence
cannot be collaterally attacked.
ISSUE: WON the Municipality of Balabagan is a de facto
corporation?
HELD: No. In cases where a de facto municipal corporation was
recognized as such despite the fact that the statute creating it
was later invalidated, the decision could be fairly made to rest on
the consideration that there was some other valid law giving
validity to the organization. Hence, in the case at bar, the
mere fact that Balabagan was organized at the time when the
statute had not been invalidated cannot conceivably make it a de
facto corporation, as independently of the Administrative Code
provision in question, there is no other valid statute to give color
of authority for its creation.
An unconstitutional act is not a law; it confers no rights; it imposes
no duties; it affords no protection; it creates no office; it is, in legal
contemplation, as inoperative as though it had never been
passed.
HALL VS. PICCIO (86 Phil 603 June 29, 1950) Petitioner,
together with private respondents signed and acknowledged the
AOI of Far East Lumber and Commercial Co., Inc., after the
execution of which the corporation proceeded to do business by
adopting its by-laws and election of its officers. Subsequently,
pending action on the AOI, the respondents filed with the CFI
alleging the corporation to be an unregistered partnership and
praying for its dissolution, which was granted.
Herein petitioner claims that the corporation is a de facto
corporation, that its dissolution may be ordered only in a quo
warranto proceedings instituted by the State.
ISSUE: WON it is a de facto corporation?
HELD: No. First, not having obtained a certificate of incorporation,
the company, even its stockholders, may not probably claim in
good faith to be a corporation.
Such claim is compatible with the existence of errors and
irregularities, but not with a total or substantial disregard of the
law. Unless there has been an evident attempt to comply with the
law the claim to be a corporation under this Act (Sec. 19) could
not be made in good faith.
Second, this is not a suit where the corporation is a party. This is a
litigation between a stockholder of the alleged corporation, for the
purpose of obtaining its dissolution. Even the existence of a de
jure corporation may be terminated in a private suit for its
dissolution between stockholders, without the intervention of the
State.
2.

CORPORATION BY ESTOPPEL

A corporation may exist on the ground of estoppel by virtue of the


agreement, admission or conduct of the parties such that they will
not be permitted to deny the fact of the existence of the
corporation. It is neither a de jure nor de facto because of serious
defects in its incorporation or organization, unlike the de facto
doctrine, it does not involve a theory that the irregular corporation
has acquired a corporate status generally. It applies to the
consequences of some particular transactions or acts done in the
corporate name by associates assuming to be a corporation.
Sec. 21. Corporation by estoppel. - All persons who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages
incurred or arising as a result thereof: Provided, however, That when
any such ostensible corporation is sued on any transaction entered by
it as a corporation or on any tort committed by it as such, it shall not
be allowed to use as a defense its lack of corporate personality.

18

On who assumes an obligation to an ostensible corporation as such,


cannot resist performance thereof on the ground that there was in
fact no corporation.
From the above provision, it is clear that the doctrine of estoppel
may apply to the alleged corporation or to a third party
transacting with the former.
As to the Corporation the members who purported to be a
corporate body cannot deny their purported existence as a
corporation in an action against them on the contract, where the
third persons were induced to deal with the supposed corporation.
They cannot avoid liability on the ground of lack of personality to
be sued.
As to third persons they are estopped from denying the
existence of the alleged corporation in a suit to enforce a contract.
However, the association of persons must have purported or
acted, and were treated by the third persons, as corporations. The
doctrine also applies when the third person tries to escape liability
on a contract from which he has benefited on the irrelevant
ground of defective incorporation.
LOZANO VS. DE LOS SANTOS (274 SCRA 452; June 19, 1977)
Petitioner Reynaldo Lozano and respondent Antonio Anda agreed
to consolidate their respective Jeepney Associations, to which they
are presidents. They conducted an election for one set of officers
of the consolidated association, where petitioner was the winner.
Respondent, however, refused to abide by the agreement which
prompted petitioner to institute an action for damages in the trial
court which was denied for being intra-corporate, and was held to
be within the jurisdiction of the SEC.
ISSUE: WON there is corporation by estoppel placing the case
within SEC jurisdiction?
HELD: None. The unified association was still a proposal and had
not been approved by the SEC, neither had its officers and
members submitted their AOI. Their respective associations are
distinct and separate entities, petitioner and private respondent
does not have an intra-corporate relation much less do they have
an intra-corporate dispute. The SEC has no jurisdiction over the
complaint.
The doctrine of corporation by estoppel advance by private
respondent
cannot
override
jurisdictional
requirements.
Jurisdiction is fixed by law and is not subject to the agreement of
the parties.
Corporation by estoppel is founded on principle of equity and is
designated to prevent injustice and unfairness. It applies when
persons assume to form a corporation and exercise corporate
functions and enter into business relations with third persons.
Where there is no third person involved and the conflict
arises only among those assuming to form a corporation,
who therefore know that it has not been registered, there
is no corporation by estoppel.
ALBERT VS. UNIVERSITY PUBLISHING CO., INC. (13 SCRA 84;
Jan. 30, 1965) Jose Aruego, president of defendant University
Publishing Co, Inc. entered into a contract with plaintiff for the
publishing of the latters revised commentaries on the Revised
Penal Code, which the defendant failed to pay the second
instalment due. The CFI of Manila rendered judgment in favor of
plaintiff, such judgment reduced by the Supreme Court to
P15,000.
The CFI issued a writ of execution against Aruego, as the real
defendant, stating the discovery that there is no such entity as
University Publishing Co., Inc.
ISSUE: WON the writ of execution may be effected upon Aruego?

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

HELD: Yes. On account of non-registration, University cannot be


considered a corporation, not even a corporation de facto. It has
therefore, no personality separate from Aruego it cannot be sued
independently.
The doctrine of corporation by estoppel is inapplicable. Aruego
represented a non-existent entity and induced not only the
plaintiff but even the court of belief of such representation. He
signed the contract as President of University and obviously
misled plaintiff in to believing that University is a corporation
duly organized and existing under the laws of the Philippines.
One who has induced another to act upon his wilful
misrepresentation that a corporation was duly organized
and existing under the law, cannot, thereafter, set up
against his victim the principle of corporation by estoppel.
SALVATIERRA VS. GARLITOS, ET AL. (103 Phil. 757; May 23,
1958) Petitioner Manuel T. Vda de Salvatierra, owner of a parcel
of land, entered into a contract of lease with Philippine Fibers
Processing Co., Inc., allegedly a corporation. For failure to comply
with the obligations under the lease, petitioner filed a complaint in
the CFI where the company was declared in default and decision
was rendered in favor of petitioner. Defendant Refuerzo filed a
motion claiming that he should not be made personally liable in
the decision which was granted by the Court. Hence, this petition.

mandated by law, it cannot now invoke such non-compliance with


the law to immunize it from the private respondents complaint.
There should also be no question that having contracted with the
private respondent every year for 32 years and thus represented
itself possessed of juridical personality to defeat her claim against
it. According to Art. 1431 of the Civil Code: through estoppel an
admission or representation is rendered conclusive upon the
person making it and it cannot be denied as against the person
relying on it.
As the school itself may be sued in its own name, there is no need
to apply Rule 3, Sec. 15 ,under which the persons joined in an
association without any juridical personality may be sued with
such an association. Besides, it has been shown that the
individual members of the board of trustees are not liable, having
been appointed only after the private respondents dismissal.

ASIA BANKING CORP., plaintiff-appelle VS. STANDARD


PRODUCTS CO., INC., defendant-appellant (46 Phil. 144; Sept.
11, 1924) This action was brought to recover the balance due of
a promissory note executed by herein appellant. The court
rendered judgment in favor of the plaintiff.

ISSUE: WON Refuerzon can be made personally liable?


HELD: Yes. While as a general rule, a person who has
contracted or dealt with an association in such a way as to
recognize its existence as a corporate body is estopped from
denying the same in an action arising out of such transaction or
dealing, yet this doctrine may not be held applicable where
fraud takes part in the said transaction. In the instant case, on
plaintiffs charge that she was unaware of the fact that the
company had no juridical personality, defendant Refuerzo gave no
confirmation or denial and the circumstances surrounding the
execution of the contract led to the inescapable conclusion that
plaintiff Salvatierra was really made to believe that such
corporation was duly organized in accordance with law.
The rule on the separate personality of a corporation is
understood to refer merely to registered corporations and cannot
be made applicable to the liability of members of an
unincorporated association. The reason behind this doctrine is
obvious since an organization which before the law is nonexistent has no personality and would be incompetent to
act on its behalf; thus, those who act or purport to act as
its representatives or agent do so without authority and at
their own risk. And, as is it elementary principle of law that a
person who acts as an agent without authority or without
principal is himself regarded as the principal, a person
acting or purporting to act on behalf of a corporation
which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts
entered into or for other acts performed as such agents.
In acting on behalf of a corporation which he knew to be
unregistered, the president of the unregistered corporation
Refuerzo, assumed the risk of reaping the con the consequential
damages of resultant right, if any, arising out of such transaction.
CHANG KAI SHEK SCHOOL VS. CA (172 SCRA 389; April 18,
1989) Private respondent Faustina Oh has been teaching in the
herein petitioner School since 1932 for a continuous period of 33
years until that day that she was told that she had no assignment
for the next semester. She filed a suit before the CFI against the
school and later on amended her complaint to include certain
officials. The CFI of Sorsogon dismissed the complaint. On appeal,
the CA reversed the decision and held herein petitioner school
liable but absolved the other defendants.
ISSUE: WON the School can be held liable?
HELD: Yes. Even though the school failed to incorporate as

19

At the trial of the case the plaintiff failed to prove affirmatively the
corporate existence of the parties and the appellant insists that
under these circumstances the court erred in finding that the
parties were corporations with juridical personality and assigns
same as reversible error.

ISSUE: WON parties herein are corporations with juridical


personality?
HELD: Yes. There is no merit whatever in the appellant's
contention. The general rule is that in the absence of fraud a
person who has contracted or otherwise dealt with an
association in such a way as to recognize and in effect
admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action
leading out of or involving such contract or dealing, unless
its existence is attacked for cause which have arisen since
making the contract or other dealing relied on as an
estoppel and this applies to foreign as well as to domestic
corporations. (14 C. J., 227; Chinese Chamber of Commerce vs.
Pua Te Ching, 14 Phil., 222.)
The defendant having recognized the corporate existence of the
plaintiff by making a promissory note in its favor and making
partial payments on the same is therefore estopped to deny said
plaintiff's corporate existence. It is, of course, also estopped from
denying its own corporate existence. Under these circumstances it
was unnecessary for the plaintiff to present other evidence of the
corporate existence of either of the parties. It may be noted that
there is no evidence showing circumstances taking the case out of
the rules stated.
INTERNATIONAL EXPRESS TRAVEL & TOURS SERVICES, INC.
VS. CA (343 SCRA 674; Oct. 19, 2000) Petitioner International
Express Travel & Tours Services, Inc. entered into an agreement
with the Philippine Football Federation through its president Henry
Kahn, herein private respondent, where the former supplied
tickets for the trips of the athletes to the Southeast Asian Games
and other various trips. The Federation failed to pay a balance of
P265,894.33 which led petitioner to file a civil case in the RTC of
Manila which decided in its favor and holding Henry Kahn
personally liable. On appeal, the CA reversed the decision of the
RTC absolving Kahn from personal liability holding that the
Federation had a separate and distinct personality.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

ISSUE: WON Henry Kahn can be made personally liable?


HELD: Yes. While we agree with the appellate court that
associations may be accorded corporate status, such does not
automatically take place by the mere passage of RA 3135
otherwise known as the Revised Charter of the Philippine Amateur
Athletic Federation and PD 604. It is a basic postulate that before
a corporation may acquire juridical personality, the State must
give its consent either in the form of a special law or a general
enabling act. Nowhere can it be found in RA 3135 and PD 604 any
provision creating the Philippine Football Federation. These laws
merely recognized the existence of national sports associations
and provided for the manner by which these entities may acquire
juridical personality.

IN SUMMARY: it appears that if a corporation by estoppel exist


and enters into a contract and transact business with a third
party, the latter has three possible remedies:
1. He may file a suit against the ostensible corporation to
recover from the corporate properties;
2. He may file the case directly against the associates
personally liable who held out the association as a
corporation; and
3. Against both the ostensible corporation and persons forming
it, jointly and severally. The last two remedies may not,
however, be availed of if the third party by his conduct is
estopped from denying the existence of the association as a
corporation and as such, recovery should be limited only
against the corporate assets.

The recognition of Philippine Amateur Athletic Federation required


under RA 3135 and the Department of Youth and Sports
Development under 604, extended to the PFF was not
substantiated by Kahn. Accordingly, the PFF is not a national
sports association within the purview of the aforementioned laws
and does not have corporate existence of its own.

INDIVIDUAL LIABILITY of associates should not be overlooked. If


the doctrine of corporation by estoppel cannot be applied in their
favor because the third party dealing with it has not, in any
manner, deemed to have chosen to deal with it as a corporation
or in short not, estopped to deny corporate existence, the
associates can be held liable either as partners or principals.

This being said, it follows that private respondent Kahn should be


held liable for the unpaid obligations of the unincorporated PFF. It
is a settled principle in corporation law that any person acting or
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes
personally liable for contracts entered into or for other acts
performed as such agents.

WHO SHOULD BEAR THE LOSS: The better view is that those
who actively participated in holding out the association as a
corporation should be held personally liable by virtue of the
express provision of Sec. 21 which provides that all persons who
assume to act as a corporation knowing it to be without
authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising therefrom.

We cannot subscribe to the position taken by the appellate court


that even assuming that the PFF was defectively incorporated, the
petitioner cannot deny the corporate existence of the PFF because
it had contracted and dealt with the PFF in such a manner as to
recognize and in effect admits its existence. The doctrine of
corporation by estoppel is mistakenly applied by the respondent
court to the petitioner. The application of the doctrine applies
to a third party only when he tries to escape liability on a
contract from which he has benefited on the irrelevant
ground of defective incorporation. In the case at bar, the
petitioner is not trying to escape liability from the contract but
rather is the one claiming from the contract.

4.

ORGANIZATION AND COMMENCEMENT OF BUSINESS

a.

CORPORATE ORGANIZATION

GEORG GROTJAHN GMBH & CO. VS. ISNANI (235 SCRA 216;
Aug. 10, 1994) Petitioner is a German company who was
granted a license to establish a regional or area headquarters in
the Philippines. Private respondent Romana Lanchinebre was a
sales representative of petitioner who made advances totalling
P35,000 which were left unpaid. Petitioner filed a complaint for
the collection of a sum of money which was dismissed by the
judge holding, among others, that the license of petitioner does
not include the license to do business in the Philippines.
ISSUE: WON petitioner has capacity to sue?
HELD: Yes. Private respondent is estopped from assailing the
personality of petitioner. The rule is that the party is estopped to
challenge the personality of a corporation after having
acknowledged the same by entering into a contract with it. And
the doctrine of estoppel to deny corporate existence applies to
foreign as well as domestic corporation; one who has dealt with a
corporation of foreign origin as a corporate entity is estopped to
deny its corporate existence and capacity. The principle will be
applied to prevent a person contracting with a foreign corporation
from later taking advantage of its non-compliance with the
statutes chiefly in case where such person has received the
benefits of the contract (Merill Lynch Futures, Inc. vs. CA).
In the case of Merill Lynch Futures, the SC held that a foreign
corporation doing business in the Philippines may sue in Philippine
courts although not authorized to do business here against the
Philippine citizen who had contracted with and been benefited by
said corporation. Citing and applying the doctrine laid down in
Asia Banking Corp. vs. Standard Products Co., Inc.

20

Sec. 22. Effects on non-use of corporate charter and


continuous inoperation of a corporation.- If a corporation does
not formally organize and commence the transaction of its business
or the construction of its works within two (2) years from the date of
its incorporation, its corporate powers cease and the corporation shall
be deemed dissolved. However, if a corporation has commenced the
transaction of its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
corporation as may be determined by the Securities and Exchange
Commission.
Once the certificate of incorporation has been issued, the
corporation MUST formally organize and commence its business.
NON-USE OF CORPORATE CHARTER: Apparent from the above
provision is that the failure of the corporation to organize
within 2 years would result in it automatic dissolution,
unless, of course, its failure to do so is due to causes beyond its
control.
FORMAL ORGANIZATION: refers to the process of structuring
the corporation to enable it to effectively pursue the purpose for
which it was organized. It includes:
a. Organizational meeting of the stockholders to elect the BOD;
b. Adoption of by-laws, if not simultaneously filed with the AOI,
and its subsequent filing with the SEC which must be within 1
month from the issuance of the certificate of incorporation;
c. Organizational meeting of the BOD to elect the corporate
officers, adoption of corporate seal, accepting preincorporation subscriptions, establishing the principal office

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

and such other steps necessary to transact the legitimate


business for which the corporation was formed.
Strict compliance is not required. Substantial compliance
therewith is sufficient. Thus, it has been held in the case of Perez
vs. Balmaceda that a corporation is deemed to have formally
organized if it had a governing board which direct its affairs, as
well as a treasurer and a clerk, and that through these
instrumentalities, it actually functioned and engaged in the
business for which it was organized. It cannot be held to have
forfeited its charter simply because it has not been shown that is
also had a president and a secretary.
b.

COMMENCEMENT OF BUSINESS/TRANSACTION

This means that the corporation has actually functioned and


engaged in business for which it was organized which must be
done within two years from the issuance of the certificate
of incorporation lest it is deemed dissolved. This may take
the form of entering into contracts which tend to pursue its
business undertaking or other acts related thereto.
If a corporation has commenced its business but subsequently
becomes inoperative continuously for a period of at least 5
years, the same shall be merely a ground for suspension
or revocation of its corporate franchise or certificate of
registration.
CHAPTER 5: THE CORPORATE CHARTER AND ITS
AMENDMENTS
A.

CORPORATE CHARTER

CORPORATE CHARTER signifies an instrument or authority from


the sovereign power, bestowing rights or power, and is often used
convertibly with the term act of incorporation, where the
corporation was formed under a special act of the legislature, and
with the articles of incorporation, when the corporation was
formed under a general law.
THREE-FOLD CONTRACT:
1. Between the corporation and the state insofar as it concerns
its primary franchise to be and act as a corporation
2. Between the corporation and the stockholders or members
insofar as it governs their respective rights and obligations;
3. Between and among the stockholders or members
themselves as far as their relationship with one another is
concerned.
FRANCHISE: appropriately applies to the right or privilege itself
to be and act as a corporation or to do a certain act while charter
applies to the instrument by which the state vests such right or
privilege. Franchise may either be: (1) Primary nothing more
than the right or privilege of being a corporation; or (2) Secondary
the powers and privileges vested in, and to be exercised by the
corporate body as such. Example: Employment Agencies, primary
franchise is the certificate of incorporation from the SEC, the
secondary franchise is the license issued by the POEA.
B.

CORPORATE ENTITY THEORY

SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO


ARANETA, INC. ET AL., defendant-appelle (72 SCRA 347; Aug.
17, 1976) Plaintiff-appellant Sulo ng Bayan, Inc. instituted a
reinvindicatory action for the recovery of 28,000 square meters of
land for and in behalf of its members, who were themselves and
their predecessors-in-interest pioneered in the clearing of the land
and cultivated the same since the Spanish Regime and have been
in continuous possession of the same. The action was dismissed
on the ground that there is no cause of action. On appeal, the CA
certified the case to the SC for the legal issues involved.
ISSUED: WON Sulo ng Bayan, Inc. may institute the action for
recovery of property of it individual members?
HELD: No. It is a doctrine well-established and obtains both at law
and in equity that a corporation is a distinct legal entity to be
considered as separate and apart from the individual stockholders
or members who compose it, and is not affected by the personal
rights, obligations and transactions of its stockholders or
members. The property of a corporation is its property and not
that of the stockholders, as owners, although they have equities
in it. Properties registered in the name of the corporation are
owned by it as an entity separate and distinct from its members.
Conversely, a corporation ordinarily has no interest in the
individual property of its stockholders unless transferred to the
corporation, even in the case of a one-man corporation.
Absent any showing of interest, therefore, a corporation, like
plaintiff-appellant herein, has no personality to bring an action for
and in behalf of its stockholders or members for the purpose of
recovering property which belongs to said stockholders or
members in their personal capacities.
It is fundamental that there cannot be a cause of action without
an antecedent primary legal right conferred by law upon a person.
Evidently, there can be no wrong without a corresponding right,
and no breach of duty by one person without a corresponding
right belonging to some other person.
FERMIN CARAM, JR. AND ROSA DE CARAM VS. CA AND
ALBERTO V. ARELLANO (151 SCRA 372; June 30, 1987) Herein
petitioners were ordered jointly and severally to pay the plaintiff
P50,000 for the preparation of the project study and his technical
services that led to the organization of the defendant corporation.
The petitioners questioned the order stating that they are mere
subsequent investors in the corporation that was later created,
that they should not be held solidarily liable with the Filipinas
Orient Airways, a separate juridical entity, and with co-defendants
who were the ones who requested the said services from the
private respondent.
ISSUE: WON petitioners can be held personally liable for such
expenses?
HELD: No. Petitioners were not involved in the initial stages of the
organization of the airline, which were being directed by Baretto,
respondent, as the main promoter. It was he who was putting all
the pieces together, so to speak. The petitioners were merely
among the financiers whose interest was to be invited and who
were in fact persuaded, on the strength of the project study, to
invest in the proposed airline.

As a legal entity, the corporation is possessed with a juridical


personality separate and distinct from the individual stockholders
or members and is not affected by the personal rights, obligations
or transactions of the latter. The properties it possesses belongs
to it exclusively as a separate juridical entity such that the
personal creditors of its stockholders or members cannot attach
corporate properties to satisfy their claims.

Significantly, there was no showing that the Filipinas Orient


Airways was a fictitious corporation and did not have a separate
juridical personality, to justify making the petitioner, as principal
stockholder thereof, responsible for its obligations. As a bona fide
corporation, the Filipinas Orient Airways should alone be liable for
its corporate acts as duly authorized by its directors and officers.

On the other hand, the corporation is not likewise liable for the
debts, obligations or liabilities of its stockholders. Neither may it
properties be made answerable to satisfy the claim of creditors
against its stockholders or member even if the stockholder
concerned is its president.

The most that can be said is that they benefited from the services,
but that surely is no justification to hold them personally liable
therefor. Otherwise, all other stockholders of the corporation,
including those who came in later, and regardless of the amount
of their stockholdings would be equally and personally liable also

21

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

with the petitioners for the claims of the private respondents.


Petitioners are not liable under the challenged decision.
RUSTAN PULP AND PAPER MILLS, INC. VS. IAC (214 SCRA
665; Oct. 19, 1992) Petitioner Rustan entered into a contract of
sale with respondent Lluch which was later on stopped by Rustan
through a letter. Lluch sent a letter to clarify whether the letter
sent by Rustan was for the stoppage of delivery or termination of
the contract of sale. Unanswered, respondent Lluch resumed
deliveries and later on filed a complaint for contractual breach
which was dismissed. On appeal, the CA modified the decision of
the trial court directing petitioner including Tantoco, president and
general manager, and Vergara, resident manager, to pay private
respondents.
ISSUE: WON individual petitioners may be held liable?
HELD: No. The president and manager of a corporation,
who entered into and signed a contract in his official
capacity, cannot be made liable thereunder in his
individual capacity in the absence of stipulation to that
effect due to the personality of a corporation being
separate and distinct from the person composing it. And
because of this precept, Vergaras supposed non-participation in
the contract of sale although he signed the letter terminating it is
completely immaterial.
CRUZ VS. DALISAY (152 SCRA 482; July 31, 1987) Adelio Cruz
charged Quiterio Dalisay, Senior Deputy Sheriff of Manila, with
malfeasance in office, corrupt practices and serious irregularities
when the respondent sheriff attached and/or levied the money
belonging to complainant Cruz when he was not himself the
judgment debtor in the final judgment of NLRC sought to be
enforced but rather the company known as Qualitrans Limousine
Service, Inc., a duly registered corporation.
ISSUE: WON the charge against the respondent should be upheld
for attaching personal property of the corporate president?
HELD: Yes. The respondents action in enforcing judgment against
complaint who is not the judgment debtor in the case calls for
disciplinary action. Considering the ministerial duty in enforcing
writs of execution, what is incumbent upon him is to ensure that
only that portion of a decision ordered or decreed in the
dispositive part should be the subject of execution. No more, no
less. That the title of the case specifically names complaint as one
of the respondent is of no moment as execution must conform to
that directed in the dispositive portion and not in the title of the
case. The tenor of the NLRC judgment and the implementing writ
are clear enough. It directed Qualitrans to reinstate the
discharged employee and pay the full backwages. Respondent,
however, chose to pierce the veil of corporate entity usurping a
power belonging to the court and assumed improvidently that
since the complainant is the owner/president, they are one and
the same. It is well-settled doctrine, both in law and in equity that
as a legal entity, a corporation has a personality distinct
and separate from its individual stockholders or members.
The mere fact that one is president of a corporation does
not render the property he owns or possesses the
property of the corporation, since the president, as
individual, and the corporation are separate entities.
PALAY INC. VS. CLAVE (124 SCRA 638; Sept. 21, 1983)
Petitioner Palay, Inc. through its president Albert Onstott,
executed in favor of respondent Naario Dumpit a Contract to Sell a
parcel of land which provided for automatic rescission upon
default in payment of any monthly amortization without need of
notice and forfeiture of all instalments paid. Respondent failed to
pay some instalments and later offered to update all his overdue
account but was informed that the contract has already been
rescinded.
Respondent filed with the NHA a complaint questioning the
validity of the rescission which decided in its favor holding Palay,

22

Inc. and Alberto Onstott, in his capacity as president, jointly and


severally liable.
ISSUE: WON the corporate president is liable to refund the
amount state in the NHA ruling?
HELD: No. As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the
legal entities to which it may be connected and vice versa.
However, the veil of corporate fiction may be pierced when it is
used as a shield to further an end subversive of justice; or for
purposes that could not have been intended by the law that
created it; or to defeat public convenience, justify 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, adjunct or business conduit for the
sole benefit of the stockholders.
We find no badges of fraud on petitioners part. They had literally
relied, albeit mistakenly, on its contract with private respondent
when it rescinded the contract to sell extrajudicially and had sold
it to another person.
No sufficient proof exists on record that said petitioner used the
corporation to defraud private respondent. He cannot, therefore,
be made personally liable just because he appears to be the
controlling stockholder. Mere ownership by a single
stockholder or by another corporation of all or nearly all of
the capital stock of a corporation is not, of itself, sufficient
ground
for
disregarding
the
separate
corporate
personality.
PAULINO SORIANO, NENITA C. ESPERANZA and JANDRO G.
MACADANGDANG, petitioners,
vs.
HON. COURT OF APPEALS (Former Sixth Division) and
GERVACIO CU, respondents
(GR No. L-49834; June 22, 1989)
FACTS: Petitioners were held solidarily liable by the appellate
court in their personally capacity to the private respondent for
non-payment of tobacco under an agreement between them
embodied in a receipt which states as follows:
GREETINGS:
WE, the President, Manager, Treasurer and Director
Representative of Bacarra (I.N.) Facoma, Inc., do hereby execute
this document:
That we received from Mr. Gervacio Cu, a truck load of Virginia
tobacco consisting of ONE HUNDRED SIXTY (160) bales of fifty
(50) kilos each bale (sic) the said Virginia tobacco consists of
different grades or class from E to A (sic) the said tobaccos are
to be shipped to the redrying plants through the Bacarra
Facoma under Guia number 236.
Conditions of the deal between Mr. Cu and the Association.
Upon payment of the said tobacco by the Philippine Virginia
Tobacco Administration then Mr. Cu, will collect the
corresponding payments as graded by the redrying plant as
further stipulated that the check representing the payment shall
only be cashed in the presence of Mr. Cu, or his authorized
representative. (Sic)
This instrument is executed for the protection, guidance and
information of the parties concerned.
Done this 10th day of August 1964 at Bacarra, Ilocos Norte.
(Sgd.) Paulino Soriano
PAULINO SORIANO
President
(Sgd.) Nenita C. Esperanza
NENITA C. ESPERANZA
Sec. Treasurer

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

by:
(Sgd.) Erlinda V. Acosta
BIENVENIDO E. ACOSTA Director,
Official Representative
(Sgd.) A. Macadangdang
A.G. MACADANGDANG
Manager
ISSUE: WON petitioners are liable?
HELD: No. We cannot accept the conclusion that the official
designations of petitioners were written on the document merely
as meaningless and hollow decorations or as mere descripto
personae without any relevance to the liability of the corporation
these officers obviously represented. Indeed, taking in conjunction
with the other obtaining circumstances, the receipt discloses the
capacity by which the petitioners entered into the deal with
private respondent.
The subject receipt itself states that the conditions contained
therein were between the private respondent and the
Association. The lower court held that the Association referred
only to the signatories. We disagree. It is quite plain and we are
convinced that the Association is none other than the Bacarra
(I.N.) Facoma, Inc. which is a farmers cooperative marketing
association. Not only that , we cannot find any cogent reason why
the petitioners used the word Association when they could have
more easily and conveniently placed the undersigned or words
to the same effect in its stead.
In light of the foregoing, it is clear that the liability of the
petitioners under the document subject of the instant case is not
personal but corporate, and therefore attached to the Bacarra
(I.N.) Facoma, Inc. which being a corporation, has a personality
distinct and separate from that of the petitioners who are only its
officers. It is the general rule that the protective mantle of
a corporations separate and distinct personality could
only be pierced and liability attached directly to its officers
and/or member-stockholders, when the same is used for
fraudulent, unfair or illegal purpose.
C.

PIERCING THE VEIL OF CORPORATE FICTION

The notion of corporate legal entity is not, at all ties respected.


This is because the applicability of the corporate entity theory is
confined to legitimate transactions and is subject to equitable
limitations to prevent its being used as a cloak or cover for fraud
or illegality, or to work injustice.
While no hard and fast rule exists as to when the corporate fiction
may pierced or disregarded, it is a fundamental principle in
Corporation law that a corporation is an entity separate and
distinct from its stockholders or member and from other
corporations to which it may be connected. But when the notion of
legal entity is used to defeat public convenience, Justify wrong,
Protect fraud, Defend crime, the law will regard the corporation as
a mere association of persons, or in the case of two corporations,
merge them into one, the one being merely regarded as part or
instrumentality of the other. The same is true where a corporation
is a mere dummy and serves no business purpose and is intended
only as a blind, or an alter-ego or business conduit for the sole
benefit of the stockholders.
In cases where the doctrine of piercing the veil of corporate
fiction, liability
will attach directly to the officers and
stockholders, at least, in so far as that particular act is concerned.
PALACIO VS. FELY TRANSPORTATION COMPANY (5 SCRA
1011; Aug. 31, 1962) Alfredo Carillo, a driver of herein
respondent corporation, ran over the child of herein petitioner
Mario Palacio, and was found guilty of the criminal case filed
against him. Isabelo Calingasan, the employer, was held
subsidiarily liable and not the defendant corporation. Plaintiffs

23

now contend that the defendant corporation should be made


subsidiarily liable for damages in the criminal case because the
sale to it of the jeep in question, after the conviction of Carillo was
merely an attempt on the part of Calingasan, its president and
general manager, to evade his subsidiary civil liability.
ISSUE: WON the corporation can be held liable for the subsidiary
civil liability of Isabelo Calingasan?
HELD: Yes. It is evident that Calingasans main purpose in
forming the corporation was to evade his subsidiary civil liability
resulting from the conviction of his driver. This conclusion is borne
out by the fact that the incorporators of the Fely Transportation
are Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his
two daughters. We believe that this one case where the
defendant corporation should not be heard to say that it
has a personality separate and distinct from its members
when to allow it to do so would be to sanction the use of
the fiction of corporate entity as a shield to further an end
of subversive of justice. Furthermore, the failure of the
defendant corporation to prove that it has other property other
than the jeep strengthens the conviction that its formation was for
the purpose above indicated.
MARVEL BUILDING CORPORATION, et al. VS. DAVID (94 Phil.
376; Feb. 24, 1954) Plaintiffs, as stockholders of Marvel Building
Corporation sought to enjoin the defendant Collector of Internal
Revenue from selling at a public auction properties which were
said to be registered in the name of said corporation. Said
properties were seized and distrained by defendant to collect war
profits taxes against Maria Castro who the former claims to be the
sole owner of the said corporation. Maria Castro owns P250,000 of
the P1,025,000 capital of the corporation, of the rest of the
incorporators were her half-brothers, half-sister and a brother-inlaw.
ISSUE: WON Maria Castro is the sole owner of the Corporation?
HELD: Yes. Circumstantial pieces of evidence presented were: (1)
Endorsement in blank of the certificates of stock issued in the
name of the incorporators and the possession thereof by Maria
Castro; (2) The other incorporators did not have incomes in such
amount, during the time of the organization of the corporation or
immediately thereto, as to enable them to pay in full their
supposed subscriptions; and (3) It should have been the supposed
subscribers who should have come to court to assert that they
actually paid for their subscriptions and are not mere dummies.
The circumstantial evidence is not only convincing, it is
conclusive. In addition to the above, the fact that the stockholders
or directors never appeared to have ever met to discuss the
business of the corporation and the fact that Maria Castro
advanced big sums of money to the corporation without any
previous arrangements or account, and the fact that the books of
accounts were kept as if they belonged to Maria Castro alone
these facts are of patent and potent significance.
In our opinion, the facts and circumstances duly set forth, all of
which have been proved to our satisfaction, prove conclusively
and beyond reasonable doubt that Maria Castro is the sole and
exclusive owner of all the shares of stock of the corporation and
that the other partners are her dummies.
YUTIVO & SONS CO. VS. CTA (1 SCRA 160; Jan. 28, 1961)
Herein petitioner Yutivo purchased its cars and trucks from
General Motors Overseas Corporation (GM), the latter paying the
sales tax once on original sales, Yutivo no longer paid sales tax on
its sales to the public. Later no, GM withdrew from the Philippines
and appointed Yutivo as importer. Yutivo in turn exclusively sold to
Southern Motors, Inc. (SM), a corporation where the incorporators
are sons of the founders of Yutivo. Under this arrangement, Yutivo
paid the sales tax on original sale, while SM did not subject to
sales tax its sales to the public.
The Collector of Internal Revenue assessed Yutivo for deficiency

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

sales taxes which the CTA affirmed.


ISSUE: WON Yutivo is liable for the deficiency taxes?
HELD: No. It is elementary rule and fundamental principle of
corporation law that a corporation is an entity separate and
distinct from its stockholders and from other corporations to which
it may be connected. However, when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud or
defend crime, the law will regard the corporation as an association
of persons, or in case of two corporations merge them into one.
Another rule is that, when the corporation is a mere alter-ego or
business conduit of a person, it may disregarded.
The sales tax liability of Yutivo did not arise until it became the
importer and simply continued its practice of selling to SM. The
decision, therefore, of the Tax Court that SM was organized
purposely as a tax evasion device runs counter to the fact that
there was no tax to evade.
We are, however, inclined to agree with the court below that SM
was actually owned and controlled by petitioner as to make it a
mere subsidiary or branch of the latter created for the purpose of
selling the vehicles at retail and maintaining stores for spare parts
as well as service repair shops. It is not disputed that the
petitioner, which is engaged principally in hardware supplies and
equipment, is completely controlled by the Yutivo, Young and Yu
family. The founders of the corporation are closely related to each
other either by blood or affinity and most of its stockholders are
members of the Yu (Yutivo or Young) family.
According to the AOI, the amount of P62,500 was actually
advanced by Yutivo. The additional subscriptions to SM were paid
by Yutivo. The shareholders in SM are mere nominal stockholders
holding the share for and in behalf of Yutivo, so even conceding
that the original subscribers were bona fide stockholders, Yutivo
was at all tie in control of the stock of SM and that the latter was a
mere subsidiary of the former.
SM is under the management control of Yutivo by virtue of the
management contract entered into between the two parties. In
fact, the controlling majority of the BOD of Yutivo is also the
controlling majority of the Board of SM. At the same time, the
principal officers of both corporations are identical. In addition,
both corporations have a common comptroller. There is therefore
no doubt that by virtue of such control, the business, financial and
management policies of both corporations would be directed
towards common ends. Likewise, cash or funds of SM, including
those of its branches which are directly remitted to Yutivo, and
subject to withdrawal only by Yutivo, SMs being under Yutivos
control, the formers operations and existence became dependent
upon the latter.
SM, being but a mere instrumentality or adjunct of Yutivo, the CTA
correctly disregarded the technical defense of separate corporate
entity to arrive at the true tax liability of Yutivo.
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
NORTON and HARRISON COMPANY, respondent.
(GR No. L-17618; 11 SCRA 714; Aug 31, 1964)
FACTS: Herein respondent entered into an agreement with
Jackbilt where the former was made the sole and exclusive
distributor of concrete blocks manufactured by Jackbilt and
accordingly every order of a customer of Norton was transmitted
to Jackbilt which delivered the merchandise directly to the
customer. Payment of the goods, however, is made to Norton,
which in turn pays Jackbilt the amount charged the customer less
a certain amount, as its compensation or profit.
During the existence of the agreement, Norton acquired by
purchase all the outstanding stocks of Jackbilt. Due to this, the
Commissioner of Internal Revenue, assess respondent Norton for
deficiency taxes making the basis of sales tax the sales of Norton

24

to the public, which is the higher price compare to the sale of


Jackbilt to Norton. The CTA decided in favor of Norton.
ISSE: WON the two corporations may be merged into a single
corporation?
HELD: Yes. It has been settled that the ownership of all the
stocks of a corporation by another corporation does not
necessarily breed an identity of corporate interest
between the two companies and be considered as a
sufficient ground for disregarding distinct personalities.
However, in the case at bar, we find sufficient grounds to support
the theory that the separate identities of the two companies
should be disregarded.
(a) Norton owned all the outstanding stocks of Jackbilt;
(b) Norton constituted Jackbilts directors;
(c) Norton financed the operations of Jackbilt;
(d) Norton treats Jackbilts employees as its own;
(e) Compensation given to board members of Jackbilt indicate that
Jackbilt is merely a department of Norton;
(f) The offices of Norton and Jackbilt are located in the same
compound;
(g) Payments were effected by Norton of accounts for Jackbilt and
vice versa;
(h) Payments were also made to Norton of accounts due or
payable to Jackbilt and vice versa.
The circumstances presented by the facts of the case, yields to
the conclusion that Jackbilt is merely an adjunct, business conduit
or alter-ego of Norton and that the fiction of corporate entities,
separate and distinct from each other should be disregarded.
LA CAMPANA COFFEE FACTORY, INC. VS. KAISAHAN NG
MGA MANGGAGAWA SA LA CAMPANA (KKM) (93 Phil. 160;
May 25, 1953) Tan Tong, one of herein petitioners, is engaged in
the buying and selling of guagua under the trade name La
Campana Guagua Packing. Later on, Tong and his family organized
a family corporation known as La Campana Coffee Factory Co, Inc.
with its principal office located at the same place as that of La
Campana Guagua Packing.
Tan Tongs employees later on formed a union (herein respondent)
through which they demanded (from both companies) higher
salaries and more privileges. As the demand was not granted and
an attempt at a settlement through mediation had given no result,
the Department of Labor certified the dispute to the Court of
Industrial Relations (CIR). Petitioners filled a motion to dismiss
which was denied. Hence, this present petition for certiorari.
ISSUE: WON the corporate entity of La Campana Coffee Factory,
Inc. may be disregarded?
HELD: Yes. La Campana Guagua Packing and La Campana Coffee
Factory, Inc. are operating under on single management, that is,
as one business though with two trade names. True, the coffee
factory is a corporation and, by legal fiction, an entity existing
separate and apart from the person composing it, that Tan Tong
and his family. But it is settled that this fiction of law, which
has been introduced as a matter of convenience and to
subserve the ends of justice cannot be invoked as to
further and end subversive of that purpose.
In the present case, Tan Tong appears to be the owner of the
guagua factory. And the factory, though an incorporated business,
is in reality owned exclusively by Tan Tong and his family. As found
by the CIR, one payroll, except after July 17, the day the case was
certified to the CIR, when the person who was discharging the
office of cashier for both branches of the business began
preparing separate payrolls for the two. And above all, it should
not be overlooked that, as also found by the industrial court, the
laborers of the guagua factory and the coffee factory were
interchangeable. In view of all these, the attempt to make the two
factories appear as two separate businesses, when in reality they
are but one, is but a device to defeat the ends of the law and

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

should not be permitted to prevail.


EMILIO CANO ENTERPRISES, INC. VS. COURT OF
INDUSTRIAL RELATIONS (CIR) (13 SCRA 290; Feb. 26, 1965)
In a complaint for unfair labor practice, the Court of Industrial
Relations rendered a decision in favor of Honorata Cruz, ordering
Emilio and Rodolfo Cano, officials of herein petitioner corporation,
to reinstate Cruz. An order of execution was issued directed
against the properties of herein petitioner. Hence, this petition.
ISSUE: WON execution may be had on the properties of the
corporation?
HELD: Yes. We should not lose sight of the fact that Emilio Cano
Enterprises, Inc. is a closed family corporation where the
incorporators and directors belong to one single family. Here is an
instance where the corporation and its members are considered
as one. And to hold such entity liable for the acts of its
members is not to ignore the legal fiction but merely to
give meaning to the principle that such fiction cannot be
invoked if its purpose is to use it as a shield to further an
end subversive of justice. And so it has been held that while a
corporation is a legal entity existing separate and apart
from the person composing it, that concept cannot be
extended to a point beyond it reason and policy, and when
invoked in support of an end subversive of this policy it
should be disregarded by the courts.
Emilio and Rodlfo Cano were indicted in the case, not in their
personal capacity, but as president and manager of the
corporation. Having been sued officially, their connection with the
case must be deemed to be impressed with the representation of
the corporation. In fact, the courts order is for them to reinstate
Honorata Cruz to her former position in the corporation and
incidentally pay her the wages she had been deprived of during
her separation. Verily, the order against them is in effect against
the corporation. No benefit can be attained if this case were to be
remanded to the court a quo merely in response to a technical
substitution of parties.
TELEPHONE ENGINEERING SERVICE CO. VS. WCC (104 SCRA
354; May 13, 1981) The late Pacifico Gatus was an employee of
Utilities Management Corporation (UMACOR), a sister company of
herein Petitioner TESCO. He was later on detailed with Petitioner
Company and returned back to UMACOR. But he contracted illness
and later on died of liver cirrhosis with malignant degeneration.
His wife, respondent Leonila Gatus filed a Notice and Claim for
Compensation with the Workmens Compensation Commission
(WCC) alleging Pacifico to be an employee of TESCO. An
employers report was submitted to WCC where UMACOR was
indicated as the employer of the deceased and stated that it
would not contravert the claim and admitted that Pacifico
contracted illness in regular occupation.
The sheriff levied on and attached the property of TESCO and
scheduled the sale of the same at public auction. Thus, the
present petition for certiorari with preliminary injunction.
ISSUE: WON the award may be rendered against TESCO?
HELD: Yes. We note that it is only in this Petition that petitioner
denied, for the first time, the employer-employee relationship. In
fact, in the letters it submitted to the Acting Referee and to the
Commission, petitioner represented and defended itself as the
employer of the deceased. Petitioner even admitted that TESCO
and UMACOR are sister companies operating under one single
management and housed in the same building. Although
respect for the corporate personality as such, is the
general rule, there are exceptions. In appropriate cases,
the veil of corporate fiction may be pierced as when the
same is made as a shield to confuse the legitimate issues.
While indeed, jurisdiction cannot be conferred by acts or omission
of the parties. TESCOs denial at this stage that it is the employer

25

of the deceased is obviously an afterthought, a devise to defeat


the law and evade its obligations. This denial also constitutes a
change of theory on appeal which is not allowed in this
jurisdiction.
CLARAPOLS VS. COMMISSIONER OF INTERNAL REVENUE
(July 31, 1975; 65 SCRA 613) A decision rendered against herein
petitioner was rendered on a complaint filed by herein private
respondents Allied Workers Association, Demetrio Garlitos and 10
respondent workers who petitioner dismissed from Clarapols Steel
and Nail Plant.
ISSUE: WON the veil of corporate fiction should be pierced?
HELD: Yes. It very clear that the latter corporation was a
continuation and successor of the first entity, and its emergence
was skilfully timed to avoid financial liability that already attached
to its predecessor, Clarapols Steel and Nail Plant. (1) Both
predecessor and successor were owned and controlled by the
petitioner Eduardo Clarapols; and (2) there was no break in the
succession and continuity in the same business. This avoiding-theliability scheme is very patent, considering that (3) 90% of the
subscribed shares of stock of the second corporation was owned
by Clarapols himself, and (4) all assets of the dissolved Clarapols
Steel and Nail Plant were turned over to the emerging Clarapols
Steel Corporation.
It is very obvious that the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case could,
and should be pierced as it was deliberately and maliciously
designed to evade its financial obligations to its employees.
NATIONAL FEDERATION OF LABOR UNION (NAFLU) VS.
OPLE (143 SCRA 124; July 22, 1986) NAFLU requested for
conciliation before the Bureau of Labor Relations for certain
money claims and refusal of the company to conclude collective
agreement and run-away shop undertaken by management. In the
course of the negotiation, management unilaterally declared a
temporary shutdown. But it was discovered that the actual partial
shutdown begun a month before and that the machines of
Lawman were transferred to a different location and the name of
the company was changed to Libra Garments, upon discovery of
this, the name was further changed to DOLPHIN garments. For
failure of the company to resume operations in January 1983 (as
promised) a complaint for unfair labor practice was filed.
ISSUE: WON the corporate fiction of LIBRA (now DOLPHIN)
garments should be pierced?
HELD: Yes. It is very obvious from the above findings that the
second corporation seeks the protective shield of a corporate
fiction to achieve illegal purpose. As enunciated in Clarapols vs.
CIR, its view in the present case should, therefore be pierced as it
was deliberately and maliciously designed to evade its financial
obligations to it employees. It is an established principle that
when the veil of corporate fictions is made as a shield to
perpetrate a fraud or to confuse legitimate issues (here, the
relation of employer-employee), the same should be pierced.
After finding that Lawman Industrial Corporation had transferred
business operations to Libra Garments, which later changed to
Dolphin Garments, the public respondent cannot deny
reinstatement to the petitioners simply because Lawman has
ceased its operation.
As Libra Garments is but an alter-ego of the old employer,
Lawman Industrial, the former must bear the consequences of the
latters unfair act by reinstating petitioners to their former
positions without loss of seniority rights.
AC RANSOM LABOR UNION-CCLU VS. NLRC (150 SCRA 498
May 29, 1987) A decision was rendered by the CIR and affirmed
by this Court against AC Ransom for unfair labor practice. Writ of
execution were issued successively against Ransom to no avail.
The Union filed an ex-parte motion for a Writ of Execution and

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Garnishment against the officers/agents of AC Ransom personally


and on their estates, as the case may be, which the Labor Arbiter
granted. On appeal, the NLRC reversed the Labor Arbiter relieving
the officers of personal liability.
ISSUE: WON the officers may be liable?
HELD: Yes. The NLRC, on appeal, could not have modified the CIR
decision as affirmed by this Court, by relieving AC Ransoms
officers and agent of liability which were held to be jointly and
severally liable to the 22 employees for unfair labor practice.
This finding does not ignore the legal fiction that a corporation has
a personality separate and distinct from its stockholders and
members for, as this Court had held where the incorporators
belong to a single family, the corporation and its members can be
considered as one in order to avoid it being used as an instrument
to commit injustice, or to further an end subversive of justice. In
the case of Clarapols vs. CIR involving almost similar facts as in
this case, it was also held that the shield of corporate fiction
should be pierced when it is deliberately and maliciously designed
to evade financial obligations to employees.
Aggravating AC Ransoms clear evasion of payment of its financial
obligations is the organization of a run-away corporation,
ROSARIO Industrial Corporation, in 1969 at the time the unfair
labor practice case was proceeding before the CIR by the same
person who were the officers and stockholders of AC Ransom,
engaged in the same line of business, producing the same line of
product, occupying the same compound, using the same
machineries, buildings, factories, bodega and sales and accounts
departments used by AC Ransom, and which is still in existence.
Both corporations were closed corporations owned and managed
by members of the same family. Its organization proved to be a
convenient instrument to avoid payment of backwages and the
reinstatement of 22 workers. This is another instance where the
fiction of separate and distinct corporate entities should be
disregarded.
CONCEPT BUILDERS, INC. VS. NLRC (257 SCRA 149; May 29,
1996) Private respondents were employees of petitioner Concept
Builders, Inc., who were served termination letters stating that the
project for which they were hired was already completed and that
their contracts have already expired. Finding that the project was
not actually completed yet, and that petitioner employed a
subcontractor whose employees performed the duties of private
respondents, the latter filed a complaint for illegal dismissal with
the Labor Arbiter who held that the dismissal was illegal.
A writ of execution was issued but was partially satisfied only. The
sheriff sought levy upon the properties in the head office of
Concept Builders, Inc. but was not allowed to do so on the ground
that it was occupied by Hydro Pipes Philippines, Inc. and not
concept builders. Unable to remove the personal properties he
found thereat, the Sheriff asked for a break-open order which
was denied by the Labor Arbiter after a third party claim was filed
by Hydro, which was reversed by the NLRC on appeal.
ISSUE: WON the break-open order should be issued?
HELD: Yes. The conditions under which the juridical entity may be
disregarded vary according to the particular facts and
circumstances of each case. No hard and fast rule can be
accurately laid down, but certainly there are some probative
factors of identity that will justify the application of the doctrine
of piercing the veil of corporate veil, to wit:
1. Stock ownership by one or common ownership of both
corporations;
2. Identity of directors and officers;
3. The manner of keeping corporate books and records;
4. Methods of conducting the business.
The SEC en banc explained the instrumentality rule which the
courts have applied in disregarding separate juridical personality
of corporations as follows:

26

Where on corporation is so organized and controlled and its


affairs are conducted so that it is, in fact, a mere instrumentality
or adjunct of the other, the fiction of the corporate entity of the
instrumentality may be disregarded. The control necessary to
invoke the rule is not majority or even complete stock control but
such domination of finances, policies, and practices that
the controlled corporation has, so to speak, no separate mind, will
or existence of its own and is a business conduit of its principal. It
must be kept in mind that the control must be shown to have
been exercised at the time the acts complained of took place.
Moreover, the control and breach of duty must proximately cause
the injury or unjust loss for which the complaint is made
The test in determining the applicability of piercing the
veil of corporate fictions is as follows:
1. Control, not mere majority or complete stock control, but
complete domination, not only in finances but of policy and
business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the
time no separate mind, will or existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and unjust
act in contravention of plaintiffs legal rights; and
3. The aforesaid control and breach of duty must proximately
cause the injury or unjust los complained of.
The absence of one of the elements prevents piercing the
corporate veil. In applying the instrumentality or alter-ego
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendants
relationship to that operation. Thus, the question of whether a
corporation is mere alter-ego, a mere sheet of paper
corporation, a sham or a subterfuge is purely one of fact.
In this case, while petitioner claimed that it ceased on operations
on April 29, 1986, it filed an information sheet with the SEC on
May 15, 1987 stating that its office address is at 355 Maysan
Road, Valenzuela Metro Manila. On the other hand, third-party
claimant Hydro, on the same day, filed an information sheet with
the same address, both information sheets filed by the same
Virgilio O. Casino. Both companies have the same president, the
same BOD, the same corporate officers and substantially the
same subscribers.
Clearly, petitioner ceased its business operations in order to
evade the payment to private respondents of back wages and to
bar their reinstatement to their former position. Hydro is obviously
a business conduit of petitioner corporation and its emergence
was skilfully orchestrated to avoid the financial liability attached
to petitioner corporation.
MC CONNEL VS. CA (1 SCRA 722; March 1, 1961) Petitioners,
original incorporators of Park Rite Co., Inc. was ordered to pay the
unsatisfied balance of a judgment rendered in favor of lot owners
whose property they used in the operations of their parking
business without the owners consent.
ISSUE: WON the incorporators may be held liable for obligations
of the corporation?
HELD: Yes. The Court has already answered the question in the
affirmative wherever the circumstances have shown that the
corporate entity is being used as an alter-ego or business conduit
for the sole benefit of the stockholders, or else to defeat public
convenience, justify wrong, protect fraud, or defend crime.
The evidence shows that Cirilio Paredes and Ursula Tolentino
(present stockholders) and M. McConnel, WP Cochrane and
Ricardo Rodriguez (previous stockholders) completely dominated
and controlled the corporation and that the functions of the
corporation were solely for their benefit, as shown that the other
shareholders were merely qualifying shares. This is strengthened
by the fact that the office of Cirilio Paredes and that of Park Rite

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Co., Inc. were located in the same building, in the same floor, and
in the same room. This is further shown by the fact that the funds
of the corporation were kept by Cirilio Paredes in his own name.
The corporation itself had no visible assets, as correctly found by
the trial court, except perhaps the toll house, the wire fence
around the lot and the signs thereon It was for this reason that the
judgment against it could not be fully satisfied.
While the mere ownership of all or nearly all of the capital
stock of a corporation does not necessarily mean that it is
a mere business conduit of the stockholder, that
conclusion is amply unjustified where it is shown, as in
this case before us, that the operations of the corporation
were so merged with the stockholders as to be practically
indistinguishable from them. To hold the latter liable for the
corporations obligations is not to ignore the corporations
separate entity, but merely to apply the established principle that
such entity cannot be invoked or used for purposes that could not
have been intended by the law that created the separate
personality.
TAN BOON BEE & CO., INC., petitioner,
vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE
OF BRANCH XVIII of the Court of First Instance of Manila, GRAPHIC
PUBLISHING, INC., and PHILIPPINE AMERICAN CAN DRUG
COMPANY, respondents
(GR No. L-41337; 163 SCRA 205; June 30, 1988)
FACTS: For failure of private respondent Graphic Publishing Inc. to
pay paper products purchased from petitioner (doing business
under the name and style Anchor Supply, Inc.), petitioner filed a
complaint in the CFI of Manila. A writ of Execution was issued
levying a printing machine which private respondent Philippine
American Drug Company claimed as its own. PADCO filed a third
party claim and asked the court to nullify the auction sale already
conducted, which herein respondent judge granted.
ISSUE: WON the respondent judge should be upheld?
HELD: No. It is true that a corporation, upon coming into being, is
invested by law with a personality separate and distinct from that
of the persons composing it as well as from any other legal entity
to which it may be related. As a matter of fact, the doctrine that a
corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and
respected in all cases which are within reason and the law.
However, this separate and distinct personality is merely a
fiction created by law for convenience and to promote
justice. Accordingly, this separate personality of the
corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or
cover for fraud or illegality, or to work an injustice, or
where necessary to achieve equity or when necessary for
the protection of creditors. Corporations are composed of
natural persons and the legal fiction of a separate
corporate personality is not a shield for the commission of
injustice and inequity. Likewise, this is true when the
corporation is merely an adjunct, business conduit or
alter-ego of another corporation. In such case, the fiction
of separate and distinct corporate entities should be
disregarded.
In the instant case, petitioners evidence established that PADCO
never engaged in the printing business; that the BOD and the
officers of PADCO and Graphic are the same; and that PADCO
holds 50% share of stock of Graphic. The printing machine in
question was in the premises of Graphic, long before PADCO even
acquired its alleged title from Capitol Publishing.
Considering the above, respondent judge should have pierced
PADCOs veil of corporate identity.
CEASE VS. CA (93 SCRA 483; Oct. 18, 1979) Forrest L. Cease is
the common predecessor-in-interest of the parties. He and other

27

American citizens organized the Tiaong Milling and Plantation


Company and in the course of its corporate existence all other
incorporators were bought out by Cease and his children. The
corporations charter expired but there were no records as to its
liquidation. Upon Ceases death, Ernesto, Teresita, Cecilia (3 of the
5 children) and Bonifacia Terante re-incorporated under FL Cease
Plantation Company, to the objection of Benjamin and Florence
who wanted actual division of Forrest Ceases shares. The latter
two filed a civil case asking to declare the corporation identical to
FL Cease and that its properties be divided among Fl Ceases
children as his intestate heirs which was granted by the trial
court.
ISSUE: WON the assets of the corporation are also the properties
of Forrest L. Cease?
HELD: Yes. In sustaining respondents theory of merger of
Forrest Cease and the Tiaong Milling as one personality, or that
the company is only the business conduit and alter-ego of the
deceased FL Cease and the registered properties of Tiaong Milling
are actually properties of FL Cease and should be divided equally
among his children, the trial court did aptly apply the familiar
exception to the general rule by disregarding the legal fiction of
distinct and separate corporate personality and regarding the
corporation and the individual members one and the same. In
shredding the fictitious corporate veil, the trial judge narrated the
undisputed factual premise:
While the records show that originally, the incorporators were
aliens, friends or third-parties in relation of one to another, in the
course of its existence, it developed into a close family
corporation. The BOD and stockholders belong to one family the
head of which FL Cease always retained the majority and hence,
the control and management of its affairs. In fact, during the
reconstruction of its records before the SEC, only 9 nominal shares
out of 300 appear in the name of his 3 eldest children then and
another person close to them (Ternate). It is likewise noteworthy
to observe that as his children increase or perhaps become of
age, he continued distributing his shares among them adding
Florence, Teresa and Marion until at the time of his death, only
190 were left to his name. Definitely, only the members of his
family benefited from the corporation.
The accounts of the corporation and therefore its operation, as
well as that of the family appears to be indistinguishable and
apparently joined together. As admitted by the defendants, the
corporation never had any account with any banking institution
or if any account was carried in a bank on its behalf, it was in the
name of FL Cease. In brief, the operation of the Corporation is
merged with those of the majority stockholders, the latter using
the former as his instrumentality and for the exclusive benefit of
all his family. From the foregoing indication, therefore, there is
truth in plaintiffs allegation that the corporation is only a business
conduit of his father and an extension of his personality, they are
once and the same thing. Thus, the assets of the corporation are
also the estate of FL Cease, the father of the parties herein who
are al legitimate children of full blood
Were we to sustain petitioners, the legal fiction of separate
corporate personality shall have been used to delay and
ultimately deprive and defraud the respondents of their
successional right to the estate of their deceased father.
D.

WHEN PIERCING THE CORPORATE FICTION IS NOT


JUSTIFIED

WHEN PIERCING
JUSTIFIED
1

THE

CORPORATE

FICTION

IS

NOT

Absent any of the following circumstances, the courts will not


be justified in disregarding the corporate entity;
a
The corporation is used or being used to defeat public
convenience;
b
Justify wrong;
c
Protect fraud;

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

d
e
f
g
h
2
3

Defend crime;
Confuse legitimate issues;
Circumvent the law;
Perpetuate deception; or
An alter-ego, adjunct or business conduit for the sole
benefit of a stockholder or a group of stockholders or
another corporation.
The wrong doing must be clearly and convincingly
established. It cannot be justified by speculation and can
never be presumed.
The petitioner must seek to impose a claim against the
stockholders or officers directly liable, otherwise piercing the
veil of corporate fiction would not be available nor justified.

CRUZ VS. DALISAY (supra) It is well-settled doctrine, both in


law and in equity that as a legal entity, a corporation has a
personality distinct and separate from its individual
stockholders or members. The mere fact that one is
president of a corporation does not render the property he
owns or possesses the property of the corporation, since
the president, as individual, and the corporation are
separate entities
REMO, JR. VS. INTERMEDIATE APPELLATE COURT (175 SCRA
405; April 18, 1989) Petitioner Feliciano Coprada, as president of
Akron, purchased 13 trucks from private respondent (EB Marcha
Transport Co., Inc.) for and in consideration of P525,000 as
evidenced by a deed of absolute sale. In a side agreement, the
parties agreed on a down payment of P50,000 and the balance to
be paid within 60 days. They further agreed that until the balance
is paid, the down payment shall accrue as rentals for the 13
trucks; and in case of failure to pay the balance shall constitute a
chattel mortgage lien; and the parties may allow 30 day
extension; and private respondent may ask for the revocation of
the contract and re-conveyance of the said trucks. The obligation
is further secured by a promissory note executed by Coprada,
where it is stated that the balance shall be paid from the proceeds
of a loan from DBP which was never applied for. A complaint was
later on filed by private respondent for the recovery of the P525,
000 or the return of the 13 trucks against Akron and its officers
and directors including herein petitioner which was granted by the
CFI of Rizal. Petitioner denied any participation the transaction
and alleging that Akron has distinct corporate personality. He was,
however, declared in default for failure to attend pre-trial.
ISSUE: WON Petitioner Remo, Jr. is jointly and severally liable?
HELD: No. The facts of the case show that there is no cogent
basis to pierce the corporate veil of Akron and hold petitioner
personally liable for its obligation to private respondent. While it is
true that he is a member of the board at the time the resolution to
purchase the trucks were adopted, it does not appear that said
resolution was intended to defraud anyone. It was Coprada who
negotiated with respondent and the one who signed the
promissory note. The word We in the said promissory note must
refer to the corporation and Coprada and not of its stockholders
and directors. Petitioner did not sign such note so he cannot be
personally bound thereby. Thus, if there was any fraud or
misrepresentation that was foisted on private respondent in that
there was forthcoming loan from the DBP when in fact there as
none, it is Coprada who should account for the same and not the
petitioner.
DEL ROSARIO VS. NLRC (182 SCRA 777; July 24, 1990) Pursuant to a complaint for money claims which was ultimately
decided by the NLRC against PHILSA Construction and Trading Co.
(recruiter) and Arieb Enterprises (employer), a writ of execution
was issued by the POEA which was returned unsatisfied as PHILSA
was no longer operating and was financially incapable of
satisfying the judgment.
At the motion of private respondent, an alias writ was issued
against the properties of Mr. Francisco del Rosario and if

28

insufficient, against the cash and/or surety bond of the Bonding


Company concerned.
Petitioner appealed to the NLRC which was denied together with
his MR.
ISSUE: WON the writ of execution must be upheld?
HELD: No. Under the law, a corporation is bestowed juridical
personality, separate and distinct from its stockholders. But when
the juridical personality of the corporation is used to defeat public
convenience, Justify wrong, protect fraud or defend crime, the
corporation shall be considered as a mere association of
persons, and its responsible officers and/or stockholders
shall be held individually liable. For the same reasons, a
corporation shall be liable for the obligation of a stockholder or a
corporation and its successor-in-interest shall be considered as
one and the liability of the former shall attach to the latter.
But for the separate juridical personality of a corporation to be
disregarded, the wrongdoing must be clearly and convincingly
established. It cannot be presumed. In this regard, we find the
NLRC decision wanting.
1. PHILSA allowed its license to expire so as to evade payment of
private respondents claim not supported by facts. The
license expired in 1985, it was delisted in 1986, there was no
judgment yet in favour of PR. An intent to evade payment of
his claims cannot therefore be implied from the expiration
of PHILSAs license and its delisting.
2. Organization of PHILSA International Placemen and Services
Corp. and its registration with POEA implies fraud it was
organized and registered in 1981, several years before private
respondent filed his complaint with the POEA in 1985. The
creation of the second corporation could not therefore
have been in anticipation of PRs money claims and the
consequent adverse judgment against PHILSA.
3. Substantial identity of the incorporators of the two corporations
does not necessarily imply fraud.
*Distinguished from other cases*
LA CAMPANA the two companies were substantially owned by
the same person. They had one office, one management, and a
single payroll for both businesses. The laborers were also
interchangeable.
CLARAPOLS Both corporations were substantially owned and
controlled by the same person and there was no break or
cessation in operations. Moreover, all the assets of the old were
transferred to the new corporation.
AC RANSOM The distinguishing mark of fraud were clearly
apparent in AC Ransom, when such corporation ceased operation
after the decision of the CIR and new one replacing it which was
owned by the same family, engaging in the same business and
operating in the same compound. In the present case, not only
has there been failure to establish fraud, but it has also
not been shown that petitioner is the corporation officer
responsible for PRs predicament. It must be emphasized that
the claims were actually directed against the employer, PHILSA
became liable only because of its undertaking to be jointly and
severally bound with the foreign employer, as required by POEA
rules.
INDOPHIL TEXTILE MILL WORKERS UNION VS. CALICA (205
SCRA 697; Feb. 3, 1992) - On April 1987, petitioner and Indophil
Textile Mills, Inc. executed a CBA effective from April 1, 1987 to
March 31, 1990.
On November 3, 1987, Indophil ACRYLIC
MANUFACTURING CORP was formed and registered with the SEC
and in 1988 became operation and hired workers according to its
own criteria and standards.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

In 1989, the workers of ACRYLIC unionized and a CBA was


executed. In 1990, petitioner union claimed that the plant
facilities build and set up by ACRYLIC should be considered an
extension or expansion of the facilities of TEXTILE MILLS, to make
ACRYLIC part of the TEXTILE MILLS bargaining unit. Public
respondent voluntary arbitrator Calica declared that the CBA of
petitioner DOES NOT extend to employees of ACRYLIC.
ISSUE: WON the veil of corporate entity should be pierced?
HELD: No. Under the doctrine of piercing the veil of corporate
entity, when valid grounds therefore exist, the legal fiction that a
corporation is an entity with a juridical personality separate and
distinct from its members or stockholders may be disregarded. In
such cases, the corporation will be considered as a mere
association of persons. The members or stockholders of a
corporation will be considered as the corporation, that is,
liability will attach directly to the officers and
stockholders.
In the case at bar, petitioner alleges that the creation of the
ACRYLIC is a devise to evade the application of the CBA between
petitioner and TEXTILE MILL. While we do not discount the
possibility of the similarities of the businesses of the two
corporations, neither are we inclined to apply the doctrine invoked
by petitioner.
1. The fact that the business of Indophil Textile Mills and Indphil
Acrylic Manufacturing are related;
2. That some of the employees of PR are the same persons
manning and providing for auxilliary services to the units of
ACRILYC, and that;
3. The physical plants, offices and facilities are situated in the
same compound.
It is our considered opinion that these facts are not
sufficient to justify piercing the corporate veil of ACRILYC.
UMALI VS. CA the legal corporate entity is disregarded only if
its sought to hold the officers and stockholders directly liable for
a corporate debt or obligation. In the instant case, petitioner
does not seek to impose a claim against the members of
ACRILYC.
PNB VS. RITRATTO GROUP, INC. ET. AL. (362 SCRA 216; July
31, 2001) - PNB International Finance Ltd. (IFL), a wholly-owned
subsidiary of PNB, organized and doing business in HK, extended
a letter of credit in favor of respondent RITRATTO in the amount of
US$300K , later increased to 1.14M, to 1.29M, to 1.425M and
decreased to 1,421,316.18, secured by a real estate mortgage
constituted in 4 parcels of land in Makati City.
As of April 1998, the outstanding obligation of respondents stood
at US$1,497,274.70. Pursuant to the terms of the mortgages, IFL,
through its attorney-in-fact PNB, notified respondents of the
foreclosure of all the real estate mortgages and that the
properties would be sold at a public auction.
Respondents filed a complaint for injunction for which a TRO was
issued and later on a writ of preliminary injunction, which
petitioner assailed with the CA through petition for certiorari.
The CA dismissed the petition.
ISSUE: WON the corporate entity of IFL may be disregarded?
HELD: No. Respondents, therefore, do not have any cause of
action against it. The trial court erred in disregarding the
corporate entity by saying that IFL is a wholly owned subsidiary of
PNB and that it is a mere alter-ego or business conduit of the
latter.

legitimate functions, a subsidiarys separate existence


may be respected, and the liability of the parent
corporation as well as the subsidiary will be confined to
those arising in their respective businesses.
KOPPEL PHIL VS. YATCO this Court disregarded the separate
existence of the parent and subsidiary on the ground that the
latter was formed merely for the purpose of evading the payment
of higher taxes. In the case at bar, respondents failed to show
any cogent reason why the separate entities of PNB and
IFL should be disregarded.
While there exists no definite test of general application in
determining when a subsidiary may be treated as a mere
instrumentality of the parent corporation some factors have been
identified that will justify the application of the treatment of the
doctrine of piercing the corporate veil:
1. As a general rule, the stock ownership alone by one corporation
of the stock 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 by an instrumentality or adjunct of the dominant
corporation (Garrett vs. Southern Railway Co.; Tennessee SC);
2. The doctrine of piercing the corporate veil is an equitable
doctrine developed to address situations where the separate
corporate personality of a corporation is abused or used for
wrongful purpose. The doctrine applies when the corporate
fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime, or when it is used as a shield to confuse
legitimate issues or where the corporation is so organized
and controlled and its affairs are so conducted as to make
it merely an instrumentality, agency, conduit or adjunct of
another corporation;
3. The test in determining the doctrine of piercing the veil of
corporation fiction:
a. Control, not mere majority of complete control, but
complete domination, not only of finances, but of policy
and business practices in respect to the transaction attacked
so that the corporate entity as to this transaction had at
the time no separate mind, will or existence of its own;
b. Such control must have been used by the defendant to
commit fraud, or wrong to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and
unjust act in contravention to plaintiffs legal rights; and
c. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.
The absence of any one of these elements prevents piercing
the corporate veil. In applying the instrumentality or alterego doctrine, the courts are concerned with reality and not
form, with how the corporation operated and the
individual defendants relationship to the operation.
(Concept Builders, Inc. vs. NLRC)
Aside from the fact that IFL is a wholly owned subsidiary, there is
no showing of the indicative factors that the it is a mere
instrumentality of PNB. Neither is there a demonstration that any
of the evils sought to be prevented by the doctrine of
piercing the corporate veil based on the alter-ego or
instrumentality doctrine finds application in the case at
bar.
The injunction suit was directed against PNB, as agent of IFL and
not as parent. A suit against an agent, cannot, without compelling
reasons be considered a suit against the principal, for he is not
the real party in interest provided under the Rules of Court.

The mere fact that a corporation owns all of the stocks of


another corporation, taken alone is not sufficient to justify
their being treated as one entity. If used to perform

29

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

YU VS. NLRC, FERNANDO DURAN, EDUARDO PALIWAN,


ROQUE ESTOCE AND RODRIGO SANTOS (245 SCRA 134) Private respondents were employees of Tanduay Distillery, Inc.
(TDI). On March 29, 1988, 22 employees of TDI, including PRs,
received a memorandum from TDI, terminating their services for
reasons of retrenchment, because First Pacific Metro Corporation
is buying TDIs assets, which purchase did not push through.
On June 1, 1988, after employees had ceased as such, Twin Ace
Holdings, Inc. took over the business and assumed the name
Tanduay Distillers (Tanduay).
Labor Arbiter, on a case originally filed in April 26, decided in
favor of PRs holding the retrenchment illegal, which was affirmed
by the NLRC. Petitioners filed an opposition against the motion for
execution (which was directed towards them and TDI) contending
that Tanduay is a separate entity distinct from TDI, and
respondents James Yu and Wilson Young, which was dismissed by
the NLRC.
ISSUE1: WON the order of execution is void?
HELD: Yes. The decision dated May 24, 1989, was already final
and executory and cannot be amended or corrected except for
clerical errors or mistakes. An examination of the said decision
does not in any manner obligate Tanduay or even petitioners Yu
and Young to reinstate PRs. Only TDI was held liable up to the
time of change of ownership. The order of execution in effect
amended the decision. It is beyond the power and competence of
Labor Arbiter Cueto to amend a final decision. The writ of
execution must not go beyond the scope of judgment.
ISSUE2: WON NLRC committed grave abuse of discretion in
holding petitioner Yu and Young liable?
HELD: It cannot be said that TDI and Tanduay are one and the
same, as seems to be the impression of respondents when they
impleaded petitioners as party-respondents in their complaint.
Such a stance is not supported by the facts. The name of the
company for whom the petitioners are working is Twin Ace
Holdings Corporation. As stated by the SolGen, Twin Ace is part
of the Allied Banking Group although it conducts the rum business
under the name of Tanduay Distillers. The use of a similar
sounding or almost identical name is an obvious device to
capitalize on the goodwill which Tanduay Rhum has built over the
years. Twin Ace or Tanduay Distillers and TDI are distinct
and separate corporations. There is nothing to suggest
that the owners of TDI, have any common relationship as
to identify it with Allied Banking Group which runs
Tanduay Distillery.
The genuine nature of the sale to Twin Ace is evidenced by the
fact that Twin Ace was only a subsequent interested buyer. PRs
have not presented any proof as to communality of
ownership and management to support their contention
that the two companies are one firm or closely related.
The complaint was filed against TDI. Only later when the
manufacture and sale of Tanduay products was taken over
by Twin Ace or Tanduay Distillers were James Yu and
Wilson Young impleaded. The corporation itself was never
made a party to the case.
The buyer (Twin Ace) did not buy TDI as a corporation, only most
of its assets, equipment and machinery. Thus, Tanduay Distillers
or Twin-Ace did not take over the corporate personality of
TDI although they manufacture the same product at the
same plant with the same equipment and machinery.
Obviously, the trade name Tanduay went with the sale because
the new firm does business as Tanduay Distillers and its main
product of rum is sold as Tanduay Rum. There is no showing,
however, that TDI itself was absorbed by Twin Ace or that
it ceased to exist as a separate corporation. In point of fact,

30

TDI is now herein a party respondent represented by its own


counsel.
The fiction of separate and distinct corporate entities cannot, in
the instant case, be disregarded and brushed aside, there being
not the lease indication that the second corporation was a
dummy or services as a client of the first corporate entity.
AMENDMENT OF THE CORPORATE CHARTER
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
xxx
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
Sec. 16. Amendment of Articles of Incorporation. - Unless
otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, without prejudice to the appraisal right of dissenting
stockholders in accordance with the provisions of this Code, or the
vote or written assent of at least two-thirds (2/3) of the members if it
be a non-stock corporation.
The original and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation. Such
articles, as amended shall be indicated by underscoring the change
or changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating
the fact that said amendment or amendments have been duly
approved by the required vote of the stockholders or members, shall
be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing with
the said Commission if not acted upon within six (6) months from the
date of filing for a cause not attributable to the corporation
The steps to be followed for an effective amendment of the
articles of incorporation would thus be:
1
Resolution by at least a majority of the board of directors or
trustees;
2
Vote OR WRITTEN ASSENT of the stockholders
representing at least 2/3 of the outstanding capital stocks or
members in case of a non-stock corporation. (Note: nonvoting shares are considered in determining the voting and
quorum requirement in case of amendments of the articles of
incorporation as provided in Sec. 6);
3
Submission and filing of the amendments with the SEC as
follows:
a
The original and amended articles together shall contain
all the provision required by law to be set out in the
articles of incorporation. Such articles, as amended, shall
be indicated by underscoring the change or changes
made;
b
A copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees
stating the fact that such amendments have been
approved by the required vote of the stockholders or
members;
c
Favorable
recommendation
of
the
appropriate
government agency concerned in the case where the
corporation is under its supervision such as banking and
insurance companies, etc.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

When to take effect? (1) Upon approval by the SEC; or (2) From
the date of filing if not acted upon within 6 months for a cause not
attributed to the corporation (does not apply to increasing or
decreasing the capital stock or shortening the corporate term,
which shall require the approval of the SEC [Sec. 38 and 120])
SPECIAL AMENDMENTS
Sec. 37.Power to extend or shorten corporate term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of
directors or trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action and of the time
and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may exercise
his appraisal right under the conditions provided in this code.
Sec. 38. Power to increase or decrease capital stock; incur,
create or increase bonded indebtedness. - No corporation shall
increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the board
of directors and, at a stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor
the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written notice of
the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of
the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring
or increasing of any bonded indebtedness is to be considered, must
be addressed to each stockholder at his place of residence as shown
on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.

the corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twentyfive (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to
the corporation property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further, That no decrease
of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board
of trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities
and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof.
SEC. 37&38 vs. SEC. 16:
1. In the former a meeting of the stockholders would be
REQUIRED, unlike in Sec. 16, where the written assent would
suffice.
2. Former requires the approval of the SEC.
NOTE: When the amendment of the corporate charter involves
shortening the life of the corporation with the effect of dissolution,
Sec. 120 would apply, requiring approval by the SEC.

A certificate in duplicate must be signed by a majority of the directors GROUNDS FOR DISAPPROVAL OF AMENDMENT
of the corporation and countersigned by the chairman and the
Sec. 17. Grounds when articles of incorporation or
secretary of the stockholders' meeting, setting forth:
amendment may be rejected or disapproved. - The Securities
and Exchange Commission may reject the articles of incorporation or
(1) That the requirements of this section have been complied with;
disapprove any amendment thereto if the same is not in compliance
(2) The amount of the increase or diminution of the capital stock;
with the requirements of this Code: Provided, That the Commission
(3) If an increase of the capital stock, the amount of capital stock or
shall give the incorporators a reasonable time within which to correct
number of shares of no-par stock thereof actually subscribed, the
or modify the objectionable portions of the articles or amendment.
names, nationalities and residences of the persons subscribing, the
The following are grounds for such rejection or disapproval:
amount of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription in cash or
1. That the articles of incorporation or any amendment thereto is not
property, or the amount of capital stock or number of shares of nosubstantially in accordance with the form prescribed herein;
par stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
2. That the purpose or purposes of the corporation are patently
(4) Any bonded indebtedness to be incurred, created or increased;
unconstitutional, illegal, immoral, or contrary to government rules
(5) The actual indebtedness of the corporation on the day of the
and regulations;
meeting;
(6) The amount of stock represented at the meeting; and
3. That the Treasurer's Affidavit concerning the amount of capital
(7) The vote authorizing the increase or diminution of the capital
stock subscribed and/or paid if false;
stock, or the incurring, creating or increasing of any bonded
indebtedness.
4. That the percentage of ownership of the capital stock to be owned
by citizens of the Philippines has not been complied with as required
Any increase or decrease in the capital stock or the incurring, creating
by existing laws or the Constitution.
or increasing of any bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, building and loan
One of the duplicate certificates shall be kept on file in the office of
associations, trust companies and other financial intermediaries,

31

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

insurance companies, public utilities, educational institutions, and


other corporations governed by special laws shall be accepted or
approved by the Commission unless accompanied by a favorable
recommendation of the appropriate government agency to the effect
that such articles or amendment is in accordance with law.
PROVISIONS NOT SUBJECT TO AMENDMENT (fait accompli):
1
Names of the incorporations and the incorporating directors
or trustees;
2
Name of the treasurer originally or first elected by the
subscribers or members to act as such;
3
Number of shares and the amount originally subscribed and
paid out of the original authorized capital stock of the
corporation; and
4
Date and place of execution of the articles of incorporation
and the signatories and acknowledgment thereof.
CHANGE IN CORPORATE NAME
Change in corporate name is included in the general power to
amend and maybe effected with compliance to Sec. 16.
Any change in the corporate identity or name does not affect the
rights and obligations of the corporation. A mere change in the
name of the corporation does not affect the identity of a
corporation nor in any manner affect the rights, privileges
and obligations previously acquired or incurred by it.
PHILIPPINE FIRST INSURANCE CO., plaintiff-appellant
vs.
MARIA CARMEN HARTIGAN, CGH and O. ENGKEE,
defendants-appellees (GR No. L-26370; 74 SCRA 252; July 31,
1970)
FACTS: Plaintiff changed its name from The Yek Tong Lin Fire and
Marine Insurance Co., Ltd (Yek Tong).
The complaint alleges that under its old name, PFIC signed as comaker together with Hartigan, a promissory note for P5,000 in
favor of China Banking Corporation (Chinabank). Plaintiff agreed
to act as such upon application of the defendant, who together
with Antonio Chua and Chang Ka Fu, signed an indemnity
agreement in favor of the plaintiff.
Defendants admitted the execution of the indemnity agreement
but argued that it was made in favor of Yek Tong and not PFIC.
They claim that there was no privity of contract between plaintiff
and defendants and consequently, the plaintiff has no cause of
action against them considering that the plaintiff does not allege
that PFIC and Yek Tong are one and the same or that the plaintiff
has acquired the rights of the latter.
CFI of Manila dismissed the complaint.
ISSUE: WON the trial court correctly dismissed the case?
HELD: No. Sec. 18 (Now Sec. 16) of the Corporation Law (Act No.
1459) explicitly permits the articles of incorporation to be
amended. The law does not only authorize corporations to amend
their charter; it also lays down the procedure for such
amendment; and, what is more relevant to the present discussion,
it contains provisos restricting the power to amend when it comes
to the term of their existence and the increase or decrease of the
capital stock. There is no prohibition therein against the change of
name. The inference is clear that such a change is allowed, for if
the legislature had intended to enjoin corporations from changing
names, it would have expressly stated so in this section or in any
other provision of the law.
No doubt, the name of the corporation is peculiarly
important as necessary to the very existence of a
corporation. The general rule as to corporation is that
each corporation shall have a name by which it is to sue
and be sued and do all legal acts. The name of the

32

corporation in this respect designates the corporation in the same


manner as the name of an individual designates the person.
Since an individual has the right to change his name under
certain conditions, there is no compelling reason why a
corporation may not enjoy the same right. The sentimental
considerations which individuals attach to their names are not
present in corporations and partnerships. Of course, as in the
case of an individual, such change may not be made
exclusively by the corporations own act. It has to follow
the procedure prescribed by law for the purpose, and this is
what is important and indispensably prescribed strict adherence
to such procedure.
RED LINE TRANSPORT VS. RURAL TRANSIT CO. what was
held as contrary to public policy is the USE by one corporation of
the name of another corporation as its trade name. We are certain
no one will disagree that such an act can only result in confusion
and open the door to frauds and evasions and difficulties of
administration and supervision. Surely, the Red Line case was
not one of change of name.
The change of name of a corporation DOES NOT result in its
dissolution. There is unanimity in authorities: An authorized
change in the name of a corporation has no more effect upon
its identity as a corporation than change of name of
natural person has upon his identity. It does not affect the
rights of the corporation or lessen or add to its
obligations. After a corporation has effected a change in
its name it should sue and be sued in its new name (13
Am. Jur. 276-277)
A mere change in the name of a corporation, either by the
legislature or by the corporators or stockholders under legislative
authority, does not, generally speaking, affect the identity
of the corporation, nor in any way affect the rights,
privileges, or obligations previously acquired or incurred
by it. Indeed, it has been said that a change of name by a
corporation has no more effect upon the identity of the
corporation than a change of name by a natural person has upon
the identity of such person. The corporation, upon such
change in its name, is in no sense a new corporation, nor
the successor of the original one, but remains and
continues to be the original corporation. It is the same
corporation with a different name, and its character is in
no respect changed. ... (6 Fletcher, Cyclopedia of the Law of
Private Corporations, 224-225, citing cases).
REPUBLIC PLANTERS BANK VS. CA (216 SCRA 738; Dec. 31,
1992) A change in the corporate name does not make a new
corporation, and whether effected by special act or under a
general law, has no effect on the identity of the corporation, or on
its property rights or liabilities. The corporation continues, as
before, responsible in its new name for all debts or other liabilities
which it had previously contracted or incurred.
AMENDMENT OF THE CORPORATION TERM
For purposes of amending the corporate term, the following
procedure is to be observed (Sec. 37):
1
Approval by a majority vote of the board of directors or
trustees;
2
Written notice of the proposed action and the time and
place of meeting shall be served to each stockholder or
member either by mail or by personal service;
3
Ratification by the stockholders or members representing at
least 2/3;
4
In case of extension of corporate term, it should be for
periods not exceeding 50 years in any single instance, and
provided that no extension can be made earlier than 5 years
prior to the original or subsequent expiry date(s) unless
there are justifiable reasons for an earlier extension as may
be determined by the SEC.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

In cases of extension of corporate term, a dissenting


stockholder may exercise appraisal rights under the
conditions prescribes by Sec. 81 and 82 of the Code.

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING


COMPANY, INC., petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent
(G.R. No. L-23606 July 29, 1968)
FACTS: ACCMC was incorporated on Jan. 15, 1912 for a period of
50 years which expired on Jan. 15, 1962.
On July 15, 1963, during the period within which it is to liquidate,
the board of directors resolved to amend its articles of
incorporation extending its corporate life for another 50 years
which was approved by the stockholders but denied by the SEC.
ISSUE: WON the extension of corporate term should be allowed?
HELD: No. The privilege of extension is purely statutory. All the
statutory conditions precedent must be complied with in
order that the extension may be effectuated. And, generally,
these conditions must be complied with, and the steps necessary
to effectuate an extension must be taken, during the life of the
corporation, and before the expiration of the term of
existence as originally fixed by its charter or the general law,
since, as a rule, the corporation is ipso facto dissolved as
soon as the time expires. So where the extension is by
amendment of the articles of incorporation, the amendment must
be adopted before that time.
The logic of this position is well-expressed in a four square case
decided by the CA of Kentucky:
But section 561 (section 2147) provides that, when any
corporation expires by the terms of its articles of incorporation,
it may be thereafter continued to act for the purpose of closing
up its business, but for no other purpose. The corporate life of
the Home Building Association expired on May 3, 1905. After
that date, by the mandate of the statute, it could continue to
act for the purpose of closing up its business, but for no other
purpose. The proposed amendment was not made until January
16, 1908, or nearly three years after the corporation expired by
the terms of the articles of incorporation. When the corporate
life of the corporation was ended, there was nothing to extend.
Here it was proposed nearly three years after the corporate life
of the association had expired to revivify the dead body, and to
make that relate back some two years and eight months. In
other words, the association for two years and eight months
had only existed for the purpose of winding up its business,
and, after this length of time, it was proposed to revivify it and
make it a live corporation for the two years and eight months
daring which it had not been such.
The law gives a certain length of time for the filing of records in
this court, and provides that the time may be extended by the
court, but under this provision it has uniformly been held that
when the time was expired, there is nothing to extend, and that
the appeal must be dismissed... So, when the articles of a
corporation have expired, it is too late to adopt an amendment
extending the life of a corporation; for, the corporation having
expired, this is in effect to create a new corporation ..."
OTHER MATTERS SUBJECT TO AMENDMENT:
1
Purpose clause by changing, altering or including other
purpose or purposes;
2
Principal Office;
3
Number of Directors;
4
Shares of stock and their classification;
5
Restrictions as well as preference;
CHAPTER 6: BOARD OF DIRECTORS/TRUSTEES AND
OFFICERS

33

A.

POWERS OF THE BOARD

Sec. 23. The board of directors or trustees. - Unless otherwise


provided in this Code, the corporate powers of all corporations formed
under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of
directors or trustees to be elected from among the holders of stocks,
or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director, which share shall stand in
his name on the books of the corporation. Any director who ceases to
be the owner of at least one (1) share of the capital stock of the
corporation of which he is a director shall thereby cease to be a
director. Trustees of non-stock corporations must be members
thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
The Board of Directors (or trustees or other designation allowed
under Sec. 138) is the supreme authority in matter of
management of the regular and ordinary business affairs of the
corporation.
However, this authority does not extend to the fundamental
changes in the corporate charter such as amendments or
substantial changes thereof, which belong to the stockholders as
a whole. The equitable principle therefore is that the
stockholders may have all the profits but shall turn over
the management of the enterprise to the Board of
Directors.
CLASSIFICATION
AGENTS/OFFICERS

OF

POWERS

OF

CORPORATE

Unless the law so provides, corporate powers may be


delegated to individual directors or other officers or
agents. Whether or not the acts of the individual director, officer
or agent would bind the corporation depend on the nature of the
agency created or the powers conferred upon such person by the
statute, the corporate charter, the by-laws, the corporate action of
the board or stockholders, or whether it is necessary or incidental
to ones office.
The general rule is that a corporation is bound by the acts
of its corporate officers who act within the scope of the 5
classification of powers of corporate agents, which are:
1
Those expressly conferred or those granted by the articles
of incorporation, corporate by-laws or by the official act of the
board of directors;
2
Those that are incidental or those acts as are naturally and
ordinarily done which are reasonable and necessary to carry
out the corporate purpose or purposes;
3
Those that are inherent or acts that go with the office;
4
Those that are apparent or those acts which although not
actually granted, the principal knowingly allows or permits it
to be done; and
5
Powers arising out of customs, usage or emergency.
J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ,
defendants-appellants
(G.R. No. 11897 September 24, 1918)
FACTS: The Board of Directors were apprised of the fact the
plaintiff JF Ramirez, who is based in Paris and represented by his
son Jose Ramirez, had control of agencies for two different marks
of films, clair Films and Milano Films.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Negotiations began between Jose Ramirez and the board of


directors of Orientalist Co. where Ramon Fernandez, one of the
members of the board and TOCs treasurer was chiefly active.
Near the end of July 1913, Jose Ramirez offered to supply from
Paris the aforesaid films to TOC through Fernandez. Accordingly,
Fernandez had an informal conference with the BOD except one,
and with approval of those whom he had communicated, accepted
the offer through letters signed by Fernandez in his capacity as
treasurer.
Upon arrival of the said films, it turned out that TOC was without
funds, so the first drafts, taken in the name of TOC were received
and paid by its president, Hernandez, through his own funds and
such films were treated by him as his own property; and in fact,
they never came into the possession of TOC and were rented by
Hernandez to TOC as they are exhibited in the Oriental Theater.
Other films arrived together with their drafts, taken in the name of
TOC through its president, which were not paid and gave rise to
the present action. TOC was declared the principal debtor and
Ramon Fernandez, the guarantor.
ISSUE: WON the corporation could be held liable for the contract?
HELD: Yes. The public is not supposed nor required to know the
transactions which happen around the table where the corporate
board of directors or the stockholders are from time to time
convoked. In dealing with corporations, the public at large
is bound to rely to a large extent upon outward
appearances. If a man is acting for a corporation with the
external indicia of authority, any person not having notice of want
of authority may usually rely upon those appearances; and if it be
found that the directors had permitted the agent to exercise that
authority and thereby held him out as a person competent to bind
the corporation, or had acquiesced in a contract and retained the
benefit supposed to have been conferred by it, the corporation will
be bound, notwithstanding the actual authority may ever have
been granted.
The failure of the defendant corporation to make an issue in its
answer with regard to the authority of Ramon Fernandez to bind
it, and particularly to deny specifically under oath the
genuineness and due execution of the contracts sued upon have
the effect of eliminating the question of his authority from the
case.
It is declared under Sec. 28 (now 23) that corporate powers
shall be exercised, and all corporate business conducted
by the board of directors, and this principle is recognized
in the by-laws of the corporation in question which contain
a provision declaring that the power to make contracts
shall be vested in the board of directors.
It is true that it is also true in the by-laws, that the president shall
have the power and it shall be his duty, to sigh contract; but this
has reference rather to the formality of reducing to proper
form the contract which are authorized by the board and is not
intended to confer an independent power to make contract
binding on the corporation.
The fact that the power to make corporate contracts is thus
vested in the board of directors does not signify that a formal vote
of the board must always be taken before contractual liability can
be fixed upon a corporation; for a board can create liability,
like an individual, by other means than by a formal
expression of its will.
Participation of the stockholders. The letter accepting the offer
was dispatched in a meeting of the board called by Ramon
Fernandez, where 4 members, including the president were
present. The minutes add that terms of this offer were approved;
but at the suggestion of Fernandez it was decided to call a special
meeting of the stockholders to consider the matter and definite
action was postponed. From the meeting of the stockholders, it

34

can be inferred that this body was then cognizant that the offer
had already been accepted. It is not, however, necessary to find
the judgment of the stockholder proceedings, even if the
assumption is that they did not approve of the contract.
Both upon the principle and authority it is clear that the action
of the stockholders, whatever its character, must be
ignored. The theory of a corporation is that the stockholders
may have all the profits but shall turn over the complete
management of the enterprise to their representatives
and agents, called directors. Accordingly, there is little for the
stockholders to do beyond electing directors, making by-laws, and
exercising certain other special powers defined by law. In
conformity with this idea, it is settled that contract between a
corporation and third person must be made by the director
and not by the stockholders. The corporation, in such matters,
is represented by the former and not by the latter. It results that
where a meeting of the stockholders is called for the purpose of
passing on the propriety of making a corporate contract, its
resolutions are at most advisory and not in any wise binding on
the board.
BARRETO VS. LA PREVISORY FILIPINA (57 Phil. 649; Dec. 8,
1932) Petitioners, directors of respondent up to March 1929,
sought to recover 1% (to each plaintiff) of the profits of the
company for the year 1929, under and in accordance with an
amendment to the by-laws which was made at the general
meeting of the stockholders on Feb. 1929, to which the lower
court rendered in their favor.
ISSUE: WON the amendment has a binding effect as to grant
plaintiffs claim?
HELD: No. Sec. 20 of the Corporation Law limits the authority of a
corporation to adopt by-laws which are not consistent with the
provisions of the law. The appellees contend that the articled in
question is merely a provision of the compensation of directors
which is not only consistent with but expressly authorized by Sec.
21 of the Corporation Law.
We cannot agree with this contention. The authority conferred
upon corporations in that section refers only to providing
compensation for the future services of directors, officers, and
employees thereof after the adoption of the by-law or other
provisions in relation thereto, and cannot in any sense be held to
authorize the giving, as in this case, of continuous compensation
to particular directors after their employment has terminated for
part services rendered gratuitously by them to the corporation. To
permit the transaction involved in this case would be to create an
obligation unknown to law, and to countenance a misapplication
of the funds of the defendant building and loan association to the
prejudice of the substantial rights of its shareholders.
Irrespective of the above, the conclusion is the same. The article
which the appellees rely upon is merely a by-law provision
adopted by the stockholders of the defendant corporation, without
any action having been taken in relation thereto by its board of
directors. The law is settled that contracts between a
corporation and third person must be made by or under
the authority of its board of directors and not by its
stockholders. Hence, the action of the stockholders in such
matters is only advisory and not in any wise binding on the
corporation. There could not be a contract without mutual
consent, and it appears that the plaintiffs did not consent
to the provisions of the by-law in question, but, on the
contrary, they objected to and voted against it in the
stockholders meeting in which it was adopted.
QUALIFICATIONS AND DISQUALIFICATIONS (see discussion
under DIRECTORS/TRUSTEES in chapter 4)
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING
CORP., PABLO GONZALES, JR. and THOMAS GONZALES,

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

respondents.
(GR No. 93695; 205 SCRA 752; Feb. 4, 1992)
FACTS: A complaint for a sum of money was filed by International
Corporate Bank, Inc. against the private respondents who, in turn,
filed a third-party complaint against Alfa Integrated Textile Mills,
Inc.
The trial court ordered the issuance of alias summons upon Alfa
through DBP, who is said to be the transferee of Alfas
management by virtue of a voting trust agreement.
DBP declined to receive the summons saying it is not authorized,
Alfa having a personality separate and distinct. The trial court in
turn ordered private respondents to take the appropriate steps to
serve the summons to Alfa which they made through the officers
and later on, was later on declared to be proper service of
summons.
After the second motion for reconsideration, the trial court
reversed itself, saying that the service of summons upon the
petitioners were not proper, them not being officers of the
corporation anymore. On appeal, the CA reversed the trial court.
ISSUE: WON the petitioners can still be authorized to receive the
summons despite the voting trust agreement with DBP?
HELD: No. Sec. 59 of the Code expressly recognizes VTAs and
gives a more definitive meaning. By its very nature, a VTA results
in the separation of the voting right of a stockholder from his
other rights such as the right to receive dividends, the right to
inspect the books of the corporation, the right to sell certain
interests in the assets of the corporation and other rights to which
a stockholder may be entitled until the liquidation of the
corporation. However, in order to distinguish a VTA from proxies
and other voting pool and agreements, it must pass three criteria
or tests, namely: (1) the voting rights of the stock are separated
from other attributes or ownership; (2) that the voting right
granted are intended to be irrevocable for a definite period of
time; and (3) that the principal purpose of the grant of voting
rights is to acquire voting control of the corporation.
The execution of VTA, therefore, may create a dichotomy
between the equitable and beneficial ownership of the
corporate shares of stockholder, on the one hand and the
legal title thereto, on the other hand.
By virtue of the VTA, the petitioners are no longer directors. Under
the old and new Corporation Code, the most immediate effect of a
VTA on the status of a stockholder who is a party to its execution
is that he becomes only an equitable or beneficial owner, from
being the legal titleholder or owner of the shares subject of the
VTA.
Under the old code, the eligibility of a director, strictly speaking,
cannot be adversely affected by a VTA inasmuch as he remains
the owner (although beneficial or equitable only) of the shares
subject of the VTA pursuant to which a transfer of the
stockholders shares in favor of the trustee is required. No
disqualification arises by virtue of the phrase in his own right
provided under the Old Code, which has been omitted.
Hence, this omission requires that in order to be eligible as
director, what is material is the legal title to, not beneficial
ownership, of the stock as appearing on the books of the
corporation.
The petitioners ceased to be the owners of at least one share
standing in their names on the books of Alfa as required under
Sec. 23 of the new Code. They also ceased to have anything to do
with the management of the enterprise. The petitioners ceased to
be directors.
Considering the VTA, DBP as trustee, became the stockholder of
record with respect to the said shares of stocks.

35

DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26


SCRA 256; Nov. 29, 1968) A complaint was filed by herein
petitioner-plaintiff Detective and Protective Bureau against
defendant-respondent Fausto Alberto, alleging that defendant
illegally seized and took control of all the assets as well as the
books, records, vouchers and receipt of the corporation from the
accountant-cashier, concealed them illegally and refused to allow
any member of the corporation to see and examine the same.
That on a meeting, the stockholders removed defendant as
managing director and elected Jose dela Rosa.
Alberto, on the other hand, stated that Jose dela Rosa could not be
elected managing director because he did not own any stock in
the corporation.
ISSUE: WON dela Rosa may be elected managing director?
HELD: No. There is no record showing that Jose dela Rosa owned
a share of stock in the corporation. If he did not own any share of
stock, certainly he could not be a director pursuant to Sec. 30 of
the Corporation Law and consequently he cannot be a managing
director by virtue of the by-laws of the corporation that the
manager shall be elected by the BOD among its members.
Accordingly, Faustino Alberto could not be compelled to vacate his
office and cede the same to dela Rosa because the by-laws
provide that the Directors shall serve until the election and
qualification of their duly qualified successor.
ELECTION AND VOTING
Sec. 24. Election of directors or trustees. - At all elections of
directors or trustees, there must be present, either in person or by
representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital
stock, a majority of the members entitled to vote. The election must
be by ballot if requested by any voting stockholder or member. In
stock corporations, every stockholder entitled to vote shall have the
right to vote in person or by proxy the number of shares of stock
standing, at the time fixed in the by-laws, in his own name on the
stock books of the corporation, or where the by-laws are silent, at the
time of the election; and said stockholder may vote such number of
shares for as many persons as there are directors to be elected or he
may cumulate said shares and give one candidate as many votes as
the number of directors to be elected multiplied by the number of his
shares shall equal, or he may distribute them on the same principle
among as many candidates as he shall see fit: Provided, That the
total number of votes cast by him shall not exceed the number of
shares owned by him as shown in the books of the corporation
multiplied by the whole number of directors to be elected: Provided,
however, That no delinquent stock shall be voted. Unless otherwise
provided in the articles of incorporation or in the by-laws, members of
corporations which have no capital stock may cast as many votes as
there are trustees to be elected but may not cast more than one vote
for one candidate. Candidates receiving the highest number of votes
shall be declared elected. Any meeting of the stockholders or
members called for an election may adjourn from day to day or from
time to time but not sine die or indefinitely if, for any reason, no
election is held, or if there not present or represented by proxy, at the
meeting, the owners of a majority of the outstanding capital stock, or
if there be no capital stock, a majority of the member entitled to vote.
NOTE:
1
Majority of the outstanding capital stock, whether in person
or by written proxy must be present at the election of the
directors; or majority of members entitled to vote, in the case
of a non-stock corporation. If the required quorum is not
obtaining, the meeting may be adjourned;
2
On the request of any voting stockholder or member, the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

election may be held by ballot otherwise viva-voce would


suffice.
The candidates receiving the highest number of votes shall
be elected.

CUMULATIVE VOTING:
1
Cumulative voting gives the stockholder entitled to vote the
right to give a candidate as many votes as the number of
directors to be elected multiplied by the number of his shares
shall equal or he may distribute them among the candidates
as he may see fit.
2
This is granted by law to each stockholder with voting rights.
However, in non-stock corporations, cumulative voting is
generally not allowed, UNLESS allowed by the AOI or by-laws.
3
Under this method, if there are 10 directors to be elected, a
holder of 1,000 shares will have 10,000 votes which he may
cast in favor of one candidate or may apportion to any
number of candidate he may wish;
4
PURPOSE: to allow the minority to have a rightful
representation in the board of directors.
Sec. 25. Corporate officers, quorum. - Immediately after their
election, the directors of a corporation must formally organize by the
election of a president, who shall be a director, a treasurer who may
or may not be a director, a secretary who shall be a resident and
citizen of the Philippines, and such other officers as may be provided
for in the by-laws. Any two (2) or more positions may be held
concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same
time.
NOTE:
1
Except in a close corporation where the corporate officers
may be elected directly by the stockholders, the Code
requires the BOD to elect the said officers;
2
The officers that may be elected are the:
a
President who must be a director;
b
Treasurer who may or may not be a director;
c
Secretary who should be a resident and citizen of the
Philippines;
d
Such other officers as may be provided for in the by-laws.
3
Any two or more positions may be held concurrently by the
same person, except:
a
The president and the secretary;
b
The president and the treasurer.
B.

VALIDITY AND BINDING


CORPORATE OFFICERS

EFFECT

OF

ACTIONS

OF

Every action of the board without a meeting and without the


required voting and quorum requirement will not bind the
corporation unless subsequently ratified, expressly or impliedly.
Individual directors, however, can rightfully be considered as
agents of the corporation. And although they cannot bind the
corporation by their individual acts, this is subject to certain
EXCEPTIONS: (1) by delegation of authority; (2) when expressly
conferred; or (3) where the officer or agent is clothed with actual
or apparent authority.
YAO KA SIN TRADING VS. CA (209 SCRA 763; June 15, 1992)
Constacio B. Malagna, President and Chairman of the Board of
private respondent Prime White Cement Corporation (PWCC), sent
a letter-offer (Exhibit A) to Mr. Yao for the delivery of cement,
which was accepted by the latter by delivering a check for
P243,000.
ISSUE: WON
corporation?

the

letter-offer

sent

by

Malagna

binds

the

HELD: No. A corporation can act only through its officers and
agents, all acts within the powers of said corporation may be
performed by agents of his selection and except in so far as
limitations or restrictions may be imposed by special charter, bylaw or statutory provisions, the same general provision of law
which govern the relation of agency for natural person govern the
officer or agent of a corporation, of whatever status or rank, in
respect to his power to act for the corporation; and the agents
once appointed, or members acting in their stead, are subject to
the same rules, liabilities and incapacities as are agents of
individuals and private persons.
Moreover, a corporate officer or agent may represent and bind the
corporation in transactions with third person to the extent that
authority has been conferred upon him, and this includes powers
which have been (1) intentionally conferred, and (2) also such
powers as, in the usual course of business, are incidental
thereto, or may be implied therefrom, (3) powers added by
custom and usage, as usually pertaining to the particular officer
or agent, and (4) such apparent powers as the corporation has
caused persons dealing with the officer or agent to believe that it
has conferred.
While Mr. Maglana was an officer, the by-laws do not in any way
confer upon the president the authority to enter into contracts for
the corporation independently of the BOD. That power is expressly
lodged in the latter.

Nevertheless, to expedite or facilitate the execution of the


contract, only the President shall sign the contact for the
corporation. No greater power can be implied from such express,
xxx
but limited delegated authority. Neither can it be logically claimed
The directors or trustees and officers to be elected shall perform the that any power greater than that expressly conferred is inherent
duties enjoined on them by law and the by-laws of the corporation. in Mr. Maglanas position as president and chairman of the
Unless the articles of incorporation or the by-laws provide for a corporation.
greater majority, a majority of the number of directors or trustees as
fixed in the articles of incorporation shall constitute a quorum for the Although there is authority "that if the president is given general
control and supervision over the affairs of the corporation, it will
transaction of corporate business, and every decision of at least a
be presumed that he has authority to make contract and do acts
majority of the directors or trustees present at a meeting at which within the course of its ordinary business," We find such
there is a quorum shall be valid as a corporate act, except for the inapplicable in this case. We note that the private corporation
election of officers which shall require the vote of a majority of all the has a general manager who, under its By-Laws has, inter alia,
the following powers: "(a) to have the active and direct
members of the board.
management of the business and operation of the corporation,
conducting the same accordingly to the order, directives or
QUORUM: requirement for a valid board meeting is the majority
resolutions of the Board of Directors or of the president." It goes
of the number of the board fixed in the AOI, and a decision of at
without saying then that Mr. Maglana did not have a direct and
least a majority of the directors/trustees present in a meeting at
active and in the management of the business and operations of
which there is a quorum shall be a valid corporate act, except:
the corporation.
1
Election of officers, which shall require the majority of all the
members of the board; and
Petitioner's last refuge then is his alternative proposition, namely,
2
Unless the AOI or the by-laws provide for a greater
that private respondent had clothed Mr. Maglana with the
quorum/voting requirement.
apparent power to act for it and had caused persons dealing with
Sec. 25. Corporate officers, quorum

36

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

it to believe that he was conferred with such power. The rule is of


course settled that "[a]lthough an officer or agent acts
without, or in excess of, his actual authority if he acts
within the scope of an apparent authority with which the
corporation has clothed him by holding him out or
permitting him to appear as having such authority, the
corporation is bound thereby in favor of a person who
deals with him in good faith in reliance on such apparent
authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a
particular branch of it, continuously and publicly, for a
considerable time." Also, "if a private corporation
intentionally or negligently clothes its officers or agents
with apparent power to perform acts for it, the corporation
will be estopped to deny that such apparent authority in
real, as to innocent third persons dealing in good faith
with such officers or agents." This "apparent authority may
result from (1) the general manner, by which the corporation
holds out an officer or agent as having power to act or, in other
words, the apparent authority with which it clothes him to act in
general or (2) acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or
without the scope of his ordinary powers.
It was incumbent upon the petitioner to prove that indeed the
private respondent had clothed Mr. Maglana with the apparent
power to execute Exhibit "A" or any similar contract. This could
have been easily done by evidence of similar acts
executed either in its favor or in favor of other parties.
Petitioner miserably failed to do that. Upon the other hand,
private respondent's evidence overwhelmingly shows that no
contract can be signed by the president without first being
approved by the Board of Directors; such approval may only be
given after the contract passes through, at least, the comptroller,
who is the NIDC representative, and the legal counsel.
LOPEZ REALTY, INC. VS. FOTENCHA (147 SCRA 183; Aug. 11,
1995) Petitioner corporation approved two resolutions providing
for the gratuity pay of its employees. Except for Asuncion LopezGonzales, who was then abroad, the remaining member of the
board convened a special meeting and passed a resolution
adopting the above-mentioned resolutions. Private respondents
requested for the full payment of the gratuity pay which was
granted.
At that time, however, petitioner Asuncion was still abroad, and
allegedly sent a cablegram objecting to certain matters taken up
by the board in her absence.
Notwithstanding a corporate squabble between Asuncion and
Arturo Lopez, the first two installments of the gratuity pay of
private respondents were paid. Also, petitioner corporation had
prepared the cash vouchers and checks for the third installment.
For some reason, said voucher was cancelled by petitioner
Asuncion.
A complaint was filed before the labor arbiter who decided in
favor of private respondents.
ISSUE: WON the gratuity pay should be paid?
HELD: Yes. The general rules is that a corporation, through its
board of directors, should act in the manner and within
the formalities, if any, prescribed by its charter or by the
general law. Thus, the directors must act as a body in a meeting
called pursuant to the law or the corporations by-laws, otherwise,
any action taken therein may be questioned by any objecting
director or shareholder.
Be that as it may, jurisprudence tells us that an action of the
board of directors during a meeting, which was illegal for
lack of notice, may be ratified either (1) expressly, by the
action of the directors in subsequent legal meeting, or (2)
impliedly, by the corporations subsequent conduct.

37

Ratification by directors may be by an express resolution or vote


to that effect, or it may be implied from adoption of the act,
acceptance or acquiescence. Moreover, the unauthorized acts of
an officer of a corporation may be ratified by the corporation by
conduct implying approval and adoption of the act in question.
Such ratification may be expressed or may be inferred from
silence and inaction.
In the case at bench, it was established that petitioner corporation
did not issue any resolution revoking nor nullifying the board
resolution granting gratuity pay to private respondents. Instead,
they paid the gratuity pay, particularly, the first two installments
thereof.
Despite lack of notice to Asuncion, we can glean from the records
that she was aware of the corporations obligations under the said
resolution. More importantly she acquiesced thereto by affixing
her signature on two cash vouchers. The conduct of petitioners
had estopped them from assailing the validity of the said board
resolutions.
PUA CASIM & CO. VS. NEUMARK AND CO. (46 Phil. 242; Oct.
2, 1924) W. Neumark, president of defendant corporation
borrowed P15000 from plaintiff which was delivered by means of a
check in favor of defendant and deposited in BPI and the amount
of it credited to the corporations current account.
ISSUE: WON the corporation is responsible for the money
borrowed by its president?
HELD: Yes. W. Neumark is the principal stockholder, president and
general business manager of the defendant corporation. On
behalf of the corporation, he solicited a loan and was given a
check, which was endorsed by him in his capacity as president
and deposited to the corporations account. It may be true that a
large part of the amount so deposited was diverted by Neumark
to his own use, but that does not alter that the money was
borrowed for the corporation and was placed in its possession.
It is conceded that Neumark was not expressly authorized by the
board of directors to borrow the money in question and the
general rule is that a business manager or other officer of a
corporation, has no implied power to borrow money on its behalf.
But much depends upon the circumstances of each particular case
and the rule state is subject to important exceptions. Thus, where
a general business manager of a corporation is clothed
with apparent authority to borrow money and the amount
borrowed does not exceed the ordinary requirements of
the business, it has often been held that the authority is
implied and that the corporation is bound.
YU CHUCK VS. KONG LI PO (46 Phil. 608; Dec. 3, 1924) CC
Chen or TC Chen, General Manager of defendant corporation Kong
Li Po, entered into an agreement with the plaintiffs by which the
latter bound themselves to do the necessary printing for the
newspaper. Later on, the new general manager, Tan Tian Hong,
discharged plaintiffs with no special reasons. Aggrieved, plaintiffs
sought to recover full payment of the remaining term of the
contract, which was originally for 3 years, as stated therein.
ISSUE: WON Chen had the power to bind the corporation under a
contract of that character?
HELD: No. The general rule is that the power to bind a
corporation by contract lies with its board of directors or trustees,
but this power may either be expressly or impliedly be delegated
to other officers or agents of the corporation, and it is well settled
that except where the authority of employing servants and
agents is expressly vested in the BOD/T, an officer or agent
who has general control and management of the
corporations business, or a specific part thereof, may bind
the corporation as are usual and necessary in the conduct
of such business. But the contracts of employment must
be reasonable.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Chen, as general manager of Kong Li Po, had implied authority to


bind the defendant corporation by a reasonable and usual
contract of employment with the plaintiffs, but we do not think
that contract here in question can be so considered. Not only is
the term of employment usually long, but the conditions are
otherwise so onerous to the defendant that the possibility of the
corporation being thrown into insolvency thereby is expressly
contemplated in the same contract. This fact, in itself was, in our
opinion, sufficient to put the plaintiffs upon inquiry as to the
extent of the business managers authority; they had not the right
to presume that he or any other single officer or employee of that
corporation had implied authority to enter into a contract of
employment which might bring about its ruin.
TRINIDAD J. FRANCISCO VS. GSIS (7 SCRA 557; March 30,
1963) Trinidad Francisco, in consideration of loan extended by
GSIS, mortgaged her property in QC. For being in arrears in her
installments, GSIS extrajudicially foreclosed the mortgage.
Plaintiffs father, Atty. Vicente Francisco sent a letter to Rodolfo
Andal, general manager of GSIS, offering to redeem the property
which was replied to by Andal through a telegram saying GSIS
BOARD APPROVED YOUR REQUEST RE REDEMTPION OF
FORECLOSED PROPERTY OF YOUR DAUGHTER
Later, inasmuch as, according to the defendant GSIS, the
remittances made by Atty. Francisco were allegedly not sufficient
to pay off her daughters arrears, the one year redemption period
has expired, said defendant consolidated title to the property in its
name.
ISSUE: WON the telegram
corporation?

sent by the Andal binds

the

HELD: Yes. The terms of the offer were clear and over the
signature of Andnal, plaintiff was informed that the proposal has
been accepted. There was nothing in the telegram that hinted at
any anomaly, or gave grounds to suspect its veracity, and the
plaintiff, therefore, cannot be blamed for relying upon it. There is
no denying that the telegram was within Andals apparent
authority, but eh defense is that he did not sign it, but that it was
sent by the board secretary in his name and without his
knowledge. Assuming this to be true, how was appellee to know
it? Corporate transactions would speedily come to a
standstill were every person dealing with a corporation
were held duty-bound to disbelieve every act of its
responsible officers, no matter how regular they should
appear on their face.
Indeed, it is well-settled that If a private corporation
intentionally or negligently clothes its officers or agents
with apparent power to perform acts for it, the corporation
will be estopped to deny that such apparent authority is
real, as to innocent third persons dealing in good faith
with such officers or agents.
Hence, even if it were the board secretary who sent the telegram,
the corporation could not evade the binding effect produced by
the telegram.
The error in the wording cannot be taken seriously. All the while
GSIS pocketed the various remittances, and kept silent as to the
true facts as it now alleges. This silence, taken together with the
unconditional acceptance of three other subsequent remittances
from plaintiff constitutes in itself a binding ratification of the
original agreement.
THE BOARD OF LIQUIDATORS VS. KALAW (20 SCRA 987; Aug.
10, 1965) National Coconut Corporation (NACOCO) embarked on
copra trading activities led by its General Manager Maximo Kalaw
and the other defendants as members of the board. Due to
natural calamities, the business of copra became unprofitable.
Kalaw made a full disclosure of the situation and apprised the
board of the impending losses on the contracts already entered
into, but no action was taken. But later on, the contracts were

38

unanimously approved by the Board.


The buyers threated damage suits, but some were settled. Louis
Dreyfus & Co. Ltd. Actually sued but was also culminated in an
out-of-court settlement.
NACOCO now seeks to recover the sum paid to Louis from general
manager and board chairman Kalaw and the other members who
approved the contracts. It charges Kalaw with negligence and bad
faith and/or breach of trust for having approved the contracts,
which was dismissed by the trial court.
ISSUE: WON
corporation?

the

contracts

executed

by

Kalaw

bind

the

HELD: Yes. A rule that has gained acceptance through the years
is that a corporate officer entrusted with the general
management and control of its business, has implied
authority to make any contract or do any other act which
is necessary or appropriate to the conduct of the ordinary
business of the corporation. As such officer, he may,
without any special authority from the BOD perform all
acts of an ordinary nature, which by usage or necessity
are incident to his office, and may bind the corporation by
contracts in matters arising in the usual course of
business.
Long before the disputed contracts came into being, Kalaw
contracted by himself alone as general manager for forward
sales of copra (which is a necessity in the business) which were
profitable. So pleased was NACOCO;s BOD that it voted to grant
Kalaw special bonus in recognition of the signal achievement
rendered by him.
These previous contacts, it should be stressed, were signed by
Kalaw without prior authority from the board. Said contracts were
known all along to the board members. Nothing was said by them.
The aforesaid contracts stand to prove one thing. Obviously,
NACOCOs board met difficulties attendant to forward sales by
leaving the adoption of means to end, to the sound discretion of
NACOCOs general manager Maximo Kalaw.
Where similar acts have been approved by the directors as
a matter of general practice, custom, and policy, the
general manager may bind the company without formal
authorization of the BOD. In varying language, existence of
such authority is established, by proof of the course of business,
the usages and practices of the company and by the knowledge
which the BOD has, or must be presumed to have, of acts and
doings of its subordinates in and about the affairs of the
corporation.
In the case at bar, the practice of the corporation has been to
allow its general manager to negotiate and execute contracts in
its copra trading activities for and in NACOCOs behalf without
prior board approval. If the by-laws were to be literally followed,
the board should give its stamp of prior approval on all corporate
contracts. But the Board itself, by its acts and through
acquiescence, practically laid aside the by-law requirement of
prior approval.
BUENASEDA VS. BOWEN & CO., INC. (110 Phil. 464; Dec. 29,
1969) As a consequence of P200,000 worth of ECA allocated to
the Bowen & Co., Inc., it required a letter of credit in the amount
of P100,000 with the PNB. As the corporation did not have at the
time the necessary funds to put up the required cash marginal
deposit of P60,000, its president Geoffrey Bowen, obligating the
corporation and himself in his personal capacity, offered to pay
Francisco Buenaseda 37 % of the profits to be realized from the
sale of the ECA procurement materials, should he be able to
obtain and produce the amount necessary to cover the cash
marginal deposit which Buenaseda was able to do.
The corporation refused to pay, Buenaseda filed an action in the
CFI to recover the same.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

ISSUE: WON the agreement was binding?


HELD: Yes. It is not here pretended that the BOD of the defendant
corporation had no knowledge of the agreement between Bowen
and plaintiff. Indeed, at the time the said Agreement was made,
the BOD of the corporation was composed of Bowen himself, his
wife, Buenaseda and two others, with Bowen and his wife
controlling the majority of the stocks of the corporation. The Board
did not repudiate the agreement but on the contrary, acquiesced
in and took advantage of the benefits afforded by said agreement.
Such acts are equivalent to an implied ratification of the
agreement by the BOD and bound the corporation even without
formal resolution passed and recorded.
It is agreed by the respondents, defendants below, that the profits
of the corporation form part of its assets and payment of a certain
percentage of the profits requires a declaration of dividends
and/or resolution of the BOD. The agreement is untenable.
Although the plaintiff is a stockholder of the corporation he does
not, however, claim a share of the profits as such stockholder, but
under the agreement between him and the president of the
corporation which has been impliedly ratified by the BOD.
IN SUMMARY: An unauthorized act, or the act of a single director,
officer or agent of a corporation may be ratified either expressly
or impliedly.
1. Express ratification is made through a formal board action;
2. Implied ratification can either be (a) silence or acquiescence;
(b) acceptance and/or retention of benefits, or (c) by
recognition or adoption.
C.

REMOVAL AND FILLING UP OF VACANCIES

Sec. 28. Removal of directors or trustees. - Any director or


trustee of a corporation may be removed from office by a vote of the
stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock
corporation, by a vote of at least two-thirds (2/3) of the members
entitled to vote: Provided, That such removal shall take place either
at a regular meeting of the corporation or at a special meeting called
for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to
propose such removal at the meeting. A special meeting of the
stockholders or members of a corporation for the purpose of removal
of directors or trustees, or any of them, must be called by the
secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the
outstanding capital stock, or, if it be a non-stock corporation, on the
written demand of a majority of the members entitled to vote. Should
the secretary fail or refuse to call the special meeting upon such
demand or fail or refuse to give the notice, or if there is no secretary,
the call for the meeting may be addressed directly to the
stockholders or members by any stockholder or member of the
corporation signing the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code.
Removal may be with or without cause: Provided, That removal
without cause may not be used to deprive minority stockholders or
members of the right of representation to which they may be entitled
under Section 24 of this Code.
NOTE:
1. By-laws may provide for causes or grounds for removal of a
director;
2. A director representing the minority may not be removed
except for those causes;
3. A director NOT representing the minority may be removed

even without a cause.

1.
2.

3.

The removal should take place at a general or special


meeting duly call for that purpose;
The removal must be by the vote of the stockholders holding
or representing 2/3 of the outstanding capital stock or the
members entitled to vote in cases of non-stock corporations;
and
There must be a previous notice to the stockholders or
members of the intention to propose such removal at the
meeting either by publication or on written notice to the
stockholders or members.

JURISDICTION OF THE COURT: The law, as it stands now, grants


the proper court, the power and authority to hear and decide
cases involving controversies in the election or appointment of
directors, trustees, officers, or managers of such corporation,
partnership or association.
DEADLOCK: In the case of deadlock in a close corporation, the
SEC is also authorized to issue an Order as it deems appropriate
canceling, altering or enjoining any resolution or other act of the
corporation or its board of directors or directing or prohibiting
any act the corporation or the other board of directors thereby
effectively taking away the rights of the directors to act as
manager of the corporation.
VACANCY:
1. If a vacancy occurs by virtue of REMOVAL, Sec. 28
authorizes the filling of the vacancy by the election of a
replacement at the same meeting;
2. If it occurs NOT by removal, Sec. 29 applies.
Sec. 29. Vacancies in the office of director or trustee. - Any
vacancy occurring in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special
meeting called for that purpose. A director or trustee so elected to fill
a vacancy shall be elected only or the unexpired term of his
predecessor in office.
A directorship or trusteeship to be filled by reason of an increase in
the number of directors or trustees shall be filled only by an election
at a regular or at a special meeting of stockholders or members duly
called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the
meeting.
If the VACANCY is resulting from other than (1) by expiration of
term; or (2) by removal, the BOARD OF DIRECTORS, if still
constituting a quorum, may fill the vacancy.
VALLE VERDE COUNTRY CLUB, INC., ERNESTO VILLALUNA, RAY
GAMBOA, AMADO M. SANTIAGO, JR., FORTUNATO DEE, AUGUSTO
SUNICO, VICTOR SALTA, FRANCISCO ORTIGAS III, ERIC ROXAS, in
their capacities as members of the Board of Directors of Valle
Verde Country Club, Inc., and JOSE RAMIREZ, Petitioners
Vs.
Victor Africa, Respondent
(GR No. 151969; Sept. 4, 2009)
FACTS: February 27, 1996: Ernesto Villaluna, Jaime C.
Dinglasan (Dinglasan), Eduardo Makalintal (Makalintal), Francisco
Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato Dee,
Augusto Sunico, and Ray Gamboa were elected as BOD during
the Annual Stockholders Meeting of petitioner Valle Verde
Country
Club,
Inc.
(VVCC).
From
1997-2001,
the
requisite quorum could not be obtained so they continued to act
as directors in a hold-over capacity.

REQUIREMENTS FOR A VALID REMOVAL:

39

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

On September 1, 1998, Dinglasan resigned, BOD still


constituting a quorum elected Eric Roxas (Roxas) followed by
Macalintal.

On March 6, 2001, Jose Ramirez (Ramirez) was


elected by the remaining BOD. Respondent Africa (Africa), a
member of VVCC, questioned the election of Roxas and Ramirez
as members of the VVCC Board with the Securities and Exchange
Commission (SEC) and the Regional Trial Court (RTC) as contrary
to Sec. 23 and 29 of the Corporation Code.
The RTC decided in favor of Africa.
ISSUE: WON the appointment of Roxas and Ramirez made by the
remaining members of the Board, still constituting a quorum, were
valid?
HELD: No. The resolution of this legal issue is significantly hinged
on the determination of what constitutes a directors term of
office.
The holdover period is not part of the term of office of a
member of the board of directors. The word term has
acquired a definite meaning in jurisprudence. In several cases, we
have defined term as the time during which the officer
may claim to hold the office as of right, and fixes the interval
after which the several incumbents shall succeed one another.
The term of office is not affected by the holdover. The term
is fixed by statute and it does not change simply because the
office may have become vacant, nor because the incumbent holds
over in office beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officers tenure
represents the term during which the incumbent actually
holds office. The tenure may be shorter (or, in case of holdover,
longer) than the term for reasons within or beyond the power of
the incumbent.
Based on the above discussion, when Section 23 of the
Corporation Code declares that the board of directorsshall hold
office for one (1) year until their successors are elected and
qualified, we construe the provision to mean that the term of
the members of the board of directors shall be only for
one year; their term expires one year after election to the office.
The holdover period that time from the lapse of one year from a
members election to the Board and until his successors election
and qualification is not part of the directors original term of
office, nor is it a new term; the holdover period, however,
constitutes part of his tenure. Corollary, when an incumbent
member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has
expired, and the incumbent is holding the succeeding term.
After the lapse of one year from his election as member of the
VVCC Board in 1996, Makalintals term of office is deemed to have
already expired. That he continued to serve in the VVCC Board in
a holdover capacity cannot be considered as extending his term.
This holdover period is not to be considered as part of his term,
which, as declared, had already expired.
With the expiration of Makalintals term of office, a vacancy
resulted which, by the terms of Section 29 of the Corporation
Code, must be filled by the stockholders of VVCC in a regular or
special meeting called for the purpose. To assume as VVCC does
that the vacancy is caused by Makalintals resignation in 1998,
not by the expiration of his term in 1997, is both illogical and
unreasonable. His resignation as a holdover director did not
change the nature of the vacancy; the vacancy due to the
expiration of Makalintals term had been created long before his
resignation.
The powers of the corporations board of directors
emanate from its stockholders

40

This theory of delegated power of the board of directors similarly


explains why, under Section 29 of the Corporation Code, in cases
where the vacancy in the corporations board of directors is
caused not by the expiration of a members term, the successor
so elected to fill in a vacancy shall be elected only for the
unexpired term of the his predecessor in office. The law has
authorized the remaining members of the board to fill in a
vacancy only in specified instances, so as not to retard or impair
the corporations operations; yet, in recognition of the
stockholders right to elect the members of the board, it limited
the period during which the successor shall serve only to the
unexpired term of his predecessor in office.
It also bears noting that the vacancy referred to in Section 29
contemplates a vacancy occurring within the directors term
of office. When a vacancy is created by the expiration of a term,
logically, there is no more unexpired term to speak of. Hence,
Section 29 declares that it shall be the corporations stockholders
who shall possess the authority to fill in a vacancy caused by the
expiration of a members term.
CHANGE IN CONSTITUTION OF THE BOARD: must be reported
by the BOD to the SEC:
Sec. 26. Report of election of directors, trustees and officers.
- Within thirty (30) days after the election of the directors, trustees
and officers of the corporation, the secretary, or any other officer of
the corporation, shall submit to the Securities and Exchange
Commission, the names, nationalities and residences of the directors,
trustees, and officers elected. Should a director, trustee or officer die,
resign or in any manner cease to hold office, his heirs in case of his
death, the secretary, or any other officer of the corporation, or the
director, trustee or officer himself, shall immediately report such fact
to the Securities and Exchange Commission
PURPOSE: to give public information, under sanction of oath
responsible officers, of the nature of the business, financial
condition and operational status of the company together with
information on its key officers or managers so that hose dealing
with it and those who intend to do business with it may know or
have the means of knowing facts concerning the corporations
financial resources and business responsibility
D.

COMPENSATION OF DIRECTORS

Sec. 30. Compensation of directors. - In the absence of any


provision in the by-laws fixing their compensation, the directors shall
not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such
compensation other than per diems may be granted to directors by
the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly compensation of directors,
as such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year.
GENERALLY: Directors are not entitled to receive any
compensation, EXCEPT:
1. Reasonable per diems;
2. As provided in the by-laws or upon a majority vote of the
stockholders; and
3. If they are performing functions other than that of a director.
(3) above: Sec. 30 is clear on the point when it provides as such
directors. Therefore, special and extraordinary service rendered,
outside of the regular duties, may form the basis for a claim of
special compensation, such as when a director acts as a general
counsel.
REASON: the office of a director is usually filled up by those

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

chiefly interested in the welfare of the institution by virtue of their


interest in stock or other advantages and such interests are
presumed to be the motive for executing duties of the office
without compensation.

aspect being denied, petitioners filed this petition.

MAY THE COURTS LOOK INTO THE REASONABLENESS OF


COMPENSATION? The courts will not generally undertake to
review the fairness of official salaries, at the suit of a stockholder
unless wrongdoing and oppression or possible abuse of fiduciary
position are shown.

HELD: Yes. The proscription under Sec. 30, is against granting


compensation to directors/trustees of a corporation is not a
sweeping rule. Worthy of note is the clear phraseology of Sec 30
which states [T]he directors shall not receive any
compensation, as such directors, The phrase as such
directors is not without significance for it delimits the
scope of the prohibition to compensation given to them for
services performed purely in their capacity as directors or
trustees. The unambiguous implication is that members of the
board may receive compensation, in addition to reasonable per
diems, when they render services to the corporation in a
capacity other than as directors/trustees. In the case at
bench, the Resolution granted monthly compensation to private
respondents not in their capacity as members of the board, but
rather as officers of the corporation, more particularly as
Chairman, Vice-Chairman, Treasurer and Secretary of WIT.

When the recipient does not stand in the dual relation of the (1)
one compensated and (2) a participant in fixing his own
compensation, it is considered outside the proper judicial function
to go into business policy question of the fairness or
reasonableness of compensation as fixed by the board. Otherwise,
it will call for a scrutiny of the reasonableness or fairness of the
compensation. Likewise, even if consented to by the majority of
stockholders, the courts may still look into such reasonableness if:
(1) it would amount to giving away corporate funds in the guise of
compensation as against the interest of the dissenting minority; or
(2) in fraud of creditors, either amounting to wastage of assets.
CENTRAL COOPERATIVE EXCHANGE (CCE) VS. TIBE, JR. (33
SCRA 593; June 30, 1970) This is a complaint filed by herein
petitioner CCE for the refund of certain amounts received by
respondent when he served as member of the board of directors
of CCE, which were said to be per diems and transportation
expenses, representation expenses and commutable discretionary
funds.
ISSUE: WON the BOD had the power to appropriate funds for the
expenses claimed by respondent?
HELD: No. The by-laws expressly reserved unto the stockholders
the power to determine the compensation of the members of the
BOD, and the stockholders did restrict such compensation to (1)
actual transportation expenses plus (2) per diems of P30 and (3)
actual expenses while waiting. Even without the express
prohibition, the directors are not entitled to compensation for
The law is well-settled that directors of corporations
presumptively serve without compensation and in the
absence of an express agreement or a resolution thereto,
no claim can be asserted therefor. Thus it has been held
that there can be no recovery of compensation, unless
expressly provided for, when director serves as president
or vice-president, as secretary or treasurer or cashier, as
member of an executive committee, as chairman of a
building committee, or similar offices.
Thus, the directors, in assigning themselves additional duties,
such as the visitation of FACOMAS, acted within their power, but,
by voting for themselves compensation for such additional duties,
they acted in excess of their authority, as express in the by-laws.
WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L.
VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS &
REGINALD
F.
VILLASIS,
petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALASTUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS & HON.
JUDGE PORFIRIO PARIAN, respondents
(GR No. 113032; 278 SCRA 216; Aug. 21, 1997)
FACTS: In a special board meeting, a resolution was passed
providing for compensation of officers. A few years later,
petitioners Homero Villasis, Prestod Villasis, Reginald Villasis and
Dimas Enriquez filed an affidavit-complaint for falsification of
public documents (for submission of an income reflecting the
resolution as passed on 1985, when in fact it was passed in 1986)
and estafa (for the disbursement of funds by effecting payment to
the aforesaid salaries) against herein respondents who were
members of the Board of Trustees who were also officers of the
corporation. The trial court acquitted respondents in both charges
without civil liability. The motion for reconsideration on the civil

41

ISSUE: WON the resolution granting compensation to OFFICERS of


the corporation is valid?

Clearly Sec. 30 is not violated. Consequently, the last sentence


limiting the compensation to 10% of the net income before
income tax does not likewise find application in this case since the
compensation is being given to private respondents in their
capacity as officers of WIT and not as board members.
GOVERNMENT VS. EL HOGAR FILIPINO (50 Phil. 399; July 14,
1927) The members of the board of El Hogar Filipino receives 5%
of the net profit as shown in the balance sheet and is distributed
in proportion to their attendance to meetings of the board. A
complaint was filed against the, and the sixth cause of action
alleged that the directors, instead of serving without pay, or
receiving nominal pay or a fixed salary - as the complainant
supposes would be proper have been receiving large
compensation in varying amounts.
ISSUE: WON the courts may declare the by-law provision null and
void?
HELD: No. The Corporation Law does not undertake to
prescribe the rate of compensation for the directors of
corporations. The power to fix the compensation they shall
receive, if any, is left to the corporation, to be determined in its
by-laws (Act No. 1459, sec. 21). Pursuant to this authority the
compensation for the directors of El Hogar Filipino has been fixed
in section 92 of its by-laws, as already stated. The justice and
propriety of this provision was a proper matter for the
shareholders when the by-laws were framed; and the
circumstance that, with the growth of the corporation, the
amount paid as compensation to the directors has
increased beyond what would probably be necessary to
secure adequate service from them is matter that cannot
be corrected in this action; nor can it properly be made a basis
for depriving the respondent of its franchise, or even for enjoining
it from compliance with the provisions of its own by-laws. If a
mistake has been made, or the rule adopted in the by-laws has
been found to work harmful results, the remedy is in the hands of
the stockholders who have the power at any lawful meeting to
change the rule. The remedy, if any, seems to lie rather in
publicity and competition, rather than in a court proceeding. The
sixth cause of action is in our opinion without merit.
E.

LIBABILITY OF CORPORATE OFFICERS

The general rule is that unless the law specifically provides a


corporate officer or agent is not civilly or criminally liable for acts
done by him as such officer or agent, or when absent bad faith or
malice.
TRAMAT MERCANTILE, INC. VS. CA (238 SCRA 14; Nov. 7,
1994) Melchor dela Cuesta, doing business under the name
Farmers Machineries, sold a tractor to Tramat Mercantile, Inc. In
payment, David Ong, Tramats president and manager issued a

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

check for P33,500. Tramat sold the tractor, together with an


attached lawn mower fabricated by it, to NAWASA. David Ong put
a stop payment on the check when NAWASA refused to pay on the
account that aside from the defects on the lawn mower, the
engine (sold by dela Costa) was a reconditioned unit.
De la Costa filed an action for recovery of money which was
granted by the court.
ISSUE: WON Ong should be held jointly and severally liable?

HELD: No. It was an error to hold David Ong jointly and severally
liable with TRAMAT to de la Cuesta under the questioned
transaction. Ong had there so acted, not in his personal capacity,
but as an officer of a corporation, TRAMAT, with a distinct and
separate personality. As such, it should only be the corporation,
not the person acting for and on its behalf that properly could be
made liable thereon.

insufficiency of his funds in or credit with the bank at the time of


the issuance and on the check's presentment for payment.
Petitioner failed to rebut the presumption by paying the amount of
the check within five (5) banking days from notice of the dishonor.
His claim that he signed the check in blank which allegedly is
common business practice is hardly a defense. If as he claims, he
signed the check in blank, he made himself prone to being
charged with violation of BP 22. It became incumbent upon him to
prove his defenses. As Treasurer of the corporation who signed the
check in his capacity as an officer of the corporation, lack of
involvement in the negotiation for the transaction is not a
defense.

Petitioner's argument that he should not be held personally liable


for the amount of the check because it was a check of the Pan
Asia Finance Corporation and he signed the same in his capacity
as Treasurer of the corporation, is also untenable. The third
paragraph of Section 1 of BP Blg. 22 states:

Personal liability of a corporate director, trustee or officer


along (although not necessarily) with the corporation may
so validly attach, as a rule, only when

Where the check is drawn by a corporation, company or


entity, the person or persons who actually signed the
check in behalf of such drawer shall be liable under this
Act

1. He assents (a) to a patently unlawful act of the corporation, or


(b) for bad faith, or gross negligence in directing its affairs, or (c)
for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons;

ELENA F. UICHICO, SAMUEL FLORO, VICTORIA F. BASILIO,


petitioners,
vs.
NATIONAL LABOR RELATIONS COMMISSION, LUZVIMINDA
SANTOS, SHIRLEY PORRAS, CARMEN ELIZARDE, ET. AL.,
respondents
(GR No. 121434; 273 SCRA 35; June 2, 1997)

2. He consents to the issuance of watered stocks or who, having


knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with
the corporation;
4. He is made, by a specific provision of law, to personally answer
for his corporate action.
In the case at bench, there is no indication that petitioner David
Ong could be held personally accountable under any of the
abovementioned cases.
RICARDO A. LLAMADO, petitioner,
vs.
COURT OF APPEALS and PEOPLE OF THE PHILIPPINES,
respondents
(GR No. 99032; 270 SCRA 423; March 26, 1997)
FACTS: Private complainant Leon Gaw delivered to the accused
Ricardo Llamado and Jacinto Pascual the amount of P180,000
which is to be repaid in 6 months with 12% interest. As security,
the accused issued and signed a postdated check which was later
on stopped and dishonored for being drawn against insufficient
funds. Gaw filed a complaint for violation of BP Blg. 22. Pascual
remained at large and the trial on the merits against Llamado was
conducted. The trial court convicted Llamado.
ISSUE: WON petitioner, treasurer of Pan Asia Finance Corporation
could be held civilly and criminally liable?

HELD: Yes. Petitioner denies knowledge of the issuance of the


check without sufficient funds and involvement in the transaction
with private complainant. However, knowledge involves a state of
mind difficult to establish. Thus, the statute itself creates a prima
facie presumption, i.e., that the drawer had knowledge of the

42

FACTS: Private respondents were employees of Crispa, Inc. who


were dismissed due to alleged retrenchment. They filed an illegal
dismissal complaint with the NLRC against Crispa, Inc., Valeriano
Floro (major stockholder, incorporation and director of Crispa) and
petitioners, who were high ranking officials and directors of
Crispa. The Labor Arbiter dismissed the complaint but ordered
petitioners, Floro and Crispa to pay separation pay.
ISSUE: WON petitioners can be held liable?
HELD: Yes. A corporation is a juridical entity with legal personality
separate and distinct from those acting for and in its behalf and,
in general, from the people comprising it. The general rule is that
obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities. There are
times, however, when solidary liabilities may be incurred but only
when exceptional circumstances warrant such as in the following
cases:
1. When directors and trustees or, in appropriate
cases, the officers of a corporation: (a) vote for or
assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in
directing the corporate affairs; (c) are guilty of
conflict of interest
to the prejudice of the
corporation, its stockholders or members, and other
persons;
2. When a director or officer has consented to the
issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto;
3. When a director, trustee or officer has contractually
agreed or stipulated to hold himself personally and
solidarily liable with the corporation; or
4. When a director, trustee or officer is made, by
specific provision of law, personally liable for his
corporate action.i

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

In 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. In this case, it is undisputed that
petitioners have a direct hand in the illegal dismissal of
respondent employees. They were the ones, who as high-ranking
officers and directors of Crispa, Inc., signed the Board Resolution
retrenching the private respondents on the feigned ground of
serious business losses that had no basis apart from an unsigned
and unaudited Profit and Loss Statement which, to repeat, had no
evidentiary value whatsoever. This is indicative of bad faith on
the part of petitioners for which they can be held jointly and
severally liable with Crispa, Inc. for all the money claims of the
illegally terminated respondent employees in this case.

defendant-appellees sugar central mill under identical milling


contracts with a 55% share of the resulting product. There was a
proposal to increase the planters share to 60% which was
adopted by defendant in an Amended Milling Contract and
consequently a Board Resolution.

In 1953, the appellants initiated the present action, contending


that three Negros sugar centrals (La Carlota, Binalbagan-Isabela
and San Carlos), with a total annual production exceeding onethird of the production of all the sugar central mills in the
province, had already granted increased participation (of 62.5%)
to their planters, and that under paragraph 9 of the resolution of
August 20, 1936, heretofore quoted, the appellee had become
obligated to grant similar concessions to the plaintiffs (appellants
herein). The appellee Bacolod-Murcia Milling Co., Inc., resisted the
F. THREE-FOLD DUTY OF DIRECTORS
claim, and defended by urging that the stipulations contained in
the resolution were made without consideration; that the
Directors owe a three-fold duty to the corporation: (1) Obedience;
resolution in question was, therefore, null and void ab initio, being
(2) Diligence and (3) Loyalty.
in effect a donation that was ultra vires and beyond the powers of
the corporate directors to adopt. The trial court decided in favor of
Sec. 31. Liability of directors, trustees or officers. - Directors or defendant, thus the present appeal.
trustees who willfully and knowingly vote for or assent to patently
unlawful acts of the corporation or who are guilty of gross negligence ISSUE: WON the resolutions passed by the bard are valid and
binding?
or bad faith in directing the affairs of the corporation or acquire any
personal or pecuniary interest in conflict with their duty as such
directors or trustees shall be liable jointly and severally for all
HELD: Yes. There can be no doubt that the directors of the
damages resulting therefrom suffered by the corporation, its
appellee company had authority to modify the proposed terms of
stockholders or members and other persons.
the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties.
When a director, trustee or officer attempts to acquire or acquires, 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 equity imposes a disability upon him to deal in his own As the resolution in question was passed in good faith by
behalf, he shall be liable as a trustee for the corporation and must the board of directors, it is valid and binding, and whether
or not it will cause losses or decrease the profits of the
account for the profits which otherwise would have accrued to the
central, the court has no authority to review them.
corporation.
OBEDIENCE: as stated in the first part of Sec. 31 refers to the act
of voting or assenting, either willfully or knowingly, to patently
unlawful acts thereby making the responsible director liable for
damages resulting therefrom;
DILIGENCE: Under the second part of Sec. 31, the directors are
required to manage the corporate affairs with reasonable care and
prudence. This is because the liability of a corporation is not
limited to willful breach of trust or excess of power, but extends
also to negligence. Their liability rests upon the common law rule
which renders liable every agent who violates his authority or
neglects his duty to the damage of his principal.
The degree of diligence is relative. The more fair and satisfactory
rule is that degree of care and diligence which an ordinary
prudent director could reasonably be expected to exercise in a like
position under similar circumstances.
BUSINESS JUDGMENT RULE: Although directors are commonly
said to be responsible both for reasonable care and also prudence,
the formula is continually repeated that they are not liable for
losses due to imprudence or honest error of judgment. The
business judgment rule in effect states that questions of policy
and management are left solely to the honest decision of the
board of directors and the courts are without authority to
substitute its judgment as against the former. The directors are
business managers and as long as they act in good faith, its
actuations are not subject to judicial review.
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
(GR No. L-15092; 5 SCRA 36; May 18, 1962)
FACTS:

Appellants

43

have

been

sugar

planter

adhered

They hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing
they cannot be controlled in the reasonable exercise and
performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or
close down at a smaller loss, is a purely business and economic
problem to be determined by the directors of the corporation
and not by the court. It is a well-known rule of law that
questions 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 judgment of the
board of directors; 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. (Fletcher on Corporations, Vol. 2,
p. 390).
And it appearing undisputed in this appeal that sugar centrals of
La Carlota, Hawaiian Philippines, San Carlos and Binalbagan
(which produce over one-third of the entire annual sugar
production in Occidental Negros) have granted progressively
increasing participations to their adhered planter at an average
rate of
62.333%

for the 1951-52 crop year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms


of its Resolution of August 20, 1936, duty bound to grant similar
increases to plaintiffs-appellants herein.
to

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

LIABILITY OF DIRECTORS FOR ACTS OF THEIR CODIRECTORS:


Generally: a director is not liable for the acts of their co-directors,
unless: (1) He connives or participates; or (2) He is negligent in
not discovering or acting to prevent it. Thus, absent of actual
knowledge of the wrongful activities, on the part of the codirectors, the same cannot be imputed to the other director unless
in the exercise of reasonable care attending his responsibilities, he
should have been aware of suspicious circumstances demanding
correlative action.
LOYALTY: refers to the proscription imposed on directors on
acquiring any personal or pecuniary interest in conflict with their
duty as director. Their relationship is regarded as fiduciary
relation. As fiduciaries, they are obliged to act with utmost
candor and fair dealing for the interest of the corporation and
without selfish motives.
Sec. 34. Disloyalty of a director. - Where a director, by virtue of
his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of
such corporation, he must account to the latter for all such profits by
refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the
venture.
Apparent from Sec. 31 and 34, the duty of loyalty is violated in the
following instances:
1. When a director or trustee acquires any personal or
pecuniary interest in conflict with (his) duty as such director
or trustee;
2. When he attempts to acquire or acquires, in violation of his
duty, any interest adverse to the corporation in respect to
any matter which has been reposed in him in confidence, as
to which equity imposes a disability upon him to deal in his
own behalf; and
3. When he, by virtue of his office, acquires for himself a
business opportunity which should belong to the corporation,
thereby obtaining profit to the prejudice of such corporation.
FORBIDDEN PROFITS: Forbidden in the sense that directors and
officers are fiduciary representatives of the corporation and as
such they are not allowed to obtain any personal profit,
commission, bonus or gain for their official actions. This may also
refer to those arising from transactions of directors with third
persons which may involve misappropriation of corporate
opportunities and disloyal diverting of business. Directors and
officers are corporate insiders and cannot, therefore, utilize their
strategic position for their own preferment or use their powers
and opportunities for their personal advantage to the exclusion of
the interest which they represent.
CORPORATE OPPORTUNITY DOCTRINE: it places a director of a
corporation in the position of a fiduciary and prohibits him from
seizing a business opportunity and/or developing it at the expense
and with the facilities of the corporation. He cannot appropriate to
himself opportunity which in fairness should belong to the
corporation.
RATIFICATION:
1. The second paragraph of Sec. 31 which makes a director
liable to account for profits if he attempts to acquire or
acquires any interest adverse to the corporation in respect to
any matter reposed in him in confidence as to which equity
imposes a disability upon him to deal in his own behalf is not
subject to ratification.
2. Whereas, in Sec. 34, if a director acquires a business
opportunity which should belong to the corporation, he is
bound to account for such profits unless his act is ratified by
the stockholders owing or representing at least 2/3 of the
outstanding capital stock.

44

Example: A, B, C, D and E are directors of REALTY CORP., Z


wanted to sell his property with a fair market value of P100M for
P90M.
a. If it was offered first to A, and A made a profit of P10M, this
would fall under Sec. 34 and may be subject to ratification; A
merely acquired a business opportunity owing to the
corporation.
b. If it was offered to REALTY CORP., and A, later on offered to
buy it for P95 and sold it making a profit of P5M, it would fall
under Sec. 31 and not subject to ratification, A should return
the profits to REALTY CORP. It was a matter reposed in him in
confidence.
STRONG VS. REPIDE (41 Phil. 947; May 3, 1909) the Governor
of the Philippine Islands, on behalf of the government, made an
offer of purchase for the total sum of $6,,043,219.47 in gold for all
the friar lands, though owned by different owners.
While this state of things existed, and before the final offer had
been made by the Governor, the defendant, although still holding
out for a higher price for the lands, took steps to purchase the 800
shares of stock in his own company from Mrs. Strong, which he
knew were in the possession of F. Stuart Jones, as her agent. The
defendant employed Krauffman and the latter employed Mr.
Sloan, a broker, to purchase the stock for him. Mr. Sloan, the
husband, did not know who wanted to buy the shares nor did
Jones when he was spoken to. Jones would not have sold at the
price he did had he known it was the defendant who was
purchasing, because, as he said, it would show increased value, as
the defendant would not be likely to purchase ore stock unless the
price was going up.
ISSUE: WON it was the duty of the defendant to disclose to the
agent of the plaintiff the facts bearing upon or which might affect
the value of the stock?
HELD: Yes. A director upon whose action the value of the shares
depends cannot avail of his knowledge of what his own action will
be to acquire shares from those whom he intentionally keeps in
ignorance of his expected action and the resulting value of the
shares.
Even though a director may not be under the obligation of a
fiduciary nature to disclose to a shareholder his knowledge
affecting the value of the shares, that duty may exist in special
cases, and did exist upon the facts in this case.
In this case, the facts clearly indicate that a director of a
corporation owning friar lands in the Philippine Islands, and who
controlled the action of the corporation, had so concealed his
exclusive knowledge of the impending sale to the government
from a shareholder from whom he purchased, through an agent,
shares in the corporation, that the concealment was in violation of
his duty as a director to disclose such knowledge, and amounted
to deceit sufficient to avoid the sale; and, under such
circumstances, it was immaterial whether the shareholder's agent
did or did not have power to sell the stock.
In addition to his ownership of almost three-fourths of the shares
of the stock of the company, the defendant was one of the five
directors of the company, and was elected by the board the agent
and administrator general of such company, "with exclusive
intervention in the management" of its general business.
Concealing his identity when procuring the purchase of stock, by
his agent, was in itself stock evidence of fraud on the part of the
defendant. The concealment was not a mere inadvertent omission
but was a studied and intentional omission, to be characterized as
part of the deceitful machination to obtain the purchase without
giving information whatever as to the state and probable result of
the negotiations, to the vendor of the stock, and to, in that way,
obtain the same at a lower price.
G.

SELF-DEALING DIRECTORS

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

The self-dealing director is one who deals or transacts business


with his own corporation.

HELD: No. In the instant case respondent Te was not an ordinary


Sec. 32. Dealings of directors, trustees or officers with the stockholder; he was a member of the Board of Directors and
corporation. - A contract of the corporation with one or more of its Auditor of the corporation as well. He was what is often referred to
directors or trustees or officers is voidable, at the option of such as a "self-dealing" director.
corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances;
and
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or
trustee, such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or of at least two-thirds (2/3) of the members in a meeting called for
the purpose: Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the
circumstances.
Generally: A contract entered into by a director with his own
corporation is voidable at the latters option, except when all the
conditions laid down in Sec. 32 are met. On the other hand, where
any of the first two conditions is absent, the contract becomes
voidable subject to the ratification of the stockholders
representing 2/3 of the outstanding capital stock the
requirements of which are: (1) there must be a meeting called for
that purpose; (2) full disclosure of the adverse interest of the
director; and (3) the contract is fair and reasonable under the
circumstances.
If the self-dealing director owns all or substantially all of the
shares of stock, thereby making ratification easily possible, the
last sentence of Sec. 32 should be made to apply by determining
reasonableness of the transaction to which there is no yardstick.
Every case stands upon its own bottom, and the ultimate question
is whether the contract was honest and beneficial which is always
a question of fact.
PRIME WHITE CEMENT CORPORATION, petitioner,
vs.
IAC and ALEJANDRO TE, respondents
(GR No. L-68555; 220 SCRA 103; March 19, 1993)
FACTS: Respondent Alejandro Te, a director of petitioner
corporation, was awarded a dealership agreement whereby Te
would be the exclusive dealer and/or distributor of the corporation
in the entire Mindanao. As a consequence, Te entered into
different contracts for selling white cement. Laer on, defendant
corporation decided to impose certain conditions upon the
dealership agreement.
Several demands to comply with the agreement were made by Te
to the corporation but were refused and Te was constrained to
cancel the contracts he entered into.
Defendant corporation entered into an exclusive dealership
agreement with Napoleon Co for the marketing of white cement in
Mindanao. Hence, this suit.
ISSUE: WON the dealership agreement entered into by Te with his
own corporation is valid and binding?

45

A director of a corporation holds a position of trust and as such, he


owes a duty of loyalty to his corporation. In 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 seek the maximum amount of profits
for the corporation. This trust relationship "is not a matter of
statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders.
Granting arguendo that the "dealership agreement" involved here
would be valid and enforceable if entered into with a person other
than a director or officer of the corporation, the fact that the other
party to the contract was a Director and Auditor of the petitioner
corporation changes the whole situation. First of all, We believe
that the contract was neither fair nor reasonable. The "dealership
agreement" entered into in July, 1969, was to sell and supply to
respondent Te 20,000 bags of white cement per month, for five
years starting September, 1970, at the fixed price of P9.70 per
bag. Respondent Te is a businessman himself and must have
known, or at least must be presumed to know, that at that time,
prices of commodities in general, and white cement in particular,
were not stable and were expected to rise. At the time of the
contract, petitioner corporation had not even commenced the
manufacture of white cement, the reason why delivery was not to
begin until 14 months later. He must have known that within that
period of six years, there would be a considerable rise in the price
of white cement. In fact, respondent Te's own Memorandum shows
that in September, 1970, the price per bag was P14.50, and by
the middle of 1975, it was already P37.50 per bag. Despite this,
no provision was made in the "dealership agreement" to allow for
an increase in price mutually acceptable to the parties. Instead,
the price was pegged at P9.70 per bag for the whole five years of
the contract. Fairness on his part as a director of the corporation
from whom he was to buy the cement, would require such a
provision. In fact, this unfairness in the contract is also a basis
which renders a contract entered into by the President, without
authority from the Board of Directors, void or voidable, although it
may have been in the ordinary course of business. We believe
that the fixed price of P9.70 per bag for a period of five years was
not fair and reasonable. Respondent Te, himself, when he
subsequently entered into contracts to resell the cement to his
"new dealers" Henry Wee and Gaudencio Galang stipulated as
follows:
The price of white cement shall be mutually determined by us
but in no case shall the same be less than P14.00 per bag (94
lbs)
As director, especially since he was the other party in interest,
respondent Te's bounden duty was to act in such manner as not to
unduly prejudice the corporation. In the light of the circumstances
of this case, it is to Us quite clear that he was guilty of disloyalty
to the corporation; he was attempting in effect, to enrich himself
at the expense of the corporation. There is no showing that the
stockholders ratified the "dealership agreement" or that they were
fully aware of its provisions. The contract was therefore not valid
and this Court cannot allow him to reap the fruits of his disloyalty.
CHARLES W. MEAD, plaintiff-appellant,
vs.
E. C. McCULLOUGH, ET AL., and THE PHILIPPINE
ENGINEERING AND CONSTRUCTION COMPANY, defendantappellants

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

(GR No. 6217; 21 Phil. 95; Dec. 26, 1911)


FACTS:
Herein
plaintiff-appellant Mead
with
defendant
McCullough formed the Philippine Engineering and Construction
Company, the incorporators being the only stockholders and
directors of the company. When Mead left for China, the other
directors entered into an agreement where all the rights in a
wrecking contract with the naval authorities were sold to
defendant. The defendant, in turn, sold these rights with R.W.
Brown, HDC jones, John Macleod and TH Twentyman, and retaining
one sixth interest, formed Manila Salvage Association.
ISSUE: WON officers or directors of the corporation may purchase
the corporate property?

HELD: Yes. While a corporation remains solvent, we can see no


reason why a director or officer, by the authority of a majority of
the stockholders or board of managers, may not deal with the
corporation, loan it money or buy property from it, in like manner
as a stranger. So long as a purely private corporation remains
solvent, its directors are agents or trustees for the stockholders.
They owe no duties or obligations to others. But the moment such
a corporation becomes insolvent, its directors are trustees of all
the creditors, whether they are members of the corporation or
not, and must manage its property and assets with strict regard to
their interest; and if they are themselves creditors while the
insolvent corporation is under their management, they will not be
permitted to secure to themselves by purchasing the corporate
property or otherwise any personal advantage over the other
creditors. Nevertheless, a director or officer may in good faith and
for an adequate consideration purchase from a majority of the
directors or stockholders the property even of an insolvent
corporation, and a sale thus made to him is valid and binding
upon the minority. (Beach et al. vs. Miller, supra; Twin-Lick Oil
Company vs. Marbury, supra; Drury vs. Cross, 7 Wall., 299; Curran
vs. State of Arkansas, 15 How., 304; Richards vs. New Hamphshire
Insurance Company, 43 N. H., 263; Morawetz on Corporations
(first edition), sec. 579; Haywood vs. Lincoln Lumber Company et
al., 64 Wis., 639; Port vs. Russels, 36 Ind., 60; Lippincott vs. Shaw
Carriage Company, 21 Fed. Rep., 577.)

In the case of the Twin-Lick Oil Company vs. Marbury, he court


said:
That a director of a joint-stock corporation occupies one of
those fiduciary relations where his dealings with the subjectmatter of his trust or agency, and with the beneficiary or
party whose interest is confided to his care, is viewed with
jealousy by the courts, and may be set aside on slight
grounds, is a doctrine founded on the soundest morality, and
which has received the clearest recognition in this court and
others. (Koehler vs. Iron., 2 Black, 715; Drury vs. Cross, 7
Wall., 299; R.R. Co. vs. Magnay, 25 Beav., 586; Cumberland
Co vs. Sherman, 30 Barb., 553; Hoffman S. Coal Co. vs.
Cumberland Co., 16 Md., 456.) The general doctrine,
however, in regard to contracts of this class, is, not that they
are absolutely void, but that they are voidable at the election
of the party whose interest has been so represented by the
party claiming under it. We say, this is the general rule; for
there may be cases where such contracts would be void ab
initio; as when an agent to sell buys of himself, and by his
power of attorney conveys to himself that which he was
authorized to sell. But even here, acts which amount to a
ratification by the principal may validate the sale

46

The sale or transfer of the corporate property in the case at bar


was made by three directors who were at the same time a
majority of stockholders. If a majority of the stockholders have a
clear and a better right to sell the corporate property than a
majority of the directors, then it can be said that a majority of the
stockholders made this sale or transfer to the defendant
McCullough.
What were the circumstances under which said sale was made?
The corporation had been going from bad to worse. The work of
trying to raise the sunken Spanish fleet had been for several
months abandoned. The corporation under the management of
the plaintiff had entirely failed in this undertaking. It had broken
its contract with the naval authorities and the $10,000 Mexican
currency deposited had been confiscated. It had no money. It was
considerably in debt. It was a losing concern and a financial
failure. To continue its operation meant more losses. Success was
impossible. The corporation was civilly dead and had passed into
the limbo of utter insolvency. The majority of the stockholders or
directors sold the assets of this corporation, thereby relieving
themselves and the plaintiff of all responsibility. This was only the
wise and sensible thing for them to do. They acted in perfectly
good faith and for the best interests of all the stockholders. "It
would be a harsh rule that would permit one stockholder, or any
minority of stockholders to hold a majority to their investment
where a continuation of the business would be at a loss and where
there was no prospect or hope that the enterprise would be
profitable."
We therefore conclude that the sale or transfer made by the
quorum of the board of directors a majority of the stockholders
is valid and binding upon the majority-the plaintiff.
H.

INTERLOCKING DIRECTORS

An interlocking director is a director in one corporation who deals


or transacts with another corporation of which he is also a
director. In such case, there may effectively be a dual agency, a
divided allegiance where allegiance in one corporation may
subordinated to the other.
The prevailing view is that these contracts entered into where
there is an interlocking director is not voidable merely by reason
of conflicting duties or interest as to corporations represented,
even when a majority or all of the directors are common to both
corporations. It is recognized that such will be upheld if there is no
bad faith or unfairness or collusion.
Sec. 33. Contracts between corporations with interlocking
directors. (1) Except in cases of fraud, and provided (2) the
contract is fair and reasonable under the circumstances, a
contract between two or more corporations having interlocking
directors shall not be invalidated on that ground alone:
Provided, That if the interest of the interlocking director in one
corporation is substantial and his interest in the other corporation or
corporations is merely nominal, he shall be subject to the provisions
of the preceding section insofar as the latter corporation or
corporations are concerned.
Stockholdings exceeding twenty (20%) percent of the outstanding
capital stock shall be considered substantial for purposes of
interlocking directors.
NOTE:
1. The contract between corporations with interlocking director
is valid absent fraud and provided it is reasonable under the
circumstances;
2. If the interest of the interlocking director in one corporation
exceeds 20% and in the other merely nominal, the contract
becomes voidable at the latter corporations option. In effect,
the director would be treated as a self-dealing director under
Sec. 32;
3. If the interest in both companies is either both substantial or

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

both nominal, Sec. 33 will apply.


I.

DERIVATIVE SUIT

In case of a wrongful or fraudulent act of a director, officer or


agent, stockholders have the following options:
1. Individual or Personal Action for direct injury to his rights,
such as denial of his right to inspect corporate books and
records or pre-emptive rights;
2. Representative or Class Suit in which one or more members
of a class sue for themselves as a class or for all to whom the
right was denied, either as an individual action or a derivative
suit; and a
3. Derivative Suit an action based on injury to the corporation
to enforce a corporate right wherein the corporation itself
is joined as a necessary party, and recovery is in favor of and
for the corporation. It is a suit granted to any stockholder to
institute a case to remedy a wrong done directly to the
corporation and indirectly to stockholders.
CANDIDO PASCUAL, plaintiff-appellant,
vs.
EUGENIO DEL SAZ OROZCO, ET AL, defendants-appellees
(GR No. L-5174; 19 Phil. 83; March 17, 1911)
FACTS: During 1903-1907, the defendant-appellees, without the
knowledge and acquiescence of the stockholders deducted their
compensation from gross income instead of from the net profits of
the bank, the same with their predecessors for the years 18991902.
Plaintiff-appellant brings this action in his own right as a
stockholder of the bank, for the benefit of the bank and all the
stockholders, in behalf of the corporation, which, even though,
nominally a defendant, is to all intents and purposes the real
plaintiff in this case as shown in the prayer of the complaint.
ISSUE: WON plaintiff has capacity to sue?

HELD: Yes. In suits of this character the corporation itself and not
the plaintiff stockholder is the real party in interest. The rights of
the individual stockholder are merged into that of the corporation.
It is a universally recognized doctrine that a stockholder in a
corporation has no title legal or equitable to the corporate
property; that both of these are in the corporation itself for the
benefit of all the stockholders. Text writers illustrate this rule by
the familiar example of one person or entity owning all the stock
and still having no greater or essentially different title than if he
owned but one single share. Since, therefore, the stockholder has
no title; it is evident that what he does have, with respect to the
corporation and his fellow stockholder, are certain rights sui
generis. These rights are generally enumerated as being, first, to
have a certificate or other evidence of his status as stockholder
issued to him; second, to vote at meetings of the corporation;
third, to receive his proportionate share of the profits of the
corporation; and lastly, to participate proportionately in the
distribution of the corporate assets upon the dissolution or
winding up. (Purdy's Beach on Private Corporations, sec. 554.)

The right of individual stockholders to maintain suits for and on


behalf of the corporation was denied until within a comparatively
short time, but his right is now no longer doubted. Accordingly, in
1843, in the leading case of Foss vs. Harbottle, a stockholder
brought suit in the name of himself and other defrauded
stockholders, and for the benefit of the corporation, against the
directors, for a breach of their duty to the corporation. This case
was decided against the complaining stockholder, on the ground
that the complainant had not proved that the corporation itself
was under the control of the guilty parties, and had not proved

47

that it was unable to institute suit. The court, however, broadly


intimated that a case might arise when a suit instituted by
defrauded stockholders would be entertained by the court and
redress given. Acting upon this suggestion, and impelled by the
utter inadequacy of suits instituted by the corporation, defrauded
stockholders continued to institute these suits and to urge the
courts of equity to grant relief. These efforts were unsuccessful in
clearly establishing the right of stockholders herein until the cases
of Atwol against Merriwether, in England, 1867, and of Dodge vs.
Woolsey, in this country, in 1855. These two great and leading
cases have firmly established the law for England and America,
that where corporate directors have committed a breach of
trust either by their frauds, ultra vires acts, or negligence,
and the corporation is unable or unwilling to institute suit
to remedy the wrong, a single stockholder may institute
that suit, suing on behalf of himself and other
stockholders and for the benefit of the corporation, to
bring about a redress of the wrong done directly to the
corporation and indirectly to the stockholders.
So it is clear that the plaintiff, by reason of the fact that he is a
stockholder in the bank (corporation) has a right to maintain a suit
for and on behalf of the bank, but the extent of such a right must
depend upon when, how, and for what purpose he acquired the
shares which he now owns. In the determination of these
questions we cannot see how, if it be true that the bank is a quasipublic institution, it can affect in any way the final result.
It is alleged that the plaintiff became a stockholder on the 13th of
November, 1903; that the defendants, as members of the board
of directors and board of government, respectively, during each
and all the years 1903, 1904, 1905, 1906, and 1907, did
fraudulently, and to the great prejudice of the bank and its
stockholders, appropriate to their own use from the profits of the
bank sums of money amounting approximately to P20,000 per
annum.
It is self-evident that the plaintiff in the case at bar was not,
before he acquired in September, 1903, the shares which he now
owns, injured or affected in any manner by the transactions set
forth in the second cause of action. His vendor could have
complained of these transactions, but he did not choose to do so.
The discretion whether to sue to set them aside, or to acquiesce
in and agree to them, is, in our opinion, incapable of transfer. If
the plaintiff himself had been injured by the acts of defendants'
predecessors that is another matter. He ought to take things as he
found them when he voluntarily acquired his ten shares. If he was
defrauded in the purchase of these shares he should sue his
vendor. (Thus, he may sue for the second half of 1903 to 1907 but
not for the years 1989 to the first half of 1903.)
So it seems to be settled by the Supreme Court of the United
States, as a matter of substantive law, that a stockholder in a
corporation who was not such at the time of the transactions
complained of, or whose shares had not devolved upon him since
by operation of law, cannot maintain suits of this character, unless
such transactions continue and are injurious to the stockholder, or
affect him especially and specifically in some other way.
HARRIE S. EVERETT, CRAL G. CLIFFORD, ELLIS H. TEAL and
GEORGE W. ROBINSON, plaintiffs-appellants,
vs.
THE ASIA BANKING CORPORATION, NICHOLAS E. MULLEN,
ERIC BARCLAY, ALFRED F. KELLY, JOHN W. MEARS and CHARLES D.
MACINTOSH, defendants-appellees.
(GR No. L-25241; 49 Phil. 512; Nov. 3, 1926)
FACTS: Plaintiffs, stockholders (together with Barclay) of Teal and
Company (Company), entered into a Memorandum of Agreement
and Voting Trust Agreement with defendant Asia Banking
Corporation (Bank) with the understanding that it was intended
for the protection of all parties thereto from outside creditors, but
that they were not intended to be enforced according to the letter
thereof, and that they did not contain the true agreement
between the Bank and the Company which was to finance the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

company without interference from the above-named creditors.

inflated appraised value of real estate properties, in connivance


with other officials.

That shortly after, Mullen caused the removal of the plaintiffs as


directors of the Company and their replacement. The defendants
thereafter gave pledges and mortgages from the Company to the
Bank and entered into contracts as directed by the Bank, and
permitted the Bank to foreclose the same and to sell the property
of the Company itself and permitted the Bank to institute suits
against the Company, in which the Company was not represented
by anyone having its interest at heart and in which reason the
Bank occupied both plaintiff and defendant and tricked and
deluded the courts into giving judgment in which the rights of the
real parties were concealed and unknown to the courts.

The complaint alleged that Miguel Cuaderno, then Central Bank


Governor, acting upon the complaint, and the Monetary Board
ordered an investigation and found violations of the General
Banking Act, but no information was filed until his retirement; that
to neutralize the impending action against him, Pablo Roman
engaged Miguel Cuaderno as technical consultant and selected
Bienvenido Dizon as Chairman of the Board of the Bank; that such
appointment was done in bad faith and without intention to
protect the interest of the Bank but were only prompted to protect
Pablo Roman.

Thereafter, defendants incorporated Philippine Motors Corporation


where all the assets and goodwill of the Company were
transferred by the Bank.

The complaint, therefore, prayed for a writ of preliminary


injunction against eh Monetary Board in confirming such
appointments, but was dismissed by the lower court.

ISSUE: WON the plaintiffs have the legal capacity to bring an


action?

ISSUE: WON the court below erred in dismissing the complaint?

HELD: Yes. Invoking the well-known rule that shareholders cannot


ordinarily sue in equity to redress wrongs done to the corporation,
but that the action must be brought by the Board of Directors, the
appellees argue and the court below held that the
corporation Teal and Company is a necessary party plaintiff and
that the plaintiff stockholders, not having made any demand on
the Board to bring the action, are not the proper parties plaintiff.
But, like most rules, the rule in question has its exceptions. It is
alleged in the complaint and, consequently, admitted through the
demurrer that the corporation Teal and Company is under the
complete control of the principal defendants in the case,
and, in these circumstances, it is obvious that a demand
upon the Board of Directors to institute an action and
prosecute the same effectively would have been useless,
and the law does not require litigants to perform useless
acts. (Exchange bank of Wewoka vs. Bailey, 29 Okla., 246;
Fleming and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1;
Wickersham vs. Crittenden, 106 Cal., 329; Glenn vs. Kittaning
Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water
Company, 104 U. S., 450.)
The conclusion of the court below that the plaintiffs, not being
stockholders in the Philippine Motors Corporation, had no legal
right to proceed against that corporation in the manner suggested
in the complaint evidently rest upon a misconception of the
character of the action. In this proceeding it was necessary for the
plaintiffs to set forth in full the history of the various transactions
which eventually led to the alleged loss of their property and, in
making a full disclosure, references to the Philippine Motors
Corporation appear to have been inevitable. It is to be noted that
the plaintiffs seek no judgment against the corporation itself at
this stage of the proceedings.
In our opinion the plaintiffs state a good cause of action for
equitable relief and their complaint is not in any respect fatally
defective. The judgment of the court below is therefore reversed,
the defendants demurrer is overruled, and it is ordered that the
return of the record to the Court within ten days from the return of
the record to the Court of First Instance. So ordered
REPUBLIC BANK, represented in this action by DAMASO P.
PEREZ,
etc.,
plaintiff-appellant,
vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE
MONETARY BOARD OF THE CENTRAL BANK OF THE PHILIPPINES,
defendants-appellees
(GR No. L-22399; 19 SCRA 671; March 30, 1967)
FACTS: Damaso Perez, a stockholder of Republic Bank, instituted
a derivative suit against defendant Pablo Roman, then President of
the Bank, for granting certain loans to fictitious and non-existing
persons and to their close friends, relatives and/or employees,
who were in reality their dummies on the basis of fictitious or

48

HELD: Yes. The defendants mainly controvert the right of plaintiff


to question the appointment and selection of defendants
Cuaderno and Dizon, which they contend to be the result of
corporate acts with which plaintiff, as stockholder, cannot
interfere. Normally, this is correct, but Philippine jurisprudence is
settled that an individual stockholder is permitted to
institute a derivative or representative suit on behalf of
the corporation wherein he holds stock in order to protect
or vindicate corporate rights, whenever (1) the officials of
the corporation refuse to sue, or (2) are the ones to be
sued or (3) hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal
party, with the corporation as the real party in interest
(Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia
Banking Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697;
Evangelista vs. Santos, 86 Phil. 388). Plaintiff-appellant's action
here is precisely in conformity, with these principles. He is
neither alleging nor vindicating his own individual interest
or prejudice, but the interest of the Republic Bank and the
damage caused to it. The action he has brought is a
derivative one, expressly manifested to be for and in
behalf of the Republic Bank, because it was futile to
demand action by the corporation, since its Directors were
nominees and creatures of defendant Pablo Roman
(Complaint, p. 6). The frauds charged by plaintiff are frauds
against the Bank that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno
as technical consultant, and of Bienvenido Dizon to head the
Board of Directors of the Republic Bank, were made only to shield
Pablo Roman from criminal prosecution and not to further the
interests of the Bank, and avers that both men are Roman's alter
egos. There is no denying that the facts thus pleaded in the
complaint constitute a cause of action for the bank: if the
questioned appointments were made solely to protect Roman
from criminal prosecution, by a Board composed by Roman's
creatures and nominees, then the moneys disbursed in favor of
Cuaderno and Dizon would be an unlawful wastage or diversion of
corporate funds, since the Republic Bank would have no interest
in shielding Roman, and the directors in approving the
appointments would be committing a breach of trust; the Bank,
therefore, could sue to nullify the appointments, enjoin
disbursement of its funds to pay them, and recover those paid out
for the purpose, as prayed for in the complaint in this case
(Angeles vs. Santos, supra.).
Defendants urge that the action is improper because the plaintiff
was not authorized by the corporation to bring suit in its behalf.
Any such authority could not be expected as the suit is aimed to

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

nullify the action taken by the manager and the board of directors
of the Republic Bank; and any demand for intra-corporate remedy
would be futile, as expressly pleaded in the complaint. These
circumstances permit a stockholder to bring a derivative suit
(Evangelista vs. Santos, 86 Phil. 394). That no other
stockholder has chosen to make common cause with
plaintiff Perez is irrelevant, since the smallness of
plaintiff's holdings is no ground for denying him relief
(Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is yet too early
in the proceedings for the absence of other stockholders to be of
any significance, no issues having even been joined.
ISSUE2: WON the Corporation should be a plaintiff or defendant?
HELD2: The English practice is to make the corporation a party
plaintiff, while in the United States, the usage leans in favor of its
being joined as party defendant (see Editorial Note, 51 LRA [NS]
123). Objections can be raised against either method. (1)
Absence of corporate authority would seem to militate
against making the corporation a party plaintiff, while (2)
joining it as defendant places the entity in the awkward
position of resisting an action instituted for its benefit.
What is important is that the corporation' should be made
a party, in order to make the Court's judgment binding
upon it, and thus bar future relitigation of the issues. On
what side the corporation appears loses importance when
it is considered that it lay within the power of the trial
court to direct the making of such amendments of the
pleadings, by adding or dropping parties, as may be
required in the interest of justice (Revised Rule 3, sec. 11).
Misjoinder of parties is not a ground to dismiss an action.
(Ibid.)
ISSUE3: WON the action of the plaintiff amounts to a quo
warranto proceeding?
HELD: No. Plaintiff Perez is not claiming title to Dizon's position as
head of the Republic Bank's board of directors. The suit is aimed
at preventing the waste or diversion of corporate funds in paying
officers appointed solely to protect Pablo Roman from criminal
prosecution, and not to carry on the corporation's bank business.
Whether the complaint's allegations to such effect are true or not
must be determined after due hearing.
WESTERN INSTITUTE OF TECHNOLOGY, INC., vs. SALAS
(supra, under Compensation of Directors) Petitioners assert that
the motion for reconsideration of the civil aspect of the RTC
decision acquitting respondents is a derivative suit brought by
them as minority stockholders of WIT for and on behalf of the
corporation
ISSUE: WON the appeal may be considered as a derivative
action?

HELD:
No. A derivative suit is an action brought by
minority shareholders in the name of the corporation to
redress wrongs committed against it, for which the
directors refuse to sue. It is a remedy designed by equity
and has been the principal defense of the minority
shareholders against abuses by the majority. Here, however,
the case is not a derivative suit but is merely an appeal on the
civil aspect of Criminal Cases Nos. 37097 and 37098 filed with the
RTC of Iloilo for estafa and falsification of public document.
Among the basic requirements for a derivative suit to
prosper is that the minority shareholder who is suing for
and on behalf of the corporation must allege in his
complaint before the proper forum that he is suing on a
derivative cause of action on behalf of the corporation and
all other shareholders similarly situated who wish to join.
This is necessary to vest jurisdiction upon the tribunal in line with
the rule that it is the allegations in the complaint that vests

49

jurisdiction upon the court or quasi-judicial body concerned over


the subject matter and nature of the action. This was not complied
with by the petitioners either in their complaint before the court a
quo nor in the instant petition which, in part, merely states that
"this is a petition for review on certiorari on pure questions of law
to set aside a portion of the RTC decision in Criminal Cases Nos.
37097 and 37098" since the trial court's judgment of acquittal
failed to impose any civil liability against the private respondents.
By no amount of equity considerations, if at all deserved, can a
mere appeal on the civil aspect of a criminal case be treated as a
derivative suit.

Granting, for purposes of discussion, that this is a derivative suit


as insisted by petitioners, which it is not, the same is outrightly
dismissible for having been wrongfully filed in the regular court
devoid of any jurisdiction to entertain the complaint. The ease
should have been filed with the Securities and Exchange
Commission (SEC) which exercises original and exclusive
jurisdiction over derivative suits, they being intra-corporate
disputes, per Section 5 (b) of P.D. No. 902-A.
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR.,
ANTONIO ROXAS, ANTONIO PRIETO, FRANCISCO EIZMENDI, JR.,
EDUARDO SORIANO, RALPH KAHN and RAMON DEL ROSARIO, JR.,
respondents.
(GR No. 85339; 176 SCRA 447; Aug. 11, 1989)
FACTS: Eduardo de los Angeles was a director appointed by PCGG
who sequestered the shares of Andres Soriano III claiming it to
belong to Eduardo Conjuangco, a close associate and dummy of
then President Marcos. De los Angeles initiated a derivative suit
against herein respondents, in behalf of SMC, for the revocation of
a Board Resolution adopted to assume the loans incurred by
Neptunia Corporation, a foreign company, said to be a whollyowned subsidiary of SMC. The action was dismissed by the SEC on
the grounds that De los Angeles does not have adequate shares to
represent the interest of the stockholders and that his assumed
role as a PCGG appointed director is inconsistent with his assumed
role as a representative of minority stockholders.
ISSUE: WON De Los Angeles can institute a derivative suit?

HELD: Yes. The theory that de los Angeles has no personality to


bring suit in behalf of the corporation because his stockholding
is minuscule, and there is a "conflict of interest" between him and
the PCGG cannot be sustained.

It is claimed that since de los Angeles 20 shares (owned by him


since 1977) represent only. 00001644% of the total number of
outstanding shares (1 21,645,860), he cannot be deemed to fairly
and adequately represent the interests of the minority
stockholders. The implicit argument that a stockholder, to be
considered as qualified to bring a derivative suit, must hold a
substantial or significant block of stock finds no support
whatever in the law. The requisites for a derivative suit are as
follows:
a) the party bringing suit should be a shareholder as of the
time of the act or transaction complained of, the number of his
shares not being material;

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

b) he has tried to exhaust intra-corporate remedies, i.e.,


has made a demand on the board of directors for the appropriate
relief but the latter has failed or refused to heed his plea; and
c) the cause of action actually devolves on the corporation,
the wrongdoing or harm having been, or being caused to the
corporation and not to the particular stockholder bringing the suit.
The bona fide ownership by a stockholder of stock in his
own right suffices to invest him with standing to bring a
derivative action for the benefit of the corporation. The
number of his shares is immaterial since he is not suing in
his own behalf, or for the protection or vindication of his
own particular right, or the redress of a wrong committed
against him, individually, but in behalf and for the benefit
of the corporation.
Neither can the "conflict-of-interest" theory be upheld. From the
conceded premise that de los Angeles now sits in the SMC Board
of Directors by the grace of the PCGG, it does not follow that he is
legally obliged to vote as the PCGG would have him do, that he
cannot legitimately take a position inconsistent with that of the
PCGG, or that, not having been elected by the minority
stockholders, his vote would necessarily never consider the
latter's interests. The proposition is not only logically indefensible,
non sequitur, but also constitutes an erroneous conception of a
director's role and function, it being plainly a director's duty to
vote according to his own independent judgment and his own
conscience as to what is in the best interests of the company.
Moreover, it is undisputed that apart from the qualifying shares
given to him by the PCGG, he owns 20 shares in his own right, as
regards which he cannot from any aspect be deemed to be
"beholden" to the PCGG, his ownership of these shares being
precisely what he invokes as the source of his authority to bring
the derivative suit.
ELTON W. CHASE, as minority Stockholder and on behalf of other
Stockholders similarly situated and for the benefit of AMERICAN
MACHINERY AND PARTS MANUFACTURING, INC., plaintiff-appellant,
vs.
DR. VICTOR BUENCAMINO, SR., VICTOR BUENCAMINO, JR.,
JULIO B. FRANCIA and DOLORES A. BUENCAMINO, respondents.
(GR No. L-20395; 136 SCRA 365; May 13, 1985)
FACTS: Herein plaintiff-appellant Elton Chase, entered into an
agreement with Dr. Buencamino and William Cranker (already
business partners) for the establishment of a factory in Manila
called American Machinery Engineering Parts, Inc. (Amparts),
where chase was to transfer his tractor plant, ship his machineries
from his former plant in America to Manila, install said
machineries at Amparts plant and he is to be the production
manager of Amparts.
For some time the three maintained harmonious relations until
Chase tendered his resignation which was accepted by
Buencamino and Cranker. Chase initially filed a case in California
against Cranker for the recovery of the purchase price of his plant,
but this died a natural death. Eventually, he filed a case before
the CFI alleging various acts of frauds allegedly committed by the
other two.
ISSUE: WON Chase has capacity to institute a derivative suit?
HELD: Yes. The evidence of defendants proves very clearly that
right from the start, Chase was by them recognized as a
stockholder and initial incorporator with 600 paid up shares
representing a 1/3 interest in Amparts, and that would be enough
for Chase to have the correct personality to institute this
derivative suit; the second place, it also appears apparently
undenied that Chase did not win in California so that he did not
recover the $150,000.00 that he had prayed for there against
Overseas, which if he had would really in the mind of the Court
have put him in estoppel to intervene in any manner as
incorporator or stockholder of Amparts; and in the third place and
most important it should not be forgotten that Chase has filed the
present case not for his personal benefit, but for the benefit of

50

Amparts, so that to the Court the argument of estoppel as against


him would appear to be out of place; the estoppel to be valid as a
defense must be an estoppel against Amparts itself; the long and
short of it is that the Court is impelled and constrained to discard
all the other defenses set up by Dr. Buencamino on the principal
complaint; the result of all these would be to sustain so far, the
position of Chase that Dr. Buencamino must account for the
P570,000.00 used to pay the second series of payment on the
subscription, the P330,000.00 used in paying the last series on
the subscription, plus another sum of P245,000.00 entered as loan
on his favor and against Amparts, for the sum of P434,000.00
earned in the blackmarketing of the excess of $140,000.00 dollars
on the forwarding costs and promotional expenses, for the sum of
P391,200.00 earned in the blackmarketing of the excess of
$117,000.00 in the transaction with Bertoni and Cotti, and all
these would reach a total of P1,970,200.00; and as the
appropriation of the profits for himself was a quasi-delict, the
liability therefore assuming that it had been done with the
cooperation of Cranker would have to be solidary, 2194 New Civil
Code.
CATALINA R. REYES, petitioner,
vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First
Instance of Manila, Branch XIII and FRANCISCA R. JUSTINIANI,
respondents.
(GR No. L-16982; 3 SCRA 198; Sept. 30, 1961)
FACTS: Several purchases were made by Roxas-Kalaw Textile Mills
in New York for raw materials but were found out to consist of
already finished product for which reason the Central Bank of the
Philippines stopped all dollar allocations for raw materials for the
corporation which necessarily led to the paralysis of the
operations. It was alleged that the supplier of the said finished
goods was United Commercial Company of New York in which
Dalamal, appointed by the BOD of the Textile Mills as co-manager,
had interests and that the letter of credit for said goods were
guaranteed by the Indian Commercial Company and Indian
Traders in which Dalamal likewise has interests. It was further
alleged that the sale of the finished products was the business of
Indian Commercial Company of Manila who cannot obtain dollar
allocations for importations of finished goods.
An action for the appointment of a receiver was filed before the
trial court after the BOD refused to proceed against Dalamal,
which was granted.
ISSUE: WON Justiniani may be allowed to institute the case for
receivership and damages?

HELD: Yes. It is not denied by petitioner that the allocation of


dollars to the corporation for the importation of raw materials was
suspended. In the eyes of the court below, as well as in our own,
the importation of textiles instead of raw materials, as well as the
failure of the Board of Directors to take action against those
directly responsible for the misuse of dollar allocations constitute
fraud, or consent thereto on the part of the directors. Therefore, a
breach of trust was committed which justified the derivative suit
by a minority stockholder on behalf of the corporation.

It is well settled in this jurisdiction that where corporate


directors are guilty of a breach of trust not of mere
error of judgment or abuse of discretion and
intracorporate remedy is futile or useless, a stockholder
may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to
bring about a redress of the wrong inflicted directly upon
the corporation and indirectly upon the stockholders. An

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

illustration of a suit of this kind is found in the case of Pascual vs.


Del Saz Orozco (19 Phil. 82), decided by this Court as early as
1911. In that case, the Banco Espaol-Filipino suffered heavy
losses due to fraudulent connivance between a depositor and an
employee of the bank, which losses, it was contended, could have
been avoided if the president and directors had been more
vigilant in the administration of the affairs of the bank. The
stockholders constituting the minority brought a suit in behalf of
the bank against the directors to recover damages, and this over
the objection of the majority of the stockholders and the directors.
This court held that the suit could properly be maintained. (64
Phil., Angeles vs. Santos [G.R. No. L-43413, prom. August 31,
1937] p. 697).

The claim that respondent Justiniani did not take steps to remedy
the illegal importation for a period of two years is also without
merit. During that period of time respondent had the right to
assume and expect that the directors would remedy the
anomalous situation of the corporation brought about by their own
wrong doing. Only after such period of time had elapsed could
respondent conclude that the directors were remiss in their duty
to protect the corporation property and business.
We are led to agree with the judge below that the appointment of
a receiver was not only expedient but also necessary to restore
the faith and confidence of the Central Bank authorities in the
administration of the affairs of the corporation, thus ultimately
leading to a restoration of the dollar allocation so essential to the
operation of the textile mills.
RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A
RAMA, EDUARDO DE LA RAMA, and the HEIRS OF MERCEDES DE
LA RAMA-BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of
First Instance of Negros Occidental, Branch II, BENJAMIN LOPUE,
SR., BENJAMIN LOPUE, JR., LEONITO LOPUE, and LUISA U. DACLES
respondents.
(GR No. -40620; 90 SCRA 40; May 6, 1979)
FACTS: A writ of preliminary injunction was filed by herein
respondents as purchasers of 1,328 shares of stock of Inocente De
La Rama, inc. after herein petitioners surreptitiously met and
authorized the sale of 823 shares to forestall the petitioners
takeover from the previous president and vice-president (sellers of
the 1,328 shares), in violation of their pre-emptive right. The trial
court ruled in favor of respondents. Later on, private respondents
entered into a compromise agreement with the recipients for the
transfer of the 823 shares, against which the petitioners filed a
motion to dismiss which was denied.
ISSUE: WON a derivative suit is the more proper action that
should have been filed by respondents?

HELD: No. The petitioners contend that the proper remedy of the
plaintiffs would be to institute a derivative suit against the
petitioners in the name of the corporation in order to secure a
binding relief after exhausting all the possible remedies available
within the corporation.

An individual stockholder is permitted to institute a derivative suit


on behalf of the corporation wherein he holds stock in order to
protect or vindicate corporate rights, whenever the officials of the
corporation refuse to sue, or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real

51

party in interest. In the case at bar, however, the plaintiffs


are alleging and vindicating their own individual interests
or prejudice, and not that of the corporation. At any rate, it
is yet too early in the proceedings since the issues have not been
joined. Besides, misjoinder of parties is not a ground to dismiss an
action.
JUAN D. EVANGELISTA, et. al., plaintiff-appellant VS. RAFAEL
SANTOS, defendant-appelle (86 Phil. 387; May 19, 1950) Juan
D. Evangelista, et. al. are minority stockholders of the Vitali
Lumber Company, Inc., while Rafael Santos holds more than 50%
of the stocks of said corporation and also is and always has been
the president, manager, and treasurer thereof. Santos, in such
triple capacity, through fault, neglect, and abandonment allowed
its lumber concession to lapse and its properties and assets,
among them machineries, buildings, warehouses, trucks, etc., to
disappear, thus causing the complete ruin of the corporation and
total depreciation of its stocks.
Evangelista, et. al. therefore prays for judgment requiring Santos:
(1) to render an account of his administration of the corporate
affairs and assets: (2) to pay plaintiffs the value of their respective
participation in said assets on the basis of the value of the stocks
held by each of them; and (3) to pay the costs of suit.
Evangelista, et. al. also ask for such other remedy as may be and
equitable. The trial court dismissed the action on the ground of
improper venue and lack of cause of action.
ISSUE: WON plaintiffs have a right to bring the action for their
benefit?
HELD: No. The complaint shows that the action is for damages
resulting from mismanagement of the affairs and assets of the
corporation by its principal officer, it being alleged that
defendant's maladministration has brought about the ruin of the
corporation and the consequent loss of value of its stocks. The
injury complained of is thus primarily to that of the corporation, so
that the suit for the damages claimed should be by the
corporation rather than by the stockholders (3 Fletcher,
Cyclopedia of Corporation pp. 977-980). The stockholders may
not directly claim those damages for themselves for that
would result in the appropriation by, and the distribution
among them of part of the corporate assets before the
dissolution of the corporation and the liquidation of its
debts and liabilities, something which cannot be legally
done in view of section 16 of the Corporation Law.
But while it is to the corporation that the action should pertain in
cases of this nature, however, if the officers of the corporation,
who are the ones called upon to protect their rights, refuse to sue,
or where a demand upon them to file the necessary suit would be
futile because they are the very ones to be sued or because they
hold the controlling interest in the corporation, then in that case
any one of the stockholders is allowed to bring suit (3 Fletcher's
Cyclopedia of Corporations, pp. 977-980). But in that case it is the
corporation itself and not the plaintiff stockholder that is the real
property in interest, so that such damages as may be recovered
shall pertain to the corporation (Pascual vs. Del Saz Orosco, 19
Phil. 82, 85). In other words, it is a derivative suit brought by a
stockholder as the nominal party plaintiff for the benefit of the
corporation, which is the real property in interest (13 Fletcher,
Cyclopedia of Corporations, p. 295).
In the present case, the plaintiff stockholders have brought the
action not for the benefit of the corporation but for their own
benefit, since they ask that the defendant make good the losses
occasioned by his mismanagement and pay to them the value of
their respective participation in the corporate assets on the basis
of their respective holdings. Clearly, this cannot be done until all
corporate debts, if there be any, are paid and the existence of the
corporation terminated by the limitation of its charter or by lawful
dissolution in view of the provisions of section 16 of the
Corporation Law.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

It results that plaintiff's complaint shows no cause of action in


their favor so that the lower court did not err in dismissing the
complaint on that ground.
While plaintiffs ask for remedy to which they are not entitled
unless the requirement of section 16 of the Corporation Law be
first complied with, we note that the action stated in their
complaint is susceptible of being converted into a derivative suit
for the benefit of the corporation by a mere change in the prayer.
Such amendment, however, is not possible now, since the
complaint has been filed in the wrong court, so that the same last
to be dismissed.
The order appealed from is therefore affirmed, but without
prejudice to the filing of the proper action in which the venue shall
be laid in the proper province. Appellant's shall pay costs. So
ordered
IN SUMMARY:
1. That the party bringing the suit should be a
stockholder as of the time the act or transaction complained
of took place, or whose shares have evolved upon him since
by operation of law. This rule, however, does not apply if such
act or transaction continues and is injurious to the
stockholder or affect him specifically in some other way.

2.

3.

4.

5.

The number of his shares is immaterial since he is not


suing in his own behalf or for the protection or vindication of
his own right, or the redress of a wrong done against him,
individually, but in behalf and for the benefit of the
corporation.
He has tried to exhaust intra-corporate remedies, he
has made a demand on the board of directors for the
appropriate relief but the latter had failed or refused to heed
his plea. Demand, however, is not required if the
company is under the complete control of the directors
who are the very ones to be sued (or where it becomes
obvious that a demand upon them would have been futile
and useless) since the law does not require a litigant to
perform useless acts;
The stockholder bringing the suit must allege in his
complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other
stockholders similarly situated, otherwise, the case is
dismissible. This is because the cause of action actually
devolves on the corporation and not to a particular
stockholder.
The corporation should be made a party, either as partyplaintiff or defendant, in order to make the courts judgment
binding upon it, and thus, bar future litigation of the same
issues. On what side the corporation appears loses
importance when it is considered that it lay within the power
of the court to direct the making of amendment of the
pleading, by adding or dropping parties, as may be required
in the interest of justice. Misjoinder of parties is not a ground
to dismiss action; and,
Any benefit or damages recovered shall pertain to the
corporation. This is so because in all instances, derivative
suit is instituted for and in behalf of the corporation and not
for the protection or vindication of a right or rights of a
particular stockholder, otherwise, the aggrieved stockholder
should institute, instead, an individual or personal suit to
vindicate his personal or individual right. Or, for that matter,
representative or class suit for all other stockholders whose
rights are similarly situated, injured or violated, personally or
individually.

by-laws or on a majority vote of the board, except with respect to: (1)
approval of any action for which shareholders' approval is also
required; (2) the filing of vacancies in the board; (3) the amendment
or repeal of by-laws or the adoption of new by-laws; (4) the
amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and (5) a
distribution of cash dividends to the shareholders
CHAPTER 7: CORPORATE POWERS AND AUTHORITY
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the
provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and
to amend or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers
and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members
to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with 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 require, subject to the limitations prescribed by law
and the Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign, shall
give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of
incorporation.
The statement of the objects, purposes or powers in the AOI
results practically in defining the scope of the authorized
corporate enterprise or undertaking. This statement both confers
and also limits the actual authority of the corporation.

Along with the powers indicated in the AOI, a corporation can also
exercise powers that may be granted by law, particularly those
Sec. 35. Executive committee. - The by-laws of a corporation may provided under Sec. 36 and 44 of the Corporation Code and those
which may be necessary or incidental to tis existence.
create an executive committee, composed of not less than three
members of the board, to be appointed by the board. Said committee In short, corporate authority may be classified as:
may act, by majority vote of all its members, on such specific matters 1. Express powers those expressly granted by law inclusive of
within the competence of the board, as may be delegated to it in the
the corporate charter or AOI;
J.

EXECUTIVE COMMITTEE

52

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

2.
3.

Implied Powers those impliedly granted as are essential or


reasonably necessary to the carrying out of the express
powers; and
Incidental Powers those incidental to its existence.

A.

POWER TO SUE AND BE SUED

A corporation may sue and be sued in its corporate name just like
any other person.
VENUE: the action filed against it must be instituted at the place
of principal office of the corporation.
SERVICE OF SUMMONS: Sec. 11, Rule 14 of the Rules of Court
provide:

of summons on the secretary's wife did not confer jurisdiction


over the corporation in the foreclosure proceeding against it.
Hence, the decree of foreclosure and the deficiency judgment
were void and should be vacated. (Reader vs. District Court, 94
Pacific 2nd 858).
The purpose is to render it reasonably certain that the
corporation will receive prompt and proper notice in an
action against it or to insure that the summons be served
on a representative so integrated with the corporation
that such person will know what to do with the legal
papers served on him. In other words, "to bring home to
the corporation notice of the filing of the action". (35A C.J.S.
288 citing Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848;
MacCarthy vs. Langston D.C. Fla., 23 F.R.D. 249).

Sec. 11. Service upon domestic private juridical entity. When


the defendant is a corporation, partnership or association organized
under the laws of the Philippines with a juridical personality, service
may be made on the president, managing partner, general manager, In the instant case the Manila court did not acquire jurisdiction
over Delta Motor because it was not properly served with
corporate secretary, treasurer, or in-house counsel.
summons. The service of summons on Dionisia G. Miranda, who is
not among the persons mentioned in section 13 of Rule 14, was
Service of summons upon persons other than those named under
than those named in the above provision is without force and
insufficient. It did not bind the Delta Motor. Courts acquire
effect.
jurisdiction over the person of a party defendant and of the
subject-matter of the action by vertue of the service of summons
DELTA MOTOR SALES CORPORATION, petitioner,
in the manner required by law. Where there is no service of
vs.
summons or a voluntary general appearance by the defendant,
HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First
the court acquires no jurisdiction to pronounce a judgment in the
Instance of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS
cause. (Syllabi Salmon and Pacific Commercial Co. vs. Tan Cueco,
PAMINTUAN, respondents
(GR No. L-41667; April 30, 1976)
36 Phil. 556).
FACTS: Herein respondent Pamintuan initiated an action against
petitioner Delta Motors for the alleged defective Toyota car sold to
him and for failure to fulfill the warranty obligation by not
repairing the car.
The summons were served on Dionisia Miranda, employee of the
petitioner. Delta Motors failed to answer the complaint and was
declared in default and evidence was presented and a decision
was rendered against herein petitioner.
Petitioner filed a motion to lift the order of default and to set aside
the judgment and for new trial, which was denied.

Consequently, the order of default, the judgment by default and


the execution in Civil Case No. 97373 are void and should be set
aside.
E. B. VILLAROSA & PARTNER CO., LTD., petitioner,
vs.
HON. HERMINIO I. BENITO, in his capacity as Presiding Judge,
RTC, Branch 132, Makati City and IMPERIAL DEVELOPMENT
CORPORATION, respondent.
(GR No. 136426; Aug. 6, 1999)

ISSUE: WON there was proper service of summons?

FACTS: Petitioner is a limited partnership with principal office


address at Davao City and with branch offices at Paraaque, Metro
Manila and Lapasan, Cagayan de Oro City.

HELD: No. Rule 14 of the Revised Rules of Court provides:

Petitioner and private respondent executed a Deed of Sale with


Development Agreement wherein the former agreed to develop
certain parcels of land located at Cagayan de Oro belonging to the
latter into a housing subdivision for the construction of low cost
housing units. They further agreed that in case of litigation
regarding any dispute arising therefrom, the venue shall be in the
proper courts of Makati.

SEC. 13. Service upon private domestic corporation or


partnership. If defendant is a corporation organized under the
laws of the Philippines or a partnership duly registered, service
may be made on the president, manager, secretary, cashier,
agent, or any of its directors.
For the purpose of receiving service of summons and
being bound by it, a corporation is identified with its agent
or officer who under the rule is designated to accept
service of process. "The corporate power to receive and
act on such service, so far as to make it known to the
corporation, is thus vested in such officer or agent."
(Lafayette Insurance Co. vs. French, 15 L. Ed. 451, 453).
A strict compliance with the mode of service is necessary to
confer jurisdiction of the court over a corporation. The officer upon
whom service is made be one who is named in the statute;
otherwise the service is insufficient. So, where the statute
required that in the case of a domestic corporation summons
should be served on "the president or head of the corporation
secretary treasurer, cashier or managing agent thereof", service

53

Private respondent, as plaintiff, filed a Complaint for Breach of


Contract and Damages against petitioner, as defendant, before
the RTC Makati for failure of the latter to comply with its
contractual obligation in that, other than a few unfinished low cost
houses, there were no substantial developments therein.
Summons, together with the complaint, were served upon the
defendant, through its Branch Manager at the stated address at
Cagayan de Oro City but the Sheriff's Return of Service stated that
the summons was duly served "upon defendant E.B. Villarosa &
Partner Co., Ltd. thru its Branch Manager Engr. at their new office
Villa Gonzalo, Nazareth, Cagayan de Oro City, and evidenced by
the signature on the face of the original copy of the summons.
Defendant filed a motion to dismiss on the ground of improper
service of summons which was denied.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

ISSUE: WON the court acquired jurisdiction?


HELD: No. Earlier cases have uphold service of summons upon a
construction project manager; a corporation's assistant manager;
ordinary clerk of a corporation; private secretary of corporate
executives; retained counsel; officials who had charge or control
of the operations of the corporation, like the assistant general
manager; or the corporation's Chief Finance and Administrative
Officer. In these cases, these persons were considered as "agent"
within the contemplation of the old rule. Notably, under the new
Rules, service of summons upon an agent of the corporation is no
longer authorized.
The designation of persons or officers who are authorized to
accept summons for a domestic corporation or partnership is now
limited and more clearly specified in Section 11, Rule 14 of the
1997 Rules of Civil Procedure. The rule now states "general
manager" instead of only "manager"; "corporate secretary"
instead of "secretary"; and "treasurer" instead of "cashier." The
phrase "agent, or any of its directors" is conspicuously deleted in
the new rule.
The particular revision under Section 11 of Rule 14 was explained
by retired Supreme Court Justice Florenz Regalado, thus:
. . . the then Sec. 13 of this Rule allowed service upon a
defendant corporation to "be made on the president,
manager, secretary, cashier, agent or any of its
directors." The aforesaid terms were obviously
ambiguous and susceptible of broad and sometimes
illogical interpretations, especially the word "agent" of
the corporation. The Filoil case, involving the litigation
lawyer of the corporation who precisely appeared to
challenge the validity of service of summons but
whose very appearance for that purpose was seized
upon to validate the defective service, is an
illustration of the need for this revised section with
limited scope and specific terminology. Thus the
absurd result in the Filoil case necessitated the
amendment permitting service only on the in-house
counsel of the corporation who is in effect an
employee of the corporation, as distinguished from an
independent practitioner. (emphasis supplied).
Retired Justice Oscar Herrera, who is also a consultant of the Rules
of Court Revision Committee, stated that "(T)he rule must be
strictly observed. Service must be made to one named in (the)
statute . . .
It should be noted that even prior to the effectivity of the 1997
Rules of Civil Procedure, strict compliance with the rules has been
enjoined. In the case of Delta Motor Sales Corporation vs.
Mangosing, the Court held:
A strict compliance with the mode of service is
necessary to confer jurisdiction of the court over a
corporation. The officer upon whom service is made
must be one who is named in the statute; otherwise
the service is insufficient. . . .
The purpose is to render it reasonably certain that the
corporation will receive prompt and proper notice in an action
against it or to insure that the summons be served on a
representative so integrated with the corporation that such
person will know what to do with the legal papers served on
him. In other words, "to bring home to the corporation notice
of the filing of the action." . . . .
The liberal construction rule cannot be invoked and
utilized as a substitute for the plain legal
requirements as to the manner in which summons
should be served on a domestic corporation. . . . .
(emphasis supplied).

54

Accordingly, we rule that the service of summons upon the branch


manager of petitioner at its branch office at Cagayan de Oro,
instead of upon the general manager at its principal office at
Davao City is improper. Consequently, the trial court did not
acquire jurisdiction over the person of the petitioner.
B.

POWER OF SUCCESSION

This right basically means that the corporation persists to exist


despite death, incapacity, civil interdiction, or withdrawal of the
stockholders or members thereof.
C.

POWER TO ADOPT AND USE A COMMON SEAL

This right has been expressly granted by law. However, it is not


mandatory but merely permissive. This is because the corporate
seal performs no further or greater function than to impart prima
facie evidence of the due execution by the corporation of a
written document or obligation.
D.

POWER TO AMEND ITS ARTICLES OF INCORPORATION

The procedures for the exercise of this right are provided under
Sec. 16, Sec. 37 and 38 as discussed earlier under CHAPTER 5:
CORPORATE CHARTER AND ITS AMENDMENTS.
As far as corporations created by special law are concerned,
amendment may NOT be considered as a matter of right. The law
creating it may or may not authorize or empower the corporation
to make any changes in its AOI or charter. However, whether
empowered or not, Congress may amend or repeal a corporate
charter by virtue of its inherent authority to amend or repeal laws
under the Constitution.
E.

POWER TO ADOPT BY-LAWS

The Corporation Code actually REQUIRES a corporation to adopt


by-laws, not contrary to law, morals, or public policy, within 1
month from receipt of official notice of the issuance of the
certificate of incorporation or registration (Sec. 46).
Amendment of the by-laws are allowed subject to the procedure
and requirement provided under Sec. 48.
F.

POWER TO ISSUE OR SELL STOCKS AND TO ADMIT


MEMBERS

The power of a corporation to issue or sell its stocks is an inherent


right of any stock corporation except only as it may be regulated
by law or by the AOI.
Admission, as well as termination of members is a prerogative
granted by law to non-stock corporations and the manner,
requirements or procedures for such admission or termination
may be contained in the AOI or by-laws.
G.

POWER TO ACQUIRE OR ALIENATE REAL OR PERSONAL


PROPERTY

When a corporation is expressly empowered by law to acquire or


alienate real and/or personal properties, the limitations imposed
by Sec. 36 are as follows:
Sec. 36. Xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, (1) as
the transaction of the lawful business of the corporation may
reasonably and necessarily require, (2) subject to the
limitations prescribed by law and the Constitution.
The first limitation practically sets the limit of the corporate

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

authority to acquire, own, hold or alienate property. As it has been


said the purpose clause in the AOI grants as well as limits the
powers which a corporation may exercise. Verily, WON the
acquisition of such property is within the corporate powers or
authority may reasonably be determined from the purpose or
purposes indicated in the AOI.
LUNETA MOTOR COMPANY, petitioner, vs. A.D. SANTOS, INC.,
ET AL., respondents (Gr No. 17716; July 31, 1962) Nicolas
Concepcion executed a chattel mortgage covering a certificate of
public convenience granted to him to operate taxicab service of
27 units in Manila, in favor of petitioner, to secure a loan
evidenced by a promissory note guaranteed by Concepcion and
one Placid Esteban.
Concepcion mortgaged the same certificate to cover a second
loan with Rehabilitation Finance.
Petitioner filed an action to foreclose the mortgage. While it was
pending, RF also foreclosed the second chattel mortgage where
the certificate was sold at a public auction in favor of AD Santos
who applied for the approval of the sale which was granted by the
Public Service Commission.
Later on, the CFI rendered a judgment in favor of petitioner, where
the certificate was sold at a public auction in favor of the
petitioner who immediately filed for approval with the
Commission. AD Santos Inc., recipient of the certificate from AD
Santos, opposed the application for approval.

ISSUE: WON the erection of the building was reasonable?

HELD: Yes. With this contention we are unable to agree. Under


the Corporation Law, every corporation has the power to
purchase, hold and lease such real property as the transaction of
the lawful business of the corporation may reasonably and
necessarily require. When this property was acquired in 1916, the
business of El Hogar Filipino had developed to such an extent, and
its prospects for the future were such as to justify its directors in
acquiring a lot in the financial district of the City of Manila and in
constructing thereon a suitable building as the site of its offices;
and it cannot be fairly said that the area of the lot 1,413 square
meters was in excess of its reasonable requirements. The law
expressly declares that corporations may acquire such real estate
as is reasonably necessary to enable them to carry out the
purposes for which they were created; and we are of the opinion
that the owning of a business lot upon which to construct and
maintain its offices is reasonably necessary to a building and loan
association such as the respondent was at the time this property
was acquired. A different ruling on this point would compel
important enterprises to conduct their business exclusively in
leased offices a result which could serve no useful end but
would retard industrial growth and be inimical to the best interests
of society.

ISSUE: WON Petitioner may acquire the certificate of public


convenience?

HELD: No. Petitioner claims in this regard that its corporate


purposes are to carry on a general mercantile and commercial
business, etc., and that it is authorized in its articles of
incorporation to operate and otherwise deal in and concerning
automobiles and automobile accessories' business in all its
multifarious ramification (petitioner's brief p. 7) and to operate,
etc., and otherwise dispose of vessels and boats, etc., and to own
and operate steamship and sailing ships and other floating craft
and deal in the same and engage in the Philippine Islands and
elsewhere in the transportation of persons, merchandise and
chattels by water; all this incidental to the transportation of
automobiles (id. pp. 7-8 and Exhibit B).

We find nothing in the legal provision and the provisions of


petitioner's articles of incorporation relied upon that could justify
petitioner's contention in this case. To the contrary, they are
precisely the best evidence that it has no authority at all to
engage in the business of land transportation and operate a
taxicab service. That it may operate and otherwise deal in
automobiles and automobile accessories; that it may engage in
the transportation of persons by water does not mean that it may
engage in the business of land transportation an entirely
different line of business. If it could not thus engage in the line of
business, it follows that it may not acquire a certificate of public
convenience to operate a taxicab service, such as the one in
question, because such acquisition would be without purpose and
would have no necessary connection with petitioner's legitimate
business.
GOVERNMENT VS. EL HOGAR FILIPINO (supra) the directors
of El Hogar Filipino erected a modern reinforced concrete office
building at the site of its old building. The acquisition of the lot
and the construction of the new office building thereon is not the
subject of the second cause of action for being ultra vires on the
part of the corporation.

55

We are furthermore of the opinion that, inasmuch as the lot


referred to was lawfully acquired by the respondent, it is entitled
to the full beneficial use thereof. No legitimate principle can
discovered which would deny to one owner the right to enjoy his
(or its) property to the same extent that is conceded to any other
owner; and an intention to discriminate between owners in this
respect is not lightly to be imputed to the Legislature. The point
here involved has been the subject of consideration in many
decisions of American courts under statutes even more restrictive
than that which prevails in this jurisdiction; and the conclusion has
uniformly been that a corporations whose business may properly
be conducted in a populous center may acquire an appropriate lot
and construct thereon an edifice with facilities in excess of its own
immediate requirements
It would seem to be unnecessary to extend the opinion by lengthy
citations upon the point under consideration, but Brown vs.
Schleier (118 Fed., 981), may be cited as being in harmony with
the foregoing authorities. In dealing with the powers of a national
bank the court, in this case, said:
When an occasion arises for an investment in real property
for either of the purposes specified in the statute the national
bank act permits banking associations to act as any prudent
person would act in making an investment in real estate, and
to exercise the same measure of judgment and discretion.
The act ought not to be construed in such a way as to compel
a national bank, when it acquires real property for a
legitimate purpose, to deal with it otherwise than a prudent
land owner would ordinarily deal with such property.
At any rate the weight of judicial opinion is so overwhelmingly in
favor of sustaining the validity of the acts alleged in the second
cause of action to have been done by the respondent in excess of
its powers that we refrain from commenting at any length upon
said cases. The ground stated in the second cause of action is in
our opinion without merit.
THE DIRECTOR OF LANDS, petitioner,
vs.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

THE HONORABLE COURT OF APPEALS and IGLESIA NI


CRISTO, respondents
(GR No. L56613; March 14, 1988)

occupation of the land in question, the 30-year period of open,


continuous, exclusive and notorious possession and occupation
required by law was completed in 1966.

FACTS: Private respondent Iglesia Ni Cristo applied with the CFI of


Cavite for registration of a parcel of land which it claimed to have
acquired by virtue of a Deed of Absolute Sale from Aquelina de la
Cruz, alleging that the applicant and its predecessors-in-interest
have been in actual, continuous, public, peaceful and adverse
possession and occupation of the said land for more than 30
years, which was opposed by the Government as represented by
the Director of Lands. The CFI and the CA ruled in favor of INC.

The completion by private respondent of this statutory 30-year


period has dual significance in the light of Section 48[b] of
Commonwealth Act No. 141, as amended and prevailing
jurisprudence: [1] at this point, the land in question ceased by
operation of law to be part of the public domain; and [2] private
respondent could have its title thereto confirmed through the
appropriate proceedings as under the Constitution then in force,
private corporations or associations were not prohibited from
acquiring public lands, but merely prohibited from acquiring,
holding or leasing such type of land in excess of 1,024 hectares.

ISSUE: WON the corporation may acquire the land in question?

HELD Yes. As observed at the outset, had this case been resolved
immediately after it was submitted for decision, the result may
have been quite adverse to private respondent. For the rule then
prevailing under the case of Manila Electric Company v. CastroBartolome et al., 114 SCRA 799, reiterated in Republic v.
Villanueva, 114 SCRA 875 as well as the other subsequent cases
involving private respondent adverted to above', is that a juridical
person, private respondent in particular, is disqualified under the
1973 Constitution from applying for registration in its name
alienable public land, as such land ceases to be public land "only
upon the issuance of title to any Filipino citizen claiming it under
section 48[b]" of Commonwealth Act No. 141, as amended. These
are precisely the cases cited by petitioner in support of its theory
of disqualification.

Since then, however, this Court had occasion to re-examine the


rulings in these cases vis-a-vis the earlier cases of Carino v.
Insular Government, 41 Phil. 935, Susi v. Razon, 48 Phil. 424 and
Herico v. Dar, 95 SCRA 437, among others. Thus, in the recent
case of Director of Lands v. Intermediate Appellate Court, 146
SCRA 509, We categorically stated that the majority ruling in
Meralco is "no longer deemed to be binding precedent", and that
"[T]he correct rule, ... is that alienable public land held by a
possessor, personally or through his predecessors-in-interest,
openly, continuously and exclusively for the prescribed statutory
period [30 years under the Public Land Act, as amended] is
converted to private property by mere lapse or completion of said
period, ipso jure." We further reiterated therein the timehonored
principle of non-impairment of vested rights.
The crucial factor to be determined therefore is the length of time
private respondent and its predecessors-in-interest had been in
possession of the land in question prior to the institution of the
instant registration proceedings. The land under consideration
was acquired by private respondent from Aquelina de la Cruz in
1947, who, in turn, acquired by same by purchase from the Ramos
brothers and sisters, namely: Eusebia, Eulalia, Mercedes, Santos
and Agapito, in 1936. Under section 48[b] of Commonwealth Act
No. 141, as amended, "those who by themselves or through their
predecessors-in-interest have been in open, continuous, exclusive
and notorious possession and occupation of agricultural lands of
the public domain, under a bona fide claim of acquisition or
ownership, for at least thirty years immediately preceding the
filing of the application for confirmation of title except when
prevented by war or force majeure" may apply to the Court of First
Instance of the province where the land is located for confirmation
of their claims, and the issuance of a certificate of title therefor,
under the Land Registration Act. Said paragraph [b] further
provides that "these shall be conclusively presumed to have
performed all the conditions essential to a Government grant and
shall be entitled to a certificate of title under the provisions of this
chapter." Taking the year 1936 as the reckoning point, there being
no showing as to when the Ramoses first took possession and

56

If in 1966, the land in question was converted ipso jure into


private land, it remained so in 1974 when the registration
proceedings were commenced. This being the case, the
prohibition under the 1973 Constitution would have no
application. Otherwise construed, if in 1966, private respondent
could have its title to the land confirmed, then it had acquired a
vested right thereto, which the 1973 Constitution can neither
impair nor defeat.
H.

POWER TO ENTER INTO MERGER OR CONSOLIDATION

This is an express power granted by the law under the Code,


particularly Title IX thereof.
I.

POWER TO MAKE REASONABLE DONATIONS

Ordinarily, a pure gift of funds or property by a corporation not


created for charitable purpose is not authorized and would
constitute a violation of the rights of its stockholders unless it is
empowered by statute. There are circumstances, however, under
which a donation by a corporation may be to it benefit as a means
of increasing its business or promoting patronage.
Thus, Sec. 36 (9) expressly authorizes a corporation to make
donations, subject to the following limitations:
1. The donation must be reasonable;
2. It must be for public welfare, or for hospital, charitable,
scientific, cultural or similar purpose; and
3. It shall not be in aid of political party or candidate, or for
purposes of partisan political activity.
J.

POWER TO ESTABLISH PENSION, RETIREMENT AND


OTHER PLANS

It is now generally recognized in almost all jurisdiction to


empower a corporation to establish pension plans, pension trust,
profit sharing plans, stock bonus or stock option plans and other
incentive plans to directors, officers and employees. In fact, the
power may include any act to promote convenience, welfare and
benefit of the employees or officers.
REPUBLIC VS. ACOJE MINING COMPANY INC. (7 SCRA 361;
Feb. 28, 1963) - A post office branch was opened in herein
respondents mining camp at Sta. Cruz Zambales, at its request,
where Hilario M. Sanchez, an employee of such company, was the
postmaster. Prior to the opening the company, at the request of
the Bureau of Posts, adopted a resolution that the former would
assume full responsibility for all cash received by the postmaster.
On May 11, 1954, the postmaster went on a three day leave but
never returned. As a result, an action was brought by the
government to recover P13,867.24, the amount of shortage in the
accounts of the postmaster, from the company.
ISSUE: WON the subject resolution is within the powers of the
company to adopt?
HELD: Yes. The opening of the post office branch was undertaken
because of a request submitted by respondent company to
promote the convenience and benefit of its employees. The idea

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

did not come from the government and the Director of Posts was
prevailed upon to agree to the request only after studying the
necessity for its establishment and after imposing upon the
company certain requirements intended to safeguard and protect
the interest of the government. Accordingly, the company cannot
now be heard to complain of its liability upon the technical plea
that the resolution is ultra vires. The least that can be said is that
it cannot now go back on its plighted word on the ground of
estoppel.
The resolution covers a subject which concerns the benefit,
convenience and welfare of the companys employees and their
families. There are 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.
Thus, it has been held that although not expressly authorized to
do so a corporation may become a surety where the particular
transaction is reasonably necessary or proper to the conduct of its
business, and here it is undisputed that the establishment of the
local post office is a vital improvement in the living condition of its
employees and laborers who came to settle in it mining camp
which is far removed from the postal facilities or means of
communication accorded to people living in a city or municipality.

NPC VS. VERA (170 SCRA 721; Feb. 27, 1989)


FACTS: Private Respondent Sea Lion International Port Terminal
Services Inc. filed a complaint for prohibition and mandamus with
damages against petitioner NPC and Philippine Ports Authority
after NPC did not renew its Contract for Stevedoring Services for
coal-handling of NPCs plant and in taking over its stevedoring
services.
ISSUE: WON NPC may embark in stevedoring and arrastre
services?
HELD: Yes. The NPC was created and empowered not only to
construct, operate and maintain power plants, reservois,
transmission lines and other works, but also:
to exercise such powers and do such things as may be
reasonably necessary to carry out the business and purposes for
which it was organized, or which, from time to time, may be
declared by the Board to be necessary, useful, incidental or
auxiliary to accomplish said purpose (Sec. 3[1] of RA 6395, as
amended)

IMPLIED POWERS

To determine whether or not the NPC act falls within the purview
of the above provision, the Court must decide whether or not a
logical and necessary relation exists between the act
Sec. 36. Xxx
questioned and the corporate purpose expressed in the
11. To exercise such other powers as may be essential or necessary NPC charter. For if the act is one which is lawful in itself
and not otherwise prohibited, and is done for the purpose
to carry out its purpose or purposes as stated in the articles of
of serving corporate ends, and reasonably contributes to
incorporation
the promotion of those ends in a substantial and not in a
remote and fanciful sense, it may be fairly considered
It is a question, in each case, of the logical relation of the act
within the corporations charter powers (Montelibano vs.
to the corporate purpose expressed in the charter. For if
Bacolod-Murcia Milling Co., Inc.)
the act is one which is lawful in itself and not otherwise
prohibited, and is done for the purpose of serving
In the instant case, it is an undisputed fact that the pier owned by
corporate ends, and reasonably contributes to the
NPC, receives various shipment of coal which is used exclusively
promotion of those ends in a substantial and not in a
to fuel the Batangas Coal-Fired Thermal Power Plant of the NPC for
remote and fanciful sense, it may be fairly considered
the generation of electric power. The stevedoring services which
within the corporations charter powers (Montelibano vs.
involve the unloading of the coal shipments into the NPC pier for
Bacolod-Murcia Milling Co., Inc. as cited in NPC vs. VERA)
its eventual conveyance to the power plant are incidental and
I.

POWER TO EXERCISE SUCH OTHER POWERS ESSENTIAL


OR NECESSARY TO CARRY OUT ITS PURPOSES

TERESA ELECTRIC AND POWER CO., INC. VS. P.S.C (21 SCRA
198; Sept. 25, 1967) Respondent Filipinas Cement Corporation
filed an application with herein respondent PSC for a certificate of
public convenience to install, maintain and operate an electric
plant in Teresa, Rizal for the purpose of supplying electric power
and light to its cement factory and its employees living within its
compound. Herein petitioner, operating an electric plant in Teresa
Rizal filed an opposition claiming that Filipinas is not authorized to
operate the proposed electric plant under its articles of
incorporation. PSC decided in favor of Filipinas.
ISSUE: WON under its articles of incorporation, Filipinas is
authorized to operate and maintain an electric plant?
HELD: Yes. Paragraph 7 of the AOI of Filipinas provides for
authority to secure from any governmental, state, municipality, or
provincial, city or other authority, and to utilize and dispose of in
any lawful manner, rights, powers, privileges, franchises and
concessions obviously necessary or at least related to the
operation of its cement factory. Moreover, said AOI also provide
that the corporation may generally perform any and all acts
connected with the business of manufacturing portland cement or
arising therefrom or incidental thereto.
It cannot be denied that the operation of an electric light, heat
and power plant is necessarily connected with the business of
manufacturing cement. If in the modern world where we live
today electricity is virtually a necessity for our daily needs, it is
more so in the case of industries like the manufacture of cement.

57

indispensable to the operation of the plant. The Court holds that


NPC is empowered under its Charter to undertake such services, it
being reasonably necessary to the operation and maintenance of
the power plant.
POWERS VS. MARSHALL (161 SCRA 176; May 9, 1988)
FACTS: 14 plaintiffs, all associate members of the International
School, Inc. brought an action for injunction against 10 members
of the Board of Trustees, after a letter of Donal Marshall, president
of the board, was sent stating that the school would be collecting
a development fee of P2,625 per enrollee for the purpose of
constructing new buildings and remodel existing ones to
accommodate the increasing enrollment in the school which
would need P35M. The CFI of Manila dismissed the complaint.
ISSUE: WON the imposition of the development fee is within the
powers of the school?
HELD: Yes. Section 2(b) of PD No. 732 granting certain rights to
the sch0ol, expressly authorized the Board of Trustees upon
consultation with the Secretary of Education and Culture to
determine the amount of fees and assessments which may be
reasonably imposed upon its students, to maintain or conform to
the schools standard of education. Such consultation complied
with and the Secretary expressed his conformity with the
reasonableness of the assessment. The lower court observed that:
Xxx the expansion of the school facilities, which is to be done by
improving old buildings and/or constructing new ones, is an
ordinary business transaction well within the competence of the
Board of Trustees to act upon. Xxx Being directly related to the
purpose of elevating and maintaining the schools standard of

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

instruction, which is ordained in fact by PD 732, the expansion


cannot result in any radical or fundamental change in the kind of
activity being conducted by the school that might require the
consent of the members composing it.

A certificate in duplicate must be signed by a majority of the directors


of the corporation and countersigned by the chairman and the
secretary of the stockholders' meeting, setting forth:

J.

(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by
each, and the amount paid by each on his subscription in cash or
property, or the amount of capital stock or number of shares of nopar stock allotted to each stock-holder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded
indebtedness.

POWER TO EXTEND OR SHORTEN CORPORATE TERM

This has been discussed in Chapter 5: CORPORATE CHARTER AND


ITS AMENDMENTS.
Sec. 37. Power to extend or shorten corporate term. - A private
corporation may extend or shorten its term as stated in the articles of
incorporation when approved by a majority vote of the board of
directors or trustees and ratified at a meeting by the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock
or by at least two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action and of the time
and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may exercise
his appraisal right under the conditions provided in this code.
From the above-provision and jurisprudence, the requirements
and procedure for extending or shortening the corporate term are
as follows:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of
the outstanding capital stock (including non-voting shares) or
2/3 of the members in case of non-stock corporations;
3. The ratification must be made at a meeting duly called for
that purpose;
4. Prior written notice of the proposal to extend or shorten the
corporate term must be made stating the time and place of
meeting addressed to each stockholder or member at his
place of residence, either by mail or personal service;
5. In case of extension, the same cannot be made earlier than 5
years prior to the original or subsequent expiry date unless
there are justifiable reasons for an earlier extension;
6. In case of extension, the same must be made during the
lifetime of the corporation;
7. Any dissenting stockholder may exercise his appraisal right;
8. Submission of the amended articles with the SEC; and
9. Approval thereof by the SEC (as required under Sec. 37 for
extension, and Sec. 120 for shortening the term with the
effect of dissolution)
READ: Alhambra Cigar and Cigarette Manufacturing, Inc. vs. SEC
K.

POWER TO INCREASE OR DECREASE CAPITAL STOCK;


INCUR, CREATE OR INCREASE BONDED INDEBTEDNESS

Sec. 38. Power to increase or decrease capital stock; incur,


create or increase bonded indebtedness. - No corporation shall
increase or decrease its capital stock or incur, create or increase any
bonded indebtedness unless approved by a majority vote of the board
of directors and, at a stockholder's meeting duly called for the
purpose, two-thirds (2/3) of the outstanding capital stock shall favor
the increase or diminution of the capital stock, or the incurring,
creating or increasing of any bonded indebtedness. Written notice of
the proposed increase or diminution of the capital stock or of the
incurring, creating, or increasing of any bonded indebtedness and of
the time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the incurring
or increasing of any bonded indebtedness is to be considered, must
be addressed to each stockholder at his place of residence as shown
on the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally.

58

Any increase or decrease in the capital stock or the incurring,


creating or increasing of any bonded indebtedness shall
require prior approval of the Securities and Exchange
Commission.
One of the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of its
certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare:
Provided, That the Securities and Exchange Commission shall not
accept for filing any certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the
certificate, showing that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and that at least twentyfive (25%) percent of the amount subscribed has been paid either in
actual cash to the corporation or that there has been transferred to
the corporation property the valuation of which is equal to twenty-five
(25%) percent of the subscription: Provided, further, That no decrease
of the capital stock shall be approved by the Commission if its effect
shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board
of trustees and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities
and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof.
The following requirements or procedure should be complied with:
1. Approval by the majority vote of the BOD/T;
2. Ratification by the stockholders representing at least 2/3 of
the outstanding capital stock (including non-voting shares) or
2/3 of the members in case of non-stock corporations at a
meeting duly called for that purpose;
3. Prior written notice of the proposal to extend or shorten the
corporate term must be made stating the time and place of
meeting addressed to each stockholder or member at his

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

4.

5.
6.
7.
8.

place of residence, either by mail or personal service;


A certificate in duplicate must be signed by a majority of the
directors of the corporation, countersigned by the chairman
and the secretary of the stockholders meeting, setting forth
the matters contained in subsection 1 to 7 of Sec. 38;
In case of increase in capital stock, 25% of such increased
capital must be subscribed and that at least 25% of the
amount subscribed must be paid either in cash or property;
In case of decrease of capital stock, the same must not
prejudice the right of the creditors;
Filing of the certificate of increase and amended AOI with the
SEC; and
Approval thereof by the SEC.

METHODS OF INCREASING CAPITAL STOCK:


1. Increase the par value of the existing number of shares
without increasing the number of shares;
2. Increase the number of existing shares without increasing the
par value thereof;
3. Increasing the number of shares and at the same time
increasing the par value of the shares
REASONS/PURPOSE FOR THE INCREASE:
1. Expansion;
2. Payment of Debt Obligations;
3. To acquire additional assets such as providing cars to
employees to distribute the goods;
*Nothing in law prohibits increase of capital stock
REASONS FOR DECREASE:
1. To reduce or wipe out existing deficit where no creditors
would thereby by affected;
2. When the capital is more than what is necessary to procreate
the business or reduction of capital surplus;
3. To write down the value of its fixed assets to reflect their
present actual value in case where there is a decline in the
value of the fixed assets of the corporation.
TRUST FUND DOCTRINE: The subscriptions to capital stock of
the corporation constitute a fund which the creditors have a right
to look up for the satisfaction of their claims. Accordingly, if the
decrease would affect the rights of creditors, the same would not
be approved by the SEC.
PHILIPPINE TRUST COMPANY VS. RIVERA (44 Phil. 469; Jan.
29, 1923) - Shortly after its incorporation, the stockholders of
Cooperativa Naval Filipina, adopted a resolution to the effect that
the capital should be reduced by 50% and the subscribers be
released from the obligation to pay their unpaid balance.
In the course of time, the company became insolvent and went
into the hands of Philippine Trust Company (Philtrust), as assignee
in bankruptcy, and by it this action was instituted to recover of
the stock subscription of herein defendant who subscribed to 450
of the 1,000 authorized capital stock.
It does not appear that the formalities under the Corporation Code
for the reduction of capital stock were observed and in particular
it does not appear that any certificate was at any time filed in the
Bureau of Commerce and Industry, showing such reduction.
Respondent judge ruled in favor of Philtrust and directed
respondent to pay of the subscription price of his shares.
ISSUE: WON the reduction is valid and proper?
HELD: No. A corporation has no power to release an original
subscriber to its capital stock from the obligation of paying for his
shares, without a valuable consideration for such release; and as
against creditors a reduction of the capital stock can take place
only in the manner and under the conditions prescribed by the
statute or the charter or the AOI. Moreover, strict compliance with
the statutory regulations is necessary. In the case before us, the

59

resolution releasing the shareholders from their obligation to pay


50% of their respective subscriptions was an attempted
withdrawals of so much capital from the fund upon which the
companys creditors were entitled ultimately to rely and, having
been
effected
without
compliance
with
the
statutory
requirements, was wholly ineffectual.
MADRIGAL & COMPANY VS. ZAMORA (151 SCRA 355; June 30,
1987) - The Madrigal Central Office Employees Union sought for
the renewal of its CBA, proposing a P200 wage increase and an
allowance of P100 a month. Petitioner company requested for the
deferment of its negotiation.
Meanwhile, the company effected two reductions of its capital
stock by issuing marketable securities owned by petitioner in
exchange for shareholders shares.
After the petitioners failure to sit down with the respondent union,
the latter commenced a case with the NLRC for unfair labor
practice. In due time, petitioner filed its position paper, alleging
operating losses.
The Labor Arbiter rendered a decision in favor of respondent
Union.
ISSUE: WON the decrease in capital stock is valid and binding?
HELD: No. What clearly emerges from the recorded facts is that
the petitioner, awash with profits from its business operations but
confronted with the demand of the union for wage increase,
decided to evade its responsibility towards the employees by a
devised capital reduction. While the reduction in capital stock
created an apparent need for retrenchment, it was, by all
indications, just a mask for the purge of union members, who, by
then, had agitated for wage increases. In the face of the petitioner
companys piling profits, the unionists had the right to demand for
such salary adjustments.
That the petitioner made quite handsome profits is clear from the
records.
This court is convinced that the petitioners capital reduction
efforts were, to begin with, a subterfuge, a deception as it were,
to camouflage the fact that it had been making profits, and
consequently, to justify the mass layoff in it employee ranks,
especially the union members. They were nothing but a
premature and plain distribution of corporate assets to obviate a
just sharing to labor of the vast profits obtained by its joint efforts
with capital through the years. Surely, we can neither
countenance nor condone this. It is an unfair labor practice.
L.

POWER TO DENY PRE-EMPTIVE RIGHT

PRE-EMPTIVE RIGHT is a right granted by law to all existing


stockholders of a stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
holdings, subject only to the limitation imposed under Sec. 39,
which provides:
Sec. 39. Power to deny pre-emptive right. - All stockholders of a
stock corporation shall enjoy pre-emptive right to subscribe to all
issues or disposition of shares of any class, in proportion to their
respective shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such preemptive right shall not extend to shares to be issued in compliance
with laws requiring stock offerings or minimum stock ownership by
the public; or to shares to be issued in good faith with the approval of
the stockholders representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for corporate purposes
or in payment of a previously contracted debt.
BASIS OF RIGHT: The grant of this right is for the preservation,
unimpaired and undiluted, of the old stockholders relative and

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

proportionate voting strength and control, that is, the existing


ratio of their property interest and voting power in the
corporation.

increased capital stock proportionate to his present shareholdings.

EXCEPTIONS (Under Sec. 39):


1. When shares to be issued is in compliance with laws requiring
stock offerings or minimum stock ownership by the public; or
2. Shares to be issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding capital stock
either:
a. In exchange for property needed for corporate purpose;
or
b. In payment of a previously contracted debt.

BENITO VS. SEC (123 SCRA 722; July 25, 1983) -Respondent
Jamiatul Philippines Al Islamia, Inc. was incorporated with
P2,000,000 authorized capital stock divided into 20,000 shares, of
which 460 belong to herein petitioner. In a stockholders meeting,
an increase of the authorized capital stock to P1,000,000 was
approved, where the previously unissued shares were all issued.

Sec. 40. Sale or other disposition of assets. - Subject to the


provisions of existing laws on illegal combinations and monopolies, a
corporation may, by a majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including
its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other
instruments for the payment of money or other property or
consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
or in case of non-stock corporation, by the vote of at least to twothirds (2/3) of the members, in a stockholder's or member's meeting
duly called for the purpose. Written notice of the proposed action and
of the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the
conditions provided in this Code.

Petitioner Datu Tagoranao Benito filed a petition with herein


respondent SEC alleging that the additional issue of previously
unissued shares was made in violation of his pre-emptive right
and that the increase of capital stock was illegal considering that
the stockholders on record were not notified, and that such
issuance be cancelled.

A sale or other disposition shall be deemed to cover


substantially all the corporate property and assets if thereby
the corporation would be rendered incapable of continuing
the business or accomplishing the purpose for which it was
incorporated.

SEC Ruling: Benito is not entitled to pre-emptive right with respect


to the original unsubscribed shares, but can exercise such right
with regards the increase capitalization.

After such authorization or approval by the stockholders or members,


the board of directors or trustees may, nevertheless, in its discretion,
abandon such sale, lease, exchange, mortgage, pledge or other
disposition of property and assets, subject to the rights of third
parties under any contract relating thereto, without further action or
approval by the stockholders or members.

The exceptions will not apply to stockholders of close corporation


whose pre-emptive right, is broader if not absolute. See Sec. 102.
The right may likewise be lost by waiver, express or implied or
inability or failure to exercise it having been notified of the
proposed disposition of shares.

ISSUE: WON the above ruling is correct?


HELD: Yes. The issuance of the unsubscribed portion of the
capital stock or P110,980 is valid even if assuming that it was
made without notice to the stockholders as claimed by petitioner.
The power to issue shares of stocks in a corporation is lodged in
the board of directors and no stockholders meeting is necessary
to consider it because such issuance does not need approval of
stockholders.
The general rule is that pre-emptive right is recognized only with
respect to new issue of shares, and not with respect to additional
issues of originally authorized shares. This is on theory that when
a corporation, at its inception offers its first shares, it is presumed
to have offered all of those which it is authorized to issue. An
original subscriber is deemed to have taken his shares knowing
that they form a definite proportionate part of the whole number
of authorized shares. When the shares left unsubscribed are
reoffered, he cannot therefore claim a dilution of interest.
With respect to the claim that the increase in the authorized
capital stock was without consent, expressed or implied, of the
stockholder, it was the finding of the Commission that a meeting
was called for the purpose. The petitioner had not sufficiently
overcome the evidence of respondent that such meeting was in
fact held. What petitioner successfully proved, however, was the
fact that he was not notified of said meeting and that he never
attended the same as he was out of the country at the time,
attending the Mecca pilgrimage. Another thing that petitioner was
able to disprove was the allegation that all stockholders who did
not subscribe to the increase have waived their pre-emptive right.
As far as petitioner is concerned, he had not waived his preemptive right to subscribe as he could not have done so for the
reason that he was not present at the meeting and had not
executed a waiver, thereof. Not having waived such right and for
reasons of equity, he may still be allowed to subscribe to the

60

M. POWER TO SELL OR DISPOSE OF ASSETS

Nothing in this section is intended to restrict the power of any


corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is (1)
necessary in the usual and regular course of business of said
corporation or (2) if the proceeds of the sale or other
disposition of such property and assets be appropriated for
the conduct of its remaining business.
In non-stock corporations where there are no members with voting
rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any
transaction authorized by this section.
The conditions for the valid exercise of this power are thus as
follows:
1. Resolution by a majority of the BOD/T;
2. Authorization from the stockholders representing at least 2/3
of the outstanding capital stock or 2/3 of the members;
3. The ratification of the stockholders or member must be made
at a meeting duly called for that purpose;
4. Prior written notice of the proposed action and of the time
and place of meeting must be made addressed to all
stockholders of record, either by mail or personal service;
5. The sale of the assets shall be subject to the provisions of
existing laws on illegal combinations and monopolies; and
6. Any dissenting stockholder shall have the option to exercise
his appraisal right.
The above requirements will not apply:

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

1.

2.

In case the sale is NOT covering all or substantially all of the


assets of a corporation as to render it incapable of
continuing the business or accomplishing the purpose
for which it was incorporated; or if the proceeds are to be
used to continue the conduct of the remaining business of the
company;
If the sale is in the usual and regular course of business of the
company.

ISLAMIC DIRECTORATE OF THE PHILIPPINES VS. CA (272


SCRA 454; May 4, 1997) The Islamic Directorate of the
Philippines received two parcels of land from the Libyan
government for the purpose of putting up a Mosque, Madrasah
(arabic school) and other religious infrastructures. In 1972, Martial
Law was declared, most of the members of the Board of Trustees,
together with petitioner Sen. Mamintal Tamano, fled to the middleeast to escape political prosecution.
Thereafter, two Muslim groups sprung claiming to be the
legitimate IDP. One headed by Engr. Farouk Caprizo, not having
been properly elected as new members of the Board of Trustees
caused to be sold, through a resolution of IDP, the two lots to
respondent Iglesia Ni Cristo.
The 1971 Board of Trustees now filed a petition to declare the sale
null and void.
ISSUE: WON the sale is valid?
HELD: No. The Caprizo Group is a fake board of trustees. IDP
never gave its consent through a legitimate Board of Trustees.
Therefore, this is not a case of vitiated consent, but one where
consent on the part of one of the contracting parties is totally
wanting. Ineluctably, the subject sale is void and produces no
effect whatsoever.
The Caprizo group-INC sale is further deemed null and void ab
initio because of the Caprizo Groups failure to comply with Sec.
40 of the Corporation Code pertaining to
the disposition of all or substantially all assets of the corporation.
The Tandang Sora property, it appears from the records,
constitutes the only property of the IDP. Hence, its sale to a thirdparty is a sale or disposition of all the corporate property and
assets of IDP falling squarely within the contemplation of Sec. 40.
For the sale to be valid, the majority vote of the legitimate Board
of Trustees, concurred in by vote of at least 2/3 of the bona fide
members of the corporation should have been obtained. These
twin requirements were not met as the Caprizo Groups which
voted to sell the property was a fake Board and those whose
names and signatures were affixed by the Caprizo Group together
with the sham Board Resolution authorizing negotiation for the
sale were, from all indications, not bona fide members of the IDP
as they were made to appear to be.
EDWARD J. NELL CO. VS. PACIFIC FARMS, INC. (15 SCRA 415;
Nov. 29, 1965) - The appellant secured in a civil case against
Insular Famrs, Inc. a judgment for the balance of the price of a
pump sold by the former to the latter. A writ of execution was
issued but was returned unsatisfied, saying that Insular Farms had
no leviable property. Soon after appellant filed with the same
Municipal Court the present action against Pacific Farms claiming
it to be an alter ego of Insular Farms, which the court denied. On
appeal, the CFI and CA also denied the petition.
ISSUE: WON Pacific Farms should answer for the liability of Insular
Farms?
HELD: No. It appears on record that the appellee purchase 1,000
shares of stock of Insular Farms, and thereupon sold said shares of
stock to certain individuals, who forthwith reorganized said
corporation and that the board of directors thereof, as
reorganized, then caused its assets, including its leasehold right
over a public land in Pangasinan to be sold to herein appellee.
These facts do not prove that the appellee is an alter ego of

61

Insular Farms, or is liable for its debts.


Generally where on corporation sells or otherwise transfers all of
its assets to another corporation, the latter is not liable for the
debts and liabilities of the transferor, except: (1) where the
purchaser expressly or impliedly agrees to assumes such debts;
(2) where the transaction amounts to a consolidation or merger of
the corporations; (3) where the purchasing corporation is merely a
continuation of the selling corporation; and (4) where the
transaction is entered into fraudulently in order to escape liability
for such debts.
In the case at bar, there is neither proof nor allegation of the
foregoing exceptions. In fact, these sales took place not only over
6 months before the rendition of the judgment sought to be
collected in the present action, but also, appellee purchase the
shares of stock of Insular Farms as the highest bidder at an
auction sale held at the instance of a bank to which said shares
had been pledged as security for the obligation of Insular Farms in
favor of said bank.
N.

POWER TO ACQUIRE OWN SHARES

Sec. 41. Power to acquire own shares. - A stock corporation shall


have the power to purchase or acquire its own shares for a legitimate
corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted
retained earnings in its books to cover the shares to be purchased or
acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation,
arising out of unpaid subscription, in a delinquency sale, and to
purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment
for their shares under the provisions of this Code.
The limitation that the corporation must at all times have
unrestricted retained earnings is a condition for the exercise of
this power, EXCEPT:
1. Redemption of redeemable shares under Sec. 8;
2. Exercise of stockholders right to compel a close corporation
to purchase his shares for any reason under Sec. 105 when
the corporation has sufficient assets in its book to cover its
debts and liabilities exclusive of capital stock;
3. In case of deadlocks under Sec. 104.
Once purchased, the shares are considered as treasury shares and
while they remain so, they have no voting rights and dividend
rights. The corporation may (1) re-issue them even below par; (2)
issue them as stock dividends; (3) retire or cancel them and
thereby remove from issue effectively reducing the number of
shares issued stated in the AOI.
STEINBERG VS. VELASCO (52 Phil 953; March 12, 1929) - the
Board of Directors of Trading Company approved and authorized
the purchases of the capital stock of the company from its various
stockholder, herein respondents, at par value amounting to
P3,300. Petitioner assails the recovery of the amount paid to such
stockholders and the P3,000 dividends declared which were
claimed to be made to the injury and in fraud of its creditors. The
complaint was dismissed.
ISSUE: WON recovery can be made?
HELD: Yes. The Board of Directors acted on the assumption that it
had accounts receivable of the face value of P19,126.02 but there
was no stipulation as to the value of such accounts and
P12,512.47 of which had but little, if any value. The purchase of
the stocks and the dividend declaration further decreased the
assets of the corporation. The profits amounted only to P3,314.72.
In other words, that the corporation did not then have actual bona
fide surplus from which the dividends could be paid, and that the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

payment of them in full at the time would affect the financial


condition of the corporation.
It is indeed peculiar that the action of the board in the assailed
acts was all done at the same meeting of the board of directors,
and it appears that the stockholders, whose shares were
purchased, were former directors and resigned before the board
approved the purchase and declaration of dividends. In other
words, the directors were permitted to resign so that they could
sell their stock to the corporation. In this situation and upon this
state of facts, it is very apparent that the directors did not act in
good faith or that they were grossly ignorant of their duties.
Creditors of a corporation have the right to assume that so long as
there are outstanding debts and liabilities, the board of directors
will not use the assets of the corporation to purchase its own
stock, and that it will not declare dividends to stockholders when
the corporation is insolvent.
The amount involved in this case is not large, but the legal
principles are important and we have given them consideration
which they deserve.
O.

POWER TO INVEST FUNDS

Sec. 42. Power to invest corporate funds in another


corporation or business or for any other purpose. - Subject to
the provisions of this Code, a private corporation may invest its funds
in any other corporation or business or for any purpose other than the
primary purpose for which it was organized when approved by a
majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock, or by at least two thirds (2/3) of the members in the
case of non-stock corporations, at a stockholder's or member's
meeting duly called for the purpose. Written notice of the proposed
investment and the time and place of the meeting shall be addressed
to each stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee in the
post office with postage prepaid, or served personally: Provided, That
any dissenting stockholder shall have appraisal right as provided in
this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary
purpose as stated in the articles of incorporation, the approval of the
stockholders or members shall not be necessary.
MAY INVEST FUNDS has been held by the SEC to mean an
investment in the form of money, stock, bonds and other liquid
assets and does not include real properties or other fixed assets,
otherwise the law would have phrased Sec. 42 to include assets
rather than to invest funds.
SECONDARY PURPOSE: the law uses the phrase for any
purpose other than the primary purpose signifying that even if
the business or undertaking is allowed or authorized in the
secondary purpose or purposes of the corporation, the provision
of Sec. 42 would apply.
REQUIREMENTS FOR A VALID INVESTMENT OF CORPORATE
FUNDS:
1. Resolution by a majority of the BOD/T;
2. Ratification by the stockholders representing 2/3 of the
outstanding capital stock (or 2/3 of members);
3. The ratification must be made at a meeting duly called for
that purpose;
4. Prior written notice of the proposed investment and the time
and place of the meeting shall be made, addressed to each
stockholder or member by mail or by personal service; and
5. Any dissenting stockholder shall have the option to exercise
his appraisal right.
RATIFICATION: as a requirement, applies only to investments
that are beyond the corporations primary purpose, or outside the

62

express or implied powers of the investing corporation. Thus, if


the investment is reasonably necessary to accomplish its primary
purpose, the approval of the stockholders or members is not
required.
DELA RAMA VS. MA-AO SUGAR CENTRAL CO., INC. (27 SCRA
247; Feb. 28, 1969) - Defendant Ma-ao Sugar Central Co, Inc.,
engaged in the manufacture of sugar, invested P655,000 in shares
of stock of Philippine Fiber Processing Co., Inc., which is engaged
in the manufacture of sugar bags. The sale, though not previously
authorized, was ratified by the 2/3 vote of the stockholders.
Claiming the business of defendant is not related to that of
Philippine Fiber, such sale was attacked but the trial court decided
on its legality.
ISSUE: WON the investment by Ma-ao Sugar constitutes a
violation of Sec. 17-1/2 of the Corporation Law?
HELD: Yes. In his work entitled The Philippine Corporation Law,
Professor Sulpicio S. Guevarra of the UP College of Law,
reconciled par. (9) and (10) of Sec. 13, as follows:
j. Power to acquire or dispose of shares or securities. A
private corporation, in order to accomplish it purpose as stated
in its articles of incorporation, and imposed by the Corporation
Law, has the power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other evidences of
indebtedness of any domestic or foreign corporation. Such an
act, if done in pursuance of the corporate purpose, does
not need the approval of the stockholders; but when the
purchase of shares of another corporation is done solely
for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is
necessary
40. Power to invest corporate funds. A private corporation
has the power to invest its corporate funds in any other
corporation or business, or for any other purpose other than the
main purpose for which it was organized, provided that its board
of directors has been authorized in a resolution by the
affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the
voting power on such a proposal at a stockholders meeting
called for that purpose. When the investment is necessary to
accomplish its purpose or purposes as stated in its articles of
incorporation, the approval of the stockholders is not
necessary
We agree with Professor Guevarra. We therefore agree with the
finding of the lower court that the investment in question does not
fall under the purview of Sec. 17 of the Corporation Law.
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M.
SORIANO, JOSE M. SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS,
EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL ORTIGAS,
ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO
TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
(GR No. L-45911; April 11, 1979)
FACTS: Petitioner John Gokongwei alleged that the respondent
corporation has been investing corporate funds in other
corporations or business outside of its primary purpose in
violation of Sec. 17 of the Corporation Law.
Respondents sent notices of the annual stockholders meeting
including in the agenda thereof the re-affirmation of the
authorization of the BOD by the stockholders at the meeting to
invest corporate funds in other companies or businesses or for
purposes other than the main purpose. An injunction was prayed
for by petitioner, but the date of hearing originally set was
cancelled. No action was taken up to the date of the filing of the
instant petition.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

ISSUE: WON respondent SEC committed grave abuse of


discretion in allowing the above agenda to be taken up in the
stockholders meeting?
HELD: No. Section 17-1/2 of the Corporation Law allows a
corporation to "invest its funds in any other corporation or
business or for any purpose other than the main purpose for
which it was organized" provided that its Board of Directors has
been so authorized by the affirmative vote of stockholders holding
shares entitling them to exercise at least two-thirds of the voting
power. If the investment is made in pursuance of the
corporate purpose, it does not need the approval of the
stockholders. It is only when the purchase of shares is
done solely for investment and not to accomplish the
purpose of its incorporation that the vote of approval of
the stockholders holding shares entitling them to exercise
at least two-thirds of the voting power is necessary.
As stated by respondent corporation, the purchase of beer
manufacturing facilities by SMC was an investment in the same
business stated as its main purpose in its Articles of Incorporation,
which is to manufacture and market beer. It appears that the
original investment was made in 1947-1948, when SMC, then San
Miguel Brewery, Inc., purchased a beer brewery in Hongkong
(Hongkong Brewery & Distillery, Ltd.) for the manufacture and
marketing of San Miguel beer thereat. Restructuring of the
investment was made in 1970-1971 thru the organization of SMI
in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao
Sugar Central Co., Inc., supra, appears relevant. In said case, one
of the issues was the legality of an investment made by Manao
Sugar Central Co., Inc., without prior resolution approved by the
affirmative vote of 2/3 of the stockholders' voting power, in the
Philippine Fiber Processing Co., Inc., a company engaged in the
manufacture of sugar bags. The lower court said that "there is
more logic in the stand that if the investment is made in a
corporation whose business is important to the investing
corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail
the power of the Board of Directors.
Assuming arguendo that the Board of Directors of SMC had no
authority to make the assailed investment, there is no question
that a corporation, like an individual, may ratify and thereby
render binding upon it the originally unauthorized acts of its
officers or other agents. This is true because the questioned
investment is neither contrary to law, morals, public order or
public policy. It is a corporate transaction or contract which is
within the corporate powers, but which is defective from a
supported failure to observe in its execution the. requirement of
the law that the investment must be authorized by the affirmative
vote of the stockholders holding two-thirds of the voting power.
This requirement is for the benefit of the stockholders. The
stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the
outset. "Mere ultra vires acts", said this Court in Pirovano,
"or those which are not illegal and void ab initio, but are
not merely within the scope of the articles of
incorporation, are merely voidable and may become
binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer
manufacturing and marketing facilities which is apparently
relevant to the corporate purpose. The mere fact that respondent
corporation submitted the assailed investment to the stockholders
for ratification at the annual meeting of May 10, 1977 cannot be
construed as an admission that respondent corporation had
committed an ultra vires act, considering the common practice of
corporations of periodically submitting for the gratification of their
stockholders the acts of their directors, officers and managers.
P.

POWER TO DECLARE DIVIDENDS

63

DIVIDENDS are corporate profits set aside, declared and ordered


by the BOD to be paid to the stockholders. It is a fruit of
investment, the recurrent return, analogous to interest and rent
upon other forms of invested capital.
Sec. 43. Power to declare dividends. - The board of directors of a
stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding stock held by
them: Provided, That any cash dividends due on delinquent stock
shall first be applied to the unpaid balance on the subscription plus
costs and expenses, while stock dividends shall be withheld from the
delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds (2/3) of
the outstanding capital stock at a regular or special meeting duly
called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in
excess of one hundred (100%) percent of their paid-in capital stock,
except: (1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any financial
institution or creditor, whether local or foreign, from declaring
dividends without its/his consent, and such consent has not yet been
secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation,
such as when there is need for special reserve for probable
contingencies.
UNRESTRICTED RETAINED EARNINGS: 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 stockholders as dividends.
TYPES OF DIVIDENDS:
1. Cash dividends payable in lawful money or currency;
2. Property dividends - those paid in the form property (e.g.,
bonds, notes, shares in another corporation);
3. Stock dividends corporations own shares of stock out of the
remaining unissued shares which would require the approval
of the stockholders representing 2/3 of the outstanding
capital stock at a regular or special meeting duly called for
that purpose. This is to be valued at par value or issue price.
Cash and property dividends have the effect of reducing corporate
assets to the extent of the dividends declared. In stock dividends,
it would generally not increase the proportionate interest of the
stockholders of the corporation although it will have the effect of
increasing the subscribed and paid-up capital (exception is when
the stock dividend declaration would result in fractional shares
like when 1 share is declared as dividend for every 9 shares held)
OVERISSUANCE OF SHARES: happens when a corporation
issues shares beyond its authorized capital stock, even in the form
of stock dividends.
DELINQUENCY: is a requirement for the application of the second
part of the first paragraph of Sec. 43. Such that, cash dividends
declared are first applied on the unpaid balance on the
subscription plus costs and expenses and stock dividends are
withheld until the subscription is fully paid.
WHO CAN DECLARE DIVIDENDS? The BOD. They cannot be
compelled to declare dividends, except: (1) When the unrestricted
retained earnings is in excess of 100% of the paid-up capital; and
(2) In the case of Mandatory If Earned Preference Shares.
The judgment of the BOD is conclusive, EXCEPT: (1) when they act
in bad faith; (2) for a dishonest purpose; (3) they act fraudulently,
oppressively, unreasonably or unjustly; or (4) abuse of discretion

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

can be shown as to impair the rights of the complaining


shareholders. The TEST of bad faith is to determine if the policy of
the directors is dictated by their personal interest rather than the
corporate welfare.
WHEN DIVIDENDS RIGHTS VEST: It has been succinctly said
that the right of the stockholders to be paid dividends vest as
soon as they have been lawfully and finally declared by the BOD.
It is not revocable unless: (1) it has not been officially
communicated to the stockholders; or (2) it is in the form of stock
dividends which is revocable any time prior to distribution
because this does not result in the distribution of assets but
merely the division of existing shares of a stockholder into smaller
units or integers.
TRANSFER OF SHARES: The dividends already declared belong
to the owner at the time of declaration. Usually, however, the
dividends are payable to stockholders of record on a specific
future date and as far as the corporation is concerned, the
registered owner is the one entitled to dividends. As against his
transferor, however, the transferee has presumably the right to
such dividends and is oftentimes taken into account in entering
effecting the transfer of shares.
NIELSON & COMPANY, INC., plaintiff-appellant,
vs.
LEPANTO CONSOLIDATED MINING COMPANY,
appellee
(GR No. L-21601; Dec. 28, 1968)

defendant-

FACTS: This is a motion for reconsideration filed by respondent


Lepanto contending that the order of the SC to pay Nielson 10% of
the stock dividends, declared by Lepanto during the extension of
the contract, as compensation for services under a management
contract is in violation of the Corporation Law and that it could not
be the intention of the parties that the services of Nielson should
be paid in stock dividends.
ISSUE: WON Nielson & Co. is entitled to receive stock dividends?

HELD: No. The considerations for which shares of stock may be


issued are: (1) cash; (2) property; and (3) undistributed profits.
Shares of stock are given the special name "stock dividends" only
if they are issued in lieu of undistributed profits. If shares of stocks
are issued in exchange of cash or property then those shares do
not fall under the category of "stock dividends". A corporation
may legally issue shares of stock in consideration of services
rendered to it by a person not a stockholder, or in payment of its
indebtedness. A share of stock issued to pay for services rendered
is equivalent to a stock issued in exchange of property, because
services is equivalent to property. Likewise a share of stock issued
in payment of indebtedness is equivalent to issuing a stock in
exchange for cash. But a share of stock thus issued should be part
of the original capital stock of the corporation upon its
organization, or part of the stocks issued when the increase of the
capitalization of a corporation is properly authorized. In other
words, it is the shares of stock that are originally issued by the
corporation and forming part of the capital that can be exchanged
for cash or services rendered, or property; that is, if the
corporation has original shares of stock unsold or unsubscribed,
either coming from the original capitalization or from the
increased capitalization. Those shares of stock may be issued to a
person who is not a stockholder, or to a person already a
stockholder in exchange for services rendered or for cash or
property. But a share of stock coming from stock dividends
declared cannot be issued to one who is not a stockholder of a
corporation.

64

A "stock dividend" is any dividend payable in shares of


stock of the corporation declaring or authorizing such
dividend. It is, what the term itself implies, a distribution of the
shares of stock of the corporation among the stockholders as
dividends. A stock dividend of a corporation is a dividend paid in
shares of stock instead of cash, and is properly payable only out
of surplus profits. So, a stock dividend is actually two things:
(1) a dividend, and (2) the enforced use of the dividend
money to purchase additional shares of stock at par. When
a corporation issues stock dividends, it shows that the
corporation's accumulated profits have been capitalized
instead of distributed to the stockholders or retained as
surplus available for distribution, in money or kind, should
opportunity offer. Far from being a realization of profits for the
stockholder, it tends rather to postpone said realization, in that
the fund represented by the new stock has been transferred from
surplus to assets and no longer available for actual distribution.
Thus, it is apparent that stock dividends are issued only to
stockholders. This is so because only stockholders are entitled to
dividends. They are the only ones who have a right to a
proportional share in that part of the surplus which is declared as
dividends. A stock dividend really adds nothing to the interest of
the stockholder; the proportional interest of each stockholder
remains the same. If a stockholder is deprived of his stock
dividends - and this happens if the shares of stock forming
part of the stock dividends are issued to a non-stockholder
then the proportion of the stockholder's interest
changes radically. Stock dividends are civil fruits of the
original investment, and to the owners of the shares
belong the civil fruits.
The term "dividend" both in the technical sense and its ordinary
acceptation, is that part or portion of the profits of the enterprise
which the corporation, by its governing agents, sets apart for
ratable division among the holders of the capital stock. It means
the fund actually set aside, and declared by the directors of the
corporation as dividends and duly ordered by the director, or by
the stockholders at a corporate meeting, to be divided or
distributed among the stockholders according to their respective
interests.
It is Our considered view, therefore, that under Section 16 of the
Corporation Law stock dividends cannot be issued to a person
who is not a stockholder in payment of services rendered. And so,
in the case at bar Nielson can not be paid in shares of stock which
form part of the stock dividends of Lepanto for services it
rendered under the management contract. We sustain the
contention of Lepanto that the understanding between Lepanto
and Nielson was simply to make the cash value of the stock
dividends declared as the basis for determining the amount of
compensation that should be paid to Nielson, in the proportion of
10% of the cash value of the stock dividends declared. And this
conclusion of Ours finds support in the record.
Q.

POWER TO ENTER INTO MANAGEMENT CONTRACT

Sec. 44. Power to enter into management contract. - No


corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the
board of directors and by stockholders owning at least the majority of
the outstanding capital stock, or by at least a majority of the
members in the case of a non-stock corporation, of both the
managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the
managed corporations own or control more than one-third (1/3) of the
total outstanding capital stock entitled to vote of the managing
corporation; or (2) where a majority of the members of the board of
directors of the managing corporation also constitute a majority of
the members of the board of directors of the managed corporation,
then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

(2/3) of the total outstanding capital stock entitled to vote, or by at


least two-thirds (2/3) of the members in the case of a non-stock
corporation. No management contract shall be entered into for a
period longer than five years for any one term.
The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate all
or substantially all of the business of another corporation, whether
such contracts are called service contracts, operating agreements or
otherwise: Provided, however, That such service contracts or
operating agreements which relate to the exploration, development,
exploitation or utilization of natural resources may be entered into for
such periods as may be provided by the pertinent laws or regulations.
This provision was inserted to assure not only technical
competence but continuity in management policy in running
corporate affairs which can be achieved through a management
contract.
REQUIREMENTS OF A VALID MANAGEMENT CONTRACT:
1. Resolution of the BOD;
2. Approval by the stockholders representing a majority of the
outstanding capital stock or majority of the members of both
the managing and the managed corporation;
3. The approval of the stockholders or members must be made
at the meeting called for that purpose; and
4. The contract shall not be for a period longer than 5 years for
any one term, except those which relate to exploration,
development or utilization of natural resources which may be
entered into for such periods as may be provided by pertinent
laws and regulations;
5. 2/3 of the stockholders or members would be required,
where:
a. The stockholders representing the same interest of both
the managing and the managed corporation own or
control more than 1/3 of the total outstanding capital
stock of the managing corporation;
b. A majority of the members of the BOD of the managing
corporation also constitute a majority of the directors of
the managed corporation;
c. The contract would constitute the management or
operation of all or substantially all of the business of
another corporation, whether such contracts are called
service contracts. If it will not constitute the
management of all or substantially all of the business of
another corporation, the first paragraph of Sec. 44 will
apply and not that of the second, that is, only the vote of
the majority is required.
R.

ULTRA VIRES ACTS

Sec. 45. Ultra vires acts of corporations. - No corporation under


this Code shall possess or exercise any corporate powers except
those conferred by this Code or by its articles of incorporation and
except such as are necessary or incidental to the exercise of the
powers so conferred.
ULTRA VIRES ACTS are those which cannot be executed or
performed by a corporation because they are not within its
express, inherent, or implied powers as defined by its charter or
AOI. Accordingly, it may be subject to a collateral attack
questioning the authority of the corporation to engage in such
particular endeavor.
CONSEQUENCES:
1. On the Corporation itself: The proper forum may suspend or
revoke, after proper notice and hearing, the franchise or
certificate of registration of the corporation for serious
misrepresentation as to what the corporation can do or is
doing to the great damage or prejudice of the general public.
2. On the rights of the Stockholders: A stockholder may bring
either an individual or derivative suit to enjoin a threatened

65

3.

ultra-vires act or contract. If already performed, a derivative


suit against the directors may be filed, but their liability will
depend on whether they acted in good faith and with
reasonable diligence in entering into the contract.
On the immediate parties:
a. If the contract is fully executed in both sides, the contract
is effective and the courts will not interfere to deprive
either party of what has been acquired under it;
b. If the contract is executory on both sides, as a rule,
neither party can maintain an action for its nonperformance; and
c. Where the contract is executory on one side only, and
has been fully performed on the other, the courts differ
as to whether an action will lie on the contract against
the party who has received benefits of performance
under it. Majority of the courts, however, hold that the
party who has received benefits from the performance is
estopped to set up that the contract is ultra vires to
defeat an action on the contract.

READ AGAIN: Government vs. EL Hogar and Republic vs. Acoje


Mining (both in this chapter)
PRIVANO, ET AL. VS. DE LA RAMA STEAMSHIP CO. (96 Phil.
335; Dec. 29, 1954) - The Board of directors of defendant
company adopted a resolution wherein the proceeds of the
insurance taken on the life of its previous President and General
Manager Enrico Privano be set aside and used to purchase 4,000
shares to be given to Privanos heirs, which was approved by the
stockholders in a meeting duly called for the purpose.
The donation of the shares was later on modified to transfer all
the proceeds directly to the heirs which would become a loan of
the company with 5% interest per annum and payable after the
settlement of its bonded indebtedness, and still later, modified to
be payable whenever the company is in a position to meet said
obligation.
On an opinion by the SEC, sought by the President of the
corporation, Sergio Osmena, Jr., it was opined by the SEC that the
donation was void for being ultra vires. The Board planned to
adopt a different resolution to effect the donation but failed to act
on it. The heirs, through Mrs. Estefania R. Privano, acting as
guardian, demanded the settlement of the obligation.
ISSUE: WON the donation was an ultra vires act?
HELD: No. After a careful perusal of the AOI, we find that the
corporation was given broad and almost unlimited powers to carry
out the purposes for which it was organized among them, (1) to
invest and deal with the money of the company not immediately
required, in such manner as from time to time may be
determined and (2) to aid in any manner any person
association, or corporation or in the affairs of the property of
which this corporation has lawful interest. The donation in
question undoubtedly comes within the scope of this broad power
for it is a fact appearing in the evidence that the insurance
proceeds were not immediately required when they were given
away.
We dont see much distinction between the acts of
generosity of the benevolence extended to some
employees of the corporation, and even to some in whom
the corporation was merely interested because of certain
moral or political consideration, and the donations which
the corporation has seen fit to give the children of the late
Enrico Privano from the point of view of the power of the
corporation as expressed in the AOI. And if the former had been
sanctioned and had been valid and intra-vires, we see no plausible
reasons why the latter should now be deemed ultra-vires. It may
perhaps be argued that the donation given to the children of the
late Enrico Privano is so large and disproportionate that it can
hardly be considered a pension or gratuity that can be placed on
par with the instances above-mentioned, but this argument
overlooks one consideration: the gratuity here given was not

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

merely motivated by pure liberality or act of generosity, but by a


deep sense of recognition of the valuable services rendered by
the late Enrico Privano which had immensely contributed to the
growth of the corporation to the extent that from its humble
capitalization it blossomed into a multi-million corporation that it
is today.

legitimate furtherance of its purposes and business. And it


is well settled that where a corporation acquires commercial
papers or bonds in the legitimate transaction of its business it
may sell them, and in furtherance of such a sale, it may in order
to make them more readily marketable, indorse or guarantee their
payment.

Granting that it was ultra-vires, it may be said that the


same cannot be invalidated, or declared legally ineffective
for that reason alone, it appearing that the donation
represents not only the act of the BOD but of the
stockholders themselves as shown by the fact the same
has been expressly ratified in a resolution duly approved
by the latter. By this ratification, the infirmity of the
corporate act, if any has been obliterated thereby making
the act perfectly valid and enforceable. This is specially so if
the donation is not merely executory but executed and
consummated and no creditors are prejudiced, or if there are
creditors affected, the latter has expressly given their conformity.

Even if PTC did not acquire the bonds in question, but only
guaranteed them, it would at any rate, be valid and the said
corporation is bound to pay the appellant their value with the
accrued interest in view of the fact that they become due on
account of the lapse of 60 days, without the accrued interest due
having been paid; and the reason is that it is estopped from
denying the validity of its guarantee.

ISSUE2: What is the difference between an illegal act and that


which is ultra-vires?
HELD: The former contemplates the doing of an act which is
contrary to law, morals, or public order or contravene some rules
of public policy or public duty, and are, like similar transactions
between the individuals, void. They cannot serve as basis of a
court action, nor acquire validity by performance, ratification or
estoppel. Mere ultra-vires acts, on the other hand, or those
which are not illegal and void ab initio, but are merely
beyond the scope of the AOI, are merely voidable and may
become binding and enforceable when ratified by the
stockholders.
Since it is not contended that the donation under consideration is
illegal, or contrary to any of the express provisions of the AOI, nor
prejudicial to the creditors of the defendant corporation, we
cannot but logically conclude that said donation, even if ultra
vires in the supposition we have adverted to, is not void,
and if voidable its infirmity has been cured by ratification
and subsequent acts of the defendant corporation. The
corporation is now prevented or estopped from contesting the
validity of the donation.
IRINEO CARLOS, plaintiff-appellant VS. MINDORO SUGAR CO.,
ET AL., defendant-appellees (57 Phil. 343; Oct. 26, 1932) Mindoro Sugar Company (MSC) transferred all of its property to
Philippine Trust Company (PTC) in consideration of the bonds it
had issued to the value of P3,000,000, each bond being $1,000,
which par value, with interest at 8% per annum, PTC guaranteed
to the holders.
PTC paid Ramon Diaz upon presentation of the coupons, the
stipulated interest from the date of maturity until July 1, 1928,
when its stopped payments, alleging that it did not deem itself
bound to pay such interest or to redeem the obligation because
the guarantee given for the bonds was illegal and void.
The CFI of Manila absolved the defendants from the complaint
except MSC which was sentenced to pay the value of the bond.
ISSUE: WON PTCs act was ultra-vires?
HELD: No. Firstly, PTC although secondarily engaged in banking,
was primarily organized as a trust corporation with full power to
acquire personal property such as the bonds in question according
to both sec. 13 (par. 5) of the Corporation Law and its duly
registered by-laws and AOI; Secondly, that being thus authorized
to acquire the bonds, it was given implied power to guarantee
them in order to place them upon the market under better, more
advantageous conditions, and thereby secure the profit derived
from their sale.
It is not, however, ultra vires for a corporation to enter
into contracts of guaranty where it does so in the

66

The doctrine of ultra vires as a defense, is by some courts


regarded as an ungracious and odious one, to be sustained only
where the most persuasive consideration of public policy are
involved, and there are numerous decisions and dicta to the effect
that the plea should not as a general rule prevail whether
interposed for or against the corporation, where it will not
advance justice but on the contrary will accomplish a legal wrong.
When a contract is not on its face necessarily beyond the scope of
the power of the corporation by which it was made, it will, in the
absence of proof to the contrary, be presumed to be valid.
Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation,
should not be allowed to prevail where it would defeat the ends of
justice or work a legal wrong.
JAPANESE WAR NOTES CLAIMANTS ASSOC., INC. VS. SEC
(101 Phil 540; May 23, 1957) - The SEC issued an order requiring
petitioner herein and its President Alfredo Abcede to show cause
why it should not be proceeded against for making
misrepresentations to the public about the need of registering and
depositing war notes, with a view of probable redemption as
contemplated in Senate Bill No. 163 and in Senate Concurrent
Resolution No. 14, for otherwise they would be valueless.
Petitioner contended that the statement was made in good faith
as President Magsaysay would soon make representations to the
US to have the war notes redeemed.
Respondent SEC found that according to its AOI, the petitioner has
the privilege to work for the redemption of the war notes of its
members alone, but that it cannot offer its services to the public
for a valuable consideration, because there is nothing definite and
tangible about the redemption of the war notes and its success is
speculative that any authority given to offer services can easily
degenerate into a racket; that under its AOI the petitioner is a
civic and non-stock corporation and upon should not engage in
business for profit; that it has received war notes for deposit, upon
payment of fees, without authority in its articles to do so; that it
had previously been rendered to desist from collecting from those
registering the war notes, but notwithstanding this prohibition it
has done so in the guise of service fees. Hence the Commission
ordered to stop receiving war notes, receiving same for deposit
and charging fees therefore.
ISSUE: WON the SEC erred in issuing the questioned order?
HELD: No. The articles authorize collection of fees from members;
but they do not authorize the corporation to engage in the
business of registering and accepting war notes for deposit and
collecting fees from such services. This was the ruling of the
Commission and this we find to be correct.
Neither do we find any merit in the third contention that the
association has authority to accept and collect fees for reparation
claims for civilian casualties and other injuries. This is beyond any
of the powers of the association as embodied in its articles and
has absolutely no relation to the avowed purpose of the
association to work for the redemption of war notes.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

ERNESTINA CRISOLOGO-JOSE VS. CA (GR No. 80599; Sept. 15,


1989) - The Vice-president of Mover Enterprises, Inc. issued a
check drawn against Traders Royal Bank, payable to petitioner
Ernestina Crisologo-Jose, for the accommodation of his client.
Petitioner-payee was charged with the knowledge that the check
was issued at the instance and for the personal account of the
President who merely prevailed upon respondent vice-president to
act as co-signatory in accordance with the arrangement of the
corporation with its depository bank. While it was the
corporation's check which was issued to petitioner for the amount
involved, petitioner actually had no transaction directly with said
corporation.
ISSUE: WON private respondent, one of the signatories of the
check issued under the account of Mover Enterprises, Inc., is an
accommodation party under NIL and a debtor of petitioner to the
extent of the amount of said check?
HELD: Yes. The liability of an accommodation party to a holder for
value, although such holder does not include nor apply to
corporations which are accommodation parties. This is because
the issue or indorsement of negotiable paper by a
corporation
without
consideration
and
for
the
accommodation of another is ultra vires. One who has taken
the instrument with knowledge of the accommodation nature
thereof cannot recover against a corporation where it is only an
accommodation party. By way of exception, an officer or agent of
a corporation shall have the power to execute or indorse a
negotiable paper in the name of the corporation for the
accommodation of a third person only if specifically authorized to
do so. Corollarily, corporate officers, such as the president and
vice-president, have no power to execute for mere
accommodation a negotiable instrument of the corporation for
their individual debts or transactions arising from or in relation to
matters in which the corporation has no legitimate concern. Since
such accommodation paper cannot thus be enforced against the
corporation, especially since it is not involved in any aspect of the
corporate business or operations, the signatories thereof
(president and vice-president) shall be personally liable therefor,
as well as the consequences arising from their acts in connection
therewith.

may be adopted and filed prior to incorporation; in such case, such


by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the bylaws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing
the by-laws or any amendment thereto of any bank, banking
institution, building and loan association, trust company, insurance
company, public utility, educational institution or other special
corporations governed by special laws, unless accompanied by a
certificate of the appropriate government agency to the effect that
such by-laws or amendments are in accordance with law.
EFFECTIVITY: After approval of the SEC.
BY-LAWS PRIOR TO INCORPORATION: it must be signed by all
the incorporators without the need of the affirmative vote of the
majority of the outstanding capital stock or the members provided
it is submitted together with the AOI.
AFTER INCPORPORATION: Must be submitted one month after
the issuance of the certificate of incorporation and must be
approved by a majority of the outstanding capital stock or
members and signed by such stockholders or members voting for
them. Failure to file within 1 month may result to suspension or
revocation of corporate franchise.
THIRD PERSONS: are generally not bound, affected or prejudiced
the by-laws, it being merely internal rules of the corporation,
EXCEPT: if they have knowledge of its existence and contents.
CONTENTS:
Sec. 47. Contents of by-laws. - Subject to the provisions of the
Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:

CHAPTER 8: BY-LAWS
BY-LAWS are rules and ordinances made by a corporation for its
own government; to regulate the conduct and define the duties of
the stockholders or members towards the corporation and among
themselves. They are the rules and regulations or private laws
enacted by the corporation to regulate, govern and control its own
actions, affairs and concerns and tis stockholder or members and
directors and officers with relation thereto and among themselves
in their relation to it.
Sec. 46. Adoption of by-laws. - Every corporation formed under
this Code must, within one (1) month after receipt of official notice of
the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its
government not inconsistent with this Code. For the adoption of
by-laws by the corporation the affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or
of at least a majority of the members in case of non-stock
corporations, shall be necessary. The by-laws shall be signed by the
stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to the inspection of the
stockholders or members during office hours. A copy thereof, duly
certified to by a majority of the directors or trustees countersigned by
the secretary of the corporation, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles
of incorporation.

1. The time, place and manner of calling and conducting regular or


special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members
and the manner of voting therein;
4. The form for proxies of stockholders and members and the
manner of voting them;
5. The qualifications, duties and compensation of directors or
trustees, officers and employees;
6. The time for holding the annual election of directors of
trustees and the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of
office of all officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.
AMENDMENT:

Sec. 48. Amendments to by-laws. - The board of directors or


trustees, by a majority vote thereof, and the owners of at least a
majority of the outstanding capital stock, or at least a majority of the
members of a non-stock corporation, at a regular or special meeting
Notwithstanding the provisions of the preceding paragraph, by-laws duly called for the purpose, may amend or repeal any by-laws or

67

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

adopt new by-laws. The owners of two-thirds (2/3) of the outstanding


capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the
power to amend or repeal any by-laws or adopt new by-laws:
Provided, That any power delegated to the board of directors or
trustees to amend or repeal any by-laws or adopt new by-laws shall
be considered as revoked whenever stockholders owning or
representing a majority of the outstanding capital stock or a majority
of the members in non-stock corporations, shall so vote at a regular
or special meeting.
Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-laws
in the office of the corporation, and a copy thereof, duly certified
under oath by the corporate secretary and a majority of the directors
or trustees, shall be filed with the Securities and Exchange
Commission the same to be attached to the original articles of
incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
certification that the same are not inconsistent with this Code.
TWO MODES OF AMENDMENT:
1. By a majority vote of the directors or trustees and the
majority vote of the outstanding capital stock or members, at
a regular or special meeting called for that purpose; or
2. By the board of directors alone when delegated by
stockholders owning 2/3 of the outstanding capital stock or
2/3 of the members. This power, however, is considered
revoked, when so voted by a majority of the outstanding
capital stock or members in a regular or special meeting.
LOYOLA
GRAND
VILLAS
HOMEOWNERS
(SOUTH)
ASSOCIATION,
INC.,
petitioner,
vs.
HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY
CORPORATION, EMDEN ENCARNACION and HORATIO AYCARDO,
respondents.
(GR No. 117188; Aug. 7, 1997)
FACTS: Petitioner Association was organized on Feb. 8, 1983, but
for some reason failed to file its corporate by-laws. Victorio
Soliven, himslef the owner and developer of the subdivision was
the first president of the Association. Later on, asking on the
status of petitioner, Soliven discovered that the said association
was already dissolved (according to the head of the legal
department of HIGC), and accordingly caused the registration of
HIGC as the association covering Phases West I, East I and East II
of the subdivision.
ISSUE: WON the Association can be considered dissolved for nonadoption of by-laws?

HELD: Yes. As correctly postulated by the petitioner,


interpretation of this provision of Sec. 46 begins with the
determination of the meaning and import of the word "must" in
this section. Ordinarily, the word "must" connotes an imperative
act or operates to impose a duty which may be enforced. It is
synonymous with "ought" which connotes compulsion or
mandatoriness. However, the word "must" in a statute, like
"shall," is not always imperative. It may be consistent with an
exercise of discretion. In this jurisdiction, the tendency has been
to interpret "shall" as the context or a reasonable construction of
the statute in which it is used demands or requires. This is equally
true as regards the word "must." Thus, if the languages of a
statute considered as a whole and with due regard to its nature
and object reveals that the legislature intended to use the words

68

"shall" and "must" to be directory, they should be given that


meaning.

In this respect, the following portions of the deliberations of the


Batasang Pambansa No. 68 are illuminating:
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we
made to understand here, Mr. Speaker, that by-laws must
immediately be filed within one month after the issuance? In
other words, would this be mandatory or directory in
character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what
would be the effect of the failure of the corporation to file
these by-laws within one month?
MR. MENDOZA. There is a provision in the latter part of the
Code which identifies and describes the consequences of
violations of any provision of this Code. One such
consequences is the dissolution of the corporation for its
inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a
dissolution of the corporation by merely failing to file the bylaws within one month. Supposing the corporation was late,
say, five days, what would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the
automatic or ipso facto dissolution of the corporation.
Perhaps, as in the case, as you suggested, in the case of El
Hogar Filipino where a quo warranto action is brought, one
takes into account the gravity of the violation committed. If
the by-laws were late the filing of the by-laws were late by,
perhaps, a day or two, I would suppose that might be a
tolerable delay, but if they are delayed over a period of
months as is happening now because of the absence of
a clear requirement that by-laws must be completed within a
specified period of time, the corporation must suffer certain
consequences.
This exchange of views demonstrates clearly that automatic
corporate dissolution for failure to file the by-laws on time was
never the intention of the legislature. Moreover, even without
resorting to the records of deliberations of the Batasang
Pambansa, the law itself provides the answer to the issue
propounded by petitioner.
Taken as a whole and under the principle that the best interpreter
of a statute is the statute itself (optima statuli interpretatix est
ipsum statutum), Section 46 aforequoted reveals the legislative
intent to attach a directory, and not mandatory, meaning for the
word "must" in the first sentence thereof. Note should be taken
of the second paragraph of the law which allows the filing
of the by-laws even prior to incorporation. This provision
in the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws
"within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the
Securities and Exchange Commission." It necessarily
follows that failure to file the by-laws within that period
does not imply the "demise" of the corporation. By-laws
may be necessary for the "government" of the corporation but
these are subordinate to the articles of incorporation as well as to
the Corporation Code and related statutes. There are in fact cases
where by-laws are unnecessary to corporate existence or to the
valid exercise of corporate powers, thus:

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

In the absence of charter or statutory provisions to the


contrary, by-laws are not necessary either to the existence of
a corporation or to the valid exercise of the powers conferred
upon it, certainly in all cases where the charter sufficiently
provides for the government of the body; and even where the
governing statute in express terms confers upon the
corporation the power to adopt by-laws, the failure to
exercise the power will be ascribed to mere nonaction which
will not render void any acts of the corporation which would
otherwise be valid. (Emphasis supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule
of its life, and that until by-laws have been adopted the
corporation may not be able to act for the purposes of its
creation, and that the first and most important duty of the
members is to adopt them. This would seem to follow as a
matter of principle from the office and functions of by-laws.
Viewed in this light, the adoption of by-laws is a
matter of practical, if not one of legal, necessity.
Moreover, the peculiar circumstances attending the formation
of a corporation may impose the obligation to adopt certain
by-laws, as in the case of a close corporation organized for
specific purposes. And the statute or general laws from which
the corporation derives its corporate existence may expressly
require it to make and adopt by-laws and specify to some
extent what they shall contain and the manner of their
adoption. The mere fact, however, of the existence of
power in the corporation to adopt by-laws does not
ordinarily and of necessity make the exercise of such
power essential to its corporate life, or to the validity
of any of its acts.
Although the Corporation Code requires the filing of by-laws, it
does not expressly provide for the consequences of the non-filing
of the same within the period provided for in Section 46. However,
such omission has been rectified by Presidential Decree No. 902-A,
the pertinent provisions on the jurisdiction of the SEC of which
state:
Sec. 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing,
the franchise or certificate of registration of corporations,
partnerships or associations, upon any of the grounds
provided by law, including the following:
xxx xxx xxx
Failure to file by-laws within the required period.
Even under the foregoing express grant of power and
authority, there can be no automatic corporate dissolution
simply because the incorporators failed to abide by the
required filing of by-laws embodied in Section 46 of the
Corporation Code. There is no outright "demise" of
corporate existence. Proper notice and hearing are
cardinal components of due process in any democratic
institution, agency or society. In other words, the
incorporators must be given the chance to explain their
neglect or omission and remedy the same.
That the failure to file by-laws is not provided for by the
Corporation Code but in another law is of no moment. P.D. No.
902-A, which took effect immediately after its promulgation on
March 11, 1976, is very much apposite to the Code.
Accordingly, the provisions abovequoted supply the law governing
the situation in the case at bar, inasmuch as the Corporation Code
and P.D. No. 902-A are statutes in pari materia. Interpretare et
concordare legibus est optimus interpretandi. Every statute must
be so construed and harmonized with other statutes as to form a
uniform system of jurisprudence.

69

As the "rules and regulations or private laws enacted by the


corporation to regulate, govern and control its own actions, affairs
and concerns and its stockholders or members and directors and
officers with relation thereto and among themselves in their
relation to it," by-laws are indispensable to corporations in this
jurisdiction. These may not be essential to corporate birth but
certainly, these are required by law for an orderly governance and
management of corporations. Nonetheless, failure to file them
within the period required by law by no means tolls the automatic
dissolution of a corporation.
In this regard, private respondents are correct in relying on the
pronouncements of this Court in Chung Ka Bio v. Intermediate
Appellate Court, as follows:
Non-filing of the by-laws will not result in automatic
dissolution of the corporation. Under Section 6(I) of PD
902-A, the SEC is empowered to "suspend or revoke, after
proper notice and hearing, the franchise or certificate of
registration of a corporation" on the ground inter alia of
"failure to file by-laws within the required period." It is clear
from this provision that there must first of all be a hearing to
determine the existence of the ground, and secondly,
assuming such finding, the penalty is not necessarily
revocation but may be only suspension of the charter. In fact,
under the rules and regulations of the SEC, failure to file the
by-laws on time may be penalized merely with the imposition
of an administrative fine without affecting the corporate
existence of the erring firm.
HENRY FLEISCHER, plaintiff-appellee,
vs.
BOTICA NOLASCO CO., INC., defendant-appellant.
(GR No. L-23241; March 14 ,1925)
FACTS: Manuel Gonzales, the original owner of 5 shares of stock
in question of Defendant Company, assigned and transferred to
herein plaintiff Fleischer. Two days after, Dr. Miciano, secretarytreasurer of the company, offered to buy from Fleischer the said
shares in behalf of the corporation, contending that Art. 12 of the
by-laws grants the company preferential right to buy Gonzales
shares. Plaintiff refused and requested Dr. Miciano to register said
shares in his name, and the latter refused to do so.
ISSUE: WON Fleischer is bound by the provisions of the
corporations by-laws?

HELD: No. Section 13, paragraph 7 (of Act 1459), empowers a


corporation to make by-laws, not inconsistent with any existing
law, for the transferring of its stock. It follows from said provision,
that a by-law adopted by a corporation relating to transfer of
stock should be in harmony with the law on the subject of transfer
of stock. The law on this subject is found in section 35 of Act No.
1459. Said section specifically provides that the shares of stock
"are personal property and may be transferred by delivery of the
certificate indorsed by the owner, etc." Said section 35 defines the
nature, character and transferability of shares of stock. Under said
section they are personal property and may be transferred as
therein provided. Said section contemplates no restriction as to
whom they may be transferred or sold. It does not suggest that
any discrimination may be created by the corporation in favor or
against a certain purchaser. The holder of shares, as owner of
personal property, is at liberty, under said section, to
dispose of them in favor of whomsoever he pleases,
without any other limitation in this respect, than the
general provisions of law. Therefore, a stock corporation in
adopting a by-law governing transfer of shares of stock should
take into consideration the specific provisions of section 35 of Act
No. 1459, and said by-law should be made to harmonize with said
provisions. It should not be inconsistent therewith.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

As a general rule, the by-laws of a corporation are valid if they are


reasonable and calculated to carry into effect the objects of the
corporation, and are not contradictory to the general policy of the
laws of the land. (Supreme Commandery of the Knights of the
Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)
On the other hand, it is equally well settled that by-laws of a
corporation must be reasonable and for a corporate purpose, and
always within the charter limits. They must always be strictly
subordinate to the constitution and the general laws of the land.
They must not infringe the policy of the state, nor be hostile to
public welfare. (46 Am. Rep., 332.) They must not disturb vested
rights or impair the obligation of a contract, take away or abridge
the substantial rights of stockholder or member, affect rights of
property or create obligations unknown to the law. (People's Home
Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep.,
147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)
The validity of the by-law of a corporation is purely a question of
law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)
The power to enact by-laws restraining the sale and transfer of
stock must be found in the governing statute or the charter.
Restrictions upon the traffic in stock must have their source in
legislative enactment, as the corporation itself cannot create
such impediments. By-laws are intended merely for the
protection of the corporation, and prescribe regulation and not
restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such a
power, cannot ordinarily inquire into or pass upon the
legality of the transaction by which its stock passes from
one person to another, nor can it question the
consideration upon which a sale is based. A by-law
cannot take away or abridge the substantial rights of
stockholder. Under a statute authorizing by- laws for the
transfer of stock, a corporation can do no more than prescribe a
general mode of transfer on the corporate books and cannot
justify an unreasonable restriction upon the right of sale. (4
Thompson on Corporations, sec. 4137, p. 674.
The jus disponendi, being an incident of the ownership of
property, the general rule (subject to exceptions hereafter
pointed out and discussed) is that every owner of corporate
shares has the same uncontrollable right to alien them which
attaches to the ownership of any other species of property. A
shareholder is under no obligation to refrain from selling his
shares at the sacrifice of his personal interest, in order to secure
the welfare of the corporation, or to enable another shareholder
to make gains and profits. (10 Cyc., p. 577.)
It follows from the foregoing that a corporation has no power to
prevent or to restrain transfers of its shares, unless such power is
expressly conferred in its charter or governing statute. This
conclusion follows from the further consideration that by-laws or
other regulations restraining such transfers, unless
derived from authority expressly granted by the
legislature, would be regarded as impositions in restraint
of trade. (10 Cyc., p. 578.)
The foregoing authorities go farther than the stand we are taking
on this question. They hold that the power of a corporation to
enact by-laws restraining the sale and transfer of shares,
should not only be in harmony with the law or charter of
the corporation, but such power should be expressly
granted in said law or charter.
The only restraint imposed by the Corporation Law upon transfer
of shares is found in section 35 of Act No. 1459, quoted above, as
follows: "No transfer, however, shall be valid, except as between
the parties, until the transfer is entered and noted upon the books
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,

70

and the number of shares transferred." This restriction is


necessary in order that the officers of the corporation may know
who are the stockholders, which is essential in conducting
elections of officers, in calling meeting of stockholders, and for
other purposes. but any restriction of the nature of that imposed
in the by-law now in question, is ultra vires, violative of the
property rights of shareholders, and in restraint of trade
And moreover, the by-laws now in question cannot have any
effect on the appellee. He had no knowledge of such by-law when
the shares were assigned to him. He obtained them in good faith
and for a valuable consideration. He was not a privy to the
contract created by said by-law between the shareholder Manuel
Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate
to defeat his rights as a purchaser.

GOVERNMENT VS. EL HOGAR (supra) - Fourth cause of action.


It appears that among the by-laws of the association there is an
article (No. 10) which reads as follows:

The board of directors of the association, by the vote of an


absolute majority of its members, is empowered to cancel
shares and to return to the owner thereof the balance resulting
from the liquidation thereof whenever, by reason of their
conduct, or for any other motive, the continuation as members
of the owners of such shares is not desirable.
ISSUE: WON the above provision is valid?

HELD: No. This by-law is of course a patent nullity, since it


is in direct conflict with the latter part of section 187 of
the Corporation Law, which expressly declares that the
board of directors shall not have the power to force the
surrender and withdrawal of unmatured stock except in
case of liquidation of the corporation or of forfeiture of the
stock for delinquency. It is agreed that this provision of the bylaws has never been enforced, and in fact no attempt has ever
been made by the board of directors to make use of the power
therein conferred. In November, 1923, the Acting Insular Treasurer
addressed a letter to El Hogar Filipino, calling attention to article
10 of its by-laws and expressing the view that said article was
invalid. It was therefore suggested that the article in question
should be eliminated from the by-laws. At the next meeting of the
board of directors the matter was called to their attention and it
was resolved to recommend to the shareholders that in their next
annual meeting the article in question be abrogated. It appears,
however, that no annual meeting of the shareholders called since
that date has been attended by a sufficient number of
shareholders to constitute a quorum, with the result that the
provision referred to has not been eliminated from the by-laws,
and it still stands among the by-laws of the association,
notwithstanding its patent conflict with the law.

It is supposed, in the fourth cause of action, that the existence of


this article among the by-laws of the association is a
misdemeanor on the part of the respondent which justifies its
dissolution. In this view we are unable to concur. The obnoxious
by-law, as it stands, is a mere nullity, and could not be enforced
even if the directors were to attempt to do so. There is no
provision of law making it a misdemeanor to incorporate an
invalid provision in the by-laws of a corporation; and if there were
such, the hazards incident to corporate effort would certainly be
largely increased. There is no merit in this cause of action.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

ISSUE2: Owing to the failure of a quorum at most of the general


meetings since the respondent has been in existence, it has been
the practice of the directors to fill vacancies in the directorate by
choosing suitable persons from among the stockholders. This
custom finds its sanction in article 71 of the by-laws, which reads
as follows:

ART. 71. The directors shall elect from among the shareholders
members to fill the vacancies that may occur in the board of
directors until the election at the general meeting
WON Art. 71 is valid?

HELD: Yes. We are unable to see the slightest merit in the charge.
No fault can be imputed to the corporation on account of the
failure of the shareholders to attend the annual meetings; and
their non-attendance at such meetings is doubtless to be
interpreted in part as expressing their satisfaction of the way in
which things have been conducted. Upon failure of a quorum at
any annual meeting the directorate naturally holds over and
continues to function until another directorate is chosen and
qualified. Unless the law or the charter of a corporation
expressly provides that an office shall become vacant at
the expiration of the term of office for which the officer
was elected, the general rule is to allow the officer to
holdover until his successor is duly qualified. Mere failure
of a corporation to elect officers does not terminate the
terms of existing officers nor dissolve the corporation
(Quitman Oil Company vs. Peacock, 14 Ga. App., 550; Jenkins vs.
Baxter, 160 Pa. State, 199; New York B. & E. Ry. Co. vs. Motil, 81
Conn., 466; Hatch vs. Lucky Bill Mining Company, 71 Pac., 865;
Youree vs. Home Town Matual Ins. Company, 180 Missouri, 153;
Cassell vs. Lexington, H. and P. Turnpike Road Co., 10 Ky. L. R.,
486). The doctrine above stated finds expressions in article 66 of
the by-laws of the respondent which declares in so many words
that directors shall hold office "for the term of one year on until
their successors shall have been elected and taken possession of
their offices."

It result that the practice of the directorate of filling vacancies by


the action of the directors themselves is valid. Nor can any
exception be taken to then personality of the individuals chosen
by the directors to fill vacancies in the body. Certainly it is no fair
criticism to say that they have chosen competent businessmen of
financial responsibility instead of electing poor persons to so
responsible a position. The possession of means does not
disqualify a man for filling positions of responsibility in corporate
affairs.
READ AGAIN: BARRETO VS. LA PREVISORA FILIPINA (CHAPTER 6)
GOKONGWEI VS. SEC (supra) - As additional causes of action, it
was alleged that corporations have no inherent power to
disqualify a stockholder from being elected as a director and,
therefore, the questioned act is ultra vires and void; that Andres
M. Soriano, Jr. and/or Jose M. Soriano, while representing other
corporations, entered into contracts (specifically a management
contract) with respondent corporation, which was allowed

71

because the questioned amendment gave the Board itself the


prerogative of determining whether they or other persons are
engaged in competitive or antagonistic business; that the portion
of the amended bylaws which states that in determining whether
or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is
unreasonable and oppressive and, therefore, void; and that the
portion of the amended by-laws which requires that "all
nominations for election of directors ... shall be submitted in
writing to the Board of Directors at least five (5) working days
before the date of the Annual Meeting" is likewise unreasonable
and oppressive.
ISSUE: WON the amended by-laws of SMC disqualifying a
competitor from nomination or election to the BOD are valid and
reasonable?

HELD: Yes. The validity or reasonableness of a by-law of a


corporation in purely a question of law. Whether the by-law is in
conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore
unlawful is a question of law. This rule is subject, however, to the
limitation that where the reasonableness of a by-law is a mere
matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting
its judgment instead of the judgment of those who are authorized
to make by-laws and who have exercised their authority.

It is a settled state law in the United States, according to Fletcher,


that corporations have the power to make by-laws declaring a
person employed in the service of a rival company to be ineligible
for the corporation's Board of Directors. ... (A)n amendment which
renders ineligible, or if elected, subjects to removal, a director if
he be also a director in a corporation whose business is in
competition with or is antagonistic to the other corporation is
valid." This is based upon the principle that where the director
is so employed in the service of a rival company, he cannot
serve both, but must betray one or the other. Such an
amendment "advances the benefit of the corporation and
is good." An exception exists in New Jersey, where the Supreme
Court held that the Corporation Law in New Jersey prescribed the
only qualification, and therefore the corporation was not
empowered to add additional qualifications. This is the exact
opposite of the situation in the Philippines because as stated
heretofore, section 21 of the Corporation Law expressly provides
that a corporation may make by-laws for the qualifications of
directors. Thus, it has been held that an officer of a corporation
cannot engage in a business in direct competition with that of the
corporation where he is a director by utilizing information he has
received as such officer, under "the established law that a director
or officer of a corporation may not enter into a competing
enterprise which cripples or injures the business of the
corporation of which he is an officer or director.
It is also well established that corporate officers "are not
permitted to use their position of trust and confidence to further
their private interests." In a case where directors of a corporation
cancelled a contract of the corporation for exclusive sale of a
foreign firm's products, and after establishing a rival business, the
directors entered into a new contract themselves with the foreign
firm for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract
and, therefore, for the benefit of the corporation, as a "faultless
fiduciary may not reap the fruits of his misconduct to the
exclusion of his principal.
The doctrine of "corporate opportunity" is precisely a recognition
by the courts that the fiduciary standards could not be upheld

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

where the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally on the unfairness, in
particular circumstances, of an officer or director taking
advantage of an opportunity for his own personal profit when the
interest of the corporation justly calls for protection.
It is not denied that a member of the Board of Directors of the San
Miguel Corporation has access to sensitive and highly confidential
information, such as: (a) marketing strategies and pricing
structure; (b) budget for expansion and diversification; (c)
research and development; and (d) sources of funding, availability
of personnel, proposals of mergers or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an
officer or director of San Miguel Corporation, who is also the
officer or owner of a competing corporation, from taking
advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice of
San Miguel Corporation and its stockholders, that the questioned
amendment of the by-laws was made. Certainly, where two
corporations are competitive in a substantial sense, it would seem
improbable, if not impossible, for the director, if he were to
discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties
above his personal concerns.
Sound principles of corporate management counsel against
sharing sensitive information with a director whose fiduciary duty
of loyalty may well require that he disclose this information to a
competitive arrival. These dangers are enhanced considerably
where the common director such as the petitioner is a controlling
stockholder of two of the competing corporations. It would seem
manifest that in such situations, the director has an economic
incentive to appropriate for the benefit of his own corporation the
corporate plans and policies of the corporation where he sits as
director.
Indeed, access by a competitor to confidential information
regarding marketing strategies and pricing policies of San Miguel
Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance
knowledge by the competitor of the strategies for the
development of existing or new markets of existing or new
products could enable said competitor to utilize such knowledge
to his advantage.
Neither are We persuaded by the claim that the by-law was
Intended to prevent the candidacy of petitioner for election to the
Board. If the by-law were to be applied in the case of one
stockholder but waived in the case of another, then it could be
reasonably claimed that the by-law was being applied in a
discriminatory manner. However, the by law, by its terms, applies
to all stockholders. The equal protection clause of the Constitution
requires only that the by-law operate equally upon all persons of a
class. Besides, before petitioner can be declared ineligible to run
for director, there must be hearing and evidence must be
submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which
disqualifies a competition from election to the Board of Directors
of another corporation is valid and reasonable.
ISSUE2: WON the Corporation has the power to prescribe
qualifications?

HELD2: Yes. Private respondents contend that the disputed


amended by laws were adopted by the Board of Directors of San
Miguel Corporation a-, a measure of self-defense to protect the
corporation from the clear and present danger that the election of
a business competitor to the Board may cause upon the
corporation and the other stockholders inseparable prejudice.
Submitted for resolution, therefore, is the issue whether or not

72

respondent San Miguel Corporation could, as a measure of selfprotection, disqualify a competitor from nomination and election
to its Board of Directors.

It is recognized by an authorities that 'every corporation has the


inherent power to adopt by-laws 'for its internal government, and
to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the
management of its affairs. At common law, the rule was "that the
power to make and adopt by-laws was inherent in every
corporation as one of its necessary and inseparable legal
incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and
inseparable legal incidents, independent of any specific enabling
provision in its charter or in general law, such power of selfgovernment being essential to enable the corporation to
accomplish the purposes of its creation.
In this jurisdiction, under section 21 of the Corporation Law, a
corporation may prescribe in its by-laws "the qualifications, duties
and compensation of directors, officers and employees ... " This
must necessarily refer to a qualification in addition to that
specified by section 30 of the Corporation Law, which provides
that "every director must own in his right at least one share of the
capital stock of the stock corporation of which he is a director ... "
In Government v. El Hogar, the Court sustained the validity of a
provision in the corporate by-law requiring that persons elected to
the Board of Directors must be holders of shares of the paid up
value of P5,000.00, which shall be held as security for their action,
on the ground that section 21 of the Corporation Law expressly
gives the power to the corporation to provide in its by-laws for the
qualifications of directors and is "highly prudent and in conformity
with good practice
ISSUE3: WON stockholders have the vested right to be elected a
director?
HELD: No. Any person "who buys stock in a corporation does so
with the knowledge that its affairs are dominated by a majority of
the stockholders and that he impliedly contracts that the will of
the majority shall govern in all matters within the limits of the act
of incorporation and lawfully enacted by-laws and not forbidden
by law." To this extent, therefore, the stockholder may be
considered to have "parted with his personal right or privilege to
regulate the disposition of his property which he has invested in
the capital stock of the corporation, and surrendered it to the will
of the majority of his fellow incorporators. ... It cannot therefore
be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed ... by any act of the
former which is authorized by a majority ... ."
Under section 22 of the same law, the owners of the majority of
the subscribed capital stock may amend or repeal any by-law or
adopt new by-laws. It cannot be said, therefore, that petitioner
has a vested right to be elected director, in the face of the fact
that the law at the time such right as stockholder was acquired
contained the prescription that the corporate charter and the bylaw shall be subject to amendment, alteration and modification.
It being settled that the corporation has the power to provide for
the qualifications of its directors, it has also been settled that the
disqualification of a competitor from being elected to the Board of
Directors is a reasonable exercise of corporate authority.
CHAPTER 9: MEETINGS
Meetings applies to every duly convened assembly either of
stockholders, members, directors or trustees, managers, etc. for
any legal purpose or the transaction of business of common
interest.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

may be taken up before the meeting otherwise it may


become voidable at the instance of any objecting stockholder
or member.

Sec. 49. Kinds of meetings. - Meetings of directors, trustees,


stockholders, or members may be regular or special.

THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF


THE SMB WORKERS SAVINGS AND LOAN ASSOCIATION,
ET
AL.,
petitioners,
Sec. 50. Regular and special meetings of stockholders or INC.,
vs.
members. - Regular meetings of stockholders or members shall be
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.
held annually on a date fixed in the by-laws, or if not so fixed, on any (GR No. L-12282; March 31, 1959)
date in April of every year as determined by the board of directors or
trustees: Provided, That written notice of regular meetings shall be FACTS: A meeting electing the BOD of herein petitioner was
sent to all stockholders or members of record at least two (2) weeks declared null and void by the Court in a suit filed by John Castillo,
prior to the meeting, unless a different period is required by the by- et. al.
laws.
In compliance with the order, another election was scheduled on
March 28 at 5:30. On March 27, the plaintiff filed an ex-parte
Special meetings of stockholders or members shall be held at any motion alleging that the meeting is composed of the same people
time deemed necessary or as provided in the by-laws: Provided, that had conducted and supervised the previously nullified
however, That at least one (1) week written notice shall be sent to all meeting; that the election to be conducted did not comply with
the 5 day notice requirement required by the by-laws and the
stockholders or members, unless otherwise provided in the by-laws.
constitution of the association, since the notice was posted and
Notice of any meeting may be waived, expressly or impliedly, by any sent out only on March 26 and the election was to be held on
March 28.
stockholder or member.
A.

STOCKHOLDERS MEETING

ISSUE: WON the notice requirement is complied with?


Whenever, for any cause, there is no person authorized to call a
meeting, the Securities and Exchange Commission, upon petition of a
stockholder or member on a showing of good cause therefor, may HELD: No. Section 3, article III, of the constitution and by-laws the
issue an order to the petitioning stockholder or member directing him association provides:
to call a meeting of the corporation by giving proper notice required
by this Code or by the by-laws. The petitioning stockholder or
member shall preside thereat until at least a majority of the
stockholders or members present have been chosen one of their
Notice of the time and place of holding of any annual meeting,
number as presiding officer.
or any special meeting, the members, shall be given either by
posting the same in a postage prepaid envelope, addressed to
The stockholders have no power to act as or for the corporation
each member on the record at the address left by such member
except at a corporate meeting called and conducted according to
with the Secretary of the Association, or at his known post-office
law. This rule arises from the need to protect the stockholder by
address or by delivering the same person at least (5) days
providing them with notice of meeting and giving them
before the date set for such meeting. . . . In lieu of addressing
opportunity to attend the meeting, discuss the issues and vote (an
or serving personal notices to the members, notice of the
exception would be an ordinary amendment where written asset
members, notice of a regular annual meeting or of a special
is acceptable).
meeting of the members may be given by posting copies of said
notice at the different departments and plants of the San Miguel
DATE OF REGULAR MEETING: The date so fixed in the by-laws,
Brewery Inc., not less than five (5) days prior to the date of the
if not fixed, on any date of April of very year as the BOD/T may
meeting. (Annex K.)
determine. April, because this is the time the Audited Financial
Statements are already available.
Notice of a special meeting of the members should be given at
least five days before the date of the meeting. Therefore, the five
DATE OF SPECIAL MEETING: At any time deemed necessary or
days previous notice required would not be complied with.
as provided for in the by-laws.
REQUIREMENTS FOR A VALID STOCKHOLDERS MEETING:
1. It Must Be Held On The Date Fixed In The By-Laws Or
In Accordance With The Law.
The date required, as previously discussed, admits of an
exception, as when the annual meeting cannot be held on the
appointed time for some valid and meritorious reasons.
2.

Prior Notice Must Be Given


Sec 50 and 51 requires that written notice of regular meeting
shall be sent at least 2 weeks prior to the meeting, whereas,
1 week prior notice is required for special meetings.
EXCEPTIONS: (a) If the by-laws provide for a different period
for sending out notice for regular or special meetings (failure
to comply would render the resolutions adopted at the option
of the stockholder who was not notified); (b) Waiver, either
express or implied.

3.

It Must Be Held at the Proper Place

Sec. 51. Place and time of meetings of stockholders or


members. - Stockholders' or members' meetings, whether regular or
special, shall be held in the city or municipality where the principal
office of the corporation is located, and if practicable in the principal
office of the corporation: Provided, That Metro Manila shall, for
purposes of this section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof
stated therein.
All proceedings had and any business transacted at any meeting of
the stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided all the stockholders or members of the corporation
are present or duly represented at the meeting.

The Notice must contain the agenda or business matter/s that

73

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Meeting must, at all times, be held in the city or municipality


where the principal office is located, or if practicable at the
principal office of the corporation. For this purpose, Metro Manila
is considered as one city or municipality.

meeting then the Ponce case WILL NOT APPLY. This is so, because
the phrase or when the officer authorized to do so refuses, or
fails, or neglects to call a meeting has been deliberately omitted
in Sec. 50 of the Corporation Code.

While there is no law allowing a STOCK corporation to hold a


meeting outside the city or municipality where the principal office
is located, NON-STOCK corporations are allowed to provide a
provision in its by-laws any place of members meeting provided
there is proper notice (Sec. 93)

Likewise, in the same ruling of the SEC, the Ponce case likened
the questioned order to a writ of preliminary injunction which may
be issued ex parte, the said PI can no longer be issued without
notice and hearing under Sec. 5 of Rule 58 of the Rules of Court.
Mandamus is the proper remedy.

4.

IN SUMMARY: The following are authorized to call a meeting:


a. The person or persons authorized under the by-laws;
b. Absent any provision in the by-laws, it may be called by the
President;
c. By the secretary on order of the president or on written
demand of the stockholders representing at least a majority
of the outstanding capital stock or majority of the members
entitled to vote, or the stockholder or member making the
demand if there is no secretary or he refuses to do so, under
Sec. 28; and
d. A stockholder as empowered by the proper forum pursuant to
Sec. 50

It Must Be Called by the Proper Party

DOMINGO PONCE AND BUHAY L. PONCE, petitioners,


vs.
DEMETRIO B. ENCARNACION, Judge of the Court of First
Instance of Manila, Branch I, and POTENCIANO GAPOL,
respondents
(GR No. L-5883; Nov. 28, 1953)
FACTS: It was agreed by the stockholders of Daguhoy Enterprises
at a stockholders meeting that the said corporation shall be
voluntarily dissolved, and was placed under the receivership of
Gapol, the largest stockholder. A petition for voluntary dissolution
was drafted and signed by Ponce, which was to be filed with the
appropriate authorities. It was found out that instead of filing the
petition, Gapol filed a complaint in the CFI for the accounting of
the funds and assets of the corporation, and to reimburse it the
amounts expended for the purchase of a parcel of land, a loan
extended to the wife of Ponce, and an amount spent by Ponce in a
trip to the US. Gapol contends that such amount, taken from the
corporation, was misapplied, misappropriated and misspent by
Ponce to his own use and benefit, thus he prayed for the removal
of Ponce as a member of the board of directors. Such removal was
rejected by the court, but Gapols petition for the calling of a
stockholders meeting, was granted. At said meeting, a new set of
board of directors was elected. Ponce filed a petition in the lower
court seeking to set aside its order, but the same was denied.
Thus, they filed for an appeal to the SC.
ISSUE: WON the Court may issue such order directing a
stockholder to call a meeting of the stockholders of a corporation?
HELD: Yes. The corporation law provides that whenever, from
any cause, there is no person authorized to call a meeting, or
when the officer authorized to do so refuses, fails or neglects to
call a meeting, any judge of a CFI on the showing of a good cause
therefore, may issue an order to any stockholder or member of a
corporation, directing him to call a meeting of the corporation by
giving the proper notice required. Thus, on the showing of
good cause therefore, the court may authorize a
stockholder to call a meeting and to preside thereat until
the majority stockholders representing a majority of the
stock present and permitted to be voted shall have chosen
one among them to preside. This showing of good cause
exists when the court is apprised of the fact that the bylaws of the corporation require the calling of a general
meeting of the stockholders to elect the board of directors
but the call of the meeting has not been done. There is no
need to issue a notice of hearing, nor is there any necessity to
hold a hearing, upon the board of directors. The court here found
good cause in calling the meeting for the election of a new board,
because the chairman of the board of directors who is so
authorized to call such meeting, failed, neglected or refused to
perform his duty. Having the authority to grant such relief, the
lower court did not exceed its jurisdiction nor did it abuse its
discretion in granting it.
NOTE: In a case decided by the SEC, it rules that under the
present state of law, the Ponce case will apply ONLY where there
is no person authorized to call the meeting:, thus an ex-parte
proceeding may be allowed as obviously there is no person to
summon and no person whose right to due process will be
violated. However, where there is an officer authorized to call the
meeting and that officer refuses, fails or neglects to call a

74

5.

Quorum and Voting Requirement Must Be Met

Sec. 52. Quorum in meetings. - Unless otherwise provided for in


this Code or in the by-laws, a quorum shall consist of the stockholders
representing a majority of the outstanding capital stock or a majority
of the members in the case of non-stock corporations.
A by-law provision may provide for a higher quorum requirement
than that prescribed in the Code, but not less. Otherwise, the bylaw provision providing for a lesser quorum requirement have no
force and effect since a by-law provision is subordinate to the
statute and could not defeat the requirements of the law. The
same goes for a by-law provision providing for a voting
requirement less than that provided in the Code.
If the voting requirement is met, any resolution passed in the
meeting, even if improperly held or called will be valid if ALL the
stockholders or members are present or duly represented thereat,
as provided under the last paragraph of Sec. 51:
All proceedings had and any business transacted at any meeting
of the stockholders or members, if within the powers or authority
of the corporation, shall be valid even if the meeting be
improperly held or called, provided all the stockholders or
members of the corporation are present or duly represented at
the meeting.
B.

DIRECTORS/TRUSTEES MEETING

Sec. 53. Regular and special meetings of directors or


trustees. - Regular meetings of the board of directors or trustees of
every corporation shall be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or trustees may be held at
any time upon the call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held
anywhere in or outside of the Philippines, unless the by-laws provide
otherwise. Notice of regular or special meetings stating the date, time
and place of the meeting must be sent to every director or trustee at
least one (1) day prior to the scheduled meeting, unless otherwise
provided by the by-laws. A director or trustee may waive this
requirement, either expressly or impliedly.
REGULAR MEETINGS: those held monthly or as the by-laws may
provide;
SPECIAL MEETINGS: those that are held at any time upon call of

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

the President or the person authorized to do so as may be


provided in the by-laws.
PLACE: Unlike the meeting of stockholders, the meetings of
directors/trustees may be held anywhere, within or even outside
the Philippines, except when the by-laws provide otherwise.
NOTICE REQUIREMENT: is necessary for the purpose of
determining the legality of and binding effect of the resolution/s
passed, EXCEPT:
1. When subsequently ratified;
2. In close corporations where a director may bid the
corporation even without a meeting;
3. When the right to a notice is waived.
The SEC has ruled that a special meeting conducted in the
absence of some of the directors and without any notice to them
is illegal and the action at such meeting although by a majority of
the directors is invalid, unless ratified.
However, if all the directors are present, their presence at the
meeting waives the want of notice.
PRESIDING OFFICER: Unless the by-laws otherwise provide, the
president.

stockholders or members without need of any written proxy.


SHARES OWNED BY TWO OR MORE PERSONS JOINTLY:
Sec. 56. Voting in case of joint ownership of stock. - In case of
shares of stock owned jointly by two or more persons, in order to vote
the same, the consent of all the co-owners shall be necessary, unless
there is a written proxy, signed by all the co-owners, authorizing one
or some of them or any other person to vote such share or shares:
Provided, That when the shares are owned in an "and/or" capacity by
the holders thereof, any one of the joint owners can vote said shares
or appoint a proxy therefor.
D.

PROXY AND OTHER REPRESENTATIVE VOTING

PROXY: is a species of absentee voting by mail by a one way


ballot for the slate or proposals suggested by the management or
even perhaps, the solicitor thereof. It is the authority given by the
stockholder or member to another to vote for him at a
stockholders or members meeting. The term is also used to refer
to the instrument or paper which is evidence of the authority of an
agent or the holder thereof to vote for and in behalf of the
stockholder or member.

Sec. 58. Proxies. - Stockholders and members may vote in person


Sec. 54. Who shall preside at meetings. - The president shall or by proxy in all meetings of stockholders or members. Proxies shall
preside at all meetings of the directors or trustee as well as of the be in writing, signed by the stockholder or member and filed before
stockholders or members, unless the by-laws provide otherwise.
the scheduled meeting with the corporate secretary. Unless otherwise
provided in the proxy, it shall be valid only for the meeting for which
QUORUM: Unless the AOI or by-laws provide for a greater
it is intended. No proxy shall be valid and effective for a period longer
majority, a majority of the members of the BOD/T as fixed in the
than five (5) years at any one time.
AOI will constitute a quorum for the transaction of corporate
business and the decision of the majority of those present shall be
PROXY VOTING: is a right granted by law to all stockholders
valid as a corporate act. EXCEPT: election of corporate officers as
entitled to vote in stock corporations and cannot, therefore, be
provided under Sec. 25 which required the vote of a majority of all
denied. EXCEPT: In a non-stock corporation with by-laws providing
the members of the board.
for a prohibition on the use of proxies (Sec. 89).
PROXY VOTING: is not allowed for a director or trustee, since he
REQUIREMENTS: In the absence of a by-law provision regulating
was supposedly elected because of his expertise in management
the form and execution of proxy, Sec. 58 requires:
or his business acumen such that he is expected to personally
1. The proxy must be in writing;
attend and vote on matters brought before the meeting.
2. It is signed by the stockholder or member or his duly
authorized representative; and
C. STOCKHOLDERS RIGHT TO VOTE AND MANNER OF
3. It is filed on or before the schedule meeting with the
VOTING
corporate secretary.
Being a property right, a stockholder can vote his share the way
It is to be noted, however, that publicly listed companies are
he pleases except in the following:
required to observe and comply with SEC Memorandum Circular
1. Non-voting shares are not entitled to vote except in those
No. 5 -1996.
instances provided in the penultimate paragraph of Sec. 6 of
the Code;
TYPES OF PROXIES:
2. Treasury shares have no voting rights while they remain in
1. General gives a general discretionary power of attorney to
the treasury (Sec. 57);
vote for directors and all ordinary matters that my properly
3. Shares of stock declared delinquent are not entitled to vote at
come before a meeting. It is not an authority, however, to
any meeting; and
vote for fundamental changes in the corporate charter or for
4. Unregistered transferee of shares of stock.
other unusual transactions, unless so specified;
2. Special restricts the authority to vote on specified matters
PROXY VOTING: is allowed or through a voting trust agreement,
only and may direct the manner in which the vote will be
or by the executor, administrator, receiver or other legal
cast.
representative appointed by the court.
PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor
is entitled to vote in the absence of an agreement to the contrary:

DURATION: May be fixed by the proxys own terms but it cannot


exceed 5 years and for not more than 5 years for each renewal.
Otherwise, it expires after the meeting for which it was given.

Sec. 55. Right to vote of pledgors, mortgagors, and


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

VOTING TRUST: is one created by an agreement between a


group of stockholders of a corporation and a trustee, or a group of
identical agreements between individual stockholders and a
common trustee, whereby it is provided that for a term of years,
or for a period contingent upon a certain event, or until the
agreement is terminated, control over the stock owned by such
stockholders, shall be lodged in the trustee, either with or without
Executors, administrators, receivers, and other legal representatives reservation to the owners or persons designated by them the
duly appointed by the court may attend and vote in behalf of the power to direct how such control shall be issued.

75

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Sec. 59. Voting trusts. - One or more stockholders of a stock


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

Irrevocable
The trustee can act and vote at
any meeting during the duration
of the VTA
Trustee may vote in person or by
proxy
Duration may exceed five years
VTA to be valid and effective,
must be notarized and filed with
the SEC

representing
an
absent
stockholder
Revocable
anytime
unless
coupled with an interest
Proxy can generally act as such
only at a particular meeting
Proxy holder must vote in person
Proxy is of a shorter duration and
may not exceed 5 years
Unless required by the by-laws,
proxies need not be notarized nor
is it required to be filed with the
SEC.

READ AGAIN: LEE VS. CA

NATIONAL
INVESTMENT
AND
DEVELOPMENT
CORPORATION, EUSEBIO VILLATUYA MARIO Y. CONSING and
ROBERTO S. BENEDICTO, petitioners,
The trustee or trustees shall execute and deliver to the transferors vs.
voting trust certificates, which shall be transferable in the same HON. BENJAMIN AQUINO, in his official capacity as Presiding
Judge of Branch VIII of the Court of First Instance of Rizal, BATJAK
manner and with the same effect as certificates of stock.
INC., GRACIANO A. GARCIA and MARCELINO CALINAWAN JR.,
respondents.
The voting trust agreement filed with the corporation shall be subject (G.R. No. L-34192 June 30, 1988)
to examination by any stockholder of the corporation in the same
manner as any other corporate book or record: Provided, That both PHILIPPINE NATIONAL BANK, petitioner,
the transferor and the trustee or trustees may exercise the right of vs.
inspection of all corporate books and records in accordance with the HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge
of the Court of First Instance of Rizal, Branch VIII and BATJAK
provisions of this Code.
INCORPORATED, respondents
(G.R. No. L-34213 June 30, 1988)
Any other stockholder may transfer his shares to the same trustee or
trustees upon the terms and conditions stated in the voting trust FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered
agreement, and thereupon shall be bound by all the provisions of said into a Voting Trust Agreement with petitioner NIDC, in order to
assist the former with its financial obligations. The VTA was for a
agreement.
period of 5 years constituting 60% of the outstanding paid-up and
subscribed shares of Batjak. 5 years therafter, or on Aug. 31,
No voting trust agreement shall be entered into for the purpose of 1970, Batjak represented by majority stockholders, through Atty.
circumventing the law against monopolies and illegal combinations in Amado Duran, legal counsel, wrote to NIDC inquiring if the atter
restraint of trade or used for purposes of fraud.
was still interest in negotiating the renewal of the VTA, but there
was no reply even with the second letter sent on Sept. 22, 1970.
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period, On Sept. 23, 1970, legal counsel of Batjak wrote another letter
asking for a complete accounting of the assets, properties,
and the voting trust certificates as well as the certificates of stock in
management and operation of Batjak, preparatory to their turnthe name of the trustee or trustees shall thereby be deemed over and transfer to the stockholders of Batjak.
cancelled and new certificates of stock shall be reissued in the name
of the transferors.
NIDC replied that it had no intention to comply with such demand.
Batjak filed an action for mandamus with preliminary injunction
The voting trustee or trustees may vote by proxy unless the which was granted.
agreement provides otherwise.
VOTING TRUSTS DISTINGUISHED FROM PROXY
VOTING TRUST
The beneficial owner of the
shares ceased to be stockholder
of record of the corporation since
the shares are transferred to the
trustee
Trustee votes as owner of the
shares
The
beneficial
owner
is
disqualified to be a director
Purpose is to acquire
control of the corporation

76

voting

ISSUE: WON Batjak has the personality to enforce the voting trust
agreement executed by its stockholders and whether it may
compel the trustee to turn over the assets of the corporation?

PROXY
Legal title to the shares remain
HELD: No. In support of the third ground of their motion to
with the beneficial owner
dismiss, PNB and NIDC contend that Batjak's complaint for
mandamus is based on its claim or right to recovery of possession
of the three (3) oil mills, on the ground of an alleged breach of
fiduciary relationship. Noteworthy is the fact that, in the Voting
Proxy votes merely as an agent
Trust Agreement, the parties thereto were NIDC and certain
The owner of the shares may be stockholders of Batjak. Batjak itself was not a signatory thereto.
elected as such since legal title Under Sec. 2, Rule 3 of the Rules of Court, every action must be
thereof remains with him
prosecuted and defended in the name of the real party in interest.
Generally used to secure voting Applying the rule in the present case, the action should have been
an quorum requirements or filed by the stockholders of Batjak, who executed the Voting Trust
merely for the purpose of Agreement with NIDC, and not by Batjak itself which is not a party

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

to said agreement, and therefore, not the real party in interest in


the suit to enforce the same.

In addition, PNB claims that Batjak has no cause of action and


prays that the petition for mandamus be dismissed. A careful
reading of the Voting Trust Agreement shows that PNB was really
not a party thereto. Hence, mandamus will not lie against PNB.
Batjak has no clear right to be entitled to the writ prayed
for. What Batjak seeks to recover is title to, or possession
of, real property (the three (3) oil mills which really made
up the assets of Batjak) but which the records show
already belong to NIDC. It is not disputed that the mortgages
on the three (3) oil mills were foreclosed by PNB and NIDC and
acquired by them as the highest bidder in the appropriate
foreclosure sales. Ownership
thereto
was subsequently
consolidated by PNB and NIDC, after Batjak failed to exercise its
right of redemption. The three (3) oil mills are now titled in the
name of NIDC. From the foregoing, it is evident that Batjak had no
clear right to be entitled to the writ prayed for. In Lamb vs.
Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs.
The Board of Pharmacy, 20 Phil. 367, the Court said that the writ
of mandamus will not issue to give to the applicant anything to
which he is not entitled by law.

Batjak premises its right to the possession of the three (3) off mills
on the Voting Trust Agreement, claiming that under said
agreement, NIDC was constituted as trustee of the assets,
management and operations of Batjak, that due to the expiration
of the Voting Trust Agreement, on 26 October 1970, NIDC should
tum over the assets of the three (3) oil mills to Batjak From the
foregoing provisions, it is clear that what was assigned to NIDC
was the power to vote the shares of stock of the stockholders of
Batjak, representing 60% of Batjak's outstanding shares, and who
are the signatories to the agreement. The power entrusted to
NIDC also included the authority to execute any agreement or
document that may be necessary to express the consent or
assent to any matter, by the stockholders. Nowhere in the said
provisions or in any other part of the Voting Trust Agreement is
mention made of any transfer or assignment to NIDC of Batjak's
assets, operations, and management. NIDC was constituted as
trustee only of the voting rights of 60% of the paid-up and
outstanding shares of stock in Batjak. This is confirmed by
paragraph No. 9 of the Voting Trust Agreement, thus:

9. TERMINATION Upon termination of this Agreement as


heretofore provided, the certificates delivered to the TRUSTEE
by virtue hereof shall be returned and delivered to the
undersigned stockholders as the absolute owners thereof,
upon surrender of their respective voting trust certificates,
and the duties of the TRUSTEE shall cease and terminate.Under the aforecited provision, what was to be returned by NIDC
as trustee to Batjak's stockholders, upon the termination of the
agreement, are the certificates of shares of stock belonging to
Batjak's stockholders, not the properties or assets of Batjak itself
which were never delivered, in the first place to NIDC, under the
terms of said Voting Trust Agreement.
In any event, a voting trust transfers only voting or other rights
pertaining to the shares subject of the agreement or control over
the stock. The law on the matter is Section 59, Paragraph 1 of the
Corporation Code (BP 68) which provides:

77

Sec. 59. Voting Trusts One or more stockholders of a stock


corporation may create a voting trust for the purpose of
conferring upon a trustee or trusties the right to vote and
other rights pertaining to the shares for a period not
exceeding five (5) years at any one time: ...
The acquisition by PNB-NIDC of the properties in question was not
made or effected under the capacity of a trustee but as a
foreclosing creditor for the purpose of recovering on a just and
valid obligation of Batjak.
CHAPTER 10: STOCKS AND STOCKHOLDERS
A person may become a stockholder in a corporation in either of
three ways:
1. By a contract of subscription with the corporation;
2. By purchase of treasury shares from the corporation; and
3. By purchase or acquisition of shares from existing
stockholders.
A.

SUBSCRIPTION CONTRACT

A subscription, properly speaking, is the mutual agreement of


the subscribers to take and pay for the stocks of the corporation.
A subscription contract, on the other hand is specifically defined
in Sec. 60:
Sec. 60. Subscription contract. - Any contract for the acquisition
of unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a
purchase or some other contract.
SUBSCRIPTION VS. PURCHASE: In the latter, the buyer
becomes a shareholder only upon full payment of the price.
UNISSUED shares cannot be the subject of a purchase.
We may add that the law in force in this jurisdiction makes no
distinction, in respect to the liability of the subscriber, between
shares subscribed before incorporation is effected and shares
subscribed thereafter. All like are bound to pay full value in cash
or its equivalent, and any attempt to discriminate in favor of one
subscriber by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference of course
primarily to subscriptions to shares that have not been previously
issued. It is conceivable that the power of the corporation to make
terms with the purchaser would be greater where the shares
which are the subject of the transaction have been acquired by
the corporation in course of commerce, after they have already
been once issued. But the shares with which are here concerned
are not of this sort. (National Exchange Co., Inc. vs. Dexter)
EXAMPLE: If X corporation had P1M authorized capital divided
into 1M shares with a par value of P1. 500,000 has already been
subscribed:
1. Z purchased 100,000 of the UNISSUED shares paying 50%
down payment and the balance payable after 6 months, with
a condition that he will not be considered a shareholder until
full payment. He is still liable for the balance because this
will be considered a subscription no matter how the parties
refer to it and accordingly, Z is liable as a shareholder therein.
2. Z was declared a delinquent shareholder and X Co. was
declared as the winning bidder by paying P100,000 and
acquired the delinquent shares. Later on, 20,000 of the
shares were sold to Y here, the shares being from treasury
and not from unissued shares, may be the proper subject of a
purchase and thus, a condition that Y would not became a
shareholder until full payment may be valid.
FORM: A subscription contract need not be in writing such that an
oral contract of subscription is valid and enforceable under the
Statute of Frauds. Thus, it was ruled by the SC that such an
agreement does not seem to fall within the definition of a sale

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

under our substantive law, and is therefore believed that an oral


subscription agreement as distinguished from sale of stock is valid
and enforceable.
CONDITION: Subscriptions may be made upon a condition
precedent or upon special terms (condition subsequent). A
conditional subscription, or one made upon a condition
precedent, does not make the subscriber a stockholder, or render
him to pay the amount of his subscription, until performance of
the condition. A subscription upon special terms, on the other
hand, is an absolute subscription, making the subscriber a
stockholder, and rendering him liable as such, as soon as the
subscription is accepted, the special term being an independent
stipulation.
In case of doubt in the intention of the parties, a subscription
should be considered as an absolute subscription upon special
terms, rather than conditional. The policy of giving protection to
creditors and other subscribers has led to the adoption of this rule
of construction favoring the immediate liability of the subscriber.
Conditional Subscriptions are valid provided: (1) there is nothing
in the charter or enabling act prohibiting the same; and (2)
provided the conditions are not such as to render their
performance beyond the powers of the corporation or in violation
of law or contrary to public policy.
NAZARIO TRILLANA, administrator-appellee,
vs.
QUEZON COLLEGE, INC., claimant-appellant
(GR No. L-5003; June 27, 1953)

FACTS: Damasa Crisostomo sent the following letter to the Board


of Trustees of the Quezon College:

June 1, 1948
The BOARD OF TRUSTEES
Quezon College
Manila
Gentlemen:
Please enter my subscription to dalawang daan (200)
shares of your capital stock with a par value of P100
each. Enclosed you will find (Babayaran kong lahat
pagkatapos na ako ay makapag-pahuli ng isda) pesos as
my initial payment and the balance payable in
accordance with law and the rules and regulations of the
Quezon College. I hereby agree to shoulder the expenses
connected with said shares of stock. I further submit
myself to all lawful demands, decisions or directives of
the Board of Trustees of the Quezon College and all its
duly constituted officers or authorities (ang nasa itaas ay
binasa at ipinaliwanag sa akin sa wikang tagalog na
aking nalalaman).
Very respectfully,
(Sgd.) DAMASA CRISOSTOMO
Signature of subscriber
Nilagdaan sa aming harapan:
JOSE CRISOSTOMO
EDUARDO CRISOSTOMO
On Oct. 26, 1948, Crisostomo died. As no payment on the
subscriptions appear to have been made, herein appellant filed a
claim in her testate proceedings for P20,000 which was opposed
by the administrator, and dismissed by the CFI.
ISSUE: WON the subscription is valid and enfroceable?

78

HELD: No. It appears that the application sent by Damasa


Crisostomo to the Quezon College, Inc. was written on a general
form indicating that an applicant will enclose an amount as initial
payment and will pay the balance in accordance with law and the
regulations of the College. On the other hand, in the letter actually
sent by Damasa Crisostomo, the latter (who requested that her
subscription for 200 shares be entered) not only did not enclose
any initial payment but stated that "babayaran kong lahat
pagkatapos na ako ay makapagpahuli ng isda." There is nothing in
the record to show that the Quezon College, Inc. accepted the
term of payment suggested by Damasa Crisostomo, or that if
there was any acceptance the same came to her knowledge
during her lifetime. As the application of Damasa Crisostomo is
obviously at variance with the terms evidenced in the form letter
issued by the Quezon College, Inc., there was absolute necessity
on the part of the College to express its agreement to Damasa's
offer in order to bind the latter. Conversely, said acceptance was
essential, because it would be unfair to immediately obligate the
Quezon College, Inc. under Damasa's promise to pay the price of
the subscription after she had caused fish to be caught. In other
words, the relation between Damasa Crisostomo and the
Quezon College, Inc. had only thus reached the preliminary
stage whereby the latter offered its stock for subscription
on the terms stated in the form letter, and Damasa applied
for subscription fixing her own plan of payment, a
relation, in the absence as in the present case of
acceptance by the Quezon College, Inc. of the counter
offer of Damasa Crisostomo, that had not ripened into an
enforceable contract.
Indeed, the need for express acceptance on the part of the
Quezon College, Inc. becomes the more imperative, in view of the
proposal of Damasa Crisostomo to pay the value of the
subscription after she has harvested fish, a condition obviously
dependent upon her sole will and, therefore, facultative in nature,
rendering the obligation void, under article 1115 of the old Civil
Code which provides as follows: "If the fulfillment of the condition
should depend upon the exclusive will of the debtor, the
conditional obligation shall be void. If it should depend upon
chance, or upon the will of a third person, the obligation shall
produce all its effects in accordance with the provisions of this
code." It cannot be argued that the condition solely is void,
because it would have served to create the obligation to pay,
unlike a case, exemplified by Osmea vs. Rama (14 Phil., 99),
wherein only the potestative condition was held void because it
referred merely to the fulfillment of an already existing
indebtedness.
In the case of Taylor vs. Uy Tieng Piao, et al. (43 Phil., 873, 879),
this Court already held that "a condition, facultative as to the
debtor, is obnoxious to the first sentence contained in article 1115
and renders the whole obligation void."
B.

PRE-INCORPORATION SUBSCRIPTION

Pre-incorporation subscriptions make reference to subscriptions


for shares of stock of a corporation still to be formed while postincorporation subscriptions are those made or executed after the
formation or organization of the corporation.
Sec. 61. Pre-incorporation subscription. - A subscription for
shares of stock of a corporation still to be formed shall be irrevocable
for a period of at least six (6) months from the date of subscription,
unless all of the other subscribers consent to the revocation, or unless
the incorporation of said corporation fails to materialize within said
period or within a longer period as may be stipulated in the contract
of subscription: Provided, That no pre-incorporation subscription may
be revoked after the submission of the articles of incorporation to the
Securities and Exchange Commission.
IMMEDIATE BINDING EFFECT: This new provision gives an
immediate binding effect on pre-incorporation subscriptions as
against the subscribers of the capital stock of a corporation still to

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

be formed. Pre-incorporation subscriptions are, in fact, mandatory


as may be culled from the provisions of Sec. 13 and 14 of the
Code which mandates that a corporation may be registered as
such only if at least 25% of its authorized capital stock has been
subscribed and that at least 25% of the subscribed capital has
been paid.
IRREVOCABLE: Pre-incorporation subscriptions are irrevocable:
1. For a period of at least 6 months from the date of subscription
unless (a) all the subscribers consent to the revocation; or (b)
the incorporation fails to materialize within said period or
within a longer period as may stipulated in the contract of
subscription; and
2. After submission of the AOI to the SEC.
C.

STOCK ISSUANCE

Stock issuance is generally the initial and primary source of


corporate capital. Other sources may include corporate
borrowings, loans and advances from creditors or stockholders.
Corporate earnings may also be a source of corporate funds if it is
reinvested or ploughed back to the company.

value of the shares which constantly fluctuates, merely indicates


the amount which the original subscribers are supposed to
contribute to the corporate capital as the basis of the privilege of
profit sharing with limited liability.
PROPERTY: If shares are issued in exchange for property, the
value of such should at least be equal to the par or issued value of
the stocks. Such value, may be determined with reference to
a. REAL PROPERTY - (1) independent appraisers appraisal
report; (2) BIR Zonal Valuation; or (3) Market Value indicated
in the Real Estate Tax Declaration.
b. INTANGIBLE PROPERTY as determined by the incorporators
or the BOD subject to the approval of the SEC.
TRUE VALUE RULE: the motives and intent of those making the
valuation are disregarded and the sole and decisive factor or
question is whether or not the property or services are in fact
worth the value placed on them.

GOOD FAITH RULE: is based on the proposition that the value of


the property or services is a matter about which there can be an
honest difference of opinion. Therefore, if the parties have acted
in good faith without fraud or intentional over-valuation, the
Sec. 62. Consideration for stocks. - Stocks shall not be issued for transaction cannot be overturned even if it later becomes evident
a consideration less than the par or issued price thereof. that the property or services were in fact worth much less than
Consideration for the issuance of stock may be any or a combination the value fixed on them initially.
of any two or more of the following:
Most jurisdiction follow the GOOD FAITH rule.
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of the
stock issued;
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated
capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation
thereof shall initially be determined by the incorporators or the board
of directors, subject to approval by the Securities and Exchange
Commission.

STOCK DIVIDENDS: Sec. 62(5) which states that amounts


transferred from unrestricted retained earnings to stated capital
refer to stock dividends where corporate earnings are capitalized
rather than being distributed as cash dividend. It merely converts
income into capital, the consideration being the retained earnings
itself which would have accrued to the stockholders in proportion
to their respective stockholdings.
NO CONSIDERATION: stocks may not be issued without
consideration for the following reasons: (1) it is discriminatory
against other stockholders; and (2) it prejudices the rights of
creditors under the Trust Fund Doctrine.
RECLASSIFICATION: Sec. 62(6) which provides that outstanding
shares exchanged for stocks in the event of reclassification or
conversion speaks of shares of stock surrendered to the
corporation in exchange for new or different type of shares.
Example: Found Shares which, after 5 years, may be converted to
common stocks.

PROHIBITED CONSIDERATIONS: Shares of stock may not be


issued in exchange for (1) promissory notes; or (2) future services
Shares of stock shall not be issued in exchange for promissory notes as their realization are not certain.
or future service.
THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,
The same considerations provided for in this section, insofar as they vs.
may be applicable, may be used for the issuance of bonds by the I. B. DEXTER, defendant-appellant
(GR No. L-27872; Feb. 25, 1928)
corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a
conferred upon it by the articles of incorporation or the by-laws, or in written subscription to the corporate stock of C. S. Salmon & Co.
the absence thereof, by the stockholders representing at least a in the following form:
majority of the outstanding capital stock at a meeting duly called for
the purpose.
I hereby subscribe for three hundred (300) shares of the capital
stock of C. S. Salmon and Company, payable from the first
ISSUE: is generally employed to indicate the making of a share
dividends declared on any and all shares of said company
contract or contract of subscription, that is, transaction by which a
owned by me at the time dividends are declared, until the full
person becomes the owner of shares and by which new share
amount of this subscription has been paid
contracts are created. It is often associated with the execution
and delivery of a share certificate but the issuance of the shares is
Upon subscription, defendant Dexter paid P15,000 from the
not dependent on the delivery of a certificate of stock.
dividends declared by the company and supplemented by money
supplied personally by the subscriber. No other payment was
PAR or ISSUED PRICE: while it may not reflect the true

79

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

made.
ISSUE: WON the subscription to be paid out of the dividends
declared on the shares has the effect of relieving the subscriber
from personal liability in an action to recover the value of the
shares?

HELD: No. Under the American regime corporate franchises in the


Philippine Islands are granted subject to the provisions of section
74 of the Organic Act of July 1, 1902, which, in the part here
material, is substantially reproduced in section 28 of the
Autonomy Act of August 29, 1916. In the Organic Act it is among
other things, declared: "That all franchises, privileges, or
concessions granted under this Act shall forbid the issue of stock
or bonds except in exchange for actual cash or for property at a
fair valuation equal to the par value of the stock or bonds so
issued; . . . ." (Act of Congress of July 1, 1902, sec. 74.)

in 21 Law. ed., 361, the rule is that "Conditions attached to


subscriptions, which, if valid, lessen the capital of the
company, are a fraud upon the grantor of the franchise,
and upon those who may become creditors of the
corporation, and upon unconditional stockholders."
In the appellant's brief attention is called to the third headnote to
Bank vs. Cook (125 Iowa, 111), where it is stated that a collateral
agreement with a subscriber to stock that his subscription shall
not be collectible except from dividends on the stock, is valid as
between the parties and a complete defense to a suit on notes
given for the amount of the subscription. A careful perusal of the
decision will show that the rule thus broadly stated in the
headnote is not justified by anything in the reported decision; for
what the court really held was that the making of such promise by
the agent of the corporation who sold the stock is admissible in
evidence in support of the defense of fraud and failure of
consideration. Moreover, even if the decision had been to the
effect supposed, the rule announced in the headnote, could have
no weight in a jurisdiction like this where there is a statutory
provision prohibiting such agreements.
D.

Pursuant to this provision we find that the Philippine Commission


inserted in the Corporation Law, enacted March 1, 1906, the
following provision: ". . . no corporation shall issue stock or
bonds except in exchange for actual cash paid to the
corporation or for property actually received by it at a fair
valuation equal to the par value of the stock or bonds so
issued." (Act No. 1459, sec. 16 as amended by Act No. 2792, sec.
2.)
The prohibition against the issuance of shares by corporations
except for actual cash to the par value of the stock to its full
equivalent in property is thus enshrined in both the organic and
statutory law of the Philippine Islands; and it would seem that our
lawmakers could scarcely have chosen language more directly
suited to secure absolute equality stockholders with respect to
their liability upon stock subscriptions. Now, if it is unlawful to
issue stock otherwise than as stated it is self-evident that a
stipulation such as that now under consideration, in a
stock subscription, is illegal, for this stipulation obligates
the subscriber to pay nothing for the shares except as
dividends may accrue upon the stock. In the contingency
that dividends are not paid, there is no liability at all. This
is a discrimination in favor of the particular subscriber,
and hence the stipulation is unlawful.
The general doctrine of corporation law is in conformity with this
conclusion, as may be seen from the following proposition taken
from the standard encyclopedia treatise, Corpus Juris:
Nor has a corporation the power to receive a
subscription upon such terms as will operate as a fraud
upon the other subscribers or stockholders by subjecting
the particular subcriber to lighter burdens, or by giving
him greater rights and privileges, or as a fraud upon
creditors of the corporation by withdrawing or
decreasing the capital. It is well settled therefore, as a
general rule, that an agreement between a corporation and a
particular subscriber, by which the subscription is not to be
payable, or is to be payable in part only, whether it is for the
purpose of pretending that the stock is really greater than it is,
or for the purpose of preventing the predominance of certain
stockholders, or for any other purpose, is illegal and void as in
fraud of other stockholders or creditors, or both, and cannot be
either enforced by the subscriber or interposed as a defense in
an action on the subscription. (14 C. J., p. 570.)
The rule thus stated is supported by a long line of decisions from
numerous courts, with little or no diversity of opinion. As stated in
the headnote to the opinion of the Supreme Court of United States
in the case of Putnan vs. New Albany, etc. Railroad Co. as reported

80

CERTIFICATE OF STOCK AND THEIR TRANSFER

Share of Stock: may rightfully be described as a profit sharing


contract, a series of units of interest and participation in a
corporation in consideration of a proportionate right to participate
in dividend and other distributions. They are personal properties
and the owners thereof have the unbridled right to transfer the
same to anyone they please subject only to reasonable charter
provisions.
Certificate of Stock: is the piece of paper or document which
evidences the ownership of shares and a convenient instrument in
the transfer of the title.
Sec. 63. Certificate of stock and transfer of shares. - The
capital stock of stock corporations shall be divided into shares for
which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed
with the seal of the corporation shall be issued in accordance with the
by-laws. Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates endorsed by
the owner or his attorney-in-fact or other person legally authorized to
make the transfer. No transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and
the number of shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
REQUISITES FOR THE ISSUANCE OF CERTIFICATE OF STOCK:
1. It must be signed by the president or vice-president and
countersigned by the secretary or assistant secretary;
2. It must be sealed with the corporate seal, and
3. The entire value thereof (together with the interest or
expenses, if any) should have been paid.
RIGHTS OF SUBSCRIBERS: While it appears, that a subscriber
to shares of stock cannot be entitled to the issuance of a
certificate of stock until the full amount of his subscription
together with interest and expenses (in case of delinquent shares)
if any is due, has been paid, a subscriber, even if not yet fully
paid, is entitled to exercise all the rights of a stockholder and the
corresponding liability that attach thereunder:
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares
not fully paid which are not delinquent shall have all the rights of a
stockholder.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

In essence, the issuance of a certificate of stock is not a condition


sine qua non to consider a subscriber a stockholder. To all intents
and purposes, a subscriber is a shareholder upon subscription and
entitled to the all the rights as such, except:
1. For the issuance of a certificate of stock;
2. If his shares are declared delinquent; or
3. When he exercises appraisal right under Sec. 83.
NEGOTIABILITY: A certificate of stock is not regarded as
negotiable in the sense same sense as a bill or a not, even if its
endorsed in blank. Thus, while it may be transferred by
endorsement coupled with delivery thereof, it is nonetheless nonnegotiable in that the transferee takes it without prejudice to all
the rights and defenses which the true and lawful owner may
have except in so far as the principles governing estoppel may
apply.
NON-REGISTRATION: of shares disposed of by the holder will not
affect the validity of the transfer at least in so far as the
contracting parties are concerned. As regards, the corporation,
the transferee will not be recognized as such stockholder and
could not exercise the rights until the transfer has been duly
recorded in the stock and transfer book. As such, he cannot vote
or be vote for, and he will not be entitled to dividends. The
corporation may be protected when it pays dividends to the
registered owner despite a previous transfer of which it had no
knowledge. The purpose of registration therefore is two-fold: (1) to
enable the transferee to exercise all the rights of stockholder, and
(2) to inform the corporation of any change in share ownership so
that it can ascertain the person entitled to the rights and subject
to the liabilities of a corporation (De Erquiga vs. CA)
REGISTRATION: is necessary to:
1. Enable the corporation to know who its stockholders are;
2. Enable the transferee to exercise his rights as a stockholder;
3. Afford the corporation an opportunity to object or refuse
registration of the transfer in cases allowed by law (as when it
has unpaid claims on the shares transferred);
4. Avoid fictitious and fraudulent transfers; and
5. Protect creditors who have the right to look upon
stockholders, in case of non-payment or watered shares, for
the satisfaction of their claims.
MANDAMUS: If the corporate secretary refuses to registered or
record the transfer, mandamus will lie to compel the registration.
This is because such duty is ministerial. HOWEVER, he cannot be
compelled to do so when the transferees title to said shares has
no prima facie validity or is uncertain.
TWO MODES OF TRANSFERRING STOCKS:
1. Endorsement and delivery of certificate of stock;
2. Notarized deed.
The SEC has, however, ruled that when a corporation has already
issued stock certificates, any transfer of the shares can only be
effectively made by endorsement and delivery of the stock
certificate. A deed of transfer, sale or assignment alone would not
suffice (as affirmed by the SC in Rural Bank of Lipa City, Inc. vs.
CA) for to rule otherwise would open the door to fraudulent or
fictitious transfer which the SEC seeks to avoid. In effect, while a
formal contract of sale in a notarized document is equivalent to
actual delivery of the certificate itself, this mode of transfer is
available only if no certificate of stock has been issued.
RIGHT TO TRANSFER SHARES OF STOCK: may not be
unreasonably restricted prohibited. Thus, in Padgett vs. Bobcock &
Templeton and Fleischer vs. Botica Nolasco, the SC held that
every owner of corporate shares has the same uncontrollable right
to alienate them and is under no obligation from selling them at
his sacrifice and for the welfare and benefit of the corporation and
other stockholders. But while unreasonable restrictions may not
be allowed, the right to transfer may be regulated to give the
corporation protection against colorable or fraudulent transfer or
to enable it to know who its stockholders are. Also, as a matter of

81

policy, the SEC allows the grant of preferential rights to existing


stockholders and/or the corporation, giving them the first option
to purchase the shares of a selling stockholder within a reasonable
period not exceeding thirty days provided that the same is
contained in the AOI and in all the stock certificates to be issued.
This is considered reasonable since it merely suspends the right
to transfer within the period specified.
OTHER RESTRICTIONS:
1. It is not valid, except as between the parties, until recorded in
the books of the corporation;
2. Shares of stock against which the corporation holds any
unpaid claim shall not be transferrable in the books of the
corporation. Unpaid claims, refer to claims arising from
unpaid subscription and not to any indebtedness which a
stockholder may owe the corporation such as monthly dues;
3. Restrictions required to be indicated in the AOI, bylaws and
stock certificates of a close corporation;
4. Restrictions imposed by special law, such as the Public
Service Act requiring the approval of the government agency
concerned if it will vest unto the transferee 40% of the capital
of the public service company;
5. Sale to aliens in violation of maximum ownership of shares
under the Nationalization Laws; and
6. Those covered by reasonable agreement of the parties.
TRANSFER: as used in the Corporation Code, refers to absolute
and unconditional transfer to warrant registration in the books of
the corporation in order to bind the latter and other third persons.
ENRIQUE MONSERRAT, plaintiff-appellee,
vs.
CARLOS G. CERON, ET AL., defendants.
ERMA, INC., and, THE SHERIFF OF MANILA, respondents
(G.R. No. 37078; September 27, 1933)

FACTS: Enrique Monserrat, president and manager of the Manila


Yellow Taxicab Co., Inc. (MYTC), assigned to Carlos G. Ceron the
usufruct of his 1,200 shares in consideration of the interest shown
and the financial aid extended him (Monserrat) in the organization
of the corporation. This assignment allowed Ceron to derive the
right to enjoy the profits (during his lifetim) that may be derived
from the shares but prohibited him from acts of absolute
ownership, such acts and the right to vote, reserved to Monserrat
and his heirs. Such assignment was recorded in the books of the
corporation and the corresponding shares certificate was issued to
Ceron.
Later on, Ceron mortgaged the shares to herein defendant
Eduardo Matute, the latter without knowledge of the existence of
the assignment. Due to non-payment, Matute foreclosed the
mortgage and the shares were sold at a public auction.
Monserrat claims ownership over the shares and the lower court
rendered judgment in his favor, holding that the mortgage on the
shares was null and void, but the mortgage on the usufruct is
valid.
ISSUE: WON it is necessary to enter upon the books of the
corporation a mortgage constituted on shares of stock in order
that such mortgage may be valid and may have force and effect
as against third persons?

HELD: No. Section 35 of the Corporation Law provides the


following:

SEC. 35. The capital stock of stock corporations shall be divided


into shares for which certificates signed by the president or the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

vice-president, counter signed by the secretary or clerk and


sealed with the seal of the corporation, shall be issued in
accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the
transfer is entered and noted upon the books 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.
No share of stock against which the corporation hold, any
unpaid claim shall be transferable on the books of the
corporation.
The legal provision just quoted does not require any entry except
of transfers of shares of stock in order that such transfers may be
valid as against third persons. Now, what did the Legislature mean
in using the word "transfer"?
Inasmuch as it does not appear from the text of the Corporation
Law that an attempt was made to give a special signification to
the word "transfer", we shall construe it according to its accepted
meaning in ordinary parlance.
The word "transferencia" (transfer) is defined by the "Diccionario
de la Academia de la Lengua Castellana" as "accion y efecto de
transferir" (the act and effect of transferring); and the verb
"transferir", as "ceder o renunciar en otro el derecho o dominio
que se tiene sobre una cosa, haciendole dueno de ella" (to assign
or waive the right in, or absolute ownership of, a thing in favor of
another, making him the owner thereof).
In the Law Dictionary of "Words and Phrases", third series, volume
7, p. 589, the word "transfer" is defined as follows:
"Transfer" means any act by which property of one person is
vested in another, and "transfer of shares", as used in Uniform
Stock Transfer Act (Comp. St. Supp., 690), implies any means
whereby one may be divested of and another acquire ownership
of stock. (Wallach vs. Stein [N.J.], 136 A., 209, 210.)"
In view of the definitions cited above, the question arises as to
whether or not a mortgage constituted on certain shares of stock
in accordance with Act No. 1508, as amended by Act No. 2496, is
a transfer of such shares in the abovementioned sense.
Section 3 of the aforesaid Act No. 1508, as amended by Act No.
2496, defines the phrase "hipoteca mobiliaria" (chattel mortgage)
as follows:
SEC. 3. A chattel mortgage is a conditional sale of personal
property as security for the payment of a debt, or the
performance of some other obligation specified therein, the
condition being that the sale shall be avoided upon the seller
paying to the purchaser a sum of money or doing some other
act named. If the condition is performed according to its terms
the mortgage and sale immediately become void, and the
mortgage is hereby divested of his title.
According to the legal provision just quoted, although a chattel
mortgage, accompanied by delivery of the mortgaged thing,
transfers the title and ownership thereof to the mortgage creditor,
such transfer is not absolute but constitutes a mere security for
the payment of the mortgage debt, the transfer in question
becoming null and void from the time the mortgage debtor
complies with his obligation to pay his debt.
In the case of Noble vs. Ft. Smith Wholesale Grocery Co. (127 Pac.,
14, 17; 34 Okl., 662; 46 L. R. A. [N.S.], 455), cited in Words and
Phrases, second series, vol. 4, p. 978, the following appears:
A "transfer" is the act by which owner of a thing delivers it to
another with the intent of passing the rights which he has in it

82

to the latter, and a chattel mortgage is not within the meaning


of such term.
Therefore, the chattel mortgage is not the transfer referred
to in section 35 of Act No. 1459 commonly known as the
Corporation law, which transfer should be entered and
noted upon the books of a corporation in order to be valid,
and which, as has already been said, means the absolute
and unconditional conveyance of the title and ownership
of a share of stock.
If, in accordance with said section 35 of the Corporation Law, only
the transfer or absolute conveyance of the ownership of
the title to a share need be entered and noted upon the
books of the corporation in order that such transfer may
be valid, therefore, inasmuch as a chattel mortgage of the
aforesaid title is not a complete and absolute alienation of
the dominion and ownership thereof, its entry and
notation upon the books of the corporation is not
necessary requisite to its validity.
It is obvious, therefore, that the defendant entity Erma, Inc., as a
conditional purchaser of the shares of stock in question given as
security for the payment of his credit, acquired in good faith
Carlos G. Ceron's right and title to the 600 common shares of
stock evidenced by certificate No. 7 of the MYTC, and as such
conditional purchaser in good faith, it is entitled to the protection
of the law.
In view of the foregoing considerations, we are of the opinion and
so hold that, inasmuch as section 35 of the Corporation Law
does not require the notation upon the books of a
corporation of transactions relating to its shares, except
the transfer of possession and ownership thereof, as a
necessary requisite to the validity of such transfer, the
notation upon the aforesaid books of the corporation, of a
chattel mortgage constituted on the shares of stock in
question is not necessary to its validity.
GONZALO CHUA GUAN, plaintiff-appellant,
vs.
SAMAHANG MAGSASAKA, INC., and SIMPLICIO OCAMPO,
ADRIANO G. SOTTO, and EMILIO VERGARA, as president, secretary
and treasurer respectively of the same, defendants-appellees
(G.R. No. L-42091; November 2, 1935)
FACTS: To secure the payment of a debt, Gonzalo H. Co Toco
mortgage his shares to Chua Chiu, such assignment recorded in
the Office of the Register of Deeds and the books of the
corporation. For non-payment, the mortgage was foreclosed and
the shares were sold at a public auction with plaintiff Chua Guan
as the highest bidder.
The Company refused to cancel the certificates of stock and issue
new ones to herein plaintiff alleging that prior to the date of
plaintiffs demand, nine attachments had been issued and served
and noted on the books of the corporation. Thus, a prayer for a
writ of mandamus.
The validity of the assignments and the mortgage is not in
question.
ISSUE: WON the registration of the mortgage in the registry of
chattel mortgage in the office of the register of deeds give
constructive notice to the said attaching creditors and thus gave
preference to the mortgage over the other debts?

HELD: No. In passing, let it be noted that the registration of the


said chattel mortgage in the office of the corporation was not
necessary and had no legal effect. (Monserrat vs. Ceron, 58 Phil.,
469.) The long mooted question as to whether or not shares of a

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corporation could be hypothecated by placing a chattel mortgage


on the certificate representing such shares we now regard as
settled by the case of Monserrat vs. Ceron, supra. But that case
did not deal with any question relating to the registration of such
a mortgage or the effect of such registration. Nothing appears in
the record of that case even tending to show that the chattel
mortgage there involved was ever registered anywhere except in
the office of the corporation, and there was no question involved
there as to the right of priority among conflicting claims of
creditors of the owner of the shares

Section 4 of Act No. 1508 provides two ways for executing a valid
chattel mortgage which shall be effective against third persons.
First, the possession of the property mortgage must be delivered
to and retained by the mortgagee; and, second, without such
delivery the mortgage must be recorded in the proper office or
offices of the register or registers of deeds. If a chattel mortgage
of shares of stock of a corporation may validly be made without
the delivery of possession of the property to the mortgagee and
the mere registration of the mortgage is sufficient to constructive
notice to third parties, we are confronted with the question as to
the proper place of registration of such a mortgage. Section 4
provides that in such a case the mortgage resides at the time of
making the same or, if he is a non-resident, in the province in
which the property is situated; and it also provides that if the
property is situated in a different province from that in which the
mortgagor resides the mortgage shall be recorded both in the
province of the mortgagor's residence and in the province where
the property is situated.

If with respect to a chattel mortgage of shares of stock of a


corporation, registration in the province of the owner's domicile
should be sufficient, those who lend on such security would be
confronted with the practical difficulty of being compelled not only
to search the records of every province in which the mortgagor
might have been domiciled but also every province in which a
chattel mortgage by any former owner of such shares might be
registered. We cannot think that it was the intention of the
legislature to put this almost prohibitive impediment upon the
hypothecation of shares of stock in view of the great volume of
business that is done on the faith of the pledge of shares of stock
as collateral.
It is a common but not accurate generalization that the situs of
shares of stock is at the domicile of the owner. The term situs is
not one of fixed of invariable meaning or usage. Nor should we
lose sight of the difference between the situs of the shares and
the situs of the certificates of shares. The situs of shares of stock
for some purposes may be at the domicile of the owner and for
others at the domicile of the corporation; and even elsewhere. (Cf.
Vidal vs. South American Securities Co., 276 Fed., 855; Black
Eagle Min. Co. vs. Conroy, 94 Okla., 199; 221 Pac,, 425 Norrie vs.
Kansas City Southern Ry. Co., 7 Fed. [2d]. 158.) It is a general
rule that for purposes of execution, attachment and
garnishment, it is not the domicile of the owner of a
certificate but the domicile of the corporation which is
decisive. (Fletcher, Cyclopedia of the Law of Private
Corporations, vol. 11, paragraph 5106. Cf. sections 430 and 450,
Code of Civil Procedure.)
By analogy with the foregoing and considering the ownership of
shares in a corporation as property distinct from the certificates
which are merely the evidence of such ownership, it seems to us a
reasonable construction of section 4 of Act No. 1508 to hold that
the property in the shares may be deemed to be situated
in the province in which the corporation has its principal

83

office or place of business. If this province is also the


province of the owner's domicile, a single registration
sufficient. If not, the chattel mortgage should be
registered both at the owner's domicile and in the
province where the corporation has its principal office or
place of business. In this sense the property mortgaged is
not the certificate but the participation and share of the
owner in the assets of the corporation.
In view of the premises, the attaching creditors are entitled to
priority over the defectively registered mortgage of the appellant
and the judgment appealed from must be affirmed without special
pronouncement as to costs in this instance.
TORIBIA USON, plaintiff-appellee,
vs.
VICENTE DIOSOMITO, ET AL., defendants.
VICENTE DIOSOMITO, EMETERIO BARCELON, H.P.L. JOLLYE and
NORTH ELECTRIC COMPANY, INC., appellants.
(G.R. No. L-42135; June 17, 1935)
FACTS: In a civil action filed by herein plaintiff-appellee Uson, an
attachment was levied on Jan. 18, 1932 upon the property of
defendant Vicente Diosmomito including the question 75 shares of
North Electric Company, Inc.. On March 20, 1933, the said shares
were sold at a public auction to satisfy the claim of Uson.
In the present action, appellant HPL Jollye claims ownership of
said shares. Apparently, these shares were sold by Diosomito to
Emetertio Barcelon on Feb. 3, 1931 but the certificates were
cancelled and a new one issued only on Sep. 16, 1932. Later on,
the same shares were sold to Jollye and registered in the books on
Feb. 13, 1933.
ISSUE: WON a bona fide transfer of the shares of a corporation,
not registered or noted on the books of the corporation, is valid as
against a subsequent lawful attachment of said shares, regardless
of whether the attaching creditor had actual notice of said transfer
or not?

HELD: Section 35 of the Corporation Law is as follows:

SEC. 35. The capital stock of stock corporations shall be divided


into shares for which certificates signed by the president or the
vice-president, countersigned by the secretary or clerk and
sealed with the by-laws. Shares of stock so issued are personal
property and may be transferred by delivery of the certificate
indorsed by the owner or his attorney in fact or other person
legally authorized to make the transfer. No transfer, however,
shall be valid, except as between the parties, until the transfer
is entered and noted upon the books 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
We prefer to adopt the line followed by the Supreme Courts of
Massachusetts and of Wisconsin. (See Clews vs. Friedman, 182
Mass., 555; 66 N.E. 201, and In re Murphy, 51 Wis., 519; 8 N.W.,
419.) In this case the court had under consideration a statute
identical with our own section 35, supra, and the court said:
We think the true meaning of the language is, and the obvious
intention of the legislature in using it was, that all transfers of
shares should be entered, as here required, on the books of the
corporation. And it is equally clear to us that 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 subsequent purchasers in good faith,
and indeed, as to all persons interested, except the
parties to such transfers. All transfers not so entered on
the books of the corporation are absolutely void; not

Cesar Nickolai F. Soriano Jr.


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because they are without notice or fraudulent in law or


fact, but because they are made so void by statute.

though a controlling interest is sold to one purchaser. (Ibid., sec.


1035, pp. 665, 666.)

To us the language of the legislature is plain to the effect that the


right of the owner of the shares of stock of a Philippine
corporation to transfer the same by delivery of the
certificate, whether it be regarded as statutory on
common law right, is limited and restricted by the express
provision that "no transfer, however, shall be valid, except
as between the parties, until the transfer is entered and
noted upon the books of the corporation." Therefore, the
transfer of the 75 shares in the North Electric Company,
Inc., made by the defendant Diosomito to the defendant
Barcelon was not valid as to the plaintiff-appellee, Toribia
Uson, on January 18, 1932, the date on which she obtained
her attachment lien on said shares of stock which still
stood in the name of Diosomito on the books of the
corporation.

In the case of Fleischer vs. Botica Nolasco Co. (47 Phil., 583), we
have discussed the validity of a clause in the by-laws of the
defendant corporation, which provided that, under the same
conditions, the owner of a share of stock could not sell it to
another person except to the defendant corporation. In deciding
the legality and validity of said restriction, we held:

CYRUS PADGETT, plaintiff-appellee,


vs.
BABCOCK & TEMPLETON, INC., and
defendants-appellants
(G.R. No. L-38684; December 21, 1933)

W.

R.

BABCOCK,

FACTS: The appellee was an employee of the appellant


corporation and rendered services as such from January 1, 1923,
to April 15, 1929. During that period he bought 35 shares thereof
at P100 a share at the suggestion of the president of said
corporation. He was also the recipient of 9 shares by way of bonus
during Christmas seasons. In this way the said appellee became
the owner of 44 shares for which the 12 certificates, Exhibits F to
F-11, were issued in his favor. The word "nontransferable" appears
on each and every one of these certificates. Before severing his
connections with the said corporation, the appellee proposed to
the president that the said corporation buy his 44 shares at par
value plus the interest thereon, or that he be authorized to sell
them to other persons. The corporation bought similar shares
belonging to other employees, at par value. Sometime later, the
said president offered to buy the appellee's shares first at P85
each and then at P80. The appellee did not agree thereto.
ISSUE: WON the restriction imposed on the right to transfer the
shares is valid?

HELD: No. The opinion seems to be unanimous that a restriction


imposed upon a certificate of shares, similar to the ones
under consideration, is null and void on the ground that it
constitutes and unreasonable limitation of the right of
ownership and is in restraint of trade.

Shares of corporate stock being regarded as property, the


owner of such shares may, as a general rule, dispose of them as
he sees fit, unless the corporation has been dissolved, or unless
the right to do so is properly restricted, or the owner's privilege
of disposing of his shares has been hampered by his own action.
(14 C. J., sec. 1033, pp. 663, 664.)
Any restriction on a stockholder's right to dispose of his shares
must be construed strictly; and any attempt to restrain a
transfer of shares is regarded as being in restraint of trade, in
the absence of a valid lien upon its shares, and except to the
extent that valid restrictive regulations and agreements exist
and are applicable. Subject only to such restrictions, a
stockholder cannot be controlled in or restrained from
exercising his right to transfer by the corporation or its officers
or by other stockholders, even though the sale is to a
competitor of the company, or to an insolvent person, or even

84

The only restraint imposed by the Corporation Law upon


transfer of shares is found in section 35 of Act No. 1459.
This restriction is necessary in order that the officers of
the corporation may know who are the stockholders,
which is essential in conducting elections of officers, in
calling meetings of stockholders, and for other
purposes. But any restriction of the nature of that
imposed in the by-law now in question, is ultra vires,
violative of the property rights of shareholders, and in
restraint of trade. (Id., p. 592.)
It is obvious, therefore, that the restriction consisting in the word
"nontransferable", appearing on the 12 certificates, Exhibits F to
F-11, is illegal and should be eliminated.
ISSUE2: WON the corporation may be compelled to buy the
shares of a selling stockholder?
HELD: No. There is no existing law nor authority in support of the
plaintiff's claim to the effect that the defendants are obliged to
buy his shares of stock value at par value, plus the interest
demanded thereon. In this respect, we hold that there has been
no such contract, either express or implied, between the plaintiff
and the defendants. In the absence of a similar contractual
obligation and of a legal provision applicable thereto, it is logical
to conclude that it would be unjust and unreasonable to compel
the said defendants to comply with a non-existent or imaginary
obligation. Whereupon, we are likewise compelled to conclude
that the judgment originally rendered to that effect is untenable
and should be set aside
LEON J. LAMBERT, plaintiff-appellant,
vs.
T. J. FOX, defendant-appellee
(G.R. No. L-7991; January 29, 1914)
FACTS: Defendant and plaintiff, became two of the largest
shareholders of John R. Edgar & Co., Inc. was incorporated. They
were former creditors who agreed to aid the financially distressed
predecessor John R. Edgar & Co.. They entered into an agreement
a few days after incorporation as follows:
Whereas the undersigned are, respectively, owners of large
amounts of stock in John R. Edgar and Co, Inc; and,
Whereas it is recognized that the success of said corporation
depends, now and for at least one year next following, in the
larger stockholders retaining their respective interests in the
business of said corporation:
Therefore, the undersigned mutually and reciprocally agree not
to sell, transfer, or otherwise dispose of any part of their
present holdings of stock in said John R. Edgar & Co. Inc., till
after one year from the date hereof.
Either party violating this agreement shall pay to the other the
sum of one thousand (P1,000) pesos as liquidated damages,
unless previous consent in writing to such sale, transfer, or
other disposition be obtained.
Notwithstanding this contract the defendant Fox on October 19,
1911, sold his stock in the said corporation to E. C. McCullough of
the firm of E. C. McCullough & Co. of Manila, a strong competitor
of the said John R. Edgar & Co., Inc.
A complaint was filed and the trial court decided in favor of
defendant.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
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ISSUE: WON the stipulation in the contract is valid?


HELD: Yes. It is urged by the appellee in this case that the
stipulation in the contract suspending the power to sell the stock
referred to therein is an illegal stipulation, is in restraint of trade
and, therefore, offends public policy. We do not so regard it. The
suspension of the power to sell has a beneficial purpose,
results in the protection of the corporation as well as of
the individual parties to the contract, and is reasonable as
to the length of time of the suspension. We do not here
undertake to discuss the limitations to the power to suspend the
right of alienation of stock, limiting ourselves to the statement
that the suspension in this particular case is legal and valid.
EMBASSY FARMS, INC., petitioner,
vs.
HON. COURT OF APPEALS (INTERMEDIATE APPELLATE COURT),
HON. ZENAIDA S. BALTAZAR, Judge of the Regional Trial Court,
Branch CLVIII, (158), Pasig, Metro Manila, VOLTAIRE B. CRUZ,
Deputy Sheriff, Branch CLVIII, Regional Trial Court, Pasig, Metro
Manila and EDUARDO B. EVANGELISTA, respondents
(G.R. No. 80682 August 13, 1990)
FACTS: Alexander G. Asuncion and Eduardo B. Evangelista
entered into a Memorandum of Agreement (MOA) with the
following obligations:

EVANGELISTA:
1. To transfer to Asuncion 19 parcels of agricultural land
registered in his name, together with the stocks,
equipment and facilities of Embassy Farms, Inc. wherein
90% of the shares of stock is owned by Evangelista;
2. To cede, transfer and convey in a manner absolute and
irrevocable any and all of his shares of stocks in
Embassy Farms, Inc. to Asuncion or his nominees until
the total of said shares of stock so transferred shall
constitute 90% of the paid-in equity of said corporation
within a reasonable time from signing the document.
ASUNCION:
1. To pay Evangelista P8,630,999;
2. To organize and register a new corporation with an
authorized capital stock of P10M which upon registration
will take over all the rights and liabilities of Asuncion.

Effective control and management of the piggery at Embassy


Farms, Inc. was transferred by Evangelista to Asuncion pursuant
to clause 8 of the MOA. In accordance with clause 15, Evangelista
served as President and Chief Executive of Embassy Farms.
Evangelista also endorsed in blank all his shares of stock including
that of his wife and three nominees with minor holdings but
retained possession of said shares and opted to deliver to
Asuncion only upon full compliance of the latter of his obligations
under the MOA.
For failure to comply with his obligations, Evangelista intimated
the institution of the appropriate legal action. But Asuncion
eventually filed for the rescission of the MOA.
ISSUE: WON Evangelista has a better right to the shares and
control of the corporate affairs?

HELD: Yes. From the pleadings submitted by the parties it is clear


that although Evangelista has indorsed in blank the shares
outstanding in his name he has not delivered the certificate of
stocks to Asuncion because the latter has not fully complied with
his obligations under the MOA. There being no delivery of the
indorsed shares of stock Asuncion cannot therefore
effectively transfer to other person or his nominees the
undelivered shares of stock. For an effective transfer of shares
of stock the mode and manner of transfer as prescribed by law

85

must be followed (Navea v. Peers Marketing Corp., 74 SCRA 65).


As provided under Section 3 of Batas Pambansa Bilang 68,
otherwise known as the Corporation Code of the Philippines,
shares of stock may be transferred by delivery to the
transferree of the certificate properly indorsed. Title may
be vested in the transferree by the delivery of the duly
indorsed certificate of stock (18 C.J.S. 928, cited in Rivera v.
Florendo, 144 SCRA 643). However, no transfer shall be valid,
except as between the parties until the transfer is properly
recorded in the books of the corporation (Sec. 63, Corporation
Code of the Philippines).

In the case at bar the indorsed certificate of stock was not actually
delivered to Asuncion so that Evangelista is still the controlling
stockholder of Embassy Farms despite the execution of the
memorandum of agreement and the turn-over of control and
management of the Embassy Farms to Asuncion on August 2,
1984.
When Asuncion filed on April 10, 1986 an action for the rescission
of contracts with damages, the Pasig Court merely restored and
established the status quo prior to the execution of the MOA by
the issuance of a restraining order on July 10, 1987 and the writ of
preliminary injunction on July 30, 1987. It would be unjust and
unfair to allow Asuncion and his nominees to control and manage
the Embassy Farms despite the fact that Asuncion, who is the
source of their supposed shares of stock in the corporation, is not
asking for the delivery of the indorsed certificate of stock but for
the rescission of the MOA. Rescission would result in mutual
restitution (Magdalena Estate v. Myrick, 71 Phil. 344) so it is but
proper to allow Evangelista to manage the farm. Compared to
Asuncion or his nominees Evangelista would be more interested in
the preservation of the assets, equipment and facilities of
Embassy Farms during the pendency of the main case.
ENRIQUE RAZON, petitioner,
vs.
INTERMEDIATE APPELLATE COURT and VICENTE B. CHUIDIAN,
in his capacity as Administrator of the Estate of the Deceased
JUAN T. CHUIDIAN, respondents.
(G.R. No. 74306 March 16, 1992)
VICENTE B. CHUIDIAN, petitioner,
vs.
INTERMEDIATE APPELLATE COURT, ENRIQUE RAZ0N, and E.
RAZON, INC., respondents
(G.R. No. 74315 March 16, 1992)
FACTS: E. Razon, Inc. was organized by petitioner Enrique Razon
in 1962. However, it began operations only in 1966 since the
other incorporators withdrew from the said corporation. The
petitioner then distributed the stocks previously placed in the
names of the withdrawing nominal incorporators to some friends,
among them the late Juan T. Chuidian to whom he gave 1,500
shares.
The shares of stocks were registered in the name of Chuidian only
as nominal stockholder and with the agreement that the said
shares of stock were owned and held by the petitioner but
Chuidian was given the option to buy the same
Chuidian delivered to petitioner the stock certificate in 1966, and
since then petitioner had in his possession such certificate, until
the time, he delivered it for deposit with PBCom under the parties
joint custody pursuant to their agreement embodied in the trial
courts order.
ISSUE: WON petitioner Razon is the rightful owner of the shares?

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

HELD: No. In the case of Embassy Farms, Inc. v. Court of Appeals


(188 SCRA 492 [1990]) we ruled:

. . . For an effective, transfer of shares of stock the mode and


manner of transfer as prescribed by law must be followed
(Navea v. Peers Marketing Corp., 74 SCRA 65). As provided
under Section 3 of Batas Pambansa Bilang, 68 otherwise known
as the Corporation Code of the Philippines, shares of stock may
be transferred by delivery to the transferee of the certificate
properly indorsed. Title may be vested in the transferee by the
delivery of the duly indorsed certificate of stock (18 C.J.S. 928,
cited in Rivera v. Florendo, 144 SCRA 643). However, no transfer
shall be valid, except as between the parties until the transfer is
properly recorded in the books of the corporation (Sec. 63,
Corporation Code of the Philippines; Section 35 of the
Corporation Law)
In the instant case, there is no dispute that the questioned 1,500
shares of stock of E. Razon, Inc. are in the name of the late Juan
Chuidian in the books of the corporation. Moreover, the records
show that during his lifetime Chuidian was elected member of the
Board of Directors of the corporation which clearly shows that he
was a stockholder of the corporation. (See Section 30, Corporation
Code) From the point of view of the corporation, therefore,
Chuidian was the owner of the 1,500 shares of stock. In such a
case, the petitioner who claims ownership over the questioned
shares of stock must show that the same were transferred to him
by proving that all the requirements for the effective transfer of
shares of stock in accordance with the corporation's by laws, if
any, were followed (See Nava v. Peers Marketing Corporation, 74
SCRA 65 [1976]) or in accordance with the provisions of law.
The petitioner failed in both instances. The petitioner did not
present any by-laws which could show that the 1,500 shares of
stock were effectively transferred to him. In the absence of the
corporation's by-laws or rules governing effective transfer of
shares of stock, the provisions of the Corporation Law are made
applicable to the instant case.
The law is clear that in order for a transfer of stock
certificate to be effective, the certificate must be properly
indorsed and that title to such certificate of stock is
vested in the transferee by the delivery of the duly
indorsed certificate of stock. (Section 35, Corporation Code)
Since the certificate of stock covering the questioned 1,500
shares of stock registered in the name of the late Juan Chuidian
was never indorsed to the petitioner, the inevitable conclusion is
that the questioned shares of stock belong to Chuidian. The
petitioner's asseveration that he did not require an indorsement of
the certificate of stock in view of his intimate friendship with the
late Juan Chuidian cannot overcome the failure to follow the
procedure required by law or the proper conduct of business even
among friends. To reiterate, indorsement of the certificate of stock
is a mandatory requirement of law for an effective transfer of a
certificate of stock.
Moreover, the preponderance of evidence supports the appellate
court's factual findings that the shares of stock were given to Juan
T. Chuidian for value. Juan T. Chuidian was the legal counsel who
handled the legal affairs of the corporation. We give credence to
the testimony of the private respondent that the shares of stock
were given to Juan T. Chuidian in payment of his legal services to
the corporation. Petitioner Razon failed to overcome this
testimony.
RURAL BANK OF SALINAS, INC., MANUEL SALUD, LUZVIMINDA
TRIAS and FRANCISCO TRIAS, petitioners,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION,
MELANIA A. GUERRERO, LUZ ANDICO, WILHEMINA G. ROSALES,

86

FRANCISCO M. GUERRERO, JR., and FRANCISCO GUERRERO , SR.,


respondents
(G.R. No. 96674 June 26, 1992)

FACTS: On June 10, 1979, Clemente G. Guerrero, President of the


Rural Bank of Salinas, Inc., executed a Special Power of Attorney
in favor of his wife, private respondent Melania Guerrero, giving
and granting the latter full power and authority to sell or
otherwise dispose of and/or mortgage 473 shares of stock of the
Bank registered in his name (represented by the Bank's stock
certificates nos. 26, 49 and 65), to execute the proper documents
therefor, and to receive and sign receipts for the dispositions.

Pursuant to said SPA, private respondent Melania Guerrero, as


Attorney-in-Fact, executed the following assignments of shares of
stocks: Luz Andico (457 shares); Wilhelmina Rosales (10 shares);
Francisco Guerrero, Jr. (5 shares); and Francisco Guerrero, Sr. (1
share). The last share was transferred 2 months before the death
of Clemente.
Subsequently, Melania Guerrero presented the Deeds of
Assignments and requested for the cancellation of the certificates
of stock and new ones to be issued in the name of transferees.
However, petitioner Bank refused.
Melania Guerrero filed for an action for mandamus with the SEC.
Maripol Guerrero, a legally adopted daughter of Melania and
Clemente filed for intervention claiming that two weeks before
filing the action for mandamus, a petition for the administration of
the estate of Celemente has been filed and that the deeds of
assignment were fictitious and antedated. SEC denied the motion
for intervention.
Maripol filed a complaint before the CFI for the annulment of the
Deeds of Assignment.
Later on, the SEC rendered a decision granting the action for
mandamus which was affirmed by the SEC en banc and still later,
by the CA.
ISSUE: WON the mandamus was properly granted for the
registration of the transfer of the 473 shares in question?

HELD: Yes. Respondent SEC correctly ruled in favor of the


registering of the shares of stock in question in private
respondent's names. Such ruling finds support under Section 63 of
the Corporation Code, to wit:

Sec. 63. . . . Shares of stock so issued are personal property


and may be transferred by delivery of the certificate or
certificates indorsed by the owner or his attorney-in-fact or
other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation . . .
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court
interpreted Sec. 63 in his wise:
Said Section (Sec. 35 of Act 1459 [now Sec. 63 of the
Corporation Code]) contemplates no restriction as to
whom the stocks may be transferred. It does not
suggest that any discrimination may be created by the
corporation in favor of, or against a certain purchaser.
The owner of shares, as owner of personal property, is

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

at liberty, under said section to dispose them in favor


of whomever he pleases, without limitation in this
respect, than the general provisions of law. . . .
The only limitation imposed by Section 63 of the
Corporation Code is when the corporation holds any
unpaid claim against the shares intended to be
transferred, which is absent here.
A corporation, either by its board, its by-laws, or the act of its
officers, cannot create restrictions in stock transfers, because:
. . . Restrictions in the traffic of stock must have their source
in legislative enactment, as the corporation itself cannot
create such impediment. By-laws are intended merely for the
protection of the corporation, and prescribe regulation, not
restriction; they are always subject to the charter of the
corporation. The corporation, in the absence of such power,
cannot ordinarily inquire into or pass upon the legality of the
transactions by which its stock passes from one person to
another, nor can it question the consideration upon which a
sale is based. . . . (Tomson on Corporation Sec. 4137, cited in
Fleisher vs. Nolasco, Supra).
The right of a transferee/assignee to have stocks transferred to his
name is an inherent right flowing from his ownership of the
stocks. Thus:
Whenever a corporation refuses to transfer and
register stock in cases like the present, mandamus will
lie to compel the officers of the corporation to transfer
said stock in the books of the corporation" (26, Cyc.
347, Hyer vs. Bryan, 19 Phil. 138; Fleisher vs. Botica Nolasco,
47 Phil. 583, 594).
The corporation's obligation to register is ministerial.
In transferring stock, the secretary of a corporation acts in
purely ministerial capacity, and does not try to decide the
question of ownership. (Fletcher, Sec. 5528, page 434).
The duty of the corporation to transfer is a ministerial
one and if it refuses to make such transaction without
good cause, it may be compelled to do so by
mandamus. (See. 5518, 12 Fletcher 394)
For the petitioner Rural Bank of Salinas to refuse registration of
the transferred shares in its stock and transfer book, which duty is
ministerial on its part, is to render nugatory and ineffectual the
spirit and intent of Section 63 of the Corporation Code. Thus,
respondent Court of Appeals did not err in upholding the Decision
of respondent SEC affirming the Decision of its Hearing Officer
directing the registration of the 473 shares in the stock and
transfer book in the names of private respondents. At all events,
the registration is without prejudice to the proceedings in court to
determine the validity of the Deeds of Assignment of the shares of
stock in question.
LIM TAY, petitioner,
vs.
COURT OF APPEALS, GO FAY AND CO. INC., SY GUIOK, and THE
ESTATE OF ALFONSO LIM, respondents
(G.R. No. 126891; August 5, 1998)
FACTS: To secure their separate loans, respondent Sy Guiok and
Alfonso Lim, each executed a contract of pledge covering their
respective 300 shares in favor of petitioner Lim Tay where they
indorsed in blank and delivered their shares of stock to Tay.
For non-payment, Lim Tay filed a Petition for Mandamus in the SEC
against Go Fay & Compny, Inc. to cancel the old certificates and
issue a new one in his name, which was granted by the SEC but
reversed by the CA.
ISSUE: WON the rulings in the Abejo case and the Rural Bank of
Salinas case will apply?

87

HELD: No. Petitioner's reliance on the doctrines set forth in Abejo


v. De la Cruz and Rural Bank of Salinas, Inc. v. Court of Appeals is
misplaced.

ABEJO: the Abejo spouses sold to Telectronic Systems, Inc.


shares of stock in Pocket Bell Philippines, Inc. Subsequent to such
contract of sale, the corporate secretary, Norberto Braga, refused
to record the transfer of the shares in the corporate books and
instead asked for the annulment of the sale, claiming that he and
his wife had a pre-emptive right over some of the shares, and that
his wife's shares were sold without consideration or consent.

At the time the Bragas questioned the validity of the sale, the
contract had already been perfected, thereby demonstrating that
Telectronic Systems, Inc. was already the prima facie owner of the
shares and, consequently, a stockholder of Pocket Bell Philippines,
Inc. Even if the sale were to be annulled later on, Telectronic
Systems, Inc. had, in the meantime, title over the shares from the
time the sale was perfected until the time such sale was annulled.
The effects of an annulment operate prospectively and do not, as
a rule, retroact to the time the sale was made. Therefore, at the
time the Bragas questioned the validity of the tranfers made by
the Abejos, Telectronic Systems, Inc. was already a prima facie
shareholder of the corporation, thus making the dispute between
the Bragas and the Abejos "intra-corporate" in nature. Hence, the
Court held that "the issue is not on ownership of shares but rather
the non-performance by the corporate secretary of the ministerial
duty of recording transfers of shares of stock of the corporation of
which he is secretary."
Unlike Abejo, however, petitioner's ownership over the
shares in this case was not yet perfected when the
Complaint was filed. The contract of pledge certainly does
not make him the owner of the shares pledged. Further,
whether prescription effectively transferred ownership of the
shares, whether there was a novation of the contracts of pledge,
and whether laches had set in were difficult legal issues, which
were unpleaded and unresolved when herein petitioner asked the
corporate secretary of Go Fay to effect the transfer, in his favor, of
the shares pledged to him.
In Rural Bank of Salinas: Melenia Guerrero executed deeds of
assignment for the shares in favor of the respondents in that case.
When the corporate secretary refused to register the transfer, an
action for mandamus was instituted. Subsequently, a motion for
intervention was filed, seeking the annulment of the deeds of
assignment on the grounds that the same were fictitious and
antedated, and that they were in fact donations because the
considerations therefor were below the book value of the shares.
Like the Abejo spouses, the respondents in Rural Bank of Salinas
were already prima facie shareholders when the deeds of
assignment were questioned. If the said deeds were to be
annulled later on, respondents would still be considered
shareholders of the corporation from the time of the assignment
until the annulment of such contracts.
ISSUE2: WON petitioner is entitled to the relief of mandamus as
against the company?
HELD: No. Petitioner prays for the issuance of a writ of
mandamus, directing the corporate secretary of respondent
corporation to have the shares transferred to his name in the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

corporate books, to issue new certificates of stock and to deliver


the corresponding dividends to him.
In order that a writ of mandamus may issue, it is essential
that the person petitioning for the same has a clear legal
right to the thing demanded and that it is the imperative
duty of the respondent to perform the act required. It
neither confers powers nor imposes duties and is never
issued in doubtful cases. It is simply a command to
exercise a power already possessed and to perform a duty
already imposed.
In the present case, petitioner has failed to establish a clear legal
right. Petitioner's contention that he is the owner of the said
shares is completely without merit. Quite the contrary and as
already shown, he does not have any ownership rights at all. At
the time petitioner instituted his suit at the SEC, his ownership
claim had no prima facie leg to stand on. At best, his contention
was disputable and uncertain Mandamus will not issue to establish
a legal right, but only to enforce one that is already clearly
established.

RICARDO A. NAVA, petitioner-appellant.


vs.
PEERS MARKETING CORPORATION, RENATO R. CUSI and
AMPARO CUSI, respondents-appellees
(G.R. No. L-28120; November 25, 1976)
FACTS: Teofilo Po was an incorporator who subscribed to 80
shares and paid 25% of the subscription. No certificate of stock
was issued to him.
Later on, Po sold to herein petitioner Nava 20 of the 80 shares at
par value of P100, or P2,000. Nava requested herein private
respondents, officers of Peers Marketing Corporation, to register
him as owner of the shares, but they refused, Po being delinquent
in the payment of the balance due his subscription.
Po filed an action for mandamus in the CFI of Negros but it was
dismissed.

ISSUE3: WON by Guiok and Lims failure to pay, the ownership of


the shares automatically passed to Lim Tay?

Po claims that the trial court erred in applying the ruling in Fua
Cun vs. Summers and China Banking Corporation wherein it was
ruled that the payment of one-half of the subscription does not
entitle the subscriber to a certificate for one-half of the number of
shares subscribed.

HELD: No. On appeal, petitioner claimed that ownership over the


shares had passed to him, not via the contracts of pledge, but by
virtue of prescription and by respondents' subsequent acts which
amounted to a novation of the contracts of pledge. We do not
agree.

ISSUE: WON Peers Marketing Corporation may be compelled by


mandamus to enter in its stock and transfer book the sale made
by Po to Nava of the 20 shares forming part of Pos subscription of
80 shares, it being admitted that the corporation has an unpaid
claim of P6,000 as the balance on said subscription?

At the outset, it must be underscored that petitioner did not


acquire ownership of the shares by virtue of the contracts of
pledge. Article 2112 of the Civil Code states:
The creditor to whom the credit has not been satisfied in due
time, may proceed before a Notary Public to the sale of the
thing pledged. This sale shall be made at a public auction, and
with notification to the debtor and the owner of the thing
pledged in a proper case, stating the amount for which the
public sale is to be held. If at the first auction the thing is not
sold, a second one with the same formalities shall be held; and
if at the second auction there is no sale either, the creditor may
appropriate the thing pledged. In this case he shall be obliged
to give an acquittance for his entire claim.
Furthermore, the contracts of pledge contained a common
proviso, which we quote again for the sake of clarity:
3. In the event of the failure of the PLEDGOR to pay the
amount within a period of six (6) months from the date hereof,
the PLEDGEE is hereby authorized to foreclose the pledge upon
the said shares of stock hereby created by selling the same at
public or private sale with or without notice to the PLEDGOR, at
which sale the PLEDGEE may be the purchaser at his option;
and "the PLEDGEE is hereby authorized and empowered at his
option to transfer the said shares of stock on the books of the
corporation to his own name, and to hold the certificate issued
in lieu thereof under the terms of this pledge, and to sell the
said shares to issue to him and to apply the proceeds of the
sale to the payment of the said sum and interest, in the manner
hereinabove provided;
There is no showing that petitioner made any attempt to
foreclose or sell the shares through public or private
auction, as stipulated in the contracts of pledge and as
required by Article 2112 of the Civil Code. Therefore,
ownership of the shares could not have passed to him. The
pledgor remains the owner during the pendency of the pledge and
prior to foreclosure and sale, as explicitly provided by Article 2103
of the same Code:
Unless the thing pledged is expropriated, the debtor continues
to be the owner thereof.

88

HELD: No. We hold that the transfer made by Po to Nava is not


the "alienation, sale, or transfer of stock" that is supposed to be
recorded in the stock and transfer book, as contemplated in
section 52 of the Corporation Law.

As a rule, the shares which may be alienated are those


which are covered by certificates of stock, as shown in the
following provisions of the Corporation Law and as intimated in
Hager vs. Bryan, 19 Phil. 138 (overruling the decision in Hager vs.
Bryan, 21 Phil. 523. See 19 Phil. 616, notes, and Hodges vs.
Lezama, 14 SCRA 1030).
SEC. 35. The capital stock of stock corporations shall be divided
into shares for which certificates signed by the president or the
vice-president, countersigned by the secretary or clerk and
sealed with the seal of the corporation, shall be issued in
accordance with the by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the
certificate indorsed by the owner or his attorney in fact or other
person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the, parties, until
the transfer is entered and noted upon the books 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.
No share of stock against which the corporation holds any
unpaid claim shall be transferable on the books of the
corporation.
SEC. 36. (re voting trust agreement) ...
The certificates of stock so transferred shall be surrendered and
cancelled, and new certificates therefor issued to such person
or persons, or corporation, as such trustee or trustees, in which
new certificates it shall appear that they are issued pursuant to
said agreement.
xxx xxx xxx

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

As prescribed in section 35, shares of stock may be transferred by


delivery to the transferee of the certificate properly indorsed.
"Title may be vested in the transferee by delivery of the certificate
with a written assignment or indorsement thereof" (18 C.J.S. 928).
There should be compliance with the mode of transfer prescribed
by law (18 C.J.S. 930).
The usual practice is for the stockholder to sign the form on the
back of the stock certificate. The certificate may thereafter be
transferred from one person to another. If the holder of the
certificate desires to assume the legal rights of a shareholder to
enable him to vote at corporate elections and to receive
dividends, he fills up the blanks in the form by inserting his own
name as transferee. Then he delivers the certificate to the
secretary of the corporation so that the transfer may be entered
in the corporation's books. The certificate is then surrendered and
a new one issued to the transferee. (Hager vs. Bryan, 19 Phil. 138,
143-4).
That procedure cannot be followed in the instant case because, as
already noted, the twenty shares in question are not covered by
any certificate of stock in Po's name. Moreover, the corporation
has a claim on the said shares for the unpaid balance of
Po's subscription. A stock subscription is a subsisting
liability from the time the subscription is made. The
subscriber is as much bound to pay his subscription as he
would be to pay any other debt. The right of the
corporation to demand payment is no less incontestable.
(Velasco vs. Poizat, 37 Phil. 802; Lumanlan vs. Cura, 59 Phil. 746).
A corporation cannot release an original subscriber from
paying for his shares without a valuable consideration
(Philippine National Bank vs. Bitulok Sawmill, Inc., L-24177-85,
June 29, 1968, 23 SCRA 1366) or without the unanimous
consent of the stockholders (Lingayen Gulf Electric Power Co.,
Inc. vs. Baltazar, 93 Phil 404).
Under the facts of this case, there is no clear legal duty on the
part of the officers of the corporation to register the twenty shares
in Nava's name, Hence, there is no cause of action for mandamus
As already stressed, in this case no stock certificate was issued to
Po. Without stock certificate, which is the evidence of
ownership of corporate stock, the assignment of corporate
shares is effective only between the parties to the
transaction (Davis vs. Wachter, 140 So. 361).
The delivery of the stock certificate, which represents the shares
to be alienated , is essential for the protection of both the
corporation and its stockholders (Smallwood vs. Moretti, 128 So.
2d 628).
THE RURAL BANK OF LIPA CITY, INC., THE OFFICERS AND
DIRECTORS, BERNARDO BAUTISTA, JAIME CUSTODIO, OCTAVIO
KATIGBAK, FRANCISCO CUSTODIO, and JUANITA BAUTISTA OF THE
RURAL
BANK
OF
LIPA
CITY,
INC.,
petitioners,
vs.
HONORABLE COURT OF APPEALS, HONORABLE COMMISSION
EN BANC, SECURITIES AND EXCHANGE COMMISSION, HONORABLE
ENRIQUE L. FLORES, JR., in his capacity as Hearing Officer,
REYNALDO VILLANUEVA, SR, AVELINA M. VILLANUEVA, CATALINO
VILLANUEVA, ANDRES GONZALES, AURORA LACERNA, CELSO
LAYGO, EDGARDO REYES, ALEJANDRA TONOGAN and ELENA USI,
respondents
(G.R. No. 124535; September 28, 2001)
FACTS: Private respondent Reynaldo Villanueva Sr., a stockholder
of Rural Bank of Lipa City, Inc. executed a Deed of Assignment
wherein he assigned his shares, as well as those of eight
stockholders under his control with a total of 10,457 shares, in
favor of stockholders of the Bank represented by its BOD. At the
same time, He and his wife executed an agreement wherein he
acknowledge their indebtedness of P4M and stipulated that the

89

said debt will be paid out of the proceeds of the sale of their real
property described in the agreement.
The Villanueva spouses failed to settle their obligation on the due
date, and the BOD sent a demand letter for the surrender of the
said shares and for the delivery of sufficient collateral to cover the
balance of the debt, which the Villanueva spouses ignored. Their
shares were converted into Treasury shares.
The Villanueva spouses questioned the legality of the such
conversion and filed with the SEC a petition for annulment of the
stockholders meeting and election of directors and officers
because they were not notified of such meeting.
The SEC hearing officer dismissed the application for issuance of a
preliminary injunction, but was granted on reconsideration. The
decision was affirmed by the SEC en banc and later by the CA.
ISSUE: WON the transfer of the shares is ineffective for nonindorsement and non-delivery of the certificate of stocks?

HELD: Yes. The Corporation Code specifically provides:

SECTION 63. Certificate of stock and transfer of shares. The


capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stocks so issued are
personal property and may be transferred by delivery of the
certificate or certificates indorsed by the owner or his attorneyin-fact or other person legally authorized to make the transfer.
No transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books 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 or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any
unpaid claim shall be transferable in the books of the
corporation. (Emphasis ours)
Petitioners argue that by virtue of the Deed of Assignment, private
respondents had relinquished to them any and all rights they may
have had as stockholders of the Bank. While it may be true that
there was an assignment of private respondents' shares to the
petitioners, said assignment was not sufficient to effect the
transfer of shares since there was no endorsement of the
certificates of stock by the owners, their attorneys-in-fact
or any other person legally authorized to make the
transfer. Moreover, petitioners admit that the assignment of
shares was not coupled with delivery, the absence of which is a
fatal defect. The rule is that the delivery of the stock
certificate duly endorsed by the owner is the operative act
of transfer of shares from the lawful owner to the
transferee. Thus, title may be vested in the transferee
only by delivery of the duly indorsed certificate of stock.
We have uniformly held that for a valid transfer of stocks, there
must be strict compliance with the mode of transfer prescribed by
law. The requirements are: (a) There must be delivery of
the stock certificate: (b) The certificate must be endorsed
by the owner or his attorney-in-fact or other persons
legally authorized to make the transfer; and (c) To be valid
against third parties, the transfer must be recorded in the
books of the corporation. As it is, compliance with any of these
requisites has not been clearly and sufficiently shown.
It may be argued that despite non-compliance with the requisite
endorsement and delivery, the assignment was valid between the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

parties, meaning the private respondents as assignors and the


petitioners as assignees. While the assignment may be valid and
binding on the petitioners and private respondents, it does not
necessarily make the transfer effective. Consequently, the
petitioners, as mere assignees, cannot enjoy the status of
a stockholder, cannot vote nor be voted for, and will not be
entitled to dividends, insofar as the assigned shares are
concerned. Parenthetically, the private respondents cannot, as
yet, be deprived of their rights as stockholders, until and unless
the issue of ownership and transfer of the shares in question is
resolved with finality.
There being no showing that any of the requisites mandated by
law was complied with, the SEC Hearing Officer did not abuse his
discretion in granting the issuance of the preliminary injunction
prayed for by petitioners in SEC Case No. 02-94-4683 (herein
private respondents). Accordingly, the order of the SEC en banc
affirming the ruling of the SEC Hearing Officer, and the Court of
Appeals decision upholding the SEC en banc order, are valid and
in accordance with law and jurisprudence, thus warranting the
denial of the instant petition for review.
ALFONSO S. TAN, Petitioner,
vs.
SECURITIES
AND
EXCHANGE
COMMISSION,
VISAYAN
EDUCATIONAL SUPPLY CORP., TAN SU CHING, ALFREDO B. UY,
ANGEL S. TAN and PATRICIA AGUILAR, Respondents
(G.R. No. 95696; March 3, 1992)

"Remedial law statues are to be construed liberally." The term


'may' as used in adjective rules, is only permissive and not
mandatory.
This Court held in Chua v. Samahang Magsasaka, that "the word
"may" indicates that the transfer may be effected in a manner
different from that provided for in the law." (62 Phil. 472)
Moreover, it is safe to infer from the facts deduced in the instant
case that, there was already delivery of the unendorsed Stock
Certificate No. 2, which is essential to the issuance of Stock
Certificate Nos. 6 and 8 to angel S. Tan and petitioner Alfonso S.
Tan, respectively. What led to the problem was the return of the
cancelled certificate (No. 2) to Alfonso S. Tan for his endorsement
and his deliberate non-endorsement.
For all intents and purposes, however, since this was already
cancelled which cancellation was also reported to the
respondent Commission, there was no necessity for the
same certificate to be endorsed by the petitioner. All the
acts required for the transferee to exercise its rights over
the acquired stocks were attendant and even the
corporation was protected from other parties, considering
that said transfer was earlier recorded or registered in the
corporate stock and transfer book.
Following the doctrine enunciated in the case of Tuazon v. La
Provisora Filipina, where this Court held, that:

FACTS: With the withdrawal of two of the original incorporators,


petitioner Alfonso Tan assigned 50 of his 400 shares (covered by
Stock Certificate No. 2) to his brother Angel S. Tan, private
respondent.

But delivery is not essential where it appears that the


persons sought to be held as stockholders are officers of
the corporation, and have the custody of the stock
book . . . (67 Phi. 36).

Petitioners stock certificate was cancelled by the corporate


secretary, Patricia Aguilar, by virtue of Resolution No. 1981(b),
while petitioner was still the president and member of the board.

Furthermore, there is a necessity to delineate the function of the


stock itself from the actual delivery or endorsement of the
certificate of stock itself as is the question in the instant case. A
certificate of stock is not necessary to render one a stockholder in
corporation.

With the cancellation of Certificate of stock No. 2 and the


subsequent issuance of Stock Certificate No. 6 in the name of
Angel S. Tan and for the remaining 350 shares, Stock Certificate
No. 8 was issued in the name of petitioner Alfonso S. Tan, Mr.
Buzon, submitted an Affidavit (Exh. 29), alleging that:
9. That in view of his having taken 33 1/3 interest, I was
personally requested by Mr. Tan Su Ching to request Mr. Alfonso
Tan to make proper endorsement in the cancelled Certificate of
Stock No. 2 and Certificate No. 8, but he did not endorse,
instead he kept the cancelled (1981) Certificate of Stock No. 2
and returned only to me Certificate of Stock No. 8, which I
delivered to Tan Su Ching.
10. That the cancellation of his stock (Stock No. 2) was known
by him in 1981; that it was Stock No. 8 that was delivered in
March 1983 for his endorsement and cancellation.

Nevertheless, a certificate of stock is the paper


representative or tangible evidence of the stock itself and
of the various interests therein. The certificate is not stock
in the corporation but is merely evidence of the holder's
interest and status in the corporation, his ownership of
the share represented thereby, but is not in law the
equivalent of such ownership. It expresses the contract
between the corporation and the stockholder, but is not
essential to the existence of a share in stock or the nation
of the relation of shareholder to the corporation. (13 Am.
Jur. 2d, 769)

HELD: Yes. Petitioner claims that "(T)he cancellation and transfer


of petitioner's shares and Certificate of Stock No. 2 (Exh. A) as
well as the issuance and cancellation of Certificate of Stock No. 8
(Exh. M) was patently and palpably unlawful, null and void, invalid
and fraudulent." (Rollo, p. 9) And, that Section 63 of the
Corporation Code of the Philippines is "mandatory in nature",
meaning that without the actual delivery and endorsement of the
certificate in question, there can be no transfer, or that such
transfer is null and void.

Under the instant case, the fact of the matter is, the new holder,
Angel S. Tan has already exercised his rights and prerogatives as
stockholder and was even elected as member of the board of
directors in the respondent corporation with the full knowledge
and acquiescence of petitioner. Due to the transfer of fifty (50)
shares, Angel S. Tan was clothed with rights and responsibilities in
the board of the respondent corporation when he was elected as
officer thereof.
Besides, in Philippine jurisprudence, a certificate of stock is
not a negotiable instrument. "Although it is sometime
regarded as quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery, it is
well-settled that it is non-negotiable, because the holder
thereof takes it without prejudice to such rights or
defenses as the registered owner/s or transferror's
creditor may have under the law, except insofar as such
rights or defenses are subject to the limitations imposed
by the principles governing estoppel." (De los Santos vs.
McGrath, 96 Phil. 577)

Contrary to the understanding of the petitioner with respect to the


use of the word "may", in the case of Shauf v. Court of Appeals,
(191 SCRA 713, 27 November 1990), this Court held, that

To follow the argument put up by petitioner which was upheld by


the Cebu SEC Extension Office Hearing Officer, Felix Chan, that
the cancellation of Stock Certificate Nos. 2 and 8 was null and

Petitioner filed with the SEC a case questioning the cancellation of


the aforesaid Stock Nos. 2 and 8.
ISSUE: WON the cancellation and transfer of stock certificate no.
2 was valid?

90

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

void for lack of delivery of the cancelled "mother" Certificate No. 2


whose endorsement was deliberately withheld by petitioner, is to
prescribe certain restrictions on the transfer of stock in violation of
the corporation law itself as the only law governing transfer of
stocks. While Section 47(s) grants a stock corporation the
authority to determine in the by-laws "the manner of issuing
certificates" of shares of stock, however, the power to regulate
is not the power to prohibit, or to impose unreasonable
restrictions of the right of stockholders to transfer their
shares. (Emphasis supplied)
In Fleisher v. Botica Nolasco Co., Inc., it was held that a by-law
which prohibits a transfer of stock without the consent or approval
of all the stockholders or of the president or board of directors is
illegal as constituting undue limitation on the right of ownership
and in restraint of trade. (47 Phil. 583)
LEE E. WON alias RAMON LEE, plaintiff-appellant,
vs.
WACK WACK GOLF and COUNTRY CLUB, INC., defendantappellee
(G.R. No. L-10122; August 30, 1958)
FACTS: The defendant corporation issued membership certificate
no. 201 to Iwao Teruyama which on April 1944, was assigned to
MT Reyes and on the same year assigned to herein plaintiffappellant. On April 26, 1955, the plaintiff filed an action against
the defendant alleging that shortly after its rehabilitation after the
war, plaintiff asked that the assignment be registered in the books
of the defendant and that the latter refused and still refuses to do
so unlawfully.
Defendant filed a motion to dismiss on the ground that 11 years
have elapsed from the time of the assignment up to the time of
the filing of the complaint, beyond the 5 year period provided
under Art. 1149 of the Civil Code. The trial court dismissed the
action and denied reconsideration.
ISSUE: WON plaintiff was bound to present and register the
certificate assigned to him within any definite or fixed period?

accruing under the outstanding certificate in question between


the date of the assignment to the plaintiff and the date of the
latters demand for registration and issuance of a new certificate.
APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO,
plaintiffs-appellees,
vs.
J. HOWARD MCGRATH ATTORNEY GENERAL OF THE UNITED
STATES, SUCCESSOR TO THE PHILIPPINE ALIEN PROPERTY
ADMINISTRATION OF THE UNITED STATES, defendant-appellant.
REPUBLIC OF THE PHILIPPINES, intervenor-appellant
(G.R. No. L-4818; February 28, 1955)
FACTS: Plaintiff delos Santos alleges that he purchased 55,000
shares of Lepanto Consolidated Mining Co., Inc. from Juan
Campos, and later 200,000 shares from Carl Hess and much later
800,000 still from Hess (for the account and benefit of
Astraquillo). Both of the supposed vendors, now deceased.
By virtue of vesting order P-12, title to the 1,600,000 shares in
dispute was, however, vested in the Alien Property Custodian of
the US. In due course, the Vested Property Claims Committee of
the
Philippine
Alien
Property
Administration
made
a
determination allowing said claims, which were considered and
hear jointly. But upon personal review of the Philippine Alien
Property Administrator, the determination was reversed and
decreed that title to the shares in question shall remain in the
name of the Philippine Alien Property Administrator.
Consequently, plaintiffs instituted the present action to establish
title to the aforementioned shares of stock.
Defendant Attorney General of the US contends that the shares
were bought by Vicente Madrigal, in trust and for the benefit, of
the Mistsui Bussan, abranch office of a Japanese company; and
that Madrigal endorsed in blank and delivered the shares to
Mistsui for safe keeping; that Mitsui never sold or otherwise
disposed of the said shares; and that the stock certificates must
have been stolen or looted during the emergency from the
liberation.
ISSUE: WON plaintiffs are the rightful owners of the shares?

HELD: No. The defendant has not made herein any pretense to
that effect; but it contends that from the moment the certificate
was assigned to the plaintiff, the latter's right to have the
assignment registered commenced to exist. This contention is
correct, but it would not follow that said right should be
exercised immediately or within a definite period. The
existence of a right is one thing, and the duration of said
right is another.

On the other hand, it is stated in the appealed order of dismissal


that the plaintiff sought to register the assignment on April 13,
1955; whereas in plaintiff's brief it is alleged that it was only in
February, 1955, when the defendant refused to recognize the
plaintiff. If, as already observed, there is no fixed period for
registering an assignment, how can the complaint be
considered as already barred by the Statute of Limitations when it
was filed on April 26, 1955, or barely a few days (according to the
lower court) and two months (according to the plaintiff), after the
demand for registration and its denial by the defendant. Plaintiff's
right was violated only sometime in 1955, and it could not
accordingly have asserted any cause of action against the
defendant before that.
The defendant seems to believe that the plaintiff was compelled
immediately to register his assignment. Any such compulsion is
obviously for the benefit of the plaintiff, because it is only after
registration that the transfer would be binding against the
defendant. But we are not here concerned with a situation where
the plaintiff claims anything against the defendant allegedly

91

HELD: No. Even, however, if Juan Campos and Carl Hess had sold
the shares of stock in question, as testified to by De los Santos,
the result, insofar as plaintiffs are concerned, would be the same.
It is not disputed that said shares of stock were registered, in the
records of the Lepanto, in the name of Vicente Madrigal. Neither is
it denied that the latter was, as regards said shares of stock, a
mere trustee for the benefit of the Mitsuis. The record shows
and there is no evidence to the contrary that Madrigal had
never disposed of said shares of stock in any manner whatsoever,
except by turning over the corresponding stock certificates, late in
1941, to the Mitsuis, the beneficial and true owners thereof. It has,
moreover, been established, by the uncontradicted testimony of
Kitajima and Miwa, the managers of the Mitsuis in the Philippines,
from 1941 to 1945, that the Mitsuis had neither sold, conveyed, or
alienated said shares of stock, nor delivered the aforementioned
stock certificates, to anybody during said period. Section 35 of the
Corporation Law reads:

The capital stock corporations shall be divided into shares for


which certificates signed by the president or the vice-president,
countersigned by the secretary or clerk and sealed with the seal
of the corporation, shall be issued in accordance with the bylaws. Shares of stock so issued are personal property and may
be transferred by delivery of the certificate endorsed by the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

owner or his attorney in fact or other person legally authorized


to make the transfer. No transfer, however, shall be valid,
except as between the parties, until the transfer is
entered and noted upon the books 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.
Pursuant to this provision, a share of stock may be
transferred by endorsement of the corresponding stock
certificate, coupled with its delivery. However, the transfer
shall "not be valid, except as between the parties," until it
is "entered and noted upon the books of the corporation."
no such entry in the name of the plaintiffs herein having been
made, it follows that the transfer allegedly effected by Juan
Campos and Carl Hess in their favor is "not valid, except as
between" themselves. It does not bind either Madrigal or the
Mitsuis, who are not parties to said alleged transaction. What is
more, the same is "not valid," or, in the words of the Supreme
Court of Wisconsin (Re Murphy, 51 Wisc. 519, 8 N. W. 419)
which were quoted approval in Uson vs. Diosomito (61 Phil., 535)
"absolutely void" and, hence, as good as non-existent, insofar
as Madrigal and the Mitsuis are concerned. For this reason,
although a stock certificate is sometimes regarded as
quasi-negotiable, in the sense that it may be transferred
by endorsement, coupled with delivery, it is well settled
that the instrument is non-negotiable, because the holder
thereof takes it without prejudice to such rights or
defenses as the registered owner or creditor may have
under the law, except insofar as such rights or defenses
are subject to the limitations imposed by the principles
governing estoppel.
Certificates of stock are not negotiable instruments (post, Par.
102), consequently, a transferee under a forged assignment
acquires no title which can be asserted against the true owner,
unless his own negligence has been such as to create an
estoppel against him (Clarke on Corporations, Sec. Ed. p. 415).
If the owner of the certificate has endorsed it in blank, and it is
stolen from him, no title is acquired by an innocent purchaser
for value (East Birmingham Land Co. vs. Dennis, 85 Ala. 565, 2
L.R.A. 836; Sherwood vs. mining co., 50 Calif. 412).
In the case at bar, neither madrigal nor the Mitsuis had alienated
shares of stock in question. It is not even claimed that either had,
through negligence, given occasion for an improper or irregular
disposition of the corresponding stock certificates.
E.

FORGED AND UNAUTHORIZED TRANSFERS

FORGED
AND
UNAUTHORIZED
TRANSFERS
VS.
UNAUTHORIZED ISSUANCE OF STOCK CERTIFICATE: In the
former, what is forged or unauthorized is the transfer of the
certificate from the true and lawful owner to another person.
While the latter refers to the act of the corporation in issuing the
certificate, either fraudulently or by mistake.
In forged or unauthorized transfer:
1. The purchaser or purchasers, no matter how innocent they
may have been, will acquire no title as against the lawful
owner by virtue of the doctrine of non-negotiability of
certificates of stock;
2. The purchaser will have no right or remedy against the
corporation because he took the shares not by virtue of a
misrepresentation made by the corporation but on the faith of
a forged endorsement or unauthorized transfer;
3. The corporation incurs no liability to the person in whose
favor the certificate is endorsed or issued.
4. If the old certificate is cancelled and new one is issued by the
corporation, the holder thereof may be required to return the
same for its cancellation;
5. However, if new certificates are issued and passes into the
hands of a subsequent bona fide purchaser, the latter may
rightfully acquire title thereto since the corporation will be
estopped to deny the validity thereof;

92

6.

The subsequent purchaser in good faith took the shares, not


by virtue of a forged or unauthorized transfer but on reliance
to the genuineness of the certificate issued by the
corporation or by virtue of the representation made by the
corporation that the same is valid and therefore, compel the
corporation to recognize him as a stockholder or claim
reimbursement and damages against the latter.

Example: A owns 100 shares of X Co., B stole the stock certificate


and forged As signature:
a
If B indorsed and sold it to C:
1
C will not acquire title to the shares whether he is
innocent or not;
2
C cannot compel the corporation to register him as
stockholder;
3
X Co. does not incur any liability in favor of C
b
If X Co. cancelled the certificate and issued a new one to C:
1
If A later on finds out that his certificate was stolen, C
may still be required to return the new certificate;
2
If C sold it to D, an innocent purchaser, D may rightfully
acquire thereto since X Co. is estopped to deny the
validity of the certificate;
3
If A later on finds out that his certificate was stole, X Co.
may be compelled to recognize both A and D as
stockholders.*
*This is so because the A cannot be deprived of his rights as
owner by virtue of a forged transfer, and B, because of X Co.s
representation that the person named therein is the owner of
shares in the corporation.
c

If (b3) above would result in over-issuance of shares


1
Only A, the rightful owner may be recognized and A will
have a right to compel X Co. to issue him a new
certificate;
2
D will be entitled to damages from the X Co.;
3
X Co. will have a right of action against the who made
false representation and in whose favor a new certificate
is issued.**

**In this sense, if D sues X Co., the latter will have no valid
defense, but he may institute a third party complaint against C. If
C is an innocent purchaser, X Co., may file a fourth party
complaint against B.
ISSUANCE OF STOCK CERTIFICATION
Subscriptions to shares of stock are indivisible such that a
subscriber to such shares will not be entitled to the issuance of a
stock certificate until he has paid the full amount of his
subscription.
Sec. 64. Issuance of stock certificates. - No certificate of stock
shall be issued to a subscriber until the full amount of his subscription
together with interest and expenses (in case of delinquent shares), if
any is due, has been paid.
INDIVISIBILITY: As the law stands now, subscription to shares of
stock are deemed indivisible and no certificate of stock can be
issued unless and until the full amount of his subscription
including interest and expenses, if any is paid.
The ruling, therefore, in Baltazar vs. Lingayen Gulf Electronic
Power Co where a subscriber may opt to apply his partial payment
to a corresponding number of shares, will not hold true. Thus,
even if under the old law, where a corporation may, under a bylaw provision or by custom, practice or tradition, issue stock
certificates covering the number of shares that might have been
correspondingly paid, this authority or practice is valid only two
years after the effectivity of the Corporation Code and after which
corporations, registered under the said law should comply with
the mandatory requirement of Sec. 64. The Corporation Code thus
provides:

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

Sec. 148. Applicability to existing corporations. - All


corporations lawfully existing and doing business in the Philippines on
the date of the effectivity of this Code and heretofore authorized,
licensed or registered by the Securities and Exchange Commission,
shall be deemed to have been authorized, licensed or registered
under the provisions of this Code, subject to the terms and conditions
of its license, and shall be governed by the provisions hereof:
Provided, That if any such corporation is affected by the new
requirements of this Code, said corporation shall, unless otherwise
herein provided, be given a period of not more than two (2) years
from the effectivity of this Code within which to comply with the
same.
MANDAMUS: Once a subscriber has paid his subscription in full,
he becomes entitled to be issued a stock certificate and in the
event that the corporation refuses to do so, the stockholder may
institute a case for mandamus with damages, such issuance being
ministerial.
FUA CUN (alias Tua Cun), plaintiff-appellee,
vs.
RICARDO SUMMERS, in his capacity as Sheriff ex-oficio of the
City of Manila, and the CHINA BANKING CORPORATION,
defendants-appellants
(G.R. No. L-19441; March 27, 1923)
FACTS: Chua Soco subscribed to 500 shares of defendant Bank
paying 50% of the subscription price and a corresponding receipt
being issued therefor. Such shares were mortgaged to plaintiff Fua
Cun to secure a loan evidenced by a promissory note, together
with the receipt, which was endorsed and delivered to plaintiff
mortgagee. Plaintiff informed the manager of the Bank about the
transaction but was told to await action by the BOD.
In the meantime, Chua Soco became indebted to the bank, and in
the action for recovery of money, his 500 shares were attached.
Fua Cun thereupon instituted the present action maintaining that
the payment of 50% of the subscription entitled Chua Soco to 250
shares and prayed that his lien on the shares by virtue of the
chattel mortgage be declared to have priority over the claim of
defendant Bank.
The trial court rendered judgment in favor of plaintiff.
ISSUE: (1) WON Chua Soco became entitled to 250 shares or the
proportionate share to his partial payment? (2) WON plaintiff had
a superior claim over that of the Bank?

HELD: (1) No. (2) Yes. Though the court below erred in holding
that Chua Soco, by paying one-half of the subscription price of
five hundred shares, in effect became the owner of two hundred
and fifty shares, the judgment appealed from is in the main
correct.

The claim of the defendant Banking Corporation upon which it


brought the action in which the writ of attachment was issued,
was for the non-payment of drafts accepted by Chua Soco and
had no direct connection with the shares of stock in question. At
common law a corporation has no lien upon the shares of
stockholders for any indebtedness to the corporation (Jones on
Liens, 3d ed., sec. 375) and our attention has not been called to
any statute creating such lien here. On the contrary, section 120
of the Corporation Act provides that "no bank organized under this
Act shall make any loan or discount on the security of the shares
of its own capital stock, nor be the purchaser or holder of any
such shares, unless such security or purchase shall be necessary

93

to prevent loss upon a debt previously contracted in good faith,


and stock so purchased or acquired shall, within six months from
the time of its purchase, be sold or disposed of at public or private
sale, or, in default thereof, a receiver may be appointed to close
up the business of the bank in accordance with law."
There can be no doubt that an equity in shares of stock may be
assigned and that the assignment is valid as between the parties
and as to persons to whom notice is brought home. Such an
assignment exists here, though it was made for the purpose of
securing a debt. The endorsement to the plaintiff of the receipt
above mentioned reads:
For value received, I assign all my rights in these shares in
favor of Mr. Tua Cun.
Manila, P. I., May 18, 1921.

(Sgd.) CHUA SOCO

This endorsement was accompanied by the delivery of the receipt


to the plaintiff and further strengthened by the execution of the
chattel mortgage, which mortgage, at least, operated as a
conditional equitable assignment.
As against the rights of the plaintiff the defendant bank had, as
we have seen, no lien unless by virtue of the attachment. But the
attachment was levied after the bank had received notice of the
assignment of Chua Soco's interests to the plaintiff and was
therefore subject to the rights of the latter. It follows that as
against these rights the defendant bank holds no lien whatever.
As we have already stated, the court
as the owner of two hundred and
plaintiff's rights consist in an equity
upon payment of the unpaid portion
becomes entitled to the issuance
hundred shares in his favor."

erred in holding the plaintiff


fifty shares of stock; "the
in five hundred shares and
of the subscription price he
of certificate for said five

The judgment appealed from is modified accordingly, and in all


other respects it is affirmed, with the costs against the appellants
Banking Corporation. So ordered.
F.

WATERED STOCKS

DEFINITION: Watered stocks may be defined as one which is


issued by the corporation as fully paid-up shares, when in fact the
whole amount of the value thereof has not been paid. If the
shares have thus been issued by the corporation as fully paid,
when in fact it has intentionally and knowingly received or agreed
to receive nothing at all for them, or less than their par value,
either in money, property or services, the shares are said to be
watered or fictitiously paid-up to the extent to which they
have not been issued or are not to be paid for
Sec. 65. Liability of directors for watered stocks. - Any director
or officer of a corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a consideration
in any form other than cash, valued in excess of its fair value, or who,
having knowledge thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary, shall be
solidarily liable with the stockholder concerned to the corporation and
its creditors for the difference between the fair value received at the
time of issuance of the stock and the par or issued value of the same.
RIGHT OF CORPORATION AND CREDITORS: The law does not
make any distinction as to the right of the corporation and its
creditors to enforce payment of the water in the stocks issued,
thus, it applies to all creditors whether prior or subsequent to the
issuance of the watered stock.
SOLIDARY LIABILITY: All consenting directors and officers are
solidarily liable for the water in the stock.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

NON-CONSENTING DIRECTORS: may be absolved of liability by


their written dissent. Otherwise, if they did not issue such written
dissent or are passive, they may be held liable for not objecting
thereto.
ISSUANCE OF WATERED STOCKS: may be effected in the
following ways:
1. For a monetary consideration less than its par or issue value;
2. For a consideration in property, tangible or intangible, valued
in excess of its market value;
3. Gratuitously or under an agreement that nothing shall be paid
at all; or
4. In the guise of stock dividends when there are no surplus
profits of the corporation.
ILLUSTRATION: X Co. has P10M Authorized Capital Stock divided
into: (1) 5M shares at P1.00 par value; and (2) 1M no par value
shares with issued value at P5.00. A acquired 1M of the par value
shares for P.80 and 100,000 no par value shares at P4.00:
1. WATERED STOCK: There is stock watering for both shares.
Sec. 65 speaks of issuance of shares at less than its par or
issued value;
2. LIABILITY FOR PAR VALUE SHARES: The directors who
consented to the issuance or were passive about it, without
written dissent, are solidarily liable with A for the difference of
P.20;
3. LIABILITY FOR NO PAR VALUE SHARES: A cannot be held liable
because the no par value shares are deemed fully paid and
non-assessable (Sec. 6). Accordingly, only the directors or
officers consenting to the issuance are liable.
ILLUSTRATION2: X Co. has P100M Authorized Capital Stock
divided into 100M shares at P1.00 par value, there is a provision in
the by-laws denying the pre-emptive right of the shareholders.
The Board of Directors subscribed to 1M of the unissued shares at
P2.00 each when the fair market value of the shares was P12.00.
1. WATERED STOCK: No stock watering, since the shares were
subscribed for more than the par value, notwithstanding if it
less than the fair market value;
2. If 3 days later, the members of the Board sold those
purchased shares at P12.00 per share, making a profit of
P10.00 per share, they cannot be held liable for stock
watering but they can be question on their duty of loyalty.
Since the whole P12.00 per share couldve gone to the coffers
of the corporation instead of them reaping the profits for
themselves.
EFFECTS OF ISSUANCE OF WATERED STOCKS:
1. The corporation is deprived of its capital thereby hurting its
business prospects, financial capability and responsibility;
2. Stockholder who paid their subscriptions in full, or promised
to pay the same, are injured and prejudiced by the reduction
of their proportionate interest in the corporation; and
3. Present and future creditors are deprived of the corporate
assets for the protections of their interest.
BASIS OF LIABILITY:
1. Trust Fund Doctrine the capital stock of the corporation is
treated as inclusive of the unpaid portion of subscriptions to
said capital, as a trust fund which the creditors have a right
to look up to for the satisfaction of their claims. Stockholders,
therefore, are mandated to pay the full value of their shares.
2. Fraud or Misrepresentation Theory liability is based on the
false representation made by the corporation and the
stockholder concerned to the creditors that the true par value
or issued price of the shares has been paid or promised to be
paid in full.
CONSEQUENCES OF ISSUANCE OF WATERED STOCKS
(FLETCHER):
1. As to the corporation when a corporation is guilty of ultravires or illegal acts which constitute an injury to or fraud upon
the public, or which will tend to injure or defraud the public,
the State may institute a quo-warranto proceeding to forfeit
its charter for the misuse or abuse of its franchise;

94

2.

3.
4.

5.

6.

As between the corporation and the subscriber the


subscription is void. Such being the case, the subscriber is
liable to pay the full or par or issued value thereof, to render
it valid and effective;
As to the consenting stockholders they are estopped from
raising any objection thereto;
As to dissenting stockholders in view of the dilution of their
proportionate interest in the corporation, they may compel
the payment of the water in the stock solidarily against the
responsible and consenting directors and officers inclusive of
the holder of the watered stock;
As to creditors they may enforce payment of the difference
in the price, or the water in the stock, solidarily against the
responsible directors/officers and the stockholders concerned;
and
As against the transferees of the watered stocks his right is
the same as that of his transferor. If, however, a certificate of
stock has been issued and duly indorsed to a bona fide
purchaser, without knowledge, actual or constructive, the
latter cannot be held liable, at least as against the
corporation, since he took the shares on reliance of the
misrepresentation made by the corporation that the stock
certificate is valid and subsisting. This is because a
corporation is prohibited from issuing certificates of stock
until the full value of the subscriptions have been paid and
could not, therefore, deny the validity of the stock certificate
it issued as against a purchaser in good faith. Thus, Ballantine
states that whether there is any liability on the part of the
transferee of watered stock is made to depend upon whether
he acquired the same without notice, either as purchaser or
donee. If he had knowledge thereof, he is subject to the same
liability as his transferor.

LIABILITY FOR INTEREST: Aside from the value of their


subscription, subscribers may likewise be required to pay interest
on all unpaid subscriptions if so imposed in the contract or in the
corporate by-laws at such rate as may be indicated thereat or the
legal rate if so not fixed. Unless so required or provided, however,
the subscribers to shares of stock, not fully paid, are not liable to
pay interest on their unpaid subscriptions.
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock
shall pay to the corporation interest on all unpaid subscriptions from
the date of subscription, if so required by, and at the rate of interest
fixed in the by-laws. If no rate of interest is fixed in the by-laws, such
rate shall be deemed to be the legal rate.
G.

ENFORCEMENT OF PAYMENT OF SUBSCRIPTIONS

TIME OF PAYMENT: Unpaid subscription or any percentage


thereof, together with interest if required by the by-laws or the
contract of subscription, shall be paid either:
1. On the date or dates fixed in the contract or subscription;
2. On the date or dates that may be specified by the BOD
pursuant to a call declaring any or all unpaid portion
thereof to be so payable.
REMEDIES
TO
ENFORCE
PAYMENT
ON
UNPAID
SUBSCRIPTION:
1. By board action in accordance with the procedure laid down
in Sec. 67 to 69 of the Code; and
2. By a collection case in court as provided for in section 70.
CREDITOR/RECEIVER: Failure or refusal of the BOD to enforce or
collect payment of unpaid subscription will not prevent the
creditors or the receiver of the corporation to institute a court
action to collect the unpaid portion thereof. This is because the
capital of the corporation is the basis of the credit of and financial
responsibility of the corporation. Persons dealing with a
corporation and extending credit to it have a right to insist that
the unpaid subscription shall be paid in when this becomes
necessary for the satisfaction of their claims. This is otherwise
known as the Trust Fund Doctrine which states that subscriptions
to the capital of a corporation constitute a fund to which creditors

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

have the right to look up to for the satisfaction of their claims.

2.

Sec. 67. Payment of balance of subscription. - Subject to the


provisions of the contract of subscription, the board of directors of
any stock corporation may at any time declare due and payable to
the corporation unpaid subscriptions to the capital stock and may
collect the same or such percentage thereof, in either case with 3.
accrued interest, if any, as it may deem necessary.
4.
Payment of any unpaid subscription or any percentage thereof,
together with the interest accrued, if any, shall be made on the date
specified in the contract of subscription or on the date stated in the
5.
call made by the board. Failure to pay on such date shall render the
entire balance due and payable and shall make the stockholder liable
for interest at the legal rate on such balance, unless a different rate 6.
of interest is provided in the by-laws, computed from such date until
full payment. If within thirty (30) days from the said date no payment
is made, all stocks covered by said subscription shall thereupon 7.
become delinquent and shall be subject to sale as hereinafter
8.
provided, unless the board of directors orders otherwise.
Sec. 68. Delinquency sale. - The board of directors may, by
resolution, order the sale of delinquent stock and shall specifically 9.
state the amount due on each subscription plus all accrued interest,
and the date, time and place of the sale which shall not be less than
thirty (30) days nor more than sixty (60) days from the date the
stocks become delinquent.
10.
Notice of said sale, with a copy of the resolution, shall be sent to
every delinquent stockholder either personally or by registered mail. 11.
The same shall furthermore be published once a week for two (2)
consecutive weeks in a newspaper of general circulation in the
province or city where the principal office of the corporation is 12.
located.
Unless the delinquent stockholder pays to the corporation, on or
before the date specified for the sale of the delinquent stock, the
balance due on his subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the board of directors
otherwise orders, said delinquent stock shall be 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 smallest number of
shares or fraction of a share. The stock so purchased shall be
transferred to such purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the delinquent stockholder
who shall likewise be entitled to the issuance of a certificate of stock
covering such shares.

13.

declaration by the board is necessary;


The stockholders concerned are given notice of the board
resolution by the corporation either personally or by
registered mail. Publication of the notice of call is not required
unless the by-laws provide otherwise. Notice is not likewise
necessary if the contract of the subscription stipulates a
specific date when any unpaid portion is due and payable;
Payment shall be made on the date specified in the call or on
the date provided for in the contract of subscription;
Failure to pay on the date required in the call or as specified
in the contract of subscription will render the entire balance
due and payable and making the stockholder liable for the
interest;
If within 30 days from the date, no payment is made, all the
stock covered by the subscription shall become delinquent
and shall be subject to a delinquency sale;
The board, by resolution, orders the sale of the delinquent
stock stating the amount due and the date, time and place of
the sale;
The sale shall be made not less than 30 days nor more than
60 days from the date the stocks become delinquent;
Publication of the notice of sale must be made once a week
for 2 consecutive weeks in the newspaper of general
circulation in the province or city where the principal office is
located;
Sale at public auction, if no payment is made by the
delinquent stockholder, in favor of the bidder who offered to
pay the full amount of the balance in the subscription,
inclusive of interest, cost of advertisement and expenses for
the smallest number of shares;
Registration or transfer of the shares of stock in the name of
the bidder and corresponding issuance of the stock certificate
covering the shares successfully bidded;
If there be any remaining shares, the same shall be credited
in favor of the delinquent stockholder who shall be entitled to
the issuance of a certificate of stock covering such shares;
If there is no bidder at the public auction, the corporation
may, subject to the provisions of the Code, bid for the same
and the total amount due shall be credited or paid in full in
the corporate books; and
The shares so purchased by the corporation shall be vested in
the latter as treasury shares.

HIGHEST BIDDER: in the case of sale of delinquent stock, and as


indicated in number 10 above, is such bidder who shall offer to
pay the full amount of the balance on the subscription together
with accrued interest, cost of advertisement and expenses of sale,
for the smallest number of shares or fraction of a share. It should
be properly termed Lowest Bidder because the bidders are
offering to pay the same amount, and their bids are based on the
number of shares they are willing to receive, the lowest of which
is the winning bid.

Ex. A subscribed to 100 shares of stock for P100.00 each and paid
only 50% and later on declared to be delinquent. For the full
amount of P5,000 (unpaid balance) and the interests, costs, and
expenses, the following bidders are willing to accept - X: 70
Should there be no bidder at the public auction who offers to pay the shares; Y: 80 shares; Z: 90 shares. In this case, X would be the
full amount of the balance on the subscription together with accrued highest bidder. The remaining 30 shares would be credited to A.
interest, costs of advertisement and expenses of sale, for the
*NO BIDDER: If there was no bidder, the company has to have
smallest number of shares or fraction of a share, the corporation may,
unrestricted retained earnings in order to acquire the shares as
subject to the provisions of this Code*, bid for the same, and the thus provided under Sec. 41 of the Corporation Code (Power to
total amount due shall be credited as paid in full in the books of the Acquire Own Shares). Accordingly, if the company has no
corporation. Title to all the shares of stock covered by the unrestricted retained earnings, it cannot acquire the said shares
subscription shall be vested in the corporation as treasury shares and by virtue of a delinquency sale, however, it may institute an
may be disposed of by said corporation in accordance with the action for the recovery of the subscription price under Sec. 70.
provisions of this Code.
MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS
SUBSCRIPTION BE ALLOWED TO CARRY OUT HIS
PROCEDURE:
FUNCTIONS AS SUCH DIRECTOR? Yes. He is still a shareholder
1. The BOD, by a formal Resolution, declares the whole or any
entitled to all the rights as such, and pending the sale, the shares
percentage unpaid subscriptions to be due and payable on a
still stand in his name. Even after the sale, he may still be credited
specified date. However, if the contract of subscription
to some of the shares and he only needs 1 to qualify as a director.
provides the date or dates when payment is due, no call or

95

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

QUESTIONING A SALE ON IRREGULARITY OR DEFECT IN THE


NOTICE OR IN THE SALE ITSELF:
Sec. 69. When sale may be questioned. - No action to recover
delinquent stock sold can be sustained upon the ground of irregularity
or defect in the notice of sale, or in the sale itself of the delinquent
stock, unless the party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which the same
was sold, with interest from the date of sale at the legal rate; and no
such action shall be maintained unless it is commenced by the filing
of a complaint within six (6) months from the date of sale
TWO CONDITIONS:
1. The party seeking to maintain such action first pays or
tenders to the party holding the stock the sum for which the
same was sold, with interest from the date of the sale at the
legal rate; and
2. The action shall be commenced by the filing of a complaint
within 6 months from the date of sale.
ACTION BY THE CORPORATION:

The provisions of the Corporation Law (Act No. 1459) has given
recognition of two remedies for the enforcement of stock
subscriptions. The first and most special remedy given by
the statute consists in permitting the corporation to put
up the unpaid stock for sale and dispose of it for the
account of the delinquent subscriber. In this case the
provisions of section 38 to 48, inclusive of the Corporation Law are
applicable and must be followed. The other remedy is by
action in court, concerning which we find in section 49 the
following provision:
Nothing in this Act shall prevent the directors from
collecting, by action in any court of proper jurisdiction, the
amount due on any unpaid subscription, together with
accrued interest and costs and expenses incurred.
ARNALDO F. DE SILVA, plaintiff-appellant,
vs.
ABOITIZ & COMPANY, INC., defendant-appellee
(G.R. No. L-19893; March 31, 1923)

Notwithstanding the provisions of Sec. 67 to 69, the corporation


may enforce payment of unpaid subscriptions by court action.

FACTS: Plaintiff de Silva subscribed to 650 shares of defendant


company and paid 200 of such subscription leaving a balance of
P225,000. On April 22, 1922, he was informed by the corporate
Sec. 70. Court action to recover unpaid subscription. - Nothing
secretary that he has been declared delinquent by the BOD and
in this Code shall prevent the corporation from collecting by action in that he should pay the unpaid subscription otherwise such shares
a court of proper jurisdiction the amount due on any unpaid shall be sold at a public auction.
subscription, with accrued interest, costs and expenses.
De Silva filed a complaint in the CFI of Cebu, contending among
others that the resolution adopted was violative of Art. 46 of the
CALL: Consistent with Art. 1169 of the Civil Code, a call is a
by-laws stating that all shares subscribed and were not paid at the
condition precedent before the right of action to institute a
time of the incorporation shall be paid out of the 70% of the profit
recovery suit accrues. This is because a demand is required
obtained until such shares are paid in full. De Silva contends that
before a debtor may incur a delay in the performance of his
such article provides for the operative method of payment of the
obligation. As earlier said however, a call is not necessary if the
shares, and by declaring the unpaid subscription to have become
contract of subscription provides for a date or dates when
due and payable on May 31st and in publishing the notice
payment is due, or when the corporation has become insolvent.
declaring his shares to be delinquent, the company has exceeded
its executive authority.
MIGUEL VELASCO, assignee of The Philippine Chemical
Product Co. (Ltd.), plaintiff-appellant,
ISSUE: WON the BOD may declare the unpaid shares delinquent
vs.
or collect or enforce payment of the same despite the provision of
JEAN M. POIZAT, defendant-appellee
the by-laws?
(G.R. No. L-11528; March 15, 1918)
FACTS: Defendant Jean M. Poizat subscribed to 20 shares of stock
of The Philippine Chemical Product Co., of which 5 were paid. In an
action instituted by Miguel Velasco as assignee of the company,
he seeks to recover the balance of the subscription. The CFI
rendered a judgment dismissing the complaint. Hence, this
appeal.
ISSUE: WON defendant is liable for the balance?

HELD: Yes. We think that Poizat is liable upon this subscription. A


stock subscription is a contract between the corporation on one
side, and the subscriber on the other, and courts will enforce it for
or against either. It is a rule, accepted by the Supreme Court of
the United States, that a subscription for shares of stock
does not require an express promise to pay the amount
subscribed, as the law implies a promise to pay on the
part of the subscriber. (7 Ruling Case Law, sec. 191.) Section
36 of the Corporation Law clearly recognizes that a stock
subscription is subsisting liability from the time the subscription is
made, since it requires the subscriber to pay interest quarterly
from that date unless he is relieved from such liability by the bylaws of the corporation. The subscriber is as much bound to
pay the amount of the share subscribed by him as he
would be to pay any other debt, and the right of the
company to demand payment is no less incontestable.

96

HELD: Yes. It is discretionary on the part of the board of directors


to do whatever is provided in the said article relative to the
application of a part of the 70 percent of the profit distributable in
equal parts on the payment of the shares subscribed to and not
fully paid.

If the board of directors does not wish to make, or does not make,
use of said authority it has two other remedies for accomplishing
the same purpose. As was said by this court in the case of Velasco
vs. Poizat (37 Phil., 802):
The first and most special remedy given by the statute consists
in permitting the corporation to put the unpaid stock for sale
and dispose of it for the account of the delinquent subscriber. In
this case the provisions of sections 38 to 48, inclusive, of the
Corporation Law are applicable and must be followed. The other
remedy is by action in court.
Admitting that the provision of article 46 of the said by-laws
maybe regarded as a contract between the defendant corporation
and its stockholders , yet as it is only to the board of directors of
the corporation that said articles gives the authority or right to
apply on the payment of unpaid subscriptions such amount of the
70 percent of the profit distributable among the shareholders in
equal parts as may be deemed fit, it cannot be maintained that

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Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

the said article has prescribe an operative method for the


payment of said subscription continuously until their full
amortization.
In the instant case, the defendant corporation, through its board
of directors, made use of its discretionary power, taking
advantage of the first of the two remedies provided by the
aforesaid law. On the other hand, the plaintiff has no right
whatsoever under the provision of the above cited article 46 of
the said by-laws to prevent the board of directors from following,
for that purpose, any other method than that mentioned in the
said article, for the very reason that the same does not give the
stockholders any right in connection with the determination of the
question whether or not there should be deducted from the 70
percent of the profit distributable among the stockholders such
amount as may be deemed fit for the payment of subscriptions
due and unpaid. Therefore, it is evident that the defendant
corporation has not violated, nor disregarded any right of the
plaintiff recognized by the said by-laws, nor exceeded its authority
in the discharge of its executive functions, nor abused its
discretion when it performed the acts mentioned in the complaint
as grounds thereof, and, consequently, the facts therein alleged
do not constitute a cause of action.
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiffappellant,
vs.
IRINEO BALTAZAR, defendant-appellee.
(G.R. No. L-4824; June 30, 1953)
LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiffappellee,
vs.
IRINEO BALTAZAR, defendant and appellant
(G.R. No. L-6244; June 30, 1953)
FACTS: Herein defendant Irineo Baltazar subscribed to 600
shares, at P100.000 par value per share, of the plaintiff
corporation paying P15,000 and making further payments leaving
a balance of P18,500.
On July 23, 1946, the stockholders, including herein defendant,
approved Resolution No. 17 agreeing: (1) to call of the balance
of the unpaid subscription to be paid: 50% within 60 days
beginning Aug. 1, 1946; the remaining 50% 60 days beginning
October 1, 1946; (2) that all unpaid unpaid subscriptions after the
due dates of both calls to be subject to 12% interest per annum;
(3) that after the expiration of a grace period of 60 days, all
unpaid subscribed shares would revert to the corporation.
A demand was made against defendant, but was ignored. Hence
this action.
ISSUE: WON Baltazar is liable to pay the unpaid portion of his
subscription
HELD: No. We agree with the lower court that the law requires
that notice of any call for the payment of unpaid
subscription should be made not only personally but also
by publication. This is clear from the provisions of section 40 of
the Corporation Law, Act No. 1459, as amended.
It will be noted that section 40 is mandatory as regards
publication, using the word "must". As correctly stated by the trial
court, the reason for the mandatory provision is not only to assure
notice to all subscribers, but also to assure equality and uniformity
in the assessment on stockholders. (14 C.J. 639).
We find the citation of authorities made by the plaintiff and
appellant inapplicable. In the case of Velasco vs. Poizat (37 Phil.
805), the corporation involved was insolvent, in which case all
unpaid stock subscriptions become payable on demand and are
immediately recoverable in an action instituted by the assignee.
Said the court in that case:

97

. . . . it is now quite well settled that when the corporation


becomes insolvent, with proceedings instituted by
creditors to wind up and distribute its assets, no call or
assessment is necessary before the institution of suits to
collect unpaid balance on subscription.
But when the corporation is a solvent concern, the rule is:
It is again insisted that plaintiffs cannot recover because the
suit was not proceeded by a call or assessment against the
defendant as a subscriber, and that until this is done no
right of action accrues. In a suit by a solvent going corporation
to collect a subscription, and in certain suits provided by statute
this would be true;. . . . . (Id.)
ISSUE 2: WON the Baltazar is correct in claiming that Resolution
No. 17 of 1946 of the BOD released him from the obligation to pay
for his unpaid subscription?
HELD: No. There must be unanimous consent of the stockholders
of the corporation. We quote some authorities:
Subject to certain exceptions, considered in subdivision (3) of this
section, the general rule is that a valid and binding
subscription for stock of a corporation cannot be cancelled
so as to release the subscriber from liability thereon
without the consent of all the stockholders or subscribers.
Furthermore, a subscription cannot be cancelled by the
company, even under a secret or collateral agreement for
cancellation made with the subscriber at the time of the
subscription, as against persons who subsequently
subscribed or purchased without notice of such
agreement. (18 C.J.S. 874).
(3) Exceptions.
In particular circumstances, as where it is given pursuant to a
bona fide compromise, or to set off a debt due from the
corporation, a release, supported by consideration, will be
effectual as against dissenting stockholders and subsequent and
existing creditors. A release which might originally have been held
invalid may be sustained after a considerable lapse of time. (18
C.J.S. 874).
In the present case, the release claimed by defendant and
appellant does not fall under the exception above referred to,
because it was not given pursuant to a bona fide compromise, or
to set off a debt due from the corporation, and there was no
consideration for it.
In conclusion we hold that under the Corporation Law, notice of
call for payment for unpaid subscribed stock must be
published, except when the corporation is insolvent, in
which case, payment is immediately demandable. We also
rule that release from such payment must be made by all
the stockholders.
ERNESTO M. APODACA, petitioner,
vs.
NATIONAL LABOR RELATIONS COMMISSION,
MIRASOL and INTRANS PHILS., INC., respondents
(G.R. No. 80039; April 18, 1989)

JOSE

M.

FACTS: Petitioner, an employee of respondent company,


subscribed to 1,500 shares at P100 per share. He paid an initial
payment P37,500. On Sept. 1, 1975, he was appointed President
and General Manager of the company but on Jan. 2, 1986, he
resigned.
He filed a complaint with the NLRC claiming unpaid wages, cost of
living allowance, the balance of his gasoline and representation
expenses and his bonus compensation for 1986. Respondent
admitted that petitioner was entitled to P17,060.07 but the same
was already set-off against his unpaid subscription. Petitioner
questioned such set-off claiming that no call or notice was made.

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Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

The Labor Arbiter decided in favor of petitioner. On appeal, such


decision was reversed by the NLRC.
ISSUE: WON the set-off was properly made?

HELD: No. Firstly, the NLRC has no jurisdiction to determine such


intra-corporate dispute between the stockholder and the
corporation as in the matter of unpaid subscriptions. This
controversy is within the exclusive jurisdiction of the Securities
and Exchange Commission.

Secondly, assuming arguendo that the NLRC may exercise


jurisdiction over the said subject matter under the circumstances
of this case, the unpaid subscriptions are not due and
payable until a call is made by the corporation for
payment. Private respondents have not presented a resolution of
the board of directors of respondent corporation calling for the
payment of the unpaid subscriptions. It does not even appear that
a notice of such call has been sent to petitioner by the respondent
corporation.
What the records show is that the respondent corporation
deducted the amount due to petitioner from the amount
receivable from him for the unpaid subscriptions. No doubt such
set-off was without lawful basis, if not premature. As there was no
notice or call for the payment of unpaid subscriptions, the same is
not yet due and payable.
BONIFACIO LUMANLAN, plaintiff-appellee,
vs.
JACINTO R. CURA, ET AL., defendants.
DIZON & CO., INC., ETC., appellant.
(G.R. No. L-39861; March 21, 1934)
FACTS: Lumanlan subscribed to 300 shares of stock of appellant
company at a par value of P50.
Layag was appointed the receiver of said company, at the
instance of its creditors Julio Valenzuela, Pedro Santos and
Francisco Escoto, to collect the unpaid subscriptions, there
appearing that the company had no assets except the credits
against those who had subscribed for shares of stock.
The CFI rendered a decision in favor of Julio Valenzuela and held
Lumanlan liable for the unpaid subscription and loans and
advances together with interests.
Pending appeal, the parties entered into an agreement where
Lumanlan would dismiss the appeal and the corporation would
collect only 50% of the amount subscribed by him for stock,
provided that in case the 50% was inufficient to pay Valenzuela he
should pay an additional amount not to exceed the judgment
against him in that case. Lumanlan paid Valenzuela the sum of
P11,840 including interest.

By virtue of these facts Lumanlan is entitled to a credit against


the judgment in case No. 37492 for P11,840 and an additional
sum of P2,000, which is 25 per cent on the principal debt, as he
had to file this suit to collect, or receive credit for the sum which
he had paid Valenzuela for and in place of the corporation, or a
total of P13,840. This leaves a balance due Dizon & co., Inc., of
P1,269 on that judgment with interest thereon at 6 per cent per
annum from August 30, 1930.
It appears from the record that during the trial of the case now
under consideration, the Bank of the Philippine Islands appeared
in this case as assignee in the "Involuntary Insolvency of Dizon &
Co., Inc. That bank was appointed assignee in case No. 43065 of
the Court of First Instance of the City of Manila on November 28,
1932. It is therefore evident that there are still other creditors of
Dizon & Co., Inc. This being the case that corporation has a right
to collect all unpaid stock subscriptions and any other amounts
which may be due it.
It is established doctrine that subscriptions to the
capital of a corporation constitute a fund to which the
creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain
an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts. (Philippine
Trust Co. vs. Rivera, 44 Phil., 469, 470.)
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
vs.
BITULOK SAWMILL, INC., DINGALAN LUMBER CO., INC., SIERRA
MADRE LUMBER CO., INC., NASIPIT LUMBER CO., INC.,
WOODWORKS, INC., GONZALO PUYAT, TOMAS B. MORATO,
FINDLAY MILLAR LUMBER CO., INC., ET AL., INSULAR LUMBER CO.,
ANAKAN LUMBER CO., AND CANTILAN LUMBER CO., INC.,
defendants-appellees.
(G.R. Nos. L-24177-85; June 29, 1968)
FACTS: In various suits decided jointly, PNB as creditor, and
therefore the real party in interest, was allowed by the lower court
to substitute the receiver of the Philippine Lumber Distributing
Agency in these respective actions for the recovery from the
defendant lumber producers the balance of their stock
subscriptions.
The defendant lumber producers were convinced by the late
President Manuel Roxas to form a cooperative and ensure the
stable supply of lumber in the country and to eliminate alien
middlemen. To induce them, the president promised and agreed
to invest P9.00 for every P1.00 that the members would invest
therein.
There was no appropriation made by congress for the P9.00
investment. The President then instructed Hon. Emilio Abello, then
Executive Secretary and chairman of the BOD of PNB to grant an
overdraft of P250,000 (later increased to P350,000) which was
approved by the BOD of PNB with interest at 6%.

Disregarding the agreement, appellant company asked for and


order of execution of the CFI decision which was granted and the
provincial sheriff levied upon two parcels of land of Lumanlan.

The Philippines did not invest the P9.00 for every peso coming
from defendant lumber producers. The loan extended by PNB was
not paid. Hence, these suits which the trial court dismissed.

ISSUE: WON Lumanlan is still liable to the corporation?

ISSUE: WON the lumber producers are liable for the full value of
their subscriptions?

HELD: Yes. In the promissory note given by the corporation to


Valenzuela the former obligated itself to pay Valenzuela the sum
of P8,000 with interest at 12 per cent per annum and, upon failure
to pay said sum and interest when due, 25 per cent of the
principal as expenses of collection and judicial costs in case of
litigation.

98

HELD: Yes. In Philippine Trust Co. v. Rivera, citing the leading case
of Velasco v. Poizat, this Court held: "It is established doctrine that
subscriptions to the capital of a corporation constitute a fund to
which creditors have a right to look for satisfaction of their claims
and that the assignee in insolvency can maintain an action upon
any unpaid stock subscription in order to realize assets for the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

payment of its debt.... A corporation has no power to release an


original subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for such
release; and as against creditors a reduction of the capital stock
can take place only in the manner and under the conditions
prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory
regulations is necessary...." The Poizat doctrine found acceptance
in later cases. One of the latest cases, Lingayen Gulf Electric
Power v. Baltazar, Speaks to this effect: "In the case of Velasco v.
Poizat, the corporation involved was insolvent, in which case all
unpaid stock subscriptions become payable on demand and are
immediately recoverable in an action instituted by the assignee."

It would be unwarranted to ascribe to the late President Roxas the


view that the payment of the stock subscriptions, as thus required
by law, could be condoned in the event that the counterpart fund
to be invested by the Government would not be available. Even if
such were the case, however, and such a promise were in fact
made, to further the laudable purpose to which the proposed
corporation would be devoted and the possibility that the lumber
producers would lose money in the process, still the plain and
specific wording of the applicable legal provision as
interpreted by this Court must be controlling. It is a wellsettled principle that with all the vast powers lodged in
the Executive, he is still devoid of the prerogative of
suspending the operation of any statute or any of its
terms.
EDWARD A. KELLER & CO., LTD., petitioner-appellant,
vs.
COB GROUP MARKETING, INC., JOSE E. BAX, FRANCISCO C. DE
CASTRO, JOHNNY DE LA FUENTE, SERGIO C. ORDOEZ, TRINIDAD
C. ORDOEZ, MAGNO C. ORDOEZ, ADORACION C. ORDOEZ,
TOMAS C. LORENZO, JR., LUIZ M. AGUILA-ADAO, MOISES P. ADAO,
ASUNCION MANAHAN and INTERMEDIATE APPELLATE COURT,
respondents-appellees.
(G.R. No. L-68097; January 16, 1986)
FACTS: Petitioner-appellant appointed defendant COB Group
Marketing, Inc. as exclusive distributor of its household products
in Panay and Negros. Under its sales agreement, Keller sold on
credit its products to COB Group Marketing.
The BOD of COB Group Marketing were apprised by Jose E. Bax
that the firm owed Keller about P179,000.

but the complaint was dismissed for lack of prosecution.


On Oct. 10, 1935, a similar action was instituted which was
granted by the CFI holding defendant liable for the balance of his
unpaid subscription and interest. On appeal, the defendant raises
the issue of prescription.
ISSUE: WON defendant Suarez is liable?

HELD: Yes. The premise of the argument is wrong because it


confuses two distinct obligations: the obligation to pay interest
and that to pay the amount of the subscription. The said section
37 of the Corporation Law provides when the obligation to pay
interest arises and when payment should be made, but it is
absolutely silent as to when the subscription to a stock should be
paid. Of course, the obligation to pay arises from the date
of the subscription, but the coming into being of an
obligation should not be confused with the time when it
becomes demandable. In a loan for example, the obligation to
pay arises from the time the loan is taken; but the maturity of that
obligation, the date when the debtor can be compelled to pay, is
not the date itself of the loan, because this would be absurd. The
date when payment can be demanded is necessarily distinct from
and subsequent to that the obligation is contracted.

By the same token, the subscription to the capital stock of


the corporation, unless otherwise stipulation, is not
payable at the moment of the subscription but on a
subsequent date which may be fixed by the corporation.
Hence, section 38 of the Corporation Law, amended by Act No.
3518, provides that:
The board of directors or trustees of any stock corporation
formed, organized, or existing under this Act may at any time
declare due and payable to the corporation unpaid
subscriptions to the capital stock . . . .
The board of directors of the Compaia Hispano-Filipino, Inc., not
having declared due and payable the stock subscribed by the
appellant, the prescriptive period of the action for the collection
thereof only commenced to run from June 18, 1931 when the
plaintiff, in his capacity as receiver and in the exercise of the
power conferred upon him by the said section 38 of the
Corporation Law, demanded of the appellant to pay the balance of
his subscription. The present action having been filed on October
10, 1935, the defense of prescription is entirely without basis.

Keller sued COB Marketing and its stockholders.


ISSUE: WON Keller can collect the unpaid subscriptions of the
stockholders?
HELD: Yes. It is settled that a stockholder is personally
liable for the financial obligations of a corporation to the
extent of his unpaid subscription (Vda. de Salvatierra vs.
Garlitos 103 Phil. 757, 763; 18 CJs 1311-2).
GERARDO GARCIA, plaintiff-appellee,
vs.
ANGEL SUAREZ, defendant-appellant
(G.R. No. L-45493; April 21, 1939)
FACTS: Appellant Suarez subscribed to 16 shares of Compania
Hispano-Filipina, Inc. and paid the value of 4 shares, at P100 par
value each, or P400.
Plaintiff-appellee Garcia was appointed by the court as receiver of
the company, to collect the unpaid subscription, among others.
On June 18, 1931, Garcia brought an action to recover from
Suarez and other shareholders the balance of their subscriptions,

99

DELINQUENT: Shares of stock become delinquent when no


payment is made on the balance of all or any portion of the
subscription on the date or dates fixed in the contract of
subscription without need of call, or on the date specified by the
BOD pursuant to a call made by it in accordance with the
provisions of Sec. 67.
EFFECT OF DELINQUENCY: The stockholder thereof immediately
loses the right to vote and be voted upon or represented in any
stockholders meeting as well as all the rights pertaining to a
stockholder except the right to receive dividends in accordance
with the Code.
Sec. 71. Effect of delinquency. - No delinquent stock shall be
voted for be entitled to vote or to representation at any stockholder's
meeting, nor shall the holder thereof be entitled to any of the rights
of a stockholder except the right to dividends in accordance with the
provisions of this Code, until and unless he pays the amount due on
his subscription with accrued interest, and the costs and expenses of
advertisement, if any.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

RIGHT TO RECEIVE DIVIDENDS: Sec. 43 provides that any


cash dividend due on delinquent stockholders shall first be applied
to the unpaid balance on his subscription plus cost and expenses,
while stock dividends shall be withheld until his unpaid
subscription is paid in full
RIGHTS OF UNPAID SHARES: If the shares are not delinquent,
however, subscribers to the capital stock of a corporation though
not fully paid, are entitled to all the rights of a stockholder (Sec.
72) EXCEPT the issuance of certificate of stocks (Sec. 64). They
can vote and be voted upon and entitled to receive all dividends
due their shares.

corporation and its officers, no action may be brought against any


corporation which shall have issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the procedure above-described.
RATIONALE:
1. To avoid duplication of certificates of stock;
2. To avoid fictitious and fraudulent transfers; and
3. To protect the corporation against damage from whatever
source arising from the issuance of the duplicate certificate
inluding liability to the holder of the original certificate or to
innocent holders of certificate based on the duplicate.

Thus, the BOD has the authority to decide the amount and the
kind of surety bond that may be required for the issuance of a
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares certificate of stock, in liey of the lost or destroyed one, if the same
not fully paid which are not delinquent shall have all the rights of a is to be issued prior to the expiration of the 1 year period provided
stockholder.
by Sec. 73.
NON-STOCK CORPORATIONS: The rules on delinquent
shareholders applies to non-stock corporations, such as when
members are delinquent in paying membership dues.

ISSUANCE OF NEW CERTIFICATES:


1. After the above procedures have been complied with, the new
certificate will be issued 1 year from the date of the last
publication;
RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK
2. Nevertheless, the stockholder may file a bond or other
CERTIFICATE:
security to have the shares issued before the 1 year
prescribed.
Sec. 73. Lost or destroyed certificates. - The following procedure 3. If a contest has been present to the corporation or an action
is pending in court, the issuance of the new certificate shall
shall be followed for the issuance by a corporation of new certificates
be suspended until final decision.
of stock in lieu of those which have been lost, stolen or destroyed:
H. RIGHTS AND LIABILITIES OF STOCKHOLDERS
1. The registered owner of a certificate of stock in a corporation or his
legal representative shall file with the corporation (A) an affidavit in RIGHTS OF A STOCKHOLDER:
triplicate setting forth, if possible, (1) the circumstances as to how 1. Participation in the management of the corporate
affairs by exercising their right to vote and be voted upon
the certificate was lost, stolen or destroyed, (2) the number of
either personally or by proxy as provided for under Sec. 50
shares represented by such certificate, (3) the serial number of
and 58 of the Code;
the certificate and (4) the name of the corporation which issued 2. To enter into a voting trust agreement subject to the
the same. He shall also submit such (B) other information and
procedure, requirements and limitations imposed under Sec.
50;
evidence which he may deem necessary;
3. To receive dividends and to compel their declaration if
warranted under Sec. 43;
2. After verifying the affidavit and other information and evidence
4. To transfer shares of stock subject only to reasonable
with the books of the corporation, said corporation shall publish a
restrictions such as the options and preferences as may be
notice in a newspaper of general circulation published in the place
allowed by law inclusive of the right of the transferee to
where the corporation has its principal office, once a week for three
compel the registration of the transfer in the books of the
corporation as provided for in Sec. 63;
(3) consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed. The 5. To be issued a certificate of stock for fully paid-up shares
in accordance with Sec. 64;
notice shall state (1) the name of said corporation, (2) the name
6. To exercise pre-emptive rights as provided for in Sec. 39;
of the registered owner and (3) the serial number of said
7. To exercise their appraisal right in accordance with the
certificate, and (4) the number of shares represented by such
provision of Sec. 81 and in those instance allowed by law
certificate, and that after the expiration of one (1) year from the date
such as Sec. 42 and 105;
of the last publication, if no contest has been presented to said 8. To institute and file a derivative suit;
corporation regarding said certificate of stock, the right to make such 9. To recover shares of stock unlawfully sold for
delinquency as may be allowed under Sec. 69;
contest shall be barred and said corporation shall cancel in its books
the certificate of stock which has been lost, stolen or destroyed and 10. To inspect the books of the corporation subject only to
the limitations imposed by Sec. 75;
issue in lieu thereof new certificate of stock, unless the registered
11. To be furnished by the most recent financial statement
owner files a bond or other security in lieu thereof as may be
of the corporation as by Sec. 75;
required, effective for a period of one (1) year, for such amount and 12. To be issued a new stock certificate in lieu of the lost or
in such form and with such sureties as may be satisfactory to the
destroyed one subject to the procedure laid down in Sec. 73;
board of directors, in which case a new certificate may be issued 13. To have the corporation dissolved under Sec. 118 to 121,
and Sec. 105 in a close corporation;
even before the expiration of the one (1) year period provided herein:
Provided, That if a contest has been presented to said corporation or 14. To participate in the distribution of assets of the
corporation upon dissolution under Sec. 122;
if an action is pending in court regarding the ownership of said 15. In the case of a close corporation, to petition the SEC to
certificate of stock which has been lost, stolen or destroyed, the
arbitrate in the event of a deadlock as allowed under
issuance of the new certificate of stock in lieu thereof shall be
Sec. 104; and
suspended until the final decision by the court regarding the 16. Also in the case of a close corporation, to withdraw
therefrom, for any reason, and compel the corporation to
ownership of said certificate of stock which has been lost, stolen or
purchase his shares as provided for in Sec. 105.
destroyed.
OBLIGATIONS AND LIABILITIES:
Except in case of fraud, bad faith, or negligence on the part of the 1. To pay the corporation the balance of his unpaid

100

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

2.
3.
4.
5.
6.

subscriptions subject to the provision of Sec. 67-70;


To pay interest on his unpaid subscription, if required by
the by-laws or by the contract of subscription in accordance
with Sec. 66;
To answer to the creditor for the unpaid portion of his
subscription under the Trust Fund Doctrine;
To answer the water in his stocks as provided for in
Sec. 65;
To be liable, as general partners, for all debts, liabilities
and damages of determinable corporation as envisioned
under Sec. 21 (corporation by estoppel); and
To be personally liable for torts, in the event that a
stockholder in a close corporation actively participates in the
management of corporate affairs.
CHAPTER 11: CORPORATE BOOKS AND RECORDS

A.

BOOKS AND RECORDS TO BE KEPT

Sec. 74. Books to be kept; stock transfer agent. - Every


corporation shall keep and carefully preserve at its principal office a
record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in
which shall be set forth in detail the time and place of holding the
meeting, how authorized, the notice given, whether the meeting was
regular or special, if special its object, those present and absent, and
every act done or ordered done at the meeting. Upon the demand of
any director, trustee, stockholder or member, the time when any
director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas and
nays must be taken on any motion or proposition, and a record
thereof carefully made. The protest of any director, trustee,
stockholder or member on any action or proposed action must be
recorded in full on his demand.

shall be open for inspection by any director or stockholder of the


corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license from
the Securities and Exchange Commission and pays a fee as may be
fixed by the Commission, which shall be renewable annually:
Provided, That a stock corporation is not precluded from performing
or making transfer of its own stocks, in which case all the rules and
regulations imposed on stock transfer agents, except the payment of
a license fee herein provided, shall be applicable.
THE FOLLOWING SHALL BE KEPT AND MAINTAINED BY THE
CORPORATION:
1
Records of all business transactions which include,
among others, (1) journals, (2) ledger, (3) contracts, (4)
vouchers and receipts, (5) financial statements and other
books of accounts, (6) income tax returns, and (7) voting
trust agreements - which must be kept and carefully
preserved at its principal office;
2
Minutes of all meetings of stockholders or members and of
the directors or trustees setting forth in detail (1) the date,
time and place of meeting, (2) how authorized, (3) the notice
given, (4) whether the same be regular or special, and if
special, the purpose thereof shall be specified, (5) those
present and absent, and (6) every act done or ordered done
thereat - which must likewise be kept at the principal office of
the said corporation; and
3
Stock and Transfer Book showing the (1) names of the
stockholders, (2) the amount paid or unpaid on all stocks for
which the subscription has been made, (3) a statement of
every alienation, sale or transfer of stock made, if any (4) the
date thereof, and (5) by whom and to whom - which must
also be kept at the principal office of the corporation or in the
office of its stock transfer agent.

The records of all business transactions of the corporation and the


minutes of any meetings shall be open to inspection by any director, STOCK AND TRANSFER AGENT: is the person who records
trustee, stockholder or member of the corporation at reasonable every movement of the shares by the minute or by the hour.
hours on business days and he may demand, writing, for a copy of
NON-STOCK CORPORATIONS: can also have a stock and
excerpts from said records or minutes, at his expense.
transfer agent for purposes of the club share-membership.
Any officer or agent of the corporation who shall refuse to allow any
director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to such
director, trustee, stockholder or member for damages, and in
addition, shall be guilty of an offense which shall be punishable under
Section 144 of this Code: Provided, That if such refusal is made
pursuant to a resolution or order of the board of directors or trustees,
the liability under this section for such action shall be imposed upon
the directors or trustees who voted for such refusal: and Provided,
further, That it shall be a defense to any action under this section that
the person demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any
information secured through any prior examination of the records or
minutes of such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making his demand.

INSPECTION & COPIES: These books are subject to inspection


by any of the directors, trustees, stockholders or members of the
corporation at reasonable hours on business days and a copy of
excerpts of said records may be demanded. In fact, in so far as
Financial Statements are concerned, the Code provides:
Sec. 75. Right to financial statements. - Within ten (10) days
from receipt of a written request of any stockholder or member, the
corporation shall furnish to him its most recent financial statement,
which shall include a balance sheet as of the end of the last taxable
year and a profit or loss statement for said taxable year, showing in
reasonable detail its assets and liabilities and the result of its
operations.

At the regular meeting of stockholders or members, the board of


directors or trustees shall present to such stockholders or members a
financial report of the operations of the corporation for the preceding
year, which shall include financial statements, duly signed and
Stock corporations must also keep a book to be known as the "stock
certified by an independent certified public accountant.
and transfer book", in which must be kept a record of all stocks in the
names of the stockholders alphabetically arranged; the installments
However, if the paid-up capital of the corporation is less than
paid and unpaid on all stock for which subscription has been made,
P50,000.00, the financial statements may be certified under oath by
and the date of payment of any installment; a statement of every
the treasurer or any responsible officer of the corporation.
alienation, sale or transfer of stock made, the date thereof, and by
and to whom made; and such other entries as the by-laws may
BASIS OF RIGHT: is to protect his interest as a stockholder. Thus,
prescribe. The stock and transfer book shall be kept in the principal it has been said that: The right of the shareholders to ascertain
office of the corporation or in the office of its stock transfer agent and how the affairs of his company are being conducted by its

101

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

directors and officers is founded by his beneficial interest through


ownership of shares and the necessity of self-protection.
Managers of some corporations deliberately keep the
shareholders in ignorance or under misapprehension as to the
true condition of its affairs. Business prudence demands that the
investor keep a watchful eye on the management and the
condition of the business. Those in charge of the company may be
guilty of gross incompetence or dishonesty for years and escape
liability if the shareholders cannot inspect the records and obtain
information.
BOOKS OF SUBSIDIARY: The right of the stockholder to examine
corporate books extends to a wholly owned subsidiary which is
completely under the control and management of the parent
company where he is such a stockholder. But if the two entities
are legally being operated as separate and distinct entities, there
is no such right of inspection on the part of the stockholder of the
parent company.
INSPECTION BY AGENT: while the right is founded on stock
ownership, thus personal in nature, it may be made by the
stockholders agent or representative since it may be unavailing
in many instances.
INSPECTION BY DIRECTOR/TRUSTEE: As compared to a
stockholder or member, the right of a director or trustee to
inspect and examine corporate books and records is considered
absolute and unqualified and without regard to motive. This is
because a director supervises, directs and manages
corporate business and it is necessary that he be equipped
with all the information and data with regard to the affairs
of the company in order that he may manage and direct its
operations intelligently and according to this best
judgment in the interest of all the stockholders he represents.
Thus, while stockholders and mmebers are entitled to inspect and
examine the books and records as provided in Sec. 74 and 75 they
may not gain access to highly sensitive and confidential
information. In the case of directors, it is not denied that they
have such access. This would include, among others, (a)
marketing strategies and pricing structure; (b) budget for
expansion
and
diversification;
(c)
research
and
development; and (d) sources of funding, availability of
personnel, proposals for mergers or tie-ups with other
firms.
REMEDIES OF STOCKHOLDERS UNJUSTIFIABLY REFUSED
THE RIGHT TO INSPECT THE CORPORATE BOOKS: (MDC)
1. Mandamus. In such event, the corporate secretary shall be
included as a party respondent since he is customarily
charged with the custody of all documents or records of the
corporation and against whom personal order of the court
would be made;
2. Damages either against the corporation or the responsible
officer who refused the inspection; or
3. Criminal complaint for violation of his right to inspect and
copy excerpts of all business transactions and minutes of
meetings. The officer or agent who refused the examination
or copying thereof, shall be guilty and liable of an offense
punishable under Sec. 144 of the Code. Sec. 144 imposes a
penalty of a fine of not less than P1,000 but not more than
P10,000 or an imprisonment for not less than 30 days but not
more than 5 years, or both, at the discretion of the court. If
the refusal is pursuant to a resolution or order of the board,
the liability shall be imposed upon the directors/trustees who
voted for such refusal.
DEFENSE OF CORPRATE OFFICERS: (INL)
1. That the person demanding has improperly used any
information secured through any prior examination of the
records or minutes of such corporation or any other
corporation;
2. That he was not acting in good faith or for a legitimate
purpose in making his demand; or
3. The right is limited or restricted by special law or the law
of its creation.

102

W. G. PHILPOTTS, petitioner,
vs.
PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY,
respondents.
(G.R. No. L-15568; November 8, 1919)
FACTS: Petitioner seeks to obtain a writ of mandamus to compel
the respondents to permit him, in person or by some authorized
agent or attorney, to inspect and examine the records of the
business by Philippine Manufacturing Company, of which he is a
stockholder.
Respondents interposed a demurrer.
ISSUE: WON the right the law concedes to a stockholder may be
exercised by a proper agent or attorney?
HELD: Yes. The right of inspection given to a stockholder
can be exercised either by himself or by any proper
representative or attorney in fact, and either with or
without the attendance of the stockholder. This is in
conformity with the general rule that what a man may do in
person he may do through another; and we find nothing in the
statute that would justify us in qualifying the right in the manner
suggested by the respondents.
This conclusion is supported by the undoubted weight of authority
in the United States, where it is generally held that the provisions
of law conceding the right of inspection to stockholders of
corporations are to be liberally construed and that said right may
be exercised through any other properly authorized person. As
was said in Foster vs. White (86 Ala., 467), "The right may be
regarded as personal, in the sense that only a stockholder
may enjoy it; but the inspection and examination may be
made by another. Otherwise it would be unavailing in many
instances." An observation to the same effect is contained in
Martin vs. Bienville Oil Works Co. (28 La., 204), where it is said:
"The possession of the right in question would be futile if the
possessor of it, through lack of knowledge necessary to exercise
it, were debarred the right of procuring in his behalf the services
of one who could exercise it." In Deadreck vs. Wilson (8 Baxt.
[Tenn.], 108), the court said: "That stockholders have the
right to inspect the books of the corporation, taking
minutes from the same, at all reasonable times, and may
be aided in this by experts and counsel, so as to make the
inspection valuable to them, is a principle too well settled to
need discussion." Authorities on this point could be accumulated
in great abundance, but as they may be found cited in any legal
encyclopedia or treaties devoted to the subject of corporations, it
is unnecessary here to refer to other cases announcing the same
rule.
The demurrer is overruled; and it is ordered that the writ of
mandamus shall issue as prayed, unless within 5 days from
notification hereof the respondents answer to the merits.
ANTONIO PARDO, petitioner,
vs.
THE HERCULES LUMBER CO., INC., and IGNACIO FERRER,
respondents
(G.R. No. L-22442; August 1, 1924)
FACTS: Petitioner Antonio Pardo seeks to obtain a writ of
mandamus to compel respondent company to permit petitioner
and his duly authorized agent and representative to examine the
records and business transactions of said company.
Respondents raised the defense that under Art. 10 of the by-laws,
it is declared that every shareholder may examine the books of
the company and other documents pertaining to the same upon
the days which the board of directors shall annually fix. And thus
was set from 15th to 25th of March by virtue of a board resolution.
ISSUE: WON the BOD may choose specific performance and

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

particular dates when the right of inspection may be exercised?


HELD: No. The general right given by the statute may not
be lawfully abridged to the extent attempted in this
resolution. It may be admitted that the officials in charge of a
corporation may deny inspection when sought at unusual hours
or under other improper conditions; but neither the executive
officers nor the board of directors have the power to
deprive a stockholder of the right altogether. A by-law
unduly restricting the right of inspection is undoubtedly invalid.
Authorities to this effect are too numerous and direct to require
extended comment. (14 C.J., 859; 7 R.C.L., 325; 4 Thompson on
Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah,
248; 107 Am., St. Rep., 664. 681.)
The demurrer is, therefore, sustained; and the writ of mandamus
will issue as prayed, with the costs against the respondent.
EUGENIO VERAGUTH, Director and Stockholder of the Isabela
Sugar Company, Inc., petitioner,
vs.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting
President, and AGUSTIN B. MONTILLA, Secretary of the same
corporation, respondents.
(G.R. No. L-37064; October 4, 1932)
FACTS: Petitioner Eugenio Veraguth seeks to obtain a final and
absolute writ of mandamus to be issued to each and all of the
respondents to, among others, place at his disposal at reasonable
hours the minutes, documents and books of Isabela Sugar
Company, Inc. (which he is a director and stockholder) for his
inspection and to issue immediately, upon payment of the fees,
certified copies of any documentation in connection with said
minutes, documents and the books of the aforesaid corporation.
Director Veraguth telegraphed the secretary of the company,
asking the latter to forward in the shortest possible time a
certified copy of the resolution of the board of directors
concerning the payment of attorney's fees in the case against the
Isabela Sugar Company and others. To this the secretary made
answer by letter stating that, since the minutes of the meeting in
question had not been signed by the directors present, a certified
copy could not be furnished and that as to other proceedings of
the stockholders a request should be made to the president of the
Isabela Sugar Company, Inc. It further appears that the board of
directors adopted a resolution providing for inspection of the
books and the taking of copies "by authority of the President of
the corporation previously obtained in each case."
ISSUE: WON the corporate secretary is justified in refusing to
furnish copies of the minutes of the meeting of the BOD?

HELD: Yes. The Corporation Law, section 51, provides that:

All business corporations shall keep and carefully preserve a


record of all business transactions, and a minute of all meetings
of directors, members, or stockholders, in which shall be set
forth in detail the time and place of holding the meeting was
regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. . . .
The record of all business transactions of the corporation and
the minutes of any meeting shall be open to the inspection of
any director, member, or stockholder of the corporation at
reasonable hours.
The above puts in statutory form the general principles of
Corporation Law. Directors of a corporation have the unqualified
right to inspect the books and records of the corporation at all
reasonable times. Pretexts may not be put forward by officers of
corporations to keep a director or shareholder from inspecting the

103

books and minutes of the corporation, and the right of inspection


is not to be denied on the ground that the director or shareholder
is on unfriendly terms with the officers of the corporation whose
records are sought to be inspected. A director or stockholder
cannot of course make copies, abstracts, and memoranda of
documents, books, and papers as an incident to the right of
inspection, but cannot, without an order of a court, be permitted
to take books from the office of the corporation. We do not
conceive, however, that a director or stockholder has any
absolute right to secure certified copies of the minutes of
the corporation until these minutes have been written up
and approved by the directors. (See Fisher's Philippine Law of
Stock Corporations, sec. 153, and Fletcher Cyclopedia
Corporations, vol. 4, Chap. 45.)
Combining the facts and the law, we do not think that anything
improper occurred when the secretary declined to furnish certified
copies of minutes which had not been approved by the board of
directors, and that while so much of the last resolution of the
board of directors as provides for prior approval of the president of
the corporation before the books of the corporation can be
inspected puts an illegal obstacle in the way of a stockholder or
director, that resolution, so far as we are aware, has not been
enforced to the detriment of anyone. In addition, it should be said
that this is a family dispute, the petitioner and the individual
respondents belonging to the same family; that a test case
between the petitioner and the respondents has not been begun
in the Court of First Instance of Occidental Negros involving
hundreds of thousands of pesos, and that the appellate court
should not intrude its views to give an advantage to either party.
We rule that the petitioner has not made out a case for relief by
mandamus.
GOKONGWEI VS. SEC (supra, CHAPTER 7 and 8) ISSUE: WON
petitioner may be properly denied examination of the books and
records of San Miguel International, Inc., a fully owned subsidiary
of SMC?

HELD: No. Pursuant to the second paragraph of section 51 of


Corporation Law, "(t)he record of all business transactions of
corporation and minutes of any meeting shall be open to
inspection of any director, member or stockholder of
corporation at reasonable hours."

the
the
the
the

The stockholder's right of inspection of the corporation's books


and records is based upon their ownership of the assets and
property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or
interest be termed an equitable ownership, a beneficial
ownership, or a ownership. This right is predicated upon the
necessity of self-protection. It is generally held by majority of the
courts that where the right is granted by statute to the
stockholder, it is given to him as such and must be exercised by
him with respect to his interest as a stockholder and for some
purpose germane thereto or in the interest of the corporation. In
other words, the inspection has to be germane to the
petitioner's interest as a stockholder, and has to be proper
and lawful in character and not inimical to the interest of
the corporation. In Grey v. Insular Lumber, this Court held that
"the right to examine the books of the corporation must be
exercised in good faith, for specific and honest purpose,
and not to gratify curiosity, or for specific and honest
purpose, and not to gratify curiosity, or for speculative or
vexatious purposes. The weight of judicial opinion appears to
be, that on application for mandamus to enforce the right, it is
proper for the court to inquire into and consider the stockholder's
good faith and his purpose and motives in seeking inspection.
Thus, it was held that "the right given by statute is not
absolute and may be refused when the information is not
sought in good faith or is used to the detriment of the
corporation." But the "impropriety of purpose such as will defeat

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

enforcement must be set up the corporation defensively if the


Court is to take cognizance of it as a qualification. In other words,
the specific provisions take from the stockholder the burden of
showing propriety of purpose and place upon the corporation the
burden of showing impropriety of purpose or motive. It appears to
be the general rule that stockholders are entitled to full
information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain
such information, especially where it appears that the company is
being mismanaged or that it is being managed for the personal
benefit of officers or directors or certain of the stockholders to the
exclusion of others."
While the right of a stockholder to examine the books and
records of a corporation for a lawful purpose is a matter of
law, the right of such stockholder to examine the books
and records of a wholly-owned subsidiary of the
corporation in which he is a stockholder is a different
thing.
Some state courts recognize the right under certain conditions,
while others do not. Thus, it has been held that where a
corporation owns approximately no property except the shares of
stock of subsidiary corporations which are merely agents or
instrumentalities of the holding company, the legal fiction of
distinct corporate entities may be disregarded and the books,
papers and documents of all the corporations may be required to
be produced for examination, and that a writ of mandamus, may
be granted, as the records of the subsidiary were, to all incontents
and purposes, the records of the parent even though subsidiary
was not named as a party. Mandamus was likewise held proper to
inspect both the subsidiary's and the parent corporation's books
upon proof of sufficient control or dominion by the parent showing
the relation of principal or agent or something similar thereto.
On the other hand, mandamus at the suit of a stockholder was
refused where the subsidiary corporation is a separate and
distinct corporation domiciled and with its books and records in
another jurisdiction, and is not legally subject to the control of the
parent company, although it owned a vast majority of the stock of
the subsidiary. Likewise, inspection of the books of an allied
corporation by stockholder of the parent company which owns all
the stock of the subsidiary has been refused on the ground that
the stockholder was not within the class of "persons having an
interest."
In the Nash case, The Supreme Court of New York held that the
contractual right of former stockholders to inspect books and
records of the corporation included the right to inspect
corporation's subsidiaries' books and records which were in
corporation's possession and control in its office in New York."
In the Bailey case, stockholders of a corporation were held
entitled to inspect the records of a controlled subsidiary
corporation which used the same offices and had identical officers
and directors.
In the case at bar, considering that the foreign subsidiary is wholly
owned by respondent San Miguel Corporation and, therefore,
under its control, it would be more in accord with equity, good
faith and fair dealing to construe the statutory right of
petitioner as stockholder to inspect the books and records
of the corporation as extending to books and records of
such wholly-owned subsidiary which are in respondent
corporation's possession and control.
The Court voted unanimously to grant the petition insofar as it
prays that petitioner be allowed to examine the books and records
of San Miguel International, Inc., as specified by him.
RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
(G.R. No. L-33320; May 30, 1983)

104

FACTS: Petitioner Ramon A. Gonzales instituted in the CFI of


Manila a special civil action for mandamus against the herein
respondent PNB praying that the latter be ordered to allow him to
look into the books and records of PNB to satisfy himself as to the
truth of the published report that (1) the respondent has
guaranteed the obligation of South Negros Development
Corporation in the purchase of a US$ 23M sugar-mill to be
financed by Japanese suppliers and financiers; that the
respondent; (2) the respondent is financing the construction of the
P21M Cebu-Mactan Bridge to be constructed by VC Ponce, Inc.;
and (3) the construction of Passi Sugar Mill at Iloilo by the Homion
Philippines, Inc.; as well as (4) to inquire into the validity of said
transactions.
The CFI dismissed the special civil action.
Assailing the conclusions of the lower court, the petitioner has
assigned the single error to the lower court of having ruled that
his alleged improper motive in asking for an examination of the
books and records of the respondent bank disqualifies him to
exercise the right of a stockholder to such inspection under
Section 51 of Act No. 1459, as amended. Said provision reads in
part as follows:
Sec. 51. ... The record of all business transactions of the
corporation and the minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the
corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not
justify the qualification made by the lower court that the
inspection of corporate records may be denied on the ground that
it is intended for an improper motive or purpose, the law having
granted such right to a stockholder in clear and unconditional
terms. He further argues that, assuming that a proper motive or
purpose for the desired examination is necessary for its exercise,
there is nothing improper in his purpose for asking for the
examination and inspection herein involved.
ISSUE: WON Petitioner is correct in saying that he has an
unqualified right to inspect the books as provided under Sec. 51 of
the Corporation Law?

HELD: No. Petitioner may no longer insist on his interpretation of


Section 51 of Act No. 1459, as amended, regarding the right of a
stockholder to inspect and examine the books and records of a
corporation. The former Corporation Law (Act No. 1459, as
amended) has been replaced by Batas Pambansa Blg. 68,
otherwise known as the "Corporation Code of the Philippines."

The right of inspection granted to a stockholder under Section 51


of Act No. 1459 has been retained, but with some modifications.
The second and third paragraphs of Section 74 of Batas Pambansa
Blg. 68 provide the following:
The records of all business transactions of the corporation and
the minutes of any meeting shall be open to inspection by any
director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in
writing, for a copy of excerpts from said records or minutes, at
his expense.
Any officer or agent of the corporation who shall refuse to allow
any director, trustee, stockholder or member of the corporation
to examine and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be liable to
such director, trustee, stockholder or member for damages, and
in addition, shall be guilty of an offense which shall be
punishable under Section 144 of this Code: Provided, That if
such refusal is made pursuant to a resolution or order of the

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

board of directors or trustees, the liability under this section for


such action shall be imposed upon the directors or trustees who
voted for such refusal; and Provided, further, That it shall be a
defense to any action under this section that the person
demanding to examine and copy excerpts from the
corporation's records and minutes has improperly used any
information secured through any prior examination of the
records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate
purpose in making his demand.
As may be noted from the above-quoted provisions, among the
changes introduced in the new Code with respect to the right of
inspection granted to a stockholder are the following (1)
the records must be kept at the principal office of the
corporation; (2) the inspection must be made on business
days; (3) the stockholder may demand a copy of the
excerpts of the records or minutes; (4) and the refusal to
allow such inspection shall subject the erring officer or
agent of the corporation to civil and criminal liabilities.
However, while seemingly enlarging the right of inspection, the
new Code has prescribed limitations to the same. It is now
expressly required as a condition for such examination
that (1) the one requesting it must not have been guilty of
using improperly any information through a prior
examination, and (2) that the person asking for such
examination must be "acting in good faith and for a
legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously
contained in Section 51, Act No. 1459, as amended, no longer
holds true under the provisions of the present law. The argument
of the petitioner that the right granted to him under Section 51 of
the former Corporation Law should not be dependent on the
propriety of his motive or purpose in asking for the inspection of
the books of the respondent bank loses whatever validity it might
have had before the amendment of the law. If there is any doubt
in the correctness of the ruling of the trial court that the right of
inspection granted under Section 51 of the old Corporation Law
must be dependent on a showing of proper motive on the part of
the stockholder demanding the same, it is now dissipated by the
clear language of the pertinent provision contained in Section 74
of Batas Pambansa Blg. 68.
ISSUE2: WON petitioner is in good faith in the exercise of his right
to inspect the books of PNB?
HELD: No. Although the petitioner has claimed that he has
justifiable motives in seeking the inspection of the books of the
respondent bank, he has not set forth the reasons and the
purposes for which he desires such inspection, except to satisfy
himself as to the truth of published reports regarding certain
transactions entered into by the respondent bank and to inquire
into their validity. The circumstances under which he acquired one
share of stock in the respondent bank purposely to exercise the
right of inspection do not argue in favor of his good faith and
proper motivation. Admittedly he sought to be a stockholder in
order to pry into transactions entered into by the respondent bank
even before he became a stockholder. His obvious purpose was to
arm himself with materials which he can use against the
respondent bank for acts done by the latter when the petitioner
was a total stranger to the same. He could have been impelled by
a laudable sense of civic consciousness, but it could not be said
that his purpose is germane to his interest as a stockholder.
ISSUE3: WON the right of a stockholder to inspect the books
provided under Sec. 74 of the Corporation Code is applicable to
PNB?
HELD: No. We also find merit in the contention of the respondent
bank that the inspection sought to be exercised by the petitioner
would be violative of the provisions of its charter. (Republic Act
No. 1300, as amended.) Sections 15, 16 and 30 of the said charter
provide respectively as follows:

105

Sec. 15. Inspection by Department of Supervision and


Examination of the Central Bank. The National Bank shall
be subject to inspection by the Department of
Supervision and Examination of the Central Bank'
Sec. 16. Confidential information. The Superintendent of
Banks and the Auditor General, or other officers designated by
law to inspect or investigate the condition of the National Bank,
shall not reveal to any person other than the President
of the Philippines, the Secretary of Finance, and the
Board of Directors the details of the inspection or
investigation, nor shall they give any information
relative to the funds in its custody, its current accounts
or
deposits
belonging
to
private
individuals,
corporations, or any other entity, except by order of a
Court of competent jurisdiction,'
Sec. 30. Penalties for violation of the provisions of this Act.
Any director, officer, employee, or agent of the Bank, who
violates or permits the violation of any of the provisions of this
Act, or any person aiding or abetting the violations of any of the
provisions of this Act, shall be punished by a fine not to exceed
ten thousand pesos or by imprisonment of not more than five
years, or both such fine and imprisonment.
The Philippine National Bank is not an ordinary corporation.
Having a charter of its own, it is not governed, as a rule, by the
Corporation Code of the Philippines. Section 4 of the said Code
provides:
SEC. 4. Corporations created by special laws or charters.
Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or charter
creating them or applicable to them. supplemented by the
provisions of this Code, insofar as they are applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of
the new Corporation Code with respect to the right of a
stockholder to demand an inspection or examination of
the books of the corporation may not be reconciled with
the abovequoted provisions of the charter of the
respondent bank. It is not correct to claim, therefore, that
the right of inspection under Section 74 of the new
Corporation Code may apply in a supplementary capacity
to the charter of the respondent bank.
CHAPTER 12: MERGER AND CONSOLIDATION
Sec. 36, par. 8 of the Corporation Code of the Philippines expressly
empowers a corporation to merge or consolidate with another
corporation subject to the requirements and procedure prescribed
in TITLE IX.
Sec. 76. Plan or merger of consolidation. - Two or more
corporations may merge into a single corporation which shall be one
of the constituent corporations or may consolidate into a new single
corporation which shall be the consolidated corporation.
The board of directors or trustees of each corporation, party to the
merger or consolidation, shall approve a plan of merger or
consolidation setting forth the following: (NTSO)
1. The names of the corporations proposing to merge or consolidate,
hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of carrying
the same into effect;
3. A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of merger; and, with

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

respect to the consolidated corporation in case of consolidation, all


the statements required to be set forth in the articles of incorporation If, upon investigation, the Securities and Exchange Commission has
for corporations organized under this Code; and
reason to believe that the proposed merger or consolidation is
contrary to or inconsistent with the provisions of this Code or existing
4. Such other provisions with respect to the proposed merger or laws, it shall set a hearing to give the corporations concerned the
consolidation as are deemed necessary or desirable.
opportunity to be heard. Written notice of the date, time and place of
hearing shall be given to each constituent corporation at least two (2)
Sec. 77. Stockholder's or member's approval. - Upon approval weeks before said hearing. The Commission shall thereafter proceed
by majority vote of each of the board of directors or trustees of the as provided in this Code.
constituent corporations of the plan of merger or consolidation, the
same shall be submitted for approval by the stockholders or members Sec. 80. Effects of merger or consolidation. - The merger or
of each of such corporations at separate corporate meetings duly consolidation shall have the following effects:
called for the purpose. Notice of such meetings shall be given to all
stockholders or members of the respective corporations, at least two 1. The constituent corporations shall become a single corporation
(2) weeks prior to the date of the meeting, either personally or by which, in case of merger, shall be the surviving corporation
registered mail. Said notice shall state the purpose of the meeting designated in the plan of merger; and, in case of consolidation, shall
and shall include a copy or a summary of the plan of merger or be the consolidated corporation designated in the plan of
consolidation. The affirmative vote of stockholders representing at consolidation;
least two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least two-thirds 2. The separate existence of the constituent corporations shall cease,
(2/3) of the members in the case of non-stock corporations shall be except that of the surviving or the consolidated corporation;
necessary for the approval of such plan. Any dissenting stockholder in
stock corporations may exercise his appraisal right in accordance with 3. The surviving or the consolidated corporation shall possess all the
the Code: Provided, That if after the approval by the stockholders of rights, privileges, immunities and powers and shall be subject to all
such plan, the board of directors decides to abandon the plan, the the duties and liabilities of a corporation organized under this Code;
appraisal right shall be extinguished.
4. The surviving or the consolidated corporation shall thereupon and
Any amendment to the plan of merger or consolidation may be made, thereafter possess all the rights, privileges, immunities and franchises
provided such amendment is approved by majority vote of the of each of the constituent corporations; and all property, real or
respective boards of directors or trustees of all the constituent personal, and all receivables due on whatever account, including
corporations and ratified by the affirmative vote of stockholders subscriptions to shares and other choses in action, and all and every
representing at least two-thirds (2/3) of the outstanding capital stock other interest of, or belonging to, or due to each constituent
or of two-thirds (2/3) of the members of each of the constituent corporation, shall be deemed transferred to and vested in such
corporations. Such plan, together with any amendment, shall be surviving or consolidated corporation without further act or deed; and
considered as the agreement of merger or consolidation.
5. The surviving or consolidated corporation shall be responsible and
Sec. 78. Articles of merger or consolidation. - After the approval liable for all the liabilities and obligations of each of the constituent
by the stockholders or members as required by the preceding section, corporations in the same manner as if such surviving or consolidated
articles of merger or articles of consolidation shall be executed by corporation had itself incurred such liabilities or obligations; and any
each of the constituent corporations, to be signed by the president or pending claim, action or proceeding brought by or against any of such
vice-president and certified by the secretary or assistant secretary of constituent corporations may be prosecuted by or against the
each corporation setting forth:
surviving or consolidated corporation. The rights of creditors or liens
upon the property of any of such constituent corporations shall not be
1. The plan of the merger or the plan of consolidation;
impaired by such merger or consolidation.
2. As to stock corporations, the number of shares outstanding, or in REASON FOR REORGANIZATION: The reasons inducing a
reorganization are not in every case the same, but for the most
the case of non-stock corporations, the number of members; and
part, they are to be found in the weak financial or insolvent
condition of the particular corporations. The aim of corporate
3. As to each corporation, the number of shares or members voting
reorganization or combination is generally to put the company
for and against such plan, respectively.
upon a sound financial basis and to enable it to take care of its
obligations thereby avoiding liquidation or bankruptcy. But in
Sec. 79. Effectivity of merger or consolidation. - The articles of some cases, a reorganization is effected notwithstanding the fact
merger or of consolidation, signed and certified as herein above that the corporation is solvent.
required, shall be submitted to the Securities and Exchange
Commission in quadruplicate for its approval: Provided, That in the ILLEGAL COMBINATIONS: While a merger or consolidation is a
case of merger or consolidation of banks or banking institutions, right, granted by law, to corporations registered under the Code,
Act 3518 proscribes illegal combination. It provides, under Sec. 20
building and loan associations, trust companies, insurance
thereof that no corporation engaged in commerce may acquire,
companies, public utilities, educational institutions and other special directly or indirectly, the whole or any part of the stock or other
corporations
governed
by
special
laws,
the
favorable share capital of another corporation or corporations engaged in
recommendation of the appropriate government agency shall first be commerce, where the effect of such acquisitions may be to
obtained. If the Commission is satisfied that the merger or substantially lessen competition between the corporation or
consolidation of the corporations concerned is not inconsistent with corporations whose stock is so acquired and the corporation
the provisions of this Code and existing laws, it shall issue a making the acquisition, or between any of them, or to restrain
such commerce in any section community, or ten to create a
certificate of merger or of consolidation, at which time the merger or
monopoly of any line of commerce. Corollary to this is Art. 186 of
consolidation shall be effective.
the Revised Penal Code which imposes a penalty of imprisonment

106

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
THE CORPORATION CODE OF THE PHILIPPINES (Batas Pambansa Bilang 68, as amended) based on the book of Atty Ruben C. Ladia

and/or fine on any person who enters into a contract or conspiracy


to create monopolies and combinations in restraint of trade.
MERGER: is a union effected by absorbing one or more existing
corporations by another which survives and continues the
combined business. It is the uniting of two or more corporations
by the transfer of property to one of them which continue in
existence, the other or the others being dissolved and merged
therein.
Example: It was agreed that B Company will take over and acquire
all the business, assets, properties, rights and liabilities of C
Corporation and by virtue of which B will absorb C which is to be
dissolved.
CONSOLIDATION: is the uniting or amalgamation of two or more
existing corporations to form a new corporation. It signifies a
union as necessarily results in the creation of a new corporation
and the termination of existence of old ones. The united concern
resulting from such union is called consolidated corporation.
Thus, in the example given, if B and C agreed to form a new
corporation, A Company, which will absorb both business, and all
of Bs and Cs assets, properties, rights and liabilities are
transferred to A which will continue their combined business while
B and C will be dissolved, a consolidation takes place.
In effect, in a consolidation, the constituent corporations are all
dissolved, while in a merger, the absorbing or surviving
corporation is not, only the absorbed.
REQUIREMENTS
AND
PROCEDURE
TO
ACCOMPLISH
MERGER OR CONSOLIDATION:
1. The BOD/T of each constituent corporations shall approve a
plan or merger or consolidation setting for the matters
required in Sec. 76;
2. Approval of the plan by the stockholders representing 2/3
outstanding capital stock or 2/3 of the member in non-stock
corporations of each of such corporations at separate
corporate meetings called for the purpose;
3. Prior notice of such meeting, with a copy or summary of the
plan of merger or consolidation shall be given to all
stockholders or members at least 2 weeks prior to the
scheduled meeting, either personally or by registered mail
stating the purpose thereof;
4. Execution of the articles of merger or consolidation by each
constituent corporations to be signed by the president or
vice-president and certified by the corporate secretary or
assistant secretary setting forth the matters required in Sec.
78;
5. Submission of the articles of merger or consolidation in
quadruplicate to the SEC subject to the requirement of Sec.
79 that if it involve corporations under direct supervision of
any other government agency or governed by special laws
the favorable recommendation of the government agency
concerned shall first be secured; and
6. Issuance of the certificate of merger or consolidation by the
SEC at which time the merger or consolidation shall be
effective. If the plan, however, is believed to be contrary to
law, the SEC shall set a hearing to give the corporations
concerned an opportunity to be heard upon notice and
thereafter, the Commission shall proceed as provided in the
Code.
EFFECTS OF MERGER OR CONSOLIDATION:
1. There will only be a single corporation. In case of merger, the
surviving corporation or the consolidate corporation in case of
consolidation;
2. The termination of corporate existence of the constituent
corporations, except that of the surviving corporation or the
consolidated corporation;
3. The surviving corporation or the consolidated corporation will
possess all the rights, privileges, immunities and powers and
shall be subject to all the duties and liabilities of a corporation
organized under the Code;

107

4.

5.

The surviving or consolidated corporation shall possess all the


rights, privileges, immunities and franchises of the
constituent corporations, and all property and all receivables
due, incl