CORPORATION LAW

INTRODUCTION
Definition and attributes of a
corporation

A corporation is an artificial
being created by operation of
law,
having
the
right
of
succession and the powers,
attributes
and
properties
expressly authorized by law or
incident to its existence.

A
corporation,
being
a
creature of law, "owes its life to
the state, its birth being purely
dependent on its will," it is "a
creature without any existence
until
it
has
received
the
imprimatur of the state acting
according to law." A corporation
will have no rights and privileges
of a higher priority than that of
its
creator
and
cannot
legitimately refuse to yield
obedience to acts of its state
organs.
(Tanyag v. Benguet
Corporation)
A corporation has four (4)
attributes:

(1)
It is an artificial being;
(2)
Created by operation of
law;
(3)
With
right
of
succession;
(4)
Has
the
powers,
attributes, and properties as
expressly authorized by law
or incident to its existence.
CLASSIFICATION OF PRIVATE
CORPORATIONS
Stock v. Non-Stock
Corporations

Stock
Definition Corporatio
ns which
have
capital
stock
divided
into
shares
and
are
authorized
to
distribute
to the
holders of

NonStock
All other
private
corporati
ons (3)
One
where no
part of its
income is
distributa
ble as
dividends
to its
members
, trustees

shares
or
dividends officers.
or
(87)
allotments
of the
surplus
profits on
the basis
of the
shares
(3)
Purpose

Primarily
to make
profits for
its
sharehold
ers

May be
formed
or
organize
d for
charitabl

e,
religious,
educatio
nal,
professio
nal,
cultural,
fraternal,
literary,
scientific,
social,
civic
service,
or similar
purposes
like
trade,
industry,
agricultur

al and
like
chamber
s, or any
combinat
ion
thereof.
(88)
Distributi Profit is
on
of distribute
Profits
d to
sharehold
ers

Whatever
incidental
profit
made is
not
distribute
d among
its
members

but is
used for
furtheran
ce of its
purpose.
AOI or
by-laws
may
provide
for the
distributi
on of its
assets
among
its
members
upon its
dissolutio
n. Before

then, no
profit
may be
made by
members
.
Compositi Stockhold Members
on
ers
Scope
right
vote

of Each
to stockhold
er votes
according
to the
proportion
of his
shares in
the

Each
member,
regardles
s of
class, is
entitled
to one
(1) vote
UNLESS

corporatio
n. No
shares
may be
deprived
of voting
rights
except
those
classified
and
issued as
"preferred
" or
"redeema
ble"
shares,
and as
otherwise

such
right to
vote has
been
limited,
broadene
d, or
denied in
the AOI
or bylaws.
(Sec. 89)

provided
by the
Code.
(Sec. 6)
Voting by May be
proxy
denied by
the AOI or
the bylaws.
(Sec. 89)

Cannot
be
denied.
(Sec. 58)

Voting by May be
Not
mail
authorized possible.
by the bylaws, with
the
approval
of and

under the
conditions
prescribed
by the
SEC. (Sec.
89)
Who
exercises
Corporate
Powers
23

Board of
Directors
or
Trustees

Governin Board of
g Board
Directors
or
Trustees,
consisting
of 5-15

Members
of the
corporati
on
Board of
Trustees,
which
may
consist of
more

directors / than 15
trustees. trustees
unless
otherwise
provided
by the
AOI or
by-laws.
(Sec, 92)
Term
of
directors
or
trustees

Directors /
trustees
shall hold
office for
1 year
and until
their
successor
s are

Board
classified
in such a
way that
the term
of office
of 1/3 of
their
number

elected
and
qualified
(Sec. 23).

shall
expire
every
year.
Subsequ
ent
elections
of
trustees
comprisin
g 1/3 of
the board
shall be
held
annually,
and
trustees
so
elected

shall
have a
term of 3
years.
(Sec. 92)
Election
Officers
of officers are
elected by
the Board
of
Directors
(Sec. 25),
except in
close
corporatio
ns where
the
stockhold

Officers
may
directly
elected
by the
members
UNLESS
the AOI
or bylaws
provide
otherwise
. (Sec.

ers
92)
themselve
s may
elect the
officers.
(Sec. 97)
Place
of Any place
meetings within the
Philippine
s, if
provided
for by the
by-laws
(Sec. 93)

Generally
, the
meetings
must be
held at
the
principal
office of
the
corporati
on, if
practicab

le. If not,
then
anyplace
in the
city or
municipal
ity where
the
principal
office of
the
corporati
on is
located.
(Sec. 51)
Transfera Transferab Generally
bility
of le.
noninterest
transfera

or
members
hip

ble since
members
hip and
all rights
arising
therefro
m are
personal.
However,
the AOI
or bylaws can
provide
otherwise
. (Sec.
90)

Distributi
on
of

See Sec.
94.

assets in
case
of
dissolutio
n
CIR VS. CLUB
SCRA 321; 1962)

FILIPINO (5

FACTS: Club Filipino owns and

operates a club house, a sports
complex, and a bar restaurant,
which
is
incident
to
the
operation of the club and its gold
course. The club is operated
mainly with funds derived from
membership fees and dues. The
BIR seeks to tax the said
restaurant as a business.

HELD: The Club was organized

to develop and cultivate sports
of all class and denomination for
the healthful recreation and
entertainment of its stockholders
and members. There was in
fact,
no
cash
dividend
distribution to its stockholders
and whatever was derived on
retail
from
its
bar
and
restaurants used were to defray
its overhead expenses and to
improve its golf course.
For a stock corporation to exist,
2 requisites must be complied
with:

(1) a capital stock divided into

shares
(2) an authority to distribute
to the holders of such shares,
dividends or allotments
of the surplus profits on the
basis of shares held.
In the case at bar, nowhere in
the AOI or by-laws of Club
Filipino could be found an
authority for the distribution of
its dividends or surplus profits.
FORMATION AND
ORGANIZATION OF
CORPORATION

Requirements in the
formation of a corporation

Who may form a

corporation (See SEC. 10)
INCORPO REQUIRE COMME
RATORS
MENTS
NTS
Definition stockhold
co
ers
or mpare
member with
s
Corporat
mention ors
ed in the which
articles
include
of
all

incorpor
ation as
originall
y
forming
and
composi
ng
the
corporati
on and
who are
signatori
es
thereof
stockhol
ders or
member
s
mention

stockhol
ders or
member
s,
whether
incorpor
ators or
joining
the
corporat
ion after
its
incorpor
ation.

ed in the
articles
of
incorpor
ation as
originall
y
forming
and
composi
ng
the
corporati
on and
who are
signatori
es
thereof
Character

na

ex

istic

tural
persons

clude
s
corpo
ration
s and
partnersh
ips

Number

no
m
t
less ay
be
than 5; more
not more than 15
than 15
for nonstock
corp.
except
educatio
nal corp.


d
oes not
prevent
the
oneman
(person)
corporat
ion
wherein
the
other
incorpor
ators
may
have
only
nominal

ownersh
ip
of
only one
share of
stock;
not
necessa
rily
illegal
Age

of
legal
age

Residenc
m
re
e
ajority
sidence
should
a
be
require
resident
ment;

s of the
Philippin
es

citizens
hip
require
ment
only in
certain
areas
such as
public
utilities,
retail
trade
banks,
investm
ent
houses,
savings
and loan
associati

ons,
schools

Steps in the formation of a

corporation

Mutual Agreement to
perform certain acts
required for organizing a
corporation
1- Organize and establish
a corporation

2- Comply with
requirements of
corporation code
3- Contribute
capital/resources
4- Mode of use of
capital/resource and
control/management of
capital/resource
5- distribution/disposition
of capital/resource
(embodied in constitutive
documents)
STEPS

COMMENTS

a.
Promoter
Promotional

brings

Stage (See
SEC. 2.
Definitions)

together
persons who
become
interested in
the enterprise

aids in
procuring
subscriptions
and sets in
motion the
machinery
which leads to
the formation
of the
corporation
itself

formula
tes the
necessary

initial
business and
financial plans
and, if
necessary,
buys the
rights and
property
which the
business may
need, with the
understanding
that the
corporation
when formed,
shall take over
the same.

b.
Draftin (see chart
g articles
below)
of
incorporati
on
(See SEC.
14)
c. Filing of
articles;
payment of
fees.

AOI & the

treasurers
affidavit duly
signed &
acknowledged

must be
filed w/ the SEC
& the
corresponding
fees paid


failure to
file the AOI will
prevent due
incorporation of
the proposed
corporation &
will not give rise
to its juridical
personality. It
will not even be
a de facto corp.

Under
present SEC
rules, the AOI
once filed , will
be published in
the SEC Weekly
Bulletin at the
expense of the

corp. (SEC
Circular # 4,
1982).
d.
Examination
of articles;
approval or
rejection by
SEC.

Process:
a) SEC
shall examine
them in order to
determine
whether they are
in conformity w/
law.
b) If not,
the SEC must give
the incorporators
a reasonable time
w/in w/c to correct
or modify the

objectionable
portions.
Grounds for
rejection or
disapproval of
AOI:
a) AOI
/amendment not
substantially in
accordance w/ the
form prescribed
b)
purpose/s are
patently
unconstitutional,
illegal, immoral,

or contrary to
government rules
& regulations;
c)
Treasurers
Affidavit is false;
d)
required
percentage of
ownership has not
been complied
with (Sec. 17)
e) corp.s
establishment,
organization or
operation will not

be consistent w/
the declared
national economic
policies (to be
determined by the
SEC, after
consultation w/
BOI, NEDA or any
appropriate
government
agency -- PD 902A as amended by
PD 1758, Sec. 6
(k))

Decisions
of the SEC
disapproving or
rejecting AOI

may be
appealed to the
CA by petition
for review in
accordance w/
the ROC.
e. Issuance
of
certificate
of
incorporatio
n.

Certificate of
Incorporation
will be issued if:
a) SEC is
satisfied that all
legal
requirements
have been
complied with;
and

b) there
are no reasons for
rejecting or
disapproving the
AOI.

It is only
upon such
issuance that
the corporation
acquires juridical
personality.
(See Sec. 19.
Commencement
of corporate
existence)

Should it

be subsequently
found that the
incorporators
were guilty of
fraud in
procuring the
certificate of
incorporation,
the same may
be revoked by
the SEC, after
proper notice &
hearing.

b. Drafting
articles
of
incorporation (See SEC. 14)
CONTENT
S OF AOI

COMMENTS

Corporate
Essential to
Name
its existence since
it is through it that
the corporation can
sue and be sued
and perform all
legal acts

A corporate
name
shall
be
disallowed by the
SEC if the proposed
name is either:

(1)
identical
or deceptively or
confusingly
similar to that of
any
existing
corporation or to
any other name
already
protected
by
law; or
(2)
patently
deceptive,
confusing
or
contrary
to
existing
laws.
(Sec. 18)

LYCEUM OF THE
PHILS. VS. CA (219
SCRA 610)
The
policy
underlying
the
prohibition
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:

1.
the
avoidance
of
fraud upon the
public
which
would
have
occasion to deal
with the entity
concerned;
2.
the
prevention
of
evasion of legal
obligations and
duties, and
3.
the
reduction
of
difficulties
of
administration
and supervision

over
corporations.
Purpose
Clause

A corporation
can only have one
(1)
primary
purpose. However,
it can have several
secondary
purposes.

A corporation
has
only
such
powers
as
are
expressly granted
to it by law & by its
articles
of
incorporation,

those which may

be incidental to
such
conferred
powers
,
those
reasonably
necessary
to
accomplish
its
purposes & those
which
may
be
incident
to
its
existence.

Corporation
may not be formed
for the purpose of
practicing
a
profession like law,
medicine
or
accountancy

Principal
Office

must
be
within
the
Philippines

specify city
or province

street/numbe
r not necessary

important in
determining venue
in an action by or
against the corp.,
or on determining
the province where
a chattel mortgage
of shares should be
registered

Term of

cannot
Existence specify term which
is longer than 50
years at a time

may
be
renewed
for
another 50 years,
but not earlier than
5 years prior to the
original
or
subsequent expiry
date UNLESS there
are
justifiable
reasons
for
an
earlier extension.
Incorpora
names,
tors and
nationalities &
Directors
residences of the

incorporators;

names,
nationalities &
residences of the
directors or
trustees who will
act as such until
the first regular
directors or
trustees are
elected;

treasurer
who
has
been
chosen by the preincorporation
subscribers/membe
rs to receive on
behalf
of
the
corporation,
all

subscriptions
/contributions paid
by them.
Capital
Stock

amount of its
authorized capital
stock
in
lawful
money
of
the
Philippines

number
of
shares into which it
is divided

in case the
shares
are
par
value shares, the
par value of each,

names,
nationalities
and
residences of the

original
subscribers,
and
the
amount
subscribed
and
paid by each on his
subscription, and if
some or all of the
shares are without
par value, such fact
must be stated

for a nonstock corporation,

the amount of its
capital, the names,
nationalities
and
residences of the
contributors
and
the
amount
contributed
by

each

25% of 25%
rule to be certified
by Treasurer

paid
up
capital should not
be less than P5,000
Other
matters

Classes of
shares into w/c
the shares of
stock have been
divided;
preferences of &
restrictions on any
such class;
and any denial
or restriction of the
pre-emptive right of

stockholders
should also be
expressly stated in
said articles.

If the
corporation is
engaged in a
wholly or
partially
nationalized
business or activity,
the AOI must contain
a
prohibition
against a transfer of
stock which would
reduce
the Filipino

ownership of its
stock to less than
the required
minimum.
Any corporation may
be incorporated as a close
corporation, except:
a) mining or oil
companies;
b) stock exchanges;
c) banks;
d) insurance
companies;
e) public utilities;
f) educational
institutions; &

g) corporations
declared to be vested w/
public interest

De Facto Corporations:
Requisites

User of Corporate Powers

What is a de
corporation?

facto

A de facto corporation is a
defectively
organized
corporation, which has all

the powers and liabilities of

a de jure corporation and,
except as to the State, has
a
juridical
personality
distinct and separate from
its shareholders, provided
that the following requisites
are concurrently present:
(1)
That there is an
apparently valid statute
under
which
the
corporation
with
its
purposes
may
be
formed;
(2)
That there has been
colorable
compliance
with
the
legal

requirements
faith; and,

in

good

(3)
That there has been
use of corporate powers,
i.e., the transaction of
business in some way as
if it were a corporation.
Can
a
corporation
transact business as a
de facto corporation
while application is still
pending with SEC?
No. In the case of Hall v.
Piccio (86 Phil. 603; 1950),
where
the
supposed

corporation
transacted
business as a corporation
pending action by the SEC
on
its
articles
of
incorporation, the Court
held that there was no de
facto corporation on the
ground that the corporation
cannot claim to be in good
faith to be a corporation
when it has not yet
obtained its certificate of
incorporation.
Formation under apparently
valid statute.

MUNICIPALITY OF MALABANG
V. BENITO (29 SCRA 533; 1969)
WON a corporation organized
under a statute subsequently
declared void acquires status as
de facto corporation.
No. A corporation organized
under a statute subsequently
declared invalid cannot acquire
the status of a de facto
corporation unless there is some
other statute under which the
supposed corporation may be
validly organized. Hence, in the
case at bar, the mere fact that
the municipality was organized
before the statute had been

invalidated cannot
make it a de facto
since there is no
statute to give color
to its creation.

conceivably
corporation
other valid
of authority

Colorable compliance with

the legal requirements in
good faith.
BERGERON V. HOBBS (71 N.W.
1056, 65 Am. St. Rep. 85)

The constitutive documents of

the proposed corporation were
deposited with the Register of
Deeds but not on file in said
office. One of the requirements
for valid incorporation is the
filing of constitutive documents
in the Register of Deeds.
Was
there
colorable
compliance enough to give the
supposed corporation at least
the status of a de facto
corporation?
No.
The
filing
of
the
constitutive documents in the
Register of Deeds is a condition
precedent to the right to act as a

corporate body. As long as an

act, required as a condition
precedent, remains undone, no
immunity from individual liability
is secured.
HARRIL V. DAVIS (168 F. 187;
1909)
The constitutive documents
were filed with the clerk of the
Court of Appeals but not with the
clerk of court in the judicial
district where the business was
located. Arkansas law requires
filing in both offices.

Was
there
colorable
compliance enough to give the
supposed corporation at least
the status of a de facto
corporation?
No. Neither the hope, the
belief, nor the statement by
parties
that
they
are
incorporated, nor the signing of
the articles of incorporation
which are not filed, where filing
is requisite to create the
corporation, nor the use of the
pretended franchise of the
nonexistent
corporation,
will
constitute such a corporation de
facto as will exempt those who
actively and knowingly use s

name to incur legal obligations

from their individual liability to
pay them. There could be no
incorporation or color of it under
the law until the articles were
filed
(requisites
for
valid
incorporation).
HALL v. PICCIO (29 SCRA 533;
1969)
In the case of Hall v. Piccio,
where the supposed corporation
transacted
business
as
a
corporation pending action by
the SEC on its articles of
incorporation, the Court held
that there was no de facto

corporation on the ground that

the corporation cannot claim to
be in good faith to be a
corporation when it has not yet
obtained
its
certificate
of
incorporation.
NOTE: The
validity
of
incorporation cannot be
inquired into collaterally in
any private suit
to
which
such
corporation may be a
party. Such inquiry must
be
through
a quo
warranto proceeding
made by the Solicitor
General. (Sec. 20)

CORPORATION BY ESTOPPEL
(Sec. 21)
Distinguish a de facto
corporation
from
a
corporation by estoppel.
The de facto doctrine
differs from the estoppel
doctrine in that where all
the requisites of a de facto
corporation are present,
then
the
defectively
organized corporation will
have the status of a de
jure corporation in all
cases brought by and

against it, except only as to

the State in a direct
proceeding. On the other
hand,
if
any
of
the
requisites are absent, then
the estoppel doctrine can
apply only if under the
circumstances
of
the
particular case then before
the
court,
either
the
defendant association is
estopped from defending
on the ground of lack of
capacity to be sued, or the
defendant third party had
dealt with the plaintiff as a
corporation and is deemed
to
have
admitted
its
existence.

(De facto has status of de jure

corpo,
except
separate
personality
against
State,
provided
all
requisites
are
present)
What are the effects of a
Corporation by Estoppel in
suits brought:
(1)
against
the
Corporation?
Considered
a
corporation
in
suits
brought against it if
it held itself out as
such
and
denies
capacity to be sued;

(2)
against
third
party?
Third
party
cannot deny existence of
corporation if it
dealt with it as
such.
EMPIRE vs. STUART (46 Mich.
482, 9 N.W. 527; 1881)
Company was sued on a
promissory note. Its defense
was that at the time of its
issuance, it was defectively
organized and therefore could
not be sued as such.

The
Corporation
cannot
repudiate the transaction or
evade responsibility when sued
thereon by setting up its own
mistake affecting the original
organization.
LOWELL-WOODWARD
vs.
WOODS (104 Kan. 729; 1919)
Corporation
sued
a
partnership on a promissory
note. The latter as defense
alleged that the plaintiff was not
a corporation.
One who enters into a
contract with a party described

therein as a corporation is
precluded, in an action brought
thereon by such party under the
same designation, from denying
its corporate existence.

ASIA BANKING VS STANDARD

PRODUCTS (46 Phil. 145; 1924)
The corporation sued another
corporation a promissory note.
The defense was that the
plaintiff was not able to prove
the corporate existence of both
parties.

The defendant is estopped

from denying its own corporate
existence. It is also estopped
from
denying
the
others
corporate
existence.
The
general rule is that in the
absence of fraud, a person who
has contracted or otherwise
dealt with an association is such
a way as to recognize and in
effect admit its legal existence
as a corporate body is thereby
estopped
from
denying
its
corporate existence.
CRANSON VS IBM (234 MD.
477, 200 A. 2D 33 ; 1964)

IBM sued Cranson in his

personal capacity regarding a
typewriter bought by him as
President
of
a
defectively
organized
company
whose
Articles were not yet filed when
the obligation was contracted.
IBM, having dealt with the
defectively organized company
as if it were properly organized
and having relied on its credit
instead of Cransons, is estopped
from asserting that it was not
incorporated.
It cannot sue
Cranson personally.
SALVATIERRA
VS
GARLITOS (103 Phil. 757; 1958)

Salvatierra leased his land to

the corporation. He filed a suit
for accounting, rescission and
damages against the corporation
and its president for his share of
the produce. Judgment against
both was obtained. President
complains
for
being
held
personally liable.
He is liable. An agent who
acts for a non-existent principal
is himself the principal. In acting
on behalf of a corporation which
he knew to be unregistered, he
assumed the risk arising from
the transaction.

ALBERT
VS
UNIVERSITY
PUBLISHING CO., INC. (Jan.
30, 1965)
Mariano Albert entered
into a contract with University
Publishing Co., Inc. through Jose
M.
Aruego,
its
President,
whereby University would pay
plaintiff for the exclusive right to
publish
his
revised
Commentaries on the Revised
Penal
Code.
The
contract
stipulated that failure to pay one
installment would render the rest
of the payments due. When
University failed to pay the
second installment, Albert sued
for
collection
and
won.

However, upon execution, it was

found that University was not
registered with the SEC. Albert
petitioned for a writ of execution
against Jose M. Aruego as the
real
defendant.
University
opposed, on the ground that
Aruego was not a party to the
case.
The Supreme Court
found that Aruego represented a
non-existent entity and induced
not only Albert but the court to
believe in such representation.
Aruego, acting as representative
of such non-existent principal,
was the real party to the
contract sued upon, and thus

assumed such privileges and

obligations
and
became
personally liable for the contract
entered into or for other acts
performed as such agent.
The Supreme Court
likewise held that the doctrine of
corporation by estoppel cannot
be set up against Albert since it
was Aruego who had induced
him to act upon his (Aruego's)
willful
representation
that
University
had
been
duly
organized and was existing
under the law.
BY-LAWS (Sec. 46 & 47)

When adopted:
(a) No later than one (1)
month after receipt from
SEC
of
official
notice
of
issuance
of
Cert.
of
incorporation.
Requirement:
Affirmative vote
of stockholders representing at
least
majority
of
outstanding capital

stock (Stock Corp.)

or members (NonStock)
Must
be signed by stockholders or
members voting for them
(b) Prior
incorporation
Requirement:
incorporators;
by all of them

to

Approval of all
must be signed

Where kept:
the principal office
corporation ; and
Securities
Commission

and

(1) In
of the
(2)
Exchange

When effective:
Only
upon the SECs issuance of a
certification that the by-laws
are not inconsistent
with
the
Corporation
Code.
Special
corporations: By-laws and/or
amendments thereto must be
accompanied by

a
certificate of the appropriate
government agency to the
effect that such by-laws /
amendments are in accordance
with
law.

banks or banking
institutions

building and loan

associations

trust companies

insurance
companies

public utilities


educational
institutions

other
special
corporations governed by
special laws
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 bylaws for:
1)
the time, place and
manner of calling and

conducting
regular
special meetings of
directors or trustees;

or
the

2)
the time and manner
of calling and conducting
regular
and
special
meetings
of
the
stockholders or members;
3)
the required quorum
in meetings of stockholders
or
members
and
the
manner of voting herein;
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 or 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 certificates; and
10) such other matters as
may be necessary for the
proper
or
convenient
transaction of its corporate
business and affairs.
FLEISCHER
V.
BOTICA
NOLASCO CO. (47 Phil. 583;
1925)
As a general rule, the by-laws
of a corporation are valid if they

are reasonable and calculated to

carry into effect the objective of
the corporation and are not
contradictory to the general
policy of the laws of the land.
Under a statute authorizing bylaws for the transfer of stock, a
corp. can do no more than
prescribe a general mode of
transfer on the corp. books and
cannot justify an
restriction
upon the right of sale.
GOVT. OF P.I. V. EL HOGAR
Is a provision in the by-laws
allowing the BOD, by vote of
absolute majority, to cancel
shares valid?

No. It is a patent nullity,

being in direct conflict with Sec.
187 of the Corp. Law which
prohibits forced surrender of
unmatured stocks except in case
of dissolution.
Is a provision in the by-laws
fixing the salary of directors
valid?
Yes. Since the Corporation
Law does not prescribe the rate
of compensation, the power to
fix compensation lies with the
corporation.

Is a provision requiring persons

elected to the Board of Directors
to own at least P 5,000 shares
valid?
Yes. The Corporation Law
gives the corporation the power
to provide qualifications of its
directors.
CITIBANK, N.A. v. CHUA (220
SCRA 75)

Where the SEC grants a

license
to
a
foreign
corporation, it is deemed to
have approved its
foreign-enacted by-laws. Sec.
46 of the Corporation Code
which states that by-laws are

not valid without SEC approval

applies only to domestic
corporations.

A
board
resolution
appointing an attorney-in-fact
to represent the corporation
during
pre-trial
is
not
necessary where the by-laws
authorize an officer of the
corporation to make such
appointment.
LOYOLA GRAND VILLAS
CA (276 SCRA 681)

v.

ISSUE: Whether the failure of a

corporation to file its by-laws

within one (1) month from the

date
of
its
incorporation,
as
mandated by Art. 46 of the
Corporation Code, results in
the corporation's automatic
dissolution.
RULING:
No. Failure to file
by-laws does not result in the
automatic dissolution of the
corporation. It only constitutes
a ground for such dissolution.
(Cf. Chung Ka Bio v. IAC, 163
SCRA
534)
Incorporators
must be given the chance to
explain
their
neglect
or
omission and remedy the
same.

THE CORPORATE ENTITY

The Theory of Corporate
Entity

When
does
the
corporations existence as a
legal entity commence?
Upon issuance by the SEC
of
the
certificate
of
incorporation (Sec. 19)

What
rights
does
corporation acquire?

the

The right to:

1)
sue and be sued;
2)
hold property in its
own name;
3)
enter into contracts
with third persons; &
4)
perform all other
legal acts.
Since corporate property is
owned by the corporation
as a juridical person, the
stockholders have no claim
on it as owners, but have
merely an expectancy or

inchoate right to the same

should any of it remain
upon the dissolution of the
corporation
after
all
corporate creditors have
been paid. Conversely, a
corporation has no interest
in the individual property of
its
stockholders,
unless
transferred
to
the
corporation.
Remember
that the liability of the
stockholders is limited to
the amount of shares.
SAN JUAN STRUCTURAL &
STEEL
FABRICATORS
v.
CA (296 SCRA 631)

A corporation is a juridical
person separate and distinct
from
its
stockholders
or
members.
Accordingly,
the
property of the corporation is not
the property of its stockholders
or members and may not be sold
by the stockholders or members
without express authorization
from the corporation's Board of
Directors.
In this case, the sale of a
piece of land belonging to
Motorich Corporation by the
corporation
treasurer
(Gruenberg) was held to be
invalid in the absence of
evidence that said corporate

treasurer was authorized to

enter into the contract of sale, or
that the said contract was
ratified by Motorich.
Even
though Gruenberg and her
husband owned 99.866% of
Motorich, her act could not bind
the corporation since she was
not
the
sole
controlling
stockholder.
STOCKHOLDERS
OF
GUANZON V. REGISTER
DEEDS (6 SCRA 373)

F.
OF

Properties registered in the

name of the corporation are
owned by it as an entity
separate and distinct from its

members. While shares of stock

constitute personal property,
they do not represent property
of the corporation. A share of
stock only typifies an aliquot
part
of
the
corporation's
property or the right to share in
its proceeds to that extent when
distributed according to law and
equity, but its holder is not the
owner of any part of the capital
of the corporation. Nor is he
entitled to the possession of any
definite portion of its property or
assets.
The act of liquidation made by
the stockholders of the corp of
the latters assets is not and

cannot be considered a partition

of community property, but
rather a transfer or conveyance
of the title of its assets to the
individual stockholders. Since
the purpose of the liquidation, as
well as the distribution of the
assets, is to transfer their title
from the corporation to the
stockholders in proportion to
their shareholdings, that transfer
cannot be effected without the
corresponding
deed
of
conveyance from the corporation
to the stockholders.
It is,
therefore, fair and logical to
consider
the
certificate
of
liquidation as one in the nature
of a transfer or conveyance.

CARAM V. CA (151 SCRA 373;

1987)
The
case
of
the
unpaid
compensation
for
the
preparation of the project study.
The petitioners were not
involved in the initial stages of
the organization of the airline.
They were merely among the
financiers whose interest was to
be invited and who were in fact
persuaded, on the strength of
the project study, to invest in the
proposed airline.

There was no showing that

the Airline was a fictitious corp
and did not have a separate
juridical personality to justify
making
the
petitioners,
as
principal stockholders thereof,
responsible for its obligations.
As a bona fide corp, the Airline
should alone be liable for its
corporate
acts
as
duly
authorized by its officers and
directors.
Granting that the
petitioners benefited from the
services rendered, such is no
justification
to
hold
them
personally
liable
therefor.
Otherwise,
all
the
other
stockholders of the corporation,
including those who came in

late, and regardless of the

amount of their shareholdings,
would be equally and personally
liable also with the petitioner for
the claims of the private
respondent.
PALAY V.
640; 1983)

CLAVE (124

SCRA

The case of the reliance on a

default provision of the contract
granting automatic extra-judicial
rescission.
The court found no badges of
fraud on the part of the
president of the corporation.
The BOD had literally and

mistakenly relied on the default

provision of the contract. As
president
and
controlling
stockholder of the corp, no
sufficient proof exists on record
that he used the corp to defraud
private respondent. He cannot,
therefore, be made personally
liable because he appears to be
the
controlling
stockholder.
Mere ownership by a single
stockholder
or
by
another
corporation of all or nearly all of
the capital stock of a corporation
is not of itself sufficient ground
for disregarding the separate
corporate personality.

MAGSAYSAY
LABRADOR (180 SCRA 266)

V.

The case of the assignment by

Senator Magsaysay of a certain
portion of his shareholdings in
SUBIC granting his sisters the
right to intervene in a case filed
by the widow against SUBIC.
The words "an interest in the
subject," to allow petitioners to
intervene, mean a direct interest
in the cause of action as
pleaded, and which would put
the intervenor in a legal position
to litigate a fact alleged in the
complaint,
without
the

establishment of which plaintiff

could not recover.
Here,
the
interest,
of
petitioners, if it exists at all, is
indirect,
contingent,
remote,
conjectural, consequential and
collateral.
At the very least,
their interest is purely inchoate,
or in sheer expectancy of a right
in the management of the
corporation and to share in the
profits thereof and in the
properties and assets thereof on
dissolution, after payment of the
corporate debts and obligations.
While a share of stock
represents a proportionate or

aliquot interest in the property of

the corp, it does not vest the
owner thereof with any legal
right or title to any of the
property, his interest in the
corporate
property
being
equitable and beneficial in
nature. Shareholders are in no
legal sense the owners of
corporate property, which is
owned by the corp as a distinct
legal person.
PIERCING THE CORPORATE
VEIL

Q: What is the theory of

corporate entity?
A: That a corporation has a
personality distinct from its
stockholders, and is not
affected by the personal
rights,
obligations
and
transactions of the latter.
Q: When Can the Veil of
Corporate Entity be Pierced?
A:
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 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.
Q: What are the effects of
disregarding the corporate
veil?

(1) Stockholders would be

personally liable for the
acts and contracts of the
corporation
whose
existence at least for the
purpose of the particular
situation
involved
is
ignored.
(2) Court is not denying
corporate existence for all
purposes
but
merely
refuses
to
allow
the
corporation to use the
corporate privilege for the
particular purpose involved.

Contrary to law / public

policy; evasion of liability to
government
STATE V. STANDARD OIL (49
Ohio, St., 137, N.E. 279, 15;
1892)
Where all or a majority of
stockholders
comprising
a
corporation do an act which is
designed to affect the property
and business of the company, as
if it had been a formal resolution
of its Board of Directors and the
acts done is ultra vires, the act
should be regarded as the act of
the corporation, and may be

challenged by the state in a quo

warrranto proceeding.
LAGUNA TRANS V. SSS (107
Phil. 833; 1960)
Where the corporation was
formed by and consisted of the
members of a partnership whose
business and property was
conveyed to the corporation for
the purpose of continuing its
business, such corporation is
presumed to have assumed
partnership debts.

MARVEL BLDG. CORP.

DAVID (94 Phil. 376; 1954)

V.

The fact that:

certificates
in
possession of Castro were
endorsed in blank;

Castro had enormous

profits and had motive to hide
them;

other subscribers had no

incomes
of
sufficient
magnitude; and

directors never met;

shows that other shareholders
may be considered dummies of

Castro. Hence, corporate

may be pierced.

Evasion
creditors

of

liability

veil

to

TAN
BOON
BEE
CO.
V.
JARENCIO (163
SCRA
205;
1988)
Tan BBC (T) supplies paper to
Graphics Publishing Inc (G) but
the latter fails to pay. G's
printing machine levied upon to
satisfy claim but PADCO, another

corpo intercedes, saying it is the

owner of the machine, having
leased such to G.
Printing machine was allowed
by the Court to satisfy G's
liability. Both G and PADCO's
corporate
entities
pierced
because they have: the same
board of directors, PADCO owns
50% of G, PADCO never engaged
in the business of printing.
Obviously, the board is using
PADCO to shield G from fulfilling
liability to T.
NAMARCO v. AFCorp (19 SCRA
962; 1967)

Associated Financing Corp.

(AFC), through its pres. F. Sycip
(who together with wife, own
76% of AFC) contracts with
NAMARCO for an exchange of
sugar (raw v. refined). N delivers,
AFC doesn't since it did not have
sugar to supply in the first place.
N sues to recover sum of money
plus damages.
Sycip
held
jointly
and
severally liable with AFC. AFC's
corporate veil was pierced
because it was used as Sycip's
alter ego, corpo used merely as
an instrumentality, agency or
conduit of another to evade
liability.

JACINTO V. CA (198 SCRA 211)

Jacinto,
president/GM
and
owner of 52% of corpo, owes
MetroBank sum of money, signs
trust receipts therefor. Jacinto
absconds. Jacinto ordered to
jointly
and
severally
pay
MetroBank. Corpo veil pierced
because it was used as a shield
to perpetuate fraud and/or
confuse legitimate issues. There
was no clear cut delimitation
between the personality of
Jacinto and the corporation.

Evasion
of
liability
obligation to employees

CLAPAROLS V. CIR (65 SCRA

613; 1975)
Both
predecessor
and
successor were owned and
controlled by petitioner and
there was no break in the
succession and continuity of the
same business. All the assets of
the dissolved Plant were turned
over
to
the
emerging
corporation.
The
veil
of
corporate fiction must be pierced
as it was deliberately and
maliciously designed to evade its

financial
obligation
employees.
INDOPHIL
TEXTILE
WORKERS
UNION
CALICA (205 SCRA 698)

to

its

MILL
V.

Rule: The doctrine of piercing

the veil of corporate entity
applies when corporate fiction is
used
to
defeat
public
convenience,
justify
wrong,
protect fraud or defend crime, or
when it is made as a shield to
confuse the legitimate issues or
where a corporation is the mere
alter ego or business conduit of
a
person,
or
where
the

corporation is so organized and

controlled and its affairs are so
conducted as to make it merely
an
instrumentality,
agency,
conduit or adjunct of another
corporation.
Case at bar: Union sought to
pierce corporate veil alleging
that the creation of Acrylic is a
devise to evade the application
of the CBA Indophil had with
them (or it sought to include the
other union in its bargaining
leverage).
SC: Legal corporate entity is
disregarded only if it is sought to
hold
the
officers
and

stockholders directly liable for a

corporate debt or obligation.
Union does not seek to impose
such claim against Acrylic. Mere
fact
that
businesses
were
related, that some of the
employees of Indophil are the
same persons manning and
providing for auxiliary services
to the other company, and that
physical plants, officers and
facilities are situated in the
same compound - not sufficient
to apply doctrine.
NAFLU V. OPLE (143 SCRA 125;
1986)

Libra/Dolphin Garments was

but an alter ego of Lawman
Industrial, therefore, the former
must bear the consequences of
the latter's unfair acts. It cannot
deny
reinstatement
of
petitioners simply because of
cessation
of
Lawman's
operations, since it was in fact
an illegal lock-out, the company
having maintained a run-away
shop
and
transferred
its
machines and assets there.
Here, the veil of corporate
fiction was pierced in order to
safeguard the right to selforganization and certain vested
rights which had accrued in

favor of the union. Second

corporation
sought
the
protective shield of corporate
fiction to achieve an illegal
purpose.
ASIONICS
PHILS.
NLRC (290 SCRA 164)

v.

A corporation is invested by
law with a personality separate
and distinct from those of the
persons composing it as well as
from that of any other legal
entity to which it may be
related. Mere ownership by a
single stockholder or by another
corporation of all or nearly all of

the capital stock of a corporation

is not of itself sufficient ground
for disregarding the separate
corporate personality.
Where there is nothing on
record to indicate the President
and majority stockholder of a
corporation had acted in bad
faith or with malice in carrying
out the retrenchment program of
the company, he cannot be held
solidarily and personally liable
with the corporation.
Evasion
contract

of

liability

on

VILLA-REY
TRANSIT
V.
FERRER (25 SCRA 849; 1968)
Jose
M.
Villarama,
operator of a bus company, Villa
Rey
Transit,
which
was
authorized to operate 32 units
from Pangasinan to Manila and
vice-versa, sold 2 CPCs to
Pantranco. One of the conditions
included in the contract of sale
was that the seller (Villarama)
"shall not, for a period of 10
years from the date of the sale,
apply for any TPU service
identical or competing with the
buyer (Pantranco)."

Barely 3 months after the

sale, a corporation called Villa
Rey Transit, Inc. was organized,
with the wife of Jose M. Villarama
as one of the incorporators and
who was subsequently elected
as treasurer of the Corporation.
Barely
a
month
after
its
registration with the SEC, the
corporation bought 5 CPCs and
49 buses from one Valentin
Fernando, and applied with the
Public Service Commission (PSC)
for approval of the sale. Before
the PSC could take final action
on the said application, however,
2 of the 5 CPCs were levied upon
pursuant to a writ of execution
issued by the CFI in favor of

Eusebio
Ferrer,
judgment
creditor,
against
Valentin
Fernando,
judgment
debtor.
During
the
public
sale
conducted,
Ferrer
was
the
highest bidder, and a certificate
of sale was issued in his name.
Shortly thereafter, he sold the
said CPCs to Pantranco, and they
jointly submitted their contract
of sale to the PSC for approval.
The PSC issued an order
that pending resolution of the
applications,
Pantranco
shall
have
the
authority
to
provisionally operate the service
under the 2 CPCS that were the
subject of the contract between

Ferrer and Pantranco. Villa Rey

Transit took issue with this, and
filed a complaint for annulment
of the sheriff's sale of the CPCs
and prayed that all the orders of
the PSC relative to the dispute
over the CPCs in question be
annulled. Pantranco filed a thirdparty complaint against Jose M.
Villarama, alleging that Villarama
and Villa Rey Transit are one and
the same, and that Villarama
and/or
the
Corporation
is
qualified from operating the
CPCs by virtue of the agreement
entered into between Villarama
and Pantranco.

Given the evidence, the

Court found that the finances of
Villa-Rey, Inc. were managed as
if they were the private funds of
Villarama and in such a way and
extent that Villarama appeared
to be the actual owner of the
business without regard to the
rights
of
the
stockholders.
Villarama even admitted that he
mingled the corporate funds with
his
own
money.
These
circumstances
negate
Villarama's claim that he was
only
a
part-time
General
Manager, and show beyond
doubt that the corporation is his
alter ego. Thus, the restrictive
clause with Pantranco applies. A

seller may not make use of a

corporate entity as a means
of evading the obligation of
his covenant.
Where the
Corporation is substantially
the alter ego of one of the
parties to the covenant or
the restrictive agreement, it
can
be
enjoined
from
competing
with
the
covenantee.
Close Corporations
CEASE V. CA (93 SCRA 483;
1979)

The Cease plantation was

solely composed of the assets
and properties of the defunct
Tiaong plantation whose license
to operate already expired. The
legal
fiction
of
separate
corporate
personality
was
attempted to be used to delay
and deprive the respondents of
their succession rights to the
estate of their deceased father.
While originally, there were
other incorporators of Tiaong, it
has developed into a closed
family corporation (Cease). The
head of the corporation, Cease,
used the Tiaong plantation as his
instrumentality.
It
was
his

business
conduit
and
an
extension of his personality.
There is not even a showing that
his children were subscribers or
purchasers of the stocks they
own.
DELPHER TRADES V. CA (157
SCRA 349; 1988)
The Delpher Trades Corp. is a
business
conduit
of
the
Pachecos. What they really did
was to invest their properties
and change the nature of their
ownership from unincorporated
to
incorporated
form
by
organizing Delpher and placing

the control of their properties

under the corporation. This
saved them inheritance taxes.
This is the reverse of Cease;
however, it does not modify the
other cases. It stands on its own
because of the facts.
Parent-Subsidiary
Relationship

Q: What is the general

rule
governing
parentsubsidiary relationship?

A: The mere fact that a

corporation owns all or
substantially all of the
stocks
of
another
corporation is not alone
sufficient to justify their
being treated as one entity.
Q:
When may it be
disregarded by the courts?
(1)
if the subsidiary was
formed for the payment
of evading the payment
of higher taxes
(2)
where
it
was
controlled by the parent

that its separate identity

was hardly discernible
(3)
parent corporations
may be held responsible
for the contracts as well
as the torts of the
subsidiary
Q: What are the criteria
by which the subsidiary
can be considered a mere
instrumentality
of
the
parent company?
1.
the parent corp.
owns all or most of the

capital stock of the

subsidiary.
2.
the
parent
and
subsidiary have common
directors and officers
3.
the parent finances
the subsidiary
4.
the
parent
subscribes to all the
capital stock of the
subsidiary or otherwise
causes its incorporation
5.
the subsidiary has
grossly
inadequate
capital
6.
the parent pays the
salaries
and
other
expenses or losses of the
subsidiary

7.
the subsidiary has
substantially no business
except with the parent
corp. or no assets except
those conveyed to or by
the parent corp.
8.
in the papers of the
parent corp. or in the
statements of its officers,
the
subsidiary
is
described
as
a
department or division of
the parent corp. or its
business
or
financial
responsibility is referred
as the parents own
9.
the parent uses the
property
of
the
subsidiary as its own

10. the directors or the

executives
of
the
subsidiary do not act
independently
in
the
interest of the subsidiary
but take their orders
from the parent corp. in
the latters interest
11. the
formal
legal
requirements
of
the
subsidiary
are
not
observed
(Garrett
vs. Southern
Railway)
(Note: Sir Jack said that we
must not stop after weve
gone through the 11 points

in order to determine
whether or not there is a
subsidiary
or
instrumentality. We must
go further and consider
other circumstances which
may help determine clearly
the true nature of the
relationship. --- Em)
GARRETT
VS.
RAILWAY (173 F.
E.D. Tenn. 1959)

SOUTHERN
Supp. 915,

This case involved a

Workers Compensation claim by
a wheel moulder employed by
Lenoir Car Works. The plaintiff

sought to claim from Southern

Railway
Company,
which
acquired the entire capital stock
of Lenoir Car Works. Plaintiff
contended that Southern so
completely dominated Lenoir
that the latter was a mere
adjunct or instrumentality of
Southern.
The general rule is that
stock ownership alone by one
corporation of the stock of
another does not thereby render
the dominant corporation liable
for
the
torts
of
the
subsidiary, unless the separate
corporate existence of the
subsidiary is a mere sham, or

unless the control of the

subsidiary is such that it is but
an instrumentality or adjunct of
the dominant corporation.
In the case, it was found that
there
were
two
distinct
operations.
There
was
no
evidence that Southern dictated
the management of Lenoir. In
fact,
evidence
shows
that
Marius, the manager of the
subsidiary, was in full control of
the operation. He established
prices, handled negotiations in
CBAs, etc. Lenoir paid local
taxes, had local counsel and
maintain
a
Workmens
Compensation Fund. There was

also no evidence that Lenoir was

run solely for the benefit of
Southern. In fact, a substantial
part of its requirements in the
field of operation of Lenoir was
bought elsewhere. Lenoir sold
substantial quantities to other
companies.
Policy
decisions
remained in the hands of
Marius. Hence, the complaint
against Southern Railway was
dismissed.
KOPPEL VS. YATCO (77 Phil.
496; 1946)
This case involved a
complaint for the recovery of

merchant sales tax paid by

Koppel (Philippines), Inc. under
protest to the Collector of
Internal Revenue. Although the
Court of First Instance did not
deny legal personality to Koppel
(Philippines), Inc. for any and all
purposes,
it
dismissed
the
complaint saying that in the
transactions involved in the
case, the public interest and
convenience would be defeated
and
would
amount
to
a
perpetration of tax evasion
unless resort was had to the
doctrine of "disregard of the
corporate fiction."

The facts show that 99.5% of

the shares of stocks of K-Phil
were owned by K-USA. K-Phil.
acted as a representative of KUSA and not as an agent. K-Phil.
also
bore
alone
its
own
incidental expenses (e.g. Cable
expenses) and also those of its
principal. Moreover, K-Phils
share in the profits was left in
the hands of K-USA. Clearly, KPhil was a mere branch or
dummy of K-USA, and was
therefore liable for merchant
sales tax. To allow otherwise
would
be
to
sanction
a
circumvention of our tax laws
and permit a tax evasion of no
mean
proportion
and
the

consequent commission of a
grave
injustice
to
the
Government. Moreover, it would
allow the taxpayer to do by
indirection what the tax laws
prohibit to be done directly.
LIDDELL & CO.
SCRA 632; 1961)

VS.

CIR (2

Liddel Motors Inc. was an alter

ego of Liddel & Co. At the time
of its incorporation, 98% of the
Liddel Inc.s stock belonged to
Frank Liddel.
As to Liddel
Motors, Frank supplied the
original capital funds. The bulk
of the business of Liddel Inc. was
channeled
through
Liddel

Motors.
Also, Liddel Motors
pursued no other activities
except to secure cars, trucks and
spare parts from Liddel Inc. and
then sell them to the general
public.
To allow the taxpayer to deny
tax liability on the ground that
the sales were made through
another and distinct corporation
when it is proved that the latter
is virtually owned by the former
or that they were practically one
and the same is to sanction the
circumvention of tax laws.
YUTIVO VS. CTA (1 SCRA 160;
1961)

Southern Motors was actually

owned and controlled by Yutivo
as to make it a mere subsidiary
or branch of the latter created
for the purpose of selling
vehicles
at
retail.
Yutivo
financed
principally,
if
not
wholly, the business of Southern
Motors and actually exceeded
the credit of the latter . At all
times,
Yutivo,
through
the
officers and directors common to
it and the Southern Motors
exercised full control over the
cash
funds,
policies,
expenditures and obligations of
the latter.
Hence, Southern
Motors,
being
a
mere

instrumentality or adjunct of
Yutivo,
the
CTA
correctly
disregarded
the
technical
defense of separate corporate
identity in order to arrive at the
true tax liability of Yutivo.
LA
CAMPANA
VS.
KAISAHAN (93 Phil. 160; 1953)
The La Campana Gaugau
Packing and La Campana Coffee
Factory were operating under
one single business although
with 2 trade names. It is a
settled doctrine that the fiction
of law of having the corporate
identity separate and distinct
from the identity of the persons

running it cannot be invoked to

further the end subversive of
the purpose for which it was
created. In the case at bar, the
attempt to make the two
businesses appear as one is but
a device to defeat the ends of
the law governing capital and
labor relations and should not be
permitted to prevail.
PROMOTERS CONTRACTS
PRIOR TO INCORPORATION
Liability of Corporation for
Promoters Contracts

While a corporation
could not have been a
party to a promoter's
contract since it did yet
exist at the time the
contract was entered
into and thus could not
possibly have had an
agent who could legally
bind it, the corporation
may make the contracts
its own and become
bound thereon if, after
incorporation, it:
(1)
Adopts
or
ratifies the contract;
or

(2)
Accepts
its
benefits
with
knowledge of the
terms thereof.
It
must
be
noted,
however,
that
the
contract
must
be
adopted in its entirety;
the corporation cannot
adopt only the part that
is beneficial to it and
discard that which is
burdensome. Moreover,
the contract must be one
which is within the
powers
of
the
corporation to enter, and
one which the usual

agents of the company

have express or implied
authority to enter.
McARTHUR
V.
TIMES
PRINTING CO. (48 Minn. 319,
51 N.W. 216; 1892)
It is not a requisite that a
corporation's
adoption
or
acceptance of a promoter's
contract be expressed, but it
may be inferred from acts or
acquiescence on the part of the
corporation, or its authorized
agents, as any similar original
contract might be shown.

The right of agents to adopt

an agreement originally made by
promoters depends upon the
purposes of the corporation and
the nature of the agreement.
The agreement must be one
which the corporation itself
could make and one which the
usual agents of the company
have
express
or
implied
authority to enter into.
CLIFTON v. TOMB (21 F. 2d
893; 1921)
Whatever may be the proper
legal
theory
by
which
a
corporation may be bound by
the
contract
(ratification,

adoption, novation, a continuing

offer to be accepted or rejected
by the corporation), it is
necessary in all cases that the
corporation should have full
knowledge of the facts, or at
least should be put upon such
notice as would lead, upon
reasonable
inquiry,
to
the
knowledge of the facts.
CAGAYAN FISHING DEV. CO. v.
SANDIKO (65 Phil. 223; 1937)
A promoter could not have
acted as agent for a corporation
that had no legal existence. A
corporation, until organized, has
no life therefore no faculties.

The corporation had no juridical

personality to enter into a
contract.
Also see Caram v. CA
Corporate Rights under
Promoters Contracts

Should the other

contracting party fail to
perform its part of the
bargain, the corporation
which has adopted or
ratified the contract may
either sue for:

(1)
Specific
performance; or
(2)
Damages
resulting from breach
of contract.
The fact of bringing an
action on the contract
has
been
held
to
constitute
sufficient
adoption or ratification to
give the corporation a
cause of action.

BUILDERS DUNTILE CO. v.

DUNN (229 Ky. 569, 17 S.W. 2d
715; 1929)
When the corporation was
formed, the incorporators took
upon themselves the whole
thing, and ratified all that had
been done on its behalf. Though
there was no formal assignment
of
the
contract
to
the
corporation, the acts of the
incorporators were an adoption
of the contract. Therefore the
corporation has the right to sue
for damages for the breach of
contract.

RIZAL LIGHT V. PSC (25 SCRA

285; 1968)
The incorporation of (Morong)
and its acceptance of the
franchise as shown by this action
in prosecuting the application
filed with the Commission for
approval of said franchise, not
only
perfected
a
contract
between the municipality and
Morong but also cured the
deficiency pointed out by the
petition. The fact that Morong
did not have a corporate
existence on the day the
franchise was granted does not
render the franchise invalid, as
Morong
later
obtained
its

certificate of incorporation and

accepted the franchise.
Personal Liability of
Promoter on PreIncorporation Contracts

GENERAL
RULE:
Promoters
are
personally
liable
on
their
contracts made on behalf
of a corporation to be
formed.
EXCEPTION:
If there is
an express or implied

agreement
to
the
contrary. It must be
noted that the fact
that the corporation
when
formed
has
adopted or ratified the
contract
does not release
the
promoter
from
responsibility unless a
novation
was
intended.
WELLS VS. FAY & EGAN
CO. (143 Ga. 732, 85 S.E. 873;
1915)

Individual promoters cannot

escape liability where they buy
machinery, receive them in their
possession and authorize one
member to issue a note, in
contemplation of organizing a
corporation which was not
formed. (see Campos' notes p.
258-259).
The
agent
is
personally liable for contracts if
there is no principal. The making
of partial payments by the
corporation, when later formed,
does not release the promoters
here from liability because the
corporation acted as a mere
stranger paying the debt of
another, the acceptance of
which by the creditor does not

release the debtors from liability

over the balance. Hence, there is
no adoption or ratification.
HOW & ASSOCIATES INC. VS.
BOSS (222 F. Supp. 936; 1963)
The rule is that if the contract
is partly to be performed before
incorporation, the promoters
solely are liable. Even if the
promoter signed "on behalf of
corporation to be formed, who
will be obligor," there was here
an intention of the parties to
have a present obligor, because
three-fourths of the payment are
to be made at the time the

drawings or plans in the

architectural
contract
are
completed, with or without
incorporation.
A
purported
adoption by the corporation of
the contract must be expressed
in a novation or agreement to
that effect. The promoter is
liable unless the contract is to be
construed to mean: 1) that the
creditor agreed to look solely to
the
new
corporation
for
payment;
or
2)
that
the
promoter did not have any duty
toward the creditor to form the
corporation
and
give
the
corporation the opportunity to
assume and pay the liability.

QUAKER HILL VS. PARR (148

Colo. 45, 364 P. 2d 1056; 1961)
The promoters here are not
liable because the contract
imposed no obligation on them
to form a corporation and they
were not named there as
obligors/promissors.
The
creditor-plaintiff was aware of
the
inexistence
of
the
corporation but insisted on
naming it as obligor because the
planting
season
was
fast
approaching and he needed to
dispose of the seedlings. There
was no intent here by plaintiffcreditor to look to the promoters

for the performance of the

obligation. This is an exception
to
the
general
rule
that
promoters are personally liable
on their contracts, though made
on behalf of a corporation to be
formed.
Fiduciary relationship
between corporation and
promoter

OLD
DOMINION
VS.
BIGELOW (203 Mass. 159, 89
N.E. 193; 1909)

A promoter, notwithstanding
his fiduciary duties to the
corporation,
may
still
sell
properties to it, but he must
pursue one of four courses to
make the contract binding.
These are: 1) provide an
independent board of officers in
no respect directly or indirectly
under his control, and make full
disclosure to the corporation
through them; 2) make full
disclosure of all material facts to
each original subscriber of
shares in the corporation; 3)
procure a ratification of the
contract after disclosing its
circumstances by vote of the
stockholders of the completely

established corporation; or 4) be
himself the real subscriber of all
the shares of the capital stock
contemplated as a part of the
promotion
scheme.
The
promoter is liable, even if
owning all the stock of the
corporation at the time of the
transaction, if further original
subscription to capital stock
contemplated as an essential
part of the scheme of promotion
came in after such transaction.
CORPORATE POWERS
General Powers of
Corporation (Sec. 36)


To sue and be sued
in its corporate name;

Of succession by its
corporate name for the
period of time stated in
the
articles
of
incorporation
and
the
certificate
of
incorporation;

To adopt and use a

corporate seal;

To
amend
its
articles of incorporation in

accordance
with
the
provisions of this Code;

To adopt by-laws
not
contrary
to
law,
morals, or public policy,
and to amend or repeal
the same in accordance
with this Code;

In case of stock
corporations, to issue of
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;


To
purchase,
receive, take, 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;

(NOTE: There are two

(2) general restrictions
on the power of the corp.
to acquire and hold
properties:
(1) that the property
must be reasonable
and necessarily
required by the
transaction of its lawful
business, and
(2) that the power
shall be subject to
the
limitations
prescribed

by other special
laws
and
the
Constitution.)

To adopt any plan of

merger or consolidation as
provided in this Code;

To make reasonable
donations, including those
for the public welfare of
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;

To
establish
pension, retirement and
other plans for the benefit
of its directors, trustees,
officers and employees;
and

To exercise such
other powers as may be
essential or necessary to
carry out its purpose or
purposes as stated in its
articles of incorporation.

Specific Powers of
Corporation

Extension
or
shortening
of
the
corporate term (Sec. 37)

Increase
or
decrease of the capital
stock (Sec. 38)

Incur, create or
increase
bonded
indebtedness (Sec. 38)


Denial of the preemptive right (Sec. 39)

Sale
or
other
disposition
of
substantially
all
its
assets. (Sec. 40)

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


Acquisition of its
own shares. (Sec. 41)

Investment
another corporation
business. (Sec. 42)

Declaration
dividends. (Sec. 43)

in
or
of

Entering
into
management contracts.
(Sec. 44)
Implied Powers

Under Sec. 36, a corporation

is given such powers as are
essential or necessary to carry
out its purpose or purposes as
stated
in
the
articles
of
incorporation. This phrase gives
rise to such a wide range of
implied powers, that it would not
be at all difficult to defend a
corporate
act
versus
an
allegation that it is ultra vires.
A corporation is presumed to
act within its powers and when a
contract
is
not
its
face
necessarily beyond its authority;
it will, in the absence of proof to
the contrary, be presumed valid.

The Ultra Vires Doctrine

Blacks
Definition:

Law

Dictionary

Ultra vires acts are those acts

beyond the scope of the powers
of the corporation, as defined by
its charter or laws of state of
incorporation. The term has a
broad application and includes
not only acts prohibited by the
charter, but acts which are in
excess of powers granted and
not prohibited, and generally
applied
either
when
a

corporation
has
no
power
whatever to do an act, or when
the corporation has the power
but exercises it irregularly.
Q:
What
consequences
vires acts?

are
the
of ultra

The
corporation
may be dissolved under a
quo warrranto proceeding.

The Certificate of
Registration
may
be
suspended or revoked by
the SEC.


Parties to the ultra
vires contract will be left
as they are, if the contract
has been fully executed
on both sides. Neither
party can ask for specific
performance,
if
the
contract is executory on
both sides. The contract,
provided that it is not
illegal, will be enforced,
where one party has
performed his part, and
the other has not with the
latter having benefited
from
the
formers
performance.


Any
stockholder
may bring an individual or
derivative suit to enjoin a
threatened ultra vires act
or contract. If the act or
contract has already been
performed, a derivative
suit for damages against
the directors maybe filed,
but their liability will
depend on whether they
acted in good faith and
with reasonable diligence
in
entering
into
the
contracts. When the suit
against the injured party
who had no knowledge
that the corporation was
engaging in an act not

included
expressly
or
impliedly in its purposes
clause.

Ultra vires acts may

become binding by the
ratification of all the
stockholders, unless third
parties
are
prejudiced
thereby, or unless the acts
are illegal.
REPUBLIC OF THE PHILS. v.
ACOJE MINING (7 SCRA 361;
1963)
Resolution adopted by the
company to open a post office

branch at the mining camp and

to assume sole and direct
responsibility for any dishonest,
careless or negligent act of its
appointed postmaster is NOT
ULTRA VIRES because the act
covers a subject which concerns
the benefit, convenience, and
welfare
of
the
companys
employees and their families.
While as a rule an ultra vires
act is one committed outside the
object for which a corporation is
created as defined by the law of
its organization and therefore
beyond the powers conferred
upon it by law, there are
however certain corporate acts

that may be performed outside

of the scope of the powers
expressly conferred if they are
necessary
to
promote
the
interest or welfare of the
corporation.
CARLOS v. MINDORO SUGAR
CO. (57 SCRA 343, 1932)
The BOD of the Phil Trust Co.
adopted a resolution which
authorized its president to
purchase at par and in the name
of the corp. bonds of MSC.
These bonds were later resold
and guaranteed by PTC to third
persons. PTC paid plaintiff the
corresponding interest payments

until July 1, 1928 when it alleged

that it is not bound to pay such
interest or to redeem the
obligation
because
the
guarantee given for the bonds
was illegal and void.
Held: The act of guaranty by PTC
was well within its corporate
powers.
Furthermore, having
received money or property by
virtue of the contract which is
not illegal, it is estopped from
denying liability. Even if the
then prevailing law (Corp. Law)
prohibited
PTC
from
guaranteeing bonds with a total
value in excess of its capital,
with all the MSC properties

transferred to PTC based on the

deed of trust, sufficient assets
were made available to secure
the
payment
of
the
corresponding liabilities brought
about by the bonds.
GOVT v. EL HOGAR (50 Phil
399; 1932)
(This case is an example of how
the implied powers concept may
be used to justify certain acts of
a corporation.)
A quo warranto proceeding
instituted by the Gov't against El
Hogar, a building and loan ass'n

to deprive
franchise.

it

of

its

corp.

1. El Hogar held title to real

property for a period in excess of
5 years in good faith, hence this
cause will not prosper.
2. El Hogar owned a lot and bldg.
at a business district in Manila
allegedly in excess of its
reasonable requirements, held
valid bec, it was found to be
necessary and legally acquired
and developed.
3. El Hogar leased some office
space in its bldg.; it administered
and
managed
properties

belonging to delinquent SHs; and

managed properties of its SHs
even if such were not mortgaged
to them.
Held: first two valid, but the
third is ultra vires bec. the
administration of property in
that manner is more befitting of
the business of a real estate
agent or trust company and not
of a building and loan ass'n.
4.
Compensation
to
the
promoter
and
organizer
allegedly
excessive
and
unconscionable.

Held: Court cannot dwell on the

issue since the promoter is not
a party in the proceeding and it
is the corp. or its SHs who may
bring a complaint on such.
5. Issuance of special shares did
not affect El Hogar's character
as a building and loan ass'n nor
make its loans usurious.
6. Corporate policy of using a
depreciation rate of 10 % per
annum is not excessive, bec.
accdg. to the SC, the by-laws
expressly authorizes the BOD to
determine each year the amount
to be written down upon the

expenses of installation and the

property of the corp.
7. The Corp. Law does not
expressly grant the power of
maintaining reserve funds but
such power is implied.
All
business enterprises encounter
periods of gains and losses, and
its
officers
would
usually
provide for the creation of a
reserve to act as a buffer for
such circumstances.
8. That loans issued to member
borrowers are being used for
purposes other than the bldg. of
homes not invalid bec. there is
no statute which expressly

declares that loans may be

made by these ass'ns solely for
the purpose of bldg. homes.
9. Sec. 173 of the Corp. Law
provides that "any person" may
become a SH on a bldg. and loan
ass'n. The word "person" is used
on a broad sense including not
only natural persons but also
artificial persons.
BISSEL
v.
MICHIGAN
SOUTHERN ( 22 NY 258; 1860)
Two
railroad
corporations
contend that they transcended
their own powers and violated

their own organic laws. Hence,

they should not be held liable for
the injury of the plaintiff who
was a passenger in one of their
trains.
Held: The contract between the
two corporations was an ultra
vires act. However, it is not one
tainted with illegality, therefore,
the accompanying rights and
obligations
based
on
the
contract of carriage between
them and the plaintiff cannot be
avoided by raising such a
defense.

PIROVANO v. DELA RAMA

STEAMSHIP (96 Phil 335 ,
1954)
This case involved the issue of
whether or not the defendant
corporation performed an ultra
vires act by donating the life
insurance proceeds to the minor
children
of
Pirovano,
the
deceased
president
of
the
defendant
company
under
whose
management
the
company grew and progressed
to become a multi-million peso
corporation.
Held:

NO.

The AOI of the corporation

provided two relevant items:
(1) to invest and deal with
moneys of the company not
immediately required, in
such manner as from time
to time may be determined;
and
(2) to aid in any other
manner
any
person,
association or corporation
of which any obligation or
in which any interest is held
by this corporation or in the
affairs of prosperity of
which this corporation has
a lawful interest.

From this, it is obvious that

the
corporation
properly
exercised within its chartered
powers the act of availing of
insurance proceeds to the heirs
of the insured and deceased
officer.
HARDEN
v.
BENGUET
CONSOLIDATED (58 Phil 141)
A contract between Benguet
and
Balatoc
provided
that
Benguet will bring in capital,
eqpt. and technical expertise in
exchange for capital shares in
Balatoc. Harden was a SH of
Balatoc and he contends that

this
contract
violated
the
Corp.Law which restricts the
acquisition of interest by a
mining corp. in another mining
corp.
Held: Harden has no standing
bec. if any violation has been
committed, the same can be
enforced only in a criminal
prosecution by an action of quo
warranto
which
may
be
maintained only by the AttorneyGeneral.
CONTROL AND MANAGEMENT
Allocation of Power and
Control

Q: What are the three

levels
of
corporate
control/power?
Board
of
directors
trustees- responsible
corporate policies and
general management of
business and affairs of
corporation.

or
for
the
the
the

Officers- execute
the
policies laid down by the
board.

Stockholders
or
members- have
residual
power over fundamental
corporate
changes
like
amendments of articles of
incorporation.
Who Exercises Corporate
Powers
Board
of
trustees

directors

or

Q: What are the powers of

the BOD?

The BOD is responsible for

corporate policies and the
general management of the
business affairs of the
corporation. (See Citibank v
Chua)
(a)

Authority (Sec. 24)

(b)

Requirements

(i)

Qualifying share
(Sec. 24)

(ii)
24)

Residence (Sec.

(iii)

Nationality

(iv)
Disqualifications
(Sec. 27)
conviction by final
judgment of offense
punishable > 6 yrs.
prison
violation
of
Corporation code within
5 years prior to date of
election or appointment
(c)

How elected (Sec. 24)

The formula for determining

the number of shares needed
to elect a given number of
directors is as follows:
X = Y x N1

+1

N+1
X = being the number of
shares needed to elect a given
number of directors
Y = being the total number
of
shares
present
or
represented at the meeting
N1 = being the number of
directors desired to be elected
N = being the total number
of directors to be elected
(d)

How removed (Sec. 28)

By a vote of the SHs

holding or representing at
least 2/3 of the outstanding
capital stock, or by a vote of

at least 2/3 of the members

entitled to vote, provided that
such removal takes place at
either a regular meeting of
the corporation or at a special
meeting
called
for
the
purpose. In both cases, there
must be previous notice to the
SHs / members of the
intention to propose such
removal at the meeting.
Removal may be with or
without
cause.
However,
removal
without
cause
may not be used to deprive
minority SHs or members of
the right of representation to

which they may be entitled

under Sec. 24 of the Code.
(e)
How
(Sec. 29)

vacancy

filled

If
vacancy
due
to
removal
Must be
filled by the SHs in a regular
or special meeting
or
expiration
of
term:
called for that
purpose.
If "vacancy" due to
increase Only by means of an
election at a regular or special
SHs

in
number
of
directors
meeting
duly called for the purpose, or
in the same
or
trustees:
meeting authorizing the
increase
of
directors
or
trustees
if so stated in the notice of
the meeting.
All other vacancies:
May be filled by
the vote of at least a majority of
the

remaining directors or
trustees, if still constituting a
quorum.
Note:
Directors
or
trustees so elected to fill
vacancies shall be elected only
for the unexpired
term of their predecessors
in office.
(f)
How
(Sec. 30)
If
laws:

compensated
provided
That

in

by-

compensation stated in the

by-laws.
If not provided in bylaws:
Directors shall not
receive any compensation
other than
reasonable per
diems,
as
directors. However,
compensation other
than per diems may
be
granted
to
directors
by
a
majority vote of the
SHs at a regular or
special
stockholders'
meeting.

Note: In no case shall the

total yearly compensation of
directors, as such directors,
exceed 10%
of the net income before
income tax of the corporation
during the preceding year.
(g)
Matters requiring Board of
Directors' action
(h)
Liability
(See
subsequent
discussion
under Duties of Directors
and
Controlling
Stockholders.)
(i) In general (Sec. 31)

(ii) Business judgment rule

(iii)
Dealings
with
corporation (Sec. 32)

the

(iv)
Contracts
between
corporations with interlocking
directors (Sec. 33)
(v)
34)

Disloyalty (Sec.

(vi)
Watered
(Sec. 65)
(i)
Executive
(Sec. 35)

stocks

Committee

See subsequent discussion

under Board Committees.
RAMIREZ VS. ORIENTALIST
CO AND FERNANDEZ (38 Phil.
634; 1918)
In this case, the board of
directors, before the financial
inability of the corporation to
proceed with the project was
revealed,
had
already
recognized the contracts as
being in existence and had
proceed with the necessary
steps to utilize the films. The
subsequent
action
by
the
stockholders in not ratifying the

contract must be ignored. The

functions of the stockholders are
limited of nature. The theory of a
corporation
is
that
the
stockholders may have all the
profits but shall return over the
complete management of the
enterprise
to
their
representatives
and
agents,
called directors. Accordingly,
there is little for the 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
contracts between a corporation
and a third person must be

made by directors
stockholders.

and

not

LOPEZ VS. ERICTA (45 SCRA

539; 1972)
In this case, the Board of
Regents of the University of the
Philippines terminated the ad
interim appointment of Dr.
Blanco as Dean of the College of
Education by not acting on the
matter. In the transcript of the
meeting which was latter agreed
to be deleted, it was found out
that the BOR, consisting of 12
members, voted 5 in favor of Dr.
Blanco's appointment 3 voted
against, and 4 abstained.

The core of the issue is WON

the 4 abstentions will be counted
in
favor
of
Dr.
Blanco's
appointment or against it. The
SC held that such abstentions be
counted
as
negative
vote
considering that those who
abstained, 3 of which members
of the Screening Committee,
intended to reject Dr. Blanco's
appointment.
ZACHARY VS.
Mic. 622; 1940)

MILLIN (294

The issue in this case is

regarding the validity of the
director's
meeting
at
the

company's
laboratory
on
December 8, 1937 wherein
Zachary
was
removed
as
president
of
the
company.
Zachary that he was not notified
of the meeting thus, the action
was void. On the other hand, the
defendants contend that the
notice requirement was waived
by Zachary's presence at the
meeting.
The SC held that the validity
of the meeting was not affected
by the failure to give notice as
required
by
the
by-laws,
provided that the parties were
personally present. Since all the
parties were present at the

meeting of December 8, and

understood that the meeting
was to be a directors' meeting,
then the action taken is final and
may not be voided by any
informality in connection with its
being called.
PNB VS.
1978)

CA (83 SCRA 238;

The action was brought by the

mortgagor (Tapnio) against PNB
for damages in connection with
the failure of the latter's board of
directors to act expeditiously on
the proposed lease of the
former's sugar quota to one
Tuazon.

The Supreme Court held that

while the PNB has the ultimate
authority
to
approve
or
disapprove the proposed lease
since the quota was mortgaged
to PNB, the latter certainly
cannot
escape
liability
for
observing, for the protection of
the interest of the private
respondents, that degree of
care, precaution and vigilance
which the circumstances justly
demand
in
approving
or
disapproving the lease of the
said sugar quota.

Corporate
agents

officers

and

(a)
Minimum
set
of
officers
and
their
qualifications (Sec. 25)
The minimum set of officers
are:
(1)
president
(who
shall be a director);
(2)
secretary
(who
shall be a resident and
Filipino citizen); and
(3)
treasurer (who may
or may not be a
director)

The by-laws, however, may

provide for other officers.
Any 2 or more positions
may be held concurrently by
the same person, except
that no one shall act as (a)
president and secretary, or
(b) president and treasurer
at the same time.
(b)
Disqualifications
(Sec. 27)
Conviction by final
judgment of an offense
punishable
by
imprisonment > 6 yrs.

- Violation of Corporation
Code committed within 6
yrs. prior to the date of
election or
appointment
(c)
Liability
(Sec. 31)

in

general

See
discussion
under
Duties of Directors and
Controlling Stockholders. .
(d)
Dealings with the
corporation (Sec. 32)
- Generally voidable (See
discussion under Duties of
Directors and Controlling

Stockholders)
What is the doctrine of
apparent authority?
The
doctrine
of
apparent
authority
provides
that
a
corporation will be liable
to innocent third persons
for the acts of its agent
where the representation
was made by the agent
in the course of business
and acting within his/her
general
scope
of
authority even though, in
the particular case, the
agent is secretly abusing

his
authority
and
attempting to perpetrate
a fraud upon his/her
principal or some other
person for his/her own
ultimate benefit.
FIRST
PHILIPPINE
INTERNATIONAL
BANK
&
RIVERA v. CA (January 24,
1996)
The authority of a corporate
officer in dealing with third
persons may be actual or
apparent.
The
doctrine
of
"apparent
authority,"
with
special reference to banks, was

laid out in Prudential Bank v. CA

(223 SCRA 350) where it was
held that:
A bank is liable for the
wrongful acts of its
officers done in the
interest of the bank or
in
the
course
of
dealings of the officers
in their representative
capacity but not for
acts outside the scope
of their authority. A
bank holding out its
officers and agents as
worthy of confidence
will not be permitted
to profit by the frauds

they may thus be

enabled to perpetrate
in the apparent scope
of their employment;
nor will it be permitted
to shrink from its
responsibility for such
frauds, even though
no benefit may accrue
to
the
bank
therefrom.
Accordingly, a bank is liable to
innocent third persons where the
representation is made in the
course of its business by its
agent acting within the general
scope of his authority even
though, in the particular case,

the agent is secretly abusing his

authority and attempting to
perpetrate a fraud upon his
principal or some other person
for his own ultimate benefit.
Application of these principles is
especially necessary because
banks
have
a
fiduciary
relationship with the public and
their stability depends on the
confidence of the people in their
honesty and efficiency. Such
faith will be eroded where banks
do not exercise strict care in the
selection and supervision of its
employees, resulting in prejudice
to their depositors.

YU CHUCK V. KONG LI PO (46

Phil. 608; 1924)
The
power
to
bind
a
corporation by contract lies with
its board of directors or trustees.
Such power may be expressly or
impliedly be delegated to other
officers and agents of the
corporation.
It is also well
settled that except where the
authority of employing servants
or agents is expressly vested in
the board, officers or agents who
have
general
control
and
management
of
the
corporation's business, or at
least a specific part thereof, may
bind the corporation by the

employment of such agents and

employees as are usual and
necessary in the conduct of such
business. Those contracts of
employment
should
be
reasonable.
Case
at
bar:
contract of employment in the
printing business was too long
and onerous to the business (3year employment; shall receive
salary even if corp. is insolvent).
THE BOARD OF LIQUIDATORS
V.
HEIRS
OF
MAXIMO
KALAW (20 SCRA 987; 1967)
Kalaw was a corporate officer
entrusted
with
general

management and control of

NACOCO.
He
had
implied
authority to make any contract
or do any act which is necessary
for the conduct of the business.
He may, without authority from
the board, perform acts of
ordinary nature for as long as
these redound to the interest of
the corporation. Particularly, he
contracted forward sales with
business entities. Long before
some of these contracts were
disputed, he contracted by
himself alone, without board
approval. All of the members of
the board knew about this
practice and have entrusted fully
such decisions with Kalaw. He

was
never
questioned
nor
reprimanded nor prevented from
this practice. In fact, the board
itself, through its acts and by
acquiescence, have laid aside
the by-law requirement of prior
board approval. Thus, it cannot
now declare that these contracts
(failures) are not binding on
NACOCO.
ZAMBOANGA
TRANSPO
V.
BACHRACH MOTORS (52 Phil.
244; 1928)
A chattel mortgage, although
not approved by the board of
directors as stipulated in the bylaws, shall still be valid and

binding when the corporation,

through
the
board,
tacitly
approved and ratified it. The
following acts of the board
constitute implied ratification:
1.
Erquiaga is one of the
largest stockholder, and was
the all-in-one officer (he was
the President, GM, Attorney,
Auditor, etc.)
2.
Two
other
directors
approved his actions and
expressed satisfaction with the
advantages obtained by him in
securing the chattel mortgage.

3.
The
corporation
took
advantage of the benefits of
the chattel mortgage. There
were even partial payments
made with the knowledge of
the three directors.
ACUNA V. BATAC PRODUCERS
COOPERATIVE
MARKETING
ASSOCIATION (20 SCRA 526;
1967)
Acuna
entered
into
an
agreement
with
Verano,
manager of PROCOMA, in which
the former would be constituted
as the latter's agent in Manila.
Acuna diligently went about his
business and even used personal

funds for the benefit of the

corporation. During the face-toface meeting with the board,
Acuna was assured that there
need not be any board approval
for his constitution as agent for it
would only be a mere formality.
Later on, the board disapproved
the agency and did not pay him.
The SC ruled that the agreement
was valid due to the ratification
of the corp. proven by these
acts:
1.
He was assured by the
board that no board approval
was necessary.

2.
He delivered P 20,000,
performed his work with the
knowledge of the board.
3.
Due to acquiescence,
the board cannot disown or
disapprove the contract.
Board Committees
The
By-laws
of
the
corporation may create an
executive
committee,
composed of not less than
3 members of the Board, to
be appointed by the Board.
The executive 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
either (1) the By-laws, or
(2) on a majority vote of
the board.
However, the following acts
may never be delegated to an
executive committee:
(1)
approval
of
any
action
for
which
shareholders' approval is
also required;
(2)
the
filling
of
vacancies in the board
(refer to Sec. 29);

(3)
the amendment or
repeal of by-laws or the
adoption of new by-laws;
(4)
the amendment or
repeal of any resolution of
the board which by its
express terms is not so
amendable or repealable;
and
(5)
a distribution of cash
dividends
to
the
shareholders.
HAYES V. CANADA, ATLANTIC
AND
PLANT
S.S
CO.,
LTD. (181 F. 289; 1910)
In this case,
Committee:

the

Executive

a)
removed the Treasurer
and appointed a new one
b)
fixed the annual salary of
the members of the Executive
Committee
c)
amended the by-laws by
giving the President the sole
authority
to
call
a
stockholder's meeting and a
board of directors meeting
d)
amended the composition
of the ExeCom by limiting it to
just 2 persons.
Was these actions valid?
No, because the Executive
Commmittee
usurped
the

powers vested in the board and

the stockholders. If their actions
was valid, it would put the corp.
in a situation wherein only two
men, acting in their own
pecuniary interests, would have
absorbed the powers of the
entire corporation. "Full powers"
should be interpreted only in the
ordinary conduct of business and
not total abdication of board and
stockholders' powers to the
ExeCom. "FULL POWERS" does
not mean unlimited or absolute
power.
Stockholders or Members

In the following basic

changes in the corporation,
although
action
is
usually
initiated by the board of
directors
or
trustees,
their
decision is not final, and
approval of the stockholders or
members would be necessary:
(1)
Amendment
of
articles of incorporation;
(2)
Increase
and
decrease of capital stock;
(3)
Incurring, creating or
increasing
bonded
indebtedness;
(4)
Sale, lease, mortgage
or other disposition of

substantially all corporate

assets;
(5)
Investment of funds
in another business or
corporation
or
for
a
purpose other than the
primary purpose for which
the
corporation
was
organized;
(6)
Adoption,
amendment and repeal of
by-laws;
(7)
Merger
and
consolidation;
(8)
Dissolution
of
corporation
In all of these cases, even
non-voting stocks, or non-voting

members, as the case may be,

will be entitled to vote. (Sec. 6)
BOARD OF DIRECTORS AND
ELECTION COMMITTEE OF
SMB VS. TAN (105 Phil. 426;
1959)
Meeting was invalid for lack of
notice. By-laws provide for a 5day notice before meeting.
March 26 posting not enough for
March 28 election.

JOHNSTON VS. JOHNSTON (61

O.G. No. 39, 6160; 1965)
As a general rule, a quorum at
a stockholders' meeting, once
reached, cannot be nullified by a
subsequent walkout.
However, the proceedings can
be nullified if the walkout was for
a reasonable and justifiable
cause. In this case, F. Logan
Johnston, who owned and/or
represented more than 50% of
the corporation's outstanding
shares, was prohibited from
voting the shares of the Silos
family (which he had validly
purchased) and of the minor

children of Albert S. Johnston (of

whom he was guardian) on the
ground that such shares must
first be registered in the names
of the wards, thereby prompting
the walkout.
The Court of
Appeals held that the walkout
was neither unreasonable nor
unjustifiable. It noted however
that there was no formal
declaration of a quorum before
the withdrawal from the meeting
by F. Logan Johnston.
PONCE VS. ENCARNACION (94
Phil. 81; 1953)
Upon good cause, such as a
Chairman of the Board failing to

call a meeting, either by his

absence or neglect, the Court
may grant a stockholder the
authority to call such a meeting.
DETECTIVE AND PROTECTIVE
BUREAU VS. CLORIBEL (26
SCRA 225; 1968)
The Corporation Law says that
every director must own at least
one (1) share of the capital stock
of the corporation.
GOKONGWEI VS. SEC (89
SCRA 336; 1979)

Section
21
of
the
Corporation Law provides that

a corporation may prescribe in

its by-laws the qualifications,
duties, and compensation of
its directors.

A stockholder has no
vested right to be elected
director for he impliedly
contracts that the will of the
majority shall govern.

Amended by-laws are

valid for the corporation has
its inherent right to protect
itself.
ROXAS V. DELA ROSA (49 Phil.
609; 1926)

Under the Law, directors can

only be removed from office by a
vote
of
the
stockholders
representing 2/3 of subscribed
capital stock, while vacancies
can be filled by a mere majority.
A director cannot be removed
by a mere majority by disguising
it as filling a vacancy.
ANGELES V. SANTOS (64 Phil.
697; 1937)
Court may appoint a receiver
when
corporate
remedy
is
unavailable when board of
directors perform acts harmful to
the corporation.

Generally,
stockholders
cannot sue on behalf of the
corporation. The exception is
when the defendants are in
complete
control
of
the
corporation.
CAMPBELL
V.
LEOWS
INC. (134 A. 2d 852; 1957)
The stockholders have an
implied power to remove a
director for cause. Even when
there is cumulative voting,
stockholders can still remove
directors for cause.

DELA RAMA V. MA-AO SUGAR

CENTRAL CO, INC. (27 SCRA
247; 1969)
A corporation may use its
funds to invest in another
corporation without the approval
of the stockholders if done in
pursuance
of
a
corporate
purpose. However, if it is purely
for investment, the vote of the
stockholders is necessary.
VOTING

Pledgors,
mortgagors,
executors,
receivers,
and
administrators (Sec. 55)
- Pledgors or
mortgagors have the right to
attend
and
vote
at
stockholders' meetings.
Exception: If
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.
Joint
stock (Sec. 56)

owners

of

Generally,
consent of all co-owners shall
be necessary.

Treasury
shares (Sec. 57)
- Treasury shares have no
voting right for as long as
such shares remain in the
Treasury.
Proxies (Sec. 58)
- Proxies must be in
writing, signed by the
stockholder/member, 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.
- Voting trusts may be
voted by proxy unless the
agreement
provides
otherwise. (Sec. 59)
- It
must
be
noted
however that directors or
trustees cannot vote by
proxy at board meetings.
(Sec. 25)

- Note that in Sec.

non-stock corporations
permitted to waive
right to use proxies
their AOI or by-laws.
Voting

89,
are
the
via

trust (Sec.

59)
- Voting trusts must be in
writing,
notarized,
specifying the terms and
conditions
thereof,
certified copy filed with
SEC. Failure to comply
with
this
requirement
renders the agreement

ineffective
unenforceable.

and

- As a general rule, voting

trusts are valid for a
period not exceeding 5
years at any one time, and
automatically expire at the
end of the agreed period
unless expressly renewed.
However, in the case of a
voting trust specifically
required as a condition in
a loan agreement, said
voting trust may exceed
5
years
but
shall
automatically
expire
upon payment of the
loan.

- Voting trusts may be

voted by proxy unless the
agreement
provides
otherwise. (Sec. 59)
Pooling agreement
- Pooling
agreements
refer
to
agreements
between 2 or more SHs to
vote their shares the same
way. They are different
from
voting
trust
agreements in that they
do not involve a transfer
of stocks but are merely
private
agreements

between 2 or more SHs to

vote in the same way.
- Sec. 100, par. 2 of the
Corporation Code provides
for pooling and voting
agreements
in
close
corporations.
Although
there is no equivalent
provision for widely-held
corporations, Justice and
Prof. Campos are of the
opinion that SHs of widelyheld corporations should
not be precluded from
entering
into
voting
agreements if these are
otherwise valid and are
not intended to commit

any wrong or fraud on the

other SHs that are not
parties to the agreement.
Non-voting
shares (Sec. 6)
- Preferred
redeemable shares.

or

ITF shares
And/or shares (Sec.
56)
- Any one of the
joint owners can vote said

shares or appoint a proxy

thereof.

Devices Affecting Control

Proxy Device
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.
Character: agency relationship;
revocable at will (by express
revocation, by attending the
meeting) and by death, except
when coupled with interest or is
a security.

IN RE GIANT PORTLAND
CEMENT CO. (21 A.2d 697;
1941)
Even if stocks are sold, the
stockholder of record remains
the owner of the stocks and has
the voting right until the by-law
requiring recording of transfer in
the transfer book is complied
with. Thus, a proxy given by the
stockholder of record even if he
has already sold the share/s of
stock remains effective.
STATE EX REL EVERETT
TRUST V PACIFIC WAXED
PAPER, (159 A.L.R. 297; 1945)

The general rule is that a

proxy is revocable even though
by its express terms it is
irrevocable. The exceptions are:
(a) when authority is coupled
with interest; (b) where authority
is given as part of a security and
is necessary to effectuate such a
security. It is coupled with
interest when there is interest in
the share themselves (such as a
right of first refusal in case of
sale) and the rights inherent in
the shares (such as voting
rights;
capacity
to
obtain
majority).
DUFFY V LOFT (17 Del. Ch.
376, 152 A. 849; 1930)

Where
a
stockholders
meeting was validly convened,
the proxies must be deemed
present even if the proxies were
not presented, provided: (a)
their existence is established; (b)
the agents were so designated
to attend and act in SHs behalf;
(c) the agents were present in
the meeting.
Q: Is it valid for the
corporation to pay the
expenses
for
proxy
solicitation?
A: In the case of Rosenfeld
v. Fairchild Engine and

Airplane Corp. (128 N.E. 2d

291; 1955), it was held that
in a contest over policy (as
opposed
to
a
purely
personal power contest),
corporate directors have
the
right
to
make
reasonable
and
proper
expenditures, subject to the
scrutiny of the courts when
duly challenged, from the
corporate treasury for the
purpose of persuading the
SHs of the correctness of
their position and soliciting
their support for policies
which the directors believe,
in all good faith, are in the
best
interests
of
the

corporation.
The
SHs,
moreover, have the right to
reimburse
successful
contestants
for
the
reasonable
and bona
fide expenses incurred by
them in any such policy
contest, subject to like
court scrutiny.
However, where it is
established
that
such
monies have been spent for
personal power, individual
gain or private advantage,
and not in the belief that
such expenditures are in
the best interest of the
stockholders
and
the
corporation, or where the

fairness
and
reasonableness
of
the
amounts
allegedly
expended are duly and
successfully challenged, the
courts will not hesitate to
disallow them.
ROSENFELD V.
FAIRCHILD (128 N.E. 2d 291;
1955)
In a contest over policy, as
compared to a purely personal
power
contest,
corporate
directors have the right to make
reasonable
and
proper
expenditures. Reason: in these
days of giant corporations with

vast numbers of SHs, if directors

are not allowed to authorize
reasonable expenses in soliciting
proxies, corporate business may
be hampered by difficulty in
procuring
quorum;
or
corporations may be at the
mercy of persons seeking to
wrest control for their purposes if
the directors may not freely
answer their challenge. But corp
expense may be disallowed by
courts where money was shown
to have been spent for personal
power, individual gain or private
advantage, or where fairness
and reasonableness of amount
spent has been successfully
challenged.

Voting Trust
A Voting Trust Agreement
(VTA) is an agreement whereby
the real ownership of the shares
is separated from the voting
rights, the usual aim being to
insure
the
retention
of
incumbent directors and remove
from the stockholders the power
to change the management for
the duration of the trust.
Advantages

Accumulates
power.
Small shareholders are given

the
chance
to
have
a
representation in the BOD or
at least a spokesperson during
stockholders meetings.

Continuity
of
management.

More
effective
than
proxies
because
it
is
irrevocable.

Ensures
that
the
required
number
of
stockholders is met thereby
facilitating smooth corporate
operations.
Disadvantages

Stockholders give up
rights (voting and naked title)


Susceptible to abuse

Not used in widely held

corporations
Rights given up by the
shareholder in a VTA in
exchange for the fiduciary
obligation of the trustee:

Voting rights

Proprietary rights/naked
title/legal ownership

Incidental rights such

as to attend meetings, to be
elected, to receive dividends)

Rights
retained
shareholder

by

the

Beneficial or equitable
ownership

Right to revoke VTA in

case of breach by trustee

Regain full ownership

after the lapse of the period

Right to an accounting
by the trustee after the period
of the VTA
How
is
created?

voting

trust

(1)
A VTA is prepared in
writing, notarized, and filed

with the
SEC.

corporation

and

(2)
The certificates of stock
covered by the VTA are
cancelled and new ones
(voting trust certificates) are
issued in the name of the
trustee/s stating that they
are issued pursuant to the
VTA.
(3)
The transfer is noted in
the books of the corporation.
(4)
The trustee/s execute
and deliver to transferors the
voting
trust
certificates.
(Note that these certificates

shall be transferable in the

same manner and with the
same effect as certificates of
stock.)
(5)
At the end of the period
of the VTA (or the full
payment of the loan to
which the VTA is made a
condition, as the case may
be), in the absence of any
express renewal, the voting
trust certificates as well as
the certificates of stock in
the name of the trustee/s
shall be deemed cancelled
and new certificates of stock
shall be reissued in the name
of the transferors.

EVERETT V. ASIA
BANKING (49 Phil. 512; 1926)
This case illustrates how VTA
can give rise to effective control
and how it can be abused.
Original stockholders can set
aside the VTA when their rights
are trampled upon by the
trustee.
MACKIN, ET AL. V. NICOLLET
HOTEL (25 F. 2d 783; 1928)
Invalidating circumstances of
a VTA are:


Want of consideration

Voting
power
not
coupled with interest

Fraud

Illegal
or
improper
purpose
NIDC V. AQUINO (163 SCRA
153; 1988)
A VTA transfers only voting or
other rights pertaining to the
shares subject of the agreement,
or control over the stock.
Stockholders of a corp. that lost
all
its
assets
through
foreclosures cannot go after
those
properties.
PNB-NIDC

acquired those properties not as

trustees but as creditors.
Pooling
and
agreements

voting

What
are
the
advantages/disadvantages
of a pooling agreement?
Advantages:
1. there is a commitment
to agree to a certain
manner of voting
2. minority stockholders
are able to control the
corpo

Disadvantages:
1.
possibility
of
disagreement thus the
need for an arbitration
clause
2. there is no compelling
reason for stockholders
to act together
What
rights
does
a
shareholder give up/ retain
with a pooling agreement?
Shareholders retain their
right to vote because the
parties are not constituted

as agents. However, the

will of the parties may not
be carried out due to noncompliance with the pooling
agreement.
RINGLING v. RINGLING (29
Del. Ch. 318, 49 A. 2d 603;
1946)
Generally, agreements and
combinations to vote stock or
control corporate fiction & policy
are valid if they seek without
fraud to accomplish only what
parties might do as stockholders
and do not attempt it by illegal

proxies, trusts or other means in

contravention of statutes or law.
BUCK RETAIL STORE v.
HARKERT (62 N.W. 2d 288;
1954)
Stockholders
control
agreements are valid where it is
for the benefit of corporation
where it works no fraud upon
creditors or other stockholders
and where it violates no statute
or recognized public policy.
MCQUADE v. STONEHAM (189
N.E. 234; 1934)

An
agreement
among
stockholders to divest directors
of their power to discharge an
unfaithful employee is illegal as
against
public
policy.
Stockholders
may
not
by
agreement among themselves
control the directors in the
exercise of the judgment vested
in them by virtue of their office
to elect officers and fix salaries.
CLARK v. DODGE (199 N.E.
641; 1936)
If the enforcement of a
particular
contract
damages
nobody-not even the public,
there is no reason for holding it

illegal. Test is WON it causes

damage to the corporation and
stockholders.

Cumulative voting (see sec.

24)
Methods of Voting
1.
Straight voting:
If A has 100 shares and there
are 5 directors to be elected,
he shall
multiply 100 by five
(equals
500)
and
distribute
equally
among
the
five

candidates
preference

without

2.
Cumulative voting:
If A has 100 shares and there
are 5 directors to be elected,
he shall
(one
candidate)
multiply
100 by five (equals 500) and he
can vote the 500 for only one
candidate.
3.
Cumulative voting:
If A has 100 shares, there are
5 directors to be elected, and
he only
(multiple
candidates) wants to vote

for two nominees, he can

divide 500 votes between the
two, giving each one
250 votes.
How
to
compute
votes
needed to get a director
elected
by
cumulative
voting:
1.
Freys
formula (minimum
no.
votes to elect one director)

of

X= # of shares required
Y= # of outstanding
votes
Z= # of directors to be
elected

X = _ Y__ + 1
Z+1
2.
Baker
&
Carys
formula (minimum no. of votes
needed
to
elect
multiple
directors)
X= # of shares required
Y=
#
of
shares
represented at meeting
D= # of directors the
minority wants to elect
D= total # of directors to be
elected
X = Y
1

D +

D' + 1
NOTES

Levels playing field or

at least ensures that the
minority can elect at least
one representative to the
board of directors (BOD)

Cannot of itself give

the
minority
control
of
corporate affairs, but may
affect and limit the extent of
the majoritys control

By-laws
cannot
provide against cumulative
voting since this right is

mandated by law in Section

24.

Classification of shares (see

sec. 6)
Type of shares
1.
Common:
with right to vote

share

2.
Preferred:
share
has preference over dividends
and distribution of assets
upon liquidation;

right to vote may be

restricted (Sec. 6)
3.
Redeemable: share is
purchased or taken up by the
corporation
upon
the
expiration of a fixed
period (Sec. 8); right to
vote may be restricted
(Sec. 6)
NOTES

Stock can also be both

preferred and redeemable.

Even though the right

to vote of preferred and
redeemable shares may be

restricted, owners of these

shares can still vote on
certain matter provided for
in Sec. 6.

SEC
requires
that
where no dividends are
declared
for
three
consecutive years, in spite of
available profits, preferred
stocks will be given the right
to vote until dividends are
declared.
GOTTSCHALK V. AVALON
REALTY (23 N.W. 2d 606; 1946)


Provision granting right to
vote
to
preferred
stock
previously
prohibited
from
voting, constitutes diminution
of the voting power of common
stock.

Provision in the articles of

incorporation granting holders
of preferred stock right to vote
in case of default in payment of
dividends after July 1, 1951 was
construed
as
denial
by
necessary implication of the
right to vote even prior to July
1, 1951.
Restriction
shares

on

transfer

of


Peculiar
corporations.

to

close

Most
common
restriction:
granting
first
option
to
the
other
stockholders
and/or
the
corporation to acquire the
shares of a stockholder who
wishes to sell them.

Restrictions on shares
of stock must conform to the
requirements in Sec. 98

This gives to the

corporation and/or to its
current management the

power
to
prevent
the
transfer of shares to persons
who they may see as having
interests adverse to theirs.

Prescribing qualifications for

directors; founders shares
Directors (See Sec. 23, 27,
47)

As
long
as
the
qualifications imposed are
reasonable and not meant to

unjustly or unfairly deprive

the minority of their rightful
representation in the BOD,
such provisions are within the
power of the majority to
provide in the by-laws.

According to Gokongwei
vs.
SEC,
aside
from
prescribing qualifications, bylaws can also provide for the
disqualification of anyone in
direct competition with the
corporation.
Founders shares
See Sec. 7 for definition


Exception to the rule in
sec. 6 that non-voting shares
shall be limited to preferred
and redeemable shares

If
founders
shares
enjoy the right to vote, this
privilege is limited to 5 years
upon SECs approval, so as to
prevent
the
perpetual
disqualification
of
other
stockholders.
Management contracts (sec.
44)

Contract to manage the

day-to-day affairs of the
corporation in accordance

with the policies laid down by

the board of the managed
corporation.

BOD can and usually

delegate many of its functions
but it cant abdicate its
responsibility to act as a
governing body by giving
absolute power to officers or
others,
by
way
of
a
management
contract
or
otherwise. It must retain its
control over such officers so
that
it
may
recall
the
delegation of power whenever
the
interests
of
the
corporation
are
seriously
prejudiced thereby.

SHERMAN & ELLIS VS.

INDIANA MUTUAL
CASUALTY (41 F. 2d 588; 1930)
Although corporations may,
for a limited period, delegate to
a stranger certain duties usually
performed by the officers, there
are duties, the performance of
which may not be indefinitely
delegated to outsiders.
UNUSUAL
VOTING
AND
QUORUM
REQUIREMENTS
(Sec. 25, 97 [for close
corporations])


Increases veto power
of the minority in some
cases.

In exchange for the

numerical majority in the
BOD, minority can ask for a
stronger veto power in major
corporate decisions.

BENITENDI VS. KENTON

HOTEL (60 N.E. 2d 829; 1945)

A requirement that there

shall be no election of directors
at all unless every single vote

be cast for the same nominees,

is in direct opposition to the
statutory rule that the receipt
of plurality of the votes entitles
a nominee to election. (See
Sec. 24)

Requiring
unanimity
before the BOD can take action
on any corporate matter makes
it impossible for the directors to
act on any matter at all. In all
acts done by the corporation,
the major number must bind
the lesser, or else differences
could never be determined nor
settled.


The State has decreed
that every stock corporation
must have a representative
government,
with
voting
conducted conformably to the
statutes, and the power of
decision lodged in certain
fractions, always more than
half, of the stock. This whole
concept is destroyed when the
stockholders, by agreement,
by-law
or
certificates
of
corporation
provides
for
unanimous action, giving the
minority
an
absolute,
permanent and all-inclusive
power of veto.


The
requirement
of
unanimous vote to amend bylaws is valid. Once proper bylaws have been adopted, the
matter of amending them is no
concern of the State.
Device

Favorabl Limitatio
e To:
ns

Cumulati MINORITY: Cant give

ve
assures
minority
voting
them of
control of
representa corp.
tion on the affairs
board
Classific MINORITY: Preferred

ation of
shares

so long as
they hold
more
common
stock as
opposed
to the
majority
who holds
more
preferred
stock

and
redeemabl
e stock
can still
vote on
certain
matters as
provided
in Sec. 6
or as may
be
provided
by the
corp.

Restricti
on on
transfer
of

MAJORITY: See Sec.

they can 98
choose
whether

shares
*applica
ble only
to close
corporat
ions

to keep or
release
shares
and they
can
prevent
opposition
from
acquiring
shares

Prescribi
ng
qualifica
tions for
director
s;
founder
s shares

MAJORITY:
theyre
the ones
who can
prescribe
the
qualificati
ons in the

Qualificati
ons must
be
reasonabl
e and do
not
deprive
minority

by-laws

Manage
ment
contract
s

of
representa
tion on the
board

MAJORITY:
Ca
allows
nnot
them to
exceed
delegate
five
certain
years
functions
BO
and duties D must
without
retain
losing
control
control
over
over the
corp.
corporatio policies
n

BO
D must

have
power to
recall
contract
Unusual
voting
and
quorum
require
ments

MINORITY:
gives
them
stronger
veto
power in
certain
corp.
affairs

Subject to
the
limitations
in Sec.
103.

MEETINGS
Meetings of Directors /
Trustees

KINDS:
Meetings
of the Board of Directors or
Trustees may be either
regular or
special. (Sec. 49)
REGULAR:
Held
monthly,
unless
otherwise provided in the
by-laws.
(Sec. 53)
SPECIAL:
At
any time upon call of the
president or as provided in
the bylaws.

NOTICE:
Must
be
sent
at
least 1
day prior
to
the
scheduled
meeting,
unless
otherwise
provided by the bylaws.
Note:
Notice may
be
waived
expressly
or
impliedly. (Sec. 53)
WHERE:
Anywhere
in or outside the
Philippines, unless the
by-laws
provide
otherwise.

QUORUM:
Generally,
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.
(Sec. 25)
Exceptions:
(1)
If the AOI or
by-laws
provide
for
a
greater
majority;

(2)
If
the
meeting is for the
election
of
officers,
which
requires the vote
of a majority of
all the members
of the Board
WHO PRESIDES:
The
president, unless the by-laws
provide otherwise. (Sec. 54)
Meetings of Stockholders /
Members

KINDS:
Meeti
ngs of stockholders or
members may be either
regular or special.
(Sec. 49)
REGULAR:
Held
annually on a date
fixed in the bylaws. If no date is
fixed, on any date in
April of every year
as determined by
the
Board
of
Directors
or
trustees.
Notice: Written,
sent
to

and
all

stockholders
or
members of record
at
least 2
weeks prior to the
meeting, unless a
different period is
required by the bylaws.
SPECIAL:
At
any
time
deemed
necessary or as provided in
the by-laws.
Notice: Written, and
sent
to
all
stockholders
or
members of record
at
least 1

week prior to the

meeting,
unless
otherwise provided
in the by-laws.
Note:
Notice of
any meeting may
be
waived
expressly or
impliedly by any
SH
or
member.
(Sec. 50)
WHERE:
In the city
of municipality where
the principal office of
the
corporation
is
located,
and
if
practicable
in
the

principal office of the

corporation.
Metro
Manila is considered a
city or municipality.
(Sec. 51)
QUORUM:
Generally,
a quorum shall consist
of the stockholders
representing
a
majority
of
the
outstanding
capital
stock, or a majority of
the members.
Exception: If
otherwise provided
for in the Code or in
the

by-laws.
WHO
PRESIDES:
The president,
unless the by-laws provide
otherwise. (Sec. 54)
WHAT IS THE EFFECT
IF A STOCKHOLDER'S
MEETING
IS
IMPROPERLY HELD OR
CALLED?
Generally,
the
proceedings had and/or
any business transacted
shall be void. However,
the proceedings and/or

transacted business may

still be deemed valid if:
(1)
Such
proceedings
or
business are within
the
powers
or
authority
of
the
corporation; and
(2)
All
the
stockholders
or
members
of
the
corporation
were
present
or
duly
represented at the
meeting. (Sec. 51)

DUTIES OF DIRECTORS
AND CONTROLLING STOCKHO
LDERS
Duties and Liabilities of
Directors

WHAT IS THE 3-FOLD

DUTY THAT DIRECTORS
OWE
TO
THE
CORPORATION?
(1) Diligence
(2) Loyalty
(3) Obedience

Obedience directors
must act only within
corporate powers and are
liable for damages if they
acted beyond their powers
unless in good faith.
Assuming that they acted
within
their
powers,
liability may still arise if
they have not observed
due diligence or have
been
disloyal
to
the
corporation.
WHEN DOES LIABILITY
ON
THE
PART
OF
DIRECTORS,
TRUSTEES
OR OFFICERS ARISE?

In general, liability of
directors,
trustees
or
officers arises when they
either:
(1) willfully and
knowingly vote for or
assent
to
patently
unlawful acts of the
corporation; or
(2) are guilty of
gross negligence of bad
faith in directing the
affairs of the corporation;
or
(3) acquire any personal
or pecuniary interest in
conflict with their duty as

such
directors
trustees.

or

In such cases, the 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
would
otherwise have accrued to
the corporation. (Sec. 31)
In addition to this
general
liability,
the
Corporation Code provides
for specific rules to govern
the following situations:

(1)
Self-dealing
directors (Sec. 32)
(2)
Contracts
between interlocking
directors (Sec. 33)
(3)
Disloyalty to the
corporation (Sec. 34)
(4)
Watered stocks
(Sec. 65)
Duty of Diligence: Business
Judgment Rule.
WHAT IS THE BUSINESS
JUDGMENT RULE?

As
a
general
rule,
directors and trustees of
the corporation cannot be
held liable for mistakes or
errors in the exercise of
their business judgment,
provided they have acted in
good faith and with due
care
and
prudence.
Contracts intra
vires entered into by the
board of directors are
binding
upon
the
corporation, and the courts
will not interfere unless
such contracts are so
unconscionable
and
oppressive as to amount to

a wanton destruction of the

rights of the minority.
However, if due to
the fault or negligence of
the directors the assets of
the corporation are wasted
or lost, each of them may
be held responsible for any
amount of loss which may
have
been
proximately
caused by his wrongful acts
or omissions. Where there
exists gross negligence or
fraud in the management of
the
corporation,
the
directors, besides being
liable for damages, may be
removed
by
the

stockholders in accordance
with Sec. 28 of the Code.
(Campos & Campos)
GENERAL
RULE: Contracts intra
vires entered into by BoD
are
binding
upon
the
corporation and courts will
not interfere.
EXCEPTION:
such contracts
unconscionable
oppressive
amount

to

When
are so
and
as
to
wanton

destruction of the rights of

the minority.
WHAT
KIND
OF
DILIGENCE IS EXPECTED
OF DIRECTORS?
Directors are expected
to manage the corporation
with reasonable diligence,
care and prudence, i.e. the
degree
of
care
and
diligence
which
men
prompted by self-interest
generally exercise in their
own affairs. Thus, they can
be held liable not only
for willful dishonesty
but
also for negligence.

Although they are not

expected to interfere with
the
day-to-day
administrative details of the
business of the corporation,
they
should
keep
themselves
sufficiently
informed about the general
condition of the business.
WHAT FACTORS SHOULD
BE
CONSIDERED
IN
DETERMINING WHETHER
REASONABLE DILIGENCE
HAS BEEN EXERCISED?
The nature of the
business, as well as the
particular circumstances of

each case.
The court
should look at the facts as
they exist at the time of
their occurrence, not aided
or enlightened by those
which subsequently took
place. (Litwin v. Allen)
OTIS AND CO. VS
PENNSYLVANIA RAILROAD
CO. (155 F. 2d 522; 1946)
If
in
the
course
of
management,
the
directors
arrive at a decision for which
there is a reasonable basis and
they acted in good faith, as a
result of their independent

judgment, and uninfluenced by

any consideration other than
what they honestly believe to be
for the best interest of the
railroad, it is not the function of
the court to say that it would
have acted differently and to
charge the directors for any loss
or expenditures incurred.
In the present case, the
bond issue was adequately
deliberated
and
planned,
properly
negotiated
and
executed; there was no lack of
good faith; no motivation of
personal gain or profit; there was
no lack of diligence, skill or care
in selling the issue at the price

approved by the Commission

and which resulted in a saving of
approximately
$9M
to
the
corporation.
MONTELIBANO VS.
BACOLOD-MURCIA MILLING
CO. (5 SCRA 36; 1962)
The Bacolod-Murcia Milling Co.
adopted a resolution which
granted to its sugar planters an
increase in their share in the net
profits in the event that the
sugar
centrals
of
Negros
Occidental should have a total
annual production exceeding
one-third of the production of all
sugar central mills in the

province. Later, the company

amended its existing milling
contract with its sugar planters,
incorporating such resolution.
The company, upon demand,
refused to comply with the
contract,
stating
that
the
stipulations in the resolution
were
made
without
consideration and that such
resolution was, therefore, null
and void ab initio, being in effect
a
donation
that
was ultra
vires and beyond the powers of
the corporate directors to adopt.
This is an action by the sugar
planters to enforce the contract.

The terms embodied in the

resolution were supported by the
same cause and consideration
underlying the main amended
milling
contract;
i.e.,
the
premises
and
obligations
undertaken thereunder by the
planters, and particularly, the
extension of its operative period
for an additional 15 years over
and beyond the thirty years
stipulated in the contract.
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. 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.
LITWIN (ROSEMARIN ET. AL.,
INTERVENORS) VS. ALLEN
ET. AL.
(25 N.Y.S. 2d 667; 1940)
FACTS:
Alleghany Corp.
bought terminals in Kansas City
and St. Joseph. It needed to
raise money to pay the balance
of the purchase price but could
not directly borrow money due
to a borrowing limitation in its
charter. Thus, it sold Missouri
Pacific bonds to J.P. Morgan and
Co. worth $IOM. J.P. Morgan, in

turn, sold $3M worth of the

bonds
to
Guaranty
Trust
Company. Under the contract,
the seller was given an option to
repurchase at same price within
six months.
HELD:
Option given to
seller is invalid. It is against
public policy for a bank to sell
securities and buy them back at
the same price; similarly, it is
against public policy for the bank
to buy securities and give the
seller the option to buy them
back at the same price because
the bank incurs the entire risk of
loss with no possibility of gain
other than the interest derived

from the securities during the

period that the bank holds
them. Here, if the market price
of the securities rise, the holder
of the repurchase option would
exercise it to recover the
securities at a lower price at
which he sold them. If the
market price falls, the seller
holding the option would not
exercise it and the bank would
sustain the loss.
Directors are not in a
position of trustees of an express
trust who, regardless of good
faith, are personally liable. In
this case, the directors are liable
for the transaction because the

entire
arrangement
was
improvident, risky, unusual and
unnecessary so as to be contrary
to fundamental conceptions of
prudent banking practice. Yet,
the advice of counsel was not
sought. Absent a showing of
exercise of good faith, the
directors are thus liable.
WALKER VS. MAN, ET.
AL. (253 N.Y.S. 458; 1931)
FACTS:
Frederick Southack
and Alwyn Ball loaned Avram
$20T evidenced by a promissory
note executed by Avram and
endorsed by Lacey. The loan
was not authorized by any

meeting of the board of directors

and was not for the benefit of
the corporation. The note was
dishonored
but
defendantdirectors did not protest the note
for non-payment; thus, Lacey,
the indorser who was financially
capable
of
meeting
the
obligation, was subsequently
discharged.
HELD:
Directors
are
charged not with misfeasance,
but with non-feasance, not only
with doing wrongful acts and
committing waste, but with
acquiescing and confirming the
wrong doing of others, and with
doing nothing to retrieve the

waste. Directors have the duty

to
attempt
to
prevent
wrongdoing by their co-directors,
and if wrong is committed, to
rectify it. If the defendant knew
that an unauthorized loan was
made and did not take steps to
salvage
the
loan,
he
is
chargeable with negligence and
is accountable for his conduct.
STEINBERG VS.
VELASCO (52 Phil. 953; 1929)
FACTS:
The board of
directors of Sibuguey Trading
Company
authorized
the
purchase of 330 shares of stock
of the corporation and declared

payment of P3T as dividends to

stockholders. The directors from
whom 300 of the stocks were
bought resigned before the
board approved the purchase
and declared the dividends. At
the time of purchase of stocks
and declaration of dividends, the
corporation
had
accounts
payable amounting to P9,241
and
accounts
receivable
amounting to P12,512, but the
receiver who made diligent
efforts to collect the amounts
receivable was unable to do so.
It has been alleged that
the payment of cash dividends
to
the
stockholders
was

wrongfully done and in bad faith,

and to the injury and fraud of the
creditors of the corporation. The
directors are sought to be made
personally liable in their capacity
as directors.
HELD:
Creditors of a
corporation have the right to
assume that so long as there are
outstanding debts and liabilities,
the BOD will not use the assets
of the corporation to buy its own
stock, and will not declare
dividends to stockholders when
the corporation is insolvent.
In this case, it was found
that the corporation did not have

an actual bona fide surplus from

which dividends could be paid.
Moreover, the Court noted that
the Board of Directors purchased
the stock from the corporation
and declared the dividends on
the stock at the same Board
meeting, and that the directors
were permitted to resign so that
they could sell their stock to the
corporation. Given all of this, it
was apparent that the directors
did not act in good faith or were
grossly ignorant of their duties.
Either way, they are liable for
their actions which affected the
financial
condition
of
the
corporation
and
prejudiced
creditors.

BARNES V. ANDREWS (298 F.

614; 1924)
A complaint was filed against
a corporate director for failing to
give adequate attention (he
relied solely on the Presidents
updates on the status of the
corp) to the affairs of a
corporation
which
suffered
depletion of funds.
The director was not liable.
The court said that despite being
guilty of misprision in his office,
still the plaintiff must clearly
show that the performance of
the directors duties would have

avoided the losses. When a

business fails from general
mismanagement,
business
incapacity, or bad judgment, it is
difficult to conjecture that a
single director could turn the
company around, or how much
dollars he could have saved had
he acted properly.
FOSTER V. BOWEN (41 N.E. 2d
181; 1942)
Cushing, a director and in
charge of leasing a roller skating
rink of the corp, leased the same
to himself. Minority stockholders
filed suit against Bowen, the
corporation's
President,
to

recover for company losses

arising out of an alleged breach
of fiduciary duty.
Bowen was held to be not
liable because: (1) Cushing's
acts were not actually dishonest
or
fraudulent;
(2)
Cushing
performed personal work such
as keeping the facility in repair
which redounded to the benefit
of the company and even
increased its income; (3) Bowen
did not profit personally through
Cushing's lease; and (4) the
issue of the possible illegality of
the lease was put before the
Board of Directors, but the Board
did not act on it but instead

moved on to the next item on

the agenda. Absent any bad
faith on Bowen's part, and a
showing that it was a reasonable
exercise of judgment to take no
action on the lease agreement at
the time it was entered into,
Bowen was not liable.
LOWELL HOIT & CO. V.
DETIG (50 N.E. 2d 602; 1943)
Lowell Hoit filed action against
directors of a cooperative grain
company for an alleged willful
conversion by the manager of
grain stored in the company
facility. The court said that the
directors were not personally

liable. There was no evidence

that the directors had knowledge
of the transaction between the
manager and Lowell Hoit.
The court will treat directors
with leniency with respect to a
single act of fraud on the part of
a subordinate officer/agent. But
directors could be held liable if
the act of fraud was habitual and
openly committed as to have
been easily detected upon
proper supervision. To hold
directors liable, he must have
participated in the fraudulent
act; or have been guilty of lack
of ordinary and reasonable
supervision; or guilty of lack of

ordinary care in the selection of

the officer/agent.
BATES V. DRESSER (40
S.Ct.247; 1920)
Coleman, an employee of the
bank, was able to divert bank
finances for his benefit, resulting
in huge losses to the bank. The
receiver sued the president and
the other directors for the loss.
The court said that the
directors were not answerable as
they relied in good faith on the
cashiers statement of assets
and liabilities found correct by
the government examiner, and

were also encouraged by the

attitude of the president that all
was well (the president had a
sizable deposit in the bank). But
the president is liable. He was at
the bank daily; had direct control
of records; and had knowledge
of incidents that ordinarily would
have induced scrutiny.
The self-dealing director
WHAT
IS
DEALING
(Sec. 32)

A
SELFDIRECTOR?

A self-dealing director
is one who enters into a

contract
with
the
corporation of which he is
a director.
WHAT IS THE NATURE OF
CONTRACTS
ENTERED
INTO BY SELF-DEALING
DIRECTORS?
Voidable at the option
of
the
corporation,
whether or not it suffered
damages. It is possible
that
the
self-dealing
director may have the
greatest interest in its
welfare and may be willing
to deal with it upon
reasonable terms.

However, such contract

may be upheld by the
corporation if all of the
following
conditions are present:
(1)
The presence of
the self-dealing director
or trustee in the board
meeting for which the
contract was approved
was not necessary to
constitute a quorum for
such meeting;
(2) The vote of such selfdealing
director
or

trustee
was
necessary for the
approval
of
contract;

not
the

(3) The contract is fair

and reasonable under
the circumstances;
(4) In the case of an
officer, the contract has
been
previously
authorized by the
Board
of
Directors.
In the event that either
of or both conditions (1)
and (2) are absent (i.e., the

presence
of
the
director/trustee
was
necessary for a quorum
and/or
his
vote
was
necessary for the approval
of
the
contract), the
contract may be ratified by
a 2/3 vote of the OCS or all
of the members, in a
meeting called for the
purpose. Full disclosure of
the adverse interest of the
directors
or
trustees
involved must be made at
such meeting.
DOCTRINE:
A director
of a corporation holds a
position of trust and as

such, he owes a duty of

loyalty to his corporation.
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." (Prime White
Cement Corp. v. IAC, 220
SCRA 103; 1993)
PALTING V. SAN JOSE
PETROLEUM (Dec. 17, 1966)
The
articles
of
inc.
of
respondent included a provision
that relieves any director of all
responsibility for which he may
otherwise be liable by reason of
any contract entered into with
the corp., whether it be for his
benefit or for the benefit of any
other person, firm, association or
partnership in which he may be

interested, except in case of

fraud.
SC:
This
is
in
direct
contravention of the Corp Law,
of
the
traditional
fiduciary
relationship between directors
and the SH. The implication is
that they can do anything short
of fraud, even to their benefit,
and with immunity.
Note: This case was decided
in 1966 under the Corporation
Law, which had no
provisions on self-dealing
directors.

MEAD V.
MCCULLOUGH (21 Phil. 95;
1911)
Issue: validity of sale of corp.
property and assets to the
directors who approved the
same.
Gen Rule: When purely private
corporations remain solvent, its
directors are agents or trustees
for the SH.
Exception: when
the
corp.
becomes insolvent, its directors
are trustees of all the creditors,
whether they are members of
the corp. or not, and must

manage its property and assets

with strict regard to their
interest;
and
if
they
are
themselves creditors while the
insolvent corp is under their
management, they will not be
permitted
to
secure
to
themselves by purchasing the
corp property or otherwise any
personal advantage over the
other creditors.
Exception to Exception: A
director or officer may in good
faith and or an adequate
consideration purchase from a
majority of the directors or SH
the property even of an
insolvent corp, and a sale thus

made to him is valid and

binding upon the minority.
In the case at bar, the sale
was held to be valid and binding.
Company was losing. 4 directors
present during meeting all voted
for the sale. They likewise
constitute
majority
of
SH.
Contract was found to be fair
and reasonable.
PRIME WHITE CEMENT CORP.
V. IAC (220 SCRA 103; 1993)
Prime White Cement Corp.
(through the President and
Chairman of the Board) and
Alejandro Te, a director and

auditor of the corporation,

entered
into
a
dealership
agreement whereby Te was
obligated
to
act
as
the
corporation's exclusive dealer
and/or distributor of its cement
products in the entire Mindanao
area for 5 years. Among the
conditions in the dealership
agreement
were
that
the
corporation would sell to and
supply Te with 20,000 bags of
white cement per month, and
that Te would purchase the
cement from the corporation at a
price of P 9.70 per bag.
Relying
contained

on
in

the
the

conditions
dealership

agreement, Te entered into

written agreements with several
hardware stores which would
enable him to sell his allocation
of 20,000 bags per month.
However, the Board of Directors
subsequently
imposed
new
conditions,
including
the
condition that only 8,000 bags of
cement would be delivered per
month.
Te
made
several
demands on the corporation to
comply with the dealership
agreement. However, when the
corporation refused to comply
with
the
same,
Te
was
constrained
to
cancel
his
agreements with the hardware
stores.
Notwithstanding
the

dealership agreement with Te,

the corporation entered into an
exclusive dealership agreement
with a certain Napoleon Co for
marketing
of
corporation's
products in Mindanao. The lower
court held that Prime White was
liable to Te for actual and moral
damages for having been in
breach of the agreement which
had been validly entered into.
On appeal, the Supreme Court
held
that
the
dealership
agreement is not valid and
enforceable, for not having been
fair
and
reasonable:
the
agreement protected Te from
any market increases in the

price of cement, to the prejudice

of
the
corporation.
The
dealership agreement was an
attempt on the part of Te to
enrich himself at the expense of
the corporation. Absent any
showing that the stockholders
had ratified the dealership
agreement or that they were
fully aware of its provisions, the
contract was not valid and Te
could not be allowed to reap the
fruits of his disloyalty.

Using inside information

USE
OF
INSIDE
INFORMATION:
Do
directors and officers of
a company owe any duty
at all to stockholders in
relation to transactions
whereby the officers and
directors
buy
for
themselves shares of
stock
from
the
stockholders?
MINORITY RULE:
YES. Directors and
officers have an obligation
to
the
stockholders
individually as well as
collectively.

MAJORITY
RULE:
NO. Directors
and
officers
owe
no
fiduciary
duty
at
all to stockholders,
but may deal with them at
arms
length. No duty of
disclosure of facts known
to
the
director or
officer
exists.
Nondisclosure
cannot

constitute
constructive fraud.
SPECIAL FACTS
DOCTRINE: IT DEPENDS.
Where
special
circumstances
or
facts
are
present which make in
inequitable
to
withhold information
from the stockholder, the
duty
to
disclose
arises, and concealment is
fraud.

In
the
case
of Gokongwei v. SEC (89
SCRA 336; 1979), the
Supreme Court, quoting
from
the
US
case
of Pepper v. Litton (308
U.S.
295-313;
1939)
stated that a director
cannot,
"by
the
intervention of a corporate
entity violate the ancient
precept against serving
two masters He cannot
utilize
his
inside
information
and
his
strategic position for his
own
preferment.
He
cannot violate rules of fair

play by doing indirectly

through the corporation
what he could not do
directly. He cannot use his
power for his personal
advantage and to the
detriment
of
the
stockholders and creditors
no matter how absolute in
terms that power may be
and
no
matter
how
meticulous he is to satisfy
technical
requirements.
For that power is at all
times subject to the
equitable limitation that it
may not be exercised for
the
aggrandizement,
preference, or advantage

of the fiduciary to the

exclusion or detriment of
the cestuis."
Seizing Corporate
Opportunity (Sec. 34)
If a director acquires for
himself, by virtue of his
office,
a
business
opportunity which should
belong
to
the
corporation, thereby
obtaining profits to the
prejudice
of
the
corporation,
he
must
account to the corporation
for all such profits by

refunding
the
same. However, if his act
was ratified by
2/3
stockholders' vote, he need
not refund said profits. This
provision
applies
even
though the director may
have risked his own funds
in the venture.
Note: This provision is
to be distinguished from
Sec. 32 on contracts of selfdealing
directors: contracts of
self-dealing directors are
voidable at the option of
the corporation even if it
has not suffered any

injury;
on the other
hand, Sec. 34 applies
only if the corporation
has been prejudiced by
the contract.

SINGER VS. CARLISLE (27

N.Y.S. 2d 190; 1941)
In this case, it was held that
the general allegations in the
complaint of conspiracy of the
directors to obtain corporate
opportunity were deficient. The
complaint should state specific
transactions.

Directorship in 2 competing
corporations does not in and of
itself constitute a wrong. It is
only
when
a
business
opportunity arises which places
the director in a position of
serving two masters, and when,
dominated by one, he neglects
his duty to the other, that a
wrong has been done.
IRVING TRUST CO. VS.
DEUTSCH (79 L. Ed. 1243;
1935)
Fiduciary duty applies even if
the corporation is unable to
enter into transactions itself.

LITWIN V ALLEN (25 N.Y.S. 2d

667; 1940)
In this case, it was held that
the common stock purchased by
the
defendants
wasnt
a
business opportunity for the
corporation.
Having
fulfilled
their duty to the corporation in
accordance with their best
judgment,
the
defendant
directors were not precluded
from a transaction for their own
account and risk.
Interlocking directors

WHAT
IS
INTERLOCKING
DIRECTOR?

AN

An
interlocking
director
is
one
who
occupies a position in 2
companies dealing with
each other.
WHAT IS THE RULE ON
CONTRACTS INVOLVING
INTERLOCKING
DIRECTORS?
Except in cases of
fraud, and provided the
contract
is
fair
and
reasonable
under
the

circumstances, a contract
between
2
or
more
corporations
having
interlocking directors shall
not be invalidated on that
ground alone. This practice
is tolerated by the Courts
because
such
an
arrangement
oftentimes
presents
definite
advantages
to
the
corporations involved.
However, if the interest
of the interlocking director
in
one
corporation
is
substantial
(i.e.,
stockholdings exceed20%
of the OCS) and his interest
in the other corporation or

corporations
is
merely
nominal, he shall be subject
to the conditions stated in
Sec. 32, i.e., for the
contract not to be voidable,
the following conditions
must be present:
(1)
The presence of
the
self-dealing
director or trustee in
the board meeting
for
which
the
contract
was
approved was not
necessary
to
constitute a quorum
for such meeting;

(2)
The vote of such
self-dealing director
or trustee was not
necessary for the
approval
of
the
contract;
(3)
The contract is
fair and reasonable
under
the
circumstances;
(4)
In the case of an
officer, the contract
has been previously
authorized by the
Board of Directors.
In the event that either
of or both conditions (1)
and (2) are absent (i.e., the

presence
of
the
director/trustee
was
necessary for a quorum
and/or
his
vote
was
necessary for the approval
of
the
contract), the
contract may be ratified by
a 2/3 vote of the OCS or all
of the members, in a
meeting called for the
purpose. Full disclosure of
the adverse interest of the
directors
or
trustees
involved must be made at
such meeting.
Note: The
Investment
House Law prohibits a
director or officer of an

investment house to be
concurrently a director or
officer of a bank, except
as otherwise authorized
by the Monetary Board.
In no event can a person
be authorized to be
concurrently an officer of
an investment house and
of a bank except where
the majority or all of the
equity of the former is
owned by the bank. (P.D.
129, Sec. 6, as amended)
The Insurance
Code likewise prohibits a
person from being a
director and/or officer of
an insurance company

and
an
adjustment
company. (Sec. 187)
GLOBE WOOLEN CO. V. UTICA
GAS & ELECTRIC (121 N.E.
378; 1918)
Maynard, president and chief
stockholder of Globe but nominal
SH in Utica Gas, obtained a
cheap, 10-year contract for Utica
to supply power. Maynard did
not vote during the meeting for
the approval of the contract.
Can Globe seek to enforce
contract? The Supreme Court
held that Globe could not
enforce the contract and that

said contract was voidable at the

election of Utica. It was found
that based on the facts of the
case, the contract was clearly
one-sided. Maynard, although he
did
not
vote,
exerted
a
dominating influence to obtain
the contract from beginning to
end.
The director-trustee has a
constant duty not to seek harsh
advantage in violation of his
trust.
Watered stocks (Sec. 65)

Any director or officer of

the corporation:
(1)
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
(2)
who,
having
knowledge
thereof,
does
not
forthwith
express his objection
in writing and file the
same
with
the
corporation secretary

shall
be solidarily
liable with the stockholders
concerned
to
the
corporation
and
its
creditors for the difference
between the fair value
received at the time of the
issuance of the stock and
the par or issued value of
the same.
Fixing compensation of
directors and officers
GENERAL
RULE:
Directors as such
are not entitled

to compensation
for
performing
services
ordinarily
attached to their
office.
EXCEPTIONS:
(1)
If
the
articles
of
incorporation or the bylaws
expressly
so provide;
(2)
If a contract is expressly
made in advance.
WHO
FIXES
COMPENSATION?

THE
The

stockholders
only
(majority of the OCS)
EXCEPTION:
Per
diems, which can be fixed
by
the
directors
themselves
APPLICABILITY
OF
COMPENSATION: Only to
future and NOT past
services.
MAXIMUM
AMOUNT
ALLOWED
BY
LAW:
Total
yearly income of the
directors shall not
exceed 10% of the

net income before

income tax of the
corporation
during
the preceding year
(Sec. 30)
GOV'T OF THE PHILIPPINES
VS. EL HOGAR FILIPINO (50
Phil. 399; 1927)
The compensation provided in
sec. 92 of the by-laws of El
Hogar Filipino which stipulated
that 5% of the net profit shown
by the annual balance sheet
shall be distributed to the
directors in proportion to the
attendance at board meetings is

valid. The Corporation Law does

not prescribe the rate of
compensation for the directors
of a corporation. The power to
fix it , if any is left to the
corporation to be determined in
its by-laws. In the case at bar,
the provision in question even
resulted in extraordinarily good
attendance.
BARRETO VS. LA PREVISORA
FILIPINA
This action was brought by
the
directors
of
defendant
corporation to recover 1% from
each of the plaintiffs of the
profits of the corporation for

1929 pursuant to a by-law

provision which grants the
directors the right to receive a
life gratuity or pension in such
amount for the corporation.
The SC held that the by-law
provision is not valid. Such
provision is ultra vires for a
mutual
loan
and
building
association to make. It is not
merely
a provision for the
compensation of directors. The
authority
conferred
upon
corporations refers only to
providing compensation for the
future services of directors,
officers, and employees after the
adoption of the by-law in relation

thereto. The by-law can't be held

to authorize the giving of
continuous
compensation
to
particular directors after their
employment has terminated for
past
services
rendered
gratuitously by them to the
corporation.
CENTRAL COOPERATIVE
EXCHANGE INC VS. TIBE (33
SCRA 596; 1970)
The questioned resolutions
which appropriated the funds of
the corporation for different
expenses of the directors are
contrary to the by-laws of the
corporation; thus they are not

within the board's power to

enact. Sec. 8 of the by-laws
explicitly
reserved
to
the
stockholders
the
power
to
determine the compensation of
members of the board and they
did restrict such compensation
to
actual
transportation
expenses plus an additional P30
per diems and actual expenses
while waiting. Hence, all other
expenses are excluded. Even
without the express reservation,
directors presumptively serve
without pay and in the absence
of any agreement in relation
thereto, no claim can be
asserted therefore.

FOGELSON VS. AMERICAN

WOOLEN CO. (170 F. 2d. 660;
1948)
A retirement plan which
provides a very large pension to
an officer who has served to
within one year of the retirement
age without any expectation of
receiving a pension would seem
analogous to a gift or bonus. The
size of such bonus may raise a
justifiable inquiry as to whether
it amounts to wasting of the
corporate property. The disparity
also between the president's
pension plan and that of even
the nearest of the other officers

and employees may also be

inquired upon by the courts.
KERBS VS. CALIFORNIA
EASTERN AIRWAYS (90 A.
2d 652; 1952)
This is an appeal filed to
enjoin the California Eastern
Airways from putting into effect
a stock option plan and a profitsharing plan. The SC held that
the stock option plan was
deficient
as
it
was
not
reasonably created to insure that
the corporation would receive
contemplated benefits. A validity
of a stock option plan depends
upon
the
existence
of

consideration and the inclusion

of circumstances which may
insure that the consideration
would pass to the corporation.
The options provided may be
exercised in
toto immediately
upon their issuance within a 6
month
period
after
the
termination of employment. In
short, such plan did not insure
that any optionee would remain
with the corporation.
With regard to the profitsharing plan, it was held valid
because it was reasonable and
was ratified by the stockholders
pending the action.

Close Corporations

Sec. 97 provides that the AOI

of a close corp. may specify that
it shall be managed by the
stockholders rather than the
BoD. So long as this provision
continues in effect:

No
stockholders
meeting need be called to
elect directors;

Generally,
stockholders deemed to be

directors for purposes of this

Code, unless the context
clearly requires otherwise;

Stockholders shall be
subject to all liabilities of
directors.
The AOI may
likewise provide that all
officers or employees or that
specified
officers
or
employees shall be elected
or
appointed
by
the
stockholders instead of by
the BoD.
Further, Sec. 100 provides that
for stockholders managing corp.
affairs:


They
shall
be
personally
liable
for
corporate
torts
(unlike
ordinary directors liable only
upon finding of negligence)

If however there is
reasonable adequate liability
insurance, injured party has
no
right
of
action
v.
stockholders-managers
Duty of Controlling Interest

A SH/director is still entitled to

vote in a stockholders meeting

even if his interest is adverse to

a corporation. But a stockholder
able to control a corp. is still
subject to the duty of good faith
to the corp. and the minority.
Persons with management
control of corporation hold it in
behalf of SHs and can not regard
such as their own personal
property to dispose at their
whim.
The ff. acts are legal:

Transfer of managerial
control
through
BoD
resignation
&
seriatim
election of successors if

concomitant with the sale

and
actual
transfer
of
majority interest or that
which
constitutes
voting
control;

Disposal by controlling
SH of his stock at any time &
at such price he chooses
The ff. are illegal:

Selling corp. office or

management
control
by
itself,
that
is
NOT
accompanied by stocks or
stocks are insufficient to
carry voting control;


Transferring office to
persons who are known or
should
be
known
as
intending
to
raid
the
corporate
treasury
or
otherwise improperly benefit
themselves at the expense
of the corp. (Insuranshares
Corp. V. Northern Fiscal);

Receiving a bonus or
premium
specifically
in
consideration
of
their
agreement to resign & install
the
nominees
of
the
purchaser of their stock,
above and beyond the price
premium
normally

attributable to the control

stock being sold;
INSURANSHARES CORP. V.
NORTHERN FISCAL CORP. (35
F. Supp. 22; 1940)
The corp. is suing its former
directors to recover damages as
a result of the sale of its control
to a group (corporate raiders)
who proceeded to rob it of most
of its assets mainly marketable
securities.
Are previous directors who
sold corp. control liable? Yes,

they are under duty not to sell to

raiders.
Owners of corp. control are
liable if under the circumstances,
the proposed transfer are such
as to awaken a suspicion or put
a prudent man on his guard. As
in this case, control was bought
for so much aside from being
warned of selling to parties they
knew little about, and also from
fair notice that such outsiders
indeed intended to raid the corp.

Duty to Creditors

General rule: Corporate creditors

can run after the corp. itself
only, and not the directors for
mismanagement of a solvent
corp.
If corp. becomes insolvent,
directors are deemed trustees of
the
creditors
and
should
therefore manage its assets with
due
consideration
to
the
creditors interest.
If directors are also creditors
themselves, they are prohibited
from gaining undue advantage
over other creditors.

Personal Liability of
Directors

In what instances does

personal liability of a
corporate
director,
trustee or officer validly
attach
together
with
corporate liability?
When
the
director
trustee / officer:

I.

(1)
assents
to a patently unlawful act
of the corporation;
(2) is in bad faith or
gross
negligence
in
directing the affairs of
the corporation;
(3) creates a conflict of
interest,
resulting
in
damages
to
the
corporation,
its
stockholders or other
persons

II.

Consents
to
the issuance of watered
stocks, or who, having
knowledge thereof, does
not forthwith file with the

corporate secretary his

written objection thereto;
III.

Agrees
to
hold himself personally
and solidarily liable with
the corporation;

IV.

Is made, by a
specific provision of law,
to personally answer for
his corporate action.
(Tramat
Mercantile
v.
CA, 238 SCRA
14)

UICHICO v. NLRC (G.R.

121434, June 2, 1997)

No.

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 the instant case, there was
a showing of bad faith: the
Board Resolution retrenching the
respondents on the feigned
ground of serious business
losses had no basis apart from
an unsigned and unaudited Profit

and Loss Statement which had

no evidentiary value whatsoever.

CORPORATE BOOKS AND

RECORDS
AND
THE RIGHT OF INSPECTION
Corporate Books and
Records
WHAT
RECORDS

BOOKS
MUST

AND
A

CORPORATION
74)

KEEP?

(Sec.

(1)
Record of all business
transactions;
(2)
Minutes
of
all
meetings of stockholders
or members;
(3)
Minutes
of
all
meetings of Board of
Directors or Trustees;
(4)
Stock and Transfer
book
WHAT IS A STOCK AND
TRANSFER BOOK? (Sec. 75)
A stock and transfer
book is a record of all

stocks in the names of the

stockholders alphabetically
arranged.
It
likewise
contains
the
following
information:

Installments paid
and unpaid on all stock
for which subscription
has been made, and
the
date
of
any
installment;

A statement of
every alienation, sale or
transfer of stock made,
the date thereof, and by
whom and to whom
made;


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.
WHAT
IS
A
STOCK
TRANSFER AGENT? (Sec.
75)

A stock transfer
agent is one who is
engaged principally in the
business
of
registering
transfers of stocks in behalf
of a stock corporation. He
or she must be licensed by
the SEC; however, 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,
shall
be
applicable.

WHO IS THE CUSTODIAN

OF
CORPORATE
RECORDS?
In the absence of
any
provision
to
the
contrary,
the
corporate
secretary is the custodian
of
corporate
records.
Corollarily, he keeps the
stock and transfer book and
makes the proper and
necessary entries. (Torres,
et al. vs. CA, 278 SCRA 793;
1997)
Basis of the Right of
Inspection

Ordinary
stockholders,
the
beneficial
owners of the corporation,
usually have no say on how
business affairs of the corp. are
run by the directors. The law
therefore gives them the right to
know not only the financial
health of the corp. but also how
its affairs are managed so that if
they find it unsatisfactory, they
can seek the proper remedy to
protect their investment.

WHAT IS THE NATURE

OF
THE
RIGHT
TO
INSPECT?
PREVENTIVE
:
deterrent
to
an
illintentioned
management knowing its
acts
are subject to scrutiny;
and
REMEDIAL:
A
dissatisfied
SH
may avail of this
right
as
a
preliminary step
towards seeking

more direct and

appropriate
remedies against
mismanagement.
What Records Covered
1.
Records
of
business transactions

ALL

This includes book of

inventories and balances,
journal, ledger, book for
copies
of
letters
and
telegrams,
financial
statements, income tax

returns, vouchers, receipts,

contracts,
papers
pertaining
to
such
contracts,
voting
trust
agreements (sec. 59)
2.

By-laws
These
are
expressly
required to be open to
inspection by SH/members
during office hours (Sec.
46). Note: There is no
similar provision as to AOI,
but these are filed with the
SEC anyway.

3.
Minutes of directors
meetings

This
is
to
stockholders
of
policies. Such right
only upon approval
minutes, however.

inform
Board
arises
of the

4.
Minutes
of
stockholders' meetings
5.
Stock
books

and

transfer

These are records of all

stocks in the names of the
stockholders alphabetically
arranged.
contain
all
names of the stockholders
of record. Useful for proxy

solicitation for elections.

SEC has however ruled that
a SH cannot demand that
he be furnished such a list
but he is free to examine
corp. books.
6.
Most recent financial
statement
Sec. 75 of the Code
provides that within 10
days from the corporation's
receipt of a written request
from any stockholder or
member, the corporation
must furnish the requesting
party with a copy of its
most
recent
financial

statement,
which
shall
include a balance sheet as
of the end of the last
taxable year and a profit or
loss statement for said
taxable year.
Note: Under the Secrecy
of Bank Deposits Act,
records of bank deposits
of the corporation are NOT
open
to
inspection,
EXCEPT
under
the
following circumstances:
(1)
Upon
written
consent of concerned

depositor
(presumably the
corporation);
(2)
cases of impeachment;

In

(3)
Upon court order in cases of
bribery or dereliction of duty
of a public
official; and
(4) In cases where the
money deposited /
invested is the subject
matter
of litigation
(5)
Upon order of a
competent court in

cases of unexplained
wealth
under RA 3019 or
the
Anti-Graft
and
Corrupt Practices Act
(6)
Upon
order
of
the
Ombudsman
Extent and Limitations on
Right

1.
The exercise of this right
is subject to reasonable
limitations
similar
to
a
citizens exercise of the right

to information. Otherwise, the

corp. might be impaired, its
efficiency
in
operations
hindered, to the prejudice of
SHs.
2.
Such limitations to be
valid must be reasonable and
not inconsistent with law
( Sec. 36[5] and 46).
3.
A corp. may regulate
time and manner of inspection
but provisions in its by-law
which gives directors absolute
discretion to allow or disallow
inspection are prohibited.

Limitations as to time
and place:

Exercise of right
only
at
REASONABLE
HOURS
on
BUSINESS
DAYS.

Such business days

should be THROUGHOUT
THE YEAR. BoD cannot
limit such to merely a few
days within the year.
(Pardo
v.
Hercules
Lumber)
4.
By-laws cannot prescribe
that authority of president
must first be obtained.

5.
Inspection
should
be
made in such a manner as not
to
impede
the
efficient
operations
6.
Place
of
inspection: Principal office of
the corp. SH cannot demand
that such records be taken out
of the principal office.
7.

As to purpose:

PRESUMPTION: that
SHs purpose is proper.
Corp. cannot refuse on the
mere belief that his motive
is improper (sec 74).


BURDEN OF PROOF:
lies with corp. which should
show that purpose was
illegal.

To be legitimate, the
purpose for inspection must
be
GERMANE
to
the
INTEREST
of
the
stockholder as such, and it
is not contrary to the
interests of the corporation.
Legitimate:
inquiry
failure
to
dividends

about
declare

Not legitimate:
mere
satisfaction
speculation.

for
or

Belief in good faith

that a corp. is being
mismanaged may be given
due course even if later,
this is proven unfounded.

If motive can be
clearly shown as inimical to
corp., right may be denied.

Who May Exercise Right

Every
director,
trustee,
stockholder,
member may
exercise right personally or
through an agent who can better
understand and interpret records
(impartial
source,
expert
accountant, lawyer).
As
to
VTA: both
trustee and transferor

voting

SH of parent corp. over

subsidiary:
operated
entities
inspection

If the two are

as
SEPARATE
: NO
right
of

If they are ONE AND

THE SAME with respect
to management and
control, and inspection is
demanded due to
mismanagement of subsidiary
by
the
parents
directors who are also
directors
of
the
subsidiary
: With right of inspection
If the subsidiary is
wholly-owned by the parent,
and its books &
records are in the possession

and control of the

parent corporation
: With right of inspection
(Gokongwei v.
SEC)
Remedies available if
Inspection Refused

WHAT REMEDIES ARE

AVAILABLE
IF
INSPECTION IS REFUSED
BY THE CORPORATION?
(1) Writ of mandamus.

NOTE:
Writ shall
not issue where it is
shown
that
the
petitioners purpose is
improper and inimical to
the
interests
of
the
corporation.
Writ should
be directed against the
corporation.
The
secretary
and
the
president may be joined
as party defendants.
(2) Injunction

(3) Action for damages

against the officer or
agent refusing inspection.
Also, penal
sanctions such as fines
and / or imprisonment
(Sec. 74; Sec. 144)
What defenses are
available to the officer or
agent?
(1)
The
person
demanding
has
improperly used any
information
secured
through
any
prior
examination; or

(2)
Was not acting
in good faith; or
(3)
The
demand
was
not
for
a
legitimate purpose.
PARDO V. HERCULES
LUMBER (47 Phil. 965; 1924)
BOD/Officers
may
deny
inspection when sought at
unusual hours or under improper
conditions. But they cannot
deprive the stockholders of the
right altogether. In CAB, by-law
provided that the inspection be
made available only for a few

days in a year, chosen by the

directors. This is void.
GONZALES V. PNB (122 SCRA
490; 1983)
G acquired 1 share of stock
purposely to be able to exercise
right to inspection with respect
to
transactions
before
he
became a SH. G not in good
faith. His obvious purpose was
to arm himself with materials
which he can use against the
bank for acts done by the latter
when G was a total stranger to
the same. Right not available
here.

VERAGUTH V. ISABELA
SUGAR CO. (57 Phil. 266; 1932)
There was nothing improper in
the secretarys refusal since the
minutes of these prior meetings
have to be verified, confirmed
and signed by the directors then
present. Hence, Veraguth has to
wait until after the next meeting.
GOKONGWEI V. SEC (April 11,
1979)
The law takes from the SH the
burden of showing impropriety of

purpose and places upon the

corporation
the
burden
of
showing impropriety of purpose
and motive.
Considering that the foreign
subsidiary is wholly owned by
SMC and therefore under its
control, it would be more in
accord with equity, good faith
and fair dealing to construe the
statutory right of Gokongwei as
petitioner as SH to inspect the
books and records of such wholly
subsidiary which are in SMCs
possession and control.
DERIVATIVE SUITS

Nature and Basis of

derivative suit
Suits
of
stockholders/
members based on wrongful
or
fraudulent
acts
of
directors or other persons:
a.
Individual
suits wrong done to stockholder
personally and not to other
stockholders
(ex.
When
right
of
inspection is denied to
a stockholder)

b.
Class
suit wrong
done
to
a
group
of
stockholders
(ex.
Preferred
stockholders' rights are
violated)
c.
Derivative
wrong
done
corporation itself

to

suit the

Cause of action
belongs to the corp.
and not the stockholder

But
since
directors
who
charged
mismanagement

the
are
with
are

also the ones who will

decide WON the corp.
will sue, the corp. may
be left without redress;
thus, the stockholder is
given the right to sue
on
behalf
of
the
corporation.

An
effective
remedy of the minority
against the abuses of
management

An
individual
stockholder is permitted
to bring a derivative
suit
to
protect
or
vindicate
corporate

rights, whenever the

officials of the corp.
refuse to sue or are the
ones to be sued or hold
the control of the corp.

Suing stockholder
is merely the nominal
party and the corp. is
actually the party in
interest.

A SH can only
bring suit for an act that
took place when he was
a
stockholder;
not
before. (Bitong v. CA,
292 SCRA 503)

Requirements Relating to
Derivative Suits
WHAT ARE THE LEGAL
PRINCIPLES
CONCERNING
DERIVATIVE SUITS?
1)
Stockholder/
member
must
have
exhausted all remedies
within the corp.
2)
Stockholder/
member must be a
stockholder/ member at
the time of acts or

transactions complained
of or in case of a
stockholder, the shares
must
have
devolved
upon
him
since
by
operation of law, unless
such transaction or act
continues and is injurious
to the stockholder.
3)
Any
benefit
recovered
by
the
stockholder as a result of
bringing derivative suit
must be accounted for to
the corp. who is the real
party in interest.

4)
If suit is successful,
plaintiff
entitled
to
reimbursement
from
corp.
for
reasonable
expenses
including
attorneys' fees.
EVANGELISTA VS.
SANTOS (86 Phil. 387; 1950)
The injury complained of is
against the corporation and thus
the action properly belongs to
the corporation rather than the
stockholders. It is a derivative
suit brought by the stockholder
as a nominal party plaintiff for
the benefit of the corporation,

which is the real party in

interest. In this case, plaintiffs
brought the suit not for the
benefit of the corporation's
interest, but for their own.
Plaintiffs here asked that the
defendant make good the losses
occasioned
by
his
mismanagement and to pay
them
the
value
of
their
respective participation in the
corporate assets on the basis of
their
respective
holdings.
Petition dismissed for venue
improperly laid.

REPUBLIC BANK VS.

CUADERNO (19 SCRA 671;
1967)
In a derivative suit, the
corporation is the real party in
interest, and the stockholder
merely
a
nominal
party.
Normally, it is the corp. through
the board of directors which
should bring the suit. But as in
this case, the members of the
board of directors of the bank
were
the
nominees
and
creatures of respondent Roman
and thus, any demand for an
intra-corporate remedy would be
futile,
the
stockholder
is

permitted to bring a derivative

suit.
Should the corporation be
made a party? The English
practice is to make the corp. a
party plaintiff while the US
practice is to make it a party
defendant. What is important
though is that the corporation
should be made a party in order
to make the court's ruling
binding upon it and thus bar any
future re-litigation of the issues.
Misjoinder of parties is not a
ground to dismiss the action.

REYES VS. TAN (3 SCRA 198;

1961)
The importation of textiles
instead of raw materials, as well
as the failure of the board of
directors to take actions against
those directly responsible for the
misuse of the dollar allocations
constitute fraud, or consent
thereto on the part of the
directors. Therefore, a breach of
trust was committed which
justified the suit by a minority
stockholder of the corporation.
The
claim
that
plaintiff
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 plaintiff had the
right to assume and expect that
the directors would remedy the
anomalous situation of the
corporation brought about by
their wrong-doing. Only after
such period of time had elapsed
could plaintiff conclude that the
directors were remiss in their
duty to protect the corporation
property and business.
BITONG v. CA (292 SCRA 503)

The power to sue and

be sued in any court by a

corporation
even
as
a
stockholder is lodged in the
Board of Directors that
exercises
its
corporate
powers and not in the
president or officer thereof.

It was JAKA's Board of

Directors,
not
Senator
Enrile, which had the
power to grant Bitong
authority to institute a
derivative suit for and in
its behalf.

The
basis
of
a
stockholder's suit is always
one in equity. However, it
cannot prosper without first

complying with the legal

requisites for its institution.
The most important of these
is the bona fide ownership
by a stockholder of a stock in
his own right at the time of
the transaction complained
of which invests him with
standing
to
institute
a
derivative action for the
benefit of the corporation.

FINANCING THE
CORPORATION

Sources of Financing
WHERE CAN CAPITAL TO
FINANCE
THE
CORPORATION
BE
SOURCED?
1)
Contributions
(stockholders);
also
known as stockholder
equity/equity investment
2)
Loans or advances
(creditors)
3)
Profits (corporation
itself)
Capital Structure

WHAT IS MEANT BY
CAPITAL STRUCTURE?
This
refers
to
the
aggregate
of
the
securities -- instruments
which represent relatively
long-term investment -issued
by
the
corporation.
There are
basically
2
kinds
of
securities: shares
of
stock and debt securities.
Capital and Capital Stock
Distinguished

CAPITAL
STOCK
DEFINITI the
ON
amount
fixed,
usually
by the
corporate
charter,
to be
subscribe
d and
paid in or
secured
to be paid

CAPITAL
actual
property of
the
corporation
, including
cash, real,
and
personal
property.
Includes all
corporate
assets, less
any loss

in by the
SHS of a
corporati
on, and
upon
which the
corporati
on is to
conduct
its
operation

which may
have been
incurred in
the
business.

CONSTA CONSTAN FLUCTUATI

NCY
T, unless NG
amended
by the
AOI

Shares of Stock: Kinds

COM PREFE PAR NO TR

MON RRED
PAR* SU
DEFI Stock Stock
NITIO whic which
N
h
entitle
entitl s the
es
holder
the
to
owne some
r of
prefer
such ence
stock either

Sha
s th
hav
bee
issu
and
full
paid
but
sub

s to
an
equal
pro
rata
divisi
on of
profit
s

in the
divide
nds or
distrib
ution
of
assets
upon
liquida
tion, or
in both

que
y
rea
uire
by
issu
g
cor
atio
by
law
me
.

VALU
E

Depe Stated Fixed

nds if par
in
its
value the
par
AOI,
or no
and
par
indic
ated
in
the
stock
certi
ficat
e.
May
be
sold

Value
not
fixed
in the
AOI,
and
there
fore
not
indic
ated
in the
stock
certifi
cate.
Price

VOTI
NG
RIGH
TS

Usual
ly
veste
d

Can
vote
only
under

at a
value
high
er,
but
not
lower
,
than
that
fixed
in
the
AOI.

may
be
set
by
BOD,
SHs
or
fixed
in the
AOI
event
ually.

Depe
nds if
its
com

Depe
nds if
its
com

No
vot
righ
for

PREF
EREN
CE
UPON
LIQUI
DATI
ON

with
the
exclu
sive
right
to
vote

certain
circum
stance
s

No
adva
ntag
e,
priori
ty, or
prefe

First
crack
at
divide
nds /
profits
/

mon
or
prefe
rred.

mon
or
prefe
rred.

long
as
suc
stoc
rem
ns i
the
trea
ry
(Se
57)

rence
over
any
other
SH in
the
same
class

distrib
ution
of
assets

NOTE: Only preferred and

redeemable shares may be
deprived of the right to vote.
(Sec. 6, Corporation Code)
EXCEPTION: As
otherwise provided in the
Corporation Code.
* No-par value shares
may not be issued by the

following entities: banks, trust

companies, insurance
companies, public utilities,
building & loan association (Sec.
6)

Nature of Subscription
Contract

WHAT
IS
SUBSCRIPTION
CONTRACT?

It is any contract for the

acquisition
of
unissued
stock
in
an
existing
corporation or a corporation
still to be formed. This is
notwithstanding the fact
that the parties refer to it

as a purchase or some
other contract. (Sec. 60)
WHAT IS THE NATURE OF
A
SUBSCRIPTION
CONTRACT?

Subscriptions
constitute a fund to
which the creditors have
a right to look for
satisfaction
of
their
claims.

The assignee in
insolvency can maintain
an action upon any
unpaid stock subscription

in order to realize assets

for the payment of its
debts.

A
subscription
contract
is
INDIVISIBLE (Sec. 64).

A
subscription
contract subsists as a
liability from the time
that the subscription is
made until such time
that the subscription is
fully paid.
GARCIA V. LIM CHU SING (59
Phil. 562; 1934)

A share of stock or the

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

Pre-incorporation
subscription
RULE: When a group of persons
sign a subscription contract,
they are deemed not only to
make a continuing offer to the
corporation, but also to have
contracted with each other as
well. Thus, no one may revoke
the contract even prior to
incorporation
without
the
consent of all
the others.
WHEN
IS
A
INCORPORATION
SUBSCRIPTION
IRREVOCABLE?

PRE-

1)
For a period of at
least 6 months from the
date of subscription;
EXCEPTIONS:
(1)
unless all of the other
subscribers consent to the
revocation; or
(2)
unless the incorporation of
said corporation fails to
materialize within the
said period or within a
longer
period
as

may be stipulated in the

contract of subscription
2)
After the AOI have
been submitted to the SEC
(Sec. 61)
UTAH HOTEL CO V.
MADSEN (43 Utah 285, 134
Pac. 557; 1913)
Sec 332 in express terms
confers
powers
upon
the
stockholders to regulate the
mode of making subscriptions to
its capital stock and calling in
the same by-laws or by express
contract.

Since it may be done by express

contract, this shows that it was
intended that a contract to that
effect may be entered into even
before
the
corporation
is
organized, and the contract
agreement is enforced if the
corporation is in fact organized.
WALLACE V. ECLIPSE
POCAHONTAS COAL CO (98
S.E. 293; 1919)
One who has paid his
subscription to the capital stock
of the corporation may compel

the
issuance
of
certificates therefor.

proper

Post-incorporation
subscription
NOTE:
Under the
Corporation Code, there is no
longer any distinction between a
subscription and
a purchase. Thus, a subscriber
is liable to pay for the shares
even
if the corporation
has become insolvent.
The Preemptive Right to
Shares

WHAT
IS
THE
EMPTIVE RIGHT?

PRE-

It is the option
privilege of an existing
stockholder to subscribe
to a proportionate part of
shares
subsequently
issued by the corporation,
before the same can be
disposed
of
in
favor
others.
WHY
A
RIGHT?

PRE-EMPTIVE

To protect existing
stockholder equity. If the
right is not recognized,
the SHs interest in the
corporation will be diluted
by
the
subsequent
issuance of shares.
Basis of Right; Common Law
Rule
Under the prevailing view in
common law, the preemptive
right is limited to shares issued
in pursuance of an increase in
the authorized capital stock and
does not apply to additional
issues of originally authorized

shares which form part of the

existing capital stock.
This common law principle
which was generally understood
to
be
applicable
in
this
jurisdiction has now to give way
to the express provisions of the
Corporation Code on the matter.

Extent and Limitations of

Preemptive Right under the
Code
WHAT IS THE EXTENT OF
THE
PRE-EMPTIVE
RIGHT?

All stockholders of a stock

corporation shall enjoy preemptive right to subscribe
to
all issues or dispositions of
shares of any class, in
proportion
to
their
respective
shareholdings.
Exception: When such
right is denied by the AOI or
an amendment thereto.
LIMITATIONS: The preemptive right does not
extend to: (Sec. 39)

1)
Initial
Offerings (IPOs);

Public

2)
Issuance of shares
in
exchange
for
property needed for
corporate
purposes,
including cases wherein
an
absorbing
corporation issues new
stocks to the SHs in
pursuance
to
the
merger
agreement
(Sec. 39)
Why?
(a) Because
it is beneficial for the
corporation to save its
cash;

(b) A swap is
more expedient than
determining
the
monetary
equivalent
property.

of

the

3)
Issuance of shares
in
payment
of
a
previously
contracted
debt (Sec. 39)
Why?
(a)
The
obligation
is
extinguished outright;
(b)
Corporation does not

have to shell out money

to fulfill its
obligations;
(c)
Money
that
would
have
otherwise been used for
interest
payments
channelled
productive

can
to

be
more

corporate
activities.
Note: In Nos. (2)
and (3), such acts require

approval of 2/3 of the OCS

or
2/3 of
total members.
In Close Corporations
In close corporations, the
preemptive rights extends to ALL
stock to be issued, including reissuance
of
treasury
shares, EXCEPT if
provided
otherwise by the AOI. (Sec.
102). Note that the limitations
in Sec. 39 do not apply.
Waiver of Preemptive Right

The waiver of the preemptive

right must appear in the Articles
of
Incorporation
or
an
amendment thereto in order to
be binding on ALL stockholders,
particularly future stockholders.
(Sec. 39)
If it appears merely in a
waiver agreement and NOT in
the AOI, and was unanimously
agreed to by all existing
stockholders:

The
existing
stockholders
cannot
later
complain since they are all
bound to their

private agreement.

However,
future
stockholders will NOT be
bound to such an agreement.
Any stockholder who has not
exercised his preemptive right
within a reasonable time will be
deemed to have waived it.
When the issue is in breach
of trust
The issue of shares may still
be objectionable if the Directors
have acted in breach of trust and
their primary purpose is to

perpetuate or shift control of the

corporation, or to freeze out
the minority interest.
Remedies when right
violated/denied
WHAT
ARE
THE
REMEDIES WHEN THE
PRE-EMPTIVE RIGHT IS
UNLAWFULLY DENIED?
(1) Injunction;
(2) Mandamus;
(3) Cancellation of
the shares (NOTE: but
only if no innocent 3rd

parties
are
prejudiced)
(4) In certain cases, a
derivative suit
STOKES V. CONTINENTAL
TRUST CO. (78 N.E. 1090;
1906)
The directors were under the
legal obligation to give the SHplaintiff
an
opportunity
to
purchase at the price fixed
before they could sell his
property to a third party. By
selling to strangers without first
offering to sell to him, the
defendant wrongfully deprived

him of his property and is liable

for such damages as he actually
sustained.
THOM V. BALTIMORE
TRUST (148 Atl. 234; 1930)
Independently of the charters,
the SHs of a corporation have a
preferential right to purchase
new issues of shares, to the
proportional extent of their
respective
interests
in
the
capital stock then outstanding,
when the privilege can be
exercised consistently with the
object which the disposition of
the additional stock is legally
designed to accomplish. In the

present case, every SH of the

bank, for each of the shares, was
to receive 1 1/2 shares of the
stock co. (share in exchange for
property).
It would not be
feasible
to
consummate
a
transfer
based
upon
such
consideration if the preemptive
right were to be held enforceable
with respect to every new issue
of stock regardless of the object
of the disposition.
FULLER V. KROGH (113 N.W.
2d 25; 1962)
Preemptive right is not to be
denied when the property is to
be taken as consideration for the

stock except in those peculiar

circumstances
when
the
corporation has great need for
the particular property, and the
issuance of stock is the only
practical and feasible method by
which the corp. can acquire it for
the best interest of the SHs.
Ground: practical necessity. [cf.
Sec. 39]
DUNLAY V. M. GARAGE AND
REPAIR (170 N.E. 917; 1930)
If the issue of shares is
reasonably necessary to raise
money to be issued in the
business of the corporation
rather than the expansion of

such business beyond original

limits, the original SHs have no
right to count on obtaining and
keeping their proportional part of
original stock.
But even if preemptive right
does not exist, the issue of
shares may still be objectionable
if the directors have acted in
breach of trust and their primary
purpose is to perpetuate or shift
control of the corporation, or to
freeze out minority interest.
ROSS TRANSPORT V.
CROTHERS (45 A. 2d 267;
1946)

The doctrine of preemptive

right is not affected by the
identity of the purchasers. What
it is concerned with is who did
not get it. But when officers and
directors sell to themselves and
thereby gain an advantage, both
in value and in voting power,
another situation arises. In the
case at bar, the directors were
not able to prove good faith in
the purchase and equity of
transaction, since the corp. was
a financial success. There was
constructive fraud upon the
other SHs.
Debt Securities

Borrowings
Borrowings
are
usually
represented
by
promissory notes, bonds or
debentures.
Oftentimes,
a
financial institution will be
willing
to
lend
large
amounts
to
private
corporations only on the
condition
that
such
institution will have some
representation on the Board
of Directors. The role of

such representative is to
see
to
it
that
his
institution's investment is
protected
from
mismanagement
or
unfavorable
corporate
policies.
Bonds and Debentures
BONDS:
secured
by a mortgage or pledge of
corporate property
must be
registered with the
SEC, as provided by
Sec. 38 of the

Corporation
Code
DEBENTURES: issued on
the general credit of the
corporation
not secured by any
collateral;
THEREFORE, are not
bonded
indebtedness in the
true
sense,
and
stockholder
approval is NOT
required (although
it would generally
be a good idea to
obtain it)

Convertible securities;
stock options
NOTE: Under the SEC
rules, stock option must
first be approved by the
SEC.
Also, if the stock
option is granted
to non-stockholders, o
r to directors, officers,
or managing
groups, there must
first be SH approval of
2/3 of the OCS before
the matter is
submitted to the SEC
for approval.

Of course it goes
without saying that
the corporation must
set aside enough of
the junior securities in
case the holders of
the option decide to
exercise such option.
MERRITT-CHAPMAN & SCOTT
CORP. VS. NEW YORK TRUST
CO. (184 F. 2d 954; 1950)
If the corporation is allowed to
declare stock dividends without
taking account of the warrant
holders (who have not yet
exercised their warrant), the

percentage of interest in the

common stock capital of the
corporation which the warrant
holders would acquire, should
they choose to do so, could be
substantially
reduced/diluted.
Thus, the corporation is wrong in
contending that a warrant holder
must first exercise his warrant
before they may be issued stock
dividend.
Hybrid securities
Because preferred shares and
bonds are created by contract, it
is possible to create stock which
approximates the characteristics

of
debt
securities.
Hybrid
securities, as the name implies,
therefore combine the features
of preferred shares and bonds.
Determining the true nature of
the security is crucial for tax
purposes. The American courts
use the following criteria:
(1) Is the corporation liable to
pay back the investor at a
fixed maturity date?
(2) Is
interest
payable
unconditionally at definite
intervals, or is it dependent
on earnings?
(3) Does the security rank at
least equally with the claims

of other creditors, or is it
subordinate to them?
WHAT IS THE NATURE OF
THE SECURITY AND THE
PAYMENT MADE?
BOND STOCK
S
WHAT
IS
PAID?

Interes Dividen
t
ds

TO
WHOM
PAID?

Credito Stockhol
rder
investo
r

WHEN
PAID?

Wheth
er the
corpor
ation
has
profits
or not

NATUR
E

Expens Not an
e
expense

TAXABI Can be
LITY
deduct
ed for
tax
purpos
es

Only if
there
are
profits

CANNOT
be
deducte
d

MATURI Yes
TY
DATE?

No

RANK
ON
DISSOL
UTION

Superior
to
stockhol
ders,
inferior
to
corporat
e
creditor
s

Ranked
togeth
er with
other
corpor
ate
credito
rs

JOHN KELLY VS. CIR TALBOT

MILLS VS. CIR (326 U.S. 521;
1946)

In the Kelly case, the annual

payments made were interest on
indebtedness (therefore, a bond
is held) because there were
sales of the debentures as well
as exchanges of preferred stock
for debentures, a promise to pay
a certain annual amount if
earned, a priority for the
debentures over common stock
and a definite maturity date in
the reasonable future.
In the Talbot Mills case, the
annual payments made were
dividends
and
not
interest
(therefore, shares are held),
because of the presence of

fluctuating annual payments

with a 2% minimum, and the
limitation of the issue of notes to
stockholders in exchange only
for stock. Besides, it is the Tax
Court
which
has
final
determination of all tax issues
which are not clearly delineated
by law.
JORDAN CO. VS. ALLEN (85 F.
Supp. 437; 1949)
The
payments
made,
regardless of what they are
called, are in fact dividends (on
stocks) because of the absence
of a maturity date and the right
to enforce payment of the

principal sum by legal action,

among other factors.
The following criteria should
be used in determining whether
a payment is for interest or
dividends:
(1) maturity date and the
right to enforce collection;
(2) treatment
by
the
parties;
(3) rank on dissolution;
(4) uniform rate of interest
payable
or
income
payable only out of profits;
(5) participation
in
management
and
the
right to vote.

It must be noted that these

criteria
are
not
of
equal
importance and cannot be relied
upon individually. E.g. treatment
accorded the issuance by the
parties cannot be sufficient as
this would allow taxpayers to
avoid taxes by merely naming
payments as interest.
The trust indenture
Here, the bond issue usually
involves 3 parties:
(1) debtor-corporation
(2) creditor-bondholder

(3) trustee: representative

of all the bondholders

ALADDIN HOTEL CO. VS.

BLOOM (200 F. 2d 627; 1953)
The rights of bondholders are
to be determined by their
contract and courts will not
make or remake a contract
merely because one of the
parties may become dissatisfied
with its provisions.
If the
contract is legal, the courts will
interpret and enforce it.

In the deed of trust and bonds

in this case, there are provisions
empowering bondholders of 2/3
of the principal amount or more,
by agreement with the company,
to modify and extend the date of
payment of the bonds provided
such extension affected all
bonds alike. When this was
done, the bondholders only
followed such provisions in good
faith. The company benefited
because of such move, and the
bondholders
were
not
necessarily
prejudiced,
as
defendants Joneses in this case
were themselves owners of 72%
of the bond issue.

CONSIDERATION FOR
ISSUANCE OF SHARES
Form of Consideration

WHAT
FORMS
OF
CONSIDERATION
ARE ACCEPTABLE FOR
ISSUANCE OF SHARES?

cash;

property actually
received
by
the
corporation: must be

necessary
or
convenient for its use
and lawful purposes;

labor performed
for or services actually
rendered
to
the
corporation
(NOTE:
Future
services
are
NOT
acceptable!);

previously
incurred indebtedness
by the corporation;

amounts
transferred
from
unrestricted
retained
earnings
to
stated
capital;


outstanding
shares exchange for
stocks in the event of
reclassification
or
conversion
WHAT
FORMS
ARE UNACCEPTABLE?

future services

promissory notes

value less than

the stated par value
HOW IS THE
PRICE
OF
SHARES FIXED?

ISSUED
NO-PAR

It may be fixed as
follows:
(1)

In the AOI; or

(2)
By
the
BOD
pursuant to authority
conferred upon it by the
AOI or the by-laws; or
(3)
In the absence of
the foregoing, by the
SHs representing at
least a majority of the
outstanding
capital
stock at a meeting duly
called for the purpose
(Sec. 62)

IF THE CONSIDERATION
FOR SHARES IS OTHER
THAN CASH, HOW IS THE
VALUE
THEREOF
DETERMINED?
It
is
initially
determined
by
the
incorporators or the Board
of Directors, subject to
approval by the SEC. (Sec.
62)
Watered Stocks

WHAT
STOCK?

IS

WATERED

Stocks issued as fully

paid up in consideration of
property
at
an
overvaluation.
Oftentimes,
the
consideration received is
less than the par value of
the share.
NOTE:
No-par shares
CAN
be
watered
stock: when they are
issued for less
than their issued
value as fixed by the

corp. in accordance with

law.
WHAT ARE THE WAYS BY
WHICH WATERED STOCK
CAN BE ISSUED?
(1)
Gratuitously,
under an agreement
that nothing shall be
paid to the corporation;
(2)
Upon payment of
less than its par value
in money or for cost at
a discount;

(3)
Upon
payment
with property, labor or
services, whose value
is less than the par
value of the shares;
and
(4)
In the guise of
stock
dividends
representing
surplus
profits or an increase in
the value of property,
when there are no
sufficient
profits
or
sufficient increases in
value to justify it.
WHAT IS THE LIABILITY
OF DIRECTORS FOR THE

ISSUANCE OF WATERED
STOCK?
Directors and officers
who consented to the
issuance
of
watered
stocks
are solidarily
liable with the holder of
such stocks to the corp.
and its creditors for the
difference between the
fair value received at the
time of the issuance and
the par or issued value of
the share.
The liability will be to
all creditors, whether they
became such prior or

subsequent
to
the
issuance of the watered
stock. Reliance by the
creditors on the alleged
valuation
of
corporate
capital is immaterial and
fraud is not made an
element of liability.
NOTE:
In the
Philippines, it is the statutory
obligation
theory that
is
controlling
(cf. Sec. 65).
PRIVATE TRIPLEX SHOE V.
RICE & HUTCHINSTC \L 1
"TRIPLEX SHOE V. RICE &

HUTCHINS" (72 A.L.R. 932;

1930)
In this case, the stocks
issued to the Dillman faction
were no par value shares, the
consideration for which were
never fixed as required by law.
Hence, their issuance was void.
Moreover, the stocks were issued
to the Dillmans for services
rendered and to be rendered.
Future services are not lawful
consideration for the issuance of
stock.
PRIVATE MCCARTY V.
LANGDEAUTC \L 1 "MCCARTY

V. LANGDEAU" (337 S.W.

2d 407; 1960)
McCarty
agreed
to
purchase shares of a corp. with a
downpayment of only $20, with
the balance due to be evidenced
by a note. McCarty failed to pay
a big portion of the balance. The
Court affirmed the judgement
against McCarty for the balance
due on the contract.
McCarty contends that
the contract is void. But the law
only prohibits the issuance of
stock. If it is understood that the
stock will not be issued to the
subscriber until the note is paid,

the contract is valid and not

illegal.
If a security such as a
note, which is not a valid
consideration, is accepted, the
law does not say that such note,
or the stock issued for it, shall be
void. What is void by express
provision of law is the fictitious
increase
of
stock
or
indebtedness. The law was
designed for the protection of the
corporation and its creditors. It
emphasizes the stockholders
obligations to make full and
lawful payment in accord with its
mandate, rather than furnish him
with a defense when he has

failed in that obligation. Its

purpose is to give integrity to the
corporations capital. None of
these objects would be promoted
by declaring a note given by a
subscriber for stock uncollectible
in the hands of a bona fide
stockholder.
RHODE V. DOCK-HOP CO. (12
A.L.R. 437; 1920)
This case involves an
action to collect unpaid balances
on par value of shares. It was
held that innocent transferees of
watered stock cannot be held to
answer for the deficiency of the

stocks even at the suit of the

creditor of the company. The
creditors remedy is against the
original owner of the watered
stock.
PRIVATE BING CROSBY V.
EATONTC \L 1 "BING CROSBY
V. EATON" (297 P. 2d 5; 1956)
A subscriber to shares
who pays only part of what he
agreed to pay is liable to
creditors for the balance.
Holders of watered stock
are generally held liable to the
corporations creditors for the

difference between the par value

of the stock and the amount paid
in.
Under
the
misrepresentation theory, the
creditors who rely on the
misrepresentation
of
the
corporations capital stock are
entitled to recover the water
from holders of the watered
stock. Reliance of creditors on
the
misrepresentation
is
material.
However, under
the statutory obligation theory,
reliance of creditors on the
capital stock of the corporation is
irrelevant. (It must be noted
that here in the Philippines, it is

the statutory obligation theory

which is prevailing.)
Issuance of Certificate

Certificate of stock
CONDITION FOR ISSUANCE:
payment of full amount of
subscription price plus
interest, if any is
due (Sec. 64)
CERTIFICATION THAT: person
named therein is a holder or
owner of a

stated
number of shares in the
corporation.
INDICATES:
1. kind of shares
2. date of issuance
3. par value, if par value shares
BEARS:
Signatures of the proper officers,
usually president
or secretary, as well
as the corporate seal

AMOUNT ISSUED:
For no more than the number of
shares authorized in
articles
of
incorporation; excess
would be void

Nature and function of a

certificate of stock
A certificate of stock
is not necessary to render
one a stockholder in a
corporation. Nevertheless,
a certificate of stock is the
paper representation 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 shares
represented thereby, but is
not in law the equivalent of
such
ownership.
It
expresses
the
contract
between the corporation
and the SH, but it is not
essential to the existence of
a share in stock or the
creation of the relation of
shareholder
to
the

corporation. (Tan v. SEC,

206 SCRA 740)
Requisites for valid issuance
of formal certificate of
stock (Sec. 63)
(1)
The certificates must
be signed by the
President / VicePresident, countersigned
by the secretary or
assistant secretary, and
sealed with the seal of
the corporation.
A mere typewritten
statement advising a SH of
the extent of his ownership

in a corporation without
qualification and/or
authentication cannot be
considered as a formal
certificate of stock. (Bitong
v. CA, 292 SCRA 503)
(2)
Delivery of the
certificate
There is no issuance of
a stock certificate where it
is never detached from the
stock books although
blanks therein are properly
filled up if the person
whose name is inserted
therein has no control over
the books of the company.

(Bitong v. CA, 292 SCRA

503)
(3)
Par value of par value
shares / Full subscription
of no par value shares
must be fully paid.
(4)
Surrender of the
original certificate if the
person requesting the
issuance of a certificate
is a transferee from a SH.
BITONG V. CA (292 SCRA 503)
Stock issued without
authority and in violation of law

is void and confers no rights on

the person to whom it is issued
and
subjects
him
to
no
liabilities. Where there is an
inherent lack of power in the
corporation to issue the stock,
neither the corporation nor the
person to whom the stock is
issued is estopped to question
its validity since an estoppel
cannot operate to create stock
which under the law cannot have
existence.

Unpaid Subscriptions


Unpaid
subscriptions are not due
and payable until a call is
made by the corporation
for payment. (Sec. 67)

An
obligation
arising from non-payment
of stock subscriptions to a
corporation
cannot
be
offset against a money
claim of an employee
against the employer.
(Apodaca v. NLRC, 172
SCRA 442)

Interest on
all
unpaid subscriptions shall

be at the rate of interest

fixed in the by-laws. If
there is none, it shall be
the legal rate. (Sec. 66)

How Payment of Shares

Enforced

HOW ARE UNPAID

SUBSCRIPTIONS
COLLECTED?

(1)
Call for payment as
necessary, i.e. the BOD
declares the unpaid
subscriptions due and
payable (Sec. 67);
(2)
Delinquency sale
(Sec. 68; to be discussed
in the next section)
(3) Court action for
collection (Sec. 70)
VELASCO VS POIZAT (37 Phil.
802; 1918)
Poizat subscribed to 20 shares
but only paid for 5. Board made

a call for payment through a

resolution. Poizat refused to
pay.
Corporation
became
insolvent.
Assignee
in
insolvency sued Poizat whose
defense was that the call was
invalid for lack of publication.
It was held that the Board call
became immaterial in insolvency
which automatically causes all
unpaid subscriptions to become
due and demandable.
LINGAYEN GULF ELECTRIC VS
BALTAZAR (93 Phil. 404; 1953)

Companys
president
subscribed to shares and paid
partially. The Board made a call
for
payment
through
a
resolution.
However,
the
president
refused
to
pay,
prompting the corporation to
sue. The defense was that the
call was invalid for lack of
publication.
It was held that the call was
void for lack of publication
required
by
law.
Such
publication
is
a
condition
precedent for the filing of the
action. The ruling in Poizat does
not apply since the company
here is solvent.

DA SILVA VS ABOITIZ (44 Phil.

755; 1923)
Da Silva subscribed to 650
shares and paid for 200. The
company notified him that his
shares
will
be
declared
delinquent and sold in a public
auction if he does not pay the
balance. Da Silva did not pay.
The company advertised a
notice of delinquency sale. Da
Silva
sought
an
injunction
because the by-laws allegedly
provide
that
unpaid
subscriptions will be paid from

the
dividends
stockholders.

allotted

to

The Court held that by-laws

provide
that
unpaid
subscriptions may be paid from
such dividends. Company has
other remedies provided for by
law such as a delinquency sale
or specific performance.
NATIONAL EXCHANGE VS
DEXTER (51 Phil. 601; 1928)
Dexter subscribed to 300
shares.
The
subscription
contract provided
that the
shares will be paid solely from

the
dividends.
Company
became insolvent. Assignee in
insolvency sued Dexter for the
balance. Dexter's defense was
that
under
the
contract,
payment would come from the
dividends. Without dividends, he
cannot be obligated to pay.
The Court held that the
subscription contract was void
since it works a fraud on
creditors who rely on the
theoretical
capital
of
the
company (subscribed shares).
Under
the
contract,
this
theoretical value will never be
realized since if there are no
dividends, stockholders will not

be compelled to pay the balance

of their subscriptions.
LUMANLAN VS CURA (59 Phil.
746; 1934)
Lumanlan
had
unpaid
subscriptions.
Companys
receiver sued him for the
balance and won. While the
case was on appeal, the
company and Lumanlan entered
into a compromise whereby
Lumanlan would directly pay a
creditor of the company. In
exchange, the company would
forego
whatever
balance
remained
on
the
unpaid
subscription. Lumanlan agreed

since he would be paying less

than his unpaid subscription.
Afterwards, the corporation still
sued him for the balance
because the company still had
unpaid creditors.
Lumanlans
defense was the compromise
agreement.
The Court held that the
agreement
cannot
prejudice
creditors.
The
subscriptions
constitute a fund to which they
have a right to look to for
satisfaction of their claims.
Therefore, the corporation has a
right to collect all unpaid stock
subscriptions and any other
amounts which may be due it,

notwithstanding the compromise

agreement.
Rights and Obligations of
Holders of Unpaid but Nondelinquent Stock
WHAT
RIGHTS
OF
SHARES?

ARE THE
UNPAID

Holders of subscribed
shares not fully paid
which are not delinquent
shall have all the rights
of a stockholder. (Sec.
72)

FUA CUN V. SUMMERS (44

Phil. 704; 1923)
Chua Soco bought 500 shares
of China Banking Corp. at par
value of P100.00, paying the
sum of P25,000.00, 50% of the
subscription
price.
Chua
mortgaged the said shares in
favor of plaintiff Fua Cun to
secure a promissory note for the
sum of P25,000.00.
In the
meantime, Chua Soco's interest
in the 500 shares were attached
and levied upon to satisfy his
debt with China Banking Corp.
Fua Cun brought an action to
have himself declared to hold
priority over the claim of China

Bank, to have the receipt for the

shares delivered to him, and to
be
awarded
damages
for
wrongful attachment, on the
ground that he was owner of 250
shares by virtue of Chua Soco's
payment
of
half
of
the
subscription price.
The Court held that payment
of half the subscription price
does not make the holder of
stock the owner of half the
subscribed shares.
Plaintiff's
rights consist in an equity in 500
shares and upon payment of the
unpaid
portion
of
the
subscription price he becomes
entitled to the issuance of

certificate for the

shares in his favor.

said

500

BALTAZAR V. LINGAYEN GULF

ELECTRIC POWER (14 SCRA
522; 1965)
Baltazar, et al. subscribed to a
certain number of shares of
Lingayen Gulf Electric Power.
They had made only partial
payment of the subscription but
the corporation issued them
certificates
corresponding
to
shares covered by the partial
payments. Corporation wanted
to deny voting rights to all
subscribed shares until total
subscription is paid.

The Court held that shares of

stock covered by fully paid
capital stock shares certificates
are entitled to vote. Corporation
may choose to apply payments
to subscription either as: (a) full
payment
for
corresponding
number of stock the par value of
which is covered by such
payment; or (b) as payment prorata to each subscribed share.
The corporation chose the first
option, and, having done so, it
cannot unilaterally nullify the
certificates issued.

Note: The Camposes are of

the opinion that 64 of
Corporation Code makes
the
Lingayen
Gulf
inapplicable at present.
NAVA V. PEERS
MARKETING (74 SCRA 65;
1976)
Teofilo Co subscribed to 80
shares of Peers Marketing Corp.
at P100.00 a share for a total of
P8,000.00. He, however, paid
only P2,000.00 corresponding to
20 shares or 25% of total
subscription. Nava bought 20
shares from Co and sought its
transfer in the books of the
corporation.
The
corporation

refused to transfer said shares in

its books.
It was held that the transfer is
effective only between Co and
Nava and does not affect the
corporation. The Fua Cun ruling
applies. Lingayen Gulfdoes not
apply
because,
unlike
in
Lingayen Gulf, no certificate of
stock was issued to Co.
Effect of delinquency

WHAT IS DELINQUENT
STOCK? (Sec. 67)

Stock
that
remains
unpaid 30 days after the
date specified in the
subscription contract or
the date stated in the
call made by the Board.
WHAT ARE THE EFFECTS
OF DELINQUENCY?
1.
The holder thereof
loses all his rights as a
stockholder except only
the rights to dividends;
2.
Dividends will not
be
paid
to
the
stockholder but will be

applied to the unpaid

balance
of
his
subscription plus costs
and expenses.
Also,
stock dividends will be
withheld
until
full
payment is made.
3.
Such stockholder
cannot vote at the
election of directors or
at any meeting on any
matter
proper
for
stockholder action.
4.
Stockholder
cannot be counted as
part of the required
quorum.

5.
Stockholder
cannot be voted for as
director
of
the
corporation.
WHAT IS THE PROCEDURE
FOR THE CONDUCT OF A
DELINQUENCY SALE? (Sec. 68)
(1)
Issuance
Board resolution

of

The BOD issues a

resolution ordering the
sale
of
delinquent
stock,
specifically
stating the amount due
on each subscription

plus
all
accrued
interest, and the date,
time and place of the
sale.
Note: The sale shall
not be less than 30
days nor more than 60
days from the date
the stocks become
delinquent.
(2)
Notice of
and publication

sale

Notice of the date of

delinquency sale and a
copy of the resolution is
sent
to
every

delinquent stockholder
either personally or by
registered mail.
The
notice
is
likewise
published once a week
for 2 consecutive weeks
in a newspaper of
general circulation in
the province or city
where
the
principal
office of the corporation
is located.
(3)
Sale
auction

at

public

If
the
delinquent
stockholder fails to pay
the corporation on or

before
the
date
specified
for
the
delinquency sale, the
delinquent stock is sold
at public auction to
such bidder who shall
offer to pay the full
amount of the balance
on
the
subscription
together with accrued
interest,
costs
of
advertisement
and
expenses of sale, for
the smallest number
of shares or fraction
of a share.
(4)
Transfer
and
issuance
of
certificate of stock

The stock so purchased

is transferred to such
purchaser in the books
of the corporation and a
certificate
of
stock
covering such shares is
issued.
If there is no bidder at
the public auction who
offers to pay the full
amount of the balance
on the subscription and
its attendant costs, the
corporation may bid for
the shares, and the total
amount due shall be
credited as paid in full in

the
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
Code.
Note that this is
subject
to
the
restrictions
imposed
by
the
Code
on
corporations
as
regards
the
acquisition of their

own shares. (See the

discussion
under
Dividends
and
Purchase
by
Corporation of its Own
Shares.)
CAN
DELINQUENCY
SALE
QUESTIONED? (Sec. 69)

A
BE

Yes. This is done by

filing a complaint within 6
months from the date of
sale,
and
paying
or
tendering to the party
holding the stock the sum
for which said stock was
sold, with interest at the

legal rate from the date of

sale. No action to recover
delinquent stock sold can
be sustained upon the
ground of irregularity or
defect in the notice of sale,
or in the sale itself of the
delinquent stock unless
these
requirements
are
complied with.
Lost or Destroyed
Certificate

WHAT
IS
PROCEDURE FOR

THE
THE

ISSUANCE
OF
NEW
CERTIFICATES
TO
REPLACE
THOSE
STOLEN,
LOST
OR
DESTROYED? (Sec. 73)
(1) File an affidavit in
triplicate
with
the
corporation.
The
affidavit must state the
following:
(a) Circumstances as
to
how
the
certificates
were
SLD;
(b) Number of shares
represented; and
(c) Serial number of
the certificate

(d) Name of
corporation

issuing

(2) The corporation will

publish notice after the
affidavit
and
other
information and evidence
have been verified with
the
books
of
the
corporation,
(Note
however
that
this
is not mandatory.
The
corporation
has
the
discretion
to
decide
whether to publish or not.)
The notice will contain the
following information:

(a)
Name
of
the
corporation
(b)
Name
of
the
registered owner;
(c)
Serial number of
the certificate;
(d)
Number
of
shares
represented
by the certificate;
(e)
Effect
of
expiration of 1 year
period
from
publication
and
failure to present
contest within that
period.
(3) SLD
certificate
is
removed
from
the

books if
after one
year from date of last
publication, no contest is
presented.
NOTE: One-year period
will not be required if the
applicant files a bond
good for
1 year.
(4) The corporation
will
then
issue
new
certificates.
However, if a contest has
been presented to the
corporation, or if an action
is pending court regarding

the ownership of the SLD

certificate, the issuance of
the new certificate shall
be suspended until the
final decision by the court.
NOTE:
Should
corporation issue new
certificates without the
conditions being fulfilled
and a third party proves
that he is the rightful
owner of the shares, the
corporation may be held
liable to the latter EVEN
IF it acted in good faith.
NOTE: Even if the above
procedure was followed,
if there was fraud, bad

faith,
or negligence on
the
part
of
the
corporation
and
its
officers, the corporation
may be held liable.
TRANSFER OF SHARES
HOW ARE SHARES
OF STOCK TRANSFERRED?
By
delivery
of
the
certificate/s indorsed by the
owner or his attorney-infact or other person legally
authorized to make the
transfer. (Sec. 63)

WHAT
ARE
THE
REQUISITES FOR A VALID
TRANSFER?
(1)

Delivery;

(2)
Indorsement by the
owner or his attorneyin-fact or other persons
legally authorized to
make the transfer
Indorsement of the
certificate of stock is a
mandatory
requirement of law for
an effective transfer of

a certificate of stock.
(Razon v. CA, 207
SCRA 234)
(3)
Recording of the
transfer in the books of
the corporation (so as
to make the transfer
valid as against third
parties)
Until registration is
accomplished,
the
transfer, though valid
between the parties,
cannot be effective as
against
the
corporation. Thus, the
unrecorded transferee

cannot
enjoy
status of a SH:
cannot vote nor
voted for, and he
not be entitled
dividends.

the
he
be
will
to

RURAL BANK OF SALINAS,

INC. V. CA (210 SCRA 510)
A corporation, either by
its board, its by-laws or the act
of its officers, cannot create
restrictions in stock transfers.
TAN V. SEC (206 SCRA 740)

A by-law which prohibits

a transfer of stock without the
consent or approval of all the
SHs or of the President or Board
of
Directors
is
illegal
as
constituting undue limitation on
the right of ownership and in
restraint of trade (citing Fleisher
v. Botica Nolasco Co., Inc., 47
Phil. 583)
While Sec. 47 (9) of the
Corporation Code grants to stock
corporations 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 SHs to transfer their
shares.
To
uphold
the
cancellation
of
a
stock
certification as null and void for
lack of delivery of the cancelled
"mother"
certificate
whose
endorsement was deliberately
withheld by petitioner, is to
prescribe certain restrictions on
the transfer of stock in violation
of the Corporation Code as the
only law governing transfer of
stocks.

USON V. DIOSOMITO (61 Phil.

535; 1935)

Toribia Uson filed a civil action

for
debt
against
Vicente
Dioisomito. Upon institution of
said action, an attachment was
duly issued and D's property was
levied upon, including 75 shares
of the North Electric Co., which
stood in his name on the books
of the company when the
attachment was levied on 18
January 1932. The sheriff sold
said shares at a public auction
with Uson being the highest
bidder. Jollye claims to be the
owner of said certificate of sock
issued to him by the co. on 13
February 1933.

There is no dispute that

Diosomito was the original
owner of said shares, which he
sold to Barcelon.
However,
Barcelon did not present these
certificates to the corporation for
registration until 19 months after
the delivery thereof by Barcelon,
and
9
months
after
the
attachment and levy on said
shares. The transfer to Jollye
was made 5 months after the
issuance of a certificate of stock
in Barcelon's name.
Is a bona fide transfer of the
shares of corp., not registered or
noted on the books of the corp.,
valid as against a subsequent

lawful
attachment
of
said
shares, regardless of whether
the attaching creditor had actual
notice of said transfer or not.
NO, it is not valid. The
transfer of the 75 shares in the
North Electric Co., Inc made by
the defendant Diosomito as to
the defendant Barcelon was not
valid as to the plaintiff. Toribia
Uson, on 18 Jan. 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 corp. Sec. 35 says that No
transfer, however, is 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.
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.

No registration of transfer
of unpaid shares
No shares of stock
against which the corporation
holds any unpaid claim shall
be transferable in the books of
the corporation. (Sec. 63)
Remedy if registration
refused
The proper remedy is a
petition for a writ of
mandamus to compel the
corporation to record the
transfer or issue a new
certificate in favor of the
transferee, as the case may

be. The writ will be granted

provided it is shown that he
transferee has no other
plain, speedy and adequate
remedy and that there are
no unpaid claims against
the stocks whose transfer is
sought to be recorded. It
must be noted that unless
the latter fact is alleged,
mandamus will be denied
due to failure to state a
cause of action. (Campos
& Campos)
RURAL BANK OF SALINAS,
INC. V. CA (210 SCRA 510)

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, mandamus will lie to
compel the officers of the
corporation to transfer said stock
in the books of the corporation.
This is because the corporation's
obligation
to
register
is
ministerial. (Note, however, that
in such cases, the person
requesting the registration must
be the prima facie owner of the
shares. Cf. Lim Tay v. CA, 293
SCRA 634)

TORRES V. CA (278 SCRA 793)

It is the corporate
secretary's duty and obligation
to register valid transfers of
stocks and if said corporate
officer refuses to comply, the
transferor SH may rightfully
bring
suit
to
compel
performance.
Note: In this case, Judge
Torres had no right to enter the
assignments (conveyances) of
his shares himself in the
corporation's stock and

transfer book since he was

not corporate secretary.
RIVERA V. FLORENDO (144
SCRA 647; 1986)
Isamu Akasako, a Japanese
national who was allegedly the
real owner of the shares of stock
in the name of one Aquilino
Rivera,
a registered SH of
Fujuyama Hotel and Restaurant,
Inc., sold 2550 shares of the
same to Milagros Tsuchiya along
with the assurance that Tsuchiya
would be made President of the
corporation after the purchase.
Rivera assured her that he would
sign
the
stock
certificates

because Akasako was the real

owner. However, after the sale
was consummated and the
consideration
paid,
Rivera
refused
to
make
the
indorsement unless he is also
paid.
Tsuchiya, et al. attempted
several times to have the shares
registered but were refused
compliance by the corp. They
filed
a special action for
mandamus and damages.
The Supreme Court held
that mandamus was improper in
this case since the shares of
stock were not even indorsed by

the registered owner who was

specifically
resisting
the
registration thereof in the books
of the corporation. The rights of
the parties would have to be
threshed out in an ordinary
action.
Restrictions on Transfer;
Close Corporations

General rule: Shares of

stock are freely transferable,
without restriction.

Exception:
In
close
corporations,
restrictions may be
placed on the transfer
of
shares.
Such
restrictions
must
appear in the AOI and
in the by-laws, as well
as in the certificate of
stock. Otherwise, the
restriction shall not be
binding
on
any
purchaser thereof in
good faith.
The
restrictions
imposed
shall be no more
onerous than granting

the
existing
stockholders or the
corporation the option
to purchase the shares
of
the
transferring
stockholder with such
reasonable
terms,
conditions or period
stated therein. If this
option is not exercised
upon the expiration of
the
period,
the
transferring
stockholder may sell
his shares to any third
person. (Sec. 98)

WHAT IS THE EFFECT OF

ISSUANCE OR TRANSFER
OF STOCK IN BREACH OF
THE RESTRICTIONS?
The
corporation
may, at its option, refuse to
register the transfer of
stock in the name of the
transferee.
(Sec.
99.4) However, this shall
not be applicable if the
transfer, though otherwise
contrary to subsections (1),
(2) and (3) of Sec. 99, has
been consented to by all
the stockholders of the
close corporation, or if the
close
corporation
has

amended
its
AOI
in
accordance with Title XII of
the Code.
For his part, the
transferee may rescind the
transfer or recover from the
transferor
under
any
applicable
warranty,
whether express or implied.

UNAUTHORIZED TRANSFERS

Certificates indorsed in
blank; when quasinegotiable
A
possessor,
even
without
authority,
may
transfer good title to a bona
fide purchaser if:

the real owner

endorses the certificate
in blank

the conveyance
is for purposes other
than transfer

that relying on
the stock certificate, the
purchaser believes the
possessor to be the

owner thereof or has

authority to transfer the
same.
This proceeds from the
theory of quasi-negotiability
which provides that in
endorsing a certificate in
blank, the real owner
clothes the possessor with
apparent authority, thus,
estopping him later from
asserting his rights over the
shares of stock against a
bona fide purchaser.
Quasi-negotiability does
not apply in cases where
the real owner:

a.
did not entrust
the
certificate
to
anyone; and
b.
is not otherwise
guilty of estoppel
For example, in case
the transfer is made
by a finder or a thief.
Forged Transfers
A corporation does not
incur any misrepresentation
in the issuance of a
certificate made pursuant
to a forged transfer. It can

always recall from the

person
the
certificate
issued, for cancellation.
In
case
where
the
certificate so issued comes
into the hands of a bona
fide purchaser for value
from the original purchaser,
the corporation is estopped
from denying its liability. It
must recognize both the
original
and
the
new
certificate.
But
if
recognition results to an
over-issuance of shares,
only the original certificate
may be recognized, without
prejudice to the right of the

bona fide purchaser to sue

the
corporation
for
damages.
SANTAMARIA VS.
HONGKONG (89 Phil. 780;
1951)
Santamaria secured her order
for a number of shares with
Campos Co. with her stock
certificate
representing
her
shares with Batangas Minerals.
The
said
certificate
was
originally issued in the name of
her broker and endorsed in blank
by the latter. As Campos failed
to make good on the order,

Santamaria
demanded
the
return
of
the
certificate.
However, she was informed that
Hongkong Bank had acquired
possession of it inasmuch as it
was covered by the pledge made
by Campos with the bank.
Thereafter, she instituted an
action against Hongkong Bank
for
the
recovery
of
the
certificate. Trial court decided in
her favor. The bank appealed.
Issues: 1) WON Santamaria was
chargeable
with
negligence
which gave rise to the case

2) WON the Bank was

obligated to inquire into the
ownership of the certificate
(1) The facts of the case
justify the conclusion that she
was negligent. She delivered the
certificate, which was endorsed
in blank, to Campos without
having taken any precaution.
She did not ask the Batangas
Minerals to cancel it and instead,
issue another in her name. In
failing to do so, she clothed
Campos with apparent title to
the shares represented by the
certificate. By her misplaced
confidence in Campos, she made
possible the wrong done. She

was therefore estopped from

asserting title thereto for it is
well-settled that where one of
the innocent parties must suffer
by reason of a wrongful or
unauthorized act, the loss must
fall on the one who first trusted
the wrongdoer.
(2) The subject certificate is
what is known as a street
certificate. Upon its face, the
holder is entitled to demand its
transfer into his name from the
issuing corporation. The bank is
not obligated to look beyond the
certificate to ascertain the
ownership of the stock. A
certificate of stock, endorsed in

blank,
is
deemed
quasinegotiable, and as such, the
transferee thereof is justified in
believing that it belongs to the
transferor.
DE LOS SANTOS VS.
MCGRATH (96 Phil. 577; 1955)
De los Santos filed a claim
with
the
Alien
Property
Custodian for a number of
shares
of
the
Lepanto
corporation. He contended that
said shares were bought from
one Campos and Hess, both of
them dead. The Philippine Alien
Property Administrator rejected

the claim. He instituted the

present action to establish title
to the aforementioned shares of
stock.
The US Attorney General, the
successor of the Alien Property
Administrator,
opposed
the
action on the ground that the
said shares of stock were bought
by one Madrigal, in trust for the
true owner, Matsui, and then
delivered to the latter indorsed
in blank.
Issue: Had de los Santos in fact
purchased the shares of stock?

De los Santos sole evidence

that he purchased the said
shares was his own unverified
testimony. The alleged vendors
of the stocks who could have
verified the allegation, were
already
dead.
Further,
the
receipt that might have proven
the sale, was said to have been
lost in a fire. On the other hand,
it was shown that the shares of
stock were registered in the
records of Lepanto in the name
of Madrigal, the trustee of
Matsui;
that
Matsui
was
subsequently given possession
of the corresponding stock
certificates, though endorsed in
blank; and, that Matsui had

neither sold, conveyed

alienated these to anybody.

nor

It is the rule that if the owner

of the certificate has endorsed it
in blank, and is stolen, no title is
acquired
by
an
innocent
purchaser of value. This is so
because even though a stock
certificate is regarded as quasinegotiable, in the sense that it
may
be
transferred
by
endorsement,
coupled
with
delivery, the holder thereof
takes it without prejudice to such
rights or defenses as the
registered owner or credit may
have under the law, except in so
far as such rights or defenses

are subject to the limitations

imposed
by
the
principles
governing estoppel.
Collateral Transfers
Shares of stock are personal
property. Thus, they can either
be
pledged
or
mortgaged.
However,
such
pledge
or
mortgage cannot have any legal
effect if it is registered only in
the corporate books.
Where
a
certificate
is
delivered to the creditor as a
security,
the
contract
is

considered a pledge, and the

Civil Code will apply.
If the certificate of stock is not
delivered to the creditor, it must
be registered in the registry of
deeds of the province where the
principal office of the corporation
is located, and in case where the
domicile of the stockholder is in
a
different
province,
then
registration must also be made
there.
In a situation where, the
chattel mortgage having been
registered, the stock certificate
was not delivered to the creditor
but transferred to a bona fide

purchaser for value, it is the rule

that the bona fide purchaser for
value
is
bound
by
the
registration
in
the
chattel
mortgage registry. It is said that
such a rule tends to impair the
commercial
value
of
stock
certificates.
CHUA GUAN VS. SAMAHANG
MAGSASAKA (62 Phil. 473;
1935)
To guarantee payment of a
debt, Co mortgaged his shares of
Samahang Magsasaka stock to
Chiu. The said mortgage was
duly registered in the City of

Manila. Chiu later assigned his

rights in the mortgage to Guan
who soon foreclosed the same
after Co failed to pay. Guan won
in the public bidding. He
requested the corporation that
new certificates be issued in his
name. The corporation refused
because apparently prior to
Guans
demand,
several
attachments against the shares
covered by the certificates had
been recorded in its books.
Did the chattel mortgage in the
registry of deeds of Manila gave
constructive
notice
to
the
attaching creditors?

The Chattel Mortgage Law

provides two ways of executing a
valid chattel mortgage: 1) the
possession
of
mortgaged
property
is
delivered
and
retained by the mortgagee; and,
2)
without
delivery,
the
mortgage is recorded in the
register of deeds. But if chattel
mortgage of shares may be
made validly, the next question
then becomes: where should
such mortgage be properly
registered?
It is the general rule that the
situs of shares is the domicile of
the owner. It is also generally
held that for the purpose of

execution,
attachment,
and
garnishment, it is the domicile of
the corporation that is decisive.
Going by these principles, it is
deemed reasonable that chattel
mortgage
of
shares
be
registered both at the owners
domicile and in the province
where the corporation has its
principal office. It should be
understood that the property
mortgaged is not the certificate
but the participation and share
of the owner in the assets of the
corporation.
It is recognized that this
method of hypothecating shares
of stock in a chattel mortgage is

rather tedious and cumbersome.

But the remedy lies in the
legislature.
Note: The provision of
the Chattel Mortgage
Law (Act No. 1508)
providing for delivery of
mortgaged property to
the mortgagee as a
mode of constituting a
chattel mortgage is no
longer valid in view of
the Civil Code provision
defining
such
as
a
pledge.
NONTRANSFERAB
ILITY
IN NONSTOCK
CORPORATIO
NS

Although shares of stock are

as a rule freely transferable,
membership in a non-stock
corporation is personal and nontransferable, unless the articles
of incorporation or by-laws
provide otherwise. The court
may not strip him of his
membership
without
cause.
(Sec. 90)

DIVIDENDS AND PURCHASE

BY CORPORATION OF ITS
OWN SHARES

Form of Dividends
IN WHAT FORMS CAN
DIVIDENDS BE ISSUED?
1.

Cash

2.

Property

scrip - certificate
issued to SHs instead of
cash dividends which
entitles them to a certain
amount in the future
3.

Stock dividends


Stock
dividends
are distribution to the
SHs of the companys
own stock.

Stock
dividends
cannot
be
declared
without first increasing
the capital stock unless
unissued
shares
are
available.

New shares are

issued to the SHs in
proportion
to
their
interest.

No new income
unless sold for cash.


Civil fruits belong
to the usufructuary and
not to the naked owner.

Can only be issued

to SHs.

Whenever
fractional shares result,
corp may pay in cash or
issue fractional share
warrants.
DIFFERENTIATE
BETWEEN
CASH
DIVIDENDS AND STOCK
DIVIDENDS.
Cash
Stock
Dividen Dividen
d
d

Voting
require
ments
for
issuanc
e

Boar
d of
Direc
tors

Board
of
Direct
ors +
2/3
OCS

Effect
on
delinqu
ent
stock

Shall be
applied
to the
unpaid
balance
on the
subscri
ption
plus
costs
and

Shall be
withhel
d from
the
delinqu
ent
stockho
lder
until his
unpaid
subscri

expens ption is
es.
fully
paid.
Can
No.
this be (Sec.
issued
35)
by
Executi
ve
Commit
tee?

No,
since
this
require
s
SH
approv
al.
(Sec.
35)

NIELSON v LEPANTO (26 SCRA

540; 1968)

Stock dividends are issued

only to SHs This is so because
only stockholders are entitled to
dividends.
A stock dividend
really adds nothing to the
interest of each 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 nonstockholder - 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.
FROM
WHERE
DIVIDENDS
SOURCED?

CAN
BE

Dividends
can
be
sourced only out of the
unrestricted
retained
earnings of the corporation.
Unrestricted
retained
earnings is defined as "the
undistributed earnings of
the corporation which have
not been allocated for any
managerial, contractual or
legal purposes and which

are free for distribution to

the
stockholders
as
dividends."
(SEC
Rules
Governing Redeemable and
Treasury Shares, 1982)
Retained
earnings has
been
defined
as
"net
accumulated earnings of
the corporation out of
transactions
with
individuals or firms outside
the
corporation."
(Simmons, Smith, Kimmel,
Intermediate
Accounting,
1977, ed. P. 635) The term
implies the limitation that
no corporation can declare
dividends unless its legal or

stated
capital
maintained. It does
include:

is
not

premium on par
stock i.e. difference
between par value and
selling price of stock
by corp since this is
regarded as paid-in
capital;
but
SEC
allowed declaration of
stock dividends out of
such premiums

transactions
involving
treasury
stocks
which
are
considered expansions

and contractions
paid-in capital;

of

donations
additional
paidcapital;

as
in

increase
in
value
of
existing
assets, being merely
unrealized
capital
element
If subscribed shares have
not been fully paid, the
unpaid
portion
of
subscribed capital stock is
an asset, and as long as the
net capital asset (after

payment
of
liabilities)
including
this
unpaid
portion is at least equal to
the total par value of the
subscribed
shares,
any
excess would be surplus or
earnings
from
which
dividends may be declared.
However, if a deficit exists,
subsequent profits must
first be applied to cover the
deficit.
Restrictions on dividend
distribution include:

BODs
appropriation

of

certain earnings for

certain purposes;

Agreements
with
creditors,
bondholders
and
preferred
SHs
requiring retention
of certain percent of
corporate earnings
to
protect
their
interest
and
to
secure redemption
of their securities
upon maturity;

SEC-imposed
restrictions
pursuant to law, like

those imposed on
banks
and
insurance
companies;

Restriction on
the
retained
earnings equivalent
to
the
cost
of
treasury shares held
by the corporation,
which is lifted only
after such shares
are
reissued
or
retired (Sec. 195,
PD 612)

BERKS
BROADCASTING
v
CRAUMER (52 A.2d 571; 1947)
Dividends
can
only
be
declared only from the surplus,
i.e. the excess in the value of the
assets over the liabilities and the
issued capital stock. To do
otherwise would be illegal The
object of the prohibition is to
protect the creditors in view of
the limited liability of the SHs
and also to protect the SHs by
preserving the capital so that
the purposes of the corp. may be
performed.
Surplus must be bona fide i.e.
founded upon actual earnings or

profits and not to be dependent

for
its
existence
upon
a
theoretical
estimate
of
an
appreciation in the value of the
companys assets.
The prohibition does not
apply,
however,
to
stock
dividends because creditors and
SHs will not be affected by their
declaration since they do not
decrease the companys assets.
LICH V UNITED STATES
RUBBER (39 F. Supp. 675; 1941)
Dividends on non-cumulative
preferred stock are payable only

out of net profits and for the

years in which said net profits
are actually earned.
The right to dividends is
conditional upon: (1) accrual of
net profits, and (2) retention in
the business.
If the annual net earnings of a
corp. are justifiably applied to
legitimate corp. purposes, such
as payment of debts, reduction
of deficits and restoration of
impaired capital, the right of
non-cumulative
preferred
stockholders to the payments of
dividends is lost. If they are
applied against prior losses and

thereby completely absorbed,

there are no net profits from
which dividends may be lawfully
paid.

SOME RULES ON DIVIDEND

DECLARATION:
1.
BOD has discretion
whether or not to declare
dividends and in what
form.
Exception:
Stock
dividends, in which case

a 2/3 vote of OCS is

necessary.
However, such discretion
cannot be abused and the
BOD cannot accumulate
surplus
profits
unreasonably
on
the
excuse that it is needed
for expansion or reserves.
2.
BOD should declare
dividends when surplus
profits of the corporation
exceed 100% of the
corporation's
paid-in
capital stock.
Exceptions:

(a)
When justified by
definite
corporate
expansion projects or
programs approved by
the Board;
(b)
When
creditors
prohibit
dividend
declaration
without
their consent as a
condition for the loan,
and such consent has
not yet been secured;
(c) When retention is
necessary under special
circumstances obtaining
in the

corporation, e.g.
when there is a need
for special reserve for
probable
contingencies.
(Sec.
43)
4.
The corporation may
be subjected to additional
tax when it fails to declare
dividends,
thereby
unreasonably
accumulating
profits.
(See Sec. 25, NIRC)
5.
The
dividends
received are based on
stock held whether or not
paid.
However, if the

stocks are delinquent, the

amount
will
first
be
applied to the payment of
the delinquency plus costs
and
expenses;
stock
dividends will not be given
to a delinquent SH.
KEOGH v ST. PAUL MILK (285
N.W. 809; 1939)
The mere fact that a large
corporate surplus exists is not
enough to warrant equitable
intervention; the test is good
faith and reasonableness of the
policy of retaining the profits.
However, where dividends are

withheld for an unlawful purpose

to deprive a SH of his right to a
just
proportion
of
the
corporation's profit, the court
may compel the corporation to
declare dividends.
DODGE
v
FORD
MOTOR
CO (170 N.W. 668; 1919)
This case involves an
action against the Ford Motor
Company to compel declaration
of dividends. At the time this
complaint was made, Ford had
concluded its most prosperous
year of business, and the
demand for its cars at the price

of the previous year continued.

While it had been the practice,
under similar circumstances, to
declare larger dividends, the
corporation refused to declare
any special dividends.
The
Board justified its refusal to
declare larger dividends on the
expansion plans of the company
by erecting a smelting plant, but
maintaining the selling price of
its cars (instead of reducing it as
had been the practice in
previous years). The plaintiffs
contend that such a proposal
would be tantamount to the
business being conducted as a
semi-eleemosynary
(or

charitable) institution instead of

a business institution.
The court pointed out that a
business
corporation
is
organized
and
carried
on
primarily for the profit of SHs.
The discretion of the directors is
to be exercised in the choice of
means to attain that end and
does not extend to a change in
the end itself reduction of
profits or to devote profits to
another purpose.
While the
Court
noted
the
capable
management of the affairs of the
corporation and therefore was
not convinced that the motives
of the directors were prejudicial

to the company's interests, it

likewise noted that the annual
dividends paid were very small
in relation to the profits that the
company had been making. It
therefore affirmed the amount
fixed by the lower court to be
distributed to the stockholders.
Note: Prof. Jacinto is of the
opinion that what happened
in this case is
possible under the present
Code, even without changing
the AOI.

Preference as to Dividends

Review discussion under

kinds of stock.
WABASH RAILWAY CO. V.
BARCLAY (67 A.L.R. 762; 1930)
In the AOI and the certificate
of stock of Stock A, it was stated
that the holders of said stocks
are entitled to receive to receive
preferential dividends of 5% per
fiscal
year,
non-cumulative,
before dividends are paid to
other stocks. From 1915 to
1926,
no
dividends
were
declared. The net earnings were
instead
used
for
the

improvements and additions to

property and equipment. Due to
this, the corporation became
prosperous and proposed to pay
dividends to A & B common
stock. Plaintiffs filed this case in
order to collect the dividends for
fiscal years 1915-1926 before
the other classes of stock are
paid.
Were the Class A stockholders
entitled to dividends for FY 1915
to 1926?
No, they were not. By the
plain meaning of the words in
the AOI and the certificates of
stock, the holders are not

entitled to dividends unless

directors declare so.
It is
likewise generally understood
that
in
cases
where
the
company's net earnings are
applied for improvements and no
dividend is declared, the claim
for such year is gone in case of
non-cumulative
stock,
and
cannot be later asserted.
BURK V. OTTAWA GAS &
ELECTRIC CO. (123 Pac. 875;
1912)
An action was brought by the
preferred SHs of Ottawa against
the directors of Ottawa to (1)

require the directors to account

for all the property and assets of
the corporation, (2) declare such
dividends from the net profits of
the business of such co. as
should have been declared since
1 Jan. 1906, and (3) restrain the
officers and directors during the
pendency of the action from
paying out any of the money or
disposing of the assets of the
company except such amounts
as should be necessary to pay
the actual necessary current
expenses of conducting the
business of the corporation.
The BOD maintained that the
corporation's
funds
were

exhausted by expenditures for

the extension of the cos plant,
hence it was unable to declare
dividends. Expenditures were
said to be necessary and for the
betterment of the plant.
Were the corp funds were
wrongfully diverted, and were
preferred
SHs
entitled
to
dividends?
The case was remanded to
the trial court, with instructions
to make further findings to
protect the preferred SHs in their
rights.

The fair interpretation of the

contract between Ottawa and its
SHS is that if in any year net
profits are earned, a dividend is
to
be
declared.
To
hold
otherwise, meaning if the BOD
had absolute discretion when to
declare dividends and when not
to, when the corporation has
funds for such dividends, would
result in temptation to unfair
dealing, giving one party the
option to pay the other or not.
In the case at bar, the
accumulated profits would be
lost forever since the dividends
were non-cumulative.

Preferred SHs, however, are

not generally creditors until
dividends are declared. In the
case at bar, if dividends should
have been declared to such SHs,
they are considered creditors
from that time.
When Right to Dividends
Vests; Rights of Transferee

WHEN DOES THE RIGHT

TO DIVIDENDS VEST?
As soon as the BoD
has declared dividends.

From this time, it becomes

a debt owed by the
corporation, and therefore
can no longer be revoked
(McLaran
v.
Crescent
Planning).
EXCEPTION:
If
the declaration has not
yet been announced or
communicated
to
the
stockholders.
NOTE:
When
no
dividends are declared
for 3 consecutive years,
preferred SHs are given
the right to vote for

directors until dividends

are declared.
NOTE: The extent of
the SHs share in the
dividends will depend
on
the capital
contribution; NOT the
number of shares he
has.
MCLARAN V. CRESCENT
PLANNING MILL CO. (93 S.W.
819; 1906)
CPM Corp., having a surplus of
$29,000, declared a 6% cash
dividend
payable
in
four

installments.
The
first
installment was paid by the
Board after which an error was
discovered in the computation of
the assets: from the initial
recognized surplus of $29,000 to
$6,000. Mainly for this reason,
the Board adopted a resolution
rescinding the dividends payable
on the three other installments
despite the solvency of the corp
and the existence of ample
funds to pay said dividends. The
original P was Humber, a SH,
and was substituted by McLaran,
the administrator of his estate
when he died. The defendant
corp maintained that there was
no valid declaration of dividends

because the corporation failed to

set aside funds to pay for the
same.
A cash dividend, properly
declared, cannot be revoked by
the subsequent action of the
corp. for by its declaration, the
corp had become the debtor of
the SH and it goes without
saying that the debtor cannot
revoke, recall or rescind the debt
or otherwise absolve itself from
its payment by a unilateral
action or without the consent of
the creditor. Thus, the rescission
by the BOD of the subsequent
installments was of no force.

Dividends are defined as

portions of profits/surplus funds
of the corp. which have been
actually set apart by a valid
board resolution or by the SH at
a corp. mtg. for distribution
among SH according to their
respective interests. The mere
declaration of the dividend,
without more, by competent
authority
under
proper
circumstances, creates a debt
against the corporation in favor
of the stockholders the same as
any other general creditor of the
corporation.
By
the
mere
declaration,
the
dividend
becomes immediately fixed and
absolute in the stockholder and

from henceforth the right of

each individual stockholder is
changed
by
the
act
of
declaration from that of partner
and part owner of the corporate
property to a status absolutely,
adverse
to
every
other
stockholder
and
to
the
corporation itself, insofar as
his pro rata proportion of the
dividend is concerned.

Liability for Illegal

Dividends

WHAT
ARE
DIVIDENDS?

ILLEGAL

Illegal dividends
dividends
declared
violation of law.

are
in

WHAT ARE THE EFFECTS

OF
THE
ILLEGAL
DECLARATION
OF
DIVIDENDS?
(1)
If
the
directors
acted wilfully, or with
negligence or in bad
faith, they will be liable
to the corporation. If the
corporation has become

insolvent, they are liable

to
the
corporation's
creditors for the amount
of dividends based out of
capital. (Based on Sec.
31)
(2)
If
the
directors
cannot be held liable
because they acted with
due diligence and in
good
faith,
in
the
absence of an express
provision
of
law,
aninnocent stockholder
is not liable to return the
dividends received by
him out of capital, unless
the
corporation
was

insolvent at the time of

payment.
(Majority
view; Campos)
Purchase by Corporation of
its own shares

WHAT
ARE
THE
REQUISITES
FOR
ACQUISITION
BY
THE
CORPORATION OF ITS
OWN SHARES? (Sec. 41)
1.
unrestricted
retained earnings

to

cover the shares to be

acquired;
2.
legitimate
corporate purpose
FOR WHAT PURPOSES
CAN A CORPORATION
ACQUIRE
ITS
OWN
SHARES? (Sec. 41)
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;
3.
To pay dissenting
or
withdrawing
stockholders entitled to
payment
for
their
shares
under
the
Corporation
Code (Appraisal Right).
Appraisal Right (Sec. 81)
WHAT IS THE APPRAISAL
RIGHT?

The appraisal right

refers to the right of a
stockholder who dissented
and
voted
against
a
proposed
fundamental
corporate action to get out
of
the
corporation
by
demanding payment of the
fair value of his shares.
IN
WHAT
INSTANCES
CAN
THE
APPRAISAL
RIGHT BE EXERCISED?
The Corporation Code
lists 4 instances:
(1)
In
case
any
amendment to the AOI

has
the
effect
of
changing or restricting
the rights of any SH or
class of shares, or of
authorizing preferences
in any respect superior
to those of outstanding
shares of any class, or
of
extending
or
shortening the term of
corporate
existence
(Sec. 81);
(2)
In case of sale,
lease,
exchange,
transfer,
mortgage,
pledge
or
other
disposition of all or
substantially all of the

corporate property and

assets as provided in
this Code (Sec. 81; Sec.
40);
(3)
In case of merger
or consolidation (Sec.
81);
(4)
In
case
the
corporation invests its
funds in any other
corporation or business
or for any purpose
other than the primary
purpose for which it
was organized (Sec. 42)

WHAT
ARE
THE
REQUISITES FOR THE
EXERCISE
OF
THE
APPRAISAL RIGHT? (Sec.
82)
(1)
SH must have voted
against
he
proposed
corporate action;
(2)
Written demand on
the
corporation
for
payment of the fair value
of his shares;
(3)
Such demand must
have been made within
30 days after the date
on which the vote was
taken;

(4)
Surrender of the
stock
certificate/s
representing his shares;
(5)
Unrestricted
retained earnings in the
books of the corporation
to cover such payment.
WHAT IS THE EFFECT OF
DEMAND FOR PAYMENT
IN ACCORDANCE WITH
THE APPRAISAL RIGHT?
(Sec. 83)
All rights accruing to
the shares, including voting
and dividend rights, are
suspended in accordance

with
the
Corporation
Code, except for the right
of the SH to receive
payment of the fair value
thereof.
Such suspension shall
be from the time of demand
until either:
(1)
abandonment
of
the corporate action
involved; or
(2)
the purchase of the
said shares by the
corporation.
However,
if
said
dissenting SH is not paid

the value of his shares

within 30 days after the
award, his voting and
dividend
rights
shall
immediately be restored.
WHAT ARE THE DUTIES
OF
THE
DISSENTING
STOCKHOLDER
IN
RELATION
TO
THE
EXERCISE
OF
THE
APPRAISAL RIGHT?
The dissenting SH
must submit the certificates
of stock representing his
shares to the corporation
for notation thereon that

such shares are dissenting

shares within 10 days after
demanding payment for his
shares. Failure to do so
shall, at the option of the
corporation, terminate his
rights under Title X of the
Corporation Code.
(Sec.
86)
WHAT ARE THE EFFECTS
OF TRANSFER OF THE
CERTIFICATES BEARING
THE
NOTATION
THAT
THEY
REPRESENT
DISSENTING SHARES?

If the certificates
are consequently cancelled,
the rights of the transferor
as a dissenting SH cease
and the transferee has all
the rights of a regular
stockholder. All dividend
contributions which would
have accrued on the shares
will
be
paid
to
the
transferee. (Sec. 86)

AMENDMENTS OF CHARTER
The charter of a private
corporation
consists
of
its
articles of incorporation as well
as the Corporation Code and
such other law under which it is
organized.
Amendment by Legislature

Subject to the limitation

that no accrued rights or

liabilities be impaired, the

legislature has the power to
make changes in existing
corporations through an
amendment
to
the
Corporation Code.
Amendment by
Stockholders

One
of
the
powers
expressly granted by law to
all corporations is the
power to amend its articles
of incorporation. This, in
effect, is a grant of power

to owners of 2/3 of the

outstanding
stocks
to
change
the
basic
agreement between the
corporation
and
its
stockholders, making such
change binding on all the
stockholders, subject only
to the right of appraisal, if
proper.
WHAT
ARE
THE
LIMITATIONS
ON
THE
POWER TO AMEND?
PURPOSE:
legitimate

must

be

VOTE:
/ membership

2/3 of OCS

(1)
The appraisal
right
must
be
recognized in case the
amendment has the
effect of changing rights
of any stockholder or
class of shares, or of
authorizing preferences
in any respect superior
to those of outstanding
shares of any class, or
extending or shortening
the term of corporate
existence.

(2)
Extension of
corporate term cannot
exceed 50 yrs. in any
one instance
(3)
A copy of the
amended articles should
be filed with the SEC,
and with the proper
governmental agencies,
as appropriate (e.g., in
the case of banks,
public utilities, etc.)
(4)
Original and
amended articles should
contain
all
matters
required by law to be
set out in said articles.

(5)
An
amendment
to
increase/decrease
capital stock as well as
to
extend/shorten
corporate term cannot
be made under Sec. 16,
but must be made
under
Sec.
37-38,
respectively, both of
which
require
a
meeting; and
(6)
Amendment
must be in the form
prescribed by the Code

ON WHAT GROUNDS CAN

THE SEC DISAPPROVE
THE
PROPOSED
AMENDMENTS?
The same grounds as for
the disapproval of the original
articles (Sec. 17):

Not
substantially
in accordance with the
form prescribed by the
Code;

Purpose(s)
patently
unconstitutional, illegal,
immoral, or contrary to

government
regulations;

rules

and

Treasurers
Affidavit
concerning
amount of capital stock
subscribed/paid is false;

Required
percentage of ownership
of capital stock to be
owned by citizens of the
Phils. has not been
complied
with
as
required
by
the
Constitution or existing
laws;


Absence
of
a
favorable
recommendation
from
the
appropriate
government agency.
Amendment changing
stockholders rights
The law expressly allows
amendments which would
change or restrict existing
rights of stockholders or
any class of shares. (Sec.
81)

MARCUS V. RH MACY (74 N.E.

2d 228; 1947)
The Board of Directors gave
notice to SH that among the
matters to be acted upon in its
annual meeting would be a
proposal to amend certificate of
incorporation to add to the rights
of preferred stockholders, voting
rights equal to those of common
stockholders. Marcus, objected
and demanded payment for the
common stock owned by her.
The Court held that Marcus
may invoke her appraisal right.
The aggregate number of shares
having voting rights equal to

those of common shares was

substantially
increased
and
thereby the voting power of each
common share outstanding prior
to the meeting was altered or
limited by the resultingpro
rata diminution of its potential
worth as a factor in the
management of the corporate
affairs. Considering that she
held diminished voting power;
that she notified the corpo of her
objection; that her shares were
voted against the amendment
these were sufficient to qualify
her to invoke her statutory
appraisal right.
Effectivity of amendment

Amendments take effect

only from the approval by
the SEC. However, such
approval or rejection must
be made within six months
of filing of amendment;
otherwise it shall take
effect even w/o such
approval (as of the date of
filing), unless cause of
delay is attributable to the
corporation. (Sec. 16)
Special amendments
Increase of capital stock

After the authorized

capital stock has been
fully subscribed and the
corporation
needs to
increase its capital, it will
have
to
amend
its
articles to increase its
capital
stock.
A
corporation
does
not
have the implied power
to increase capital stock;
such a power can only be
granted by law.
The power to increase
or decrease capital stock
must be exercised in
accordance
with
the
provisions of Sec. 38 of
the Code.

Reduction of capital
stock
Reduction of capital
stock is not allowed if it
will prejudice the rights
of corporate creditors.
PHILIPPINE TRUST CO. V.
RIVERA (44 Phil. 469; 1923)
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
debts.
A corporation has no power to
release an original subscriber to
its capital stock from the
obligation of paying for his
shares,
without
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 charter or the articles

of incorporation.
Change in corporate term
The Code allows a
corporation not only to
extend
but
also
to
shorten
its
term
of
existence. As in the case
of increase/decrease of
capital stock, change
must be approved at a
members/stockholders
meeting by 2/3 of the
members/outstanding
capital stock.

Amendments in close
corporations
To recall, the provisions
required to be contained in
the
AOI
of
a
close
corporation:
(1) All issued stock of all
classes should be held
by not more than 20;
(2) All issued stock shall
be subject to one or
more
specified
restrictions on transfer
permitted by law;
(3) Corporation
should
not be listed in the

stock
exchange
or
make
any
public
offering of its stock.
If any of these are
deleted,
then
the
corporation will cease to
be a close corporation and
will
lose
the
special
privileges
of
such
corporations. Thereafter, it
will be governed by the
general provisions of the
Code.
Since
such
amendment
involves
a
change in the nature of the
corporation,
even
nonvoting stocks are given a
voice in the decision. A

stockholders meeting is
required and a 2/3 vote
must
approve
the
amendment,
unless
otherwise provided by the
articles of incorporation.

DISSOLUTION
Modes of Dissolution

HOW
MAY
CORPORATION
DISSOLVED?

A
BE

(1) Failure to organize

and commence
business (Sec. 22);
(2) Cessation of business
for 5 years (Continuous
inoperation; Sec. 22);
(3) Expiration of original,
extended, or shortened
term;

(4) Voluntary
dissolution (Sec. 118119);
(a)
Where no creditors
are affected (Sec. 118)
This is effected by
majority vote of the
BOD and a 2/3 vote of
the OCS or members.
(Note
the
special
notice
requirements.) The
copy of the resolution
authorizing
the
dissolution shall be
certified by a majority
of
the
BOD
and

countersigned by the
secretary
of
the
corporation. THE SEC
shall thereupon issue
the
certificate
of
dissolution.
(b)
Where creditors
are affected (Sec. 119)
(1)
Filing
petition
dissolution
SEC

of
for
with

A
petition
for
dissolution must be
filed with the SEC
after having been

signed by a majority
of the BOD, verified
by the president or
secretary or one of
the directors, and
resolved upon by the
affirmative vote of
2/3 of the OCS or
members.
The
petition
must
set
forth all claims and
demands against the
corporation, and the
fact
that
the
dissolution
was
approved by the SHs
with the requisite 2/3
vote.

(2)
Fixing of date
by SEC for filing of
objections
to
petition
If the petition is
sufficient in form and
substance, the SEC
shall fix a date on or
before
which
objections
thereto
may be filed by any
person.
Date: not
less
than 30 days nor
more than 60 days
after the
entry of the order

(3)
Publication
order

of

Before
the
date
fixed by the SEC, the
SEC order shall be
published and posted
accordingly.
Newspaper:
On
ce a week for 3
weeks
in
a
newspaper of
general
circulation
published
in
the
municipality or

city where the

corporation's
principal office
is situated, or
there be no
such
newspaper, in
a newspaper of
general
circulation
in
the Philippines
Posting:
For
3 consecutive
weeks
in
3
public places
in the city or
municipality
where
the

corporation's
principal office
is situated
(4)
Hearing of the
petition
for
dissolution
Upon
5
days
notice, given after
the date on which
the right to file
objections to the
order has expired,
the
SEC
shall
proceed to hear the
petition and try any
issue made by the
objections filed.

If

no
objection
is
sufficient, and the
material allegations
are true, the SEC
shall
render
judgment dissolving
the corporation and
directing
such
disposition of its
assets as justice
requires.
Note:
The SEC
may appoint a
receiver
to
collect such

assets and pay

the debts of the
corporation.

(3) Involuntary
dissolution (Sec. 121):
(a) Revocation
Certificate
Registration by
(Sec. 121)

of
of
SEC

A corporation may
be dissolved by the
SEC upon filing of a
verified complaint and

after proper notice

and
hearing
on
grounds provided by
existing laws, rules
and regulations.
(b) Quo
Warranto
proceedings (See Sec.
5b, PD 902-A and Rule
66, Rules of
Court. Previously, the
SEC had exclusive
jurisdiction over quo
warranto proceedings
involving corporation.
Under the Securities
Regulation Code or RA
8799, however, the
jurisdiction of the SEC

over
all
cases
enumerated
under
Sec. 5 of PD 902-A
have been transferred
to the Regional Trial
Courts.
The grounds for
involuntary dissolution
of
a
corporation
under quo
warranto proceedings
are:
(1)
When the
corporation has
offended
against
a
provision of an

act
for
creation
renewal;

its
or

(2)
When it has
forfeited
its
privileges
and
franchises
by
non-user;
(3)
When it has
committed
or
omitted an act
which amounts
to a surrender
of its corporate
rights,
privileges
or
franchises;

(4)
When
it
misused a right,
privilege
or
franchise
conferred upon
it by law, or
when
it
has
exercised
a
right, privilege
or franchise in
contravention of
law
(PNB v. CFI,
209
SCRA
294; 1992)

(4) Shortening of
corporate term (Sec. 120)
NOTE:
The simplest and most
expedient way of effecting
dissolution
is by
shortening the corporate
term and waiting for such
term
to expire.
Dissolution of close
corporations
In close corporations,
any stockholder may, by

written petition to the SEC,

compel the dissolution of
such corporation when:
(1)
Any of the acts of
the directors, officers,
or those in control
of the corporation is:

Illegal;

Fraudulent;

Dishonest;

Oppressive or
unfairly prejudicial to
the corporation
or any other SH;

(2)
Corporate
assets
are being misapplied or
wasted. (Sec. 105)

Effects of Dissolution

WHAT ARE THE EFFECTS

OF DISSOLUTION?

Corporation
ceases to be a juridical
person and consequently

can no longer continue

transacting its business.

Corporate
existence continues for 3
years following
dissolution for the ff.
purposes only:
(a) winding up of
affairs; and
(b) liquidation of
corporate assets.

Corporation can no
longer continue its
business, except for
winding up.


Corporation
CANNOT even be a de
facto corporation.

Corporate
existence may be subject
to COLLATERAL attack.
NOTE that the subsequent
dissolution
of
a
corporation may
not remove or impair any
right or remedy in favor of
or against, nor any liability
incurred
by,
any
corporation,
its
stockholders,
members,
directors,
trustees
or
officers. (Sec. 145)

Loss of juridical personality

NATIONAL ABACA V. PORE (2
SCRA 989; 1961)
Plaintiff
National
Abaca
Corporation filed a complaint
against Pore for the recovery of
a sum of money advanced to
her for the purchase of hemp.
She moved to dismiss the
complaint by citing the fact that
National
Abaca
had
been
abolished by EO 372 dated Nov.
24, 1950. Plaintiff objected to
such by saying that it shall
nevertheless be continued as a

corporate body for a period of 3

years from the effective date of
said order for the purpose of
prosecuting and defending suits
by or against it and to enable
the Board of Liquidators to close
its affairs.
Can an action commenced
within 3 years after the abolition
of
plaintiff
corporation
be
continued by the same after the
expiration of said period?
The Corp. Law allows a
corporation to continue as a
body for 3 years after the time
when it would have been
dissolved for the purposes of

prosecuting and defending suits

by or against it. But at any time
during
the
3
years,
the
corporation should convey all its
property to trustees so that the
latter may be the ones to
continue
on
with
such
prosecution, with no time limit
on its hands. Since the case
against Pore was strong, the
corp.'s amended complaint was
admitted and the case was
remanded to the lower court.
CLEMENTE V. CA (242 SCRA
717)

The termination of the

life of a juridical entity does not
by itself cause the extinction or
diminution of the right and
liabilities of such entity nor those
of its owners and creditors. If
the 3-year extended life has
expired without a trustee or
receiver having been expressly
designated by the corporation
itself within that period, the
board of directors or trustees
itself may be permitted to so
continue as "trustees" by legal
implication to complete the
corporate liquidation. In the
absence of a board of directors
or trustees, those having any
pecuniary interest in the assets,

including
not
only
the
shareholders but likewise the
creditors of the corporation,
acting for and in its behalf,
might
make
proper
representations with the SEC,
which
has
primary
and
sufficiently broad jurisdiction in
matters of this nature, for
working out a final settlement of
the corporate concerns.
Executory contracts
The prevailing view is
that executory contracts
are not extinguished by
dissolution. Sec. 145 of the
Code states that "No right

or remedy in favor of or
against
any
corporation.nor
any
liability incurredshall be
removed or impaired either
by
the
subsequent
dissolution of said corp. or
by
any
subsequent
amendment or repeal of
this Code or of any part
thereof."
Liquidation

WHAT
IS
LIQUIDATION? (Sec. 122)

Liquidation, or winding
up, refers to the collection
of
all
assets
of
the
corporation, payment of all
its
creditors,
and
the
distribution
of
the
remaining assets, if any,
among the stockholders
thereof in accordance with
their contracts, or if there
be no special contract, on
the basis of their respective
interests.
WHAT
ARE
METHODS
LIQUIDATING

THE
OF
A

CORPORATION?
AND
WHO MAY UNDERTAKE
THE LIQUIDATION OF A
CORPORATION?
1.
Liquidation by the
corporation
itself
through its board of
directors
Although there is no
express
provision
authorizing
this
method, neither is there
any provision in the
Code prohibiting it.
2.
Conveyance of all
corporate assets to

trustees who will take

charge of liquidation.
If this method is used,
the 3-year limitation will
not apply provided the
designation
of
the
trustees is made within
said period. There is no
time limit within which
the trustee must finish
liquidation, and he may
sue and be sued as
such even beyond the
3-year period unless the
trusteeship is limited in
its duration by the deed
of trust.
(See Nat'l

Abaca Corp. v. Pore,

supra)
3.
Liquidation
is
conducted
by
the
receiver who may be
appointed by the SEC
upon its decreeing the
dissolution
of
the
corp.
As with the previous
method, the three-year
rule shall not apply.
However,
the
mere
appointment
of
a
receiver,
without
anything more, does
not
result
in
the

dissolution
of
the
corporation nor bar it
from the exercise of its
corporation rights.
FOR HOW LONG MAY
THE LIQUIDATION OF A
CORPORATION
BE
UNDERTAKEN?
Generally,
a
corporation
may
be
continued
as
a
body
corporate for the purpose
of liquidation for 3 years
after the time when it
would have so dissolved.
(Sec. 122) However, it was

held
in
the
case
of Clemente
v.
CA
(supra) that if the 3-year
period has expired without
a trustee or receiver having
been expressly designated
by the corporation itself
within that period, the BOD
itself may be permitted to
so continue as "trustees" by
legal
implication
to
complete the corporate
liquidation.
WHAT CAN AND SHOULD
BE DONE DURING THE
PERIOD
OF
LIQUIDATION?

(Sec. 122)
(1)
Collection
corporate assets
property;

of
and

(2)
Conveyance
of
all corporate property to
trustees for the benefit
of
SHs,
members,
creditors,
and
other
persons in interest;
(3)
Payment
of
corporation's debts and
liabilities;
(4)
Distribution
assets and property

of

Distribution of assets after

payment of debts
GENERAL RULE:
No
corporation
shall
distribute any of its
assets or property
except upon lawful
dissolution and after
payment of all its
debts
and
liabilities.
(Sec.
122)
EXCEPTION:
In
cases of decrease of
capital stock, and

as
otherwise
allowed
by
the
Corporation Code
WHAT HAPPENS IF AN
ASSET
CANNOT
BE
DISTRIBUTED TO THE
PERSON ENTITLED TO
IT?
Any asset distributable
to
any
creditor
or
stockholder or member who
is unknown or cannot be
found shall be escheated to
the city or municipality
where such assets are
located. (Sec. 122)

CHINA BANKING V. MICHELIN

& CIE. (58 Phil. 261; 1933)
The appointment of a
receiver by the court to wind up
the affairs of the corporation
upon
petition
of
voluntary
dissolution does not empower
the court to hear and pass on
the claims of the creditors of the
corporation at first hand. In
such cases, the receiver does
not act as a receiver of an
insolvent
corporation.
Since
"liquidation" as applied to the
settlement of the affairs of a
corporation consists of adjusting

the debts and claims, that is, of

collecting all that is due the
corporation, the settlement and
adjustment of claims against it
and the payment of its just
debts, all claims must be
presented for allowance to the
receiver or trustees or other
proper
persons
during
the
winding-up proceedings within
the 3 years provided by the
Corporation Law as the term for
the corporate existence of the
corporation, and if a claim is
disputed so that the receiver
cannot safely allow the same, it
should be transferred to the
proper court for trial and
allowance, and the amount so

allowed then presented to the

receiver or trustee for payment.
The rulings of the receiver on
the validity of claims submitted
are subject to review by the
court appointing such receiver
though no appeal is taken to the
latter ruling, and during the
winding-up proceedings after
dissolution, no creditor will be
permitted by legal process or
otherwise to acquire priority, or
to enforce his claim against the
property held for distribution as
against the rights of other
creditors.

Note: Under the

Corporation Code, it is the SEC
which may
appoint the receiver.
RP
V.
MARSMAN
DEVELOPMENT COMPANY (44
SCRA 418; 1972)
Defendant corp. was a timber
license holder with concessions
in
Camarines
Norte.
Investigations
led
to
the
discovery that certain taxes
were due on it. BIR assessed
Marsman 3 times for unpaid
taxes. Atty. Moya, in behalf of
the corp., received the first 2

assessments. He requested for

reinvestigations. As a result,
corp. failed to pay within the
prescribed period.
Numerous
BIR warnings were given. After 3
years of futile notifications, BIR
sued the corp.
Although
Marsman
was
extrajudicially dissolved, with
the 3-year rule, nothing however
bars an action for recovery of
corporate debts against the
liquidators. In fact, the 1st
assessment was given before
dissolution, while the 2nd and
3rd assessments were given just
6
months
after
dissolution
(within the 3-year rule). Such

facts definitely established that

the Government was a creditor
of the corp. for whom the
liquidator was supposed to hold
assets of the corp.
TAN TIONG BIO V. CIR (G.R.
No. L-15778; April 23, 1962)
The creditor of a dissolved
corp. may follow its assets, as in
the nature of a trust fund, once
they pass into the hands of the
stockholders. The dissolution of
a corp. does not extinguish the
debts due or owing to it.

An indebtedness of a corp. to
the government for income and
excess profit taxes is not
extinguished by the dissolution
of the corp. The hands of
government cannot, of course,
collect taxes from a defunct
corporation, it loses thereby
none of its rights to assess taxes
which had been due from the
corporation, and to collect them
from persons, who by reason of
transactions with the corporation
hold property against which the
tax can be enforced and that the
legal death of the corporation no
more prevents such action than
would the physical death of an
individual
prevent
the

government
from
assessing
taxes against him and collecting
them from his administrator,
who holds the property which
the decedent had formerly
possessed. Thus, petitioners can
be held personally liable for the
corporation's
taxes,
being
successors-in-interest
of
the
defunct corporation.
Distribution of assets of nonstock corporations
WHAT ARE THE RULES
FOR DISTRIBUTION OF
ASSETS OF NON-STOCK

CORPORATIONS?
94-95)

(Sec.

(1)
All liabilities and
obligations
of
the
corporation shall be
paid,
satisfied,
and
discharged,
or
adequate
provision
shall be made therefor.
(2)
Assets held by
the corporation upon a
condition
requiring
return,
transfer
or
conveyance, and which
condition occurs by
reason
of
the
dissolution, shall be

returned, transferred or
conveyed
in
accordance with such
requirements.
(3)
Assets received
and
held
by
the
corporation subject to
limitations permitting
their use only for
charitable,
religious,
benevolent, education
or similar purposes, but
not subject to condition
(2) above, shall be
transferred
or
conveyed to one or
more
corporations,
societies
or

organization engaged
in activities in the
Philippines
substantially similar to
those of the dissolving
corp. according to a
plan
of
distribution
adopted pursuant to
Sec. 95 of the Code.
(4)
Assets
other
than those mentioned
in
preceding
paragraphs shall be
distributed
in
accordance with the
AOI or by-laws.

(5)
In any other
case, assets may be
distributed
to
such
persons,
societies,
organizations
or
corporations, whether
or not organized for
profit, as may be
specified in a plan of
distribution
adopted
pursuant to Sec. 95.
*
The plan
of
distribution
of
assets may be adopted
by a majority vote of the
Board of trustees and
approval of 2/3 of the

members having voting

rights
present
or
represented by proxy at
the
meeting
during
which
said
plan
is
adopted.
It must be noted that the
plan of distribution of
assets must not be
inconsistent
with
the
provisions of Title XI of
the Code.

CORPORATE COMBINATIONS

Techniques to achieve
corporate combinations

WHAT
ARE
THE
TECHNIQUES
TO
ACHIEVE A CORPORATE
COMBINATION?
(1) Merger (A + B = A)
(2) Consolidation (A + B
= C)
(3) Sale of substantially
all corporate assets and

purchase thereof by
another corporation;
(4) Acquisition of all /
substantially all of the
stock of one corporation
from its SHs in
exchange for the stock
of the acquiring
corporation
Merger or Consolidation

WHAT
IS
PROCEDURE

THE
FOR

MERGER
CONSOLIDATION?

OR

(1)
Board of Directors
of
the
constituent
corporations
must
prepare and approve a
plan of merger or
consolidation.
(2)
2/3 vote of OCS of
the
constituent
corporations.
(3)
Execution of the
Articles
of
Merger/Consolidation,
to be signed by the
Pres/VP and certified by

the secretary / assistant

secretary.
(4)
Submission to the
SEC for approval.
WHAT ARE THE EFFECTS
OF MERGER OR
CONSOLIDATION? (Sec. 80)
(1)
The constituent
corporation shall
become a single
corporation:
If merger:
the
surviving corporation

designated in the plan

of
merger
If consolidation: 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
consolidated
corporation.

(3)
The surviving or
consolidated
corporation
shall
possess
all
rights,
privileges, immunities
and powers and shall
be subject to all the
duties and liabilities of
a corporation organized
under the Corporation
Code.
(4)
The surviving or
consolidated
corporation
shall
thereupon
and
thereafter possess all
the rights, privileges,
immunities
and

franchises of each of
the
constituent
corporations;
(5)
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 belong to,
or
due
to
each
constituent corporation,
shall
be
deemed
transferred and vested
in such surviving or
consolidated

corporation without
further act or deed.
(6)
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.
(Note:
The
merger
or
consolidation
does not impair
the
rights of creditors or
liens upon the property
of any such constituent
corporations.)
LOZANO V. DE LOS
SANTOS (274 SCRA 452)

Consolidation
becomes
effective
not
upon
mere
agreement of the members but
only upon issuance of the
certificate of consolidation by
the SEC. There can be no intracorporate
nor
partnership
relation between 2 jeepney
drivers'
and
operators'
associations whose plans to
consolidate
into
a
single
common association is still a
proposal.
WHAT ARE THE RULES
GOVERNING MERGER OR
CONSOLIDATION
INVOLVING A FOREIGN

CORPORATION LICENSED
IN THE PHILIPPINES? (Sec.
132)

A
foreign
corporation authorized
to transact business in
the
Philippines
may
merge or consolidate
with
any
domestic
corporation if such is
permitted
under
Philippine law and by
the
law
of
its
incorporation.

The requirements
on
merger
or
consolidation
as

provided
in
the
Corporation Code must
be complied with.

Whenever
a
foreign
corporation
authorized to transact
business
in
the
Philippines is a party to
a
merger
or
consolidation
in
its
home country or state,
such
foreign
corporation shall file a
copy of the articles or
merger or consolidation
with the SEC and the
appropriate
government
agencies

within 60 days after

such
merger
or
consolidation becomes
effective. Such copy of
the articles must be
duly authenticated by
the proper officials of
the country or state
under the laws of which
merger or consolidation
was effected.
If
the
absorbed
corporation in such a
merger / consolidation
happens to be the
foreign
corporation
doing business in the
Philippines, it shall file a

petition for withdrawal

of
its
license
in
accordance with Sec.
136.
Sale of substantially all
corporate assets

WHEN IS A SALE OR
OTHER
DISPOSITION
DEEMED
TO
COVER
SUBSTANTIALLY ALL THE
CORPORATE PROPERTY
AND ASSETS?

If by the sale the

corporation
would
be
rendered
incapable
of
continuing the business or
accomplishing the purpose
for
which
it
was
incorporated. (Sec. 40)
WHAT
ARE
REQUIREMENTS?
40)

THE
(Sec.

(1)
Majority vote of
BOD + 2/3 vote of OCS
or
members
at
a
meeting duly called for
the purpose;

(2)
Compliance
with
the laws on illegal
combinations
and
monopolies
Note, however, that
after such approval by the
SHs,
the
BOD
may
nevertheless,
in
its
discretion, abandon such
sale or other disposition
without further action or
approval by the SHs. This,
of course, is subject to the
rights of third parties under
any
contract
relating
thereto.

WHEN
IS
SH
APPROVAL NOT NECESSA
RY FOR THE ABOVE
DISPOSITION?
(1) If the disposition is
necessary in the usual
and regular course of
business; or
(2) If the proceeds of the
disposition
be
appropriated for the
conduct of its remaining
business (Sec. 40)
IS THE APPRAISAL RIGHT
AVAILABLE
TO

DISSENTING
STOCKHOLDERS?
Yes. However, it
must be stressed that this
right is generally available
only
to
dissenting
stockholders
of
the selling corporation, not
the
purchasing
corporation. (It can be
argued, though, that in
instances
wherein
the
purchase constitutes an
investment in a purpose
other than its primary
purpose,
stockholders'
approval
of
such
investment is necessary,

and anyone who objects

thereto
will
have
the
appraisal right under Sec.
42.)
Exchange of stocks

In this method, all or

substantially
all
the
stockholders
of
the
"acquired" corporation are
made stockholders of the
acquiring
corporation.
With the exchange, the
acquired
corporation
becomes a subsidiary of

the acquiring corporation.

Although
this
method
does not combine the 2
businesses under a single
corporation as in merger
and sale of assets, from
the point of view of the
acquiring
(parent)
corporation,
there
is
hardly
any
difference
between
owing
the
acquired
corporation's
business
directly
and
operating it through a
controlled subsidiary. In
fact,
the
parent
corporation would have
the power to buy all the
subsidiary's assets and

dissolve it, achieving the

same result as in the other
methods of combination.
(Campos & Campos)

FOREIGN CORPORATIONS
WHAT IS A FOREIGN
CORPORATION? (Sec.
123)
A corporation formed
and organized under laws
other than those of the
Philippines, regardless of
the citizenship of the

incorporators
and
stockholders.
Such
corporation must have
been organized and must
operate in a country which
allows Filipino citizens and
corporations
to
do
business there.
In times of war:
For purposes of
security of the
state,
the
citizenship of the
controlling
stockholders
determines
the
corporations
nationality.

IN WHAT WAYS CAN A

FOREIGN CORPORATION
DO BUSINESS IN THE
PHILS.?
(1)
Wholly-owned
subsidiary; or
(2)

Branch office; or

(3)
Joint venture with a
local partner.

Permitted areas of
investment

100% EQUITY:
media, except recording

Mass

The practice of a profession (law,

medicine, etc.)
Operation of rural banks
Cooperatives
Private security agencies
Small-scale mining

Utilization of marine resources

Ownership,
operation, and
management of
cockpits;
Manufacture, repair,
stockpiling of
nuclear, biological,
chemical,
and radiological weapons;
Note: Retail trade is no
longer required to be 100%
Filipino-owned on account
of the Retail Trade
Liberalization Act.

75%-25% EQUITY:
Inter-island shipping (R.A.
1937, Sec. 8)
Private recruitment
Contracts for
construction and
repair of locallyfunded public
works
Except: Public
works that would
fall under the BuildOperateTransfer Law,
as well as
those that are
foreignfunded

70%-30% EQUITY:
Advertising
60%-40%
EQUITY:

SO-CALLED
RULE"?

Other industries.
WHAT IS THE
"GRANDFATHER

Where
a
domestic
corporation which has
both
Philippine
and
foreign stockholders is
an investor in another
domestic
corporation
which has also both

Philippine and foreign

stockholders,
the
socalled "grandfather rule"
is used to determine
whether or not the latter
corporation is qualified to
engage in a partially
nationalized
business,
i.e. by determining the
extent
of
Philippine
equity therein.
Under present SEC
rules, if the percentage
of Filipino ownership in
the first corporation is at
least 60%, then said
corporation
will
be
considered
as
a

Philippine national and

all of its investment in
the second corporation
would be treated as
Filipino equity. On the
other
hand,
if
the
Philippine equity in the
first corporation is less
than 60%, then only the
number
of
shares
corresponding to such
percentage
shall
be
counted as of Philippine
nationality.
(See SEC
Rule promulgated on 28
Feb. 1967, cited in
Opinion # 18, Series of
1989, Department of

Justice, dated 19 January

1989.)
NOTE: The
reader
would be well-advised
to cross-reference this
definition of the
"grandfather
rule"
with
a
trusted
commentary.
Legal Requirements Prior to
Transaction of Business
Documentary
Requirements (Sec. 125)

(1)

BOI certificate

The BOI certificate is

issued upon a finding of
the Board of Investments
that
the
business
operations of the foreign
corp. will contribute to the
sound
and
balanced
development
of
the
national economy on a
self-sustaining
basis.
(See
Omnibus
Investments Code, Sec.
48-49)
NOTE:
Applications, if
not acted upon within 10
days
from
official

acceptance thereof, shall

be
considered
automatically
approved! (Art.
53,
Omnibus
Investments
Code)
(2) SEC license to do
business (Sec. 125)

Application under
oath setting forth the
information specified in
Sec. 125;

Additional
information as may be
necessary
or
appropriate to enable

the SEC to determine

whether the corporation
is entitled to a license
to transact business in
the Philippines, and to
determine and assess
the fees payable;

Duly
executed
certificate under oath
by authorized official/s
of the jurisdiction of the
company's
incorporation, attesting
to the fact that the laws
of the country of the
applicant allow Filipino
citizens
and
corporations
to
do

business therein, and

that the applicant is an
existing corporation in
good standing;

Statement under
oath of the president or
any
other
person
authorized
by
the
corporation
showing
that the applicant is
solvent and in good
financial condition, and
setting forth the assets
and liabilities of the
corporation within 1
year immediately prior
to the application.

(3)
Certificate
from
appropriate government
agency
NOTE: Certain sectors
such
as
banking,
insurance, etc. require
prior approval
from
the
government
agencies
concerned. (Sec. 17)
Deposit requirement (Sec.
126)
Within 60 days after the
issuance of the license, the
licensee shall deposit with the

SEC securities with an actual

market value of at least P
100,000.00. These securities
are for the benefit of present
and future creditors, and shall
consist of any of the following:

Bonds or other
evidence
of
indebtedness of the
Government
or
its
instrumentalities, etc.;

Shares of stock in
"registered enterprises"
as defined in R.A. 5186;

Shares of stock in
domestic corporations
registered in the stock
exchange;


Shares of stock in
domestic
insurance
companies and banks.
Once the licensee ceases to do
business in the Philippines, these
deposited securities shall be
returned, upon the licensee's
application and proof to the
satisfaction of the SEC that the
licensee has no liability to
Philippine
residents
or
the
Philippine government.
Note: Foreign banking and
insurance corporations are
the
exceptions
to
this
requirement.

Designation of
agent (Sec. 128)

resident

The designation of a
resident agent is a condition
precedent to the issuance of the
license to transact business in
the Philippines.
A
Philippines.

WHO:
resident of

the

PURPOSE:
To
be
served
any
summons and other
legal
processes
which
may
be

served in all actions

or
other
legal
proceedings against
such
corporation.
Service upon such
resident shall be
admitted and held
as valid as if served
upon
the
duly
authorized officers
of
the
foreign
corporation at its
home office.

Laws applicable to foreign

corporations

Foreign
corporations
lawfully doing business in the
Philippines are bound by all laws,
rules and regulations applicable
to domestic corporations of the
same class.
Exceptions: (1)
As
regards
the
creation,
formation, organization
or dissolution
of
the
corporation;
(2) As regards
the fixing of relations,
liabilities,
responsibilities, or

duties
of
stockholders,
members,
or
officers
or
corporations
to
each other or to
the corporation
(Sec. 129)

Effects of Failure to Secure

SEC License

WHAT ARE THE EFFECTS

OF FAILURE TO SECURE
A LICENSE?
(1) The corporation will
not be permitted to
maintain agency in the
Philippines;
(2) The corporation will
be subject to penalties
and fines;

(3) The corporation will

not be permitted to
maintain or intervene in
any action before
Philippine courts or
administrative agencies;
it can be SUED.
Isolated transactions
MARSHALL WELLS V.
ELSER (46 Phil. 71; 1924)
Marshall Wells, a corporation
organized under the State of
Oregon, sued a domestic corp.
for the unpaid balance on a bill
of goods. Defendant demurred

to the complaint on the ground

that it did not show that plaintiff
had complied with the law
regarding corp. desiring to do
business in the Phil., nor that the
plaintiff was authorized to do
business in the Phil.
The Supreme Court, in ruling
for Marshall Wells, stated that
the object of the statute was to
subject the foreign corp. doing
business in the Phil. to the
jurisdiction of its courts. The
object of the statute was not to
prevent it from performing single
acts but to prevent it from
acquiring a domicile for the
purpose without taking the steps

necessary to render it amenable

to suit in the local courts. The
implication of the law is that it
was never the purpose of the
Legislature to exclude a foreign
corp. which happens to obtain
an isolated order for business
from the Phil., from securing
redress in Phil. Courts, and thus,
in effect to permit persons to
avoid their contract made with
such foreign corporation.
ATLANTIC MUTUAL V. CEBU
STEVEDORING (G.R. No.
18961; Aug. 31, 1966)

A foreign corp. engaged in

business in the Phil. can
maintain suit in this jurisdiction if
it is duly licensed. If a foreign
corp. is not engaged in business
in the Phil., it can maintain such
suit if the transaction sued upon
is singular and isolated, in which
no license is required. In either
case, the fact of compliance with
the requirement of license, or
the fact that the suing corp. is
exempt therefrom, as the case
may be, cannot be inferred from
the mere fact that the party
suing is a foreign corp. The
qualifying circumstance, being
an essential part of the element
of the plaintiffs capacity to sue,

must be affirmatively pleaded.

In short, facts showing foreign
corporations capacity to sue
should be pleaded.
Curing of defect
HOME INSURANCE V.
EASTERN SHIPPING (123 SCRA
424; 1983)
A contract entered into by a
foreign insurance corp. not
licensed to do business in the
Phil. is not necessarily void and
the lack of capacity to sue at the
time of execution of the contract

is cured by
registration.

its

subsequent

Protection of intellectual
property rights
GENERAL GARMENTS CORP.
V. DIR. OF PATENTS (41 SCRA
50; 1971)
Domestic corporation General
Garments registered Puritan
trademark for its mens wear. US
corporation Puritan Sportswear
petitioned the Phil. Patent Office
for
cancellation
of
said
trademark,
alleging
its

ownership and prior use in the

Phil.
The Supreme Court held that
a foreign corp. which does not
do business in the Phil. and is
unlicensed but is widely known
in the Phil. through the use of its
products here has legal right to
maintain an action to protect its
reputation, corporate name and
goodwill. The right to use the
corporate name is a property
right which the corp. may assert
and protect in any of the courts
of the world.

LE CHEMISE LACOSTE V.
FERNANDEZ (129 SCRA 377;
1984)
A foreign corporation not
doing business in the Phil. needs
no license to sue in the Phil. for
trademark violations.
Where a violation of our unfair
trade laws which provide a penal
sanction is alleged, lack of
capacity to sue of injured foreign
corp.
becomes
immaterial
(because a criminal offence is
essentially an act against the
State).

NOTE:
Sec. 160 of
R.A.
8293 (Intellectual
Property
Code)
provides that any
foreign national or
juridical person who
meets
the
requirements of Sec. 3
of the Act (i.e., is a
national
or
is
domiciled in a country
party
to
any
convention, treaty or
agreement relating to
intellectual
property
rights
or
the
repression of unfair
competition, to which

the Philippines is also

a party, or extends
reciprocal rights to
Philippine nationals by
law) and
does
not
engage in business in
the Philippines may
bring
a
civil
or
administrative action
for
opposition,
cancellation,
infringement,
unfair
competition, or false
designation of origin
and false description,
whether or not it is
licensed
to
do
business
in
the

Philippines
existing laws.

under

What Constitutes
Transacting Business

WHAT
IS
CONSIDERED
AS NOT DOING BUSINESS,
AND
THEREFORE
NOT
SUBJECT TO THE LICENSING
REQUIREMENT?

Mere investment
as a shareholder and
the exercise of the
rights as such investor;


Having a
nominee director or
officer represent the
foreign investors
interests;

Appointing a
representative or
distributor in the
Philippines who
transacts business in
his own name and for
his own account
Example:
Rustans exclusive
distributorship of
Lacoste t-shirts


Publication of a
general advertisement;
NOTE: Under the
Code of Commerce, the
publication of an ad is
prima
facie evidence (or
at least creates a
presumption) of
doing business in
the Philippines.

Maintaining stock
of goods for processing
by another entity in the
Philippines;


Consignment of
equipment to be used
in processing products
for export;

Collecting
information in the
Philippines;

Performing
services incidental to an
isolated contract of sale
Example: Installing
machinery sold by a
foreign corporation
to a Philippine
buyer

WHAT IS THE TEST OF

DOING BUSINESS IN THE
PHILIPPINES?
Whether or not there is
continuity of transactions
which are in pursuance of
the normal business of the
corporation.
(Metholatum
v. Mangaliman)
MENTHOLATUM V.
MANGALIMAN (72 Phil. 525;
1941)
The true test as to whether a
foreign corporation is doing
business in the Philippines

seems to be whether the foreign

corp. is continuing the body or
substance of the business for
which it was organized or
whether it has substantially
retired from it and turned it over
to another. The term implies a
continuity
of
dealings
and
arrangements and contemplates
performance of acts/works or the
exercise
of
the
functions
normally incident to and in
progressive prosecution of the
purpose and object of its
organization.

FACILITIES MANAGEMENT
CORP. V. DE LA OSA (89 SCRA
131; 1979)
The
Court
of
Industrial
Relations
ordered
Facilities
Management Corporation (FMC)
to pay Dela Osa his overtime
compensation, swing shift and
graveyard shift premiums. FMC
filed a petition for review on
certiorari on the issue of whether
the CIR can validly affirm a
judgment
against
persons
domiciled outside and not doing
business in the Phil. and over
whom
it
did
not
acquire
jurisdiction.

The Supreme Court held that

the petitioner may be considered
as doing business in the
Philippines within the scope of
Sec. 14, Rule 14 of the Rules of
Court:
Sec. 14. Service upon
private foreign corp. - If
the
defendant
is
a
foreign corp., or a nonresident
joint
stock
corporation
or
association,
doing
business in the Phil.,
service may be made on
its resident agent, on the
government
official
designated by law to the

effect, or to an y of its
officers or agents within
the Philippines.
FMC had appointed Jaime
Catuira as its agent with
authority
to
execute
Employment
Contracts
and
receive, on behalf of the corp.,
legal services from, and be
bound by processes of the Phil.
Courts, for as long as he remains
an employee of FMS. If a foreign
corp. not engaged in business in
the Phil., through an Agent, is
not barred from seeking redress
from courts in the Phil., that
same
corp.
cannot
claim

exemption
done
against
person or persons in the Phil..
NOTE: Under Sec. 12,
Rule 14 of the 1997
Rules
of
Civil
Procedure, the term
"doing business" has
been replaced with the
phrase
"has
transacted
business," thereby
allowing suits based on
isolated transactions.
MERRILL LYNCH FUTURES
INC. V. CA (211 SCRA 824)

Merrill Lynch Futures, Inc.

(MLF) filed a complaint against
the spouses Lara for the
recovery of a debt. MLF is a
non-resident foreign corp. not
doing business in the Phil.,
organized under the laws of
Delaware, USA. It is a futures
commission
merchant
duly
licensed to act as such in the
futures markets and exchanges
in the US, essentially functioning
as a broker executing orders to
buy and sell futures contract
received from its customers on
US futures exchanges. (Futures
contract
is
a
contractual
commitment to buy and sell a
standardized quantity of a

particular item at a specified

future settlement date and at a
price agreed upon with the
purchase or sale being executed
on
a
regulated
futures
exchange.)
The spouses refused to pay
and moved to dismiss the case
alleging that plaintiff had no
legal capacity to sue because (1)
MLF is doing business in the
country without a license; and
(2) the transactions were made
with Merrill Lynch Pierce, Fenner
and Smith and not with plaintiff
MLF.

Issue:
Can
MLF
sue
in
Philippine courts to establish
and enforce its rights against
spouses
in
light
of
the
undeniable fact that it had
transacted business without a
license?
Legal capacity to sue may be
understood in two senses: (1)
That the plaintiff is prohibited or
otherwise incapacitated by law
to institute suit in the Phil.
Courts, or (2) although not
otherwise incapacitated in the
sense just stated, that it is not a
real party in interest.

The Court finds that the Laras

were transacting with MLF fully
aware of its lack of license to do
business in the Phils., and in
relation to those transactions
had made payments and the
spouses are estopped to impugn
MLF's capacity to sue them. The
rule is that a party is estopped to
challenge the personality of a
corp after having acknowledged
the same by entering into a
contract with it. The principle is
applied to prevent a person
contracting
with
a
foreign
corporation from later taking
advantage of its noncompliance
with the statutes, chiefly in
cases where such person has

received the
contract.

benefits

of

the

PACIFIC VEGETABLE OIL V.

SINGSON (G.R. No. 7917;
April 29, 1955)
This is an action instituted by
the
plaintiff,
a
foreign
corporation,
against
the
defendant to recover a sum of
money for damages suffered by
the plaintiff as a consequence of
the failure of the defendant to
deliver copra which he sold and
bound himself to deliver to the
plaintiff.
Defendant filed a
motion to dismiss on the ground

that the plaintiff failed to obtain

a license to transact business in
the Phil and, consequently, it
had no personality to file an
action.
Has
appellant
transacted
business in the Philippines in
contemplation of law?
Contrary to the findings of the
trial court, the copra in question
was actually sold by the
defendant to the plaintiff in the
US, the agreed price to be
covered by an irrevocable letter
of credit to be opened at the
Bank of California, and delivery
to be made at the port of

destination. It follows that the

appellant corporation has not
transacted business in the Phil in
contemplation of Sec. 68 and 69
which
require
any
foreign
corporation to obtain a license
before it could transact business,
or
before
it
could
have
personality to file a suit in the
Phil.. It was never the purpose
of the Legislature to exclude a
foreign
corporation
which
happens to obtain an isolated
order of business from the Phil.,
from securing redress in the Phil.
Courts, and thus, in effect, to
permit persons to avoid their
contracts
made
with
such
foreign corp.. The lower court

erred in holding that the

appellant corporation has no
personality to maintain the
present action.
AETNA CASUALTY & SURETY
CO. VS. PACIFIC STAR
LINE (80 SCRA 635; 1977)
Aetna as subrogee of I.
Shalom sued Pacific Star Line
(PSL), the common carrier for
the loss of Linen & Cotton piece
goods due to pilferage and
damage
amounting
to
US$2,300.00. PSL contends that
Aetna has no license to transact
insurance
business
in
the

Philippines as gathered from the

Insurance
Commission
and
SEC . It also argues that since
said company has filed 13 other
civil suits, they should be
considered as doing business
here and not merely having
entered
into
an
isolated
transaction.
Based
on
rulings
in
Mentholatum
and
Eastboard
Navigation, the Supreme Court
held
that
Aetna
is
not
transacting business in the
Philippines for which it needs to
have a license. The contract
was entered into in New York
and payment was made to the

consignee in the New York

branch. Moreover, Aetna was not
engaged in the business of
insurance in the Philippines but
was merely collecting a claim
assigned to it by consignee.
Because it was not doing
business in the Philippines, it
was not subject to Sec. 68-69 of
the
Corporation
Law
and
therefore was not barred from
filing the instant case although it
had not secured a license to
transact insurance business in
the Philippines.
TOPWELD MANUEL VS.
ECED (138 SCRA 120; 1985)

Topweld
entered
into
2
separate contracts with foreign
entities: a license and technical
assistance agreement with IRTI,
and a distributor agreement with
ECED, SA. When Topweld found
out that the foreign corporations
were looking into replacing
Topweld
as
licensee
and
distributor, the latter went to
court to ask for a writ of
preliminary injunction to restrain
the foreign corporations from
negotiating with 3rd parties as
violative of RA 5445 (4).
Although IRTI and ECED were
doing business in the Philippines,

since they had not secured a

license from BOI, the foreign
corporations were not bound by
the requirement on termination
and Topweld could not invoke
the same against the former.
Moreover, it was incumbent
upon Topweld to know whether
or not IRTI and ECED were
properly authorized to engage in
such agreements. The Supreme
Court held that both parties were
guilty of violating RA 5445.
Being in pari delicto, Topweld
was not entitled to the relief
prayed for.

ANTAM CONSOLIDATED VS.

CA (143 SCRA 289; 1986)
Stokely Van Camp Inc. filed a
complaint
against
Banahaw,
Antam, Tambunting and Unicorn
for the collection of a sum of
money for failure to deliver 500
tons of crude coconut oil. Antam
et al asked for dismissal of case
on ground that Stokely was a
foreign corporation not licensed
to do business in the Philippines
and therefore had no personality
to maintain the suit.
The
SC
held
that
the
transactions entered into by
Stokely with Antam et al (3

transactions, either as buyer or

seller) were not a series of
commercial
dealings
which
signify an intent on the part of
the respondent to do business in
Philippines but constitute an
isolated
transaction.
The
records show that the 2nd and
3rd transactions were entered
into because Antam wanted to
recover the loss it sustained
from the failure of the petitioners
to deliver the crude oil under the
first transaction and in order to
give the latter a chance to make
good on their obligation. There
was
only
one
agreement
between the parties, and that

was the delivery of the 500 tons

of crude coconut oil.
How Courts Acquire
Jurisdiction over Foreign
Corporations

As a rule, jurisdiction over a

foreign corporation is acquired
by the courts through service of
summons on its resident agent.
If there is no assigned
resident agent, the government
official designated by law can
receive the summons on their
behalf and transmit the same to

them by registered mail within

10 days. This will complete the
service
of
the
summons.
Summons can also be served on
any of the corporation's officers
or agents within the Philippines.
(See Sec. 128; Rule 14, Sec. 12,
Rules of Court. Note that while
Sec. 128 presupposes that the
foreign
corporation
has
a
license, Rule 14 does not make
such an assumption.)
Note that if there is a
designated
agent,
summons
served upon the government
official is not deemed a valid
process.


Johnlo Trading case
holds that the service on
the attorney of an FC who
was also charged with the
duty of settling claims
against it is valid since no
other agent was duly
appointed.

Service on Officers or
Agents of an foreign
corporations
domestic
subsidiary will only vest
jurisdiction if there is
sufficient
ground
to
disregard the separate
personalities.

GENERAL CORPORATION OF
THE PHILIPPINES VS UNION
INSURANCE (87 Phil. 313;
1950)
General
Corporation
and
Mayon investment sued Union
Insurance and Firemens Fund
Insurance (FFI) for the payment
of 12 marine insurance policies.
The summons was served on
Union which was then acting as
FFIs settling agent in the
country. At that time, it was not
yet registered and authorized to
transact
business
in
the
Philippines.

Issue: Did the trial court acquire

valid jurisdiction over FFI?
Yes. The service of summons
for FFI on its settling agent was
legal and gave the court
jurisdiction upon FFI. Section 14,
Rule 7 of ROC embraces Union in
the phrase, or agents within the
Philippines. The law does not
make
distinctions
as
to
corporations with or without
authority to do business in the
Philippines. The test is whether
a
foreign
corporation
was
actually doing business here.
Otherwise, a foreign corporation
doing business illegally because
of its refusal or neglect to obtain

the corresponding authority to

do business may successfully
though unfairly plead such
neglect or illegal act so as to
avoid
service
and
thereby
impugn the jurisdiction of the
courts.
Withdrawal of Foreign
Corporation
(Sec. 136)
HOW: By filing a
petition for withdrawal of license
REQUISITES FOR
ISSUANCE OF CERTIFICATE
OF WITHDRAWAL:

(1)
All claims which
have accrued in the
Philippines have been
paid, compromised and
settled;
(2)
All taxes, imposts,
assessments,
and
penalties,
if
any,
lawfully due to the
Philippine Government
or any of its agencies or
political
subdivisions
have been paid; and
(3)
The petition for
withdrawal of license
has
been
published

once a week for 3

consecutive weeks in a
newspaper of general
circulation
in
the
Philippines.
Revocation and Suspension
of License
(Sec. 134)
WHAT ARE THE GROUNDS
FOR
REVOCATION
OR
SUSPENSION OF A LICENSE
OF
A
FOREIGN
CORPORATION?
(1)
Failure to file its
annual report or pay

any fees as required by

the Corporation Code;
(2)
Failure
to
appoint and maintain a
resident agent in the
Philippines as required;
(3)
Failure,
after
change
of
resident
agent or of his address,
to submit to the SEC a
statement
of
such
change;
(4)
Failure to submit
to
the
SEC
an
authenticated copy of
any amendment to its

AOI or by-laws or of
any articles of merger
or consolidation within
the time prescribed by
the Code;
(5)
A
misrepresentation
of
any material matter in
any application, report,
affidavit
or
other
document
submitted
by such corporation
pursuant to Title XV;
(6)
Failure to pay
any and all taxes,
imposts, assessments
or penalties, if any,

lawfully due to the

Philippine government
or any of its agencies
or
political
subdivisions;
(7)
Transacting
business
in
the
Philippines outside of
the purpose/s for which
such
corporation
is
authorized under its
license;
(8)
Transacting
business
in
the
Philippine as agent of
or acting for and in
behalf of any foreign

corporation or entity
not duly licensed to do
business
in
the
Philippines; or
(9)
Any
other
ground as would render
it unfit to transact
business
in
the
Philippines.
SPECIAL AND
MISCELLANEOUS
PROVISIONS
Educational corporations
(Sec. 106-108)


Educational
corporations other than
government-run
institutions are governed
first by special laws,
second, by the special
provisions
of
the
Corporation Code, and
lastly, by the general
provisions
of
the
Corporation Code. (Sec.
106)

At least 60% of the

authorized capital stock of
educational corporations
must be owned by Filipino

citizens, and Congress

may require increased
Filipino
equity
participation
therein.
(With the exception of
educational
institutions
established by religious
groups
and
mission
boards, which are not
subject to this equity
requirement.) However,
control and administration
of educational institutions
must
be
vested
exclusively in citizens of
the Philippines. (Art. XIV,
Sec.
4
(2),
1987
Constitution) This means
that no alien may be

elected as a member of
the BOD nor appointed as
Principal or officer thereof.

Once
a
school,
college or university has
been granted government
recognition by the DECS, it
must incorporate within
90 days from the date of
such recognition, unless it
is expressly exempt by
DECS for special reasons.
(Act 2706, Sec. 5) In
addition, it must file a
copy of its AOI and bylaws with the DECS.
Without
the
favorable
recommendation of the

DECS Secretary, the SEC

will not accept or approve
such articles. (Sec. 107,
Corporation Code)
Religious corporations
(Sec. 109-116)
Religious corporations
are governed by Title XIII,
Chapter II of the Corporation
Code and by the general
provisions of the Code on nonstock corporations insofar as
they may be applicable. (Sec.
109)

Corporation sole (Sec. 110115)

A corporation sole is
an
incorporated
office,
composed
of
a
single
individual who may be a
bishop, priest, minister or
presiding officer of a religious
sect, denomination or church.
Its purpose is to administer
and manage as trustee the
property and affairs of such
religious sect, denomination
or church, within the territorial
jurisdiction of such office.
(Sec. 110; Sec. 111 (3))

In case of death,
resignation,
transfer
or
removal of the person in
office, his successor replaces
him
and
continues
the
corporation
sole.
The
property is not owned but is
merely administered by the
corporation
sole,
and
ownership pertains to the
church or congregation he
represents.
On the other
hand, he is the person
authorized by law as the
administrator thereof and the
court may take judicial notice
of such fact and of the fact
that the parish priests have no
control over such property.

In
determining
whether the constitutional
provision
requiring
60%
Filipino capital for corporation
ownership
of
private
agricultural
lands,
the
Supreme Court has held that
it is the nationality of the
constituents of the diocese,
and not the nationality of the
actual incumbent of the office,
which must be taken into
consideration. Thus, where at
least 60% of the constituents
are Filipinos, land may be
registered in the name of the
corporation sole, although the
holder of the office is an

alien. This ruling is based on

the fact that the corporation
sole is not the owner but
merely the administrator of
the property, and that he
holds it in trust for the faithful
of the diocese concerned.
(See Gana v. Roman Catholic
Archbishop of Manila, 43 O.G.
No. 8, 3225; 1947)
Religious
116)

societies (Sec.

In contrast to a
corporation
sole,
religious
societies are composed of
more than one person. The

requirements for incorporation

of such societies are set forth
in Sec. 116 of the Code.
Close Corporations
(Sec. 96-105)
WHAT ARE THE
REQUISITES OF A CLOSE
CORPORATION? (Sec. 96)
A
close
corporation,
within the meaning of the
Corporation Code, is one
whose
articles
of
incorporation provide that:

(1)
All
the
corporation's issued
stock of all classes,
exclusive
of
treasury
shares,
shall be held of
record by not more
than a specified
number of persons
not exceeding 20;
(2)
All the issued
stock of all classes
shall be subject to
one
or
more
specified
restrictions
on
transfer permitted

by Title XII of the

Code; and
(3)
The
corporation
shall
not list in any stock
exchange or make
any public offering
of any of its stock of
any class.
Notes:

A
narrow
distribution
of
ownership does not,
by itself, make a close
corporation.
(San
Juan Structural and

Steel Fabricators
CA, 296 SCRA 631)

v.

A
corporation
shall not be deemed a
close
corporation
when at least 2/3 of its
voting stock or voting
rights is owned or
controlled by another
corporation which is
not
a
close
corporation.
CAN A CORPORATION
THAT IS NOT A CLOSE
CORPORATION BE A
STOCKHOLDER IN A
CLOSE CORPORATION?

YES, provided that

said corporation owns
less than 2/3 of voting
stock or voting rights.
WHAT
NOT BE
CLOSE
(Sec. 96)

ENTITIES
MAY
ORGANIZED AS
CORPORATIONS?
Mining
Oil
Stock Exchange
Bank
Insurance
Public Utilities


Educational
Institutions

Corporations
declared
vested
public interest

with

DISTINGUISH CLOSE
CORPORATIONS FROM
REGULAR CORPORATIONS.
Close "Regula
Corpora
r"
tion
Corpor
ation
No. of
Not more No limit
stockhol than 20
ders
(Sec. 96)

Manage Can be
ment
managed
by the
stockhol
ders
(Sec. 97)

Manage
d by
Board of
Director
s

Meeting May be
s
dispense
d with
(Sec.
101)

Actual
meeting
s are
required
.

Quorum Greater
and
quorum
Voting
and
voting

requirem
ents
allowed.
(Sec. 97)
PreExtends
emptive to
all
right
stock,
including
treasury
shares
(Sec.
102)
Buyback of
shares

Does
not
extend
to
treasury
shares.

Must
May be
be > par < par
value
value
(Sec.
105)

Resoluti
on of
deadloc
ks

SEC has
the
power to
arbitrate
disputes
in
case
of
deadlock
s, upon
written
petition
by
any
stockhol
der.
(Sec.
104) Thi
s
includes

the
power to
appoint a
provision
al
director,
as
well
as
to
dissolve
the
corporati
on.
Dissolut May be
ion
petitione
d by any
stockhol
der

Generall
y
requires
a
2/3
vote of

wheneve
r any of
the acts
of
the
directors
or
officers
or those
in control
of
the
corporati
on
is
illegal,
fraudule
nt,
dishones
t,
oppressi
ve
or

the
stockhol
ders and
a
majority
vote of
the
BOD.
(Note
however
that in
case of
involunt
ary
dissoluti
on
under
Sec.

unfairly
prejudici
al to the
corporati
on
or
any
stockhol
der,
or
wheneve
r
corporat
e assets
are being
misappli
ed
or
wasted.
(Sec.
105)

121,
a
corporat
ion may
be
dissolve
d by the
SEC
upon
filing of
a
verified
complai
nt and
after
proper
notice
and
hearing.
)

WHAT IS A
PROVISIONAL DIRECTOR?
(Sec. 104)
A provisional director is
an impartial person who is
neither a stockholder nor a
creditor of the corporation
or of any subsidiary or
affiliate of the corporation,
and whose qualifications, if
any, may be determined by
the SEC. He is not a
receiver of the corporation
and does not have the title
and powers of a custodian
or receiver. However, he
has all the rights and

powers of a duly-elected
director of the corporation,
including the right to notice
of and to vote at meetings
of directors, until such time
as he shall be removed by
order of the SEC or by all
the stockholders.
(Sec.
104)
COMPARE APPRAISAL RIGHT
AND WITHDRAWAL RIGHT IN
CLOSE CORPORATIONS. (Sec.
105)
Withdr Apprais
awal al Right
Right

Type of Close
corporat corporat
ion
ion
involved

"Regular
"
corporat
ion

When
availed
of

Only the
grounds
enumer
ated in
Sec. 81
and Sec.
42

For any
reason
(Sec.
105)

Fair
Must
May be
value of be > pa < par or
shares r or
issued
issued
value
value

(Sec.
105)
Miscellaneous Provisions
(Sec. 137-149)

The SEC has the

power to issue rules and
regulations
reasonably
necessary to enable it to
perform its duties under
the Code, particularly in
the prevention of fraud
and abuses on the part of
the
controlling
stockholders,
members,
directors,
trustees
or
officers. (Sec. 143)


Whenever the SEC
conducts any examination
of the operations, books
and
records
of
any
corporation, the results
thereof must be kept
strictly confidential, unless
the law requires them to
be made public or where
they
are
necessary
evidence
before
any
court. (Sec. 142)

All domestic and

foreign corporations doing
business in the Philippines
must submit an annual
report to the SEC of its

operations,
with
a
financial statement of its
assets and liabilities and
such other requirements
as the SEC may impose.
(Sec. 141)

No right or remedy
in favor of or against, nor
any liability incurred by,
any
corporation,
its
stockholders,
members,
directors,
trustees
or
officers, may be removed
or
impaired
by
the
subsequent dissolution of
said corporation or by any
subsequent
amendment

or repeal of the Code.

(Sec. 145)

Violations of the
Corporation
Code
not
otherwise
specifically
penalized
therein
are
punishable by a fine of not
less than P 1,000.00 but
not more than P 10,000.00
or by imprisonment for not
less than 30 days but not
more than 5 years, or
both, in the discretion of
the court. If the violation
is
committed
by
a
corporation,
the
same
may be dissolved in
appropriate
proceedings

before
144)

the

SEC.

(Sec.