CORPORATION CODE OF THE PHILIPPINES
CORPORATION CODE
(BP 68, effective May 1, 1980)
GENERAL PROVISIONS
Q: What is a corporation?
A: An artificial being created by operation of law
having the right of succession, and the powers,
attributes and properties expressly authorized by
law and incident to its existence. (Sec. 2)
Q: What are the attributes of a corporation?
A:
1. It is an artificial being;
2. It is created by operation of law;
3. It enjoys the right of succession; and
4. It has the powers, attributes and
properties expressly authorized by law or
incident to its existence.
Q: What are the theories on the formation of a
corporation?
A:
1. Concession Theory or Fiat Theory
Means that a corporation was conceived
as an artificial person owing existence
through creation by a foreign power. It
has without any existence until it has
received the imprimatur of the state acting
according to law, through the SEC. (Tayag
v. Benguet Consolidated, Inc., L-23276,
November 29, 1968)
2. Theory of corporate enterprise or
economic unit The corporation is not
merely an artificial being, but more of an
aggregation of persons doing business, or
an underlying business unit. (However,
this doctrine is being used in support of
other doctrines.)
3. Genossenschaft Theory Treats a
corporation as the reality of the group as
a social and legal entity, independent of
State recognition and concession. (Tayag
v. Benguet Consolidated, Inc., L-23276,
November 29, 1968)
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Q: What are the significance of the doctrine of
separate personality?
A:
1. Liability for acts or contracts the acts of
the stockholders do not bind the
corporation unless they are properly
authorized. The obligations incurred by a
corporation, acting through its authorized
agents are its sole liabilities. The
obligations of the corporation are not the
obligations of its shareholders and
members and vice-versa. (Cease v. CA,
L-33172, October 18, 1979)
2. Right to bring actions may bring civil and
criminal actions in its own name in the
same manner as natural persons. (Art. 46,
Civil Code)
3. Right to acquire and possess property
property conveyed to or acquired by the
corporation is in law the property of the
corporation itself as a distinct legal entity
and not that of the stockholders or
members. [Art. 44(3), Civil Code]
Note: The interest of the shareholder in the properties of
the corporation is inchoate only. The interest of the
shareholder on a particular property becomes actual,
direct and existing only upon the liquidation of the assets
of the corporation and the same property is assigned to
the shareholder concerned.
Q: Are corporate property owned by
stockholders or members?
A: No. Stockholders or members are in no legal
sense the owners of corporate property which is
owned by the corporation as a distinct person.
4. Acquisition of court of jurisdiction service
of summons may be made on the
president, general manager, corporate
secretary, treasurer or in-house counsel.
(Sec. 11, Rule 14, Rules of Court).
5. Changes in individual membership
corporation remains unchanged and
unaffected in its identity by changes in its
individual membership.
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GR: No. Since a corporation is a mere legal
Q: What are the constitutional guarantees to fiction, it cannot be held liable for a crime
which a corporation is entitled? committed by its officers, since it does not have
the essential element of malice; in such case
A: the responsible officers would be criminally
a. Due process - It cannot be deprive of liable. (People v. Tan Boon Kong, 54 Phil.607)
life and property without due process of
law. (Albert v. University Publishing, L- XPN: An officer of a corporation can be held
9300, April 18, 1958) criminally liable for acts or omissions done in
behalf of the corporation only where the law
directly makes the person who fails to perform
b. Equal protection of the law (Smith,
the act in the prescribed manner expressly
Bell & Co. v. Natividad, 40 Phil. 136)
liable criminally. (Sia v. People of the
Philippines, L-30896, April 28, 1983)
c. Protection against unreasonable
searches and seizures. (Stonehill v. Q: In a complaint filed against XYZ Corporation,
Diokno, L-19550, June 19, 1967) Luzon Trading Corporation alleged that its
President & General Manager, who is also a
Note: A corporation is not entitled to invoke the right stockholder, suffered mental anguish, fright,
against self-incrimination. (Bataan Shipyard v. PCGG, L- social humiliation and serious anxiety as a
75885, May 27, 1987)
result of the tortuous acts of XYZ Corporation.
In its counterclaim, XYZ Corporation claimed to
Q: Is a corporation entitled to moral damages?
have suffered moral damages due to
besmirched reputation or goodwill as a result
A:
of Luzon Trading Corporation's complaint.
GR: A corporation is not entitled to moral
damages because it has no feelings, no
May Luzon Trading Corporation recover moral
emotions, no senses. (ABS-CBN Broadcasting
damages based on the allegations in the
Corporation v CA, G.R. No. 128690
complaint?
January 21, 1999 and Phillip Brothers Oceanic,
Inc, G.R. No. 126204, November 20, 2001 )
A: No. A corporation, being an artificial person
which has no feelings, emotions or senses, and
XPN: The corporation may recover moral
which cannot experience physical suffering or
damages under item 7 of Article 2219 of the
mental anguish, is not entitled to moral damages.
New Civil Code because said provision
expressly authorizes the recovery of moral
May XYZ Corporation recover moral damages?
damages in cases of libel, slander, or any other
form of defamation. Article 2219(7) does not
A: Yes. When a juridical person has a good
qualify whether the injured party is a natural or
reputation that is debased, resulting in social
juridical person. Therefore, a corporation, as a
humiliation, moral damages may be awarded.
juridical person, can validly complain for libel or
Moreover, goodwill can be considered an asset of
any other form of defamation and claim for
the corporation. (1998 Bar Question)
moral damages. (Filipinas Broadcasting
Network, Inc. v. AMEC-BCCM G.R. No.
Q: What is the doctrine of piercing the veil of
141994, January 17, 2005)
corporate fiction?
Q: Is a corporation liable for torts?
A: It is the doctrine that allows the State to
disregard the notion of separate personality of
A: Yes whenever a tortuous act is committed by an
corporation for justifiable reason/s.
officer or agent under the express direction or
authority of the stockholders or members acting as
Q: What are the tests in piercing the corporate
a body, or, generally, from the directors as the
veil?
governing body. (PNB v. CA, L-27155, May 18,
1978)
A:
1. Fraud Test
Q: Is a corporation liable for crimes?
2. Control Test
3. Alter-ego or Instrumentality Test
A:
4. Objective Test

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 CORPORATION CODE
5. Non-payment of separation benefits Test
Q: What are the requisites of the control test?
A:
1. Control, not mere majority or complete
stock control, but complete domination,
not only of finances but of policy and
business practice in respect to the
transaction attacked such that the
corporate entity as to this had at that time,
will or existence of its own;
2. Such control must have been used by the
defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or
other positive legal duty, or dishonest or
unjust act in contravention of plaintiffs
legal right; and
3. The control and breach of duty must
proximately cause the injury or unjust loss
complained of. (Concept Builders, Inc. v.
National Labor Relations Commission,
G.R. No. 108734, May 29, 1996)
Q: What are the effects of piercing the veil?
A: Courts will look at the corporation as an
aggregation of persons undertaking the business
as a group.
Note: When the veil of corporate fiction is pierced in
proper cases, the corporate character is not necessarily
abrogated. It continues for legitimate objectives. The
decision applies only for that particular case. (Reynoso
IV v. CA, G.R. Nos. 116124-25, November 22, 2000)
Q: Is the alleged control of a proprietor over a
corporation enough in order that the separate
juridical personality of a corporation to be
disregarded?
A: No. The alleged control of a corporation was not
evident in any particular corporate acts of the
corporation wherein the proprietor using the
corporation executed acts and powers directly
involving the corporation. For the separate juridical
personality of a corporation to be disregarded, the
wrongdoing must be clearly and convincingly
established. (Matuguina Integrated Wood
Products, Inc. v. CA, G.R. No. 98310, October 24,
1996)
Q: Nine individuals formed a private
corporation pursuant to the provisions of the
Corporation Code of the Philippines (Batas
Pambansa Blg. 68). Incorporator S was elected
director and president-general manager. Part of
his emolument is a Ford Expedition, which the
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corporation owns. After a few years, S lost his
corporate positions but he refused to return the
motor vehicle claiming that as a stockholder
with a substantial equity share, he owns that
portion of the corporate assets now in his
possession. Is the contention of S valid?
Explain.
A: No. The contention of S is not valid. The Ford
Expedition is owned by the corporation. The
corporation has a legal personality separate and
distinct from that of its stockholder. What the
corporation owns is its own property and not the
property of any stockholder even how substantial
the equity share that stockholder owns. (2000 Bar
Question)
Q: What are the cases when the doctrine of
piercing the veil of corporate fiction may be
used to disregard the personality of the
corporation?
A:
a. Where the corporation is a mere
alter ego or business conduit of a person;
or
b. `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 person.
Note: Fraud is not an element in these cases.
Q: Plaintiffs filed a collection action against "X"
Corporation. Upon execution of the court's
decision, "X" Corporation was found to be
without assets. Thereafter plaintiffs filed an
action against its present and past stockholder
"Y" Corporation which owned substantially all
of the stocks of "X" corporation. The two
corporations have the same board of directors
and "Y" Corporation financed the operations of
"X" corporation. May "Y" Corporation be held
liable for the debts of "X" Corporation? Why?
A: Yes, "Y" Corporation may be held liable for the
debts of "X" Corporation. The doctrine of piercing
the veil of corporation fiction applies to this case.
The two corporations have the same board of
directors and "Y" Corporation owned substantially
all of the stocks of "X" Corporation, which facts
justify the conclusion that the latter is merely an
extension of the personality of the former, and that
the former controls the policies of the latter. Added
to this is the fact that "Y" Corporation controls the
finances of "X" Corporation which is merely an
adjunct, business conduit or alter ego of "Y"
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Corporation. (Commissioner of Internal Revenue v. When management is not Power to do business
Norton & Harrison Company, L-17618, August 31, agreed upon, every and manage its affairs is
1964) (2001 Bar Question) partner is an agent of the vested in the BOD/BOT
partnership
Q: What are the requisites in Alter Ego or
Instrumentality Rule?
Effect of Mismanagement
A: CUP A partner as such can sue The suit against a
a co-partner who member of the BOD or
1. Control, not mere majority or complete mismanages BOT who mismanages
stock control, but complete domination, must be in the name of
not only of finances but of policy and the corporation
business practice; Extent of liability to Third persons
Partners are liable Stockholders are liable
2. Such control must have been used by the personally and subsidiarily only to the extent of the
defendant to commit fraud or wrong, to (sometimes solidarily) for shares subscribed by
perpetrate the violation of a statutory or partnership debts to third them whether paid or
other positive duty, or dishonest and persons not.
unjust act in contravention of plaintiffs
legal rights; XPN: Limited partner
Right of Succession
No right of succession Has right of succession
3. Such control and breach of duty must
Transferability of SHs interest
proximately cause the injury or unjust loss Partner cannot transfer his Stockholder has the
complained of. (Velarde v Lopez, Inc. G.R. interest in the partnership right to transfer his
No. 153886, January 14, 2004) without the consent of all shares without prior
the other existing consent of the other
Q: What are the distinctions between partners. stockholders unless the
partnership and corporation? right of first refusal is
embodied in the articles
PARTNERSHIP CORPORATION of incorporation.
As to creation Term of existence
Created by mere Created by law or by May be established for May not be formed for a
agreement of the parties operation of law any period of time term in excess of 50
Commencement of juridical personality stipulated by the partners years. May be
from the moment of from the date of extendible to not more
meeting of minds of the issuance of the than 50 years in any
partners certificate of one instance
incorporation by the Firm Name
SEC In a limited partnership it May adopt any name
Number of Incorporators is required by law to add provided:
May be organized by at Requires at least 5 the word Ltd. to its name 1. it is not identical or
least two persons incorporators but not deceptively similar to
more than 15 any registered firm
XPN: corporation sole name;
2. not contrary to
Powers
existing law.
GR: May exercise any May exercise only such
Dissolution
power authorized by the powers as may be
partners. granted by law and its May be dissolved at any Can only be dissolved
articles of incorporation, time by the will of any or with the consent of the
XPN: Acts which are implied therefrom or all of the partners. State
contrary to: - law, incidental thereto.
morals, good customs, Death, civil interdiction Death or insolvency of
public order, public policy and insolvency of a shareholders cant
partner dissolves the dissolve the corporation.
Management
partnership.
Governing Law
Governed by the Civil Governed by the
Code Corporation Code

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Q: What are the advantages and disadvantages
of a business corporation?
A: Advantages
1. Limited liability;
2. Shareholders are not general agents of
the business;
3. Easy transferability of shares;
4. Continuity of existence;
5. Its credit is strengthened by such
continuity of existence;
6. Standardized methods for the creation,
organization, management and dissolution
under corporation code;
7. Centralized management in the
BOD/BOT;
8. Feasibility of great undertakings;
9. The corporation has legal capacity to act
as a legal unit.
Disadvantages
1. Relatively complicated in formation and
management;
2. Entails high cost of formation and
operation;
3. Limited liability of shareholder serves as a
limitation to corporate creditor because
shareholders are not personally liable;
4. There is ordinarily lack of personal
element in view of the transferability of
shares;
5. There is greater degree of governmental
control and supervision that in any
other forms of business organizations;
6. In large corporations, holding rights have
become largely theoretical because of the
use of proxies and widespread ownership;
7. Stockholders have little voice in the
conduct of the business;
8. In large group, management and control
has been separated from ownership;
9. Double taxation on corporate system.
Q: Give the similarities between a partnership
and a corporation.
A:
1. Has juridical personality separate and
distinct from that of the individuals
composing it;
2. Can act only through agents;
3. Organization composed of an aggregate
of individuals;
XPN: corporation sole;
4. Distributes its profits to those who
contribute capital;
XPN: The case of an industrial partner
who also shares in partnership profits;
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OF THE PHILIPPINES
5. Can only be organized where there is a
law authorizing its organization;
6. Both are taxable as corporation, subject to
income taxation.
Q: May a corporation enter into a contract of
partnership?
A:
GR: Corporations have no power to enter
into partnership. Reason: Public policy.
In a partnership, the corporation would be
bound by the acts of the persons who are
not its duly appointed and authorized agents
and officers, which would be entirely
inconsistent with the policy of the law that
the corporation shall manage its own affairs
separately and exclusively.
XPN: The SEC allowed corporations to enter
into partnerships with other corporations and
individuals provided:
a. The authority to enter into partnership
relation is expressly conferred by the
Charter or the AOI and the nature of the
business venture to be undertaken by the
partnership is in line with the business
authorized by the charter or the AOI. (SEC
Opinions, Feb. 29, 1980, Dec. 1, 1993,
and Feb. 23, 1994.);
b. The partnership must be a limited
partnership and the corporation must be a
limited partner;
c. If it is a foreign corporation, it must obtain
a license to transact business in the
country.
Q: Does a defective incorporation result into a
partnership?
A: The answer depends on whether or not there is
a clear intent to participate in the management of
the business affairs on the part of the investor.
Parties who intends to participate or has actually
participated in the business affairs of the
proposed corporation would be considered as
partners under a de facto partnership. On the
other hand, parties who took no part
notwithstanding their subscriptions do not become
partners with other subscribers. (Pioneer
Insurance v. CA, G.R. No. 84197, July 28, 1989)
Q: May a corporation enter into a joint venture?
A: Yes. It may enter into a joint venture with
another where the nature of that venture is in line
with the business authorized by its charter.
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(Aurbach v. Sanitary Wares Manufacturing
Corporation, G.R. No. 75875, December 15, 1989)
b. Corporation created under a general
law Created under the Corporation
Code, or the old Corporation law.
c. Corporation by prescription Not
formally organized as such but has
been duly recognized by immemorial
usage as a corporation.

4. As to existence of stocks
a. Stock Corporation With capital
Q: What are the distinctions between joint
stock divided into shares and is
account and partnership?
authorized to distribute to holders
thereof of such shares dividends or
A:
allotments of the surplus profits on
JOINT ACCOUNT PARTNERSHIP
the basis of the shares held.
Has none and is Has a firm name.
conducted In the b. Non-stock corporation Does not
name of the issue stocks and does not distribute
ostensible partner. dividends to their members

Has no juridical Has juridical personality 5. As to legal status

personality and can and may sue or be sued a. De jure Organized in accordance
sue or be sued only in under its firm name with requirements of a law.
the name of the b. De facto There exist a flaw in its
ostensible partner.
incorporation but there is colorable
compliance with the requirements of
Has none. Has a common fund.
law.
The ostensible partner All general partners
manages its business have the right of c. Corporation by estoppel A group of
operations. management. persons assumes to act as a
corporation knowing it to be without
Liquidation thereof can Liquidation may, by authority to do so, and enters into a
only be done by the agreement, be entrusted transaction with a third person on the
ostensible partner. to a partner or partners. strength of such appearance. They
are liable as general partners for all
Q: What are the classes of corporation? debts, liabilities and damages incurred
or arising as a result thereof. It
A: cannot be permitted to deny its
1. As to number of components existence in an action under said
a. Aggregate Consisting of more than transaction. (Sec.21)
1 member.
6. As laws of incorporation
b. Corporation sole Consisting of 1
person or member only.
a. Domestic corporation Formed,
organized or existing under Philippine
law.
2. As to functions
a. Public Organized for the government b. Foreign corporation - Formed,
organized or existing under any laws
of a portion of a State. (E.g. cities &
other than those of the Philippines
municipalities)
and whose laws allow Filipino citizens
b. Private Formed for some private and corporation to do business in its
purpose. own country or state.
3. As to the manner of creation 7. As to relationship with other corporation
a. Corporation created by special law a. Parent or Holding Corporation Has
Directly created by Congress through the power either directly or indirectly
special law. through another corporation, to elect a
majority of the directors of such other
corporation.

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 CORPORATION CODE
b. Subsidiary A majority of its directors
can be elected, directly or indirectly,
by such other corporation.
c. Affiliated One related to another by
owning or being owned by common
management or by a long-term lease
of its properties or other control
device. An affiliation exists between a
holding or parent company and its
subsidiary, or between two
corporations owned or controlled by a
third.
8. As to purpose
a. Ecclesiastical Corporation
composing entirely of spiritual persons
like bishops, deacons and the like and
are established for the furtherance of
religion and for perpetuating the rights
of a church.
b. Lay corporation All corporations
other than ecclesiastical.
c. Eleemosynary or charitable
corporation Created not for private
gain or profit but for charitable
purposes for the administration of
charitable trust
d. Civil corporation Not for the
purpose of charity but for benefit,
pecuniary or otherwise, of its
members.
9. Special Types of Corporation
See discussion on educational and religious
corporations.
Q: What are the tests in determining the
nationality of corporations?
A:
1. Incorporation Test - Determined by the
state of incorporation, regardless of the
nationality of the stockholders.
2. Control Test Determined by the
nationality of the controlling stockholders or
members. This test is applied in times of
war.
3. Grandfather Rule Nationality is attributed
to the percentage of equity in the
corporation used in nationalized or partly
nationalized area.
Note: If at least 60% of the capital is owned by Filipino
then the corporation is of Philippine nationality.
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OF THE PHILIPPINES
Q: What is the nationality of a corporation
organized and incorporated under the laws of a
foreign country, but owned 100% by Filipinos?
A: Under the control test of corporate nationality,
this foreign corporation is of Filipino Nationality.
Where there are grounds for piercing the veil of
corporate entity, that is, disregarding the fiction, the
corporation will follow the nationality of the
controlling members or stockholders, since the
corporation will then be considered as one and the
same. (1998 Bar Question)
Q: Can private corporations be created by
specific legislative act?
A: No. P.D. 1717, which created the NEW AGRIX,
INC. violates Sec.4, Article XIV of the 1973
Constitution which prohibits the formation of a
private corporation by special legislative act, since
the new corporation was neither owned nor
controlled by the government, and that the National
Development Corporation was merely required to
extend a loan to the new corporation, and the new
stocks of the corporation were to be issued to the
old investors and stockholders of the insolvent
Agrix upon proof of their claims against the
abolished corporation. (NPC v. Philippine Veterans
Bank, 1990)
Q. What are the components of a corporation?
A:
1. Corporators Those who compose a
corporation, whether as stockholders or
members
2. Incorporators - They are those mentioned
in the Articles of Incorporation as originally
forming and composing the corporation
and who are signatories thereof.
Q: What are the qualifications of incorporators?
A:
1. Natural person;
2. Not less than 5 but not more than 15;
3. Of legal age;
4. Majority must be residents of the
Philippines; and
5. Each must own or subscribe to at least
one share. (Sec.10)
Q: Who can be incorporators?
A:
GR: Only natural persons can be incorporators.
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XPN: When otherwise allowed by law, e.g.,
Rural Banks Act of 1992, where incorporated
cooperatives are allowed to be incorporators of
rural banks.
Note: An incorporator can be corporator. Non-residents
may be incorporators because the law only requires the
majority to be residents of the Philippines.
An incorporator remains to be an incorporator even if he
will later on ceases to be a corporator or shareholder.
3. Stockholders Owners of shares of stock
in a stock corporation.
4. Members Corporators of a corporation
which has no capital stock.
5. Promoter - A person who, acting alone or
with others, takes initiative in founding and
organizing the business or enterprise of
the issuer and receives consideration
therefor. (SRC)
Q: Are promoters agents of a corporation?
A: No. Promoters are not agents of the corporation
before it comes into existence. Upon incorporation,
the practice is for the BOD to pass a resolution
ratifying the contracts entered into by the
incorporators with the promoter. Then, they
become agents of the corporation.
6. Subscriber persons who have agreed to
take and pay for original, unissued shares
of a corporation formed or to be formed.
7. Underwriter a person who guarantees
on a firm commitment and/ or declared
best effort basis the distribution and sale
of securities of any king by another
company. (Sec. 3 R.A. 8799)
Q: What are the distinctions between
corporators and incorporators?
A:
INCORPORATORS CORPORATORS
Necessarily a corporator Not necessarily an
incorporator
Signatory of the Articles of Not signatory of the
Incorporation Articles of
Incorporation
Does not cease to be an Cease to be a
incorporator upon sale of his corporator by sale
shares of his shares
5 to 15 natural persons No limit
XPN: in case of cooperative,
incorporator of rural bank
8
Originally forms part of the Not necessarily
corporation
Filipino citizenship is not a
requirement.
XPN: When engaged in a
business which is partly or
wholly nationalized where
majority must be residents
Q: What is a share of stock?
A: It is an integral unit of a capital stock which
represents proportionate interest to the
corporations assets, profits, dividends and
management.
Q: What is capital stock?
A: The amount fixed in the articles of incorporation
to be subscribed and paid in or secured to be paid
in by the stockholders, either in money, or property
o services, at the organization of the corporation,
or afterwards and upon which the corporation is to
conduct its operations.
Q: What is stated capital?
A: The capital stock divided into no par value
shares.
Q: What is paid-up capital?
A: The portion of the authorized capital stock
which has been subscribed and actually paid.
Q: What is legal capital?
A: Is the portion of the paid in capital arising from
the issuance of capital stock which cannot be
returned to the stockholders in any form during the
lifetime of the corporation.
Q: What is authorized capital stock?
A: Amount fixed in the Articles of Incorporation to
be subscribed and paid by the stockholders of the
corporation.
Q: What is subscribed capital stock?
A: The portion of the authorized capital stock that
has been subscribed but not yet fully paid and
therefore still unissued.
Q: What is outstanding capital stock?
A: Refers to the total shares of stock issued to
subscribers or stockholders, whether or not fully or
 CORPORATION CODE
partially paid except treasury shares so long as
there is a binding subscription agreement.
Q: What is additional paid in capital?
A: Is the portion in capital representing excess
over the par or stated value.
Q: What are retained earnings?
A: Represent the cumulative balance of periodic
earnings, dividends distributions, fundamental
errors and other capital adjustments.
Q: What is market value?
A: The price at which shares of capital stock are
bought and sold by investors in the market.
Q: What is book value?
A: The amount per share that each shareholder
would receive if the corporation were liquidated
without incurring any further expenses and if
assets were sold and liabilities liquidated at their
recorded amounts.
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A: Shares having no par value but have issued
value stated in the certificate or articles of
incorporation.
Q: What are the limitations on no par value
shares?
A:
1. No par value shares cannot have an
issued price of less than P5.00;
2. The entire consideration for its issuance
constitutes capital so that no part of it
should be distributed as dividends;
3. They cannot be issued as preferred
stocks;
4. They cannot be issued by banks, trust
companies, insurance companies, public
utilities and building and loan association;
5. The articles of incorporation must state
the fact that it issued no par value shares as well
as the number of said shares;
6. Once issued, they are deemed fully paid
and non-assessable. (Sec. 6)
Q: What are common shares?

Q: What are the kinds or classifications of A: These are ordinarily and usually issued stocks
share? without extraordinary rights and privileges, and
entitle the shareholder to a pro rata division of
A: profits.
1. Par value shares
2. No par value shares Q: What are preferred shares?
3. Common shares
4. Preferred shares A: These entitle the shareholder to some priority
5. Redeemable shares on dividends and asset distribution.
6. Treasury shares
7. Founders share Q: Are holders of preferred shares creditors?
8. Voting shares
9. Non-voting shares A: No. Holders thereof cannot compel the
10. Convertible shares corporation to give them dividends. The preference
11. Watered stock only applies once dividends are declared.
12. Fractional share
13. Shares in escrow Q: What are the kinds of preferred shares?

Q: What are par value shares? A:

1. Preferred shares as to assets Shares
A: Shares with a value fixed in the articles of which gives the holder preference in the
incorporation and the certificates of stock. The par distribution of the assets of the corporation
value fixes the minimum issue price of the shares. in case of liquidation; and

Note: A corporation cannot sell less than the par value
but a shareholder may sell the same less than the par
value because it is his.
Q: What are no par value shares?
a. Participating preferred shares Entitled
to participate with the common shares
in excess distribution.
b. Non-participating preferred shares
Not entitled to participate with the
common shares in excess distribution.

UNIVERSITY OF SANTO TOMAS 9

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 UST GOLDEN NOTES 2009
2. Preferred shares as to dividends Shares
which are entitled to receive dividends on
said share to the extent agreed upon
before any dividends at all are paid to the
holders of common stock.
a. Cumulative preferred shares If a
dividend is omitted in any year, it must
be made up in a later year before any
dividend may be paid on the common
shares in the later year.
b. Non-cumulative preferred shares
There is no need to make up for
undeclared dividends
Q: What are redeemable shares?
A: These are shares of stocks issued by a
corporation which said corporation can purchase or
take up from their holders as expressly provided
for in the articles of incorporation and certificates of
stock representing said shares. (Sec. 8)
Q: Can a corporation purchase its own shares?
A:
GR: Corporation cannot purchase its own
shares except out of current retained earnings.
XPN: Redeemable shares may be redeemed,
regardless of the existence of unrestricted
retained earnings (Sec. 8), provided that the
corporation has, after such redemption,
sufficient assets in its books to cover debts and
liabilities inclusive of capital stock.
Corporations issuing redeemable shares with
mandatory redemption features are required to
set up and maintain a sinking fund.
Q: What are unrestricted retained earnings?
A: These are surplus profits not subject to
encumbrance.
Q: What are the limitations on redeemable
shares?
A:
1. Issuance of redeemable shares must be
expressly provided in the articles of
incorporation;
2. The terms and conditions affecting said
shares must be stated both in the articles
10
of incorporation and in the certificates of
stock;
3. Redeemable shares may be deprived of
voting rights in the articles of
incorporation, unless otherwise provided
in the Code (Sec. 6 par. 6).
4. Redemption cannot be made if it will
cause insolvency of the corporation.
Q: What are treasury shares?
A: Shares that have been earlier issued as fully
paid and have thereafter been acquired by the
corporation by purchase, donation, and redemption
or through some lawful means. (Sec. 9)
Q: What are the other means for a corporation
to reacquire treasury shares?
A:
1. To collect or compromise unpaid
indebtedness to the corporation;
2. To eliminate fractional shares;
3. To pay dissenting or withdrawing
stockholders entitled to payment for their
shares;
4. Redemption; and
5. Close corporation.
Q: What are the limitations on treasury shares?
A:
a. They may be re-issued or sold again as
long as they are held by the corporation as
treasury shares.
b. Cannot participate in dividends because
dividends cannot be declared by the
corporation itself.
c. It cannot be represented during
stockholders meetings.
d. The amount if URE equivalent to the cost
of treasury shares being held shall be
restricted from being declared and issued
as dividends.
Note: When treasury shares are sold below its par or
issued value, there can be no watering of stock because
such watering contemplates an original issuance of
shares.
Q: What are founders' shares?
A: Shares classified as such in the articles of
incorporation which may be given special
preference in voting rights and dividend payments.
But if an exclusive right to vote and be voted for as
director is granted, this privilege is subject to
 CORPORATION CODE
approval by the SEC, and cannot exceed 5 years
from the date of approval. (Sec. 7)
Q: What are voting shares?
A: Shares with a right to vote.
Q: What are non-voting shares?
A: Shares without right to vote.
The law only authorizes the denial of voting rights
in the case of redeemable shares and preferred
shares, provided that there shall always be a class
or series of shares which have complete voting
rights.
These redeemable and preferred shares, when
such voting rights are denied, shall nevertheless
be entitled to vote on the following fundamental
matters (Sec. 6 par. 6)
Q: What are convertible shares?
A: A share that is changeable by the stockholder
from one class to another at a certain price and
within a certain period.
GR: Stockholder may demand conversion at
his pleasure.
XPN: Otherwise restricted by the articles of
incorporation.
Q: What is a watered stock?
A: A stock issued not in exchange for its equivalent
either in cash, property, share, stock dividends, or
services.
Includes stocks:
a. Issued without consideration.
b. Issued for a consideration other than
cash, the fair valuation of which is less than
its par or issued value.
c. Issued as stock dividend when there are
no sufficient retained earnings to justify it.
d. Issued as fully paid when the corporation
has received a lesser sum of money than its
par or issued value.
Q: What is a fractional share?
A: A share with a value of less than one full share.
Q: What are shares in escrow?
A: Subject to an agreement by virtue of which the
share is deposited by the grantor or his agent with
UNIVERSITY
e Derecho Civil
OF THE PHILIPPINES
a third person to be kept by the depositary until the
performance of certain condition or the happening
of a certain event contained in the agreement.
Q: Are classes of shares infinite?
A: Yes. There can be other classifications as long
as they are indicated in the AOI, stock certificate
and not contrary to law.
Q: What is the doctrine of equality of shares?
A: Where the articles of incorporation do not
provide for any distinction of the shares of stock, all
shares issued by the corporation are presumed to
be equal and enjoy the same rights and privileges
and are also subject to the same liabilities. (Sec. 6)
Q: What are the requisites of a de facto
corporation?
A:
a. A valid law under which the
corporation is organized;
b. An attempt in good faith to
incorporate under such law - Issuance of a
certificate of incorporation by the SEC
c. Assumption of corporate powers
Q: What is the nature and status of de facto
corporation?
A: The existence of a de facto corporation shall not
be inquired into collaterally in any private suit to
which such corporation may be a party. Such
inquiry may be made by the Solicitor General in a
quo warranto proceeding. (Sec. 20)
Note: However, as long as it exists, a de facto
corporation enjoys all attributes of a corporation until the
State questions its existence.
In comparison with a corporation by estoppel where the
stockholders are liable as general partners, stockholders
in a de facto corporation are liable as a de jure
corporation. Hence, up to the extent of their share
holdings.
INCORPORATION AND ORGANIZATION
OF PRIVATE CORPORATION
Q: What is incorporation?
A: It is the performance of conditions, acts, deeds,
and writings by incorporators, and the official acts,
certification or records, which give the corporation
its existence.
Q: What is the term of corporate existence?
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 UST GOLDEN NOTES 2009
A:
GR: A corporation shall exist for a period not
exceeding fifty (50) years from the date of
incorporation
XPN: unless sooner dissolved or unless said
period is extended.
Note: Extension may be made for periods not exceeding
(50) years in any single instance by an amendment of the
articles of incorporation. Provided, That no extension can
be made earlier than five (5) years prior to expiration
date unless there are justifiable reasons as may be
determined by the SEC. (Sec. 11)
Q: What are the limitations on extension of
corporate term?
A:
1. Should not be made earlier than 5 years
prior to the original or subsequent expiry
dates unless there are justifiable reasons
for earlier extension to be determined by
SEC.
2. Should be made before the expiry date.
3. Extension shall not exceed 50 years.
4. Extension must comply with procedural
requirements for amendment of AOI.
Q: When must the amendment be made?
A: Before the expiration of corporate term, for after
dissolution by expiration of the corporate term
corporation ceases ipso facto.
Q: What are the capital stock requirements?
A:
GR: No minimum authorized capital stock as
long as the paid-up capital is not less than P5,
000.00
XPN:
a. As provided by special law
b. As provided by corporation code - that at
least 25% of the authorized capital stock has
been subscribed and at least 25% of the total
subscription must be paid.
Q: Is it required that each subscriber pay 25%
of each subscribed share?
A: No. It is only required that at least 25% of the
subscribed capital must be paid.
Q: What businesses are nationalized and partly
nationalized?
12
A:
A. Zero percent (0%) Foreign Equity
1. Mass Media except recording;
2. Practice of all professions
a. Law
b. Medicine and Allied
Professions
c. Accountancy, etc.
3. Retail trade enterprises with paid-
up capital of less than US$2.5 M
(Sec. 5 of RA 8762);
4. Cooperatives (Ch. III, Art. 26 of
RA 6938);
5. Private Security Agencies (Sec. 4
of RA 5487);
6. Small-scale Mining (Sec. 3 of RA
7076);
7. Utilization of Marine Resources
(Art. XII, Sec. 2 of the Constitution);
8. Cockpits (Sec. 5 of PD 449);
9. Manufacture, repair, stockpiling
and/or distribution of nuclear weapons
(Art. II, Sec. 8 of the Constitution);
10. Manufacture, repair, stockpiling
and/or distribution of biological,
chemical and radiological weapons
and anti-personnel mines (Various
treaties to which the Philippines is a
signatory and conventions supported
by the Philippines);
11. Manufacture of firecrackers and
other pyrotechnic devices (Sec. 5 of
RA 7183).
B. Up to Sixty Percent (60%) Foreign Equity
1. Financing companies regulated by the
SEC (Sec. 6 of RA 5980 as amended
by RA 8556);
2. Investment houses regulated by the
SEC (Sec. 5 of PD 129 as amended
by RA 8366).
C. Up to Forty Percent (40%) Foreign Equity
1. Exploration, development and utilization
of natural resources (Art. XII, Sec. 2
of the Constitution);
2. Ownership of private lands (Art. XII,
Sec. 7 of the Constitution; Ch. 5, Sec.
22 of CA 141; Sec. 4 of RA 9182);
3. Operation and management of public
utilities (Art. XII, Sec. 11 of the
Constitution; Sec. 16 of CA 146);
4. Ownership/establishment and
administration of educational
 CORPORATION CODE
institutions (Art. XIV, Sec. 4 of the
Constitution);
5. Culture, production, milling, processing,
trading excepting retailing, of rice and
corn and acquiring, by barter,
purchase or otherwise, rice and corn
and the by-products thereof (Sec. 5 of
PD 194;Sec. 15 of RA 8762);
6. Contracts for the supply of materials,
goods and commodities to GOCC,
agency or municipal corporation (Sec.
1 of RA 5183)
7. Project Proponent and Facility Operator
of a BOT project requiring a public
utilities franchise (Art. XII, Sec. 11 of
the Constitution; Sec. 2a of RA 7718);
8. Ownership of condominium units where
the common areas in the
condominium project are co-owned by
the owners of the separate units or
owned by a corporation (Sec. 5 of RA
4726).
D. Up to Thirty Percent (30%) Foreign Equity
1. Advertising (Art. XVI, Sec. 11 of the
Constitution).
E. Up to Twenty-Five Percent (25%) Foreign
Equity
1. Private recruitment, whether for local
or overseas employment (Art. 27 of
PD 442);
2. Contracts for the construction and
repair of locally-funded public works
(Sec. 1 of CA 541, LOI 630) except:
a. infrastructure/development
projects covered in RA 7718;
and
b. projects which are foreign
funded or assisted and
required to undergo
international competitive
bidding (Sec. 2a of RA 7718);
3. Contracts for the construction of
defense-related structures (Sec. 1 of
CA 541).
F. Up to Twenty Percent (20%) Foreign Equity
1. Private radio communications network
(RA 3846).
Q: Define Articles of Incorporation.
A: Articles of Incorporation (AOI) is one that
defines the charter of the corporation and the
contractual relationships between the State and
the corporation, the stockholders and the State,
and between the corporation and its stockholders.
UNIVERSITY
e Derecho Civil
OF THE PHILIPPINES
Q: What are the contents of AOI?
A: NaPuP- TIDUA-ONO
1. Name of corporation;
2. Purpose/s, indicating the primary and
secondary purposes;
3. Place of principal office;
4. Term of existence;
5. Names, nationalities and residences of
incorporators;
6. Number of directors or trustees, which
shall not be less than 5 nor more than 15;
7. Names, nationalities, and residences of
the persons who shall act as directors or
trustees until the first regular ones are
elected and qualified;
8. If a stock corporation, the amount of its
authorized capital stock, number of shares
and in case the shares are par value
shares, the par value of each share;
9. Names, nationalities, number of shares,
and the amounts subscribed and paid by
each of the original subscribers which
shall not be less than 25% of authorized
capital stock;
10. If non-stock, the amount of capital, the
names, residences, and amount paid by
each contributor, which shall not be less
than 25% of total subscription; name of
treasurer elected by subscribers; and
11. Other matters as are not inconsistent with
law and which the incorporators may
deem necessary and convenient. (Sec.
14)
Q: What are the limitations in adopting
corporate name?
A:
1. The proposed name is identical or
deceptively or confusingly similar to that of
any existing corporation;
2. Any other name protected by law; or
3. Patently deceptive, confusing or contrary
to existing laws. (Sec. 18).
4. The corporate name shall contain the
word Corporation or its abbreviation
Corp. or Incorporated, or Inc.
5. The partnership name shall contain the
word Company or Co..
6. For limited partnership, the word Limited
or Ltd. Shall be included.
7. If the name or surname of a person is
used as part of a corporate or partnership
name, the consent of said person or his
heirs must be submitted except if that
OF SANTO TOMAS 13
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 UST GOLDEN NOTES 2009
person is a stockholder, member, partner
or a declared national hero.
8. The name of a dissolved firm shall not be
allowed to be used by other firms within 3
years after the approval of the dissolution
of the corporation by SEC, unless allowed
by the last stockholders representing at
least majority of the outstanding capital
stock of the dissolved firm. (SC
Memorandum Circular 14)
Q: If a corporation changes its corporate name,
is it considered a new corporation?
A: No, it is the same corporation with a different
name, and its character is in no respect changed.
(Republic Planters Bank v CA, G.R. No. 93073,
December 21, 1992)
Q: What are the basic requirements for a stock
corporation?
A:
1. Name verification slip;
2. AOI and By-laws;
3. Treasurers affidavit;
4. Registration data sheet;
5. Proof of payment of subscription like Bank
Certificate of Deposit if the paid-up capital
is in cash;
6. Favorable endorsement from proper
government agency in case of special
corporations.
Q: What is the content of a treasurers
affidavit?
A: That at least 25% of the authorized capital stock
of the corporation has been subscribed, and at
least 25% of the total subscription has been fully
paid in actual cash and/or property. Such paid-up
capital being not less than P 5,000.
Q: What are the requirements for the
amendment of AOI?
A:
1. The amendment must be for legitimate
purposes and must not be contrary to
other provisions of the Corporation Code
and Special laws;
2. Approved by majority of BOD/BOT;
3. Vote or written assent of stockholders
representing 2/3 of the outstanding capital
stock or 2/3 of members;
4. The original and amended articles
together shall contain all provisions
14
required by law to be set out in the articles
of incorporation. Such articles, as
amended, shall be indicated by
underscoring the change/s made;
5. Certification under oath by corporate
secretary and a majority of the BOD/BOT
stating the fact that said amendment/s
have been duly approved by the required
vote of the stockholders or members, shall
be submitted to the SEC;
6. Must be approved by SEC. (Sec. 16);
7. Must be accompanied by a favorable
recommendation of the appropriate
government agency in cases of:
a. Banks;
b. Banking and quasi-banking
institutions;
c. Building and loan associations;
d. Trust companies and other
financial intermediaries;
e. Insurance companies;
f. Public utilities;
g. Educational institutions; and
h. Other corporations
governed by special laws [Sec. 17
(2)]
Q: When does corporate existence commence?
A: From the date the SEC issues a certificate of
incorporation under its official seal. (Sec. 19)
Q: When does amendment of AOI take effect?
A: Upon approval by the SEC. That is upon
issuance of amended certificate of incorporation.
Q: Is it necessary that the approval of SEC be
express?
A: No, implied approval of SEC is also allowed.
Thus amendment may also take effect from the
date of filing with SEC if not acted upon within 6
months from the date of filing for a cause not
attributable to the corporation.
Q: What are the provisions of AOI that cannot
be amended?
A: Those matters referring to accomplished facts,
except to correct mistakes.
Examples:
1. Names of incorporators;
2. Names of original subscribers to
the capital stock of the corporation and
their subscribed and paid up capital;
3. Names of the original directors;
 CORPORATION CODE
4. Treasurer elected by the original
subscribers;
5. Members who contributed to the
initial capital of the non-stock corporation;
and
6. Witnesses to and
acknowledgement with AOI.
Q: What are the grounds for the rejection or
disapproval of AOI or amendment thereto by
the SEC?
A:
1. If such is not substantially in accordance
with the form prescribed;
2. The purpose/s of the corporation are
patently unconstitutional, illegal, immoral,
or contrary to government rules and
regulations;
3. The Treasurers Affidavit concerning the
amount of capital stock subscribed and/or
paid is false
4. The required percentage of ownership of
the capital stock to be owned by Filipino
citizens has not been complied with. (Sec.
17)
Q: Is there an automatic rejection of the AOI or
any amendment thereto?
A: No; the SEC shall give the incorporators a
reasonable time within which to correct or modify
the objectionable portions of the AOI or
amendment. [Sec. 17 (1)]
Q: What is the effect of non-use of corporate
charter and continuous inoperation of a
corporation?
A:
1. Failure to organize and commence
business within 2 years from incorporation
its corporate powers ceases and the
corporation shall be deemed dissolve.
2. Continuous inoperation for at least 5 years
ground for the suspension or revocation
of corporate franchise or certificate of
incorporation. (Sec. 22)
Note: The above shall not be applicable if it is due to
causes beyond the control of the corporation as
determined by SEC.
Q: Is the dissolution or revocation due to
failure to operate or inoperation automatic?
UNIVERSITY
e Derecho Civil
OF THE PHILIPPINES
A: No, SEC is of the opinion that there should be
proper proceedings for the revocation of AOI in
compliance with due process.
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
Q: What are the qualifications of a
director/trustee?
A:
A. Director
1. Must own at least 1 share of the
capital stock;
2. Must be a natural person;
3. Ownership of stock shall stand in
his name on the books of the
corporation.
Note: What is material is the legal title, not beneficial
ownership of the stock as appearing on the books of the
corporation.
B. Trustee
1. Must be a member of the non-stock
corporation.
Note: A person who does not own a stock at the time of
his election or appointment does not disqualify him as
director if he becomes a shareholder before assuming
the duties of his office. (SEC Opinions, Nov. 9, 1987 &
April 5, 1990)
Q: What are the common requirements of a
director and trustee?
A:
1. Majority of the directors/trustees must be
residents of the Philippines (Sec. 23);
2. He must not have been convicted by final
judgment of an offense punishable by
imprisonment for period exceeding 6 years
or a violation of the Corporation Code,
committed within 5 years prior to the date
of his election (Sec. 27);
3. He must be of legal age;
4. Other qualifications as may be prescribed
in Special laws or regulations or in the by-
laws of the corporation.
Q: What are the disqualifications?
A:
1. Conviction by final judgment of an offense
punishable by imprisonment exceeding 6
years;
OF SANTO TOMAS 15
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 UST GOLDEN NOTES 2009
2. Violation of the Corporation Code
committed within 5 years prior to his
election or appointment.
Q: What is the term of office of BOD/BOT?
A:
GR: The regular director shall hold office for 1
year until their successors are elected and
qualified.
XPN: If no election is held, the directors and
officers shall hold over until their successors are
elected. This is applicable to a going concern
where there is no break in the exercise of the
duties of the officers and directors. (SEC
Opinion, Dec. 15, 1989).
Q: Is permanent representation allowed in the
BOD?
A: No, directors must be elected every year.
Estoppel does not set in to legitimize what is
wrongful. (Grace Christian High School v. CA,
G.R. No. 108905, October 23, 1997)
Q: Who is an independent director?
A: He is a person who, apart from his fees and
shareholdings, is independent of management and
free from any business or other relationship which
could, or could reasonably be perceived to,
materially interfere with his exercise of independent
judgment in carrying out his responsibilities as a
director in any corporation.
Q: Who shall exercise corporate powers?
A:
GR: The BOD/BOT. (Sec. 23)
XPNs:
1. In case of an Executive Committee duly
authorized in the by-laws;
2. In case of a contracted manager which
may be an individual, a partnership, or
another corporation.
Note: In case the contracted manager is another
corporation, the special rule in Sec. 44 applies.
3. In case of close corporations, the
stockholders may manage the business of
the corporation instead by a board of
directors, if the articles of incorporation so
provide.
16
Q: Is a provision in the by-laws of the
corporation declaring a person engaged in a
competing business ineligible for nomination
for elections to the board of directors valid?
A: Yes, provided that before such nominee is
disqualified, he should be given due process to
show that he is not covered by the disqualification.
(Gokongwei v. SEC, L-45911, April 11, 1979)
Reason: The disqualification of a competition from
being elected to the board is a reasonable exercise
of corporate authority.
Q: What is business judgment rule?
A: Under this rule, the will of the majority controls
in corporate affairs, and contracts intra vires
entered into by the board of directors are binding
on the corporation and courts will not interfere
unless such contracts are so unconscionable and
oppressive as to amount to a wanton destruction of
rights of the minority. (Ingersoll v. Malabon Sugar
Co., L-16977, April 21, 1922)
Q: What are the consequences of business
judgment rule?
A:
1. Resolutions and transactions entered into
by the Board within the powers of the
corporation cannot be reversed by the
courts not even on the behest of the
stockholders.
2. Directors and officers acting within such
business judgment cannot be held
personally liable for such acts.
Q: May a director or officer be held solidarily
liable for the illegal dismissal of an employee?
A: Yes it was held that while the general rule is
that obligations incurred by a corporation, acting
through its directors, officers and employees, are
its sole liabilities, there are times when solidary
liabilities may be incurred such as in this case
where it is undisputed that petitioners had a direct
hand in the illegal dismissal of respondent
employees. They were the ones, who as high-
ranking officers and directors, signed the Board
resolution retrenching the private respondents on
the feigned ground of serious business losses that
had no basis apart from an unsigned and
unaudited profit and loss statement which had no
evidentiary value whatsoever. This is indicative of
bad faith on the part of petitioners for which they
can be held jointly and severally liable with the
corporation for all the money claims of the illegally
 CORPORATION CODE
terminated respondent employees. (Uichico v.
NLRC, G.R. No.121434, June 2, 1997)
Note: Art. 1897 of the Civil Code provides that it is well-
known principle of law that an agent who acts in behalf of
a disclosed principal within the scope of his authority
cannot be held liable to third persons.
Q: How is election of BOD/BOT made?
A:
1. At a meeting of stockholder or members
called for the election of directors or
trustees, there must be present either in
person or by representative authorized to
act by written proxy, the owners of the
majority of the outstanding capital stock or
majority of the members entitled to vote;
2. The election must be by ballot if requested;
3. A stockholder cannot be deprived in the
articles of incorporation or in the by-laws
of his statutory right to use any of the
methods of voting in the election of
directors;
4. No delinquent stock shall be voted;
5. The candidates receiving the highest
number of votes shall be declared elected.
(Sec. 24)
Q: What are the different methods of voting?
A:
1. Straight Voting every stockholder may
vote such number of shares for as many
persons as there are directors to be
elected.
2. Cumulative voting for one candidate a
stockholder is allowed to concentrate his
votes and give one candidate, as many
votes as the number of directors to be
elected multiplied by the number of his
shares shall equal.
3. Cumulative voting by distribution - a
stockholder may cumulate his shares by
multiplying the number of his shares by
the number of directors to be elected and
distribute the same among as many
candidates as he shall see fit.
Q: When is cumulative voting allowed?
A: Cumulative voting is allowed in the election of
directors of stock corporations. Cumulative voting
is allowed in non-stock corporations only if the
same is provided in the AOI.
UNIVERSITY
e Derecho Civil
OF THE PHILIPPINES
Q: What are the limitations on the stockholders
right to vote?
A:
1. Where the articles of incorporation provides
for classification of shares pursuant to Sec.
6, non-voting shares are not entitled to vote
except as provided for in the last paragraph
of Sec.6.
2. Preferred or redeemable shares may be
deprived of the right to vote unless
otherwise provided in the Code.
3. Fractional shares of stock cannot be voted.
4. Treasury shares have no voting rights as
long as they remain in the treasury.
5. Holders of stock declared delinquent by the
board of directors for unpaid subscription are
not entitled to vote or to a representation at
any stockholders meeting.
6. A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
Q: What is the required number of BOD/BOT to
constitute quorum?
A:
GR: Majority of the number of directors or
trustees.
XPN: If AOI or the by-laws provide for a greater
number.
Note: Every decision of at least a majority of the
directors or trustees present at a meeting at which there
is quorum shall be valid as a corporate act.
XPN: The election of officers which shall require
the vote of a majority of all the members of the
board. [Sec. 25 (2)]
Q: Who are corporate officers?
A:
President Must be a director at the time the
assumes office not at the time of appointment;
Treasurer May or may not be a director; as a
matter of sound corporate practice, must be a
resident
Secretary Need not be a director unless
required by the by-laws; must be a resident
and citizen of the Philippines; (Sec. 25); and
Such other officers as may be provided in the
by-laws.
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Q: Can the president of a corporation sign the
verification and certification of non-forum
shopping without the approval of the Board of
Directors?
A:
GR: Only individuals vested with authority by a
valid board resolution may sign the certificate
of non-forum shopping on behalf of a
corporation.
XPN: The following officials or employees of
the company can sign the verification and
certification without need of a board resolution:
1. The Chairperson of the Board of
Directors;
2. The President of a corporation;
3. The General Manager or Acting
General Manager;
4. Personnel Officer; and
5. An Employment Specialist in a
labor case.
Reason: They are in a position to verify the
truthfulness and correctness of the allegations in
the petition. (Cagayan Valley Drug Corporation v
CIR, G.R. No. 151413, February 13, 2008)
Q: May a suit be dismissed by virtue of lack of
authority of the general manager/treasurer to
sign the certificate of non-forum shopping from
the BOD at the time of filing the complaint but
subsequently designated by the board as the
corporations attorney-in-fact?
A: No. Although the general manager/treasurer
initially failed to show that he had the capacity to
sign the verification and institute the case on behalf
of the corporation, when confronted with such
question, he immediately presented the
Secretarys Certificate confirming her authority to
represent the company. (Pasricha v Don Luis
Dison Realty Inc., G.R. No. 136409, March 14,
2008)
Note: A board resolution appointing an attorney-in-fact to
represent the corporation in the pre-trial is not necessary
where the by-laws authorizes an officer of the corporation
to make such appointment. (Citibank, N.A. v. Chua, G.R.
No. 102300 March 17, 1993)
Q: What are the distinctions between a
corporate officer and a corporate employee?
A:
CORPORATE OFFICER CORPORATE
EMPLOYEE
Position is provided for in Employed by the action
18
the by-laws or under the of the managing officer
Corporation Code. of the corporation.
RTC acting as a special LA has jurisdiction in
commercial court has case of labor disputes.
jurisdiction over intra-
corporate controversies.
Q: In case where there are 2 lists of BOD
submitted to SEC, which one is controlling?
A: In determining whether the filing of an action
was authorized by the BOD, it is the list of directors
in the latest general information sheet as filed with
the SEC which is controlling. By express mandate
of the Corporation Code, all corporations duly
organized pursuant thereto are required to file with
the SEC the names, nationalities and residences of
the directors and officers elected. (Premium
Marble Resources, Inc. v CA, G.R. No. 96551,
November 4, 1996)
Q: May 2 or more corporate positions be held
concurrently by the same person?
A: Yes, except that no one shall act as president
and secretary or president and treasurer at the
same time.
Q: What are the requisites for removal of
directors or trustees?
A:
1. It must take place either at a regular
meeting or special meeting of the
stockholders or members called for the
purpose;
2. Previous notice to the stockholders or
members of the intention to remove a
director;
3. A vote of the stockholders representing 2/3
of outstanding capital stock or 2/3 of
members;
4. If the director was elected by the minority,
there must be cause for removal; (Sec.
28)
Q: In 1999, Corporation "A" passed a board
resolution removing "X" from his position as
manager of said corporation. The by-laws of
"A" corporation provides that the officers are
the president, vice-president, treasurer and
secretary. Upon complaint filed with the SEC, it
held that a manager could be removed by mere
resolution of the board of directors. On motion
for reconsideration, "X" alleged that he could
only be removed by the affirmative vote of the
stockholders representing 2/3 of the
 CORPORATION CODE OF THE PHILIPPINES
outstanding capital stock. Is "X's" contention 1. Willfully and knowingly voting for
legally tenable. Why? and assenting to patently unlawful acts of
the corporation; (Sec. 31)
A: No. Stockholders' approval is necessary only for 2. Gross negligence or bad faith in
the removal of the members of the Board. For the directing the affairs of the corporation;
removal of a corporate officer or employee, the (Sec. 31)
vote of the Board of Directors is sufficient for the
3. Acquiring any personal or
purpose. (2001 Bar Question)
pecuniary interest in conflict of duty; (Sec.
31)
Q: What are the ways in filling up of vacancies
in the board? 4. Consenting to the issuance of
watered stocks, or, having knowledge
A: thereof, failing to file objections with the
1. Vacancies filled up by stockholders or secretary;(Sec. 65)
members, if it is due to (a) removal; (b) 5. Agreeing or stipulating in a
expiration of term; (c) grounds other than contract to hold himself liable with the
removal or expiration of term (e.g. death, corporation; or
resignation) where the remaining directors 6. By virtue of a specific provision of
do not constitute a quorum; or (d) increase law.
in the number of directors;
2. Vacancies filled up by the remaining Q: What is the doctrine of limited liability?
directors constituting a quorum, if it is due
to causes other than those specified A: Shields the corporators from corporate liability
above. (Sec. 29) beyond their agreed contribution to the capital or
shareholding in the corporation.
Note: A director elected to fill vacancy shall serve the
unexpired term. (Sec. 29) Q: Give the rules on contracts entered into by
directors/trustees of or officers.
Q: How are directors compensated?
A:
A: 1. Contracts which are entered into by the
GR: They shall be entitled as such directors to corporation with one or more of its own
reasonable per diems only. directors/trustees, or officers. (Sec. 32);
XPN: Voidable, unless:
1. When their compensation is fixed in the by- a. The presence of such director/trustee
laws; in the board meeting approving the
2. When granted by the vote of stockholders contract was not necessary to
representing at least a majority of the constitute a quorum;
outstanding capital stock at a regular or b. The vote of such director/trustee in the
special meeting; board meeting approving the contract
3. When they are also officers of the was not necessary for the approval of
corporation. the contract;
c. The contract is fair and reasonable
XPN to XPN: under the circumstances;
In no case shall the total yearly compensation of d. In the case of an officer, there was
directors, as such directors exceed 10% of the previous authorization by the board of
net income before income tax of the corporation directors.
during the preceding year. (Sec. 30)
2. Contracts entered into between corporations
Q: What are the instances when directors are with interlocking directors (interest of said
personally liable? directors is substantial, meaning,
exceeding 20% of the outstanding capital
A: stock). (Sec. 33)
GR: Directors and officers are not solidarily
liable with the corporation. Valid, provided that:
a. The contract is not fraudulent; and
XPN: AGIWAL b. The contract is fair and reasonable
under the circumstances.
UNIVERSITY OF SANTO TOMAS 19
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Note: If the interlocking directors interest in one
corporation or corporations is nominal (not exceeding
20% of the outstanding capital stock) and in the other
substantial, then all the first 3 conditions prescribed in
Sec. 32 must be present with respect to the corporation
in which he has nominal interest.
Where any of the first two conditions is absent, said
contract must be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding capital stock
or 2/3 of the members in a meeting called for the
purpose, provided:
1. That full disclosure of the adverse interest of the
director/ trustee involved is made at such
meeting;
2. The contract is fair and reasonable under the
circumstances.
Q: What is doctrine of corporate opportunity?
A: Unless his act is ratified by stockholders
representing 2/3 of the outstanding capital stock, a
director shall refund to the corporation all the
profits he realizes on a business opportunity (Sec.
34) which:
a. The corporation is financially able to
undertake;
b. From its nature, is in line with corporations
business and is of practical advantage to
it; and
c. The corporation has an interest or a
reasonable expectancy. (2005 Bar
Question)
Note: The rule shall be applied notwithstanding the fact
that the director risked his own funds in the venture.
Q: Malyn, Schiera and Jaz are the directors
of Patio Investments, a close corporation
formed to run the Patio Cafe, an al fresco
coffee shop in Makati City. In 2000, Patio
Cafe began experiencing financial reverses,
consequently, some of the checks it issued
to its beverage distributors and employees
bounced.
In October 2003, Schiera informed Malyn that
she found a location for a second cafe in
Taguig City. Malyn objected because of the
dire financial condition of the corporation.
Sometime in April 2004, Malyn learned about
Fort Patio Cafe located in Taguig City and
that its development was undertaken by a
new corporation known as Fort Patio, Inc.,
where both Schiera and Jaz are directors.
Malyn also found that Schiera and Jaz, on
behalf of Patio Investments, had obtained a
20
loan of P500, 000.00, from PBCom Bank, for
the purpose of opening Fort Patio Cafe. This
loan was secured by the assets of Patio
Investments and personally guaranteed by
Schiera and Jaz.
Malyn then filed a corporate derivative action
before the Regional Trial Court of Makati City
against Schiera and Jaz, alleging that the two
directors had breached their fiduciary duties
by misappropriating money and assets of
Patio Investments in the operation of Fort
Patio Cafe.
Did Schiera and Jaz violate the principle of
corporate opportunity? Explain.
A: Sciera and Jaz violated the principle of
corporate opportunity, because they used Patio
Investments to obtain a loan, mortgaged its
assets and used the proceeds of the loan to
acquire a coffee shop through a corporation they
formed. (Sec. 34) (2005 Bar Question)
Q: Suppose that the by-laws of "X"
Corporation, a mining firm, provides that "The
directors shall be relieved from all liability for
any contract entered into by the corporation
with any firm in which the directors may be
interested." Thus, director "A" acquired claims
which overlapped with "X's" claims and were
necessary for the development and operation
of "X's" mining properties.
Is the by-law provision valid? Why?
A: No. It is in violation of Sec. 32 of the
Corporation Code.
What happens if director "A" is able to
consummate his mining claims over and above
that of the corporation's claims? (2001 Bar
Question)
A: "A" should account to the corporation for the
profits which he realized from the transaction. He
grabbed the business opportunity from the
corporation. (Sec. 34)
Q: What is an executive committee?
A: A body created by the by-laws and composed
of some members of the board which, subject to
the statutory limitations, has all the authority of the
board to the extent provided in the board resolution
or by-laws.
 CORPORATION CODE OF THE PHILIPPINES
Must be provided for in the by laws and composed 6. For stock corporations: issue and sell
of not less than 3 members of the board appointed stocks to subscribers and treasury stocks;
by the board. for non-stock corporations: admit
members
May act by a majority vote of all of its members. 7. To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
Note: An executive committee can only be created by deal with real and personal property,
virtue of a provision in the by-laws and that in the securities and bonds;
absence of such by-law provision, the board of directors 8. To enter into merger or consolidation;
cannot simply create or appoint an executive committee 9. To make reasonable donations for public
to perform some of its functions. (SEC Opinion, Sept 27,
1993)
welfare, hospital, charitable, cultural,
scientific, civic or similar purposes,
Q: What are the limitations on the powers of the provided that no donation is given to any
executive committee? (i) political party, (ii) candidate and (iii)
partisan political activity.
A: It cannot act on the following: 10. To establish pension, retirement, and other
1. Matters needing stockholder plans for the benefit of its directors,
approval; trustees, officers and employees basis
2. Filling up of board vacancies; of which is the labor code
3. Amendment, repeal or adoption of 11. To exercise other powers essential or
by-laws; necessary to carry out its purposes.
4. Amendment or repeal of any
Q: When does the power to sue and be sued
resolution of the Board which by its commence?
express terms is not amendable or
repealable; and A: Upon issuance by SEC of Certificate of
5. Cash dividend declaration. (Sec. Incorporation.
35)
Q: What are the requisites for a valid donation?
POWERS OF CORPORATION
A:
Q: What are the kinds of powers of a. Donation must be reasonable;
corporation? b. Must be for valid purposes including public
welfare, hospital, charitable, cultural,
A: scientific, civic or similar purposes;
1. Express Powers - Granted by c. Must not be an aid in any (i) political party,
law, Corporation Code, and its Articles of (ii) candidate and (iii) partisan political
Incorporation or Charter, and activity;
administrative regulations d. Donation must bear a reasonable relation
to the corporations interest and not be so
2. Inherent/Incidental Powers Not remote and fanciful.
expressly stated but are deemed to be
within the capacity of corporate entities. Q: Can a corporation with foreign
shareholdings acquire real property?
3. Implied/Necessary Powers Exists as a
necessary consequence of the exercise of A: Yes, provided that the capital stock of the
the express powers of the corporation or corporation is 60% owned by the Filipinos.
the pursuit of its purposes as provided for
in the Charter Q: Is the right of first refusal over the shares of
a public utility whose capitalization must be
Q: What are the general powers of corporation? 60% Filipino owned granted to a foreign
corporation under a joint venture agreement
A: SUSUCO-ABSP-MEDPO violative of the Anti-Dummy Law?
1. To sue and be sued;
2. Of succession; A: No. No law disqualifies a person from
3. To adopt and use of corporate seal; purchasing shares in a landholding corporation
4. To amend its Articles of Incorporation; even if the latter will exceed the allowed foreign
5. To adopt its by-laws; equity, what the law disqualifies is the corporation
from owning land.
UNIVERSITY OF SANTO TOMAS 21
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Q: What are the limitations as to acquisition of
real property?
A:
1. Constitutional Limitations cannot acquire
public lands except by lease.
With regard to private land, 60% of the
corporation must be owned by the
Filipinos, same with the acquisition of a
condo unit
2. Special Law Banking laws, bank cannot
acquire real property except for business
purposes or when they acquired the land
in the course of business.
Q: Can a corporation act as surety or
guarantor?
A:
GR: No.
XPN: Such guaranty may be given in the
accomplishment of any object for which the
corporation was created, or when the particular
transaction is reasonably necessary or proper in
the conduct of its business.
Q: What are the specific powers of a corporate term (Sec. 37)
corporation?
A:
1. Power to extend or shorten corporate term;
2. Increase or decrease corporate stock;
3. Incur, create, or increase bonded
indebtedness;
4. Sell, dispose, lease, encumber all or
substantially all of corporate assets;
5. Purchase or acquire own shares provided:
a. there is an unrestricted
retained earnings,
b. it is for a legitimate purpose.
6. Invest corporate funds in another
corporation or business for other purpose
other than primary purpose;
7. Power to declare dividends out of
unrestricted retained earnings;
8. Enter into management contract with
another corporation (not with an individual
or a partnership-within general powers)
whereby one corporation undertakes to
manage all or substantially all of the
business of the other corporation for a
period not longer than 5 years for any one
term. (Secs. 37-44)
22
Power to extend or shorten corporate term
May be used as means to voluntarily dissolve a
corporation
Q: What are the procedural requirements in
extending/ shortening corporate term?
A:
1. Majority vote of the BOD or BOT;
2. 2/3 of the SH representing outstanding
capital stock or by at least 2/3 of the
members in case of non-stock corporation;
3. Written notice of the proposed action and
of the time and place of the meeting shall
be addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post
office with postage prepaid, or served
personally
4. Copy of the amended AOI shall be
submitted to the SEC for its
approval;
5. In case of Special Corporation, a favorable
recommendation of appropriate
government agency. (Sec. 37)
Note: Any dissenting stockholder may exercise his
appraisal right in case of shortening or extending
Power to increase or decrease capital stock
Q: What are the procedural requirements in
increasing or decreasing capital stock?
A:
1. Majority vote of the BOD;
2. SH representing 2/3 of the outstanding
capital stock;
3. Written notice of the proposed increase
or diminution of the capital stock
and of the time and place of the
stockholders meeting at which the
proposed increase or diminution of the
capital stock must be addressed to each
stockholder at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post
office with postage prepaid, or served
personally;
4. A certificate in duplicate must be signed
by a majority vote of the directors of the
corporation and countersigned by the
chairman and the secretary of the
stockholders meeting, setting forth:
 CORPORATION CODE
a. That the foregoing requirements have
been complied with;
b. The amount of increase or diminution
of the capital stock;
c. If an increase of the capital stock, the
amount of capital stock or number of
shares of no par stock actually
subscribed, the names, nationalities
and residences of the persons
subscribing, the amount of capital
stock or number of no par stock
subscribed by each, and the amount
paid by each on his subscription in
cash or property, or the amount of
capital stock or number of shares of
no par stock allotted to each
stockholder if such increase is for the
purpose of making effective stock
dividend authorized;
d. The amount of stock represented at the
meeting; and
e. The vote authorizing the increase or
diminution of the capital stock
Note: The increase or decrease in the capital stock or
the incurring, creating or increasing bonded
indebtedness shall require prior approval of the SEC.
Q: What is the additional requirement with
respect to the increase of capital stock?
A: The application to be filed with the SEC shall be
accompanied by the sworn statement of the
treasurer of the corporation, showing that at least
25% of the amount subscribed has been paid
either in cash or property or that there has been
transferred to the corporation property the
valuation of which is equal to 25% of the
subscription.
Q: What shall be the basis of the required 25%
subscription?
A: It shall be based on the additional amount by
which the capital stock increased and not on the
total capital stock as increased.
Note: No treasurers affidavit in case of decrease in
capital stock. Corporation need not exhaust its original
capital before increasing capital stock.
Q: What are the ways of increasing/ decreasing
the capital stock?
A:
UNIVERSITY
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OF THE PHILIPPINES
a. By increasing/decreasing the number of
shares and retaining the par value;
b. By increasing/decreasing the par value of
existing shares without
increasing/decreasing the number of shares;
c. By increasing/decreasing the number of
shares and increasing/decreasing the par
value.
Incur, create or increase bonded indebtedness
Q: What is bonded indebtedness?
A: it is a long term Indebtedness secured by real or
personal property.
Note: Nature of indebtedness determines if it needs
stockholders approval. The requirements are basically
the same as the requirements for increase and decrease
of capital stock as it likewise requires the same approvals
by the directors and the stockholders.
Sell, lease, exchange, mortgage, pledge or
other disposition (SLEMPO) of all or
substantially all of corporate assets;
Q: What are the procedural requirements?
A:
1. Majority vote of the BOD or BOT;
2. Stockholders representing at least 2/3 of
the outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporation;
3. Written notice of the proposed action and
of the time and place of the meeting
addressed to each stockholder or
member at his place of residence as
shown on the books of the corporation and
deposited to the addressee in the post
office with postage prepaid, or
served personally. (Sec. 40)
Note: After such authorization or approval by the
stockholders the board may, nevertheless, in its
discretion, abandon such SLEMPO. (Sec. 40)
Q: What is meant by substantially all of
corporate assets?
A: If the corporation would be rendered incapable
of continuing the business or accomplishing the
purpose for which it was incorporated.
Q: When may the corporation forgo the
ratification by SH / members?
A:
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a. If sale is necessary in the usual and regular
course of business;
b. If the proceeds of the sale or other
disposition of such property and assets
are to be appropriated for the conduct of
the remaining business;
c. If the transaction does not cover all or
substantially all of the assets.
Q: What is the effect of transfer of all or
substantially all of assets of one corporation to
another corporation?
A:
GR: The transferee corporation of all or
substantially all of the assets of the transferor
corporation shall not be liable for the debts of the
transferor corporation.
XPNs:
1. Express or implied assumption of liabilities;
2. Merger or consolidation;
3. If the purchase was in fraud of creditors;
4.If the purchaser becomes a continuation of
the seller;
5. If there is violation of the Bulk Sales Law.
Power to acquire own shares
Q: What are the requirements?
A:
1. The acquisition is for a legitimate corporate
purpose;
2. There is unrestricted retained earnings
[URE].
Q: What are the instances where corporation
may acquire its own shares?
A:
a. To eliminate fractional shares out
of stock dividends;
b. 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;
c. To pay dissenting stockholders;
d. To acquire treasury shares;
e. Redeemable shares regardless of
existence of retained earnings;
f. To effect a decrease of capital
stock;
24
g. In close corporations, when
there is a deadlock in the management of
the business
GR: In the absence of statutory authority, the
corporation cannot acquire its own shares
XPN: SEC Opinion, October 12, 1992,
imposed the following conditions on its
exercise:
1. The capital of the corporation must not
be impaired;
2. Legitimate and proper corporate
objective is advanced;
3. Condition of the corporate affairs
warrants it;
4. Transaction is designed and carried
out in good faith
5. Interest of creditors not impaired, that
is, not violative of the trust fund
doctrine.
Invest corporate funds in another corporation
or business for other purpose other than
primary purpose
Q: What are the requirements?
A:
1. Majority vote of the BOD or BOT;
2. Stockholders representing at least 2/3 of
the outstanding capital stock or by at least
2/3 of the members in case of non-stock
corporation
3. Written notice.
Note: Investment of a corporation in a business which is
in line with its primary purpose requires only the approval
of the board.
Power to declare dividends out of unrestricted
retained earnings (URE)
Q: What are the requirements?
A:
1. Unrestricted retained earnings;
2. Resolution of the board;
3. In case of stock dividend, resolution of the
board with the concurrence of 2/3 of
outstanding capital.
Q: Who are entitled to receive dividends?
A: The stockholders of record date in so far as the
corporation is concerned. If there is no record date,
the stockholders at the time of declaration of
dividends (not at the time of payment).
 CORPORATION CODE
Q: In case of mortgaged or pledged shares?
A:
GR: The mortgagor or the pledgor has the
right to receive the dividends.
XPN: When the mortage or pledge is recorded
in the books of the corporation, in such a case
then the mortgagee or pledgee is entitled to
receive the dividends.
Q: What are the forms of dividends?
A:
1. Cash
2. Stock/Property
Note: Stock dividends are withheld from the delinquent
stockholder until his unpaid subscription is fully paid.
Cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus
cost and expenses.
The right to dividends is based on duly recorded
stockholdings.
Stockholders are entitled to dividends PRO-RATA based
on the total number of shares and not on the amount
paid on shares.
Q: When may corporation declare dividends?
A:
GR: Even if there are existing profits, BOD has
discretion to determine WON dividends are
declared.
XPN: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of
their paid-in capital stock.
XPN to the XPN:
a. Definite corporate expansion projects
approved by the board of directors
b. Corporation is prohibited under any
loan agreement with any financial
institution or creditor from declaring
dividends without its/his consent and
such consent has not yet been
secured
c. The retention is necessary under
special circumstances obtaining in the
corporation, such as when there is a
need for special reserve for probable
contingencies.
UNIVERSITY
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Q: What if there is a wrongful or illegal
declaration of dividends?
A: The Board of Directors is liable. The
stockholders should return the dividends to the
corporation (solutio indebiti).
Q: What are the sources of dividends?
A:
GR: Dividends can only be declared and aid
out of actual and bona fide unrestricted retained
earnings.
Q: What are the rules regarding other sources
of dividends?
A:
a. Gain from sale of real property - Where a
corporation sold its real property, which is
not being used for business, at a gain, the
income derived therefrom may be availed
of for dividend distribution.
b. Revaluation surplus - Increase in the value
of a fixed asset as a result of its
revaluation. It cannot be declared as
dividend unless the asset is sold.
c. Paid-in surplus - Dividends can be
declared out of the amount received in
excess of the par value of shares when
(SEC Opinion):
1. That they be declared only as stock
dividends and not cash;
2. No creditors are prejudiced; and
3. There is no impairment of capital.
d. Reduction surplus - can be a source of
dividends. Rule on paid-in surplus
is applicable.
e. No dividends can be declared out of
capital except only in two instances:
1. Liquidating dividends; and
2. Dividends from investments in
Wasting Asset Corporation.
f. Treasury shares Can be
declared as property dividends.
Q: Distinguish cash and stock dividends.
A:
CASH DIVIDENDS STOCK DIVIDENDS
Part of general fund Part of capital
Results in cash outlay No cash outlay
Not subject to levy Once issued, can be
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 UST GOLDEN NOTES 2009
levied by corporate non- stock corporation, of both the
creditors because theyre managing and the managed corporation,
part of corporate capital at a meeting duly called for the purpose
Declared only by the Declared by the board 2. Contract must be approved by the
board of directors at its with the concurrence of stockholders of the managed corporation
discretion the stockholders owning at least 2/3 of the outstanding
(majority of the quorum representing at least 2/3 of capital stock entitled to vote, 2/3 members
only, not majority of all the outstanding capital when:
the board) stock at a regular/special a. Stockholders representing the same
meeting interest in both of the managing
Does not increase the Corporate capital is and the managed corporation own or
corporate capital increased
control more than 1/3 of the total
Its declaration creates No debt is created by its
outstanding capital stock entitled to
a debt from the declaration
vote of the managing corporation;
corporation to each of
its stockholders b. Majority of the members of the BOD of
If received by Not subject to tax either the managing corporation also
individual: subject to received by individual or a constitute a majority of the BOD of the
tax; corporation managed corporation.
If received by
corporation: not GR: Management contract shall be entered
subject to tax into for a period not longer than 5 years for any
Cannot be revoked Can be revoked despite one term.
after announcement announcement but before
issuance XPN: In cases of service contracts or
Applied to the unpaid Can be withheld until operating agreements which relate to the
balance of delinquent payment of unpaid exploitation, development, exploration or
shares balance of delinquent utilization of natural resources, it may be
shares entered for such periods as may be
provided by the pertinent laws or regulations.
Q: May stock dividends be issued to a person
who is not a stockholder in payment of Q: The stockholders of People Power, Inc. (PPI)
services rendered? approved two resolutions in a special
stockholders' meeting:
A: No. Only stockholders are entitled to payment of a) Resolution increasing the authorized
stock dividends. (Nielson & Co., Inc. v. Lepanto capital stock of PPI; and
Consolidated Mining Co., G.R. No. 21763, b) Resolution authorizing the Board of
December 17, 1966). Directors to issue, for cash payment,
the new shares from the proposed
Q: What is provided for by the trust fund capital stock increase in favor of
doctrine? outside investors who are non-
stockholders.
A: The subscribed capital stock of the corporation
is a trust fund for the payment of debts of the The foregoing resolutions were approved by
corporation which the creditors have the right to stockholders representing 99% of the total
look up to satisfy their credits, and which the outstanding capital stock. The sole dissenter
corporation may not dissipate. The creditors may was Jimmy Morato who owned 1% of the stock.
sue the stockholders directly for the latters unpaid
subscription. Are the resolutions binding on the corporation
and its stockholders including Jimmy Morato,
Power to enter into management contract the dissenting stockholder?

Q: What are the requirements?
A:
1. Contract must be approved by the BOD or
BOT and by the stockholders owning at
least the majority of the outstanding
capital stock, or members in case of a
A: No. The resolutions are not binding on the
corporation and its stockholders including Jimmy
Morato. While these resolutions were approved by
the stockholders, the directors' approval, which is
required by law in such case, does not exist.
What remedies, if any, are available to Morato?

26
 CORPORATION CODE OF THE PHILIPPINES
Q: What are the remedies in case of ultra vires
A: Jimmy Morato can petition the Securities and act?
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken by A:
the Board of Directors thereunder, null and void. 1. State
(1998 Bar Question) a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the
Q: What are ultra vires acts? certificate of registration

A: Those powers that are not conferred to the 2. Stockholders

corporation by law, by its AOI and those that are a. Injunction; or
not implied or necessary or incidental to the b. Derivative suit
exercise of the powers so conferred. (Sec 45)
3. Creditors
Note: Ultra vires acts apply only in executory contracts, a. Nullification of contract in fraud of
not when the contract is already executed. creditors
Q: When does the act of the officers bind the BY-LAWS
corporation?
Q: What are by-laws?
A:
1. If it is provided in the by-laws; A: Rules and regulations or private laws enacted
2. If the act requires board approval; by the corporation to regulate, govern and control
3. Under the Doctrine of apparent authority; its own actions, affairs and concerns and of its
and stockholders or members and directors and officers
4. When the act was ratified. in relation thereto and among themselves in their
relation to it.
Q: What are the effects of an ultra vires act?
Q: What are the requisites for the validity of by-
A:
laws?
1. Executed contract courts will not set
aside or interfere with such contracts;
A:
a. Must be consistent with the Corporation
2. Executory contracts no enforcement even
Code, other pertinent laws and
at the suit of either party (void and
regulations;
unenforceable);
b. Must not be contrary to morals and public
policy;
3. Partly executed and partly executory
c. Must not impair obligations and contracts
principle of no unjust enrichment at
or property rights of stockholders;
expense of another shall apply; and
d. Must be consistent with the charter or
articles of incorporation.
4. Executory contracts apparently authorized
e. Must be reasonable.
but ultra vires the principle of estoppel
f. Must be of general application and not
shall apply.
directed against a particular individual.
Q: What are the distinctions between ultra vires
Q: In case of conflict between the by-laws and
acts and illegal acts?
the articles of incorporation which prevails?
A:
A: The AOI prevails because the by-laws is
ULTRA VIRES ACT ILLEGAL ACTS
intended merely to supplement the former.
Not necessarily Unlawful; against law,
unlawful, but outside morals, public policy,
the powers of the and public order Q: What is the binding effect of by-laws?
corporation
Can be ratified Cannot be ratified A:
Can bind the parties if Cannot bind the parties A. As to members and corporation - They have
wholly or partly the force of contract between the members
executed themselves.

UNIVERSITY OF SANTO TOMAS 27

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 UST GOLDEN NOTES 2009
They are binding only upon the corporation
and on its members and those having
direction, management and control of its
affairs.
B. As to third persons - They are not bound to
know the by-laws which are merely provisions
for the government of a corporation and
notice to them will not be presumed.
Reason: By-laws have no extra-corporate
force and are not in the nature of legislative
enactments so far as third persons are
concerned.
Q: Give the procedures in adopting by-laws.
e. The qualification, duties and compensation
of directors or trustees, officers and
employees;
f. Time for holding the annual election of
directors or trustees and the mode or
manner of giving notice thereof;
g. Manner of election or appointment and the
term of office of all officers other than
directors or trustees;
h. Penalties for violation of the by-laws
i. In case of stock corporations, the manner
of issuing certificates;
j. Such other matters as may be necessary
for the proper or convenient transaction of
its corporate business and affairs. (Sec.
47)

A: The By-laws may be adopted before or after Q: Is a corporation automatically dissolved, if

incorporation. In all cases, the By-laws shall be within 1 month after receipt of the official
effective only upon the issuance by the SEC of a notice of the issuance of the certificate of
certification that the by-laws are not inconsistent incorporation by the SEC, it failed to adopt a
with the AOI. code of by-laws?
1. Pre - incorporation It shall be approved
and signed by all the incorporators and A: No. The incorporators must be given chance to
submitted to the SEC, together with AOI. explain their neglect or omission and remedy the
same.
2. Post - incorporation
a. Vote of the majority of the stockholders Q: What are the distinctions between AOI and
representing the outstanding capital By-laws?
stock or members;
b. By-laws shall be signed by the A:
stockholders or members voting for AOI BY-LAWS
them; Essentially a contract For the internal government
c. It shall be kept in the principal office of between the of the corporation but has
the corporation and subject to the corporation and the the force of a contract
inspection of the stockholders ore stockholders/ members; between the corporation and
members during office hours between the the stockholders/ members,
d. Copy thereof, duly certified by the BOD stockholders/ member and between the
or BOT countersigned by the inter se, and between stockholders and members;
secretary of the corporation, shall be the corporation and the
filed with the SEC and shall be State;
attached with the original AOI. (Sec.
Executed before May be executed after
46)
incorporation incorporation. Sec. 46 allows
the filing of the by-laws
Q: What are the contents of by-laws? simultaneously with the
Articles of Incorporation
A: Amended by a majority May be amended by a
a. Time, place and manner of calling and of the directors/ majority vote of the BOD and
conducting regular or special meetings of trustees and majority vote of outstanding
directors or trustees; stockholders capital stock or a majority of
b. Time and manner of calling and conducting representing 2/3 of the the member in non-stock
regular or special meetings of the outstanding capital corporation
stockholder or members; stock, or 2/3 of the
c. The required quorum in meeting of members in case of
stockholders or members and the manner non-stock corporations
of voting therein; Power to amend/repeal Power to amend or repeal
d. The form for proxies of stockholders and articles cannot be by-laws or adopt new by-
members and the manner of voting them; delegated by the laws may be delegated by

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 CORPORATION CODE OF THE PHILIPPINES
stockholders/ members the 2/3 of the outstanding 2. As provided in the by-laws laws
to the board of capital stock or 2/3 of the 2. If no provision in
directors/ trustees members in the case of non- the by-laws 1
stock corporation week prior to the
meeting
Q: What are the ways of amending, repealing or
Note: Whenever for any cause, there is no person
adopting new by-laws?
authorized to call the meeting, the SEC, upon petition of
any stockholder or member on showing of good cause,
A: may issue an order to the petitioning stockholder or
1. Amendment may be made by stockholders member directing him to call a meeting of the corporation
together with the Board by majority vote by giving proper notice
of directors and owners of at least a
majority of the outstanding capital Q: Where will stockholders/members meeting
stock/members; or be held?
2. By the board only after due delegation by
the stockholders owning 2/3 of the A: Whether regular or special, the meeting shall be
outstanding capital stock/members. held in the city or municipality where the principal
Provided, that such power delegated to office of the corporation is located, and if
the board shall be considered as revoked practicable, in the principal office of the
whenever stockholders owning at least corporation. (Sec. 51)
majority of the outstanding capital stock or
members, shall vote at a regular or special Note: All proceedings had and any business transacted
meeting. (Sec. 48) at any meeting of the stockholders or members, if within
the powers or authority of the corporation, shall be valid
MEETINGS even if the meeting be improperly held or called, provided
all the stockholders or members of the corporation are
present or duly represented at the meeting.
Q: What are the requirements for a valid
meeting whether stockholders/members or the Q: When will BOD/BOT meetings be held?
board?
A:
A: DATE OF MEETING REQUIRED WRITTEN
1. Required notice (Sec. 50 for /VERBAL NOTICE
stockholders/members) and (Sec. 1. The date fixed in the 1. Within the period
53 for BOD/BOT) by-laws; or provided in the by-laws
2. In the absence of
No meeting can be validly held unless there is 2. If there is no date in provision in the by-laws 1
notice. However it may be waived. the by-laws shall be day prior to the scheduled
held monthly meeting
2. Call by authorized person; 1. Any time upon the 1. Within the period
3. Presided by the president unless call of the president; or provided in the by-laws
otherwise provided in the by-laws (Sec. 2. As provided in the 2. If no provision in the by-
54); by-laws laws 1 day prior to the
4. Required quorum (Secs. 52 & 53) scheduled meeting

Q: When will stockholders/members meeting Q: Where will stockholders/members meeting

be held? be held?

A: A: May be held anywhere in or outside of the

DATE OF MEETING REQUIRED Philippines, unless the by-laws provide otherwise.
WRITTEN NOTICE (Sec. 53)
1. Annually on date fixed in 1. Within the period
the by-laws; or provided in the by- Q: What is the required quorum?
2. If there is no date in the by- laws
laws any date in April as 2. In the absence of A:
determined by the board. provision in the by- A. Quorum in meetings of Stockholders
laws 2 weeks prior GR: Shall consist of the stockholders
to the meeting. representing majority of the outstanding
1. Any time deemed 1. Within the period capital stock or a majority of the members
necessary; or provided in the by- in the case of non-stock corporation.
UNIVERSITY OF SANTO TOMAS 29
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XPN:
1. A different quorum may be provided
for in the by-laws
2. The corporation code provides for
certain resolutions that must be
approved by at least 2/3 of the
outstanding capital stock, in which
case, majority of the outstanding
capital stock is insufficient to
constitute a quorum, presence of
the stockholders representing 2/3
of the outstanding capital stock is
necessary for such purpose.
B. Quorum in meetings of Board
GR: Quorum is 1/2+1 of the total numbers
of the board as fixed in the AOI.
XPN: A different quorum may be provided
for in the by-laws.
Note: The quorum is the same even if there is vacancy in
the board
If the required quorum is not satisfied because of the
vacancy in the board, the remedy is for the stockholder to
fill the vacancy
Q: What should be the basis of quorum for a
stockholders meetingthe outstanding capital
stock as indicated in the articles of
incorporation or that contained in the
companys stock and transfer book?
A: As held, quorum is based on the totality of the
shares which have been subscribed and issued,
whether it be founders shares or common shares.
In the instant case, two figures are being pitted
against each other those contained in the
articles of incorporation, and those listed in the
stock and transfer book. (Lanuza v. CA, G.R. No.
131394, Mar 28, 2005)
Q: Is teleconferencing or video-conferencing
valid?
A: Yes under RA 8792, provided:
1. Directors must express their intent on
teleconferencing;
2. Proper identification of those attending;
3. The corporate secretary must safeguard
the integrity of the meeting by recording it.
There is no violation of the Anti-Wire
Tapping Act (RA 4200) because all the
parties to the board meeting are aware
that all the communications are recorded.
(Memo. Cir. No. 15, 11/20/01)
30
Q: Do pledgors, and mortgagors of shares of
stocks have the right to attend and vote at
meetings of stockholders?
A:
GR: Yes.
XPN: If expressly given by the pledgor or
mortgagor such right in writing which is
recorded on the corporate books.
Q: Do executors, receivers, and other legal
representatives have the right to attend and
vote at meetings of stockholders?
A: Yes, as long as they are duly appointed by the
court in behalf of the stockholders or members
without need of any written proxy. (Sec. 55)
Q: What are the rules in voting when there is
joint ownership of stock?
A:
1. Shares of stock owned jointly by 2 or more
persons
GR: In order to vote the same, the
consent of ALL the co-owners shall be
necessary;
XPN: If there is a written proxy, signed by
all the co-owners, authorizing one or some
of them or any other person to vote such
shares.
2. Shares are owned in an and/or capacity
by the holders any one of the joint
owners can vote thereof or appoint a
proxy. (Sec. 56)
Q: Do treasury shares have voting rights?
A: Treasury shares shall have no voting right as
long as such shares remain in the treasury. (Sec.
57)
Q: Who has the right to vote sequestered
shares?
A:
GR: The stockholder of record is entitled to
vote.
XPN: When the sequestered shares in the
name of the private individuals or entities are
shown, prima facie, to have been:
1. Originally government shares; or
 CORPORATION CODE
2. Purchased with public funds or
those affected with public interest.
In such cases, the government shall vote the
shares. (Republic of the Philippines v.
Sandiganbayan, G.R. No. 152154, July, 15, 2003)
Q: What is a proxy?
A: A written authorization given by one person to
another so that the second person can act for the
first such as that given by the shareholder to
someone else to represent him and vote his shares
at a shareholders meeting.
By-laws may prescribe the form of proxy.
Q: What are the requirements for a valid proxy?
A:
1. Proxies shall be in writing and shall be signed
by the stockholders or members;
2. The proxy shall be filed within 5 days before
the scheduled meeting with the corporate
secretary;
3. Unless otherwise provided (continuing in
nature) in the proxy, it shall be valid only for the
meeting for which it is intended; AND
4. No proxy shall be valid and effective for a
period longer than 5 years at any one time.
(Sec.58 BP 68 as amended by Sec.20 SRC)
Note: Stockholders or members may attend and vote in
their meetings by proxy (Sec.58); directors cannot do so.
Directors must always act in person. (Sec. 25).
Q: Is the power to appoint a proxy a personal
right?
A: Yes. The right to vote is inseparable from the
right of ownership of stock. Therefore, to be valid,
a proxy must have been given by the person who
is the legal owner of the stock and is entitled to
vote. (SEC Opinion, Sept. 9, 1991)
Q: What is the duration of proxy?
A:
1. Specific proxy Refers to one where the
authority granted the proxy holder is
merely for a particular meeting on a
specific date.
2. Continuing proxy Is not limited to a
specific meeting and it continues for a
certain period but not more that 5 years at
any one time.
UNIVERSITY
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OF THE PHILIPPINES
3. By-laws may provide for a shorter duration
of a continuing proxy.
Q: When may the right to vote by proxy be
exercised?
A:
1. Election of the BOD/BOT;
2. Voting in case of joint ownership of stock;
3. Voting by trustee under VTA;
4. Pledge or mortgage of shares;
5. As provided for in its by-laws.
Q: What is the extent of authority of a proxy?
A:
a. General proxy A general discretionary
power to attend and vote at annual
meeting.
b. Limited proxy Restrict the authority to
vote to specified matters only and may
direct the manner in which the vote shall
be cast
Q: How and when is a proxy revoked?
A: A proxy may be revoked in writing, orally or by
conduct.
GR: One who has given a proxy the right to
vote may revoke the same at anytime.
XPN: Said proxy is coupled with interest even
if though it may appear by its terms to be
irrevocable.
Q: What is a voting trust?
A: It is an agreement whereby one or more
stockholders transfer their shares of stocks to a
trustee, who thereby acquires for a period of time
the voting rights (and/or any other rights) over such
shares; and in return, trust certificates are given to
the stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.
Q: What are the specific limitations on VTA?
A:
1. VTA can be entered into for a period not
exceeding 5 years at any one time except
when it is a condition in a loan agreement
but shall automatically expire upon full
payment of the loan;
2. It must be in writing and notarized, and
shall specify the terms and conditions
thereof; (Sec. 59)
OF SANTO TOMAS 31
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Q: What are the procedural requirements for is given, other rights
VTA to be valid? as well
The trust may vote in The proxy must vote in
A: person or by proxy person
1. Execution and notarization of the VTA unless the
stating the terms and conditions thereof; agreement provides
2. A certified copy of such agreement shall otherwise
be filed with the corporation and with the The agreement must Proxy need not be
SEC, otherwise, it is ineffective and be notarized notarized
unenforceable; Trustee is not limited Proxy can only act at a
3. The certificate/s of stock covered by the to act at any specified stockholders
particular meeting meeting (if not continuing)
VTA shall be cancelled;
The share certificate No cancellation of the
4. A new certificate shall be issued in the
shall be cancelled certificate shall be made
name of the trustee/s stating that they are
and transferred to
issued pursuant to the VTA; the trustee
5. The transfer shall be noted in the books of A trustee can vote A proxy can only vote in
the corporation, that it is made pursuant to and exercise all the the absence of the owners
said VTA; rights of the of the stock
6. The trustee/s shall execute and deliver to stockholder even
the transferors voting trust certificates, when the latter is
which shall be transferable in the same present
manner and with the same effect as May not be revoked May be revoked anytime
certificates of stock; for the duration unless coupled with
7. No VTA shall be entered into for the interest
purpose of circumventing the law against The voting right is The right to vote is
monopolies and illegal combinations in divorced from the inherent in or inseparable
restraint of trade or used for purposes of ownership of stocks from the right to ownership
fraud. (Sec. 59) of stock
An agreement must A proxy is usually of
Note: Unless expressly renewed, all rights granted in a not exceed 5 years shorter duration although
voting trust agreement shall automatically expire at the at any one time under Sec. 58 it cannot
end of the agreed period, and the voting trust certificates except when the exceed 5 years at any one
as well as the certificates of stock in the name of the same is made a time
trustee or trustees shall thereby be deemed canceled condition of a loan.
and new certificates of stock shall be reissued in the
name of the transferors. STOCKS
The voting trustee or trustees may vote by proxy unless
the agreement provides otherwise. (Sec. 59) Q: How does one become a shareholder in a
corporation?
Q: What are the distinctions between a voting
trust agreement and proxy? A: A person becomes a shareholder the moment
he:
A: 1. Enters into a subscription contract with an
VOTING TRUST PROXY existing corporation (he is a stockholder
The agreement is Revocable anytime except upon acceptance of the corporation of his
irrevocable one with interest offer to subscribe whether the
Trustee acquires Proxy has no legal title to consideration is fully paid or not),
legal title to the the shares of the principal 2. Purchase treasury shares from the
shares of the corporation, or
transferring 3. Acquires shares from existing
stockholder shareholders by sale or any other
The trustee votes as The proxy holder votes as contract.
owner rather than as agent
mere agent Q: What is a subscription contract?
Qualifies as a Not qualified to be a
director director A: It is a contract for the acquisition of unissued
stock in an existing corporation or a corporation still
Not only right to vote Only right to vote is given to be formed. It is considered as such

32
 CORPORATION CODE OF THE PHILIPPINES
notwithstanding the fact that the parties refer to it has not fully paid the fulfillment of the terms of
as purchase or some other contract. (Sec. 60) subscription the sale and registration
thereof in the books of
Q: What are the kinds of subscription the corporation
contracts? Cannot be released from The corporation may
his subscription unless all rescind or cancel the
A: stockholders agree contract for non-
thereto and no creditor is fulfillment of the contract
1. Pre-incorporation subscription entered
thereby prejudiced by the buyer
into before the incorporation and
Corporate creditors may Creditors may not
irrevocable for a period of six (6) months proceed against the proceed against the
from the date of subscription unless all subscriber for his unpaid buyer for the unpaid
other subscribers consent or if the subscription in case the price as there is no
corporation failed to materialize. It cannot assets f the corporation privity of contract
also be revoked after filing the Articles of are not sufficient to pay between them
Incorporation with the SEC (Sec. 61) their claims
May be in any form, In purchase amounting to
2. Post-incorporation subscription entered written or oral, express or more than 500 pesos,
into after incorporation. implied, and therefore, the Statute of Frauds
not covered by the shall apply
Q: What are valid considerations in a Statute of Frauds
subscription agreement? Subscription price are Purchase price does not
considered assets of the become assets of the
A: corporation, hence, corporation unless fully
1. Cash; creditors may go after paid
them
2. Property;
3. Labor or services actually rendered to the
corporation; Q: What is the Doctrine of Individuality of
4. Prior corporate obligations; Subscription?
5. Amounts transferred from unrestricted
retained earnings to stated capital (in case A: A subscription is one entire and indivisible
of declaration of stock dividends); whole contract. It cannot be divided into portions.
6. Outstanding shares in exchange for stocks (Sec. 64)
in the event of reclassification or
conversion. Q: What is the rule on pre-incorporation
subscription agreements?
Note: Promissory notes or future services are not valid
considerations. A:
GR: Subscription of shares of stock of a
Q: Janice rendered some consultancy work for corporation still to be formed shall be irrevocable
XYZ Corporation. Her compensation included for a period of at least 6 months from date of
shares of stock therein. Can XYZ Corporation subscription.
issue shares of stock to pay for the services of
Janice as its consultant? Discuss your answer. XPN:
1. All of the other subscribers consent to the
A: The corporation can issue shares of stock to revocation; and
pay for actually performed services to the 2. Incorporation of said corporation fails to
corporation, but not for future services or services materialize within said period or within a
yet to be performed. [Sec. 62(3]) (2005 Bar longer period as may be stipulated in the
Question) contract of subscription; provided that no
pre-incorporation subscription may be
Q: What are the distinctions between revoked after the submission of the articles
subscription and purchase? of incorporation to the SEC. (Sec. 61)

A: XPN to XPN: When creditors will be prejudiced

Subscription Purchase thereby.
May be made before or May be made only after
after incorporation incorporation
Subscriber becomes a Buyer does not become
stockholder even if he a stockholder until the
UNIVERSITY OF SANTO TOMAS 33
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Q: In case of no-par value shares, how much
must be subscribed and paid-up upon
incorporation?
A: 25% of the total number of shares must be
subscribed. (Sec. 13) Since no-par value shares
are deemed fully paid and non-assessable and the
holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto,
then the subscription of no par value shares must
be paid in full instead of 25% thereof.
Q: Who are required to pay their subscription in
full?
A:
1. Non-resident foreign subscribers upon
incorporation must pay in full their
subscriptions unless their unpaid
subscriptions are guaranteed by a surety
bond or by an assumption by a resident
stockholder through an affidavit of liability.
b. Indorsement by the owner and his
agent;
c. To be valid to third parties, the
transfer must be recorded in the
books of the corporation (Rural Bank
of Lipa v. Court of Appeals, G.R. No.
124535, September 28, 2001).
2. If not represented by the
certificate (such as when the certificate
has not yet been issued or where for some
reason is not in the possession of the
stockholder).
a. By means of deed of assignment: and
b. Such is duly recorded in the books of
the corporation.
Note: registration in the stock and transfer book is not
necessary if the conveyance is by way of chattel
mortgage. However, there must be due registration with
the Register of Deeeds (Chua Guan v. Samahan, L-
42091, November 2, 1935)

2. In case of no-par value shares, they are Q: What if the transfer is not recorded, is it
deemed fully paid and non-assessable. valid?

Q: Is a stockholder entitled to the shares of A: Only insofar as the parties to the transfer are
stock subscribed although not fully paid? concerned.

A: Yes. As long as the shares are not considered Note: Hence, the corporation has the right to refuse to
delinquent, they are entitled to all rights granted to recognize any transfer of shares which has not been duly
registered in the stock and transfer book. (Sec. 63)
it whether or not the subscribed capital stocks are
fully paid.
Q: When may the corporation validly refuse to
register the transfer of shares?
Q: What are the distinctions between capital
stock from shares of stock?
A: No shares of stock against which the
corporation holds any unpaid claim shall be
A:
transferable in the books of the corporation. The
CAPITAL STOCK SHARES OF STOCK
unpaid claim refers to the unpaid subscription on
The amount paid in or It is an interest or right
the shares transferred and not to any other
secured to be paid in which an owner has in the
by the stockholders management of the
indebtedness that the transferor may have to the
upon which the corporation, and its surplus corporation. (Sec. 63)
corporation is to profits, and, on dissolution,
conduct its operation. in all of its assets remaining Q: "A" is the registered owner of Stock
It is the property of the after payment of its debt. Certificate No. 000011. He entrusted the
corporation itself The stockholder may own possession of said certificate to his best friend
(monetary value). the shares even if he is not "B" who borrowed the said endorsed certificate
holding a certificate of stock. to support B's application for passport (or for a
purpose other than transfer). But "B" sold the
certificate to "X", a bona fide purchaser who
Q: How are shares of stock transferred? relied on the endorsed certificates and believed
him to be the owner thereof.
A:
1. If represented by a certificate, the Can "A" claim the shares of stocks from "X"?
following must be strictly complied with: Explain.
a. Delivery of the certificate;

34
 CORPORATION CODE
A: No. Since the shares were already transferred
to "B", "A" cannot claim the shares of stock from
"X". The certificate of stock covering said shares
have been duly endorsed by "A" and entrusted by
him to "B". By his said acts, "A" is now estopped
from claiming said shares from "X", a bona fide
purchaser who relied on the endorsement by A of
the certificate of stock.
Would your answer be the same if "A" lost the
stock certificate in question or if it was stolen
from him?
A: Yes. In the case where the certificate of stock
was lost or stolen from "A", "A" has a right to claim
the certificate of stock from the thief who has no
right or title to the same. "One who has lost any
movable or has been unlawfully deprived thereof,
may recover it from the person in possession of the
same." (Art. 559, NCC) (2001 Bar Question)
Q: What if there is no certificate of stock, how
can shares be transferred?
A: It can be transferred by deed of
sale/assignment.
Q: When may a certificate of stock be issued?
A: It shall be issued until the full amount of his
subscription together with interest and expenses
has been paid. (Sec. 64)
Q: When should the balance of the subscription
be paid?
A: It should be paid:
a. on the date specified in the subscription
contract, without need of demand or call,
or;
b. if no date of payment has been specified,
on the date specified on the call made by
the BOD; or,
c. when insolvency supervenes upon a
corporation and the court assumes
jurisdiction to wind it up, all unpaid
subscriptions become payable on
demand, and are at once recoverable,
without necessity of any prior call.
Q: Will the unpaid balance accrue interest?
A: Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions
from the date of subscription, if so required by, and
at the rate of interest fixed in the by-laws. If no rate
of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. (Sec. 66)
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OF THE PHILIPPINES
Q: What is the effect of failure to pay the
subscription on the date it is due?
A: It shall render the entire balance due and
payable and shall make the SH liable for interest at
the legal rate on such balance, unless a different
rate of interest is provided in the by-laws.
Q: When will the share become delinquent?
A: If within 30 days from the date of payment
specified in the contract of subscription or from the
date stated in the call made by the board, no
payment is made, all stocks covered by said
subscription shall thereupon become delinquent
and shall be subject to sale unless the BOD orders
otherwise.
Q: What does the term unpaid claim mean (for
purposes of declaring the shareholder of
delinquent?
A: It refers to any unpaid subscription, and not to
any indebtedness which a subscriber or
stockholder may owe the corporation arising from
any other transaction. (China Banking Corporation
v. Court of Appeals, et. al., G.R. No. 117604,
March 26, 1997)
Q: What are the remedies of corporations to
enforce payment of stocks?
A:
1. Extra-judicial sale at public auction this
remedy is available upon failure of the
stockholder to pay the unpaid subscription
or balance thereof within the grace period
of 30 days from the date specified in the
contract of subscription, or in the absence
of such date, from the date stated in the
call made by the BOD. (Sec. 67)
2. Judicial action. (Sec. 70)
3. Collection from cash dividends and
withholding of stock dividends. (Sec. 43)
Q: What is the procedure for collection and
delinquency sale?
A:
1. Call whenever required must be made by
the Board.
2. Notices of call The stockholders are
given notice of the board resolution by the
corporate secretary, either personally or
by registered mail.
UNIVERSITY OF SANTO TOMAS 35
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3. If the stockholders concerned do not pay
within thirty days from the date specified in
the contract of subscription or in the call,
all the stocks covered by the subscription
shall be declared delinquent and shall be
subject to sale under Sec.68.
4. Notice of delinquency served on the
subscribers either personally or registered
mail and publication in a newspaper of
general circulation in the province or city
where principal office is located once a
week for two consecutive weeks.
Note: Notice shall state the amount due on each
subscription plus accrued interest, and the date, time and
place of the sale which shall not be less than 30 days nor
more than 60 days from the date the stocks become
delinquent.
5. Sale such number of shares as may be
necessary to pay the amount due on
subscription, plus interest and other
amounts due, will be sold at public
auction.
Note: The highest bidder is the person offering to pay full
amount of the balance on the subscription and other
amount that are due for the smallest number of shares or
fraction of a share. (Secs. 67-70)
Q: When may delinquency sale be
discontinued?
A: If the delinquent SH pays the unpaid balance
plus interest, costs and expenses on or before the
date specified for the sale or when the BOD orders
otherwise.
Q: What are the effects of stock delinquency?
A: Deprives the stockholder the right:
1. To be voted for; or
2. To be entitled to vote; or
3. To representation at any stockholders'
meeting.
Delinquent stockholder shall not be entitled to any
of the rights of a stockholder but he shall still be
entitled to receive dividends.
Note: If the delinquent stockholder is a director, he shall
continue be a director but he cannot run for re-election.
Q: Are delinquent shares entitled to dividends?
A: Yes, provided that any cash dividends due on
delinquent stocks shall first be applied to the
unpaid balance on the subscription plus costs and
36
expenses while stock dividends shall be withheld
from the delinquent stockholder until his unpaid
subscription is fully paid. (Sec. 43 par. 1)
Q: Ace Cruz subscribe to 100,000 shares of
stock of JP Development Corporation, which
has a par value of P1 per share. He paid
P25,000 and promised to pay the balance
before December 31, 2008. JP Development
Corporation declared a cash dividend on
October 15, 2008, payable on December 1,
2008.
For how many shares is Ace Cruz entitled to be
paid cash dividends? Explain.
A: Ace is entitled to be paid in cash dividends to
the extent of his 100,000 shares of stock. Shares
of stock become delinquent if the stockholder fails
to pay within 30 days from the date provided in the
subscription contract. Before the stocks are
declared delinquent, he is entitled to the exercise
of all his rights including the right to receive cash
dividends.
On December 1, 2008, can Ace Cruz compel JP
Development Corporation to issue to him the
stock certificate corresponding to the P25,000
paid by him?
A: No. The stock certificates will be issued only if
and when the full amount of his subscription
together with interests if any has been paid. (2008
Bar Question)
Q: Who is the highest bidder in a public auction
sale of delinquent sale?
A: The one who offers to pay the full amount of the
balance of the subscription together with accrued
interest, costs, and expenses of sale, for the
smallest number of shares.
Q: What is an underwriting agreement?
A: It is an agreement between a corporation and a
third person, termed the underwriter, by which the
latter agrees, for a certain compensation, to take a
stipulated amount of stocks or bonds, specified in
the underwriting agreement, if such securities are
not taken by those to whom they are first offered.
Q: What are the distinctions between
underwriting agreement and stock subscription
agreement?
A:
 CORPORATION CODE OF THE PHILIPPINES
UNDERWRITING STOCK SUBSCRIPTION f. Issuance of stock dividends;
AGREEMENT AGREEMENT g. Corporate mergers or consolidation;
The signers obligate The obligation of the h. Voluntary dissolution of the
themselves to take the signer to the purchasers corporation whether or not creditors
shares of stock which and to the public is are prejudiced.
cannot be sold. absolute.
Underwriters are usually There is no commission. 2. 2/3 of outstanding stocks
allowed a commission. a. Removal of directors;
In pure underwriting He becomes a stockholder b. Ratification of contract with director or
agreement, the signer of the company and is officer where first two requisites of
can refuse to become a liable to pay the amount Sec. 32 are lacking;
stockholder/ member of due on the stock. c. Where stockholders of managed
the company in
corporation own more than 1/3 of
pursuance of his
outstanding capital stock entitled to
contract with the
promoter. vote of the managing corporation are
also the majority of the board of
STOCKHOLDERS managed corporation, such 2/3 vote is
required to approve management
contract;
Q: What are the rights of a stockholder?
d. Delegation to the board to amend,
A: repeal by-laws or adopt new by-laws.
1. To vote at the stockholders meetings either
in person or by proxy; (Sec. 58) 3. Majority of Outstanding stocks with
2. To receive his proportionate share of the majority of the board
profits of the corporation by way of a. Approval of management contract;
dividends; (Sec. 43) b. Amendment to by-laws, repeal of by-
3. To approve the declaration of stock laws, adoption of new by-laws.
dividends; (Sec. 43)
4. Pre-emptive right; (Sec. 39) 4. Majority of outstanding stock
5. To inspect corporate books and records; a. For quorum in electing members of
(Sec. 74 par. 2) the board by cumulative voting;
6. To financial statements; (Sec. 75) b. Grant of compensation to members of
7. Appraisal right; (Sec. 81) the board;
8. To participate proportionately in the c. Adoption of original by-laws;
distribution of the corporate assets upon d. Revocation of delegated authority to
corporate liquidation following the the board of directors to amend or
dissolution and winding up; (Sec. 122) repeal or adopt new by-laws.
9. To file a derivative actions.
10. To the issuance of a certificate of stock 5. The right to vote of non-voting
upon compliance with the conditions which stockholders may be limited or broadened
entitle him to one. (SEC Opinion January to the extent specified in the AI or by-laws,
8, 1987) however, they may still vote in instances
specified in the code.
Q: Give the summary of vote requirements for
stockholders Q: What are the limitations on the
stockholders right to vote?
A:
1. 2/3 of Outstanding Stock along with A:
majority of the board: a. Where the articles of incorporation
a. Amendment of AOI; provides for classification of shares
b. Extending and Shortening Corporate pursuant to Sec.6, non-voting shares are
Term not entitled to vote except as provided for
c. Increasing / Decreasing capital stock / in the last paragraph of Sec.6.
bonded indebtedness; b. Preferred or redeemable shares may be
d. Sale or disposition of all, substantially deprived of the right to vote unless
all of corporate assets; otherwise provided in the Code. (Sec. 6)
e. Investment of corporate funds in c. Fractional shares of stock cannot be voted
another corporation or for a purpose unless they constitute at least one full
other than main purpose; share. (Sec. 41)
UNIVERSITY OF SANTO TOMAS 37
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d. Treasury shares have no voting rights as
long as they remain in the treasury (Sec.
57)
e. Holders of stock declared delinquent by
the board of directors for unpaid
subscription are not entitled to vote or a
representation at any stockholders
meeting. (Sec. 67)
f. A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation. (Sec. 63)
g. Stock held in escrow cannot be voted until
the performances of a certain condition or
the happening of a certain event as
contained in the agreement. (SEC
Opinion)
Q: What is a pooling agreement?
A: This is an agreement, also known as voting
agreement, entered into by and between 2 or
more stockholders to make their shares vote in
the same manner. This usually relates to
election of directors where parties often
provide for arbitration in case of disagreement.
This does not involve a transfer of stocks but is
merely a private agreement. (Sec. 100)
Note: Parties thereto remain the legal owners of their
stocks with the right to vote them, although contractually
they each have bound themselves to vote in accordance
with the decision of the majority in the pool.
Q: When are pooling agreements valid?
A: As long as they do not limit the discretion of the
BOD in the management of corporate affairs or
work any fraud against stockholders not party to
the contract.
Q: What is a pre-emptive right?
A: It is the right of SH to subscribe to the issuance
or disposition of shares in proportion to their
respective shareholding so that their interest in the
corporation will be maintained, before said shares
are offered to a non-stockholder.
Q: When is the pre-emptive right not available?
A:
a. To shares to be issued in compliance with
laws requiring stock offerings or minimum
stock ownership by the public;
b. Not extend to shares to be issued in good
faith with the approval of the stockholders
representing 2/3 of the outstanding capital
stock, in exchange for property needed for
38
corporate purposes or in payment of a
previously contracted debt;
c. Shall not take effect if denied in the
Articles of Incorporation or an amendment
thereto.
d. It does not apply to shares that are being
reoffered by the corporation after they
were initially offered together with all the
shares. (Benito v. SEC, L-56655, July 25,
1983)
Note: Includes not only new shares in pursuance of an
increase of capital stock but would cover the issue of
previously unissued shares which form part of the
existing capital stock as well as treasury shares. (SEC
2000 Opinion).
Q: Suppose that "X" Corporation has already
issued the 1000 originally authorized shares of
the corporation so that its Board of Directors
and stockholders wish to increase "X's"
authorized capital stock. After complying with
the requirements of the law on increase of
capital stock, "X" issued an additional 1000
shares of the same value.
Assume that stockholder "A" presently holds
200 out of the 1000 original shares. Would "A"
have a pre-emptive right to 200 of the new
issue of 1000 shares? Why?
A: Yes, "A" would have a pre-emptive right to 200
of the new issue of 1000 shares. "A" is a
stockholder of record holding 200 shares in "X"
Corporation. According to the Corporation Code,
each stockholder has the pre-emptive right to all
issues of shares made by the corporation in
proportion to the number of shares he holds on
record in the corporation.
When should stockholder "A" exercise the pre-
emptive right?
A: Pre-emptive right must be exercised in
accordance with the Articles of Incorporation or the
By-Laws. When the Articles of Incorporation and
the By-Laws are silent, the Board may fix a
reasonable time within which the stockholders may
exercise the right.
Q: ABC Corporation has an authorized capital
stock of One Million (P1,000,000.00) Pesos
divided into 50,000 common shares and 50,000
preferred shares. At its inception, the
Corporation offered for subscription all the
common shares. However, only 40,000 shares
were subscribed. Recently, the directors
thought of raising additional capital and
 CORPORATION CODE
decided to offer to the public all the authorized
shares of the Corporation at their market value.
Would Mr. X, a stockholder holding 4,000
shares, have pre-emptive rights to the
remaining 10,000 shares?
A: Yes. Mr. X, a stockholder holding 4,000 shares,
has pre-emptive right to the remaining 10,000
shares. All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings. The ruling in Benito
v. Datu and Tan v. SEC to the effect that pre-
emptive right applies only to issuance of shares in
connection with an increase in capital is no longer
a valid rule under the Corporation Code. The facts
in those cases happened during the regime of the
old Corporation Law.
Alternative answer:
No, Mr. X does not have pre-emptive right over the
remaining 10,000 shares because these shares
have already been offered at incorporation and he
chose not to subscribe to them. He, therefore, has
waived his right thereto and the corporation may
offer them to anyone.
Would Mr. X have pre-emptive rights to the
50,000 preferred shares?
A: Yes. Mr. X would have pre-emptive rights to the
50,000 preferred shares. All stockholders of a
stock corporation shall enjoy pre-emptive right to
subscribe to all issues or disposition of shares of
any class, in proportion to their respective
shareholdings.
Alternative answer:
Yes, Mr. X has preemptive right over the 50,000
preferred shares because they were not offered
before by the corporation for subscription.
Assuming that the existing stockholders are
entitled to pre-emptive rights, at what price will
the shares be offered?
A: The shares will be offered to existing stock-
holders, who are entitled to pre-emptive right, at a
price fixed by the Board of Directors, which shall
not be less than the par value of such shares.
Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
shares, may the stockholder invoke his
appraisal rights and demand payment for his
shareholdings?
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A: No, the stockholder may not exercise appraisal
right because the matter that he dissented from is
not one of those where right of appraisal is
available under the Corporation Code. (1999 Bar
Question)
Q: The Board of Directors of ABC, Inc., a
domestic corporation, passed a resolution
authorizing additional issuance of shares of
stocks without notice nor approval of the
stockholders. DX, a stockholder, objected to
the issuance, contending that it violated his
right of pre-emption to the unissued shares. Is
his contention tenable? Explain briefly.
A: Yes. DXs contention is tenable. Under Sec.39
of the Corporation Code, all stockholders of ABC,
Inc. enjoy pre-emptive right to subscribe to all
issues of shares of any class, including the
reissuance of treasury shares in proportion to their
respective shareholdings. (2004 Bar Question)
Q: What is the right of first refusal?
A: A stockholder who may wish to sell or assign his
shares must first offer the shares to the corporation
or to the other existing stockholders of the
corporation, under terms and considerations which
are reasonable, and only when the corporation or
the other stockholders do not or fail to exercise
their option, is the offering stockholder at liberty to
dispose of his shares to third parties.
Q: What is the right of first option?
A: A right that grants to the corporation the right to
buy the shares at a fixed price and only valid if
made on reasonable terms and consideration.
Q: What is the difference between pre-emptive
right and right of first refusal?
A: In pre-emptive right, it is the corporation that
offers the shares to stockholders. It is exercised
with or without a provision in the AOI. The objective
is to preserve and maintain unimpaired and
undiluted the SHs relative and proportionate voting
strength and control.
In right of first refusal, it is the SH who shall offer
his shares to the other SH before the same are
offered to the public or non-stockholders. It is a
right available to SH to be offered the shares of
another SH before it is offered to other party. The
right to be exercised must be indicated in the AOI
and printed in the stock certificate.
Q: Is there pre-emptive right on the re-issuance
of treasury shares?
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 UST GOLDEN NOTES 2009
A: Yes. When a corporation reacquires its own
shares which thereby become treasury shares, all
shareholders are entitled to pre-emptive right when
the corporation reissues or sells these treasury
shares. The re-issuance of treasury shares is not
among the exception provided by Sec. 39 when
pre-emptive right does not exist.
Q: May pre-emptive right be waived by the
stockholder?
A: Yes when the stockholder fails to exercise his
pre-emptive right after being notified and given an
opportunity to avail of such right.
Note: The shareholder must either exercise the right and
increase the investment, or dispose of the right by sale or
it will lapse and the shareholders proportionate interest
will be diluted.
Q: Is a provision stating that the consent of the
board must be obtained before transfer of
shares valid?
A: No. A provision that requires any stockholder
who wishes to sell, assign or dispose of his shares
in the corporation to first obtain the consent of the
board of directors or other stockholders of the
corporation is void as it unduly restrains the
exercise of the stockholder of his right to transfer.
Q: What is a buy-back agreement?
A: This exists in situations when shares are given
or assigned to officers or employees under the
condition that should they resign or be terminated
from employment, the corporation shall be granted
the right to buy-back the shares. It is valid only on
reasonable terms and consideration.
Q: May a provision in the articles of
incorporation validly grant a right of first
refusal in favor of other stockholders?
A: Yes, the SEC, as a matter of policy, allows
restrictions on transfer of shares in the articles of
incorporation if the same is necessary and
convenient to the attainment of the objective for
which the company was incorporated, unless
palpably unreasonable under the circumstances.
(SEC Opinion, February 20, 1995)
Q: What is the basis of SHs right
inspection?
A: Their ownership of the assets and property of
the corporation whether this ownership or interest
40
be termed equitable, beneficial or quasi-ownership.
It is predicated upon the necessity of self-
protection.
Q: What books are required to be kept by a
corporation?
A:
1. Book for the minutes of SH and BOD
meetings
2. Record of transactions
3. Stock and transfer book
4. Other books required to be kept
Q: What are the contents of a stock and
transfer book?
A:
1. All stocks in the name of the stockholders
alphabetically arranged;
2. Amount paid and unpaid on all stocks and
the date of payment of any installment;
3. Alienation, sale or transfer of stocks;
4. Other entries as the by-laws may
prescribe.
Q: What are the limitations on the right of
inspection of a stockholder?
A:
1. The inspection should only be for a
purpose germane to his interest as a SH.
2. It must be exercised in good faith.
3. It should be done during reasonable office
hours on business days.
4. It should follow the formalities that may be
required in the by-laws.
5. The right does not extend to trade secrets.
6. It is subject to limitations under special
laws.
ex. Secrecy of Bank Deposits.
Q: Who is authorized to make entries in the
stock and transfer book?
A: The corporate secretary. Hence, entries made
by the Chairman or President are invalid. (Torres,
Jr. v. Court of Appeals, G.R. No. 120138,
September 5, 1997)
Q: Who may make proper entries?
A: The obligation and duty to make entries on the
of STB falls on the Corporate Secretary. If the
corporate secretary refuses to comply, the
stockholder may rightfully bring suit to compel
performance. The stockholder cannot take the law
on to his hands; otherwise such entry shall be void.
 CORPORATION CODE
(Torres, Jr. v. Court of Appeals, G.R. No. 120138,
September 5, 1997)
Q: What is the probative value of the stock and
transfer book?
A: The stock and transfer book is the best
evidence of the transactions that must be entered
or stated therein. However, the entries are
considered prima facie evidence only and may be
subject to proof to the contrary (Bitong v. Court of
Appeals, G.R. No. 123553, July 13, 199).
Q: What is appraisal right?
A: The right to withdraw from the corporation and
demand payment of the fair value of his shares
after dissenting from certain corporate acts
involving fundamental changes in corporate
structure. (Sec. 81)
Q: In what instances may the right of appraisal
be exercised?
A: In case any amendment to the articles of
incorporation which has the effect of:
a. Changing or restricting the rights of any
stockholder or class of shares; or
b. Authorizing preferences in any respect
superior to those of outstanding shares of
any class; or
c. Extending or shortening the term of
corporate existence;
d. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all
or substantially all of the corporate
property and assets as provided in the
Code; and
e. In case of merger or consolidation
f. Extension or shortening of the term of the
corporation; (Sec. 37)
g. In case of investment of corporate funds in
another corporation or business or for any
other purpose; (Sec. 42)
h. In cases of close corporations.
Q: What are the requirements for the
successful exercise of appraisal right?
A:
1. Must have dissented from the proposed
corporate act so such dissenting
stockholder must be present in the SH
meeting where the corporate act was
proposed.
2. Make a written demand on the corporation
within 30 days after the date on which the
vote was taken for payment of the fair
value of his shares. Failure to make the
UNIVERSITY
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demand within such period shall be
deemed a waiver of the appraisal right.
3. Existence of unrestricted retained
earnings or surplus profits.
XPN: In case of a close corporation which
only requires that it has assets and the
payment of the fair value of the shares to
the dissenting SH will not result to its
insolvency.
4. Within ten (10) days after demanding
payment for his shares, a dissenting
stockholder shall submit the certificates of
stock representing his shares to the
corporation for notation thereon that such
shares are dissenting shares. (Sec. 86)
His failure to do so shall, at the option of
the corporation, terminate his rights.
5. After payment, certificate of stock of said
shares shall be cancelled and acquired as
treasury shares.
Q: When will the dissenting stockholder lose
his right of appraisal?
A:
1. If the dissenting stockholder fails to make
a written demand on the corporation within
30 days after the date on which the vote
was taken for payment on the fair value of
his shares. Such failure shall be deemed
to be a waiver of his appraisal right.
2. When the dissenting stockholder fails to
submit his certificates of stock
representing his shares for notation
thereon that such shares are dissenting
shares, within 10 days after demand for
payment for his shares.
3. When the shares of the dissenting
stockholder are transferred and the
certificates covering said shares are
consequently cancelled.
Q: What are the rules in case of disagreement
on the fair value of shares?
A: If within a period of sixty (60) days from the date
the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by
three (3) disinterested persons one of whom shall
be named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall
be final.
The award shall be paid by the corporation within
thirty (30) days after such award is made No
payment shall be made to any dissenting
OF SANTO TOMAS 41
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 UST GOLDEN NOTES 2009
stockholder unless the corporation has unrestricted
retained earnings in its books to cover such
payment
Upon payment by the corporation of the agreed or
awarded price, the stockholder shall forthwith
transfer his shares to the corporation.
Q: What is the effect of the demand and
termination of right?
A: From the time of demand for payment of the fair
value of a stockholder's shares until either the
abandonment of the corporate action involved or
the purchase of the said shares by the corporation,
all rights accruing to such shares, including voting
and dividend rights, shall be suspended, except
the right of such stockholder to receive payment of
the fair value thereof, provided, if the dissenting
stockholder is not paid the value of his shares
within 30 days after the award, his voting and
dividend rights shall immediately be restored.
(Sec.83)
Q: When will the right to payment of the fair
value be lost?
A: It ceases in the following instances:
1. If such demand for payment is withdrawn
with the consent of the corporation;
2. If the proposed corporate action is
abandoned or rescinded by the
corporation;
3. If the proposed corporate action
disapproved by the SEC where such
approval is necessary;
4. If the SEC determines that such
stockholder is not entitled to the appraisal
right. (Sec. 84)
Note: In such instances, his status as a stockholder shall
thereupon be restored, and all dividend distributions
which would have accrued on his shares shall be paid to
him.
Q: Who bears the cost of appraisal?
A:
GR: Costs of appraisal shall be borne by the
corporation
XPN: The costs shall be borne by the
stockholder, when the fair value ascertained
by the appraisers is approximately the same
as the price which the corporation may have
offered to pay the stockholder. (Sec. 85)
42
Note: In the case of an action to recover such fair value,
all costs and expenses shall be assessed against the
corporation, unless the refusal of the stockholder to
receive payment was unjustified.
Q: What is the effect of the transfer from the
dissenting stockholder?
A:
1. The rights of the transferor as a dissenting
stockholder shall cease;
2. The transferee shall have all the rights of a
regular stockholder; and
3. All dividend distributions which would have
accrued on such shares shall be paid to
the transferee.
Q: A dissenting stockholder transfers his
shares of stock and his certificate of stock
bearing the notation that such shares are
dissenting shares, are consequently cancelled.
Will the transferee acquire the right of the
transferor to demand from the corporation the
payment of the fair value of the shares?
A: No, because upon transfer of the shares of the
dissenting stockholder, his right as a dissenting
stockholder shall cease and the transferee shall
have all the rights of a regular stockholder and all
dividend distributions which would have accrued on
such shares shall be paid to the transferee. The
transfer of shares is an abandonment by the
dissenting stockholder of his appraisal right.
Q: What are derivative actions?
A: Those brought by one or more
stockholders/members in the name and on behalf
of the corporation to redress wrongs committed
against it, or protect/vindicate corporate rights
whenever the officials of the corporation refuse to
sue, or the ones to be sued, or has control of the
corporation.
Q: What are the requisites of a derivative
action?
A:
1. The party bringing suit should be
a shareholder as of the time of the act or
transaction complained of;
2. He has exhausted intra-corporate
remedies; and
3. The cause of action actually
devolves on the corporation, the
wrongdoing or harm having been caused
to the corporation and not to the particular
stockholder bringing the suit.
 CORPORATION CODE OF THE PHILIPPINES
committed the breach of trust against the interests
Note: A person who is merely holding in trust the shares of the corporation would be to emasculate the right
of stock in her name cannot file a derivative suit, since of the minority stockholders to seek redress for the
she is not a stockholder in her own right. (Bitong v. Court corporation. Filing such action as a derivative suit
of Appeals, G.R. No. 123553, July 13, 1998)
even by a lone stockholder is one of the
protections extended by law to minority
Personal injury suffered by the stockholders cannot
stockholders against abuses of the majority.
disqualify them from filing a derivative suit on
behalf of the corporation. It merely gives rise to an
additional cause of action for damages against the Q: What is the nature of a certificate of stock?
erring directors. (Gochan v. Young, G.R. No.
131889, March 12, 2001) A: A certificate of stock is the paper representative
or tangible evidence of the stock itself and of the
Q: What are individual actions? various interests therein. (Tan v. SEC, G.R. No.
95696, March 3, 1992)
A: Those brought by the shareholder in his own
name against the corporation when a wrong is
directly inflicted against him.
Q: What are shares of stock?
Q: What are representative actions?
A: It is an interest or right which an owner has in
A: These brought by the stockholder in behalf of the management of the corporation and its surplus
himself and all other stockholders similarly situated profits, and, on dissolution, in all of its assets
when a wrong is committed against a group of remaining after the payment of its debt. The
stockholders. stockholder may own the share even if he is not
holding a certificate of stock
Q: AA, a minority stockholder, filed a suit
against BB, CC, DD, and EE, the holders of Q: What are the distinctions between shares of
majority shares of MOP Corporation, for stock from certificates of stock?
alleged misappropriation of corporate funds.
The complaint averred, inter alia, that MOP A:
Corporation is the corporation in whose behalf CERTIFICATE OF
SHARE OF STOCK
and for whose benefit the derivative suit is STOCK
brought. In their capacity as members of the Unit of interest in a Evidence of the
corporation holders ownership of
Board of Directors, the majority stockholders
the stock and of his
adopted a resolution authorizing MOP
right as a shareholder
Corporation to withdraw the suit. Pursuant to and of his extent
said resolution, the corporate counsel filed a specified therein.
Motion to Dismiss in the name of the MOP It is an incorporeal or It is concrete and
Corporation. Should the motion be granted or intangible property tangible
denied? Reason briefly.
It may be issued by the It may be issued only
A: No. The requisites for a valid derivative suit corporation even if the if the
exist in this case. First, AA was exempt from subscription is not fully paid. subscription is fully
exhausting his remedies within the corporation and paid.
did not have a demand on the Board of Directors Situs is generally the state 4. The situs may be
for the latter to sue. Here, such a demand would where the corporation has the place where it is
its domicile located or at the
be futile, since the directors who comprise the
a. For purposes of domicile of the owner
majority (namely BB, CC, DD and EE are the ones
taxation, situs is the state even though the
guilty of the wrong complained of. Second, AA in which they are domicile of the owner,
appears to be a stockholder at the time of the permanently kept except when
alleged misappropriation of corporate funds. Third, regardless of the domicile corporation is
the suit is brought on behalf and for the benefit of of the owner or where the domiciled elsewhere.
MOP Corporation. In this connection, it was held in corporation was
Conmart (Phils.) Inc. vs SEC, 198 SCRA 73 that to organized. (see also sec.
grant to the corporation concerned the right of 104 of R.A. No. 8424)
withdrawing or dismissing the suit, at the instance b. To register the chattel
of the majority stockholders and directors who mortgages over the
themselves are the persons alleged to have shares of stock the situs is

UNIVERSITY OF SANTO TOMAS 43

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 UST GOLDEN NOTES 2009
the duty/promise in which
the corporation has its
principal place of
business.
c. For purposes of
execution, it is the
domicile of the
corporation.
Q: What are uncertificated shares?
A: Security evidenced by electronic or similar
records.
Note: The SEC may, by specific rule or regulation, allow
corporations to provide in their AOI and by-laws for the
use of uncertified securities. (Sec.43.2 of RA 8799 (May
2000) also known as the Securities Regulation Code)
Q: What are the special rules on registered or
listed shares?
A: Notwithstanding Sec. 63 of the Corporation
Code, under Sec. 43.1 of the Securities Regulation
Code, a corporation whose shares of stock are
registered pursuant to the Code or listed on a stock
exchange may:
a. If so resolved by its BOD and agreed by a
shareholder, issue shares to, or record the
transfer of some or all of its shares into the
name of said shareholders, investors or,
securities intermediary in the form of
uncertificated securities;
b. The use of uncertificated securities shall
be without prejudice to the rights of the
securities intermediary subsequently to
require the corporation to issue a
certificate in respect of any shares
recorded in its name; and
c. If so provided in its articles of
incorporation and by-laws, issue all of the
shares of a particular class in the form of
uncertificated securities and subject to a
condition that investors may not require
the corporation to issue a certificate in
respect of any shares recorded in their
name.
Q: Is a stock certificate negotiable?
A: No. It is regarded as quasi-negotiable in the
sense that it may be transferred by endorsement,
coupled with delivery.
Q: Why is a stock certificate not negotiable?
A: Because the holder thereof takes it without
prejudice to such rights or defenses as the
44
registered owners or transferors creditor may have
under the law, except insofar as such rights or
defenses are subject to the limitations imposed by
the principles governing estoppel. (De los Santos
v. Republic, L-4818, February 28, 1955)
Note: A sale of shares of stock, even when coupled with
endorsement and delivery of the covering stock
certificates, shall not be valid, except as between the
parties, until it is entered and noted upon the books of
the corporation and that such sale is absolutely void and
hence as good as non-existent, as far as third parties
and the corporation is concerned.
Q: May a stockholder bring suit to compel the
corporate secretary to register valid transfer of
stocks? To be valid and binding on the
corporation and third parties, is the attachment
or mortgage of shares of stock required to be
registered in the corporations stock and
transfer book?
A: Yes, it is the corporate secretarys duty and
obligation to register transfers of stocks.
Note: An attachment or mortgage of shares of stock
need not be registered in the corporations stock and
transfer book inasmuch as a chattel mortgage over
shares of stock does a transfer of shares and that only
absolute transfers of shares of stock are required to be
recorded in the corporations stock and transfer book in
order to have force and effect as against third persons.
(Chemphil Export and Import Corporation v. Court
of Appeals, G.R. Nos. 112438-39, December 12,
1995)
Q: What is the rule on right to issuance?
A: A corporation may now, in the absence of
provisions in their by-laws to the contrary, apply
payments made by subscribers-stockholders,
either as:
a. Full payment for the corresponding
number of shares of stock, the par value
of each of which is covered by such
payment; or
b. Payment pro-rata to each and all the
entire number of shares subscribed for.
(Baltazar v. Lingayen Gulf Electric Power
Co., Inc, L-16236-38, June 30, 1965)
Q: What is the rule on illegal transfer?
A: Since certificates of stock are only quasi-
negotiable, they do not afford the same protection
to a holder in good faith and for value who receives
them in the course of their being negotiated, and
that the ownership of the true owner would be
preferred, except only when the circumstances
 CORPORATION CODE
showed that the true owner was guilty of
negligence in causing the loss.
Q: Four months before his death, PX assigned
100 shares of stock registered in his name in
favor of his wife and his children. They then
brought the deed of assignment to the proper
corporate officers for registration with the
request for the transfer in the corporation's
stock and transfer books of the assigned
shares, the cancellation of the stock
certificates in PX's name, and the issuance of
new stock certificates in the names of his wife
and his children as the new owners. The
officers of the Corporation denied the request
on the ground that another heir is contesting
the validity of the deed of assignment. May the
Corporation be compelled by mandamus to
register the shares of stock in the names of the
assignees? Explain briefly.
A: Yes. The corporation may be compelled by
mandamus to register in the shares of stock in the
name of the assignee. The only legal limitation
imposed by Sec. 63 of the Corporation Code is
when the Corporation holds any unpaid claim
against the shares intended to be transferred. The
alleged claim of another heir of PX is not sufficient
to deny the issuance of new certificates of stock to
his wife and children. It would be otherwise if the
transferees title to the shares has no prima facie
validity or is uncertain.
Q: What is the rule with regard to lost or
destroyed Certificates?
A: While Sec. 73 of the Corporation Code appears
to be mandatory, the same admits of exceptions,
such that a corporation may voluntarily issue a new
certificate in lieu of the original certificate of stock
which has been lost without complying with the
requirements under Sec. 73 of the Corporation
Code, provided that the corporation is certain as to
the real owner of the shares to whom the new
certificate shall be issued. It would be an internal
matter for the corporation to find measures in
ascertaining who are the real owners of stock for
purposes of liquidation. It is well-settled that
unless proven otherwise, the STB of the
corporation is the best evidence to establish stock
ownership. (SEC Opinion, January 28, 1999)
Q: What is the procedure for the issuance of
new certificate of stock for certificate that was
lost, destroyed or stolen?
A:
1. The registered owner must make an
affidavit in triplicate stating the
UNIVERSITY
e Derecho Civil
OF THE PHILIPPINES
circumstances as to how it was lost, stolen
or destroyed, number of shares
represented by the certificate, serial
number of the certificate, and name of the
corporation that issued it.
2. The corporate secretary shall verify the
same. A notice shall also be published
once a week for 3 consecutive weeks in a
newspaper of general circulation.
3. If after 1 year from the last publication, no
contest has been presented or made
against the issuance of new certificate, the
old certificates shall be cancelled and new
ones be issued. Exception to the 1 year
period: if the registered owner files a bond
or other security effective for period of 1
year, in which case, new certificate may
be issued even before expiration of 1 year
but still upon the discretion of the
corporation.
Q: A stockholder claimed that his stock
certificate was lost. After going through with
the procedure for the issuance of lost
certificate, and no contest was presented
within 1 year from the last publication, the
corporation issued a new certificate of stock in
lieu of the supposed lost certificate. The
stockholder immediately sold his shares and
endorsed the replacement certificate to a
buyer. It turned out that the original certificate
was not lost, but sold and endorsed to another
person. (a) May the corporation be made liable
by the aggrieved party? (b) Who will have a
better right over the shares, the endorsee of the
original certificate or the endorsee of the
replacement certificate?
A:
a. No, the corporation cannot be made liable.
Except in cases of fraud, bad faith, or
negligence on the part of the corporation
and its officers, no action may be brought
against any corporation which have issued
certificates of stock in lieu of those lost,
stolen, or destroyed pursuant to the
procedure prescribed by law.
b. The endorsee of the replacement
certificate has a better right to the shares.
After expiration of 1 year form he date of
the last publication, and no contest has
been presented to said corporation
regarding said certificate, the right to make
such contest has been barred and said
corporation already cancelled in its books
the certificate which have been lost,
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stolen, or destroyed and issued in lieu Q: What are the distinctions between merger
thereof new certificate. and consolidation?

Q: What if there are oppositions on the A: In both merger and consolidation, 2 or more
issuance of new certificates, what may the corporations are involved and merged or
corporation do? consolidated into one corporation. Their
distinctions are as follows:
A: The corporation may file an interpleader
proceeding to compel the parties to litigate among Merger Consolidation
themselves. All of the constituent All consolidated
corporations involved corporations are
Q: May the corporation be sued for the are dissolved except dissolved without
issuance of new certificates of stock? one exception
No new corporation is A single new
A: No action shall prosper against the corporation created corporation emerges
for the issuance of new certificates unless there is The surviving All assets, liabilities,
bad faith, fraud or negligence present. corporation acquires and capital stock of all
all the assets, consolidated
Q: When will the issuance of new certificate of liabilities, and capital corporations are
stock in lieu of the one lost be suspended? stock of all transferred to the new
constituent corporation
A: corporations
a. if a contest has been presented to the
corporation; or Q: What is the procedure for merger or
b. if an action is pending in court regarding consolidation?
the ownership of the lost certificate. (Sec.
73 par. 2) A:
1. Board of each corporation shall draw
Q: What are the obligations of stockholders? up a plan of merger or consolidation,
setting forth:
A: a. Names of corporations involved
1. Liability to the corporation for unpaid (constituent corporations)
subscription; (Secs. 67-70) b. Terms and mode of carrying it out
2. Liability to the corporation for interest on c. Statement of changes, if any, in the
unpaid subscription if so required by the present articles of surviving
by-laws; (Sec. 66) corporation; or the articles of the new
3. Liability to the creditors of the corporation corporation to be formed in case of
for unpaid subscription; (Sec. 60) consolidation.
4. Liability for watered stock; (Sec. 65) 2. Plan for merger or consolidation shall
5. Liability for dividends unlawfully paid; be approved by majority vote of each board
(Sec. 43) of the concerned corporations at separate
6. Liability for failure to create corporation. meetings.
(Sec. 10) 3. The same shall be submitted for
approval by the stockholders or members
MERGER AND CONSOLIDATION of each such corporation at separate
corporate meetings duly called for the
Q: What is merger? purpose. Notice should be given to all
stockholders or members at least two (2)
A: One where a corporation absorbs the other and weeks prior to date of meeting, either
remains in existence while others are dissolved. personally or by registered mail.
(Sec. 76) 4. Affirmative vote of 2/3 of the
outstanding capital stock in case of stock
Q: What is consolidation? corporations, or 2/3 of the members of a
non-stock corporation shall be required.
A: One where a new corporation is created, and 5. Dissenting stockholders may exercise
consolidating corporations are extinguished. (Sec. the right of appraisal. But if Board
76)

46
 CORPORATION CODE
abandons the plan to merge or consolidate,
such right is extinguished.
6. Any amendment to the plan must be
approved by the same votes of the board
members of trustees and stockholders or
members required for the original plan.
7. After such approval, Articles of Merger
or Articles of Consolidation shall be
executed by each of the constituent
corporations, signed by president or VP
and certified by secretary or assistant
secretary, setting forth:
a. Plan of merger or consolidation
b. In stock corporation, the number of
shares outstanding; in non-stock, the
number of members
c. As to each corporation, number of
shares or members voting for and
against such plan, respectively
8. Four copies of the Articles of Merger
or Consolidation shall be submitted to the
SEC for approval. Special corporations
like banks, insurance companies, building
and loan associations, etc., need the prior
approval of the respective government
agency concerned.
9. If SEC is satisfied that the merger or
consolidation is legal, it shall issue the
Certificate of Merger or the Certificate of
Incorporation, as the case may be.
10. If the SEC is not satisfied, it shall set a
hearing, giving due notice to all the
corporations concerned. (Secs. 76-79)
Q: When shall the merger or consolidation
become effective?
A: Upon issuance by the SEC of the certificate of
merger and consolidation. In the case of merger or
consolidation of banks or banking institutions,
building and loan associations, trust companies,
insurance companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained.
Q: Two corporations agreed to merge. They
then executed an agreement specifying the
surviving corporation and the absorbed
corporation. Under the agreement of merger
dated November 5, 1998, the surviving
corporation acquired all the rights, properties
and liabilities of the absorbed corporation.
What would happen to the absorbed
corporation? Must the absorbed corporation
UNIVERSITY
e Derecho Civil
OF THE PHILIPPINES
undertake dissolution and the winding up
procedures? Explain your answer.
A: No. There is no need for the absorbed corpo-
ration to undertake dissolution and winding up
procedure. As a result of the merger, the absorbed
corporation is automatically dissolved and its
assets and liabilities are acquired and assumed by
the surviving corporation.
Pending the approval of the merger by the
Securities and Exchange Commission, may the
surviving corporation already institute suits to
collect all receivables due to the absorbed
corporation from its customers? Explain your
answer.
A: No. The merger does not become effective until
and unless approved by the Securities and
Exchange Commission. Before the approval by the
SEC of the merger, the surviving corporation has
no legal personality with respect to receivables due
to the absorbed corporation.
A case was filed against a customer to collect
on the promissory note issued by him after the
date of the merger agreement. The customer
raised the defense that while the receivables as
of the date of the merger agreement were
transferred to the surviving corporation, those
receivables which were created after the
merger agreement remained to be owned by
the absorbed corporation. These receivables
would be distributed to the stockholders
conformably with the dissolution and
liquidation procedures under the New
Corporation Code? Discuss the merits of this
argument.
A: Whether the receivable was incurred by the
absorbed corporation before or after the merger
agreement, or before or after the approval thereof
by the SEC, the said receivable would still belong
to the surviving corporation under Sec.80 of the
Corporation Code which does not make any
distinction as to the assets and liabilities of the
absorbed corporation that the surviving corporation
would inherit. (1999 Bar Question)
Q: What are the limitations on corporate
combinations?
A:
1. Should not create monopolies
2. Should not eliminate free and healthy
competition
3. Should not create illegal combinations such
as banks combined with insurance
companies
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 UST GOLDEN NOTES 2009
Q: What are the effects of merger or
consolidation?
A:
1. Transfer of Legal Title to corporate
property - Dissolution results in the
transfer of legal title to properties in the
stockholder who become co-owners
thereof;
2. On Continuation of Corporate Business
The corporation ceases as a body
corporate to continue the business for
which it was established;
3. Creation of a New Corporation The
stockholders are not prevented from
conveying their respective shareholdings
toward the creation of a new corporation
to continue the business of the old;
4. Reincorporation of Dissolved Corporation-
Though dissolved a corporation cannot be
revived, those interested may
reincorporate by re re-filing the new
Articles of Incorporation and by-laws;
5. Continuation of a Body Corporation The
corporation continues as a body corporate
for 3 years for purposes of winding up or
liquidation;
6. Cessation of Corporate Existence for All
Purposes Upon the expiration of the 3
year-winding up period, the corporation
ceases to exist for all purposes.
Q: What if there are properties under the
absorbed corporations name and the surviving
corporation wants to sell the same, is there a
need to obtain a new title or sign a deed of sale
between the two corporations?
A: No. The surviving corporation acquires the
property without need of further act. Hence, it may
sell said property even without obtaining a new title
or signing a deed of sale.
Q: What happens to the employees of the
absorbed corporation? Is the surviving
corporation duty-bound to absorb the formers
employees?
A: Yes, because employment agreements or
contracts are liabilities. All liabilities of the
absorbed corporation are acquired by the surviving
48
corporation. However, this is without being subject
to giving them the same positions.
Q: What are the types of acquisitions and
transfers?
A:
1. Assets-Only Transfers - The purchaser is
only interested in the raw assets and
properties of the business. The
transferee is not liable for the debts and
liabilities of his transferor, except where
the transferee expressly or impliedly
agrees to assume such debts.
2. Business-Enterprise Transfers - The
purchasers interest goes beyond the
assets of the business enterprise. The
primary interest is essentially to obtain the
earning capability of the venture. The
transferee is liable for the debts and
liabilities of his transferor.
3. Equity Transfers - The transferee is not
liable for the debts and liabilities of the
transferor, except where the transferee
expressly or impliedly agreed otherwise.
What the purchaser has actually
purchased is the ability to elect the
members of the board of the corporation
who run the business.
Q: What is a spin-off?
A: It has the opposite effect of merger or
consolidation, whereby a department, division or
portions of the corporate business enterprise is
sold-off or assigned into a new corporation that will
arise by the process which may constitute it into a
subsidiary of the original corporation. The validity
of spin-offs depends upon valid business cause
and good faith. (San Miguel Corp. Employees
Union-PTGWO v. Confesor, G. R. No. 111262,
September 19, 1996)
LIQUIDATION and DISSOLUTION
Q: What is meant by dissolution?
A: It is the extinguishment of the franchise of a
corporation and the termination of its corporate
existence.
Q: What are the modes of dissolution of a
corporation?
A:
1. Voluntary
 CORPORATION CODE
a. Where no creditors are affected
Procedure:
1. Majority vote of the board of
directors or trustees; and
2. Resolution duly adopted by the
affirmative vote of the
stockholders owning at least 2/3
of the outstanding capital stock or
at least 2/3 of the members at a
meeting duly called for that
purpose.
3. A copy of the resolution
authorizing the dissolution shall
be certified by a majority of the
board of directors or trustees and
countersigned by the secretary of
the corporation.
4. Such copy shall be filed with
SEC. (Sec. 118)
b. Where creditors are affected
Procedure:
1. Filing a petition for dissolution
with the SEC
2. Such petition must be signed by
majority of the board of directors
or trustees
3. Must also be verified by the
president or secretary or one of
its directors
4. The dissolution was resolved
upon by the affirmative vote of the
stockholders representing at least
2/3 of the outstanding capital
stock or at least 2/3 of the
members at a meeting duly called
for that purpose.
5. If there is no sufficient objection,
and the material allegations of the
petition are true, a judgment shall
be rendered dissolving the
corporation and directing such
disposition of its assets as justice
requires, and may appoint a
receiver to collect such assets
and pay the debts of the
corporation. (Sec. 119)
c. By shortening the corporate term - A
voluntary dissolution may be effected by
amending the AOI to shorten its corporate
term pursuant to the provisions of the
Code. A copy of the amended AOI shall
be submitted to the SEC. Upon approval
of the amended AOI of the expiration of
the shortened term, the corporation shall
be deemed dissolved without any further
proceedings, subject to the provisions of
the Code on liquidation.
UNIVERSITY
e Derecho Civil
OF THE PHILIPPINES
As an additional requirement, the SEC
requires to submit the final audited
financial statement not older than 60 days
before the application for shortening the
corporate term.
d. In case of a corporation sole, by
submitting to the SEC for approval, a
verified declaration of dissolution
(Sec.115). This merely needs the affidavit
of the presiding elder. No need for a
board resolution.
e. By merger or consolidation, whereby the
constituent corporations automatically
cease upon issuance by the SEC of the
certificate of merger or consolidation,
except the surviving or consolidated
corporation which shall continue to exist.
(Secs. 79 and 80)
f. Expiration of the corporate term (Sec. 11).
2. Involuntary
a. Failure to organize and commence
transaction of its business within 2 years
from date of incorporation. (Sec. 22)
b. Continuous inoperation for a period of at
least 5 years.
c. Failure to file by-laws within the required
period but, according to a SEC Opinion,
SEC will give it the opportunity to explain
such failure an not automatically dissolve
the corporation.
d. By order of the SEC upon a verified
petition and after proper notice and
hearing on the ground of serious
misrepresentation as to what the
corporation can do or is doing to the great
prejudice of or damage to the general
public.
e. Revocation or forfeiture of the franchise or
certificate of incorporation due to its
misuse or non-use pursuant to quo
warranto proceedings filed by the Solicitor
General.
Q: Name three (3) methods by which a stock
corporation may be voluntarily dissolved.
Explain each method.
A:
1. Voluntary Dissolution where no creditors are
affected. This Is done by a majority vote of
OF SANTO TOMAS 49
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 UST GOLDEN NOTES 2009
the directors, and resolution of at least 2/3
vote of stockholders, submitted to the
Securities and Exchange Commission.
2. Voluntary dissolution where creditors are
affected. This Is done by a petition for
dissolution which must be filed with the
Securities and Exchange Commission,
signed by a majority of the members of the
board of directors, verified by the president
or secretary, and upon affirmative vote of
stockholders representing at least 2/3 of the
outstanding capital stock.
3. Dissolution by shortening of the corporate
term. This is done by amendment of the
articles of incorporation. (2002 Bar
Question)
Q: What are the effects of dissolution of a
corporation?
A:
1. It shall be continued as a corporate body
for 3 years after dissolution, for the
purpose of liquidation but not for
continuing the business for which it was
established.
2. At any time during said 3 years, the
corporation is authorized and empowered
to convey all of its properties to trustees
for the benefit of stockholders, members,
creditors, and other interested persons.
3. After conveyance of corporate property, all
interests the corporation had in the said
property terminates, and legal title shall
vest in the transferee.
4. Upon winding up of the corporate affairs,
any asset distributable to any creditor or
stockholder or member who is unknown or
cannot be found shall be escheated to the
city or municipality where such assets are
located.
5. Distribution of its assets or property shall
be done only after payment of all its debts
and liabilities. (Sec. 122)
Q: XYZ Corporation entered into a contract of
lease with ABC, Inc., over a piece of real estate
for a term of 20 years, renewable for another 20
years, provided that XYZ's corporate term is
extended in accordance with law. Four years
after the term of XYZ Corporation expired, but
still within the period allowed by the lease
contract for the extension of the lease period,
XYZ Corp. notified ABC, Inc., that it is
exercising the option to extend the lease. ABC,
Inc., objected to the proposed extension,
arguing that since the corporate life of XYZ
50
Corp. had expired, it could no longer opt to
renew the lease. XYZ Corp. countered that
withstanding the lapse of its corporate term it
still has the right to renew the lease because no
quo warranto proceedings for involuntary
dissolution of XYZ Corp. has been instituted by
the Office of the Solicitor General. Is the
contention of XYZ Corp. meritorious? Explain
briefly.
A: XYZ Corporations contention is not meritorious
based on the ruling of the Supreme Court in PNB
v. CFI of Rizal, 209 SCRA. XYZ Corp. was
dissolved ipso facto upon the expiration of its
original term. It ceased to be a body corporate for
the purpose of continuing the business for which it
was organized, except only for purposes
connected with its winding up or liquidation.
Extending the lease is not an act to wind up or
litigate XYZs affairs. It is contrary to the idea of
winding up the affairs of the corporation. (2004 Bar
Buestion)
Q: What is liquidation?
A: It is the process by which all the assets of the
corporation are converted into liquid assets (cash)
in order to facilitate the payment of obligations to
creditors, and the remaining balance if any is to be
distributed to the stockholders.
Q: What are the modes of liquidation?
A:
1. Liquidation by a duly appointed receiver;
(Sec. 119)
2. Liquidation by the corporation itself or its
board of directors; (Sec. 122)
3. Liquidation by trustees to whom the assets
of the corporation had been conveyed.
(Sec. 122); (Board of Liquidators v. Kalaw,
L-18805, August 14, 1967)
Q: The Securities and Exchange Commission
approved the amendment of the articles of
incorporation of GHQ Corporation shortening
its corporate life to only 25 years in accordance
with Sec.120 of the Corporation Code. As
shortened, the corporation continued its
business operations until May 30, 1997, the last
day of its corporate existence. Prior to said
date, there were a number of pending civil
actions, of varying nature but mostly money
claims filed by creditors, none of which was
expected to be completed or resolved within
five years from May 30, 1997. If the creditors
had sought your professional help at that time
about whether or not their cases could be
 CORPORATION CODE
pursued beyond May 30, 1997, what would have
been your advice?
A: The cases can be pursued even beyond May
30. 1997, the last day of the corporate existence of
GHQ Corporation. The Corporation is not actually
dissolved upon the expiration of its corporate term.
There is still the period for liquidation or winding
up. (2000 Bar Question)
Q: "X" Corporation shortened its corporate life
by amending its articles of incorporation. It has
no debts but owns a prime property located in
Quezon City. How would the said property be
liquidated among the five stockholders of said
corporation? Discuss two methods of
liquidation.
A: The prime property of "X" Corporation can be
liquidated among the five stockholders after the
property has been conveyed by the corporation to
the five stockholders, by dividing or partitioning it
among themselves in any two of the following
ways:
1. By physical division or partition based on
the proportion of the values of their
stockholdings; or
2. By selling the property to a third person
and dividing the proceeds among the five
stockholders in proportion to their
stockholdings; or
3. after the determination of the value of the
property, by assigning or transferring the
property to one stockholder with the
obligation on the part of said stockholder
to pay the other four stockholders the
amount/s in proportion to the value of the
stockholding of each. (2001 Bar
Question)
Q: What are the consequences if the liquidation
is not terminated within the 3-year period?
A:
1. Pending suits for or against the corporation
which were initiated prior to the expiration of
the 3-year period shall continue. (Gelano v.
CA, L-39050, February 24, 1981)
2. New actions may still be filed against the
trustee of the corporation even after the
expiration of the 3-year period but before the
affairs of said corporation have been finally
liquidated or settled by the trustee.
(Republic v. Marsman, Co. 44 SCRA 430)
3. A corporation which has a pending action
which cannot be finished within the 3-year
period is authorized to convey all its
property, including pending choses of action,
of a trustee to enable it to prosecute and
UNIVERSITY
e Derecho Civil
OF THE PHILIPPINES
defend suits by or against the corporation
beyond the 3-year period. Where no trustee
is appointed, its counsel who prosecuted
and represented the interest of the
corporation may be considered as trustee of
said corporation, at least with respect to the
matter in litigation (Gelano v. CA, L-39050,
February 24, 1981). The directors may also
be permitted to continue as trustees to
complete the liquidation. (Clemente v. CA ,
G.R. No. 82407, March 27, 1995)
4. The creditors of the corporation who were
not paid may follow the property of the
corporation that may have passed to its
stockholders unless barred by prescription
or laches or disposition of said property in
favor of a purchaser in good faith.
Q: May the corporation, through its president
condone penalties and charges after it had
been placed under receivership?
A: No. The appointment of receiver operates to
suspend the authority of a corporation and of its
directors and officers over its property and effects,
such authority being reposed in the receiver. (Yam
v. CA, G.R. No. 104726 February 11, 1999)
FOREIGN CORPORATION
Q: What is a foreign corporation?
A: It is a corporation formed, organized or existing
under any law other than those of the Philippines,
and whose laws allow Filipino citizens and
corporation to do business in its own country or
state. (Sec. 123)
Q: May a foreign corporation sue in the
Philippines?
A: No. The foreign corporation transacting
business in the Philippines without a license to do
business shall not be permitted to maintain or
intervene in any action, suit or proceeding in any
court or administrative agency.
Q: May a foreign corporation be sued in the
Philippines?
A: Yes. Any foreign corporation transacting
business in the Philippines whether or not with a
license, may be sued against/before Philippine
courts or administrative tribunals on any valid
cause of action recognized under Philippines laws.
(Doctrine of Quasi-Estoppel By Acceptance of
Benefits)
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 UST GOLDEN NOTES 2009
Q: What constitutes doing business in the A:
Philippines for foreign corporations? 1. The Articles of Incorporation must state
that the number of stockholders shall not
A: Under the Continuity Test, doing business exceed 20;
implies a continuity of commercial dealings and 2. The Articles of Incorporation must contain
arrangements, and contemplates to some extent restriction on the transfer of issued stocks
the performance of acts or works or the exercise of (which must appear in the Articles of
some functions normally incident to and in Incorporation, By-laws and Certificate of
progressive prosecution of, the purpose and object Stock).
of its organization. Under the Substance Test, a Restrictions on the transfer must not be
foreign corporation is doing business in the country more than onerous than granting the
if it is continuing the body or substance of the existing SH or corporation the option to
enterprise of business for which it was organized. purchase the shares;
3. The stocks cannot be listed in the stock
Q: Does an isolated transaction by a foreign exchange nor publicly offered.
corporation qualify as doing business in the
Philippines? Note: The corporation is not a close even if the shares
belong to less than twenty if not all the requisites are
A: It depends. If a single or isolated transaction is present. (San Juan Structural and Steel Fabricators, Inc.
incidental and casual transaction, it cannot qualify v. Court of Appeals, G.R. No. 129459, September 29,
as doing business since it lacks the element of 1998)
continuity. However, where a single or isolated
transaction is not merely incidental or casual but CLOSE CORPORATION
indicates the foreign corporations intention to do
business in the Philippines, said single act or Q: What cannot be a close corporation?
transaction constitutes doing business in the
Philippines. A:
1. Mining companies;
Q: What are the requisites for obtaining license 2. Oil companies;
to do business? 3. Stock exchanges;
4. Banks;
A: 5. Insurance companies
6. Public utility
1. The foreign corporation should file a 7. Educational institutions
verified application containing and 8. Other corporation declared to be vested
together with the following: with public interest.
2. Designated resident agent (who will
receive summons and notices for the Q: What is the remedy in case of deadlocks in a
corporation; a special power of attorney close corporation?
should also be submitted for such
purpose; A: The SEC may be asked to intervene and the
3. An agreement that if it ceases to transact SEC may perform such actions that may be
business or if there is no more resident necessary under the circumstances including the
agent, summons shall then be served appointment of a provisional director who, as an
through SEC; impartial person will have all the powers of a duly
4. Oath of Reciprocity. Certificate under Oath elected director (not a receiver).
of the authorized official of the foreign
Q: What are the characteristics of a close
corporations country that allows Filipino
corporation?
citizens and corporations to do business in
said country. A:
5. Within 60 days from issuance of license, 1. The stockholders themselves can directly
the corporation should deposit at least manage the corporation and perform the
P100, 000.00 (cash, property or bond) for functions of directors without need of
the benefit of creditors subject to further election
deposit every six months. a. When they manage, stockholders are
liable as directors;
Q: What are the requirements for close b. There is no need to call a meeting to
corporations? elect directors;

52
 CORPORATION CODE OF THE PHILIPPINES
c. The stockholders are liable for tort. burdened with
2. Despite the presence of the requisites, the limitation that it
corporation shall not be deemed a close cant be
corporation if at least 2/3 of the voting dispensed unless
stocks or voting rights belong to a these limitations
corporation which is not a close were complied
corporation. with
c. Plan of
3. NON-STOCK CORPORATION dissolution must
be approved by
Q: What is a non-stock corporation? the majority vote
of BOT and 2/3
members
A: It is a corporation organized primarily for
Members are called Members are called
charitable, religious, educational, fraternal, literary,
corporators members
trade, industry and agriculture chambers or any
Termination: according to Termination: governed by
combination thereof. stockholders the AOI
It cannot be organized for political purposes.

The income of which cannot be distributed as

dividends to its members, trustees or officers.

Q: What are the distinctions between a stock

corporation and a non-stock corporation?
A:
STOCK NON-STOCK
Organized for profit Not organized for profit
Governed by BOD Governed by BOT
Membership is Membership is non-
transferable transferable. It Is
personal.
Right to resort to It must be provided in the
cumulative voting by-laws
BOD: not more than 15 BOT: more than 15 but
divisible by 3
Place of meeting: within Any place outside the
the city or municipality place of business but
where the place of must be within the
business is located Philippines
Term of BOD: 1 year Term of BOT: 3 years but
on a staggered basis
Right to vote can be Right to vote may be
denied except in cases denied as provided in the
stated in Sec. 60 by-laws
Assets are distributed Assets are distributed as
according to interest provided by law
Capital stock is divided No capital stock divided
into shares into shares
Officers are elected Officers are elected by
directly by BOD the members
Stockholders may vote Members may vote by
personally or by proxy email
Assets are distributed to Assets are distributed to
the stockholders after members provided:
payment of corporate a. Obligat
obligations ions and duties
were paid.
b. Propert
ies received but
UNIVERSITY
e Derecho Civil
Q: What the rights of members?
A:
a. Right to vote - A member is entitled to one
(1) vote. However, such right may be
broadened, limited or denies in the Articles
of Incorporation or BY-Laws. (Sec.89)
thus, the BY-laws of a non-stock
corporation may provide for the desired
voting rights of members, including the
number of votes. (SEC Opinion, October
10, 1989)
b. Right to transfer membership - As a
general rule, a member cannot transfer his
membership (and the rights arising
therefrom) in a non stock corporation.
However, by way of exception, the Articles
on Incorporation or BY-laws may provide
for their transferability. (Sec. 90)
Q: What are the rules regarding conversion?
A:
1. A non-stock corporation cannot be
converted into a stock corporation through
mere amendment of its Article of
Incorporation. This would violate Sec.87
which prohibits distribution of income as
dividends to members. Giving the
members shares is tantamount to
distribution of its assets or income. (SEC
Opinion, March 20, 1995)
2. A non-stock corporation can be converted
into a stock corporation only if the
OF SANTO TOMAS 53
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 UST GOLDEN NOTES 2009
members dissolve it first and then constitute at least 60% Filipinos (SEC Opinion, August 8,
organize a stock corporation. However, 1994)
there is a resulting new corporation. (SEC
Opinion, May 13, 1992) Q: How is a corporation sole dissolved?
3. A stock corporation may be converted into
a non-stock corporation by mere A: By filing a verified declaration of dissolution
amendment provided all the requirements stating:
are complied with. Its rights and liabilities 1. The name of the corporation;
will remain. 2. Reason for dissolution;
3. Authorization for the dissolution by the
Q: What is the order of distribution of assets on particular religious denomination, sect or
dissolution of non-stock corporations? church;
4. Names and addressed of the persons who
A: will supervise the dissolution and winding
1. All its creditors shall be paid; up.
2. Assets held subject to return on
dissolution, shall be delivered back to their
givers;
3. Assets held for charitable, religious
purposes, etc., without condition for their
return on dissolution, shall be conveyed to
one or more organizations engaged in
similar activities as dissolved corporation;
and
4. All other assets shall be distributed to
members, as provided for in the Articles or
By-laws. (Sec. 94)

Q: Can a non-stock corporation offset unused

contributions of members against the balance
of receivables from the same members?

A: No. The unused contributions of members

cannot be offset against the balance of receivables
because this would amount to distribution of the
capital of the corporation. Members of Non-stock
Corporation are not entitled to distribution of
capital. They are only entitled to distribution of
capital upon dissolution when it is provided for in
the Articles of Incorporation or by-laws. (SEC
Opinion, November 27, 1985)

Q: What is the nationality of a corporation

sole?

A: A corporation sole does not have any nationality

but for purposes of applying nationalization laws,
nationality is determined not by the nationality of its
but by the nationality of its members, constituting
the sect in the Philippines. Thus, the Roman
Catholic Church can acquire lands in the
Philippines even if it is headed by the Pope.
(Roman Catholic Apostolic Church v. Land
Registration Commission, L-8451, December 20,
1957)

Note: The opinion of the SEC is that for registered

corporation sole, it can acquire lands if its members

54