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THE CORPORATION CODE OF THE PHILIPPINES

CHAPTER 1: INTRODUCTION

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;

KINDS OF BUSINESS ORGANIZATION


1.

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

DISADVANTAGES
Unlimited personal liability of the
proprietor

Capital is limited by the proprietors


personal resources

2.

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)

3.

JOINT VENTURE a one-time grouping of two or more persons,


natural or juridical, in a specified undertaking.

PARTNERSHIP
Has a personality separate and
distinct from the partners
Has for its object a general business
of particular kind, although there
may be partnership for a single
transaction
Corporations, generally are not
allowed to enter into partnerships*

JOINT VENTURE
Does not acquire a separate and
distinct
personality
from
the
venturers
Object is an undertaking of a
particular or single transaction
Corporations
ventures

may

enter

joint

*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.

2.

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;

4.

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.

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 instructerd to go to
Manila to follow up on the Banks plan of payment of rediscounting
obligations with Central Banks main office, where he purchased a round trip
ticket and phone his sister to send him P1,000 for his pocket money which
LBC failed to deliver and eventually Carloto was not able to submit the
rediscounting documents and the Bank was made to pay the Central Bank
P32,000 s penalty interest and alleged that he suffered embarrassment and
humiliation. Respondent Rural Bank was later on joined as one of the plaintiff
and prayed for the reimbursement of P32,000. Carloto and the Bank was
awarded moral and exemplary damages of P10,000 and P5,000, respectively.
ISSUE: WON Rural Bank of Labason, Inc. being an artificial person should be
awarded moral damages?
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
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

2.
3.
4.

DEFINITION

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 incident to its existence.
B.

ATTRIBUTES (CARP)

1.

CREATED BY OPERATION OF LAW the formal requirement of the


States consent through compliance with the requirements imposed by

5.
6.

7.

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

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.
D.
1.
2.
3.
4.
5.
6.
7.
8.

E.

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;
Doubt 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.
CORPORATION VS. PARTNERSHIP

CORPORATION
Created by operation of law (Sec.
2&4, Corp Code)
There must be at least 5
incorporations (Sec. 10), except
corporation
sole
which
is
incorporated by one single 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)
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 non-existent 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.

PARTNERSHIP
Created by mere agreement of the
parties (Art. 1767, Civil Code)
Maybe formed by two or more
natural persons (Art. 1767)

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 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)

F.

GOVERNMENT POWERS IN RELATION TO CORPORATIONS

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. Corporations which have
capital stock divided into shares and are authorized to distribute to the
holders of such shares dividends or allotments of the surplus profits on the
basis of the shares held are stock corporations. All other corporations are
non-stock corporations.
REQUISITES TO BE CLASSIFIED STOCK CORPORATIONS:
1. They have a capital stock dividend into shares; and
2. That they are authorized to distribute dividends or allotments as surplus
profits to its stockholders on the basis of the shares held by each of
them.
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 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

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

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 CREATED BY SPECIAL LAW OR CHARTER

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.
Among these corporations created by special law are the 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 controlled, operating under a special law or charter such that
registration with the SEC is not required for them to acquire legal and
juridical personality. They owe their own existence as such not by virtue of
their compliance with the requirements of registration under the Corporation
Code but by virtue of the law specially creating them.
They are primarily governed by the special 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 government private
corporations (PNB vs. Pabolar 82 SCRA 595)
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 Corporaiton 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.
It is to be observed, however, that the mere fact that the 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 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 are held by the government does not make it a public
corporation.
The TRUE TEST to determine the nature of a corporation is found in the
relation of the body to the State. Strictly speaking, a public corporation is
one that is created, formed or organized for political or governmental
purposes with political powers to be exercised for purposes connected with
the public good in the administration of the civil government.
The GOCCs are regarded as private corporations
misconceptions.

despite common

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 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.

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

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

denominations, sects or churches.


4.

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.
5.

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.
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 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 colorabe compliance with the requirements of
the law under which they might be lawfully incorporated for the purpoes 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.
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.
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.
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.
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.
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.

CONTENTS OF THE ARTICLES OF INCORPORATION


Contents of the articles of incorporation. - All corporations organized

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 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 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 he 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.

FORMS OF ARTICLES OF INCORPORATION (Sec. 15)


a.

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.
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 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.
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.
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.

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 religious corporation.

b.

CORPORATE NAME

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

4.
5.
6.

7.

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).
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.

The name of the corporation is essential to its existence since it is through it

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

8.
9.
10.

11.
12.
13.

14.

15.

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 can not 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 undertaking is already included as one of the provisions of
the articles of incorporation or partnership of the registrant.

(http://www.disini.ph/res_sec__mc142000.html)
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 a 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?
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 order UMC to
drop its name because there was a 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." Unheaded, 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

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 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 deicison 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 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 (1 Thompson, p. 80 citing Munn v. Americana Co., 82 N. Eq. 63,
88 Atl. 30; San Francisco Oyster House v. Mihich, 75 Wash. 274, 134 Pac.

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

921). 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, 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 (Ohio Nat. Life Ins. Co. v. Ohio Life Ins. Co.,
210 NE 2d 298). 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.

single word, that is, "STANDARD", different from that of Petitioners inasmuch
as the inclusion of the term "Corporation" or "Corp." merely serves the
Purpose of distinguishing the corporation from partnerships and other
business organizations.
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).
c.

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

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).

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.

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. 16-19, 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).

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.

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

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 in connection with hotel or innkeeping 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

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

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 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
RESIDENCE
............................. ............................
............................. ............................
............................. ............................
............................. ............................
............................. ............................
xxx

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 as originally forming and composing the
corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members.

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.
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 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,

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

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.

DIRECTORS/TRUSTEES

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:
NAME
.....................
.....................
.....................
.....................
.....................

NATIONALITY
RESIDENCE
............................. ............................
............................. ............................
............................. ............................
............................. ............................
............................. ............................
xxx

DIRECTORS is the governing board in stock corporations. TRUSTEES refer


to non-stock corporations.

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


corporation. EXCEPTIONS:
1. Educational corporations registered as non-stock corporations whose
number of trustees, though not less than 5 and not more than 15 should be
divisible by 5.
2. In close corporations where all stockholders are considered as members of
the board of directors (Sec. 97) thereby effectively allowing 20 members in
the board.
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.

QUALIFICATIONS OF DIRECTORS/TRUSTEES:

1. Must own at least 1 share in their own names or a member (in the case of
trustees);
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.
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

10

election or appointment;
3. Such other disqualifications that may be provided in the by-laws.
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
irectors of SMC. This was denied by the SEC.
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 bylaws 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.

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):
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.
EIGHTH: That at least twenty five (25%) per cent of the authorized
capital stock above stated has been subscribed as follows:
Name of Subscriber Nationality No of Shares Amount
Subscribed
........................
.............. ................ ...........................
........................
.............. ................ ...........................

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

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

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

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

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.

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.

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:
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 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.
Shares of stock shall not be issued in exchange for promissory notes or
future service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.

11

The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred
upon it by the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.

SHARES OF STOCKS AND THEIR CLASSIFICATIONS


SHARES OF STOCK designate the units into which the proprietary interest
in a corporation is divided. They represent the proportionate integers or
units, the sum of which constitutes the capital stock of the corporation. It is
likewise the interest or right which the owner, called the stockholders or
shareholder, has in the management of the corporation, and in the surplus
profits and in case of distribution, in all of its assets remaining after the
payment of its debts.

CERTIFICATE OF STOCK is a document or instrument evidencing the


interest of a stockholder in the corporation.

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.
Shares of capital stock issued without par value shall be deemed fully paid
and non-assessable and the holder of such shares shall not be 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 insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other
share.
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
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

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

accordance with this Code; and


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

PURPOSE OF CLASSIFICATION:

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.

PREFERRED STOCKS is a stock that gives the holder preference over the

holder of common stocks with respect to the payment of 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.
a. PREFERENCE AS TO DIVIDENDS
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


If the preferred shares is 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.

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 pas 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

12

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

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.

c. Preference Upon Liquidation

Such preference must also be stated in the contract, accordingly giving tem
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.

PAR AND NON-PAR VALUE 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.

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).

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, non-assessable;
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 nonassessable.

VOTING AND NON-VOTING SHARES


Voting shares as the name suggests, gives the holder thereof the right 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

vote and participate in the management of the corporation, through the


election of the BOD, or in any matter requiring stockholders approval.
However, voting shares may practically be denied the right to vote where
there exist founders shares.

Non-voting shares do not grant the holder thereof, a voice in the election of
directors and some other matter requiring stockholders vote.

Only preferred and redeemable shares may be denied the right to 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.

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.
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 wil 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.

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.

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.

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

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. 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

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 paidup capital be less than five Thousand (P5,000.00) pesos

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.

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.

Such repurchase may also be made regardless if there are unrestricted


retained earnings. (see Power to Acquire Own Shares)

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.

provided in the subscription contract, which are usually attached to preferred


shares and other debt securities like bonds.

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

13

CAPITAL REQUIREMENTS

There are instances were 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 Companies where he 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

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

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 bylaws, 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.

(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.......
Doc. No...............;
Page No...............;
Book No..............;
Series of 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.
l.

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

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.
(Names and signatures of the incorporators)
xxx
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.
m. TREASURERS AFFIDAVIT
TREASURER'S AFFIDAVIT

xxx

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:
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.
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, 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.

REPUBLIC OF THE PHILIPPINES )


CITY/MUNICIPALITY OF ) S.S.
PROVINCE OF )

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.

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

3.

14

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

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

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 it into being have any power to bind it by contract,
unless so authorized by the charter, there is no corporation, nr 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

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.
1.

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

15

b.
c.
d.

created as a de jure corporation (or according to some, an apparently


valid statute);
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;
A user of corporate powers, the transaction of business in some way as
if it were a corporation;
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 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

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 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. UNnless 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.
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 Antontio 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

16

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 privte 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?
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.
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
non-existent has no personality and would be incompetent to act on
its behalf; thus, those who act or purport to act as its

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

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 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.
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.

17

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.
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.
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.
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.
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.
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 f
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).

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 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 Prodcuts Co., Inc.

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

into a contract and transact business with a third party, tha 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.

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.

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.
4.

ORGANIZATION AND COMMENCEMENT OF BUSINESS

a.

CORPORATE ORGANIZATION

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 pre-incorporation subscriptions,
establishing the principal office and such other steps necessary to
transact the legitimate business for which the corporation was formed.

18

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.
2.
3.

Between the corporation and the state insofar as it concerns its primary
franchise to be and act as a corporation
Between the corporation and the stockholders or members insofar as it
governs their respective rights and obligations;
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

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.
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.
SULO NG BAYAN, INC., plaintiff-appellant VS. GREGORIO ARANETA,
INC. ET AL., defendant-appelle (72 SCRA 347; Aug. 17, 1976) Plaintiffappellant Sulo ng Bayan, Inc. instituted a reinvindicatory action for the
recovery of 28,000 square meters of land for and in behalf of it 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.

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

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 it stockholders unless
transferred to the corporation, even in the case of a one-man corporation.
Absent any showing of interest, therefore, a corporation, like plaintiffappellant 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.
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.
The most that can be said is that they benefited from the services, but that
surely is no justification t 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 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 conract 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 devliveries and later on filed a complaint for contractual breach
which was dimissed. 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?

19

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, 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

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

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
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 tht 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

20

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 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 borned 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-in-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

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 hae 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 fo 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 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

21

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 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 Jackbiltis 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

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 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 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
officialy, 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.

22

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 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-the-liability
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 employeremployee), the same should be pierced.
After finding that Lawman Industrial Corporation had transferred business

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Arellano University School of Law 2011-0303
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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 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 pyment of it financial obligations is
the organization of a run-away corporation, ROSARIO Industrial
Corpoartion, 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

23

the
1.
2.
3.
4.

doctrine of piercing the veil of corporate veil, to wit:


Stock ownership by one or common ownership of both corporations;
Identity of directors and officers;
The manner of keeping corporate books and records;
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:
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 orporaiton.
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

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
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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 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.

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 sould 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


1.

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 American
citizens organized the Tiaong Milling and Plantation Company and in the

24

WHEN PIERCING THE CORPORATE FICTION IS NOT JUSTIFIED

2.

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;
d. Defend crime;
e. Confuse legitimate issues;
f.
Circumvent the law;
g. Perpetuate deception; or
h. 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.

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
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3.

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 pretrial.
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 issed 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 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 he obligation of a stockholder or a corporation

25

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 was 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.
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.

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. 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.
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 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 ofhte
stock of anoher 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

26

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 alter-ego 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.
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 upto 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?

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: 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.

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

Such a stance is not supported by the facts. The name of the company

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: non-voting 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.

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, equiment 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, TDI is now herein a
party respondent represented by its own counsel.
The fiction of separate and distinct corporate entites cannot, in the instant
case, be disregarded and brushed aside, there being not the lease
indication that the second corporation was a dummy or servces 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

27

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.
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:
(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

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

his subscription in cash or property, or the amount of capital stock or number


of shares of no-par stock allotted to each stock-holder if such increase is for
the 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.
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 twenty-five (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.
GROUNDS FOR DISAPPROVAL OF AMENDMENT
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:
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

28

laws or the Constitution.


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, 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, defendantsappellees (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 co-maker
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
corporation in this respect designates the corporation in the same manner as
the name of an individual designates the person. Since an individual has

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 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)

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.

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.
5. 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)

29

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
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

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

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 OF POWERS OF CORPORATE AGENTS/OFFICERS
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 poers 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, defendantsappellants

(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.
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.

30

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
exericsed, 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
rahter 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 was 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
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 upto March 1929, sought to recover 1%
(to each plaintiff) of the profits of the copany 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.

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 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 takin 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, 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,

31

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.
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 accountantcashier, 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

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 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 election may
be held by ballot otherwise viva-voce would suffice.
3. 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.

Sec. 25. Corporate officers, quorum


xxx
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a greater majority, a
majority of the number of directors or trustees as fixed in the articles of
incorporation shall constitute a quorum for the transaction of corporate
business, and every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as a corporate
act, except for the election of officers which shall require the vote of a
majority of all the members of the board.
QUORUM: requirement for a valid board meeting is the majority of the
number of the board fixed in the AOI, and a decision of at least a majority of
the directors/trustees present in a meeting at which there is a quorum shall
be a valid corporate act, except:
1. Election of officers, which shall require the majority of all the members
of the board; and
2. Unless the AOI or the by-laws provide for a greater quorum/voting
requirement.
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 impliedlly.
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 the letter-offer sent by Malagna binds the corporation?
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, by-law 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 transactiosn 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, but limited delegated authority. Neither can it be
logically claimed that any power greater than that expressly conferred is
inherent in Mr. Maglanas position as president and chairman of the
corporation.

VALIDITY AND BINDING EFFECT OF ACTIONS OF CORPORATE


OFFICERS

32

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

Although there is authority "that if the president is given general control and
supervision over the affairs of the corporation, it will be presumed that he
has authority to make contract and do acts within the course of its ordinary
business," We find such inapplicable in this case. We note that the private
corporation has a general manager who, under its By-Laws has, inter
alia, the following powers: "(a) to have the active and direct management of
the business and operation of the corporation, conducting the same
accordingly to the order, directives or resolutions of the Board of Directors or
of the president." It goes without saying then that Mr. Maglana did not have
a direct and active and in the management of the business and operations of
the corporation.
Petitioner's last refuge then is his alternative proposition, namely, that private
respondent had clothed Mr. Maglana with the apparent power to act for it
and had caused persons dealing with 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 Lopez-Gonzales, 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.

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.
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.

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 thir installment. For some reason, said voucher was cancelled by
petitioner Asuncion.

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.

A complaint was filed before the labor arbiter who decided in favor of private
respondents.

ISSUE: WON Chen had the power to bind the corporation under a contract
of that character?

ISSUE: WON the gratuity pay should be paid?

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

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

33

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

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 th conduct of such
business. But the contracts of employment must be reasonable.
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 sent by the Andal binds the corporation?
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 baord of the impending losses on the contracts already entered
into, but no action was taken. But later on, the contracts were unanimously
approved by the Board.

34

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 the contracts executed by Kalaw binds the corporation?
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 corpra (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 bylaws 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
Fracisco 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.
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,

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

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.

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.

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.

1.

VACANCY:

2.

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.

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 nonstock 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 casues 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.
REQUIREMENTS FOR A VALID REMOVAL:
1. The removal should take place at a general or special meeting duly call
for that purpose;
2. 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
3. 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

35

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;
If it occurs NOT by removal, Sec. 29 applies.

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 either resulting from (1) expiration of term; or (2) other
causes other than 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, Respondend

(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.
On September 1, 1998, Dinglasan resigned, BOD still constituting a
quorom 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

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

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
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.

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 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.
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.
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 t be per diems and
transportation expenses, representation expenses and cummutable
discretionary funds.

CHANGE IN CONSTITUTION OF THE BOARD: must be reported by the


BOD to the SEC:

ISSUE: WON the BOD had the power to appropriate funds for the expenses
claimed by respondent?

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

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

PURPOSE: to give public information, under sanction of oath responsible

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

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 affidavitcomplaint 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 aspect being denied, petitioners filed this petition.
ISSUE: WON the resolution granting compensation to OFFICERS of the
corporation is valid?
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.
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 declared 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
fixed 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

37

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 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.
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
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;
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.

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 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 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:
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
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)

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 Lbor 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
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-

38

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.
F.

THREE-FOLD DUTY OF DIRECTORS

Directors owe a three-fold duty to the corporation: (1) Obedience; (2)


Diligence and (3) Loyalty.
Sec. 31. Liability of directors, trustees or officers. - Directors or
trustees who willfully and knowingly vote for or assent to patently unlawful
acts of the corporation or who are guilty of gross negligence 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 damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.
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 behalf, he shall be liable as a
trustee for the corporation and must account for the profits which otherwise
would have accrued to the 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 have been sugar planter adhered to defendat-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 one-third 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 claim, and defended by urging

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

that the stipulations contained in the resolution were made without


consideration; that the resolution in question was, therefore, null and void ab
initio, being 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
defendant, thus the present appeal.
ISSUE: WON the resolutions passed by the bard are valid and binding?
HELD: Yes. There can be no doubt that the directors of the appellee
company had authority to modify the proposed terms of the Amended Milling
Contract for the purpose of making its terms more acceptable to the other
contracting parties.
As the resolution in question was passed in good faith by the board
of directors, it is valid and binding, and whether or not it will cause
losses or decrease the profits of the central, the court has no
authority to review them.
They hold such office charged with the duty to act for the corporation
according to their best 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 onethird 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.

LIABILITY OF DIRECTORS FOR ACTS OF THEIR CO-DIRECTORS:

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 co-directors, 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

39

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.

2.

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.
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.

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 P90M, 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?

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. 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.

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 was 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.

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.

ISSUE: WON the dealership agreement entered into by Te with his own
corporation is valid and binding?

G.

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.

SELF-DEALING DIRECTORS

The self-dealing director is one who deals or transacts business with his own
corporation.
Sec. 32. Dealings of directors, trustees or officers with the
corporation. - A contract of the corporation with one or more of its directors
or trustees or officers is voidable, at the option of such 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 nor 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

40

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


stockholder; he was a member of the Board of Directors and Auditor of the
corporation as well. He was what is often referred to as a "self-dealing"
director.

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)

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 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, defendant-appellants

(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 subject-matter 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 t a ratification
by the principal may validate the sale

41

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 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;

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.

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
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 1899-1902.
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 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

42

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 can not see how, if it be true that the
bank is a quasi-public 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
company without interference from the above-named creditors.
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.
Thereafter, defendants incorporated Philippine Motors Corporation where all
the assets and goodwill of the Company were transferred by the Bank.
ISSUE: WON the plaintiffs have the legal capacity to bring an action?
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

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Arellano University School of Law 2011-0303
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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 inflated appraised value of real estate properties,
in connivance with other officials.
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.
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 court below erred in dismissing the complaint?
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

43

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 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?

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. 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 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;

44

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 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,

Cesar Nickolai F. Soriano Jr.


Arellano University School of Law 2011-0303
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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 lsst 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 paralyzation 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
inrterests 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 imporations 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 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.

45

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 RAMABORROMEO, 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 prelimiary injunction was filed by herein respondents as


purchasers of 1,328 shares of stock of Inocented 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 vicepresident (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 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

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

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.
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.

2.

3.

4.

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.
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 party-plaintiff 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

46

5.

J.

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.
EXECUTIVE COMMITTEE

Sec. 35. Executive committee. - The by-laws of a corporation may create


an executive committee, composed of not less than three members of the
board, to be appointed by the board. Said committee may act, by majority
vote of all its members, on such specific matters within the competence of
the board, as may be delegated to it in the 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 bylaws; (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

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

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 provided under Sec.
36 and 44 of the Corporation Code and those which may be necessary or
incidental to tis existence.
In short, corporate authority may be classified as:
1. Express powers those expressly granted by law inclusive of the
corporate charter or AOI;
2. Implied Powers those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers; and
3. 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:


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, corporate secretary,
treasurer, or in-house counsel.
Service of summons upon persons other than those named under than those
named in the above provision is without force and effect.
DELTA MOTOR SALES CORPORATION, petitioner,
vs.
HON. JUDGE IGNACIO MANGOSING, Branch XXIV, Court of First
Instance of Manila, THE CITY SHERIFF OF MANILA, and JOSE LUIS
PAMINTUAN, respondents

(GR No. L-41667; April 30, 1976)

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.
ISSUE: WON there was proper service of summons?
HELD: No. Rule 14 of the Revised Rules of Court provides:
SEC. 13. Service upoin 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 whon service is

47

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
of summons on the secretary's wife did not confer jurisdiction over the
corporation in the foreclosure proceeding against it. Hence, the the decree of
forclosure 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).
In the instant case the Manila court did not acquire jurisdiction over Delta
Motor because it was not properly served with summons. The service of
summons on Dionisia G. Miranda, who is not among the persons mentioned
in section 13 of Rule 14, was insufficient. It did not bind the Delta Motor.
Courts acquire jurisdiction over the person of a party defendant and of the
subject-matter of the action by vertue of the service of summons in the
manner required by law. Where there is no service of summons or a
voluntary general appearance by the defendant, the court acquires no
jurisdiction to pronounce a judgment in the cause. (Syllabi Salmon and Pacific
Commercial Co. vs. Tan Cueco, 36 Phil. 556).
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)

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.
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.
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.
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

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

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.

greater function than to impart prima facie evidence of the due execution by
the corporation of a written document or obligation.

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 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.

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:

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 Consitution.
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:

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." . . . .

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 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. . .

The first limitation practically sets the limit of the corporate 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.

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.
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 AMEND ITS ARTICLES OF INCORPORATION

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. . . .

. . (emphasis supplied).

B.

D.

POWER TO ADOPT AND USE A COMMON SEAL

This right has be expressly granted by law. However, it is not mandatory but
merely permissive. This is because the corporate seal performs no further or

48

Sec. 36. Xxx

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 grnted 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
Placido 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.

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

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 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 an 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.
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.
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

49

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.
THE HONORABLE COURT OF APPEALS and IGLESIA NI CRISTO,
respondents

(GR No. L56613; March 14, 1988)

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.
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. Castro-Bartolome 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 predecessorsin-interest have been in open, continuous, exclusive and notorious possession

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 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 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.

ISSUE: WON the subject resolution is within the powers of the company to
adopt?

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.

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.

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 aactivity.
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.

50

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 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.

IMPLIED POWERS
Sec. 36. Xxx
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
It is a question, in each case, of the logical relation of the act to the
corporate purpose expressed in the charter. For if the act is one
which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a substantial and not
in a remote and fanciful sense, it may be fairly considered within
the corporations charter powers (Montelibano vs. Bacolod-Murcia Milling

Co., Inc. as cited in NPC vs. VERA)


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

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

cement.
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)
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 questioned and the
corporate purpose expressed in the NPC charter. For if the act is one
which is lawful in itself and not otherwise prohibited, and is done
for the purpose of serving corporate ends, and reasonably
contributes to the promotion of those ends in a substantial and not
in a remote and fanciful sense, it may be fairly considered within
the corporations charter powers (Montelibano vs. Bacolod-Murcia Milling

Co., Inc.)

In the instant case, it is an undisputed fact that the pier owned by NPC,
receives various shipment of coal which is used exclusively to fuel the
Batangas Coal-Fired Thermal Power Plant of the NPC for the generation of
electric power. The stevedoring services which involve the unloading of the
coal shipments into the NPC pier for its eventual conveyance to the power
plant are incidental and 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 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.

51

J.

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.
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:
(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

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 shares of no-par 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.
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 twenty-five (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 place of residence, either by mail or
personal service;
4. A certificaate 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;
5. 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;
6. In case of decrease of capital stock, the same must not prejudice the
right of the creditors;
7. Filing of the certificate of increase and amended AOI with the SEC; and
8. Approval thereof by the SEC.

METHODS OF INCREASING CAPITAL STOCK:


1.
2.
3.

Increase the par value of the existing number of shares without


increasing the number of shares;
Increase the number of existing shares without increasing the par value
thereof;
Increasing the number of shares and at the same time increasing the
par value of the shares

REASONS/PURPOSE FOR THE INCREASE:


1.

Expansion;

52

2.
3.

Payment of Debt Obligations;


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.
2.
3.

To reduce or wipe out existing deficit where no creditors would thereby


by affected;
When the capital is more than what is necessary to procreate the
business or reduction of capital surplus;
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 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

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

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 pre-emptive right shall not
extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be
issued in good faith with the approval of the stockholders representing twothirds (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 proportionate voting
strength and control, that is, the existing ratio of their property interest and
voting power in the corporation.

EXCEPTIONS (Under Sec. 39):


1.
2.

When shares to be issued is in compliance with laws requiring stock


offerings or minimum stock ownership by the public; or
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.

The exceptions will not apply to stockholders of close corporation whose preemptive 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.
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.
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.
SEC Ruling: Benito is not entitled to pre-emptive right with respect to the

53

original unsubscribed shares, but can exercise such right with regards the
increase capitalization.
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 bard 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 pre-emptive 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 increased capital stock proportionate
to his present shareholdings.
M.

POWER TO SELL OR DISPOSE OF ASSETS

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 two-thirds (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.
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.
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.
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

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

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:
1. 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;
2. 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 third-party 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

54

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 appelant 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 Insular Farms, or
is liable for its debts.
Generally where on corporation sells or otherwise transfers all o 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

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

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
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.
2.
3.
4.
5.

Resolution by a majority of the BOD/T;


Ratification by the stockholders representing 2/3 of the outstanding
capital stock (or 2/3 of members);
The ratification must be made at a meeting duly called for that purpose;
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
Any dissenting stockholder shall have the option to exercise his appraisal
right.

55

RATIFICATION: as a requirement, applies only to investments that are

beyond the corporations primary purpose, or outside the 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 fo 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.
ISSUE: WON respondent SEC committed grave abuse of discretion in
allowing the above agenda to be taken up in the stockholders meeting?

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. 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 19701971 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

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

56

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.
2.
3.

Cash dividends payable in lawful money or currency;


Property dividends - those paid in the form property (e.g., bonds, notes,
shares in another corporation);
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 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

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 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, defendant-appellee

(GR No. L-21601; Dec. 28, 1968)

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 consideration 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.
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.

57

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 (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.
2.
3.
4.

5.

Resolution of the BOD;


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;
The approval of the stockholders or members must be made at the
meeting called for that purpose; and
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;
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 f the members of the BOD of the managing corporation
also constitute a majority of the directors of the managed
corporation;

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

c.

R.

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.

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 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.
3. 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 non-performance; 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

58

which it was organized among them, (1) to invest and deal with the money
of the company not immediately required, in such manner as fro 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 reaons 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 ona par with the instances above-mentioned, but this
argument overlooks one consideration: the gratuity here given was not
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.
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.
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.

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 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 authoriezd 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 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.
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.
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 untra 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 chargin fees therefore.
ISSUE: WON the SEC erred in issuing the questioned order?

59

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 have absolutely no relation to the avowed
purpose of the association to work for the redemption of war notes.
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 vicepresident 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.
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.

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

Notwithstanding the provisions of the preceding paragraph, by-laws 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 by-laws are
not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the bylaws 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 suspenion or revocation of corporate franchise.
THIRD PERSONS: are generally not bound, affected or prejudiced the bylaws, 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:
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 nonstock corporation, at a regular or special meeting duly called for the purpose,
may amend or repeal any by-laws or adopt new by-laws. The owners of twothirds (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

60

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 non-adoption
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 "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?

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

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 by-laws 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:
In the absence of charter or statutory provisions to the contrary, bylaws 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

61

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.
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)

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

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, secretary-treasurer 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 bylaws?
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.
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

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, 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.

alien them which attaches to the ownership of any other species of

62

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 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.
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 bylaws, 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
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

63

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 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

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

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 respondent
San Miguel Corporation could, as a measure of self- protection, 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
self-government 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 bylaws and not forbidden by law." To this extent, therefore, the stockholder

64

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 bylaws. 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 by-law 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.
Sec. 49. Kinds of meetings. - Meetings of directors, trustees, stockholders,
or members may be regular or special.
A.

STOCKHOLDERS MEETING

Sec. 50. Regular and special meetings of stockholders or members. Regular meetings of stockholders or members shall be held annually on a
date fixed in the by-laws, or if not so fixed, on any date in April of every year
as determined by the board of directors or trustees: Provided, That written
notice of regular meetings shall be sent to all stockholders or members of
record at least two (2) weeks prior to the meeting, unless a different period
is required by the by-laws.
Special meetings of stockholders or members shall be held at any time
deemed necessary or as provided in the by-laws: Provided, however, That at
least one (1) week written notice shall be sent to all stockholders or
members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any
stockholder or member.
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 issue an order to the
petitioning stockholder or member directing him to call a meeting of the
corporation by giving proper notice required by this Code or by the by-laws.
The petitioning stockholder or member shall preside thereat until at least a
majority of the stockholders or members present have been chosen one of
their number as presiding officer.
The stockholders have no power to act as or for the corporation except at a
corporate meeting called and conducted according to law. This rule arises
from the need to protect the stockholder by providing them with notice of
meeting and giving them opportunity to attend the meeting, discuss the
issues and vote (an exception would be an ordinary amendment where
written asset is acceptable).
DATE OF REGULAR MEETING: The date so fixed in the by-laws, if not
fixed, on any date of April of very year as the BOD/T may determine. April,
because this is the time the Audited Financial Statements are already
available.
DATE OF SPECIAL MEETING: At any time deemed necessary or as
provided for in the by-laws.
REQUIREMENTS FOR A VALID STOCKHOLDERS MEETING:

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.

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

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.

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.

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.

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.

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)

The Notice must contain the agenda or business matter/s that may be
taken up before the meeting otherwise it may become voidable at the
instance of any objecting stockholder or member.

4.

THE BOARD OF DIRECTORS AND ELECTION COMMITTEE OF THE


SMB WORKERS SAVINGS AND LOAN ASSOCIATION, INC., ET AL.,
petitioners,
vs.
HON. BIENVENIDO A. TAN, ETC., ET AL., respondents.

(GR No. L-12282; March 31, 1959)

FACTS: A meeting electing the BOD of herein petitioner was declared null
and void by the Court in a suit filed by John Castillo, et. al.
In compliance with the order, another election was scheduled on March 28 at
5:30. On March 27, the plaintiff filed an ex-parte motion alleging that the
meeting is composed of the same people that had conducted and supervised
the previously nullified meeting; that the election to be conducted did not
comply with the 5 day notice requirement required by the by-laws and the
constitution of the association, since the notice was posted and sent out only
on March 26 and the election was to be held on March 28.
ISSUE: WON the notice requirement is complied with?
HELD: No. Section 3, article III, of the constitution and by-laws the
association provides:
Notice of the time and place of holding of any annual meeting, or any
special meeting, the members, shall be given either by posting the same in
a postage prepaid envelope, addressed to each member on the record at
the address left by such member with the Secretary of the Association, or
at his known post-office address or by delivering the same person at least
(5) days before the date set for such meeting. . . . In lieu of addressing or
serving personal notices to the members, notice of the members, notice of
a regular annual meeting or of a special meeting of the members may be
given by posting copies of said notice at the different departments and
plants of the San Miguel Brewery Inc., not less than five (5) days prior to
the date of the meeting. (Annex K.)
Notice of a special meeting of the members should be given at least five days
before the date of the meeting. Therefore, the five days previous notice
required would not be complied with.
3.

therein.

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

65

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
by-laws 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

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 violated. However, where there is an officer authorized to call the meeting


and that officer refuses, fails or neglects to call a 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.
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.

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


a.
b.
c.

d.
5.

The person or persons authorized under the by-laws;


Absent any provision in the by-laws, it may be called by the
President;
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
A stockholder as empowered by the proper forum pursuant to Sec.
50

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 by-law 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.

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 presidnet.
Sec. 54. Who shall preside at meetings. - The president shall preside at
all meetings of the directors or trustee as well as of the stockholders or
members, unless the by-laws provide otherwise.
QUORUM: Unless the AOI or by-laws provide for a greater majority, a
majority of the members of the BOD/T as fixed in the AOI will constitute a
quorum for the transaction of corporate business and the decision of the
majority of those present shall be valid as a corporate act. EXCEPT: election
of corporate officers as provided under Sec. 25 which required the vote of a
majority of all the members of the board.
PROXY VOTING: is not allowed for a director or trustee, since he was
supposedly elected because of his expertise in management or his business
acumen such that he is expected to personally attend and vote on matters
brought before the meeting.
C.

STOCKHOLDERS RIGHT TO VOTE AND MANNER OF VOTING

Being a property right, a stockholder can vote his share the way he pleases
except in the following:
1. Non-voting shares are not entitled to vote except in those instances
provided in the penultimate paragraph of Sec. 6 of the Code;
2. Treasury shares have no voting rights while they remain in the treasury
(Sec. 57);
3. Shares of stock declared delinquent are not entitled to vote at any
meeting; and
4. Unregistered transferee of shares of stock.
PROXY VOTING: is allowed or through a voting trust agreement, or by the
executor, administrator, receiver or other legal representative appointed by
the court.
PLEDGED OR MORTGAGED SHARES: the pledgor or mortgagor are
entitled to vote in the absence of an agreement to the contrary:
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.
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy.
SHARES OWNED BY TWO OR MORE PERSONS JOINTLY:

REGULAR MEETINGS: those held monthly or as the by-laws may provide;


SPECIAL MEETINGS: those that are held at any time upon call of the
President or the person authorized to do so as may be provided in the bylaws.
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.

66

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.

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.

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 or by
proxy in all meetings of stockholders or members. Proxies shall be in writing,
signed by the stockholder or member and filed before the scheduled meeting
with the corporate secretary. Unless otherwise provided in the proxy, it shall
be valid only for the meeting for which it is intended. No proxy shall be valid
and effective for a period longer than five (5) years at any one time.
PROXY VOTING: is a right granted by law to all stockholders entitled to
vote in stock corporations and cannot, therefore, be denied. EXCEPT: In a
non-stock corporation with by-laws providing for a prohibition on the use of
proxies (Sec. 89).
REQUIREMENTS: In the absence of a by-law provision regulating the form
and execution of proxy, Sec. 58 requires:
1. The proxy must be in writing;
2. It is signed by the stockholder or member or his duly authorized
representative; and
3. It is filed on or before the schedule meeting with the corporate
secretary.
It is to be noted, however, that publicly listed companies are requreid to
observe and comply with SEC Memorandum Circular No. 5 -1996,
TYPES OF PROXIES:
1. General gives a general discretionary power of attorney to vote for
directors and all ordinary matters that my properly come before a
meeting. It is not an authority, however, to vote for fundamental
changes in the corporate charter or for other unusual transactions,
unless so specified;
2. Special restricts the authority to vote on specified matters only and
may direct the manner in which the vote will be cast.
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.
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 reservation to the owners or persons designated by them the power
to direct how such control shall be issued.
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.

67

The trustee or trustees shall execute and deliver to the transferors voting
trust certificates, which shall be transferable in the same manner and with
the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner as
any other corporate book or record: Provided, That both the transferor and
the trustee or trustees may exercise the right of inspection of all corporate
books and records in accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees
upon the terms and conditions stated in the voting trust agreement, and
thereupon shall be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed canceled and new certificates of stock shall
be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the 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 voting control
of the corporation
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

PROXY
Legal title to the shares remain with
the beneficial owner
Proxy votes merely as an agent
The owner of the shares may be
elected as such since legal title
thereof remains with him
Generally used to secure voting an
quorum requirements or merely for
the purpose of 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,
vs.
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of
Branch VIII of the Court of First Instance of Rizal, BATJAK INC., GRACIANO
A. GARCIA and MARCELINO CALINAWAN JR., respondents.

(G.R. No. L-34192 June 30, 1988)

PHILIPPINE NATIONAL BANK, petitioner,


vs.
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge 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

Court of First Instance of Rizal, Branch VIII and BATJAK INCORPORATED,


respondents

(G.R. No. L-34213 June 30, 1988)

FACTS: On Oct. 26, 1965, private respondent Batjak, Inc. entered into a
Voting Trust Agreement with petitioner NIDC, in order to assist the former
with its financial obligations. The VTA was for a period of 5 years constituting
60% of the outstanding paid-up and subscribed shares of Batjak. 5 years
therafter, or on Aug. 31, 1970, Batjak represented by majority stockholders,
through Atty. Amado Duran, legal counsel, wrote to NIDC inquiring if the
atter 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.
On Sept. 23, 1970, legal counsel of Batjak wrote another letter asking for a
complete accounting of the assets, properties, management and operation of
Batjak, preparatory to their turn-over and transfer to the stockholders of
Batjak.
NIDC replied that it had no intention to comply with such demand. Batjak
filed an action for mandamus with preliminary injunction which was granted.
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?
HELD: No. In support of the third ground of their motion to 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 Trust Agreement, the parties thereto were NIDC and certain
stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec.
2, Rule 3 of the Rules of Court, every action must be prosecuted and
defended in the name of the real party in interest. Applying the rule in the
present case, the action should have been filed by the stockholders of Batjak,
who executed the Voting Trust Agreement with NIDC, and not by Batjak itself
which is not a party 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

68

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:
Sec. 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of confering 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. UNISSUE 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

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.

shareholder therein.
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.

ORAL: 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 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 absolut 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) providing 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

69

proceedings for P20,000 which was opposed by the administrator, and


dismissed by the CFI.
ISSUE: WON the subscription is valid and enfroceable?
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 post-incorporation 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 preincorporation 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 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

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

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.

TRUE VALUE RULE: the motives and intent of those making the valuation

IRREVOCABLE: Pre-incorporation subscriptions are irrevocable:

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

1.

2.

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
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.
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 reclassification or
conversion.

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.

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 transaction cannot be
overturned even if it later becomes evident that the property or services were
in fact worth much less than the value fixed on them initially.
Most jurisdiction follow the GOOD FAITH rule.

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 as their


realization are not certain.

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.

THE NATIONAL EXCHANGE CO., INC., plaintiff-appellee,


vs.
I. B. DEXTER, defendant-appellant

Shares of stock shall not be issued in exchange for promissory notes or


future service.

FACTS: On August 10, 1919, the defendant, I. B. Dexter, signed a written


subscription to the corporate stock of C. S. Salmon & Co. in the following
form:

The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred
upon it by the articles of incorporation or the by-laws, or in the absence
thereof, by the stockholders representing at least a majority of the
outstanding capital stock at a meeting duly called for the purpose.

ISSUE: is generally employed to indicate the making of a share contract or

contract of subscription, that is, transaction by which a person becomes the


owner of shares and by which new share contracts are created. It is often
associated with the execution and delivery of a share certificate but the
issuance of the shares is not dependent on the delivery of a certificate of
stock.

PAR or ISSUED PRICE: while it may not reflect the true 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.

70

(GR No. L-27872; Feb. 25, 1928)

I hereby subscribe for three hundred (300) shares of the capital stock of C.
S. Salmon and Company, payable from the first dividends declared on any
and all shares of said company owned by me at the time dividends are
declared, until the full amount of this subscription has been paid
Upon subscription, defendant Dexter paid P15,000 from the dividends
declared by the company and supplemented by money supplied personally be
the subscriber. No other payment was 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.)
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.)

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 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 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.

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

71

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.
2.
3.

It must be signed by the president or vice-president and countersigned


by the secretary or assistant secretary;
It must be sealed with the corporate seal, and
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.
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 non-negotiable 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.
2.
3.
4.
5.

Enable the corporation to know who its stockholders are;


Enable the transferee to exercise his rights as a stockholder;
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);
Avoid fictitious and fraudulent transfers; and
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

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

transferees title to said shares has no prima facie validity or is uncertain.

public auction.

TWO MODES OF TRANSFERRING STOCKS:

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.

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.

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?

1.
2.

Endorsement and delivery of certificate of stock;


Notarized deed.

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 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.
2.

3.
4.
5.
6.

It is not valid, except as between the parties, until recorded in the books
of the corporation;
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;
Restrictions required to be indicated in the AOI, bylaws and stock
certificates of a close corporation;
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;
Sale to aliens in violation of maximum ownership of shares under the
Nationalization Laws; and
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 nonpayment, Matute foreclosed the mortgage and the shares were sold at a

72

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 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

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

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 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.

whether or not shares of a 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.)

The validity of the assignments and the mortgage is not in question.

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 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.

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?

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.

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

TORIBIA USON, plaintiff-appellee,


vs.
VICENTE DIOSOMITO, ET AL., defendants.

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.

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

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 because they are without
notice or fraudulent in law or fact, but because they are made so
void by statute.
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.
CYRUS PADGETT, plaintiff-appellee,
vs.
BABCOCK & TEMPLETON, INC., and W. R. BABCOCK, defendantsappellants

(G.R. No. L-38684; December 21, 1933)

74

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 F11, 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 though a controlling interest is sold to one purchaser.
(Ibid., sec. 1035, pp. 665, 666.)
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:
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

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

likewise compelled to conclude that the judgment originally rendered to that


effect is untenable and should be set aside

capital stock of P10M which upon registration will take over all the
rights and liabilities of Asuncion.

LEON J. LAMBERT, plaintiff-appellant,


vs.
T. J. FOX, defendant-appellee

(G.R. No. L-7991; January 29, 1914)

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.

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:

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.

Whereas the undersigned are, respectively, owners of large amounts of


stock in John R. Edgar and Co, Inc; and,

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.

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.
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

75

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 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 turnover 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)

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

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?
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 bylaws 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

76

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,
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-inFact, 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 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.

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

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?
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.

77

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 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.
ISSUE3: WON by Guiok and Lims failure to pay, the ownership of the shares
automatically passed to Lim Tay?
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.

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 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.
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.
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.
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?
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.

78

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
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).

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 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 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 non-indorsement
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 attorney-infact 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

79

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 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)

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.
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.
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.
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

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

valid?
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.
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 "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:
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).
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.
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)
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 quasinegotiable, 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

80

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)
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 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., defendant-appellee

(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 plaintiff-appellant. 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 upto 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?
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
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.

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

APOLINARIO G. DE LOS SANTOS and ISABELO ASTRAQUILLO, plaintiffsappellees,


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. 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 by-laws. Shares of stock so issued are
personal property and may be transferred by delivery of the certificate
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 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

81

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;
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

Cesar Nickolai F. Soriano Jr.


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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 by-law 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:
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.

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 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.

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.

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.

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

As we have already stated, the court erred in holding the plaintiff as the
owner of two hundred and fifty shares of stock; "the plaintiff's rights consist
in an equity in five hundred shares and upon payment of the unpaid portion
of the subscription price he becomes entitled to the issuance of certificate for
said five hundred shares in his favor."

MANDAMUS: Once a subscriber has paid his subscription in full, he becomes

(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.

82

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

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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.

3.

BASIS OF LIABILITY:
1.

2.

1.

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.

2.

SOLIDARY LIABILITY: All consenting directors and officers are solidarily

3.
4.

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.
2.
3.
4.

For a monetary consideration less than its par or issue value;


For a consideration in property, tangible or intangible, valued in excess
of its market value;
Gratuitously or under an agreement that nothing shall be paid at all; or
In the guise of stock dividends when there are no surplus profits of the
corporation.

5.
6.

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.
2.

The corporation is deprived of its capital thereby hurting its business


prospects, financial capability and responsibility;
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

83

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.
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):

RIGHT OF CORPORATION AND CREDITORS: The law does not make

liable for the water in the stock.

Present and future creditors are deprived of the corporate assets for the
protections of their interest.

As to the corporation when a corporation is guilty of ultra-vires 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;
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

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2.

to 69 of the Code; and


By a collection case in court as provided for in section 70.

2.

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 have the right to look up to for the satisfaction of their
claims.
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 accrued interest, if any, as it may
deem necessary.
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 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 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 become delinquent and shall be subject to sale as hereinafter
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 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.
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. 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 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.
Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the smallest number of
shares or fraction of a share, the corporation may, subject to the
provisions of this Code*, bid for the same, and the total amount due shall
be credited as paid in full in the books of the corporation. Title to all the
shares of stock covered by the subscription shall be vested in the corporation
as treasury shares and may be disposed of by said corporation in accordance
with the provisions of this Code.

PROCEDURE:
1.

The BOD, by a formal Resolution, declares the whole or any percentage


unpaid subscriptions to be due and payable on a specified date.
However, if the contract of subscription provides the date or dates when

84

3.
4.
5.
6.
7.
8.
9.

10.
11.
12.
13.

payment is due, no call or 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 shares; Y: 80 shares; Z: 90 shares. In this case, X
would be the highest bidder. The remaining 30 shares would be credited to
A.

*NO BIDDER: If there was no bidder, the company has to have unrestricted

retained earnings in order to acquire the shares as thus provided under Sec.
41 of the Corporation Code (Power to Acquire Own Shares). Accordingly, if
the company has no unrestricted retained earnings, it cannot acquire the said
shares by virtue of a delinquency sale, however, it may institute an action for
the recovery of the subscription price under Sec. 70.

MAY A DIRECTOR DECLARED TO BE DELINQUENT ON HIS


SUBSCRIPTION BE ALLOWED TO CARRY OUT HIS FUNCTIONS AS
SUCH DIRECTOR? Yes. He is still a shareholder entitled to all the rights as
such, and pending the sale, the shares still stand in his name. Even after the
sale, he may still be credited to some of the shares and he only needs 1 to
qualify as a director.

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

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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.
2.

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
The action shall be commenced by the filing of a complaint within 6
months from the date of sale.

ACTION BY THE CORPORATION:


Notwithstanding the provisions of Sec. 67 to 69, the corporation may enforce
payment of unpaid subscriptions by court action.
Sec. 70. Court action to recover unpaid subscription. - Nothing in this
Code shall prevent the corporation from collecting by action in a court of
proper jurisdiction the amount due on any unpaid subscription, with accrued
interest, costs and expenses.

CALL: Consistent with Art. 1169 of the Civil Code, a call is a condition

precedent before the right of action to institute a recovery suit accrues. This
is because a demand is required before a debtor may incur a delay in the
performance of his obligation. As earlier said however, a call is not necessary
if the contract of subscription provides for a date or dates when payment is
due, or when the corporation has become insolvent.
MIGUEL VELASCO, assignee of The Philippine Chemical Product Co.
(Ltd.), plaintiff-appellant,
vs.
JEAN M. POIZAT, defendant-appellee

(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 by-laws 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.
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

85

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)

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 secretary that he has been declared
delinquent by the BOD and that he should pay the unpaid subscription
otherwise such shares shall be sold at a public auction.
De Silva filed a complaint in the CFI of Cebu, contending among others that
the resolution adopted was violative of Art. 46 of the by-laws stating that all
shares subscribed and were not paid at the time of the incorporation shall be
paid out of the 70% of the profit obtained until such shares are paid in full.
De Silva contends that such article provides for the operative method of
payment of the shares, and by declaring the unpaid subscription to have
become due and payable on May 31st and in publishing the notice declaring
his shares to be delinquent, the company has exceeded its executive
authority.
ISSUE: WON the BOD may declare the unpaid shares delinquent or collect or
enforce payment of the same despite the provision of the by-laws?
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 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
appellant,
vs.
IRINEO BALTAZAR, defendant-appellee.

COMPANY,

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

INC.,

plaintiff-

(G.R. No. L-4824; June 30, 1953)


LINGAYEN GULF ELECTRIC POWER COMPANY, INC., plaintiff-appellee,
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:
. . . . 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.

86

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, JOSE M. MIRASOL and
INTRANS PHILS., INC., respondents

(G.R. No. 80039; April 18, 1989)

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.
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 intracorporate 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

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 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.
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.
ISSUE: WON Lumanlan is still liable to the corporation?
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.
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

87

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%.
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 the lumber producers are liable for the full value of their
subscriptions?
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 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 well-settled 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.
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)

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

FACTS: Appellant Suarez subscribed to 16 shares of Compania HispanoFilipina, 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, but the complaint was
dismissed for lack of prosecution.

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.
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.

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.

NON-STOCK CORPORATIONS: The rules on delinquent shareholders

ISSUE: WON defendant Suarez is liable?

RIGHT TO SECURE THE ISSUANCE OF A NEW STOCK CERTIFICATE:

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.

Sec. 73. Lost or destroyed certificates. - The following procedure shall


be followed for the issuance by a corporation of new certificates of stock in
lieu of those which have been lost, stolen or destroyed:

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.

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.

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

88

applies to non-stock corporations, such as when members are delinquent in


paying membership dues.

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 triplicate
setting forth, if possible, (1) the circumstances as to how the certificate
was lost, stolen or destroyed, (2) the number of shares represented by
such certificate, (3) the serial number of the certificate and (4) the
name of the corporation which issued the same. He shall also submit such
(B) other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the
books of the corporation, said corporation shall publish a notice in a
newspaper of general circulation published in the place where the corporation
has its principal office, once a week for three (3) consecutive weeks at the
expense of the registered owner of the certificate of stock which has been
lost, stolen or destroyed. The notice shall state (1) the name of said
corporation, (2) the name of the registered owner and (3) the serial
number of said certificate, and (4) the number of shares represented by
such certificate, and that after the expiration of one (1) year from the date of
the last publication, if no contest has been presented to said corporation
regarding said certificate of stock, the right to make such contest shall be
barred and said corporation shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and issue in lieu thereof new
certificate of stock, unless the registered owner files a bond or other security
in lieu thereof as may be required, effective for a period of one (1) year, for
such amount and in such form and with such sureties as may be satisfactory
to the board of directors, in which case a new certificate may be issued even
before the expiration of the one (1) year period provided herein: Provided,
That if a contest has been presented to said corporation or if an action is
pending in court regarding the ownership of said certificate of stock which
has been lost, stolen or destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the final decision by the court
regarding the ownership of said certificate of stock which has been lost,
stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the
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.
2.
3.

To avoid duplication of certificates of stock;


To avoid fictitious and fraudulent transfers; and
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 certificate of stock, in liey of
the lost or destroyed one, if the same is to be issued prior to the expiration of
the 1 year period provided by Sec. 73.

ISSUANCE OF NEW CERTIFICATES:

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.
3.

H.

After the above procedures have been complied with, the new certificate
will be issued 1 year from the date of the last publication;
Nevertheless, the stockholder may file a bond or other security to have
the shares issued before the 1 year prescribed.
If a contest has been present to the corporation or an action is pending
in court, the issuance of the new certificate shall be suspended until
final decision.
RIGHTS AND LIABILITIES OF STOCKHOLDERS

RIGHTS OF A STOCKHOLDER:
1.
2.
3.
4.

5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.

Participation in the management of the corporate affairs by


exercising their right to vote and be voted upon either personally or by
proxy as provided for under Sec. 50 and 58 of the Code;
To enter into a voting trust agreement subject to the procedure,
requirements and limitations imposed under Sec. 50;
To receive dividends and to compel their declaration if warranted
under Sec. 43;
To transfer shares of stock subject only to reasonable restrictions
such as the options and preferences as may be allowed by law inclusive
of the right of the transferee to compel the registration of the transfer in
the books of the corporation as provided for in Sec. 63;
To be issued a certificate of stock for fully paid-up shares in
accordance with Sec. 64;
To exercise pre-emptive rights as provided for in Sec. 39;
To exercise their appraisal right in accordance with the provision of
Sec. 81 and in those instance allowed by law such as Sec. 42 and 105;
To institute and file a derivative suit;
To recover shares of stock unlawfully sold for delinquency as
may be allowed under Sec. 69;
To inspect the books of the corporation subject only to the
limitations imposed by Sec. 75;
To be furnished by the most recent financial statement of the
corporation as by Sec. 75;
To be issued a new stock certificate in lieu of the lost or destroyed
one subject to the procedure laid down in Sec. 73;
To have the corporation dissolved under Sec. 118 to 121, and Sec.
105 in a close corporation;
To participate in the distribution of assets of the corporation upon
dissolution under Sec. 122;
In the case of a close corporation, to petition the SEC to arbitrate in
the event of a deadlock as allowed under Sec. 104; and
Also in the case of a close corporation, to withdraw therefrom, for
any reason, and compel the corporation to purchase his shares as
provided for in Sec. 105.

OBLIGATIONS AND LIABILITIES:


1.
2.
3.
4.
5.
6.

To pay the corporation the balance of his unpaid subscriptions


subject to the provision of Sec. 67-70;
To pay interest on his unpaid subscription, if required by the bylaws 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.

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.
The records of all business transactions of the corporation and the minutes of
any meetings 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, writing, for a copy of excerpts from said records or minutes, at
his expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy
excerpts from its records or minutes, in accordance with the provisions of this
Code, shall be liable to such director, 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.
Stock corporations must also keep a book to be known as the "stock and
transfer book", in which must be kept a record of all stocks in the names of
the stockholders alphabetically arranged; the installments paid and unpaid on
all stock for which subscription has been made, and the date of payment of
any installment; a statement of every alienation, sale or transfer of stock
made, the date thereof, and by and to whom made; and such other entries
as the by-laws may prescribe. The stock and transfer book shall be kept in
the principal office of the corporation or in the office of its stock transfer
agent and shall be open for inspection by any director or stockholder of the
corporation at reasonable hours on business days.
No stock transfer agent or one engaged principally in the business of
registering transfers of stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he secures a license from the
Securities and Exchange Commission and pays a fee as may be 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.

2.

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

89

3.

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;
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
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.

STOCK AND TRANSFER AGENT: is the person who records every

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

movement of the shares by the minute or by the hour.

NON-STOCK CORPORATIONS: can also have a stock and transfer agent


for purposes of the club share-membership.

INSPECTION & COPIES: These books are subject to inspection by any of

2.
3.

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 certified by an independent certified
public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the
financial statements may be certified under oath by the treasurer or any
responsible officer of the corporation.

BASIS OF RIGHT: is to protect his interest as a stockholder. Thus, it has

been said that: The right of the shareholders to ascertain how the affairs of
his company are being conducted by its directors and officers is founded by
his beneficial interest through ownership of shares and the necessity of selfprotection. 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

90

all documents or records of the corporation and against whom personal


order of the court would be made;
Damages either against the corporation or the responsible officer who
refused the inspection; or
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.
2.
3.

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;
That he was not acting in good faith or for a legitimate purpose in
making his demand; or
The right is limited or restricted by special law or the law of its
creation.

W. G. PHILPOTTS, petitioner,
vs.
PHILIPPINE MANUFACTURING
respondents.

COMPANY

and

F.

N.

BERRY,

(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.

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

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 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

91

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 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 the
Corporation Law, "(t)he record of all business transactions of the corporation
and minutes of any meeting shall be open to the inspection of any director,
member or stockholder of the corporation at reasonable hours."
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 selfprotection. 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
enforcement must be set up the corporation defensively if the Court is to take

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

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 whollyowned subsidiary of the corporation in which he is a stockholder is a
different thing.

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.

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.

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.

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."

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."

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)

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,

92

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?

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 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

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

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:
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:

93

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 respect to the
consolidated corporation in case of consolidation, all the statements required
to be set forth in the articles of incorporation for corporations organized
under this Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable.
Sec. 77. Stockholder's or member's approval. - Upon approval by
majority vote of each of the board of directors or trustees of the constituent
corporations of the plan of merger or consolidation, the same shall be
submitted for approval by the stockholders or members of each of such
corporations at separate corporate meetings duly called for the purpose.
Notice of such meetings shall be given to all stockholders or members of the
respective corporations, at least two (2) weeks prior to the date of the
meeting, either personally or by registered mail. Said notice shall state the
purpose of the meeting and shall include a copy or a summary of the plan of
merger or consolidation. The affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock of each corporation in
the case of stock corporations or at least two-thirds (2/3) of the members in
the case of non-stock corporations shall be necessary for the approval of
such plan. Any dissenting stockholder in stock corporations may exercise his
appraisal right in accordance with the Code: Provided, That if after the
approval by the stockholders of such plan, the board of directors decides to
abandon the plan, the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made,
provided such amendment is approved by majority vote of the respective
boards of directors or trustees of all the constituent corporations and ratified
by the affirmative vote of stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such plan, together with any
amendment, shall be considered as the agreement of merger or
consolidation.

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. 78. Articles of merger or consolidation. - After the approval by the


stockholders or members as required by the preceding section, articles of
merger or articles of consolidation shall be executed by each of the
constituent corporations, to be signed by the president or vice-president and
certified by the secretary or assistant secretary of each corporation setting
forth:

aim of corporate reorganization or combination is generally to put the


company upon a sound financial basis and to enable it to take care of its
obligations thereby avoiding liquidation or bankruptcy. But in some cases, a
reorganization is effected notwithstanding the fact that the corporation is
solvent.

1. The plan of the merger or the plan of consolidation;

granted by law, to corporations registered under the Code, Act 3518


proscribes illegal combination. It provides, under Sec. 20 thereof that no
corporation engaged in commerce may acquire, directly or indirectly, the
whole or any part of the stock or other share capital of another corporation
or corporations engaged in commerce, where the effect of such acquisitions
may be to substantially lessen competition between the corporation or
corporations whose stock is so acquired and the corporation making the
acquisition, or between any of them, or to restrain such commerce in any
section community, or ten to create a monopoly of any line of commerce.
Corollary to this is Art. 186 of the Revised Penal Code which imposes a
penalty of imprisonment and/or fine on any person who enters into a
contract or conspiracy to create monopolies and combinations in restraint of
trade.

2. As to stock corporations, the number of shares outstanding, or in the case


of non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and
against such plan, respectively.
Sec. 79. Effectivity of merger or consolidation. - The articles of merger
or of consolidation, signed and certified as herein above required, shall be
submitted to the Securities and Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or consolidation of banks or
banking institutions, building and loan associations, trust companies,
insurance companies, public utilities, educational institutions and other
special corporations governed by special laws, the favorable recommendation
of the appropriate government agency shall first be obtained. If the
Commission is satisfied that the merger or consolidation of the corporations
concerned is not inconsistent with the provisions of this Code and existing
laws, it shall issue a certificate of merger or of consolidation, at which time
the merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or
inconsistent with the provisions of this Code or existing laws, it shall set a
hearing to give the corporations concerned the opportunity to be heard.
Written notice of the date, time and place of hearing shall be given to each
constituent corporation at least two (2) weeks before said hearing. The
Commission shall thereafter proceed as provided in this Code.
Sec. 80. Effects of merger or consolidation. - The merger or
consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation which, in
case of merger, shall be the surviving corporation designated in the plan of
merger; and, in case of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except
that of the surviving or the consolidated corporation;

ILLEGAL COMBINATIONS: While a merger or consolidation is a right,

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.

3. The surviving or the consolidated corporation shall possess all the rights,
privileges, immunities and powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;

REQUIREMENTS AND PROCEDURE TO ACCOMPLISH MERGER OR


CONSOLIDATION:

4. The surviving or the consolidated corporation shall thereupon and


thereafter possess all the rights, privileges, immunities and franchises of each
of the constituent corporations; and all property, real or personal, and all
receivables due on whatever account, including subscriptions to shares and
other choses in action, and all and every other interest of, or belonging to, or
due to each constituent corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation without further act or
deed; and

2.

5. The surviving or consolidated corporation shall be responsible and liable


for all the liabilities and obligations of each of the constituent corporations in
the same manner as if such surviving or consolidated corporation had itself
incurred such liabilities or obligations; and any pending claim, action or
proceeding brought by or against any of such constituent corporations may
be prosecuted by or against the surviving or consolidated corporation. The
rights of creditors or liens upon the property of any of such constituent
corporations shall not be impaired by such merger or consolidation.

REASON FOR REORGANIZATION: The reasons inducing a reorganization


are not in every case the same, but for the most part, they are to be found in
the weak financial or insolvent condition of the particular corporations. The

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1.

3.

4.

5.

6.

The BOD/T of each constituent corporations shall approve a plan or


merger or consolidation setting for the matters required in Sec. 76;
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;
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;
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;
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
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

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 thereafter, the Commission shall proceed as provided in the Code.

EFFECTS OF MERGER OR CONSOLIDATION:


1.
2.
3.
4.

5.

There will only be a single corporation. In case of merger, the surviving


corporation or the consolidate corporation in case of consolidation;
The termination of corporate existence of the constituent corporations,
except that of the surviving corporation or the consolidated corporation;
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;
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, including subscriptions to
shares and other choses in action, and every other interest of, or
belonging to or due to the constituent corporations shall be deemed
transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
The rights of creditors or any lien on the property of the constituent
corporations shall not be impaired by the merger or consolidation.

LIQUIDATION: There would be no need to liquidate or wind-up the affairs


of the corporation because (1) there are no assets to distribute; (2) no debts
and liabilities to pay since all these are transferred to the surviving or
consolidated corporation.
ASSOCIATED BANK, petitioner,
vs.
COURT OF APPEALS and LORENZO SARMIENTO JR., respondents.

(G.R. No. 123793; June 29, 1998)

FACTS: Associated Banking Corporation and Citizens Bank and Trust


Company merged to form Associated Citizens Bank which subsequently
changed its corporate name to Associate Bank.
The defendant Lorenzo Sarmiento Jr. executed a promissory note in favor of
Associated Bank for P2.5M of which P2.25M remains unpaid. Despite
repeated demands, the defendant failed to pay the sum due.
Defendant denied all pertinent allegations in the complaint and alleged as
affirmative and/or special defense that Associated Bank is not the real party
in interest because the promissory note was executed in favor of Citizens
Bank and Trust Company.
Defendant was declared in default for not appearing in the Pre-Trial
Conference and the plaintiff was allowed to present evidence ex-parte, the
Motion to Life Order of Default and or Reconsideration of the Order being
dismissed. The trial court ruled in favor of Associated Bank. On appeal, the
CA reversed the trial court.
ISSUE: WON Associated Bank, the surviving corporation, may enforce the
promissory note made by Sarmiento in favor of CBTC, the absorbed company
after the effectivity of the merger?
HELD: Yes. Ordinarily, in the merger of two or more existing
corporations, one of the combining corporations survives and
continues the combined business, while the rest are dissolved and
all their rights, properties and liabilities are acquired by the
surviving corporation. Although there is a dissolution of the
absorbed corporations, there is no winding up of their affairs or
liquidation of their assets, because the surviving corporation
automatically acquires all their rights, privileges and powers, as
well as their liabilities.
The merger, however, does not become effective upon the mere
agreement of the constituent corporations. The procedure to be
followed is prescribed under the Corporation Code. Section 79 of said Code
requires the approval by the Securities and Exchange Commission (SEC) of
the articles of merger which, in turn, must have been duly approved by a
majority of the respective stockholders of the constituent corporations. The
same provision further states that the merger shall be effective only
upon the issuance by the SEC of a certificate of merger. The

95

effectivity date of the merger is crucial for determining when the


merged or absorbed corporation ceases to exist; and when its
rights, privileges, properties as well as liabilities pass on to the
surviving corporation.
Consistent with the aforementioned Section 79, the September 16, 1975
Agreement of Merger, which Associated Banking Corporation (ABC) and
Citizens Bank and Trust Company (CBTC) entered into, provided that its
effectivity "shall, for all intents and purposes, be the date when the necessary
papers to carry out this [m]erger shall have been approved by the Securities
and Exchange Commission." As to the transfer of the properties of CBTC to
ABC, the agreement provides:
10. Upon effective date of the Merger, all rights, privileges, powers,
immunities, franchises, assets and property of [CBTC], whether real,
personal or mixed, and including [CBTC's] goodwill and tradename, and all
debts due to [CBTC] on whatever act, and all other things in action
belonging to [CBTC] as of the effective date of the [m]erger shall be
vested in [ABC], the SURVIVING BANK, without need of further act or
deed
The records do not show when the SEC approved the merger. Private
respondent's theory is that it took effect on the date of the execution of the
agreement itself, which was September 16, 1975. Private respondent
contends that, since he issued the promissory note to CBTC on September 7,
1977 two years after the merger agreement had been executed CBTC
could not have conveyed or transferred to petitioner its interest in the said
note, which was not yet in existence at the time of the merger. Therefore,
petitioner, the surviving bank, has no right to enforce the promissory note on
private respondent; such right properly pertains only to CBTC.
Assuming that the effectivity date of the merger was the date of its
execution, we still cannot agree that petitioner no longer has any interest in
the promissory note. A closer perusal of the merger agreement leads to a
different conclusion. The provision quoted earlier has this other clause:
Upon the effective date of the [m]erger, all references to [CBTC] in any

deed, documents, or other papers of whatever kind or nature and


wherever found shall be deemed for all intents and purposes, references to
[ABC], the SURVIVING BANK, as if such references were direct references
to [ABC]. . . .
Thus, the fact that the promissory note was executed after the
effectivity date of the merger does not militate against petitioner.
The agreement itself clearly provides that all contracts
irrespective of the date of execution entered into in the name of
CBTC shall be understood as pertaining to the surviving bank,
herein petitioner. Since, in contrast to the earlier aforequoted provision,
the latter clause no longer specifically refers only to contracts existing at the
time of the merger, no distinction should be made. The clause must have
been deliberately included in the agreement in order to protect the interests
of the combining banks; specifically, to avoid giving the merger agreement a
farcical interpretation aimed at evading fulfillment of a due obligation.
Thus, although the subject promissory note names CBTC as the payee, the
reference to CBTC in the note shall be construed, under the very provisions
of the merger agreement, as a reference to petitioner bank, "as if such
reference [was a] direct reference to" the latter "for all intents and
purposes."
No other constructio