Philippine Corporate Law
How can a
 Introduction to Corporate Law
o How it used to be 24 years ago (1986)
 Considered a “technical” course, likened to Tax
o The Setting today:
 Economic Growth/Financial Crisis
 Globalization
 E-commerce and What Lies Ahead
o Used to be: Corporate Law was taught ahead of Partnership and
taught in the same semester as Agency.
o Basic principles in Agency and Partnership
 Agency
 Partnership
o History of Philippine Corporate Law
 The Spanish Code of Commerce
 The Americans introduced American Constitutional Law
System, Administrative System, Commercial Law in order
to ensure that American merchants will be able to come
here to take advantage of the natural resources of the
country.
 The Corporation Law (Act 1459; 1 April 1906)
 Was weary of the size ad potency of Corporate Enterprises
 Contained prohibitory provisions on cross ownership of
corporations and of owning land
 Corporation Code (May, 1980)
 When the Corporation Code was enacted, it was already
10 years late in its provisions.
 Of common law origin, why?
o Many lawyers and judges have the Civil Code
mentality.
o In common law countries, the main source of the law
is not judges, but decisions of judges. (Cf. Art. 8, Civil
Code)
o In a true civil law country, decisions are not
published, because there is no system of precedence.
o Does the term dura lex sed lex apply to common law?
o Do common law jurisdiction now have statutory rules?
Codes? Yes, they do.
 In a common law society, what is the main source
of the law? Decisions
o By means by which man are able to achieve its goals
are called “tools.”
 P.D. No. 902-A (1985)
 Re-chartered the SEC
 Reversal of Trend: Securities Regulation Code
 Business Thesis of the Study of Corporate Law
o The “Corporation” Concept
 “… A Corporation is an artificial being created by operation of
law, having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to its
existence.” (Sec. 2, Corporation Code)
 when the law goes out of its way to define something, it is
jurisdictional
 Attributes of Corporation
 Juridical Person: A corporation is an artificial being
o In order to allow that association or business
enterprise to enter into contractual relations before
the law
 Creature of the Law: created by operation of law
o T/F: Is a partnership, as a juridical person, a creature
of the law? TRUE
 Separate Juridical Personality: with a right of succession
o Unlike a Partnership, a Corporation has a strong
juridical personality.
 Creature of Limited Powers: has only such powers,
attributes and properties expressly authorized by law or
incident to its existence
o What are human beings before the law? You are a
“free agent,” not bound by what the law says.
 Non-impairment clause of the Constitution
 Consensuality
1 CLV LECTURE NOTES | CORPORATE LAW 2012
o The Corporation is meant to serve the law.
corporation serve the law?
 How does the corporation best serve the law? By
serving the people that it serves.
 To serve men for which the law for which the law
is meant to serve
o When there is a conflict between t
 Tri-Level “Legal Relationships” in the Corporate Setting
o Juridical Entity Level
 Views the relationship between State and the
corporation
 When the issue is between the corporation, as the
creature of the State
 It is the highest level in Corporation law itself
o Intra-Corporate Contract Level
 Views the relationship between and among the
members of “corporate family”
o “Extra-Corporate” Contract Level
 Views the relationship between corporation and
“outsiders”
 Outside of Corporation law, but it is at the heart
of Corporation law
 Juridical Entity Law
o Relationship between State and Corporation
 Covered by Section 2, Corporation Code
 Only defined the juridical entity level
 Essentially Governed by Corporate Law Principles
 Animated by Contract Law Doctrines
 Under the aegis Constitutional Principles
 The only thing that can undermine the
corporate law principle
 Intra-Corporate Relationship
o Between Corporation and its Agents (Directors and
Officers)
 Governed by Corporate Law, Law on Agency and
Trust; and in some cases by Labor Law principles
o Between Corporation and Shareholders/Members
 Governed by Corporate Law, supplemented by
Contract Law Doctrines
o Between and Among Stockholders/Members in
Common Venture
 Governed by Corporate Law, supplemented by
Contract Law Doctrines
 Extra-Corporate Relationships
o Between Corporation and its Employees
 Governed by Labor Law, but limited cases by the
Business Judgment Rule of Corporate Law
o Between Corporation and its Contract Creditors
 Governed by Contract Law, particularly Mutuum
and Credit Transaction principles
o Between Corporation and Other Claimants
o Governed by Quasi-Delicts or Torts principles and
principles of Human Relationship
o These are areas outside the corporate family.
o Corporate Law is always subservient to Civil Law.
 Tri-Level “Existence” in the Corporate Setting
o Assets-Only Level
 Aggregation of Assets and Resources
 Law on Sales, wherein the Seller is the Corporation
o Business Enterprise Level
 Economic unit or the “going concern”
 It as intangible asset, which earns money
o Juridical Entity Level
 The business or endeavor pursued in the medium of the
corporation
 Defines the “Subject Matter” of Contract
 Determines the Applicable Law
 Corporate Vehicle is a complex form of Ownership-Management
System and its underlying basis is Contract.
 The demands of Commerce:
o Corporation essentially a medium of pursuing Commercial
Transactions
o Equity versus Debt Investments

II. Concepts
 Definition
o Artificial being  Separate Juridical Personality
 What sets the corporation apart from all the media of doing
business is a separate juridical person.
 But it is not unique in that sense, because Partnerships
have also separate juridical personality
 Each one is granted a charter (approved Articles of
Incorporation), which makes it strong
 Vs. partnership: the partners can themselves withdraw
from the contract
o Created by law  Strong Juridical Personality
 The law provides it with a strong juridical personality
 The law grants the separate juridical personality to a
partnership
 Consensual or informal separate juridical personality
 The nexus of its separate juridical personality of a corporation
is a State grant (commission, charter)
 T/F: The primary basis of the personality creating a
corporation is the law granting it. While the primary basis of
the personality of the partnership is the concept.
 Nexus: meeting of the minds between 5 or more persons to
create a corporation
 T/F: The basis by which the law grants a separate juridical
personality to a corporation and a partnership is the meeting
of the minds. TRUE
 Why is the juridical personality of the corporation strong?
What makes it strong?
o It a strong one, because it is formal and solemn in
character.
 Why is the juridical personality of the partnership weak?
o The personality of a partnership is informal and weak.
 It is solemn because it needs to follow a prescribed procedure
in order to be created.
o Right of succession  Separate Juridical Personality
 Is it possible for a partnership to be a separate juridical
personality without a state-grant?
 Juridical Personality always comes from the State.
 T/F: Right of succession comes about as a necessary legal
consequence of the law granting to it separate juridical
personality. FALSE
 In every artificial being that is created by law, and
thereby, every artificial take their existence from the
law, not the persons who compose it.
 The right of succession necessarily follows a strong
juridical personality.
 There is no right of succession in a partnership because of
delectus personae. It is expressly provided for by law
(mutuality or obligatory force).
o T/F: Delectus personae is the implementation of the
doctrine of mutuality.
o Delectus personae is the highest personification of the
doctrine of relativity in contract law.
 The right of succession is based on the binding and
obligatory force of the contractual relationship.
o Having the powers, attributes, and properties expressly
authorized by law or incident to its existence
 Doctrine of Creature of Limited Power
 Human Beings: Universal Declaration of Human Rights
 Persons Before the Law
 Natural Person: creature of unlimited powers
 Juridical Person: creature of limited powers
 Doctrine of Creature of Unlimited Power
 Since the corporation is merely a medium of natural
persons, our media should also be able to do what natural
persons do.
 Doctrine of Ultra Vires
o T/F: When you look at the definition, it promotes the 4 attributes
of a Corporation. FALSE
 Attributes of Corporation
o Strong (Formal) and Separate Juridical Personality
2 CLV LECTURE NOTES | CORPORATE LAW 2012
 What is the statutory provision that supports a strong juridical
personality? Section2
o Centralized Management
 Equity is the technical and commercial term for the
ownership of a business
 Shares of stocks: owners of the shares
 Where Section 23 does not exist, who will exercise acts of
ownership? The shareholders.
 The Board of Directors are agents of the principal
(corporation)
 What is the statutory provision that supports centralized
management? Section 23
o Limited Liability
 When the Board of Directors exercise their
powers/prerogatives pursuant to Section 23, they act in the
capacity of agents of the corporation.
 Every agent acts in behalf of the principal (corporation)
 Partnership
 Unlimited liability: partners are secondary liable (benefit
of excussion)
 What is the basis? The law says so.
 What is the statutory provision that supports limited liability?
It has no direct statutory support, but falls as a necessary
consequence of Section 2 that a corporation is an artificial
being. It refers to the doctrine of relativity, in that only those
who give their consent to the contract are bound by the
contract.
 There is no privity between the stockholders and the contract
entered into by the corporation, and hence, the stockholders
cannot be held liable for such contract to which they never
gave its consent.
 The corporation is just a medium for the stockholders, and
that is why, there is the doctrine of limited liability. The
separate juridical personality is the basis of limited liability.
 T/F: The Doctrine of Limited Liability emanates as a
consequence of separate juridical personality according to
Section 2. TRUE.
 T/F: Whenever the law grants to a business a separate
juridical personality, then necessarily, the doctrine of limited
liability is a necessary consequence. TRUE.
 In a corporation, the management powers are given to the
Board of Directors (centralized management)
 As it is mutual agency for a partnership, it is centralized
management as to a corporation.
 Limited Liability finds its support from separate juridical
personality and centralized management.
 Are directors and officers personally liable for the liabilities of
the corporation? No, it falls under the attribute of centralized
management
o Free Transferability of Units of Ownership
 Shares of stock are freely transferrably
 Basis: Section 63
 Shares of stock are personal and incorporeal property
(intangible and movable).
 One of the characteristics of full dominion is the right to
dispose. A shareholder, being the full owner of the shares, has
the power to dispose of his shares.
 The attribute refers to the corporation having powers,
attributes and properties expressly authorized by law.
 When a shareholder sells his shares, everything that pertains
to him as owner is transferred to the buyer.
 Any law which hampers the free-transferability is against
public policy.
 Why does the corporation law goes out of its way to take away
the ability or the power of the corporation to limit a
shareholder’s power of the 7 juses?
 Units of ownership have been made transferable in order to
build the capital market.
 It is a structural attribute of a corporation.
o The Corporation Code is the product of common law, meant to
cover large markets through the investments of millions of
people. It is a medium and corner-stone of a public market.
 Theories of the Formation of Corporation
 o Theory of Concession
 Occupies the Juridical Entity relationship (Section 2)
o Theory of Enterprise Entity
 Occupies the Intra-Corporate and Extra-Corporate
relationships
 Tayag v. Benguet
o The Theory of Concession prevails in this jurisdiction. A
Corporation is a creature of the law, and therefore subject to the
will of its Creator. It does not have the ability to say “no” to the
Creator.
o Genossenschaft theory: A corporation is an entity, independent of
state recognition and concession.
o Is there a rejection of the Theory of Enterprise Entity
(genossenschaft) in this jurisdiction? No, it does not even apply in
the Juridical Entity Level (Theory of Concession)
o Juridical Entity Level: Theory of Concession
 State (Judiciary) v. Corporation (Benguet)
o Situs of Shares of Stock
 Subject of taxation
 Subject of venue
 Must necessarily follow the domicile of the corporation that
issued them
 Stockholders of F. Guanzon Sons v. Court of Appeals
o Stockholders are not co-owners of corporate property, because of
the strong juridical personality of the corporation, all of its
properties are owned by the corporation as a separate being.
o Why does equity shareholders represent vis-à-vis the assets of the
corporation?
 Shares of stock are property, but they are not property of the
corporation.
o Whether when the stockholders decided to distribute among
themselves, after the assets have been determined, was it a
partition or distribution?
o The only way by which stockholders are deemed to be
partitioning, are only when they are co-owners of the partnership
assets.
 Partnership
o Element:
 Meeting of the minds to contribute to a common fund and
with the intention to divide the profits among themselves
o The moment all of the elements are present, but there is a
stipulation in the agreement that they are not constituting a
partnership, what happens? They will still be governed by the law
of partnership, even if the parties say otherwise.
 Pioneer Insurance v. Court of Appeals
o Was there a corporation formed? No
o Was there a de facto partnership formed? No, Lim induced the
other would-be incorporators to create a corporation. There was
an offer by Lim to create a corporation.
 Lim Tong Lim v. Fishing Gear Industries
o Corporation by Estoppel Doctrine
 The reality of the business enterprise is there. It has been
pursued as a business.
 The essence of a business transaction is a contract.
 Section 21 of the Corporation Code
III. Nature and Attributes of a Corporation
 Nature of Power to Create a Corporation
o There is a Constitutional limit.
 Corporation as a Person
o Constitutional rights
 Self-incrimination: A corporation is a person primarily used for
a business, and only doctrines and policies consistent with
proceeding with commercial transactions make sense
o Agency
o Torts
 Corporate Criminal Responsibility
o West Coast Life Ins. Co v. Hurd
 Are corporations generally liable for committing a criminal
offense? No, the exception is when the law expressly states
that the corporation is specifically liable for the offense.
 Why is it generally, in our jurisdiction, cannot be held liable
for committing a criminal offense?
3 CLV LECTURE NOTES | CORPORATE LAW 2012
 Is it possible for a corporation to be liable as a principal by
inducement?
 A corporation cannot have a malicious intent, because it
has no mind by which no malicious intent can be imputed.
 There are no processes in our laws that allow a filing of a
complaint against a corporation.
 How come, the malicious intent of an agent in pursuing its
business, cannot be imputed to the corporation?
 If a corporation does not induce or participate, then it is not
criminally liable.
o Sia v. Court of Appeals
 When a crime has been committed by an officer in the name
of a corporation that officer is not liable unless there is an
express provision of the law that makes such officer liable.
 Can a principal corporation, as a general rule, be held liable,
for the criminal offenses committed by its agents? No
 No malice
 No way to punish it
 It offends public policy: hiding behind the veil of
corporate fiction
 Except:
 When the corporation is made expressly liable, but the
corporation’s officers and agents are the ones made
liable.
o Criminal liability is a personal act
 PD 115: It is one of the few statutes that makes the officers
liable
 A man can only be convicted only of his guilt his proven
beyond reasonable doubt.
 Because PD 115 has been promulgated, then there is doubt as
to Sia’s criminal liability, and therefore, he cannot be
convicted. When a penal statute has been amended or
appealed it has retroactive effect.
o Ching v. Secretary of Justice
o Consolidated Bank v. Court of Appeals
 Nationality Rule
o (1) Primary Test: Place of Incorporation
 A domestic corporation is a corporation incorporated in the
Philippines
o (2) Secondary Control Test Rule
 The only purpose of such test is because of nationalized
industries.
 The nationality of a corporation is determined by the majority
of the nationality of the stockholders of a corporation. The
majority is anything in excess of 50%.
 The control test is as to the Board of Directors.
 Nationalized Industries: industries, occupations of our
industrial and economic areas where the Constitution or
the law has reserved the equity ownership thereof, either
fully or in part, to Filipino nationals.
o Examples: Retail Trade Liberalization Act
 Exploitation of Natural Resources
 Filipino citizens and juridical personalities whose capital
is owned by at least 60% Filipinos
 Private Land
 Filipino citizens (except: hereditary succession) or
corporations 60% of which is owned
 Mass Media
 100% Filipino corporation
 Advertising
 70& Filipino corporation
 Public Utilities
 60% Filipino corporation
o Nationalized industries: It is not enough that you are incorporated
under Philippine laws, but it is also necessary that you comply
with the ownership requirements.
o T/F: The only test of nationality, therefore, is the nationality
test. FALSE. The primary test is the place of incorporation.
o Incorporation Test: a corporation is a Filipino corporation when it
is incorporated under Philippine laws.
 Asks where are you incorporated?
 A corporation is a creature of the law under which it is
incorporated.
 o Control Test: nationality of a corporation is determined by at
least the majority of the equity
 Based on equity holdings
 There are certain sectors critical to national interest and
safety that the framers of the Constitution sought to limit the
control of certain industries to Filipinos.
o Why is the place of incorporation test not enough to save certain
industries?
 When a corporation performs its transactions, those
transactions are being done by Filipinos.
 The Board of Directors are elected by the stockholders, the
latter being the source of powers of the Board of Directors.
Since they hold majority of the interests, the majority of the
Board of Directors will be under the control of the
stockholders.
o Roman Catholic Apostolic Administrator of Davao v. Land
Registration and the Register of Deeds of Davao
 Was it lawful to register under the name of the corporation
sole when the owner is a Canadian citizen?
 Yes, because a corporation sole has no nationality. It does
not have a nationality because the Roman Catholic Church
has pre-existed before the Constitution. Having no
nationality, where it holds land, it cannot be a foreigner.
 The corporation sole was registered in the SEC (or
counterpart at that time)
 A corporation sole is a medium of holding the properties
of the church.
o People v. Quasha
 Tri-Level of Corporate Existence
 Aggregation of Assets and Resources
 Business Enterprise
 Juridical Entity Level
 Primary Franchise: one that grants the group a juridical entity
 Juridical Person: primary franchise  charter
 Secondary Franchise: business enterprise
 Business Enterprise: secondary franchise
 Nationalization laws are based on the business enterprise.
What is seeks to regulate is not the person of the corporation.
The unique feature is the relationship among those who come
into the corporation and the business enterprise.
o Tatad v. Garcia
 Built-Operate-Transfer Law (BOT Law)
 Business Enterprise
 A business enterprise is also property.
 Assets/Property
 How do we distinguish a business enterprise as a property and
the assets?
 What makes an asset rise to the level of a business
enterprise? When is the usefulness of an asset put it to the
level of a business enterprise?
o When it has the ability to earn income.
o When a group of assets are able to earn income by
transactions with the public, it now becomes a
business enterprise.
 The nationality rule is based on the business enterprise.
 A corporation is allowed to exist because it is an efficient
medium for people to enter into commercial transactions.
o Grandfather Rule
 Vs. Control Test: the nationality of a corporation is
determined by the nationality of the controlling stockholders
of a corporation
 The primary test of nationality is the place of incorporation.
When it comes to public utilities, it is not enough that it is
incorporated in the Philippines, but it must be under the
control of Filipinos or a corporation 60% of which is owned by
Filipino citizens.
 The rule is a variation of how to apply the control test.
 The rule applies to a situation where the operating company
(ABC Corp.) is owned by another company.
 Determine the nationality of the grandson by the
nationality of the grandfather
 Illustration A:
4 CLV LECTURE NOTES | CORPORATE LAW 2012
o ABC CORP.
 60% Juan Inc.
 60% Juan
 40% George
 40% George Corp.
 40% Juan
 60% George
 Illustration B:
o ABC Corp. enters into a JVA with Juan Inc.
o Is ABC Corp. considered 100% Filipino-owned for
purposes of Mass Media? No, because it becomes
equivalent to operating (the 40% of the foreign equity
in Juan Inc.).
 DOJ-SEC Rule
 The moment at least 60% of the capital is owned by
Filipino citizens (father), it shall be considered as of
Philippine nationality. If the percentage is less than 60%,
Filipino ownership will still be proportionately
determined.
o At least 60%-owned Filipino= 100% Filipino-owned
o At least 60%-foreign owned: not 100% foreign-owned
 In the illustration above, ABC Corp. can engage in public
utilities because it is 76% Filipino-owned.
o The 60% of Juan Inc. is considered of Filipino
nationality (100% of 60% is Filipino). 40% share of
George Corp. in ABC Corp. is 40% owned by Juan (40%
of 40% is 16%). Hence, ABC Corp. is 76% Filipino-
owned.
 The DOJ-SEC Rule only applies to investments.
 The DOJ-SEC Rule will not apply to Mass Media because
100% equity ownership is required and 100% Filipino
management.
o Palting v. San Jose Oil
 Real control over the company is until the 3rd tier.
IV. Separate Juridical Personality and Doctrine of Piercing the Veil of
Corporate Fiction
 Main Doctrine: A corporation has a personality separate and
distinct from its stockholders or members.
o Main purpose: to allow a business to efficiently transact
o Rules, Legal Consequences
 It has a right of succession
 Limited liability (relativity) and vice versa
 It has its own properties and vice versa
 Rights and privileges cannot extend to the shareholders and
vice versa
o DBP v. NLRC
 General rule: In a corporate setting, the rights and obligations
only pertain to the corporation. The shareholders are not
liable for the obligations of the corporation.
 EXCEPT: Piercing the Veil of Corporate Fiction
 The Doctrine of Piercing the Veil of Corporate Fiction was not
applied to the case because of Centralized Management.
There is no alter-ego here. DBP is always passive.
 Piercing the Veil of Corporate Fiction
o Not supported by any provision of law. It is a judge-made law.
o U.S. v. Milwaukee Refrigerator Transit Co.
 The general rule is that the law encourages people to use the
corporate fiction in order to gain advantage. The use of
corporate fiction in order to gain advantage, privilege, or
right is good. The exception is when it is a piercing situation.
o Types of Piercing:
 Fraud Piercing
 Malice is essential
o Fraud
o Defend crime
o Justify wrong
 Alter-Ego Piercing
 Disrespect of the Separate Juridical Personality
 If the corporation itself does not respect the separate
juridical personality, the public transacting with such
corporation cannot be expected to respect the same.
  Because of the attribute of limited liability, when a
parent corporation controls a subsidiary corporation to
such an extent that the transactions and operations of the
subsidiary corporation are effectively transactions of the
parent corporation, the veil of corporate fiction should be
pierced.
 The reason for this is that the creditors and the public
transacting with the corporation will be confused as to
who to make liable for the transactions. If a subsidiary
corporation is controlled by a parent corporation, the
creditors of the subsidiary or parent corporation will be
prejudiced because of the attribute of limited liability.
 It refers to the corporation, not on a juridical entity level,
but on the level of a business enterprise.
 Defeat Public Convenience (Equity Piercing) Piercing
 Creditors
 Why do we have to realize that there are 3 forms of piercing?
 There are differences on how they are constituted and the
legal consequences of such piercing.
o Francisco Motors Corp. v. Court of Appeals
 You apply piercing in order to achieve an end:
 There is no fraud in the case.
 When the factual basis for piercing is present and piercing is
applied, the separate juridical personality is already
inexistent, and the stockholders and/or officers are made
liable.
 T/F: Whenever piercing is applied, then it makes the
stockholders and officers of the corporation are made liable
for the obligations of such corporation. FALSE
 The purpose of piercing the veil of corporate fiction is to
make the parties at fault liable.
 T/F: Once piercing has properly been done, all persons behind
the veil is made liable. FALSE
 Only the directors, officers, stockholders who employed
fraud, those who did the disrespect, those that are required
that justice be done are the ones held liable.
 There is no basis for piercing. Piercing is not allowed as a
general rule. If the burden of proof is not proven by the
plaintiff, the separate juridical personality prevails.
o Traders Royal Bank v. Court of Appeals
 There is a Memorandum Circular issued by the Central Bank
stating that the CBCI were non-transferrable, and so TRB
could not claim piercing because of fraud.
 TRB was not an innocent victim of equity of piercing because
it knew very well that the certificates were non-transferrable.
 Piercing of the veil of corporate fiction can only be availed of
by a person who acts in good faith.
o PNB International v. Ritratto Group
 The piercing doctrine is only applied when the separate
juridical personality is used for wrongful purpose.
o Umali v. Court of Appeals
 Falls under fraud piercing
 Piercing cannot be availed of when the action seeks to make
an action for annulment of mortgage void. Piercing is
applicable only when the stockholders of a corporation are
sought to be made liable.
 The remedy of piercing the veil of corporate fiction is a
remedy of last resort, because piercing is a remedy based on
equity. It has no statutory basis.
 Why is it that equity is a remedy of last resort? If there is
a basis to declare the real estate mortgage, the action is
an action to rescind based on fraud.
 T/F: Fraud is only illusory. FALSE, because many cases have
been decided on fraud piercing. Fraud is a personal defense.
o Indophil Textile Mill Workers Union v. Calica
 Piercing cannot apply if the purpose is to merge the 2 unions
for the CBA.
 Piercing is resorted to in order to resolve issues of
liability.
o Siain Enterprises v. Cupertino Realty Corp.
o Boyer-Roxas v. Court of Appeals
 By using the recreational and staff house as her own
residence, Roxas was depriving the corporation of the use of
5 CLV LECTURE NOTES | CORPORATE LAW 2012
the said facilities, and it ultimately prejudices the
stockholders.
 Can the piercing doctrine be applied in an intra-corporate
situation?
 There was no injustice committed to Roxas, because she
chose to be in a corporation.
 The doctrine can only be asked if a person becomes a victim
in a situation to which she had no fault.
o General Credit Corporation v. Alsons Development
 Claim: alter-ego piercing
 T/F: Piercing is not only an equity remedy, it is transactional
in character. TRUE. It can only be applied to transactions
which became the basis of the piercing.
 T/F: Piercing doctrine, once applied, takes away the
corporation’s separate juridical personality forever. FALSE. It
is meant to apply to do justice in a particular situation. It is
res judicata.
o Piercing has no application when the dispute is intra-corporate?
Yes
 Parties: stockholders, incorporators, board of directors,
officers
 Intra-corporate Level
 Based on consent (consensuality): contractual binding
effect (obligatory force)
 Separate Juridical Personality
o Anti-thesis: Piercing the Veil
 No, you are estopped. You are bound by obligatory force. You
acknowledge the fact and legal consequences of separate
juridical personality.
 Piercing is not available in intra-corporate disputes
 You cannot be a victim of your own consent
 T/F: No form of piercing can be applied in an intra-corporate
setting.
 Fraud Piercing
o Concept Builders v. NLRC
 Fraud case
o In order for fraud piercing to be applied, it must be shown that it
is the corporation that is being used to commit the fraud, prevent
or escape liability.
 The alter-ego factors are the necessary ingredients to show
that there is fraud.
o Padilla v. Court of Appeals
IV. Corporate Contract Law
 Corporate Contract Law is peculiar to the Ateneo Law School.
o It is a term that had to be devised in order to put together many
concepts in Corporate Law that are actually based on promoting
policies under Contract Law.
o Contract Law made alive in the world of corporations.
o What areas in Corporation Law fall under Contract Law?
 Promoter’s Contracts
 De Facto Corporations
 Corporations by Estoppel Doctrine
 Trust Fund Doctrine
 Articles of Incorporation: Highest level of corporation law
 By-Law of the Corporation
o Manual of Corporate Governance
 All are based on consent, but governed mostly by
Corporate Law
o Corporate Contract Law animates the extra-corporate level of the
corporation.
 Except that there is now a convergence of all 3 levels in the
Articles of Incorporation and By-Laws
 Why do all of those relationships exist?
 3 Levels of the Extra-Corporate Level (Corporation and
Third-Parties)
 Corporation and its counter-part contracting parties
o The basis is the meeting of the minds
o Governed by Contract Law
 Corporation and its employees
o Governed by Labor Law, but it is established by the
contract of service (employment contract)
  Corporation and those members of the public injured by
its operations
o The basis in quasi-delict
o Governed by the Civil Code provisions on Torts
o Not based on the meeting of the minds
 What is the common denominator in the 3 levels? Consent, as
the necessary ingredient.
 Deals with the repercussions of the grant of consent.
 Pre-Incorporation Contracts
o Pre-Incorporation Subscription Agreement
o Promoter’ Contract
o Bayla v. Silang Traffic Co.
 In order for a contract relationship to exist, the following
must be present:
 Consent, subject matter, cause or consideration
 Whenever one element does not exist, the contract is
void.
 Whenever something is wrong with the consent, the
contract is voidable.
 When the contract is against public policy, the contract is
void.
 Whenever all 3 elements are present, but both parties do
not have consent, the contract is unenforceable.
 When all 3 elements are present, but there is economic
damage, the contract is rescissible.
 Subscription Agreement
 A contract wherein an outsider purchases unissued shares
of stock.
 Issuance and subscription are the same terms. It is
“issued” from the point of view of the corporation, and
“subscription” from the point of view of the subscriber.
 Mutual restitution is the effect of rescission, EXCEPT:
 When forfeiture is expressly agreed upon.
 In a subscription agreement, Corporation Law principles are
applied. While in a purchase of shares of stock, the principles
of Sales apply.
 In an ordinary contract of sale, with respect to the purchase
price, the obligor is the buyer, and the obligee is the
corporation. The corporation may waive its right to payment
of receivables.
 Differences between an Ordinary Purchase:
 In a true subscription agreement, waiver of collection of
unpaid subscription is ultra vires and void. (Waiver)
 In a subscription agreement, it is not possible for the
corporation to rescind. (Rescission)
 In a subscription agreement, the moment the corporation
becomes insolvent, all subscriptions become immediately
due and demandable despite an agreement to the
contrary. It is overtaken by corporate law doctrines. (Full
payment)
 In a subscription agreement, by merely subscribing, you
assume being part of the Intra-Corporate Doctrine.
o In an ordinary purchase agreement, the buyer does
not become an owner/investor/part of the family of
the corporation, but only becomes such after full
payment of the price, or
 In a simple purchase agreement, the intention is to
acquire property (shared). In a subscription agreement,
the subscriber is committing himself to be an investor. An
investor becomes a member of the family.
 See Section 60 of the Corporation Code
 Every contract involving unissued shares is always a
Subscription Agreement. However, it is governed by Corporate
Contract Law.
o Cagayan Fishing Dev. Co. v. Teodoro Sandiko
 When a contract is void, do third parties have the right to
raise the nullity of that contract? No, under the principle of
relativity.
 What makes a contract a promoter’s contract? A promoter’s
contract is one that is entered into with a corporation that is
yet to be formed.
6 CLV LECTURE NOTES | CORPORATE LAW 2012
 T/F: Every contract that is entered into in behalf of the
corporation that does not yet exist is a promoter’s contract.
FALSE, corporation by estoppel doctrine
 When does the situation go into a promoter’s contract or a
corporation by estoppel doctrine?
 In a promoter’s contract, the parties knew that at the
time of the meeting of the minds, the corporation was
still in the process of being incorporation. They are always
entered into by a promoter.
 In a corporation by estoppel scenario, there is a
representation by the supposed corporation that it exists.
They represent that the corporation exists already.
 Differences:
 Liability in Corporation by Estoppel
o The contracting parties will be liable as general
partners, meaning, unlimitedly liable.
o Parties will only be liable if they knew that the
corporation did not exist. Those who did not actively
participate in the operations are not liable.
 Liability in Promoter’s Contract
o The promoter will only be liable if the corporation
does not ratify the contracts entered into by the
promoter.
o If the corporation is not formed, the promoters will be
personally liable.
 The court refused to apply the ratification doctrine, because
the contract was void.
 The contract was void for lack of meeting of the minds
because at the time the sale was entered into, the
corporation does not yet exist.
 What is the status of a promoter’s contract at the time it was
executed? Unenforceable, because it was given in behalf of a
person who did not give its consent at all, and therefore,
subject to ratification.
 But why did the Supreme Court say it was void? Sandiko
transacted with Tabora, the parcels of lands were in the name
of Tabora.
 The promoter becomes liable, because Tabora will be treated
as the person to whom such third-person transacted with,
because such promoter’s contract will be valid as to the
agent. It is as though the agent (promoter) entered it in its
own name.
 Once it is ratified, it becomes valid as to the principal
(corporation).
 From the point of view of the principal, the contract is void. If
the corporation does not ratify it, it is not valid.
 Ratification by the corporation, through its Board of Directors,
cleanses the unenforceability of such promoter’s contract.
 When the seller fails to transfer ownership to the buyer, when
he is not in a position to transfer the same, such seller cannot
demand payment of the full price from the buyer.
o Rizal Light & Ice Co. v. Public Services Commission
 All that is required for a promoter’s contract to be valid is
when the corporation is organized and it expressly ratifies the
same.
o Caram, Jr. v. Court of Appeals
 Doctrines:
 A contract entered into by a promoter on and in behalf of
the corporation binds the corporation when it ratifies such
contract.
o The corporation is deemed to have ratified the
contract when it receives benefits thereto, through its
board resolutions, or pursues the contract.
 When the corporation does not ratify the promoter’s
contract, it is the promoter who becomes personally liable
for the contract entered into in behalf of the corporation.
o When do promoters become liable for the contracts
entered into in behalf of the corporation?
 Personally assumes liability
 Corporation fails to materialize
 Corporation fails to ratify the contract
o Is it possible for a non-promoter to be personally
liable in a promoter’s contract?
 o T/F: In a pre-incorporation contract, all persons who
have invested in the corporation who are non-
promoters can never be liable for a promoter’
contract. FALSE, non-promoters may be held liable for
contracts entered into in behalf of a purported
corporation.
 Those who are passive investors become limitedly
liable to the extent of their investment if they
benefitted from it. But what does “benefit”
mean? The business enterprise to which they
entered into is benefitted.
 Section 21, Corporation by Estoppel
 T/F: When both the corporation and the third-
party believe in good faith that the
corporation exists but in fact there was no
corporation, then Section 21 does not apply.
FALSE
o A contract cannot be undermined by the
fact that the corporation does not exist. A
party cannot use the fact that the
corporation does not exist in order to
avoid liability or obligation under the
contract.
o Corporation by estoppel doctrine applies
when there is or there is no fraud.
 The provision does not care about
corporations, but cares about the institution
of contracts (obligatory force). The provision
promotes the integrity of the contracts.
o Hall v. Piccio
 De Facto Corporation
 Organized under a valid law (corporation law)
 Colorable compliance with formalities of incorporation in
good faith
o For the juridical entity
 Use of corporate powers or actual organization
o For the business enterprise organization
o Examples: hiring people, renting office space, etc.
o It is meant only to protect part of the public in good
faith. This allows the public to believe that there is a
corporation. This is the only way the public sees the
corporation and claim good faith.
o But why does this element does not apply in
corporation by estoppel doctrine?
 SEC issuance of Certificate of Registration
o Specific rendering of “colorable compliance”
o Those who are part of incorporation must be sure that
they comply with this requirement.
 T/F: In the de facto corporation doctrine, the whole
public benefits from the de facto corporation. FALSE. Only
members of the public interests who deal in good faith
are the ones protected.
 Quo Warranto proceedings which challenge the authority of a
corporation to act as such can only be raised by the SEC.
(Section 20)
 Stockholders cannot invoke the estoppel doctrine, because
they can never claim the element of good faith.
 Stages of Corporate Contract Law
o Pre-Incorporation
 Pre-Incorporation Subscription Agreement
 Promoter’s Contract
 The parties acknowledge that the would-be corporation is still
in the incorporation stage.
o Post-Incorporation Stage
 Corporation De Jure
 Corporation De Facto
 Corporation by Estoppel
 At least one side did not know that the corporation does
not yet exist.
o Dissolution
 After Incorporation
o Corporation by Estoppel Doctrine
 Dissolution
7 CLV LECTURE NOTES | CORPORATE LAW 2012
 Trust Fund Doctrine (Section 122)
o In Corporation Law, outstanding capital stocks shall serve as a
trust for the benefit of the creditors of the corporation, except
for unrestricted retained earnings which may be distributed to the
stockholders.
 Assets (properties): everything owned by the corporation
 Sources:
o Liabilities: assets placed into the corporation by
creditors
o Capital stock: assets contributed into the company by
the owners
o Retained earnings
 How is it different from “income” and
“expenses?”
 It is the aggregate amount of the income less
expenses over a given period
 When expenses far exceed income, it is called
net loss
 How is net income different from retained
earnings?
 Accumulation from the life of the corporation
of all those income
 The assets contributed by the owners or taken
from lenders have now been increased.
 Deficit: expenses have exceeded net income as an
accumulated number
 Creditors
o Loan: Mutuum
o The relationship of creditors to the corporation is
governed by the law on Credit Transactions
o Found in the Extra-Corporate Level
 The corporation and the counter-contracting party
 Stockholders
o Governed by the law on Corporation Law
o Found in the Intra-Corporate Level
o Stockholders are covered by the Trust Fund Doctrine
but protects the interests of the Creditors to the
disadvantage of the stockholders.
 Legal Effects of the Trust Fund Doctrine:
 During the life of the corporation, it would be unlawful to
return or distribute any form of asset that is coming from
the capital stock
o This assets, when given to stockholders, are valid
distributions: proper reduction of capital stock
o Distribution of dividends is valid because it is sourced
from Retained Earnings
o Talks about actual capital received by the corporation
 There can be no proper waiver of Subscription Receivables
from stockholders because they are part of the Trust
Fund.
o Consequence:
 They become immediately due and demandable
despite what has been stipulated in the
subscription agreement.
 Any dividend payment not from unrestricted Retained
Earnings is void.
o Any salary or remuneration that is not reasonable is
void.
o Donation is against the Trust Fund Doctrine if it is
unreasonable.
o Donation that is unreasonable is void because it takes
away assets that are either for creditors or
stockholders.
 When the corporation is insolvent, the assets will be
divided among the creditors: all assets are held by the
Board for the creditors
o Insolvency: Assets > Liabilities
 What assets are not covered by the Trust Fund Doctrine?
 Assets that represent unrestricted retained earnings
 The Trust Fund Doctrine is limited only to capital stock
 Why does the Trust Fund Doctrine not extend to Retained
Earnings? Why is it limited to the capital stock?
  When a corporation is allowed to be a medium of doing o Corporation and directors and regulated by the Corporation
business, the Trust Fund Doctrine is being drawn to protect officers Code.
against Limited Liability.  Articles are inherently intramural  Purpose: to govern the inner
 It is the Limited Liability feature of a corporation that has and external workings and intramural
necessitated the creation of the Trust Fund Doctrine. o They are binding on third relationship
 Doctrine of Unlimited Liability: a person is not only liable parties because it is a public  It does not include the State.
to the extent of what he invested into the business, but document and the public is  Inherent in every association,
also with his separate properties (non-business assets) bound to know the contents of organization because of the
 Is there statutory basis for Limited Liability? None, it is the same. principle of survival and
derived from Strong Juridical Entity (Section 2)  The power to adopt and live by necessity.
characteristic of the corporation, based on the contract the Articles of Incorporation is  Amendment: at least the
law doctrine of relativity. expressed in the Corporation majority of the stockholders
 The general rule is actually “NO LIABILITY.” Code. of outstanding capital stock
 “Limited Liability” is a recognition that the corporation is  Without the power expressly
a tool for the benefit of the stockholders. granted to it, a corporation
o The aberration hurts the creditors, and therefore, cannot amend its articles of
because it is an aberration, the Trust Fund Doctrine is Incorporation.
a countervailing doctrine.  Purpose: meant to giver the
 It is meant to preserve the expectations that are corporation its separate juridical
possible, including stockholders. personality
 Illustration: o It’s Charter is a Primary
 Assets (P500M) = Liabilities (P200M) + Capital Stock Franchise in which the
(P200M) +Retained Earnings (P100M) Corporation is granted its
 The Board of Directors returns P200M of the Capital Stock separate juridical personality
o The stockholders are personally liable for the return o It constitutes the very life and
 To whom is the Retained Earnings owed? They eventually person of the corporation.
pertain to the stockholders o It is an exercise of legislative
 Board of Directors issues cash dividends of P100M: power. The power of the
o Assets (P400M) = Liabilities (P200M) + Capital Stock legislative power is plenary,
(P200M) + Retained Earnings (0) the only limitation being is
 Without the Trust Fund Doctrine, is it lawful for the the Constitutional provision
corporation to return P200M? No, see Section 122.  Amendment: 2/3 of the
 Board of Directors returns the capital stock stockholders of outstanding
o Assets (P200M) = Liabilities (P200M) + Capital Stock (0) capital stock
+ Retained Earnings (0)
 When net losses happen further, stockholders can  Ways to adopt by-laws:
no longer take it on the chin because the capital o As part of incorporation
stock is already declared out. It is the creditors o After 30 days after incorporation
who take it on the chain and sustain the loss.  The by-laws, as a general rule, will not be binding to govern
o The creditors are not supposed to absorb anything. the intramural affairs of the corporation until the issuance of
 How do the stockholders sustain loss? When he loses even certificate of the SEC, EXCEPT when the SEC has failed to act
his capital, and when capital stock is wiped out by deficit. on the application for approval of the by-laws within 6
o Ong Yong v. Tiu months.
 Pre-Subscription Agreement
 The Trust Fund Doctrine is Panoramic because it is meant to VI. Corporate Powers and Authority
protect the whole purpose of the corporation (to do business  It does not go into centralized management. It looks at the
for the benefit of stockholders) corporation itself as a person that enters into contracts.
o Looks at the capacity of the corporation as a party to the contract
V. Articles of Incorporation and By-Laws it enters into.
 Articles of Incorporation and By-Laws are the greatest manifestations  Juridical Level
of Corporate Contract Law. o A corporation is a creature of the law.
o It is a creature of limited powers. (Sec. 2, 38, 45)
Articles of Incorporation By-Laws  Section 2: old definition of corporation law; concentrates as
 Incorporators are those who  Contractual Relationship merely constituting the corporation as a creature of the law
originally sign the Articles of between and among: o Intra Vires v. Ultra Vires Doctrine (Sec. 45)
Incorporation o Corporation and the  Only contracts and transactions that have been entered into
o Are they the only ones bound stockholders within the corporation’s expressed or implied powers are
by the Articles of o Corporation and the deemed to be valid.
Incorporation? No officers  It can only act in the legal world only with the powers given
 Stockholders: bound by o Stockholders and officers to it by the law.
the doctrine of  By-Laws are a public  A corporation is only a tool of the state. It is a legal fiction.
consensuality document, but are Outside of the grant, the corporation does not exist.
 Right to associate intramural.  Contract entered into ultra vires.
 Contractual Relationship between:  Does not represent the  Express Powers: that which is granted by the state
o Corporation and the State: contractual relationship  Sources of Incidental Powers:
Charter (Certificate of between the corporation and o Corporation Code, Sec. 36
Incorporation) the State. o Charter: it defines what its area of business is
o Corporation and the  The power to adopt and live  Implied Powers: powers incidental to a corporation’s
stockholders by the By-Laws is inherent, expressed powers
o Among the stockholders even if not granted by the  Incidental Powers: comes as a necessary or reasonable
o Directors and officers and State. However, such power outcome of a corporation being a business enterprise
stockholders is expressed because it is

8 CLV LECTURE NOTES | CORPORATE LAW 2012

  When a corporation enters into contracts outside its
expressed, implied, and incidental powers, the acts are void
for lack of consent.
 Sec. 42: a corporation must define its primary purpose and
secondary purposes
 Ultra vires doctrine is a doctrine that holds its sway in the
Juridical Entity Level and conflicts with the Extra-Corporate
Level
 What is important in the 3rd level is not the corporation,
but the transactions.
 Sanctity of contractual relations is the most important
aspect.
 The ultra vires doctrine is meant to strengthen the
administrative power of the state over the corporation
when it conflicts with the sanctity of corporate contracts.
 3 Types of Ultra Vires Doctrines:
 Classical (Sec. 45): only contracts entered into within the
expressed, implied, or incidental powers are valid
o Entered outside: the contracts are void for lack of
consent
o The courts will look at the articles in order to
preserve the contract.
 2nd type: entered into within a corporation’s expressed,
implied, or incidental powers, but not by the Board of
Directors
o Meant to champion centralized management
o When the corporation acts other than through its duly
authorized agents, the contract is void
 Basis why it is void and not merely unenforceable:
contrary to corporate law principles (centralized
management)
o Ultra vires doctrine as it applies to centralized
management
 General ultra vires: against the law, public policy, morals,
etc. (Art. 1409 of the Civil Code)
o Section 40: Sale of Disposition of Assets
 Sale of all or substantially all of the assets of the corporation
o Section 42
 Investment in non-primary purpose business
DISCUSSION
3 Levels of Legal Relationships in Corporation Law
 Juridical Entity Level
o State v. Corporation
o Promotes the policies and issues when trying to develop the issues
between the corporation and the State
 Intra-Corporate Level
o Stockholders v. Corporation
o Stockholders v. Board of Directors
o The relationship between the corporation and the stockholders,
corporation and agents, stockholders among themselves,
stockholders andagents
o Repurcission of SJP is Limited Liability
 Extra-Corporate Level
o Corporation v. Third Persons
o Relationship between the corporation and those it deals with,
corporation and its employees, corporation and those injured by it
without contractual relationships (quasi-delicts)
o Value of SJP
 Third persons can only sue the corporation, and not the
stockholders or the corporation’s agents
 Doctrines:
 Relativity
 Consensuality
4 Principles of Corporate Law
 Strong Juridical Personality
o T/F: It only operates in the juridical entity level. FALSE, it always
operates in all levels
o The value of SJP in the Juridical Entity Level
o Tool: Charter/Articles of Incorporation
o Statutory basis: Section 2
9 CLV LECTURE NOTES | CORPORATE LAW 2012
o Doctrines that animate the relationship between the corporation
and the State
 Creature of the State
 Creature of limited powers
o What is the relevance of SJP in the Intra-Corporate Level?
 See repurcissions of SJP above
o Extra-Corporate Level
 See value of SJP above
o A corporation can only enter contracts which it is empowered to
enter under its express, implied, or incidental powers.
o T/F: In SJP, unless the contracts it has entered into is within its
expressed, implied, or incidental powers, such contracts are void.
FALSE, see countervailing doctrines
 Overcome by the Public Policy: A third party in good faith who
enters into a contract with a purported corporation has the
right to expect that the contract entered into are valid and
binding (animates all 3 levels)
 Statutory basis: all contracts entered into are binding in
whatever form they may have been entered into (Civil
Code)
 Constitution: non-impairment clause
 Countervailing Doctrines have been developed in order to
promote the non-impairment clause:
 De Jure Corporation Doctrine
 De Facto Corporation Doctrine
 Corporation by Estoppel
 Limited Liability
o Refers to the Stockholders
o Tool: Separate Juridical Personality
o Statutory basis: none, because it is borne out by SJP (logical and
natural consequence)
 Supported by Centralized Management
o Doctrine: Relativity
o T/F: The public who enters a contract with a corporation has no
cause of action against the parties behind the corporation.
 T/F: There is no countervailing doctrine. FALSE, piercing
doctrine
 Piercing Doctrine ensures SJP never becomes a tool to
frustrate legal relations
 Promotes the public policy:
o Promotes the value of SJP
o Those who have invested in the corporation are assured that the
liabilities and debts assumed cannot be ascribed to them in excess
of what they have or promised to invest.
o Is it relevant in the Juridical Entity Level?
o Is a corporation limitedly liable?
o It comes after SJP, because it is a logical and natural consequence
of SJP under the doctrine of relativity.
o The value of Limited Liability is also the value of the SJP
o What is the public policy behind the piercing doctrine that it
overrides SJP?
 Relativity and obligatory force are set aside in order to
promote the public policy that every member of the public
dealing in good faith with the corporation has the right to
expect that his contracts are valid and enforceable, and the
use of the corporation as a tool cannot be used as an excuse
to enforce such contract.
o T/F: Every enterprise that is granted SJP is granted limited
liability. FALSE, partnerships
 In spite of the grant of separate juridical personality to a
partnership, there is still no limited liability because there is
no centralized management; the partners are mutual agents
of each other
 Centralized Management
o Refers to the Board of Directors and the Corporation
o Cements Limited Liability
o Tool: Board of Directors
o Statutory basis: Section 23
o Operative Doctrine: Business Judgment Rule
 Decisions and actions of the BOD are presumed to be in good
faith and in the furtherance of the purpose of the corporation
  When a corporate action has been entered into by its BOD and
even though it causes losses to the corporation, the BOD
cannot be held liable thereto
 Basis: BOD is the agent of the corporation
 When are agents liable even when he acts in the name of
the principal and in the name of the principal?
o The agent expressly binds himself
o Negligence
o Bad faith
o Fraud
 T/F: The power to appoint a sub-agent is never presumed.
TRUE
 In the law of agency, an agent can appoint a sub-agent
unless prohibited by the principal.
 The Board appoint a sub-agent is inherent
o Board of Directors represent power to control and manage a
corporation and manage its assets
 Exercise power in what capacity? Agents
 For the benefit of the corporation (primarily) and stockholders
 Fiduciary bound to the corporation, as agents, and
stockholders, as trustees
 Board of Directors: trustee
 Stockholders: beneficiary
 Manifestation: Section 23 grants naked title to the Board
of Directors
o Section 23
 Business Judgment Rule
 Ultra Vires Doctrine
 Those entered into outside its express, implied, or incidental
powers
 Contracts are void because they are contrary to law
o Section 2: limited powers
 Juridical Entity Level
 Enforced by the Duty of Obedience
 Those entered into within its express, implied or incidental
powers but not through or by its Board of Directors
 Contracts are void because it is contrary to law
 Section 45
 Intra-Corporate Level
 Countervailing Doctrines:
o Apparent Authority
 The board can act by itself, but more often than
not, it asks another person to do it.
o Estoppel or Acceptance of Benefits
 Section 23 says that the Board of Directors’s
power is plenary
 There is no need to ask if the Board is acting
within its authority
 Cannot overcome the public policy that a member of the
public…
 Free Transferability of Units of Ownership
o Refers to the Stockholders
ROUND-UP
 The consent of the corporation in all its contracts is through the
consent of the Board.
 Enter into Partnership or Joint Venture
o Not an implied power or inherent
 Section 36
o Power to Donate or Provide for Employee’s Gratuity
 Not an inherent power
 Maximization of stockholder’s value or profits
o Any transaction against maximization of profits is
ultra vires
 When the donations or gratuity are unreasonable, they are
unreasonable
o Power to Sue and be Sued
 Inherent in the Board because it is plenary, EXCEPT in a
derivative suit
o Power to Sell
 By Board resolution
o Power to Loan
10
 By Board resolution
VII. Directors, Trustees, Officers
 Corporate Governance: Centralized Management
o Section 23
 Granted naked title to the properties
 Board of Directors become the agents of the corporation:
fiduciary relationship by the very nature of the relationship
o T/F: Members of the Board are elected into office by the
stockholders. TRUE
o Power to Remove during the Term
 Vested in the stockholders: 2/3 of the outstanding capital
stock
 Removal may be for or without cause
o Compensation
 By-laws
 Vote by at least a majority of the OCS
o Minority Stockholders
 Elected through a cumulative voting system
o Can directors, by majority vote, remove or suspend one of their
own? No
 Such provision appearing in the articles of incorporation or by-
laws shall be void
o Is it valid for the Board to resolve for themselves compensation?
No
 Provided for in the articles? No
o T/F: The Board owes fiduciary duties to the stockholders. TRUE
o T/F: The Board owes its fiduciary duties because they are agents
of the stockholders. FALSE
 What is the legal basis of this relationship of the board to the
stockholders? Section 23 (power flows from the law, not from
the stockholders), the board of the directors are trustees,
while the stockholders are beneficiaries.
 The board holds legal and naked title to all corporate
properties: Section 23, the board of directors holds all the
properties of the corporation
o Power to Remove, Compensate, Elect, Forgive, Discipline
 The powers are not given to the board
 If it is not provided for in the Code, the powers of the
board is plenary (business judgment rule)
o Good Corporate Governance Principle:
 All powers to discipline/compensate are not given to the
board: each of them must be accountable only to the
stockholders
 Cumulative Voting
 Directors are elected annually by stockholders in an annual
stockholder’s meeting
 Any provision against it is void
 Qualifications and Disqualifications
 They occupy a fiduciary relationship, and it is best that it
is peopled by those who can discharge those duties.
 Qualifications:
o Every director must own at least 1 share of stock in
the corporation, which shall stand in his name on the
books
 To avoid the directors being strangers to the
corporation
 The moment they no longer own at least 1 share
of stock, they cease to be directors
o At least a majority of the members of the Board are
residents of the Philippines
 For them to be able to oversee the corporation
 The law does not say what the consequences are
if the majority of directors cease
 Disqualification:
o A director must not have been convicted of an offense
punishable by imprisonment exceeding 6 years or have
committed any violation of the code within 5 years
prior to his election
 There must be actual conviction of a crime
 Gokongwei v. SEC
CLV LECTURE NOTES | CORPORATE LAW 2012
  The qualifications and disqualifications in the code are  In agency: preparatory and progressive
minimal, and it is possible for the corporation to adopt  Section 2 and 45: creature of limited powers
additional qualifications and disqualifications  Loyalty
o Usually expressed in the by-laws  Strongest in the intra-corporate level
 Must be in the articles of incorporation, by-laws,  Diligence
corporation code, but never in a board resolution, house o Doctrines in Contract Law
rules, minutes of the meeting  Relativity
o Against good corporate governance: a director should  Incorporation: every contract contains with it every relevant
not be under the power of the board to discipline provision of law
 Fiduciary Duties  Obligatory force
o Loyalty  Mutuality
o Obedience: owed to the corporation  Autonomy
o Diligence  Consensuality
o To Inform o Duties are open-ended, while obligations are close-ended
 Cumulative Voting vs. Straight Voting  What makes obligations close-ended? What does it mean that
o Non-stock corporations: default rule is straight voting an obligation is close-ended?
o T/F: Cumulative voting is the default rule in stock corporations.  Doctrine of mutuality: obligatory force is only within the 4
FALSE, it is the only rule allowed in stock corporations corners of consent
o Non-stock voting: can be straight voting or cumulative voting  Duties are based on persons
o Illustration: o Duties of Directors and Officers
 In a 5-man board, there are 2 sets of stockholders A (80), and  Obedience
B (20)  Obligation that when they pursue the corporate business,
 Cumulative Voting they stay within the express, implied, incidental powers
o Classic Formula: (Cole Formula) of the corporation
ABC Corp. : 5-man Board  Loyalty
Authorized Capital Stock: 1.0 Million  Because directors and officers are agents of the
Subscribed Stock: 0.5 Million corporation, then, in conflict of interest situations, they
Paid-up: 0.3 Million cannot choose their own interest over that of the
Stockholder A: 300,000 shares corporation’s, and when they do, they become liable.
Stockholder B: 200,000 shares  Is it expressed twice in the Corporation Code?
Voting power: 2,500,000 (500,000 x 5) o Section 31 par. 2
 Directors, trustees, or officers become personally
S1 = S x D1 +1 liability
D+1  He owes everything with respect to that
business to the corporation, and holds such
1,000,000 = 2,500,000 x D1 +1 property for and in behalf of the corporation.
5+1 (Disgorge)
o Constructive implied trust (bad faith)
999,999 = 2,500,000 x D1 o Account for all profits
6  Par. 1: become solidarily liable (duty of
diligence)
D1 = 2.399 o Section 34
 Defects:  Covers only directors
 Does give a strategy o Difference between Section 31 par. 2 and Section 34
o It only answers the question: How many directors a  In case a director violates his duty of loyalty, the
bloc is assured of electing? more prevailing provision would be Section 34.
 Assumes that there are only 2 blocs  The act of the director in entering into the
 Occasionally erroneous contract or transaction in Section 34 in violation
o D’Hondt Remainders Table of the duty of loyalty can be ratified by a vote of
ABC Corp. the stockholders representing at least 2/3 of the
ACS: 1 Million OCS.
SCS: 0.5 Million  Section 31 par. 2 is non-ratifiable?
Paid-up: 0.3 Million  T/F: Section 34 expresses a clear provision for
5-man board ratification that allows a director, whenever
Total Voting Power: 2,500,000 ratified by 2/3 of the OCS, to cheat the rule.
Carlos Group: 2,000,000 o Is disgorgement preventable by obtaining
Rodriguez Group: 500,000 the ratificatory vote of the stockholders?
o When the breach has been committed,
1 2 3 4 5 what is the consequence of that breach?
Carlos 2,000,00 1,000,00 666,666.6 500,00 400,00 The refunds the profits to the
0 0 7 0 0 corporation, to ensure that if it is a net
Rodrigue 501,000 250,000 166,666.67 125,000 100,00 loss, only the director will suffer, and if it
z 0 a net profit, it will go to the corporation
 T/F: Returning the profits is an obligation,
 Determines how many candidates a group can present except when ratified by the stockholders.
 Can only encircle one that which is clearly higher o To ratify it as not a breach of loyalty.
 Answers the following questions  T/F: In Section 31, when an officer has
 Number of seats assured of getting breached his duty of loyalty, his obligation
 How many nominees should I cast my ballot for? now is to disgorge, cannot be ratified by 2/3,
 Obligations versus Duties even if 2/3 of the OCS says that “he can keep
o Duties: it,” it will not absolve him from his obligation
 Obedience: obedience to the mandate of the State to return.

11 CLV LECTURE NOTES | CORPORATE LAW 2012

 o Between a director breaching his duty of
loyalty, and a trustee or officer violating
their duty, the director has much better
case, because his actions can be ratified.
(Wrong interpretation of the law)
 What is it in the position of a director that the
law goes out of its way to make it ratifiable
on their part?
o Can directors of a stock corporation be
removed by a majority vote of the rest of
the board? No, only stockholders can
remove them and the vote of the
stockholders is final (power to remove is
vested in the stockholders) Section 28
o What about trustees? Removed in the
same manner as directors
o Can members of the board or trustees be
allowed, by the fact that they render
service, receive remuneration?
 No, because the position of a member
of the board is non-remunerative and
quasi-public in character since they
are also stockholders of the
corporation, and therefore, running
the company and getting the best
return is the best motivation.
 Trustees? A trustee is also a member
of a non-stock corporation and there
to render public service and not for
profit.
 T/F: Directors are in a more favorable
position when it comes to breach of loyalty,
because their act of stealing is raitfiable,
whereas trustees and officers and their acts of
stealing are non-ratifiable. FALSE
o It is in fact the trustees and officers which
are favored, and it is the directors which
are disfavored.
o Section 34 expressly provides that the acts
of the directors are only ratifiable by a
vote of the stockholders, while, Section
31 is silent regarding ratification, (but the
act of “forgiving or ratifying” the act of
the trustee or officer is within the
business judgment of the board)
 Section 23 gives centralized
management of the board.
 “Unless ratified…” under Section 34 is
the exception that is provided for in
the “Unless otherwise provided in this
Code” in Section 23.
 It (Section 34) needs the ratification
by the stockholders because it is
“otherwise provided” in Section 23.
 Acts under Section 31 par. 2 is ratifiable by
the board because it has plenary power
under Section 23.
 Diligence
 Directors should not:
o Willingly and knowingly vote for patently unlawful
acts
o Act in gross negligence in conducting the corporate
affairs
o Act in bad faith
 Section 31 is not the only “standard of diligence” because
this standard may still evolve based on jurisprudence.
 Inform
o Tramat Machineries v. Court of Appeals
 David Ong was sued in his personal capacity. He claims that he
cannot be held liable with the corporation because he was
merely acting in behalf of the corporation and cannot be held
liable for the non-payment of the consideration of the tractor.
12
 As a general rule, the president or officers of a corporation
cannot be held personally liable for the obligations of the
corporation.
 The duty of loyalty is intracorporate character: corporation
(board) v. defaulting director, trustee or officer
 The contract entered into by a director (in conflict) is still
valid, but insofar as the 3rd party is concerned he is out of
the picture, and any profit he earns, he has to account.
 T/F: The duty of obedience is purely intracorporate. FALSE
 Relates to the duty of the board of the directors (owe the
duty of obedience to the corporation and ultimately to
the State) to the State and is primordial in the Juridical
Entity Level
 T/F: It has no application in the intracorporate
relationship. FALSE
o It affects the relationship between the board and
corporation. If the board of directors enter into a
contract outside its express, implied, and incidental
powers, they are violating their duty of obedience.
 The duty of obedience is really the relationship between
the agents (directors) and the principal (corporation),
because it is to them that they owe the duty of
obedience.
 The rationale behind the duty of obedience is because of
the corporation wishing to stay within its charter because
of its relation to the State. If the corporation is acting at
the mercy of its board, then it requires from them the
duty of obedience.
 Then, the duty of obedience is primordial in the
Intracorporate Level.
 Breach of the duty of obedience gives rise to:
o Make the agent of the corporation personally liable to
the corporation for any damages sustained by the
corporation.
o As a corporation now becomes liable to the 3rd person
they have dealt with, the duty of obedience is now
primordial here because it is creates the duty on the
part of the board to enter into contracts only within
its express, implied, and incidental powers.
o Do the agents of the corporation become personally
liable to the 3rd person?
 As a general rule, they do not become liable to
the 3rd party.
 When they violate their duty of obedience, what is the
status of that contract? It is ultra vires.
o The contract is not void, because although the duty of
obedience is important in an agency relationship and
under Sections 2 and 45, it cannot overcome public
policy.
 Third persons who deal with the corporation in
good faith have the right to expect that contract
is to be complied with.
 T/F: The duty of diligence is primordial only in the Juridical
Entity Level. FALSE
 T/F: In fact, it has no meaning in the Juridical Entity
Level.
o Ultra vires of the 3rd type: all contracts against laws,
public policy, public order are void.
 T/F: Ultra vires cannot overcome public policy in
extra-corporate relationships. FALSE, when a
contract is contrary to law, morals, public policy,
public order, even those who deal with the
corporation in good faith, it is still void because
the public policy (3rd persons who deal in good
faith…) cannot overcome a greater public policy
(contracts contrary to…)
 Expressed in Article 1409 and the provisions on
the freedom to contract
 T/F: When violating the duty of diligence, it is essentially
intracorporate in character. TRUE
o The board can only act if they act within the scope of
their authority (express, implied, incidental powers)
CLV LECTURE NOTES | CORPORATE LAW 2012
 o The fiduciary obligation of the agent to the principal
requires that it take care of the affairs of the
principal.
 He should not accept that fiduciary relationship if
he is not ready to take care as his principal
himself would.
o T/F: When you violate the duty of diligence, it has no
effect at all in the extra-corporate level. FALSE
 Every violation of the duty of diligence has an
impact on every contract, transaction, project
that the corporation deals with to the public, and
all of these is done by the corporation through its
board.
 Therefore, the duty of diligence has the following
effects insofar as the public is concerned:
 It will make the officer acting personally
liable to the corporation
 General Rule: An agent is never liable for the acts
and contracts it has entered into for and in behalf
of the corporation.
 Law on Agency: an agent acting within the
scope of his authority and in the name of the
principal cannot be held liable for the
obligations entered into in behalf of the
corporation.
 The agent is a stranger to that contract.
 EXCEPTIONS:
o Bad faith
o Fraud
o Negligence
o Makes himself personally liable
 Exceptions are found in Section 31 but differently
worded
 Agent: mere negligence
 Corporation: gross negligence makes the
board or officer personally liable
 Gross negligence
 Bad Faith: almost at the level of fraud; moral
obliquity
 Fraud: malicious intent
 The general rule is that when you set out liability, is the
officer, director, or trustee of a corporation, when directing
corporate affairs, is he personally liable? No
 EXCEPTIONS:
o Ascends to a patently unlawful act
o Acts in bad faith
o Acts in gross negligence in conducting the affairs of
the corporation
 Personal liability of a corporate director, trustee or officer,
along, although not necessarily with the corporation, may so
validly attach as a rule only when:
 He ascends to a patently unlawful act of the corporation
 For bad faith, gross negligence in directing its affairs
 For conflict of interest resulting in damages to the
corporation if stockholders or other persons
 Consents to the issuance of watered stocks, or who,
having knowledge thereof, does not express his objection
in writing (Section 65)
 He agrees to hold himself personally liable with the
corporation
 He is made, by specific provision of the law, to personally
answer for his corporate acts
 Branches of the BJR
 The acts of the board, made in good faith, cannot be
questioned by the court, and the court cannot supplant its
judgment
o The acts of the board are acts of the corporation
 The board cannot be made liable for the obligations of the
corporation when they act within the scope of their
authority
13
o Directors can make mistakes. Can they be liable for
the mistakes they made for the corporation? No, as
long as it is not gross.
 The act of the board is the act of the corporation, and no
power on earth can set it aside even if you can prove
beyond reasonable doubt that the act is going to cause
damage.
o For as long as you cannot show abuse of discretion,
gross negligence, bad faith, the act sticks. The proof
that it will cause loss to the corporation is one that
the courts cannot set aside.
 Just because losses or damages are sustained by the
corporation, by the exercise of the 1st branch of the BJR
does not make the officers and directors liable because
the general rule is that officers and directors are never
liable.
o A business is a risk, and the board of directors
handling the affairs of the corporation is not expected
to know all the consequences of their actions.
o You cannot make the board of directors a guarantee
for profitability.
 Corporate Officers
o Gurrea v. Lezama
 The power to enter into a contract, as a general rule, is with
the Board of Directors.
 If a general manager is basically hired by the board, where
does he get his authority that in order to terminate him, it
cannot be by board resolution alone?
 A President is an officer of the corporation. If you need to
terminate him, do you need 2/3 ratificatory vote? No
o Corporate Secretary? No
o Treasurer? No
o Corporate Officer? No
 There is no provision in the law that says that an officer
can only be terminated with 2/3 ratificatory vote.
 Illustration:
 ABC Corp. has a provision in its AoI that says “officers of
the corporation cannot be removed by mere board
resolution, and requires the ratificatory vote of the
stockholders representing at least 2/3 of the OCS.”
o Is that provision valid? Yes
 The power to hire and terminate officers is within the
business judgment powers of the board.
o T/F: Can be limited by by-law provisions. TRUE
 A general manager is not an officer of the corporation,
because an officer of a corporation are the only ones
mentioned in the by-laws of the Corporation Code.
 Since a general manager is not an officer, the 2/3 ratificatory
vote of the OCS is not required to terminate him.
 A corporate officer is one so named in the Corporation Code,
namely, the President, Corporate Secretary, and Treasurer,
and those enumerated in the by-laws of the corporation.
 Only corporate officers do not enjoy security of tenure and
within the business judgment of the board to hire and to fire.
 Only corporate officers, as defined by Gurrea, are bound
by the 3-fold duties?
 Illustrations:
 De Leon is the EVP of ABC Corp. He has been in that
company for 10 years without an employment contract,
but he is not within the by-law description of an officer.
The board says “we’re firing you, Mr. de Leon.” And the
board passes a resolution that says his term ends by the
end of this month. De Leon says it cannot be. The board
says he was directly hired by the board. De Leon says “you
cannot fire me.” Who wins?
o De Leon wins, because he is not a corporate officer,
and falls under security of tenure.
 Floor Manager was hired 3 years ago by the board. The
board saw him one morning, with his hair parted in a
different way. The board said the reason they hired him
was no longer there, so they fired the floor manager. Flor
claimed that the board couldn’t fire him. Who wins?
CLV LECTURE NOTES | CORPORATE LAW 2012
 o Flor wins, because of security of tenure, he cannot be
removed except for cause.
o If the “Floor Manager” is included in the list of
corporate officers in the by-laws, the corporation will
win because it is within their business judgment to
hire or to fire him.
 Gurrea lost, despite his being a non-officer, because before
Marcos became president, it was within the corporation’s
prerogative on who to hire and who to fire.
 There was no security of tenure when Gurrea was
decided.
o Mita Pardo de Tavera v. Tuberculosis Society
 Tavera, an employee of the corporation, was claiming that he
was illegally dismissed, on the ground that she can only be
removed for cause, as provided in the by-laws.
 “Employees can only be removed for cause by a decision
of the board.”
 “Officers serving at the pleasure of the board can be
removed at the pleasure of the board.”
 Tavera was not “removed,” because the letter of appointment
was for only a temporary position because it did not state the
term.
 For the by-law provision to apply, an employment contract
should have been executed, but there was none.
 Security of tenure
 Cannot be removed except for cause
 Corporate Law
o General Rule: The hiring and termination of corporate
officer are within the business judgment of the board
 The President, Corporate Secretary, and Treasurer
must be within the business judgment of the
board, because if you take it out of the business
judgment, then you undermine centralized
management and endanger the operations of the
company.
o General Rule: When it comes to employees, they are
protected by the Constitution and can only be
removed for cause.
 Security of tenure is allowed to civil service eligibles.
o Are the exemptions found in the Constitution? Yes
 The general rule is that the power of the board to hire or
to fire is overcome by the Constitutional provisions on
security of tenure, which means that they can only fire
for cause, except when it comes to corporate officers.
o What is the basis for that exception?
o What is the reason why corporate officers should be
within the business judgment of the board?
 Corporate officers are so integrated with the
operations of the corporation that their ability lie
in the heart of being able to pursue the business
enterprise successfully or not.
o Corporate officers are basically employees of the
corporation, and as such, why would corporate officer
considerations of the corporation law become an
exception to constitutional precepts that makes no
exception?
o Why is it that corporate officers although basically
employees, do not enjoy security of tenure?
 The Supreme Court says so.
 A corporate officer is not entitled to security of tenure,
because he is within the business judgment of the board to
hire and to fire.
 Except:
o By-laws provide for a term
o By-laws provides otherwise
o In the absence of a by-law or article provision, he has
signed an employment contract that has provided a
term
 The board has already exercised that judgment.
 A non-officer is entitled to security of tenure because it is
provided for by the law.
o Nacpil v. International Broadcasting Corp.
14
 Labor problems involve non-officers, and within the
jurisdiction of the NLRC
 Officers are not considered as employees, and any dispute
with regard to their situation is called intracorporate. It is
wrong for the RTC to handle a case involving an employee,
even if he is very high (EVP), because it within the original
jurisdiction of the NLRC, and vice-versa.
 Labor Arbiter
 Can argue that business judgment does not bind them,
because they only know labor law
 RTC
 They don’t know anything about labor law.
 Although it was not included in the roster of officers in the
by-laws, it was provided that the board of directors could
elect officers as may be necessary.
 The appointment of Nacpil as comptroller was approved
by the board. He was deemed a corporate officer and
therefore the SEC has jurisdiction.
o A provision in the by-laws that says, “and the board is hereby
authorized to elect officers as it may deem necessary,” was first
recognized in Tabang v. NLRC.
 When a by-law provision empowers the board to elect officers
as it wishes, then that’s the source of every appointment?
 Without the by-law provision, can the board appoint such
other officers? Yes, Section 25
 Ability to appoint officers does not have to be in the by-
laws?
 T/F: The power to appoint is inherent. TRUE
 It is in the power to terminate that the power of the
board has been so structured.
 When you appoint, you don’t need a by-law provision for
that (Section 23)
o Provision in the by-law that they can appoint officers
is a suplusage
 Nacpil and Tabang: Although the position may not be
specifically included in the roster of corporate officer, so long
as it is provided for in the by-laws, the board of directors has
the power to appoint officers as it deems necessary (enabling
clause)
 Enabling clause: no security of tenure
 Section 23: security of tenure
VIII. Non-Stock Corporations, Foundations and Cooperatives
 Primary legal distinction between stock corporations and non-stock
and non-profit corporations: diverging rules on profit distribution
o Stock corporation: fiduciary obligation to provide profits;
Stockholder’s Theory
 It is easy to verify contractual expectations
o Non-stock corporation
 Difficult to confirm contractual expectations
 Medium allowed by the State to encourage citizens to be able
to part with service, volunteerism, charitable purposes, with
a clear assurance that the money will be channeled to those
purposes
 Operating Doctrine
o Rationale for eleemosynary purpose
 Private sector comes into an area usually for public purpose
that is supposed to be provided by the government
o Contractual failure
o Prohibition on distribution of profits/dividends
 Essence of Non-Stock Corporations
o Eleemosynary Purpose
o Non-distribution of Profits (Section 87)
 It is possible that profits are derived
 Those profits are derived primarily from its eleemosynary
purpose and they are spent for the same
 Implications when it Earns Profits
o General Rule: a non-stock corporation is not empowered to
engage in business for profit. It may be allowed to engage in
profitable business only if it is necessary or essential to carry out
the purposes for which it was organized
CLV LECTURE NOTES | CORPORATE LAW 2012
  Mere fact that it may earn profit does not make it a profit-
making corporation where such profit or income is used to
carry out the eleemosynary purposes
 Implications where there is “Capital Stock”
o Statutory power to declare dividends
 There must be a provision in the articles of incorporation and
by-laws prohibiting the distribution of dividends
o Voting rights and cumulative voting
 Section 24 v. Section 89
o Transfer of “shares” and Rights
 Section 63 v. Sections 89 and 90
 Membership is not a proprietary right, it is a condition
 Distribution of Net Assets and Profits upon Dissolution
 Applicability of Stock Corporation Provisions
o Section 87
o Exceptions:
 Section 6: providing for voting rights even to non-voting
shares on enumerated major corporate acts and transactions
 Section 89 applies: members classified as non-voting in
the articles of incorporation or by-laws shall prevail
 Section 23: on requirement that only individuals can be
members of the Board of Directors
 Section 23: limiting the number of members of the Board of
Directors to not exceeding 15, and can sit in office only for 1
year
 Section 92 applies: AoI or by-laws may provide for a
number of Board of Trustees exceeding 15
 Section 24: which makes it mandatory that the cumulative
voting system be applied in all election of directors
 Section 25: corporate officers shall be elected by the Board of
Directors
 Section 92 applies: unless otherwise provided in the AoI or
by-laws, officers of a non-stock corporation may be
directly elected by the members
 Section 51: all stockholders’ meeting be held within the place
where the corporation’s principal office is located
 Jurisdictional for stock corporations
 Section 58: proxy voting and representation cannot be denied
stockholders, but can only be regulated through appropriate
by-law provisions
 Section 89 applies: unless otherwise provided by the AoI
or the by-laws, a member may vote by proxy
 Section 63: essential transferability of shares are general rule
against unreasonable restrictions
 Section 90 applies: membership is inherently personal
 Section 69: questions on delinquency sale of shares of stock
must be brought within the 6-month period does not apply to
delinquency issues on members in a club
 Section 71
 Members of Non-Stock Corporations
o Membership purely personal: unless otherwise provided in AoI or
by-laws
 Personal and non-transferable
 May be terminated in manner and for causes provided in the
AoI or by-laws
 Termination of membership shall have the effect of
extinguishing all rights of a member in corporation or in its
property
o Juridical entities as members
o Nature of Members’ Voting Right
 Trustees and Officers
o Default rule on voting: straight voting
o Nominee must be a registered member
 Specific Rules Applicable to Non-Stocks
o Power to Adopt Rules and Regulations
 Should not be contrary to the provisions of the by-laws, AoI
and/or Corporation Code
 Rules and regulations do not need SEC approval
o Assessment of Membership Dues
 Board may assess membership dues even when nothing has
been provided for in AoI and by-laws
15
 Manner of assessing members must be in accordance with the
provisions of the by-laws
 No provision: Board may collect only reasonable membership
dues and only for purposes of accomplishing the purposes or
objective for which the corporation was organized
 Non-Applicability of the Nationalization Laws
 Does not apply to owning of land
 Selling of raffle tickets and other profit-seeking activities
 Distribution of Assets of Non-Stock Corporations
 Conversion to Stock Corporation
 Foundations
o It is not different from a non-stock corporation
o It is meant to distinguish 2 types of non-stock corporations (Tax)
o Creature of the Tax Code
IX. Close Corporations
 Concept
o Convergence of ownership and management
 Found in Partnerships: equity-owners and managers
 Everything is personal
o Superiority of Contractual Intent on Proprietary Matters pursued
in Judicial Vehicle
 Look at the juridical person, not as separate and distinct, but
a means by which they can come to agree on certain
contractual relations
 First and foremost, it is formed by consent and are
contractual in nature
 Publicly-held corporation: contractual intent is subsumed
in the separate juridical entity
 Rationale
o Implementing vehicle of contractual understand on sharing of
control, risk, and benefits in the business enterprise
 Publicly-held corporations are first and foremost, impersonal
in character: stockholders do not control the business
 Free transferability of units of ownership: does not apply
to close corporations
o Essentially an “incorporated partnership”
 Corporation is impersonal, limited liability, centralized
management
 Best of both partnerships and corporations
 Statutory Definition (Section 96): definitive test
o One whose articles of incorporation provided that:
 All issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number
which cannot exceed 20
 20 is only indicative
 All issued stock of all classes shall be subject to right of first
refusal
 Corporation shall not list in any stock exchange or make
public offering of any of its stocks
 Provided: Corporation shall not be deemed a close corporation
when at least 2/3 of its voting stock or voting rights is owner
or controlled by another corporation not a close corporation
 The moment that the actuality shows this proviso, then it
is not a close corporation, and not governed by title 12
o Problems with the Statutory definition
 Large portion of closely-held corporations left out which are
in effect de facto close corporations
 Requisites existing, but not enumerate in AoI
 Not all are found, but 2/3 are found
o Dulay: The Supreme Court did not even pass upon the definition of
a “close corporation” under Section 96
o SF Naguiat: the president and vice-president can be made
personally and solidarily liable
 There was no finding if the requirements under Section 96 are
present
o San Juan Structural
 Lacking any evidence that it complied with Section 96, Title
12 cannot be applied
 Decision of the trial court did not contain a determination
that it was a close corporation
o Gala: based on the fact that families are involved
CLV LECTURE NOTES | CORPORATE LAW 2012
 Classification of Shares and Restriction of Transfer
o Section 97(1)
o Section 98
 Embodies when the right of first refusal is valid
o SEC Opinion dated March 13, 2006
 Free transferability of units of ownership should still be
preserved
 Classification of Directors: Section 97(2)
 Provisions for greater quorum or voting requirements: Section 97(3)
 Stockholders as Managers
o It is possible to do away with the board and allow the stockholders
to manage the corporation
 Agreements among Stockholders: Section 100
o Centralized management is not sacrosanct in close corporations
o “People are more important than business”
 Ong Young v. Tiu
o Original decision of the SC en banc was to decree the dissolution
of the corporation
 corporate level)
o Motion for Reconsideration
 Trust Fund Doctrine: it is unlawful for the corporation to
return to the stockholders a portion of their investment or
promised investment
 You cannot pre-empt the business judgment rule
 For the courts to tell the corporation what it should,
which all requires the passing of board resolutions,
amendments, etc., cannot be ordered by the court
because the court is without authority to tell them to do
things.
 Asking for rescission based on substantial breach
 Nobody ever raised the principles of close corporation
 SEC has the power to dissolve the corporation in a
deadlock situations
o It can order the return of the purchase value of the
shares in a close corporation setting
X. Shares of Stock
 Attributes of a Corporation
o Strong Juridical Personality: Section 2
o Creature of Limited Powers: Section 2, 45
o Centralized Management: Section 23
o Free Transferability of Units of Ownership: Section 63
 Free Transferability of Units of Ownership: Section 63
 Garcia v. Lim Chu Sing
o Shareholders are not creditors of the corporation
 Corporation (debtor; note payable/accounts payable))  P20 M 
Lender (creditor; notes receivable/accounts receivable)
o Contract of loan (mutuum)
o Does the lender hold a property arising from the relationship? Yes,
personal intangible property
 Corporation  P20 M  Shareholder (subscriber)
o Is the shareholder holding property in his hands? Yes, he is holding
shares of stock
o What kind of property is a “share” of stock? Personal, intangible
o What does the share of stock represent?
 The shareholder does not constitute himself as a creditor
against the corporation. It is an equity holding.
 Difference between equity holding and a debt holding?
o Debt holding: the creditor expects to be paid the principal and
interest
o Equity holding: the shareholder expects dividend income
o What is the difference between the returns of a debtor and
shareholder?
 Debt: contractual, obligatory in character
 Dividend: depends on the earnings of the corporation
 It is born of contract (contract of sale)
 Where does the return come from in an equity
investment? Business enterprise’s earnings
 Bayla v. Silang Traffic Co.
o Subscription Agreement v. Purchase Agreement (before
Corporation Code)
 Subscription agreement: governed by the Corporation Law
16
 Irrespective of payment
 Payment of deficiency is made on call
 Subject to the trust fund doctrine
 When the subscriber fails to pay, the corporation cannot
rescind based on the trust fund doctrine
 Corporation cannot condone/waive the payment of the
subscription
 Purchase agreement: governed by the Law on Sales
 Will become a stockholder only when such shares have
been paid for
 Upon substantial breach: corporation can rescind
 Seller has the right to condone
 Subscription Agreement
o As long as the subject matter is unissued shares, it shall be
considered as a subscription agreement and shall be governed by
the Corporation Code
o Intra-corporate level of relationship
 Meant to protect those who lend to the corporation (extra-
o Subscription agreement is consensual, not real
 Payment is not essential
 Modes of delivery:
 Public document
 Negotiation or assignment of certificates of stock
 Enjoyment of the rights and prerogatives of the right
(used in the Corporation Code)
o Kinds:
 Pre-Incorporation
 Post-Incorporation
 Free Transferability of Shares of Stock
o Trust Fund Doctrine
 Subscription Agreement: species of the contract of sale
o Sale has the following characteristics:
 Nominate and principal
 Consensual
 Bilateral and reciprocal
 Onerous
 Commutative
 Not mode, but title
o Characteristics:
 Onerous v. gratuitous: supported by consideration
 Price
o Real v. false v. simulated
 Simulated: valid, but subject to reformation
o In money or other valuable consideration v. nominal
consideration
 Nominal price: void; equivalent to “no price”
o Certain or ascertainable
 Not certain or ascertainable: void; goes into
obligatory force
o Terms of payment
 Not stipulated: void; economic indication of
certainty or ascertainability
 T/F: The general rule in a SA is that when the price
agreed upon has all the elements, it is valid.
o What is the status of issued watered stocks?
 T/F: A SA issuing a watered stock is void. FALSE.
 T/F: A SA that effects the issuance of watered stocks is void
under express provision of the law. FALSE, it is valid, but
subjects the board to pay the balance
 What is the difference between watered stocks and
discounted stocks?
 Discounted share: issued at a discount under an
agreement to pay less than the par value in money
 Watered stock: shares issued as fully paid when in truth
the consideration received is known to be less than the
par value or issued value
 What is the consequence of the illegal transaction?
 Consideration for stocks
o Cash: it must be paid one way or another; it cannot be considered
paid until it is actually paid
 Terms of payment is covered by the “Call” of the board
CLV LECTURE NOTES | CORPORATE LAW 2012
 o Property
 Is it necessary to deliver the property?
 The property must not only be given, but must be useful. If it
is not useful, it should be paid in cash.
o Labor performed for or service actually rendered to the
corporation
o Previously incurred indebtedness of the corporation
o Amounts transferred from unrestricted retained earnings to stated
capital
o Outstanding shares exchanged for stocks in the event of
reclassification or conversion
 Certificate of Stock
o Nature of Certificate
 Function of certificates of stock
 Stockholder
o Greatest proof that the holder is the owner is the
shares of stock
o Allows the person to negotiate the certificates
 Corporation
o Guarantees to the world that the covered shares are
“non-assessable”
 When a certificate has been issued for shares of
stock, it means that the subscriptions are deemed
fully paid.
 The corporation will still win even if certificates
of stock are issued despite the subscription are
not yet fully paid, because of the trust fund
doctrine, in order to protect the interests of the
creditors.
 In a suit between the corporation and a buyer
in good faith, the latter will win because of
the non-assessable doctrine.
 The corporation cannot claim the deficiency
from the buyer in good faith, but the creditors
can run after the subscriber
 To preserve the quasi-negotiable characteristics
of certificates of stock
 The trust fund doctrine will override the quasi-
negotiable characteristic of the certificates of
stock
 Public policy behind the non-assessable doctrine:
to protect those who deal in good faith with the
shares of stock
 Tan v. SEC
 In order to deal with shares through a certificate, is an
endorsement necessary? Yes, section 63
 What is it only directory, not mandatory?
o Every intangible personal property is recognizable by
law to capable of being delivered through the
following:
 Execution of a public instrument
 Enjoyment or exercise by the buyer of all the
rights pertaining to the intangible with the
knowledge and consent of the seller
 Endorsement and delivery
 Negotiation, transfer, assignment of the
evidence of the intangible (certificate of
stock)
 Section 63 governs only this mode
o When negotiation is used to transfer ownership, then,
endorsement and delivery is necessary, but there is
nothing under Section 63 which says that the only way
to deal with intangible property is through
negotiation, because there are 2 other modes.
 De los Santos v. Republic
 Personal property of the owner who has the absolute right
to deal with them
 Illustration:
o I bought 100 shares (certificate 123), which I bought
for P100,000. A wanted to buy them and paid P1M. I
said that A doesn’t need the certificate, but they
executed a Deed of Sale which was notarized. I issued
a receipt. A goes to the corporation and demands that
17
on the basis of the Deed of Sale, he should be the
registered owner. The corporation says “No.” Who
wins?
 If by the signature of the owner he sells them,
who is the corporation to say that it will not
recognize them?
 The seller goes to the corporation and says that
there was indeed a sale. The corporate secretary
asks for the certificate, but the seller “burned”
them. The corporation still refuses to register.
Who wins?
 The seller says, “Sorry, wala tayong nagawa. Sakin
na ulit yung shares.” A refuses. Who wins?
 A wins, because as to them, the contract is
valid and binding. Section 63 is
intracorporate, whereas, when a registered
owner deals with shares of stock, it is not
governed by corporate law.
 Shares of stock, when issued, are not properties of the
corporation.
o Only the subscriber has dominical rights over shares of
stock
o So why does the corporation has a say on how the
registered owner manages his shares?
 The corporation will require the turning over of
the original certificate of stock precisely to
ensure that there will be no fraud in the future.
 Tan v. SEC says that it is only “may” (endorsement and
delivery) with respect to how the parties deal with the
shares of stock (certificate of stock), but it is not “may”
insofar as the corporation is concerned, because the
certificates are issuances of the corporation, to which it is
bound by law to guarantee them.
o The only way for the corporation to guarantee them
(quasi-negotiability character), they do not end up
with someone who takes them in good faith and for
value for which the corporation is now liable, it must
make sure that there’s endorsement and delivery.
o The certificates are issuances of the corporation, and
it is a certification of the corporation to the world,
and it must be returned to the corporation in order to
be able to issue a new certificate to the new owner.
 Ponce v. Alsons Cement
 Ponce obtained shares through a deed of undertaking and
endorsement of the certificate of stock
o Ponce went to the corporation for the issuance of new
certificates in his name, but the corporation refused
since it was not in accord with the rules of the
corporation
o Ponce went to the court asking for mandamus so that
the corporation will issue to him certificate of stocks
 It is not enough, under Section 63, that there be an
endorsement by the registered owner (seller), but there
must be specific instruction or special power of attorney
granted to the buyer giving instructions to the corporate
secretary to transfer the shares of stock.
o T/F: If the corporation registers the sale on the basis
of a duly endorsed certificate, the corporation is at
fault and can be held liable.
o T/F: When a true certificate has been endorsed and
delivered by the registered owner and is in the hands
of a buyer who paid good value for it and in good
faith, and he presents it to the corporation for
registration, there is no legal basis for the corporation
to register.
 FALSE, that is the nature of quasi-negotiable.
Under Section 63, it must be registered once
there is endorsement and delivery. (Outside of the
case)
 TRUE, in the case of Alsons, aside from
endorsement and delivery, there must be specific
instruction by the registered owner to the
CLV LECTURE NOTES | CORPORATE LAW 2012
 corporation to cancel the shares and now issue
new certificates in the name of the new owner.
 The suit was for mandamus, but there was no
legal obligation for the corporation to issue
him new certificates of stock.
o It must be clear that the seller is instructing the
corporation to cancel the certificate against what
evil?
 Every corporation has the power to protect the
quasi-negotiable character of the certificate, and
also the registered stockholder.
o If it were not mandamus, who would win? Ponce
 Deed of Absolute Sale
o Despite the existence of the deed of absolute sale,
the corporation still refused to register the certificate
in the name of Ponce
o It could be an equitable mortgage.
 One that looks like a contract of sale, in the form
of sale with right of redemption and one that is a
deed of absolute sale
o Why is it that even if there is a deed of absolute sale
of shares of stock, you cannot compel the
corporation, without that specific instruction, to issue
new certificates to the buyer?
 T/F: Section 63 covers encumbrance of shares.
FALSE, it only covers dispositions, sales and
transfers. Encumbrances are not covered by
Section 63
 Because it might be an equitable mortgage, then
to transfer ownership directly to lender is pactum
commissorium.
 Summary
 Tan v. SEC: An issue between buyer and seller is not
governed by Section 63, but the sale is valid as between
the parties, but void as to everybody else (corporation,
you and me).
 Bitong: When it involves the certificate of stock, you have
to protect the quasi-negotiable character, and even if it’s
valid as between them, you cannot compel the
corporation to register the sale. If the certificate is issued
again and someone takes it in good faith and for value,
the corporation will be bound thereby.
o Although it is quasi-negotiable, it is not really quasi-
negotiable. The only thing that is quasi-negotiable
about certificates is that it can be handled by
endorsement and delivery, and people can be rest
assured that when they take it, they can go to the
corporation with that written instruction and ask that
it be transferred.
 Section 63 (process binding on the corporation): If you
don’t go through endorsement and delivery, or there is
endorsement and delivery but you don’t go to the extent
of registering the sale in the STB, insofar as the
corporation and world is concerned, the buyer has not
become the owner, and that affects the rights against
attaching and levying creditors.
o Endorsement and delivery and specific instruction,
and once you have all of these, can you register
 If you don’t register, the sale is void as to the
corporation and to the world
o What makes negotiation superior to assignment is that
when it is an assignment, it puts the assignee into the
shoes of the assignor, but it is possible in negotiation
to put somebody who takes it in good faith and for
value have better rights than his assignor.
o Quasi-negotiable character
 Endorsement and delivery makes them negotiable
 But in dealing with shares of stock, it can be dealt with by
public instrument or exercise of the rights
 Section 63: endorsement, delivery and registration in the
stock and transfer book
18
 Registration cannot be compelled unless there is a written
instruction to the corporation to transfer the title to the
certificates to the buyer
 Registration in the stock and transfer book does not bind
the public
 Public instrument and exercise of the rights: valid and binding
between the seller and buyer
 When it comes to pledging shares of stock, all that is
necessary is endorsement and delivery of the certificate of
stock.
 By doing a transaction similar to a sale, then you
“transfer” the pledgee the power of ownership, as if he is
holding in his hands the amount.
o Equitable mortgage principles state that it is unlawful
for the pledgee to appropriate for himself things given
in security for loan.
 Fua Cun: Transaction was really a pledge, and yet, when he
defaulted, it was necessary to foreclose and conduct a public
sale, otherwise, the title doesn’t hold, and the registration of
the certificate in the name of the purchaser is void.
 Equip the pledgee, aside from endorsement and delivery,
a short note, signed by the borrower, which authorizes
the corporate secretary to cancel the certificate of stocks
in the name of the borrower and issue new ones in the
name of the lender.
o Because according to Alsons, the corporate secretary
has the right to refuse registration
 Under such circumstances, the certificate is valid (quasi-
negotiable), but the title is void. However, the nullity of
the title is something between the pledgee and pledgor
and something of public policy.
o The law, insofar as the title is concerned, is void, but
the SC has allowed it to pass many times.
o Right to issuance
 Shares should be fully paid for before certificates of shares
are issued by the corporation
 Subscription is what makes a person a stockholder in a
corporation. Subscription is done with the meeting of the
minds, and not by payment
o Lost or destroyed certificates
o Forged and unauthorized transfers
 J. Santamaria v. HSB
 The quasi-negotiability character of a certificate of stock
is only meant to protect buyers in good faith.
 Nuegene Marketing v. Court of Appeals
 Intra-corporate dispute
 Stock and Transfer Book
o Fua Cun v. Summers
 “Unpaid claim” refers to “unpaid subscription”
o Monserrat v. Ceron
o Chuan Guan v. Samahang Magsasaka
 General rule: writ of attachment or levy, when properly
served by the sheriff attaches only to the property of the
judgment debtor
 Issue: When the writ was served upon the corporation, were
the shares of stock, as a matter of law, still in the ownership
of Chua Toco
 The corporate secretary was willing to issue certificates of
stock in the name of Chua Guan provided that the new
certificates include an annotation that they were attached
prior to the mortgage.
 Chattel Mortgage  Attachment
 BUT before Chua Guan could transfer the certificates of
stock to his name, there was already an attachment
 Chua Guan argues that the certificate should be issued clear
of any encumbrances, and that he is not bound by the writ of
attachment issued against Chua Toco.
 General Rule: A writ of attachment can lawful served and
binding on the property of the judgment debtor
 When the writ of attachment was served on the
corporation, were the shares of stocks, as a matter of
law, still owned by Chua Toco, therefore the creditors
CLV LECTURE NOTES | CORPORATE LAW 2012
 win, or they were no longer part of the estate of Chua
Toco, then Chua Guan will win?
o In order for the sale, disposition, transfer, assignment
of shares to be valid, when it is done by public
instrument, or endorsement and delivery, or an
exercise of the rights pertaining to the owner, for
those modes to be valid as against the corporation,
what is required?
 World: actually, eventually, registered in the STB
o  When a stockholder has fully paid his subscription, he can
 For shares of stock, the registration of the chattel mortgage in
the city where the mortgagor resides is not enough, but it is
also necessary to register the chattel mortgage in the registry
of deeds where the owner resides. (corporation resides)
 The judgment creditors won, and not Chua Guan.
 Chuan Guan registered with the RD where the corporation
is located, and not where Chua Toco resides.
 When does a chattel mortgage become a lien on shares of
stock?
 Upon double registration
 When does a writ of attachment or levy become a lien on
shares of stock?
 Service of process by the sheriff, regardless of whether it
is registered in the STB of the corporation
 When does the pledge of shares of stock become binding on
the world?
 Endorsement and delivery of certificates of stock
 Had there been double registration, who would’ve won?
 In the present case, there was only delivery, and no
endorsement
o Uson v. Diosomito
 First in time, priority in right
 Uson: judgment creditor
 Bought at a public auction: becomes the owner upon
proper service of writ of attachment
 Jollye: buyer of Barcelon
 Becomes the owner upon registration in the STB
 Encumbrance: personal in character
 Lien: more than personal, it is property-based; it attaches
to the property
o Escano v. Filipinas Mining
 Shares of stock become property when they are issued by the
corporation
 Escano (garnisher) v. Standard Investment (buyer)
 When there are claims by 2 parties to the same shares of
stock, one is a judgment creditor and the other is a buyer,
who wins?
 First in time, priority in right
 Garnisher: service of writ on the corporation
 Buyer: transaction is registered in the STB
 The registration of transactions also apply to unissued
shares
 Encumbrancer
 The moment there is a registered assignment of shares of
stock in the STB, it will bind the encumbrancer
 All that an encumbrancer will have to do is double
registration
 How does he know that what he has done has priority?
o He must be an encumbrancer in good faith.
 When he has no notice of a sale or a levy
 How does he know?
 Sale: reference to the STB
 Levy: ask the corporation
o Levier in good faith
 How do they know if there is no priority
encumbrancer?
 Go to all register of deeds
 Buyer
 The buyer will have to search all register of deeds to know
if there are any encumbrances of the shares of stock
o Bachrach Motos v. Lacson-Ledesma
19
 By the mere act of endorsement and delivery, a pledge is
constituted on a share of stock
 Pactum commisorium applies to a pledge
 There is no pactum commisorium in the case because there
was a letter by Ledesma authorizing the transfer the shares by
Talisay.
o Nava v. Peers Marketing Corp.
 No certificate of stock shall be issued without full payment of
subscription and interests
compel the corporation to issue certificates of stock
 If the corporation issues certificates over shares which have
not yet been fully paid, the certificates are still valid and in
fact under the doctrine of non-assessability
 If the corporation does not wish to do that, mandamus
cannot lie against the corporation
 The corporation cannot be compelled to record
transactions over shares of stock which are not yet fully
paid
XI. Rights of Stockholders
 Rights of Stockholders
o Right to attend and vote at stockholders’ meeting
 Right to Vote
 Constitutes one of the juses of roman law
 T/F: The right to vote can be taken away.
 How is the voting right granted to a stockholder?
o It is a common law right
 How do you take away voting right from stocks?
o Provided for by the articles of incorporation
o By-laws cannot override common law rights
 T/F: Outside of articles of incorporation, the corporation
is removed of the power to take away voting rights. TRUE
o All juses of roman law are subject to contractual
agreement
 Proxy
o Meanings:
 Agent of the stockholder
 Contract (agency)
 Instrument
o In order for a proxy to be valid, the following
solemnities are required:
 Must be in writing
 Signed by the stockholder, properly describing the
shares he can vote on
 Filed with the corporate secretary before the
meeting
o The corporation, through its corporate secretary, has
the right to refuse the binding effect of a proxy unless
the solemnities are complied with.
 In accordance with the provisions of the by-laws
 General rule: anytime before the meeting starts
o T/F: When a proxy is not in writing it is void. TRUE
 Because of the word “filed”
o Doctrines that apply:
 Essentially revocable
 Irrevocable: agency coupled with interest
o Coupled with interest:
 Proxy is an integral part of the
security by which a loan or
indebtedness is to be paid or
liquidated
 When an onerous contract, the
fulfillment of which, depends upon it
o Purely personal
o T/F: By its very nature, only has to do with the voting
attached to the shares. TRUE
 T/F: When the stockholder authorizes the proxy
to sell the shares, it is still a proxy. FALSE, it is
called a special power of attorney
 Only involves an agency with respect to voting
rights
 Voting Trust Agreement
CLV LECTURE NOTES | CORPORATE LAW 2012
 o Contract of Trust
o It is not revocable in essence.
 A trustee is an owner in his own right (naked
owner)
o Requisites:
 In writing and notarized (otherwise, it is
unenforceable)
 It has to be signed by the stockholder, or else
it will not be notarized
 Signed by the registered shareholder (trustor)
 Registered in the SEC and the corporation
 Not registered with the SEC: unenforceable
 Not registered with the corporation:
unenforceable
o The VTA can cover other rights of the stockholder
 Voting rights
 Right to receive dividends
 Right to be present
 Right to inspect
 Right to file a derivative suit
 It is really a share trust agreement
o What is the clearest proof that a person becomes a
naked title holder in a VTA?
 The certificate is actually cancelled and a new
one is issued to the trustee
 Shareholders Agreement (Pooling Agreement)
o The parties are stockholders of record, but not all of
them.
o The manner by which they vote their shares
o T/F: It is not governed by the corporation code. FALSE
 Section 100 under Close Corporations
 T/F: Without Section 100, shareholders agreement
is deemed to be illegitimate. FALSE, because it is
an aspect of ownership
o Usefulness of Section 100
 1000 shares, 51% yes, 49% no: it will be registered
as yes (all 1000 shares)
 Par. 4
 Centralized management is not respected in close
corporations, because there is no board of
directors, and the corporation is run by the
stockholders.
o Right to dividends
 At dissolution, to receive a proportional value of the “net
assets”
 T/F: The right is always demandable under any circumstances.
FALSE
 Depends on the unrestricted retained earnings: profits
o Just because there is unrestricted retained earnings,
it does not mean that they have the right to demand
 Requirements:
 Board resolution (cash or property dividends)
 2/3 of the outstanding capital stock when stock dividends
are declared
 Part of the Business Judgment Rule
 When is it outside the business judgment rule?
o When the unrestricted retained earnings exceeds 100%
of the paid-in capital stock
o Except: (exclusive list)
 Corporate expansion project
 Loan agreement prohibits the distribution of
dividends
 Contingency debts
 Kinds of dividends
 Cash dividends
 Property dividends
 Stock dividends
 Why does the law provide that when it comes to stock
dividends, there should be 2/3 ratificatory vote and board
resolution?
 The effect of stock dividends is to take them from
retained earnings and put them into capital
20
 When you declare stock dividends, a corporation really
declares nothing.
o Pre-emptive right
 It is a common law right that arises from the fact that one is
an owner of shares.
 Covers unissued shares and treasury shares
o Right to the issuance of certificate of stock
o Right to transfer his properties
 Inheres from ownership
 Protected under Section 63
 T/F: Every provision in the articles of incorporation or by-laws
that prohibits a stockholder from transferring or
encumbrancing his share is void.
 By-laws: cannot serve to restrict the ability of the
stockholder to transfer his shares because its function is
only to govern internal matters of the corporation
o Breach of public policy: free transferability of units of
ownership
 Articles of incorporation: such provision restricting the
transfer of shares by stockholders is void
o Unreasonable restraint of trade
o Breach of public policy
o The articles of incorporation is essentially a creature
of corporate law, rather than a species of contract
law. It must be consistent with corporate law
doctrines.
 T/F: When a stockholder enters into a contract with the
corporation prohibiting the stockholder from transferring
his shares is void. FALSE
o It is not against public policy
o There is no absolute prohibition on the free
transferability of units of ownership
o A prohibition that he has contracted out is valid when
he has contracted out the right to transfer his shares.
o Shares of stock are property and governed by free
transferability, and if a person contracts away his
right to transfer shares, it is not his “trade” that is
contracted away.when you are weak inlaw, you must
pound on equity
 T/F: Every restriction of the right to transfer not found in a
contract is void. FALSE
 The restrictions really void are:
o Absolute restriction
 In corporate law, it violates free transferability
 In civil law, what public policy is being
undermined?
 Constitutional policy against restraint of trade
 Non-competition clause
 Meant to promote competition
 It is in restraint of trade
o Anything that requires prior consent from a
stockholder, board, or corporation
 It takes away the right to transfer
 Valid Restrictions
 Right of First Refusal
o A right granted to the optionee to determine whether
he wants to buy the shares or not
o T/F: Whether found in the articles of incorporation,
by-laws, or contract is always valid. FALSE
 What type of first refusal is valid?
 Reasonable as to time
o 30-60-90-120 day
 Reasonable as to exercise
o It must not undermine the commercial
value
 Reasonable as to purpose
o What are the considerations whether the right of first
refusal is reasonable?
 If it is not of such length of time as to undermine
the commercial value
 Unreasonable restraint of trade
CLV LECTURE NOTES | CORPORATE LAW 2012
  You cannot enter into a contract that prohibits a person
from making a livelihood
 Waiver of future support: “self-destruction”
 Essentially void if it renders a person dead because he
cannot earn a living
 Restraint of trade in order to be valid
o Reasonable as to time period
o Reasonable as to process or execution
 What is the consideration whether the restraint of trade is
reasonable?
 About property, even if referred to by the Supreme Court
is Restraint of Trade
o Right to file a derivative suit
 An exception to the business judgment rule
 The power to sue is with the Board. It is one of the
incidental powers of the corporation.
 Is there any statutory support? Section 36: every
corporation has a power to sue and be sued
o Lodged with the board (Section 23)
o It is always with the board, why?
 “Unless otherwise provided in this Code”
 It is the exception to the exception to the general rule
o General Rule: the power is vested in the board
o Exception: unless otherwise provided in the code
o Exception to the exception: derivative suit
 It is a common law right
 It is common law right
 When you are weak in the law, you must pound on equity
 T/F: Derivative suit is a right founded on equity. TRUE
o E.g. implied trusts
 The law goes out of its way to create a
relationship between the parties because of the
need to provide justice.
o The right is created for the interest of the
corporation.
 The corporation is vulnerable.
 Is it legal in an agency situation to waive the
duties of obedience, loyalty, diligence? No, such
waiver is void.
 The duties are of the agent, and the right to
the principal. If it is a right of the principal,
can he waive the duties owed to him by the
agent? No, such waiver is void.
o In whose favor is the right to file a derivative suit
granted?
 To the corporation, against the directors when
they do not perform their duties
 It grants to the stockholders the right to protect
the corporation
 It is a right that cannot be exercise as a matter of fact. It
can only be exercised if the “duck is almost dead”
 He duties are duties of the agent, and owed to the principal.
Does It must follow certain requisites
 T/F: A right duly protected under the Corporation Code.
FALSE, it is a common law right
 It is not expressly granted by statutory law. It is derived
from jurisprudence.
 It is under remedial law.
o Rules of Court  Interim Rules of Procedure
Governing Intra-Corporate Controversies
 SMC v. Kahn
 When you file a derivative suit, you are now called the
relator.
o The SC consolidated the requisites for a derivative
suit
 The person must be a stockholder at the time of
the filing of the suit and at the time of the
violation
 (Interim Rules) Remain a stockholder during
the pendency of the case
o But what happens to the suit?
21
 The case will be considered a
harassment suit
 Not a stockholder at the time the cause of
action accrued: he will not be the best person
to champion the cause of the corporation
because he is ignorant of what has happened
 Not a stockholder at the time of the filing of
the suit: he did not actually file the suit for
the corporation
 Exhaustion of all intra-corporate remedies
 Such exhaustion must be alleged in the
complaint
 Why is it jurisdictional? Unless there is
exhaustion, there is yet no cause of action
 Why is compliance with such requirement a
satisfaction of the right as an equity-remedy?
 If you don’t exhaust, the natural remedy is to
seek it from the board.
o The real and natural saving grace is from
the board because the natural champion
does not wish to move.
 When is it not required?
o Whenever it is the board itself that is the
cause of the loss due to fraud, malice,
gross negligence, bad faith
o If it possible for there to be a derivative
suit if the board has not acted with fraud,
malice, or bad faith?
 No, but why would you still need to
exhaust?
o You are not in equity unless you ask the
board they correct their mistake.
 The cause of action that of the corporation
 See discussion under exhaustion of all intra-
corporate remedies
 There must not be an appraisal right available
 Not every corporate act gives right to
appraisal right. But whenever a transaction
that is being questioned has the appraisal
right, can the dissenting stockholder still file a
derivative suit?
o Yes, when there is not enough
unrestricted retained earnings
o T/F: Whenever there is an appraisal right
involved, but you never dissented, you
can never be a relator.
 Every time an assenting stockholder files a
derivative suit, it is a nuisance suit, because
his actions are inconsistent, and in effect, he
is not championing the cause of the
corporation
 A dissenting stockholder cannot file a
derivative suit the because of action (in the
“derivative suit”) pertains to the stockholder
and not the corporation, which goes against
the very purpose of a derivative suit.
 Must not be a nuisance suit or a harassment suit
 Rationale for the requisites of a relator
 If they are doing it for their own interests,
they are not actually championing the cause
of the corporation
 What is the greatest example that it is a
nuisance suit? If he fails to exercise his right
of appraisal
o A stockholder who ascended to the
transaction (part of the 2/3), but he still
files a derivative suit, it is a nuisance suit.
 It is not genuinely in behalf of the corporation
but is actually for himself
o A relator need not be a director, but only a
stockholder of record.
CLV LECTURE NOTES | CORPORATE LAW 2012
 o As long as the stockholder is a stockholder of record
of the corporation, such stockholder can still file a
derivative suit.
 It doesn’t matter how small your proprietary
interest is. The right being protected belongs to
the corporation.
 Chua v. Court of Appeals
 A case filed by the treasurer against the secretary
o It was made to appear that Chua was present in the
meeting
 A corporation can be a proper party in the appeal because
the criminal action involving the falsification of the
corporation’s project and documents
 T/F: Every time the corporation is included as a party-
plaintiff, in a case filed by a relator, is a derivative suit.
FALSE
o The cause of action sought to be recovered should be
for the corporation.
 For a proper derivative suit to prosper, the corporation
should appear as a plaintiff or petitioner.
o Putting the corporation as a defendant is improper. Is
the case dismissible?
 No, the defect is merely in name.
 The determination whether the corporation is the
proper party plaintiff is the cause of action. Such
defect is not fatal.
 The business judgment rule cannot be availed of if it is
exercised in fraud, bad faith, gross negligence.
 Illustration
 No allegation that the board of directors knew that the
o A derivative suit cannot be filed because of the
business judgment rule
o Since there is no allegation that the board entered
into the transaction with fraud, malice, gross
negligence, the board of directors even if it will
amount to losses
 There is an allegation that the board of directors knew
that the transaction will result into losses
o Appraisal right: provided for by law
 T/F: All stockholders have an appraisal right. FALSE
 Only dissenting stockholders can exercise their appraisal
right
 Who are dissenting stockholders?
o The stockholders who disagree.
o T/F: All dissenting stockholders have appraisal right.
FALSE
 When can dissenting stockholders exercise the right of
appraisal?
 Corporate term is extended or shortened
o Shorten
 Right of appraisal is not triggered
o Extend
 The law triggers the right of appraisal
 Extension of the corporate term is rebus sic
stantibus
 Why is the right of appraisal granted?
 Corporate funds are invested in non-primary purpose
business or enterprise
 Amendment of articles of incorporation
o Procedure to amend articles of incorporation:
 Meeting duly called for the purpose
 Board resolution
 Stockholders representing at least 2/3 of the
outstanding capital stock vote for the amendment
 Filing of certificate of amendment with the
amendments in the SEC
 Issuance of certificate of amendment of articles
o Not every amendment in the articles of incorporation
will trigger the appraisal right
 Amendment has the effect of:
 Changing or restricting the rights of any
stockholder or class of shares
22
 Authorizing preferences in any respect
superior to those of outstanding shares of any
class
o Is free transferability illusory?
 Yes, it gives such dissenting stockholders a way
out.
 Sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate
property and assets
o The source of the income is the business enterprise.
When the business enterprise is sold, there will be no
longer any manner by which the corporation will earn
profit.
o But what about free transferability of units of
ownership?
 The characteristic of free transferability of units
of ownership is illusory because there is no
business enterprise.
 Mergers and consolidation
 Right of appraisal: a right of a dissenting stockholder the
value of his shares
 Based on rebus sic stantibus
 It is not a common law doctrine, because it goes against the
trust fund doctrine.
 Why does the law give it?
o Right to examine and copy corporate records
 It is a common law right, incident to the right to hold stocks
 Right to vote, right to dividends, right to inspect
 Can the right to inspect be contracted away?
 No, because all other rights depend on the right to inspect
 You cannot protect your other rights if you don’t have the
right to be informed
 Can only be germane as to why a person is a stockholder:
to protect the other rights of the stockholders
o All other commercial rights and interests of a
stockholder are dependent on this
o It can only be exercised validly in order to protect the
other commercial rights
o Ang-Abaya v. Ang
 Section 74 is the provision for which Section 144 can be
applicable
 Requisites to be liable under Section 144:
 Formal letter by the stockholder to examine the books
 Agent or officer refuses to allow the person to examine
the books
 Refusal is made pursuant to a board resolution
o Officers or directors will be liable
XII. Corporate Capital Structures
 Authorized stock: found in the AoI representing the stock that may be
offered to the public
 SCS: portion of the authorized capital stock that has been issued by
the corporation
 Classification of Shares
o Articles of Incorporation must provide for the classifications
o Preferred Shares
 Will only have voting rights if provided for in the AoI
 As to Assets upon Liquidation
 Preferred over the common stockholders, after payment
to the creditors
 As to Dividends
 Cumulative or Non-cumulative
o Cumulative: past dividends not paid + current
dividends
o Non-cumulative: current dividends
 Participating or Non-participating
o Participating: after receipt of dividends, he can still
participate as if he also has common shares
 T/F: Every preferred stock is deemed to be cumulative. FALSE
 T/F: Every preferred stock is deemed to be participating,
rather than non-participating. FALSE
CLV LECTURE NOTES | CORPORATE LAW 2012
XIII. Dissolution
 Stages of the Corporate Life
o Pre-Incorporation
 Promoter’s contract
 Both contractors knew that there was yet no corporation
 Principle of agency in the name of a purported principal
comes into play
o Void as to the principal, valid as to the promoter, and
ratifiable by the principal corporation
 Pre-incorporation subscription agreement
o Post-Corporation
 De jure corporation
 De facto corporation
 Corporation by estoppel
 Intra-Vires v. Ultra Vires
 Undermined by: (to protect members of the public dealing
with the corporation in good faith in their expectation
that their contracts will be complied with)
o Estoppel
o Doctrine of apparent authority
o Dissolution and Liquidation
 Things radically change
o Pre-Incorporation and Post-Incorporation
 Public policy: members of the public dealing in good faith
with the corporation has a right to expect that contracts they
have entered into will be complied with
 Trust Fund Doctrine
 Dissolution and Liquidation (corporate person)
o When do we know that the problem is already covered in the
dissolution stage and not in the pre-incorporation and post-
corporation stage?
o Dissolution: that point in time when the corporation ceases to be
a juridical person for the pursuit of the business
 It occurs at the end of its term: provision in the articles of
incorporation as to the term of its existence
 Indication of the value of the corporation: how long it
shall be pursued as a “going concern”
 Helps to determine
o Value of the investment
o Length of the loan and when it is realizable
 When the term of the corporation has ended, then it has
reached the point of dissolution
 What is the importance of the dissolution point?
 The corporation ceases to have a juridical personality to
pursue a new business
o As a “going concern” with respect to the corporation,
stockholders, third persons
 Upon dissolution, the corporation still has a juridical
personality, but it can only pursue dissolution and liquidation.
 Board of Directors are mandated by law to manage the
business only for the purpose of liquidating the corporate
affairs
 BoD will have fiduciary obligations to the shareholders
o Outreach of the Trust Fund Doctrine
o The moment they pursue a new business, they
become personally liable
 Insofar as the BoD are concerned, the creditors are in the
first place
 Illustration:
 6 months after the dissolution of the corporation and
unknown to the directors, officers, and stockholders who
purchases property and ratified by the stockholders, what
is the status of the contract?
o It is void, because it has been entered into wherein
there is lack of consent. The corporation is a ghost.
o The corporation itself cannot ratify the contract
o Said contract is a “new business”
o The doctrines under the Pre-Incorporation and Post-
Corporation stage do not apply
o Why does the consideration change?
 Trust Fund Doctrine
 Rights solidified
23
 Those who are creditors, upon dissolution, have rights to
the assets of the corporation
o By allowing the directors to take risks to which the
creditors already have claimed
o Liquidation: a process usually triggered by dissolution
 Does insolvency cause the dissolution of a corporation? (business
enterprise)
o Balance Sheet Test
o Cashflow Test: that point in time that the corporation cannot
service its debts when it falls due
o Effect on the trust fund corporation is the same as in the
dissolution of the corporation
o Once the corporation becomes insolvent, the obligation of the
directors at that point is to protect the interests of the creditors.
 There is nothing more to protect for the stockholders
 The moment the directors pursue a new business, they can be
held personally liable (insolvency trading) even in the
exercise of business judgment
o Insolvency proceedings are similar to liquidation proceedings
 Original term has expired and there is no move to extend it
 Extension must be done within the last 5 years. If it is done
after the corporation is dissolved, it is considered a new
business.
 Reincorporation
o Basis: sale of all of substantially all of the assets of the
corporation (Section 40)
o When the term has expired, you recopy the articles of
incorporation and re-file them anew.
o Difference between extension of term and reincorporation
 Extension of term
 There is no break
 Reincorporation
 There is a break between the first and the second
corporation
o Everything starts with the second corporation anew
 The moment the corporation is dissolved, the contingent right
to the value of the shares become realized. Once dissolution
has been reached, the 2/3 of the OCS cannot bind what the
stockholder already has (value of the stocks).
o Reincorporation cannot be done in fraud of creditors.
 Ways of Dissolution
o Voluntary
 Methods:
 Expiration of term as found in the AoI
 Amendment of the AoI to shorten corporate life
o “The life of this corporation will expire on (date)”
o Follow procedures of the Corporation Code on
amendment
o To bind all
 Give notice to stockholders, creditors, SEC
 Affidavit of assumption of liability
o There is no right of appraisal in the shortening of
corporate life because it quickens the process.
 Case with the SEC
o BoD adopt a resolution for the dissolution of the
corporation with the ratification of 2/3 of the OCS
o Administrative proceedings does not allow the
exercise of appraisal right
 Modes:
 No creditors are affected
o The SEC has no discretion. It must grant dissolution
 Creditors are affected
o Subject to a hearing. It is not necessary that the SEC
will grant dissolution
o Involuntary
 Done by the State: quo warranto
 Highest punishment on the corporation that has offended the
laws or its charter
 A petition is filed in court, seeking for the decapitation of the
corporation.
 There is notice and hearing
 Liquidation comes in to protect the interests of creditors
CLV LECTURE NOTES | CORPORATE LAW 2012
 Liquidation: process wherein all the assets of the corporation are
gathered and liquefied to satisfy the obligations of the corporation,
and if net assets remains, it is distributed to the stockholders
o Section 122: juridical personality continues in order to liquidate
corporate assets
 The corporation is given 3 years to liquidate the assets
 Centralized management still exists
o Types of Liquidation Process
 Board itself: good only for 3 years
 After 3 years, the BoD is a stranger and there is nothing
they can do about it
 In order to go beyond the 3 years, the corporate assets
are placed in the hands of either the receiver or trustee
 Receiver: court-appointed office
 Trustee
 Contract arrangement
 Advantage: can go on for many years because there is an
owner
o Implied Trust Doctrine
 Pursue all the assets wherever they may be
 Can be sued up to the extent of the property they hold in
their hands
 Based on personal relationships
 All are geared to protect the creditors: for them to have the ability to
resort to the assets wherever they may lie
XIV. Acquisitions, Mergers and Consolidations
 Levels of Dealings: goes into the subject matter of the transaction
o Assets-Only Level
 Subject matter: property
o Business Enterprise Level
 Subject matter: ability to earn profit
 “Going concern”
 Motivation: transfer the earning capacity of the corporation
 The buyer purchases the business and controls it directly
o Juridical Entity Level
 Subject matter: shares of stock (control)
 Vs. sale governed by the Law on Sales
 Not every share of stock refers to a juridical entity level.
The sale must be in order to take control of the
corporation, to be in the juridical entity level.
 Motivation: to dispose of, to take over and control of the
earning capacity of the corporation
 Buyer purchases shares of stock of the corporation, and it
is still the corporation who manages and controls the
business
 Vs. Business Enterprise
 Control over the corporation is with the board
 Edward J. Nell Co. v. Pacific
o Pacific holds Insular as its subsidiary when it bought all or
substantially all of the latter’s property.
o General Rule: A purchasing corporation will not be liable for the
liabilities of the purchasee.
 Except:
 Purchaser expressly or impliedly assumes the debts and
liabilities of the purchasee
 Entered into the transaction in fraud of creditors
 Purchaser merely continues the business of the purchasee
 There is merger or consolidation
 Piercing doctrine
o Piercing doctrine?
 The piercing doctrine cannot apply.
 When it is clear that Pacific purchased all or substantially all
of the properties of Insular, that doesn’t warrant piercing? No,
it doesn’t warrant piercing. Mere control of all or substantially
of the shares of stock of the corporation, by itself, does not
warrant piercing because that by itself does not disregard the
separate juridical personality of the corporation. Being the
only shareholder does not grant your control over the
corporation or guarantee you a seat in the board. It is still the
board that directs and runs the business of the corporation.
24
 Piercing concerns itself with controlling the business
enterprise of the corporation.
o Dealings with shares of stock have nothing to do with the business
enterprise because it is in the juridical entity level.
 EXCEPT when it amounts to a juridical entity level transaction
o What is the control that is allows the piercing doctrine? Control
over the business enterprise
 When what is being controlled is the business enterprise (to
the disrespect), that is now the control that is prohibited
under alter-ego piercing.
 After having acquired the shares of Insular, Pacific also took
the business enterprise of Insular.
 After Pacific took over Insular, it sold all of the shares to an
individual. That itself does not allow piercing because the
control was still with the board of directors (business
enterprise). It is still in keeping with the free transferability
of units of ownership.
o When you do something or exercise something that is allowed by
law, it cannot be the subject of piercing because it is an equity
remedy and given only to render justice.
o However, when what is being transferred is the ability to transfer
the business enterprise, it is disparage of the control that
warrants the application of the piercing doctrine because the
purchase was made for a consideration. There was no business
enterprise, since Insular was no longer a going concern.
o Once dissolution is done, what is the remedy of the creditors of
the dissolved corporation?
 Run after the assets wherever they may have gone.
 General Rule: One cannot be held liable for any obligation to which he
never bound himself
o EXCEPT
 When the purchaser expressly assumes the liability
 Guaranty or surety: must be in writing to be enforceable
 Novation (change in the principal party of the obligor): to
be valid, it needs the consent of the creditor
o Unenforceable unless in writing
 In fraud of creditors
 Rescissible contracts
o Accion pauliana (in fraud of creditors)
o Lesion
 When the purchaser merely continues the business of the
purchasee
 Why is it that if the business enterprise (subject matter) is
being sold, the purchasee becomes liable as opposed to
assets as the subject matter?
o It is the earning capability which is sold, and as a
result, he becomes liable to the debts of the business
enterprise for the benefit of the creditors of the
transferor. It is inflicted upon the transferee.
o When what you sell renders the corporation unable to
continue to earn (sale of all or substantially all of the
assets of the corporation)
 When does the promissory note follow the car (property)
wherever it may go?
o When you attach a mortgage to support the mutuum
(loan)
 Common law lien: a lien that follows the business
enterprise wherever it goes
o The only real hold that suppliers have on merchants is
the going concern.
o Basis: the continuous operation of the business
enterprise is the consideration
 McLeod v. NLRC
o The transferee cannot be held liable because they only took over
the assets of the transferor.
o Piercing is not proper because the transferee cannot be
considered the mere alter ego of the old corporation solely on the
ground that there are interlocking directors and because there
was a legitimate business purpose for the dacion en pago.
o The consideration for applying the business enterprise doctrine is
entirely different from the piercing doctrine.
o Why are employees not given the common law lien?
CLV LECTURE NOTES | CORPORATE LAW 2012
  It is a commercial doctrine meant to protect commercial
transactions and employment contracts are not commercial
transactions.
 Different Rules on Succession of Liabilities
o Assets-Only
o Business Enterprise
o Juridical Entity
 Merger: union whereby one or more existing corporations are
absorbed by another corporation which survives and continues the
combined business
 Consolidation: union of two or more existing corporations to form a
new corporation called the consolidated corporation
 Mergers and Consolidation
o Procedure
 The Board will adopt a plan of merger or consolidation
 Stockholders will determine the exchange rates of their
respective shares
 Ratification by the stockholders, in a meeting duly called for
the purpose, representing at least 2/3 of the outstanding
capital stock
 Dissenting stockholders can exercise their appraisal rights
 Articles of Merger or Consolidation
 Merger
o “Amended” AoI of the surviving corporation
 Consolidation
o Entirely new AoI
 Approval by the SEC
 Merger or consolidation inherently does not prejudice
creditors
 Long Form Audit of each of the constituent corporation
 Evaluation of all the assets and liabilities of the
corporation
o Determine whether the proprietary rights of the
stockholders are protected; whether they are
receiving a fair value of the shares exchanged in the
merger or consolidation (to represent the true value)
 Transfer – Acquisition of Corporation v. Merger – Consolidation of
Corporation
o What is the purpose why one buys shares of stock in an equity
transfer? To manage the business enterprise
 Illustration
 XYZ Inc. with 1,000,000 shares
 A purchases 20,000 shares: assets-only transfer
 A purchases 510,000 shares: equity transfer
o For the purpose of managing the underlying business
enterprise
 Business enterprise transfer
 The transferee will still be held liable for the obligations
of the transferor
 In an equity transfer, the transferee does not become liable
for the obligations of the transferor.
 It is still the corporation which is liable for its obligations.
The stockholder does not by that reason alone become the
owner directly of the business assets and does not become
personally liable for the debts and liabilities of the
business
 In a business enterprise transfer, the transferee becomes
liable for all the obligations of the transferor.
 Illustration:
 XYZ Inc.
o Assets: P1B
o Liabilities: P0.5B
o S/E: P0.5B
o 1,000,000 shares
 ABC Co. purchases XYZ’s business for P2B. Only the assets
are going to be purchased, and all the liabilities will be
for the account of XZY.
 The creditors of XYZ file a claim against ABC. Who wins?
o Creditors, based on the business enterprise transfer
succession liabilities. Even if they stipulate that it is
only an assets-only transfer.
25
o The transfer is valid as to them, but void as to the
creditors, because it’s the creditors who can waive it.
 XYZ moved into another business. The creditors knew this,
but nevertheless sought payment from ABC. Who wins?
o The creditors will win, but ABC will have recourse
against XYZ.
o The application of the doctrine, does not extinguish
the obligation of XYZ. It is not a form of novation.
Business enterprise rules on the transfer and
succession of liabilities is not novation.
o The creditors can still go against ABC. The business
enterprise transfer doctrine is not an equitable
remedy (not a remedy of last resort)
 ABC decided to purchases 999,000 shares from X, Y, and
Z.
o Equity transfer
 Laguna Trans. v. SSS
o SSS wins because the business enterprise of the corporation was
merely the continuation of the business enterprise of the
unregistered partnership.
 PEA v. NLRC
o General rule: The transferee shall be liable for the obligations of
the business enterprise, except the its liabilities to its employees
 Pepsi Cola Bottlers v. NLRC
o When a corporation purchases the franchise of another
corporation, the transferee becomes liable under the business
enterprise transfer succession of liability rule.
o Does the rule include all creditors including employees as
creditors?
 No, the employees cannot hold the transferee liable under the
business enterprise transfer succession of liability rule
 As a rule, in a business enterprise transfer, the transferee
becomes liable for all the obligations of the business
enterprise, except employees because an employment
contract do not arise from the business as a going concern.
o The trasnferee does not become liable under the business
enterprise rule, but under the: (1) piercing doctrine (fraud), (2)
expressly assumes liability, (3) merger and consolidation, (4)
accion pauliana (transfer is made in fraud of creditors)
 Pepsi Cola v. NLRC 247
 Phividec v. Court of Appeals
XV. Foreign Corporations
 Domestic Corporation: a corporation organized under the laws of the
Philippines
o Vs. Foreign Corporation: a corporation organized in another state
other than under the Philippines
 Foreign Corporation
o Reciprocity: unless Philippine nationals are granted business
access in a foreign state, then the corporate entities of such
foreign state would likewise not be granted legal business access
within Philippine territory
o By naming foreign corporations, their existence has been
recognized in the Philippines (Doctrine of State Comity)
 If the Philippines express a policy which it will not recognize
the existence of a foreign corporation, is the policy legal?
That provision is legal
 Expression of state comity: Section 123
o Section 123
 Defines what is not a domestic corporation
 Reciprocity
 T/F: Insofar as all foreign corporations coming from states
which do not grant reciprocity rights, they do not exist
under Section 123.
 Is it lawful for citizens to recognize foreign corporations
that do not have the reciprocity clause? Yes
 Is it possible for courts being organs of the State to define
the will of the state? No
 Is it possible for the courts to recognize foreign
corporations who do not grant reciprocity rights? Yes,
under Section 133
CLV LECTURE NOTES | CORPORATE LAW 2012
 o The courts have the right not to recognize the
standing of foreign corporations doing business in the
Philippines without obtaining a license
 If they are doing business but are not licensed:
courts may not recognize the existence of the
foreign corporation
o Whether a foreign corporation has standing in the host
state is dependent on the policy of the host state,
BUT under the doctrine of state comity and Section
133, the state policy is that:
 The Philippines will recognize foreign
corporations, whose laws also recognize the
existence of Philippine corporations and that if
____
 Even if the foreign corporations do not engage in
business, the Philippines still recognizes them
provided that ____
 Doctrine of State Comity
o Foreign corporations are still recognized here even if
they are not engaged in business
o Doctrine of Isolated Transaction: a commercial
restatement of the Doctrine of Juridical Consent
 Born under a contract
 Doctrine of Juridical Presence
o Foreign corporations that engage in business in the
Philippines are considered as having presence in the
Philippines
o All about territory: you are here under the aegis that
all persons and properties located within the
jurisdiction of the state are effective and paramount
within the jurisdiction of that state
 Persons: physical presence in Philippine territory
 Corporations: engaging in business
 But does that mean that when they file a
petition in court, by that alone, the courts
have jurisdiction over the corporation? No
o Local courts can obtain jurisdiction by
proper service of summons
 Doctrine of Juridical Consent / Surrender
o Foreign corporations, regardless of whether they are
engaged in business or not, will be recognized in the
Philippines so long as they submit to the jurisdiction
of the Philippines
o All about “yes”
 Mentholatum v. Mangaliman
o Even if Mentholatum was not in the Philippines, it was
engaged in business through its exclusive distributing
agency, Philippine-American Drug. Under the doctrine
of agency that the acts of the agents are acts of the
principal, then, Mentholatum is deemed to be
engaged in business.
o Jurisprudential definition of “doing business in the
Philippines” (Commercial Test)
 Transaction or series of transactions that seeks
the progressive pursuit of the purpose and
object of the corporation (profit)
 The transactions must be intended to earn
profits
 With clear intention to do it in a continuing
basis; otherwise, it is an isolated transactions
 T/F: When a transaction undertaken within the
Philippines by a foreign corporation is important
to the purpose of the corporation with no
intention to pursue it in a continuing basis, then,
it is still engaged in business. FALSE, it is only an
isolated transaction. There must be an intention
to continue, without which, it is an isolated
transaction.
 Is it then necessarily an isolated transaction?
Yes
 If there is only an intention to do continue,
does it necessarily mean that it is engaged in
26
business? No, there must be progressive
pursuit of the purpose of the corporation
 Agilent Technologies v. Integrated Silicon
o Whether Agilent is engaged in business
 Requirement of a license is only relevant after a
determination of whether the corporation is
engaged in business
o Whether Agilent has the capacity to sue
o Principles
 Doing business without a license: cannot sue but
may be sued
 Domestic corporation cannot assail the capacity of
the foreign corporation if it has entered into a
contract with the same because it is estopped
 Not doing business: no need for a license, but it
can sue and be sued on isolated transactions
 Doing business with a license: can sue and be sue
o Agilent was not engaged in business, and so, it need
not obtain a license in order to sue
 It was a long-term isolated transaction
o Long-term isolated transaction
 There is no progressive pursuit
o If foreign corporations buy raw materials they need to
manufacture products, are they considered to be
engaged in business? Yes
 In the present case, even if Agilent complied with
the commercial test, it is still deemed as not
doing business because of the DTI Implementing
Rules and Regulations in its definition of not being
included in the term “doing business.”
 Pacific Vegetable Oil v. Singson
o The salient portions of the transaction were made
outside the Philippines
 Delivery of the subject matter
 Payment of the price
 Perfection of the contract
o Contract Test
o Is it legally possible for a foreign corporation to step
into Philippine shores without having a license? Yes,
by “deleting” Section 133
 If they do not comply with the requirements of
Section 133, foreign corporations will not have
standing in local courts or they pay a fine or they
cannot obtain a remedy.
o When a Nigerian corporation deposits $1B into a local
bank, is it present in our shores?
 Only by engaging business in the Philippines
o Can the courts obtain jurisdiction over a controversy
between a Nigerian corporation based on a
condominium he purchased in the Philippines?
 Through voluntary surrender, engaging in business
in the Philippines, and
o When do you invoke the Doctrine of Isolated
Transaction?
 A foreign corporation needs to prove that it is an
isolated transaction so that it will no longer be
required to obtain a license in order to be able to
sue.
 To show that it is not bound by Section 133
 Aetna v. Pacific Star
o The contract was signed and perfected in New York.
The premiums were also paid in New York, and hence,
even if it filed 13 other cases, it is still not deemed
doing business in the Philippines.
o In collecting the proceeds of the insurance policies, it
is still not engaged in business, because it is not
transacting business. The transacting of business is
entering into insurance contracts. In the present case,
it is merely seeking a remedy.
 Granger Associates v. Microwave Systems
o T/F: When a foreign corporation manages its
businesses, but appoints a local agent, it is not
engaged in business. TRUE
CLV LECTURE NOTES | CORPORATE LAW 2012
  What is the difference between appointing a local
agent and a commercial broker?
 If it appoints commercial broker and sells the
goods in its own name, the foreign corporation is
not engaged in business. (IRR)
 Except when the corporation participates in
the management of the broker and makes it a
mere conduit or alter-ego
 Procedure to Acquire License
o Articles of Incorporation duly authenticated
o Deposit securities for the benefit of its present and
future creditors
o Oath on Reciprocity compliance
o Designate who their resident agent is
 Qualified:
 An individual, with good moral character and
of sound financial standing
 Domestic corporation lawfully transacting
business in the Philippines
 In order to ensure that service of summons and all
legal process are made properly through the
resident agent
o In the absence or death of the resident agent,
authorize the SEC to be served with summons
 Express provision or application authorizing the
SEC
 The SEC will send the processes to the corporation
within 10 days
 Western Equipment v. Reyes
o Western Equipment is opposing the registration of its
trade name by a group of individuals in the
Philippines.
 Protecting its goodwill, trade name
o Herman filed a motion to dismiss on the ground that
Western Equipment is doing business in the Philippines
without obtaining a license.
o How is Western alleged to be doing business? Its
products and its brand were so well-known in the
Philippines
o Western has capacity to sue since the suit is for the
protection of its trade name, a property right, which
may be proceeded in an action in rem.
o Greatest penalty on a foreign corporation engaged in
business but without a license: such corporation
cannot sue
o When a foreign corporation has property in this
country that is the object of a litigation, can it be
sued even if it is not doing business in the country?
 The plaintiff will have to attach the properties,
and only then, will the courts will obtain
jurisdiction over the foreign corporation
 What if it is the corporation that is suing on a
property, but it has engaged in business without a
license?
 Section 133 does not distinguish whether the
action is in rem or in personam
 No matter what the action is filed, as long as
the corporation is engaged in business but
without a license, it cannot sue
o The corporation was allowed to pursue the case
notwithstanding the motion to dismiss because
Western is not seeking to enforce any legal or
contract rights arising from any business which it has
transacted in the Philippines.
o International Law  Treaties
 Constitution
 Section 133, Corporation Code
o As long as a trade name is recognized in a jurisdiction
which is a member of a Union, it shall be binding on
all members of the Union, irrespective of whether
that foreign corporation was doing business or not.
 Antam v. Court of Appeals
27
o A foreign corporation that enters into a series of auxiliary
transactions that have arisen from an isolated transaction do not
constitute as “doing business.”
o Doing business (more than one transaction) does not require a
series of transactions (there is only an isolated transaction) as
long as it complies with the 2 requirements in Mentholatum.
o What is essential for an isolated transaction?
o A single transaction would allow a foreign corporation to be
considered as doing business in the Philippines if it is done in the
progressive pursuit of the purpose of the business.
o If it is just one transaction, but it is in the progressive pursuit of
the business, how do you determine the intent?
 Extension of credit
 Venue stipulated is in the Philippines
 Contract Test
o If the performance of the contract or its perfection is done in the
Philippines, it is important that it be so in order for the
transaction to be “doing business.”
 Home Insurance v. Eastern Shipping Lines
o It is a foreign corporation doing business without a license.
o An isolated transaction must also happen in the country, without a
license, and not engaged in business, it can sue.
o At the time the contract was perfected, Home Insurance was not
yet licensed.
o Schools of Thought
 The contract is null and void because the contract has been
entered into against the prohibition of the law.
 The contract is valid, but it suspends the ability of the foreign
corporation to seek remedy based on the contract until it is
ready to comply with the requirement of the law.
o Section 133 does not go into the validity of the contract entered
into by a foreign corporation. It just goes into the standing of the
corporation in a suit, remedy available to the foreign corporation.
o The penal provision in the Old Corporation Law was penalizing
doing business without a license, and NOT entering into a contract
without a license.
 Atlantic v. Cebu Stevedoring
o When a foreign corporation files a complaint, it must aver that it
is foreign corporation whether it is doing business or not,
otherwise, the complaint will be dismissed based on the lack of
capacity to sue.
o Jurisprudence said that there was no need to aver that it was
doing business or not because it was a matter of affirmative
defense on the part of the local.
 BUT it would be unfair for a local corporation to determine if
the foreign corporation is engaged in business since it is in the
foreign corporation that is bringing the case.
 Merrill Lynch Futures v. Court of Appeals
o When a foreign corporation alleges that the transaction is an
isolated one, when in fact, it is engaged in business, the
defendant will try to prove that the foreign corporation is in fact
engaged in business in a motion to dismiss on the ground of lack
of capacity to sue.
 The foreign corporation is actually engaged in business but is
without a license.
o Better route: file an answer raising the affirmative defense of lack
of capacity to sue
 Only when it comes to proving that the foreign corporation is
not doing business in the country
o The spouses are estopped from saying that the corporation has no
capacity to sue, because it entered into transactions knowing that
it was engaged in business without a license.
o Doctrine of Estoppel
 Estopper: Spouses
 Knowing that Merrill Lynch was without license, it still
transacted with the foreign corporation
 Estoppee: Merrill Lynch
 Engaging in business without a license
o “Avoidance of Unjust Enrichment”
 Eriks v. Court of Appeals
o Notwithstanding the fact that the foreign corporation does not
have a license and without the capacity to sue, the case will be
CLV LECTURE NOTES | CORPORATE LAW 2012
 dismissed, but it can still sue a local after it obtains the required
license.
 Facilities Management Corp. v. De la Osa
o By engaging in business, it is deemed to be present in the
Philippines, and the court can obtain jurisdiction over the
properties of the foreign corporation located in the Philippines.
o if a foreign corporation, not engaged in business in the
Philippines, is not banned from seeking redress from courts in the
Philippines, a fortiori, that same corporation cannot claim
exemption from being sued in Philippine courts for acts done
against a person or persons in the Philippines.
o If a foreign corporation not doing business can sue a local in an
isolated transaction (true, based on the doctrine of voluntary
surrender), a fortiori, as a necessary consequence, that foreign
corporation can be sued for an isolated transaction. (Illogical: non
sequitur; it has no presence in the country)
 When it sues, it invokes the jurisdiction of the local courts

28 CLV LECTURE NOTES | CORPORATE LAW 2012