Corporation Code of the Philippines

Batas Pambansa Blg. 68

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 Table of Contents
TITLE I – General Provisions .......................................................................................................... 4
Definitions and Classifications................................................................................................... 4
I. Section 2 – Corporation Defined .......................................................................................... 4
II. 4 Attributes of a Private Corporation (ALSP) ....................................................................... 4
III. Natural Person vs. Corporation .......................................................................................... 5
IV. Stages in the Life of a Corporation ..................................................................................... 5
TITLE II – Incorporation and Organization of Private Corporation .............................................. 7
I. Section 14 – Contents of the Articles of Incorporation (AOI)................................................. 7
II. Section 14 and 15 - Contents of the AOI & Forms of AOI.................................................... 7
III. De Jure Corporation ........................................................................................................ 17
IV. Section 20 – De Facto Corporation .................................................................................. 18
V. Section 21 – Corporation by Estoppel (a.k.a. Ostensible Corporation) .............................. 18
VI. Once a certificate of incorporation was issued, the following subsequent conditions must
be complied with: ..................................................................................................................... 18
VII. Theory of Corporate Fiction ............................................................................................ 19
VIII. Piercing the Veil of Corporate Fiction (PFI) .................................................................... 20
IX. Section 16 – Amendment of AOI ...................................................................................... 21
TITLE V – By Laws ........................................................................................................................ 23
I. By-Laws (BL) ..................................................................................................................... 23
II. Section 46 – Kinds of BL Based on Time of Adoption: ...................................................... 23
III. Section 47 - Contents of the BL ....................................................................................... 23
IV. Section 48 – Amendment to BL ....................................................................................... 23
TITLE III – Board of Directors/Trustees/Officers ......................................................................... 25
I. Management of a Corporation............................................................................................ 25
II. Section 23 – The Board of Directors (BOD) of Trustees .................................................... 25
III. Section 24 – Election of Directors or Trustees ................................................................. 25
IV. Section 25 – Corporate Officers, Quorum ........................................................................ 26
V. Section 26 – Report of Election of Directors, Trustees and Officers .................................. 27
VI. Section 30 – Compensation of Directors .......................................................................... 27
VII. Section 27 – Disqualification of Directors, Trustees or Officers & Section 28 – Removal of
Directors or Trustees ............................................................................................................... 28
VIII. Section 29 – Vacancies in the Office of Director or Trustee ........................................... 28
IX. Delegated Powers............................................................................................................ 29
X. Section 33 – Contracts between Corporations with Interlocking Directors ......................... 31
XI. Section 31 – Liability of Directors, Trustees of Officers – What are the duties of the BOD
and officers as fiduciaries? – 3-Fold Duty – ODL ..................................................................... 32
XII. Self-Dealing Director or Officer ....................................................................................... 33
XIII. Section 33 – Contracts between Corporations with Interlocking Directors ...................... 34
XIV. Section 34 – Disloyalty of a Director .............................................................................. 35
XV. Violation of the 3-Fold Fiduciary Duties ........................................................................... 35
XVI. Doctrine of Forbidden Profits ......................................................................................... 36
TITLE IV – Powers of Corporations .............................................................................................. 37
I. Section 36 – Corporate Powers and Capacity – Theory of Special Capacities ................... 37
II. Section 37 – Power to Extend or Shorten Corporate Term – Special Powers ................... 38
III. Section 38 – Power to Increase and Decrease Capital Stock – Special Powers .............. 38
IV. Section 38 – Power to Incur, Create or Increase Bonded Indebtedness........................... 40
V. Section 40 – Sale or Other Disposition of Assets .............................................................. 41
VI. Section 42 – Power to Invest Corporate Funds in Another Corporation or Business or for
any Other Purpose................................................................................................................... 42
VII. Section 41 – Power to Acquire its Own Shares ............................................................... 43
VIII. Section 45 – Ultra Vires Act of Corporations .................................................................. 44
TITLE VII – Stock and Stockholders............................................................................................. 46
I. 3 General Ways for a Person to Own SS ........................................................................... 46
II. Subscription Contract (Sec. 60) ........................................................................................ 46
III. Treasury Shares .............................................................................................................. 48
IV. Section 70 – How may the Corporation Enforce the Delinquent Balance ......................... 49
V. Ownership of Shares in a Corporation Entails 3 Principal Rights in favor of the SH or
Subscriber ............................................................................................................................... 50
VI. Citizenship of a Corporation – Grandfather Rule .............................................................. 53
VII. Right to Transfer SS ....................................................................................................... 56
VIII. Section 73 – Lost or Destroyed Certificate ..................................................................... 57

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TITLE VIII – Corporate Books and Records ................................................................................. 58
I. Purpose for Recording in the Stock and Transfer Book (STB) ............................................ 58
II. What Transfers are Not to be Registered in the Books of the Corporation ........................ 59
III. Other Rights of a SH........................................................................................................ 60
IV. Section 74 – Stock and Transfer Agent ............................................................................ 62
TITLE VI – Meetings....................................................................................................................... 63
I. Exercising the Right to Vote through Representation ......................................................... 63
II. Section 58 – Proxies ......................................................................................................... 63
III. Section 59 – Voting Trust Agreement (VTA) .................................................................... 63
IV. When may the Right to Vote and be voted for be Exercised ............................................ 64
TITLE X – Appraisal Right ............................................................................................................. 66
I. Section 81 – Instances of Appraisal Right .......................................................................... 66
II. Surrender Value................................................................................................................ 66
III. Section 84 – When Right to Payment Ceases ................................................................. 67
TITLE IX – Merger and Consolidation .......................................................................................... 68
I. Merger or Consolidation ..................................................................................................... 68
II. Section 76 – Plan of Merger or Consolidation ................................................................... 68
TITLE XI – Non-Stock Corporations ............................................................................................. 70
I. Stock Corporation vs. Non-Stock Corporation .................................................................... 70
II. Chapter 1 - Members ........................................................................................................ 70
TITLE XIII – Special Corporations ................................................................................................ 72
Chapter I – Educational Corporations ...................................................................................... 72
I. Section 106 – Incorporation ............................................................................................... 72
II. Section 108 – Board of Trustees ....................................................................................... 72
III. Educational corporations are required to obtain a secondary franchise. .......................... 72
Chapter II – Religious Corporations ......................................................................................... 73
I. Classes of Religious Corporations ..................................................................................... 73
II. Section 110 – Corporation Sole ........................................................................................ 73
III. Section 116 – Religious Societies .................................................................................... 73
TITLE XII – Close Corporations .................................................................................................... 74
I. Section 96 – Definition and Applicability of Title ................................................................. 74
II. Section 97 – Articles of Incorporation ................................................................................ 74
III. Section 105 – Withdrawal of Stockholder or Dissolution .................................................. 75
IV. Appraisal Right ................................................................................................................ 75
V. Right of First Refusal......................................................................................................... 75
TITLE XIV – Dissolution ................................................................................................................ 76
I. Section 117 – Methods of Dissolution ................................................................................ 76
II. The dissolved corporation retains a limited civil personality for the following purposes
(powers at liquidation): ............................................................................................................. 77
III. Section 122 – Methods of Corporate Liquidation – Who may Enjoy the Powers During the
Liquidation ............................................................................................................................... 77
TITLE XV – Foreign Corporations ................................................................................................ 80
I. Section 123 – Definition and Rights of Foreign Corporations ............................................. 80
II. Section 125 – Requirements to Allow a Foreign Corporation here in the Philippines – Apply
for a License ............................................................................................................................ 80
III. Power to Sue and be Sued .............................................................................................. 82

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 TITLE I – General Provisions

Definitions and Classifications

- The 1987 Constitution provides that no law shall be passed creating a private corporation.
- Congress is devoid of any authority to enact a law purposely creating a private corporation.
- Congress can only enact a law to establish a government owned and controlled corporation
either as stock or non-stock corporation.
- Private corporation, in turn, can only be created pursuant to a General Law.
- Thus, the general law which is the source of the formal existence of all private corporations in the
Philippines is the Corporation Code of the Philippines (BP Blg. 68)
- A private corporation may only be created by a general law. To make it a private corporation, the
following are the indications: (1) A portion of its capital stock belongs to the government; and (2)
No degree of control is exercised by the government in the management.

I. Section 2 – Corporation Defined

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

II. 4 Attributes of a Private Corporation (ALSP)

A. It is a mere artificial being

- It is a juridical person that may be created either for profit or non-profit purposes
- It is granted personality separate and distinct from all other juridical entities and from all other
natural persons, whether these persons are its own stockholders, members, or officers.
- However, the separate and distinct personality of a corporation can only come about if the
second attribute is present.

B. It is created by operation or fiction of law

- Theory of Concession
- No private corporation can exist without the consent of the State.
- All private corporations derive their legal being and existence from the State’s consent.
- For said consent to be conferred or granted, there must be compliance with all the conditions
prerequisite for creation and formation of Private Corporation. (e.g. submission of Articles of
Incorporation and other authorities from proper government agencies)
- The fact that a corporation is created through a fictive process, once there is compliance with all
the requirements, then the right of succession comes about.

C. Right of Succession
- This right is understood as follows: That a corporation continues to exist regardless of changes
in its composition, since a corporation, once formed and organized, has a separate and distinct
personality from all other persons, the death, resignation or withdrawal of any of its
incorporators, stockholders, or members will not affect its legal existence. It will continue to exist
throughout the term stated in its Articles.
- This is actually the characteristic of a corporation which sets it apart from a partnership which is
dissolve once there is death, resignation, or withdrawal of the partners or any of the partners.
- This right should not be understood under the civil law perspective as the right to inherit.

D. Once formed and organized, the corporation can only exercise the following powers: (EII)

1. Express Powers
- Powers and authority that a corporation can exercise because they are granted explicitly by
the following:
a. 1987 Constitution
b. Statutes
c. Government rules and regulations
d. Articles of Incorporation (AOI); and
e. Corporation’s By-laws (BL)
- Here, there must always be a formal source of authority as to what the corporation can and
cannot do.

2. Implied Powers
- Those powers which are reasonably connected and in direct pursuit of furtherance of the
express powers.

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 - This need not be written for as long as they seek to establish or create an act or contract that
is auxiliary to the purpose of the corporation.

3. Incidental power
- This need not be written or express because they are inherent in the corporation from the
moment of its formal establishment (e.g. power to have its own name)

- Under the fourth characteristic, we must abide by the Theory of Special Capacities
- This is the legal norm applicable to juridical entities that can only enjoy or exercise rights or
privileges granted by the law
- For corporations, whatever is not granted is deemed denied. It cannot do whatever it
pleases.

- Theory of General Capacities

- The opposite of the Theory of Special Capacities
- Applicable to natural persons or individuals (e.g. a person does not need any permission in
order to live – meaning, there is no need for a law in order to exercise such capacity)

III. Natural Person vs. Corporation

Natural Person Corporation

Conception Promotion
Birth Incorporation
Any event in Example: corporate restructuring or rehabilitation (increase or decrease of
between capital; venturing into new business)
Death Dissolution
Estate Winding up or Liquidation

IV. Stages in the Life of a Corporation

A. Promotion or Creation
- Here, there is yet no corporation legally existing but the idea of a corporation is already present
for some lawful undertaking

- Promoter – Promotional/Pre-Incorporation Contracts

- At this stage, the most important actor is the promoter – He is a person, either natural or
juridical, engaged in the business of forming and organizing a corporation.
- This requires that the promoter should enter into certain contracts known as promotional or
pre-incorporation contracts. All these contracts are aimed towards the forming of a
corporation under the law.
- During the promotion stage, there may be a necessity of entering into contracts for
solicitation of capital or investment to the proposed corporation. (pre-incorporation
subscriptions, type of business, composition, etc. are done in this stage)

- A promoter enters into promotional contracts in two ways:

1. In the name of the promoter (e.g. parties are the promoter and the investor); or
2. In the name of the projected or proposed corporation of the promoter (e.g. parties are the
proposed corporation, as represented by the promoter and the investor)
- Here, the corporation does not yet legally exist. Thus, it cannot have an agent.
- This is the reason why the promoter is the one solely liable for promotional contracts.

- The promoter carries the burden of forming a corporation for which the investment was
made.
- In case of contractual breach, only the promoter can be held liable.
- The corporation, once formed, may be held a party to said contracts thru express adoption or
implied ratification.

- Express Adoption
- Belated act of the corporation in holding itself liable under contracts entered into before it is
incorporated
- This requires positive action of the Board of Directors
- The Board shall resolve to bind the corporation under said contracts; once expressly
adopted, both the corporation and the promoter are considered bound by the same
contracts.

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- Implied Ratification
- Apply the principle of estoppel (if the corporation benefited from the act of the promoter and
another, the corporation may be held liable)

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 TITLE II – Incorporation and Organization of Private Corporation

I. Section 14 – Contents of the Articles of Incorporation (AOI)

- Part of the promotional stage is compliance with the conditions prerequisite the incorporation.
The most significant prerequisite is the Articles of Incorporation.
- No corporation can be formed without the duly approved Articles of Incorporation.
- Articles of Incorporation is different from a charter. The term charter is broader than the AOI.

A. Charter
- The term Charter may be used in the following:

1. Public corporation
- Charter is the special law creating such corporation including GOCCs

2. Private corporations
- Charter means:
a. The Corporation law
b. The law special law regulating the business of the corporation; and
c. The AOI and BL

B. The AOI represents the following:

1. At the beginning, it represents a contract mutually binding between and among the
incorporators (how to be called; the term, etc.);
2. Once approved, it is a contract between the Republic of the Philippines and the corporation.

- For private corporations, the AOI is both a source of authority and limits or restrictions as to said
authority and by which its operations are monitored by the government.

II. Section 14 and 15 - Contents of the AOI & Forms of AOI.

- Follow substantially the form and contents of AOI.
- Otherwise, the SEC will not register the proposed corporation.
- It is indispensable that the applicant must file with the SEC for its approval the appropriate AOI
containing all matters and in the form prescribed in Articles 14 and 15 of the Corporation Code.

- Contents: NPOTI – DA25%25%T – N

A. Corporate Name – First Paragraph

- Serves as the identity of the corporation (indispensable requirement)

- Limitations in the adoption and use of Corporate Name: (IDCP)

1. That it must not be identical;
2. That it must not be deceptively similar;
3. That it must not be patently deceptive or confusing in relation to another corporation or name
protected by law; and
4. That it must not be prohibited by law

- The following names are prohibited by law:

1. Republic (for the exclusive use of the Republic of the Philippines and its authorized
government agencies)
2. National (usually for GOCCs only)
3. Maharlika
4. University (Under CHED Law, this term can only be used by an educational institution if it is
accredited as such by the CHED.)
5. United Nations or the names of any UN agency (cannot be used for commercial or private
purpose)

- The name of an individual can only be used as a corporate name if that individual owner gives
his or her express consent.

- In case of dispute, follow the Priority Right Rule (Priority in time is priority in right)
- This means that the one who registered first under the said name is preferred over another
corporation seeking to use the same
- This is applicable if the name is exactly the same

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 - If engaged in the same line of business and their names are confusingly similar, the one who
registered first is preferred and the subsequent one is compelled to change its corporate
name

- However, if the name is not identical but only similar, there is a need to make a comparison.

- Universal Mills, Inc. v. Universal Textile Mills, Inc., G.R. No. L – 28351, 28 July 1977
- SC: The Universal Textile Mills, Inc. was compelled to change its name. The corporate
names in question are not Identical, but they are indisputably so similar that even under
the test of "reasonable care and observation as the public generally are capable of using
and may be expected to exercise", confusion will usually arise, considering that under the
second amendment of its articles of incorporation on August 14, 1964, appellant included
among its primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of
all kinds" in which respondent had been engaged for more than a decade ahead of
petitioner.
- Factually, the Commission found existence of such confusion, and there is evidence to
support its conclusion. Since respondent is not claiming damages in this proceeding, it is,
of course, immaterial whether or not appellant has acted in good faith, but We cannot
perceive why of all names, it had to choose a name already being used by another firm
engaged in practically the same business for more than a decade enjoying well earned
patronage and goodwill, when there are so many other appropriate names it could
possibly adopt without arousing any suspicion as to its motive and, more importantly, any
degree of confusion in the mind of the public which could mislead even its own
customers, existing or prospective.

- Refractories, Inc. v. Industrial Refractories – The Industrial Refractories was compelled to

change its name

- Doctrine of Secondary Meaning

- Generally, a generic dictionary word cannot be appropriated for private use unless such
generic or ordinary word, has, through time long been associated with a particular product,
merchandise or service, in which case, the producer or manufacturer can now use such
generic word exclusively because of the secondary meaning that has attached. (e.g. Globe)

- Lyceum of the Philippines Case

- SC: The term lyceum has not acquired a secondary meaning exclusive to the use of Lyceum
of the Philippines. Universally, the term “lyceum” refers to an educational institution and is
now beyond appropriation. Geographic places differs, hence, no confusion: e.g. Lyceum of
the Philippines vis-a-vis Lyceum of Batangas.

- The corporate name can be subsequently amended. The change may be necessitated in the
change of the purposes of the corporation or in its structure such as by way of merger.

- When the name is later amended, the identity of the corporation does not change.

- Republic Bank v. CA
- A promissory note was issued by a corporation as a debtor under its original name. Because
of a merger, its name was subsequently changed. When the obligation matured, it refused to
pay its debt alleging that by reason of the change in its name, it is no longer liable under the
promissory note.
- SC: The SC did not agree to the contention. When the name is later amended, the identity of
the corporation does not change.

B. Every Corporation must have a Purpose – Second Paragraph

- The corporate purpose/s may be determined by the nature of the corporation itself

- Stock Corporations:
- The purpose may be any specific undertaking or profit or gain
- However, the stated purpose must be specific enough to permit government regulation
- How many corporate purpose/s may be stated in the AOI – there may be one or several,
there is no limit as to the number
- However, if there are multiple corporate purposes for the stock corporation, only one must be
designated as a primary purpose, all others are secondary purposes
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 - All of the corporate purposes must be licit – not contrary to law, public order, public policy,
etc.
- When there are several corporate purposes written in the AOI, all of them must be
susceptible of lawful combination

- Under Philippine law, there are certain kinds of purpose that cannot be pursued or
undertaken by one and the same corporation because they are considered incompatible with
one another as they affect public interest

- Unlawful combinations:
1. Banking and insurance (both under the Insurance Code and the General Banking Act;
combined as the former a primary purpose and the latter a secondary purpose or vice-
versa)
2. Combinations of the forms of transportation (under Public Service Act)
3. Life and non-life insurances (under the Insurance Code)
4. Securities broker (one who buys shares of stocks or other securities for the account of
others or customers) and securities dealer (one who buys or sells shares of stocks or
other securities for its own account or for its own name) (under Securities Regulation
Code)

- What is the necessity of having a secondary purpose for stock corporations?

- This would allow the corporation to diversify its sources of profits
- Secondary purposes need not be related to the primary purpose
- It is useless if the secondary purposes are in fact already related to the primary purpose
- There is no limit as to its number as long as it is capable of lawful combination

- Why do we need to distinguish between the primary and the secondary purpose?
- Any transaction related to the primary purpose requires Board approval because it is left
to the business judgment of the Board. No need to present it to the stockholders for
approval
- On the other hand, any transaction including expenditure of corporate funds for the
secondary purpose requires not just majority approval of the Board but also 2/3 of the
outstanding capital stock. Stockholder’s concurrence is mandatory

- Non-Stock Corporations:
- They should write in their AOI any non-profit purpose
- Thus, it may be for charity, religious, literary, scientific, or similar non-profit purposes
- How many purposes – one or more may be included in the AOI
- Should there be more than one corporate purposes, all of them must be non-profit and must
not change the character of the corporation as such

- Case: An opinion was sought from the SEC by a religious corporation already organized to
engage in retail service restaurants thru franchises. It sought that its AOI be amended to
include as secondary purpose those profit activities.
- According to SEC, they cannot because it is contradictory to its nature as a non-stock or
non-profit corporation

- The term non-stock or non-profit is a misnomer or often misunderstood because a non-stock

corporation can actually have a capital stock, except that in case it has capital stock, the
shares of stocks are non-proprietary – meaning: The members of the non-stock corporation
cannot be paid and should not be paid dividends – that is why it is non-profit
- But this does not mean that non-stock corporations cannot engage in activities that bring
profit – they can because a non-stock corporation must have profit in order to continue its
existence and operations, what is prohibited is that those profits be distributed as dividends

C. Specify the Principal Office – Third Paragraph

- In the AOI, the principal office must be specific as an exact address to enable the SEC to serve
notices or orders upon the applicant in relation to its registration as a corporation
- The principal address of the corporation fixes its domicile, since it is a person, it must have a
habitual residence
- For the following purpose, domicile is material:

1. To sue
- Suits initiated by a corporation are subject to the regular rules of Civil Procedure
- A corporation may file a civil action in the appropriate court of its residence or residence
of the defendant
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 - But when a corporation is impleaded as a defendant, service of summons can only be
made at its domicile or principal office stated in the AOI, otherwise motion to dismiss will
prosper on the ground of lack of jurisdiction over the person of the defendant

- Davao Light v. CA
- A civil case was filed against Davao Light for breach of contract and the prayer was
for payment of damages. After summons was served at its branch in Davao City, a
motion to dismiss was filed by the defendant citing that there was improper service of
summons because the plaintiff and the sheriff did not follow the principal office stated
in the AOI.
- SC: Upheld the dismissal of the complaint on the ground of lack of jurisdiction
because the AOI are clear that Davao Light has principal office in Cebu. So there was
no proper service of summons amounting to lack of jurisdiction over its person.

2. Situs of Income Taxation

3. In general, the principal office is where fundamental decisions of the Board are adopted and
undertaken and where the corporation has its legal representation

- The principal office need not be the place of actual conduct of business, if this were so, you
cannot have branches

D. Corporate Term – Fourth Paragraph

- Whether stock or non-stock, every corporation must specify a term or duration of time within
which it shall exist legally
- The term must be a definite number of years, not more than 50 years
- However, by formal amendment of the AOI, the corporate term may either be shortened for
purposes of dissolving it or extended
- Sec. 37: In case of extension or renewal of the corporate term, the amendment in the AOI must
be adopted within the last 5 years of its current term. Such extension or renewal cannot be done
earlier than the prescribed 5-year period except on meritorious grounds given to the SEC. The
extension cannot also be done after the current term has already lapsed, because by that time,
the corporation has already dissolved
- However, even if a specific term is placed in the AOI that only shows the length of time by which
a corporation may exercise its privilege as a corporate entity. Such privilege may be sooner
terminated thru involuntary resolution or revocation of certificate of incorporation

E. Incorporators – Fifth Paragraph

- Incorporators are corporators – True
- Corporators are always incorporators – False
- “Corporators” is the broad term referring to all persons, whether natural or juridical, that form part
of the corporation, either as stock owners or members
- “Incorporators” refer to the individuals who originally formed the corporation and whose names
are listed in the AOI
- There must be at least 5 incorporators. All 5 must be legally capacitated because the drafting of
AOI is actually entering into a contract, so they must have contracting capacity
- The maximum of incorporators is 15 members, majority of them must be residence of the
Philippines at the time of the execution of the AOI, to place them under the jurisdiction of the
SEC where they are applying for a certificate of incorporation

- If the proposed corporation is a stock, then all the incorporators must subscribe to at least 1
share in the capital stock of the projected corporation
- Since all incorporators in the stock corporation are required to be subscribers of the capital
stock, the citizenship requirement under the Constitution must be fulfilled at the time of said
incorporation. Because there are certain businesses or activities that are limited, either wholly or
partially, to Filipino citizens
- Example: Mass media – 100%

- If it is non-stock corporation, all incorporators must be members contributing his initial capital

- Can another corporation be an incorporator?

- GR: No
- XPNs:
1. Rural banks and cooperatives, allowed under Rural Bank Act
2. Merger of two or more corporations

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F. Directors or Trustees – Sixth Paragraph
- One advantage of a corporate structure is that there is centralized management exercised by the
Board

- In the AOI of a stock corporation, there is only one name – Board of Directors (BOD), numbering
at least 5 and no more than 15, except in the case of merged or consolidated banks, where the
Board may compose of 21 directors

- In the case of non-stock corporations, the minimum number of trustees is 5 but the maximum
may go beyond 15. For as long as a definite number is stated in the AOI
- In the case of non-stock corporations, the name may abide by the traditional Board of Trustees
but can go creative such as “Board of Counselors” or “Circle of Friends”  or “Board of Regents”
(educational institution)

- In the AOI, the names of the incorporating directors or trustees must also be listed, along side
their respective nationalities and addresses. This is to be included so that there is an interim
board that will temporarily manage the corporation after it is issued a certificate until regular
elections can be conducted

G. Authorized Capital Stock (ACS) – Seventh Paragraph

- The ACS is mandatory for all stock corporations only, must state this in the AOI

- ACS: This is the maximum number of shares that corporation is legally permitted to issue or sell
- The maximum must be stated in order not to prejudice, specially the public, who may be
deceived into the buying shares of stock beyond what is permitted by law because shares issued
by the corporation outside or in excess of ACS are considered void shares, they will not create or
confer any right or obligation between the parties except reimbursement of what has been given
- One who acquires such excess shares or unauthorized shares cannot become a stockholder

- There is no limit as to the amount of ACS

- This refers to the total or maximum number of shares of stocks that the corporation is legally
permitted to issue and that must be stated in the AOI in order for the law and the State to
determine how many shares that a corporation is legally allowed and entitled to sell and dispose
of in order to obtain capital

- The sale of shares of stocks is actually the first form of corporate financing of the business, that
is why such form of corporate financing through sale of shares of stocks is regulated, not just by
the Corporation Code but also by the Securities and Regulations Code and other relevant
special laws

- Why is there a need to state shares of stock or what is the purpose of the ACS
- The shares of stock represents the aggregate number of shares
- Shares of stocks are an aliquot fraction of the whole
- The sale of shares of stock is the first form of corporate financing. It is the principal means by
which a corporation obtains cash or property needed to pursue its business.
- If you do not sell shares and rely merely on profit – profits come later once business has
begun, at the beginning you get the money from sale of shares acquired by incorporators or
initial subscribers
- Being the first form of corporate financing, the sale of shares of stocks by private corporation
is regulated by the SEC, both under Corporation Code and Securities Regulations Code
(SRC)

- Example: 
- 5 friends wanted to go on pastry business. They each contributed 200 to bake their first cake.
- The cake is the ACS. Either it represents the actual contributions already in or may include
future capital to the business of the corporation.
- The cake must be sold to make profit and to be able to bake another cake.
- The question here in making the AOI is how many slices will you cut the cake, each slice
represents your shares of stocks
- If the cake cost 1,000 – will you slice it into 10 and then sell each slice at 100? – this is how
to determine the par value

- Under the ACS Clause, the shares of stocks may be classified as follows and must be
specifically written in the AOI. If the total number must be specified, such total may be further
classified into the following:
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1. Par vs. Non-Par Shares

a. Par Value Shares

- Have nominal value fixed in the AOI
- What is the significance of said par value – that is the legal minimum by which a
corporation may issue or dispose of said shares, otherwise, there could be watered
shares
- Example:
- The ACS stated in the AOI is 10M. Consisting of the 10M shares is classified as
6M common par, 4M preferred par.
- Example:
- 10M consisting of 10M shares at par value of 1.00 per share.
- Meaning all the 10M shares forming part the ACS of the corporation are nominally
valued at 1.00 per share.
- Meaning, if the corporation wants to sell a share, it can only demand a minimum
of 1.00 and not lower than 1.00
- If the corporation sells this par value share at .60 centavos per share, then those
are watered shares, and water shares are prohibited because they defraud the
creditors of the corporation violating the trust fund doctrine
- Stocks with a value fixed in the AOI and the certificate of stock
- Those that have fixed nominal values stated in the AOI
- That fixed nominal value allows the corporation from selling or disposing said shares
not less than the par value – cannot be sold below par but can be sold above par –
otherwise, there is watering down of shares if sold for a lower amount

b. No Par Value Shares

- Have value except that there is no minimum stated in the AOI
- They afford the corporation greater flexibility in pricing said shares when issued
- Example:
- ACS = 10M no par shares
- Example:
- When the corporation has been registered fulfilling the 25%-25% requirement, 5
years after it was formed, it sold 2M of its 10M no par shares. In 2010, the 2M no
par shares was sold by the corporation by resolution of the Board priced at 10.00
per share.
- How many more no par shares remain – let us say 8M
- But the corporation in 2014 requires additional capitalization that is why to finance
its continuation it needed additional capital so it sold 2M of its no par shares but it
is not limited to 10.00, it can price its shares at 50.00 per share.
- This is the flexibility of no par shares because for par shares, there is always a
minimum and cannot fall below the minimum.
- The value of no par shares is often called stated value
- Advantages of no par shares
a. Once issued, they are considered fully paid and non-accessible – meaning:
subscribers of no par shares cannot be declared delinquent. The presumption is
that there was already full payment. Unlike in the case of par shares, where the
payment may be made on installment, so some balance may remain for which
delinquency may arise.
- The value is not fixed in the AOI and the certificate of stock
- How is the value of no par value shares determined – determined at the time of
issuance or sale of the no par value shares that the value is fixed by the Board unless
the by-laws also require the assent of the stockholders in fixing the price of said no
par value shares
- Sec. 62 – Valuation of no par value shares
- They have value called “stated value”, which is fixed by the corporation at the time
when the shares are sold or disposed of
- This affords the corporation greater flexibility pricing the same
- No par value shares can be sold for less than 5.00
- Once no par value shares are issued a particular subscriber or stockholder, then the
sale is considered as fully paid and therefore non-accessible – meaning, the
subscriber does not face the risk of delinquency
- Not all corporations are permitted to have and issue no par value shares. The
following cannot issue: (BITU)
i. Banks
ii. Insurance companies
12
 iii. Trust companies
iv. All other public utilities
- The reason is because of the tendency that no par value shares may conceal the
actual value of the assets of the corporation which businesses are regulated by law
and therefore requires utmost transparency in their financial condition. It is to the
public interest that they should not have no par shares
- If the capital stock consists entirely of par value shares then the statement of the ACS
must include the aggregate value of the total
- Example:
- If the 1M shares are all par value shares and fixed at 10.00 per share. Therefore,
the ACS statement in the AOI must be 10M divided into 1M shares at par value of
10.00 each
- Example:
- If the entirety of the ACS consists only of no par shares, it is enough that
paragraph seven state the maximum number of shares – 1M no par value shares
- However, unless prohibited a combination of both par and no par shares may be
made in the AOI
- Example:
- 1M shares. 600,000 are par at 10.00 per share. 400,000 are no par.

2. Preferred vs. Common Shares

a. Common Shares
- The basic class of stock ordinarily and usually issued without extraordinary rights and
privileges, and are considered voting stocks
- With respect to dividends and assets, it enjoys a mere pro rata distribution – they are
not accorded any special rights or privileges under the AOI
- Common shares enjoy full voting rights

b. Preferred Shares
- Share with a stated par value which entitle the holder thereof to certain preferences
over the holders of common stock and may be a non-voting stock
- Preferred to be paid corporate assets during liquidation

- Group of shares that enjoy special rights or privileges, either with respect to:

i. Dividends or profit of the corporation

1) Cumulative vs. Non-Cumulative
a) Cumulative
- Those that enjoy dividend rights for current periods as well as dividend
in arrears – meaning past dividend – so they accumulate
- Meaning if you became a stockholder only now, and then you bought
preferred cumulative shares, you are entitled to a payment of the
dividend for all future ones but also for past dividends that you may not
have yet been able to obtain because you were not yet a stockholder
b) Non-Cumulative
- Only for current dividends – dividends being a form of the profits
allocated for distribution of owners of the capital stock
2) Participating vs. Non-Participating
a) Participating
- Owner of the shares of stock is entitled to 2 forms of dividends:
i) Dividends as a Preferred Share
ii) Dividends as a Common Share
- If the preferred share is participating, that preferred share will be
entitled to dividends as a preferred and also as a common share –
twice out of the same dividend
b) Non-Participating
- Only as a preferred shares

- Example: Dividend declarations or how the AOI may state:

- That in the AOI, it may state that the preferred shares totaling 400,000
of the 1M shall be paid – 1st 60% of all dividends
- Lets say 4th quarter of 2015 – total amount of dividends is 10M –
pursuant to what is stated in the AOI, 60% (6M) of this must be paid to
the preferred shareholders, even if there is only one owner
- The remaining 4M will be divided among the common shares
13
 ii. As to the assets upon dissolution of the corporation
- For as long as the corporation is existing, the law forbids it from distributing its
assets to its stockholders because corporate assets are reserve for corporate
creditors rather than stockholders – trust fund doctrine
- Distribution of property or assets of corporation can validly take place only
after the corporation is dissolved and provided further that its creditors are
paid
- Same as the subdivisions in preferred as to dividends

iii. Preferred as to voting

- Best example of this are founder’s shares
- This refers to a class of shares that enjoy the exclusive right to vote and be
voted for as directors or trustees of the corporation
- The AOI must be explicit as to the exclusive right to vote and be voted for and
such exclusive right should be no longer than 5 years approved by the SEC
- This special kind of preferred shares duly allocated to themselves by the
incorporators because they are the founders
- This allows the founders or incorporators of the corporation to more or less
institutionalize certain rules and methods or practices of the business that they
can pass on to future generations of managers of the business – proprietary
sense also
- The 5-year limit is to prevent the concentration of corporate power in the
hands of the same person

- Whenever shares of stocks are classified as preferred, the preferences must

be express in the AOI

- Sales v. SEC
- In the AOI, the shares of stocks were only divided between A shares and
B shares. And customarily, only the A shares were given the right to vote,
to attend meeting to be entitled to notice, or to participate in the
management and affairs of the corporation. Those who own and hold
these shares were not notified, called to meeting, were not consulted, etc.
Later on, one person acquired or bought these shares from an existing
stockholder of the corporation and when he learned that there is a
forthcoming stockholder’s meeting and election for directors he went and
attended. But the corporate secretary refused to recognize him saying that
he owns B shares, he is not entitled to be notified of the meeting, therefore
he is not entitled to be present and neither can he enjoy the right to vote
during said meeting.
- SC: The denial of his right to notice, to be present and to vote is absolutely
wrong because the A shares were not classified as preferred shares.
Since the AOI were also silent as to what may be given and denied, A and
B shares are considered equal.

3. Voting vs. Non-Voting Shares

a. Voting Shares
- With a right to vote
- Accorded plenary or specific voting rights
- Usually the right to vote

b. Non-Voting Shares
- No right to vote
- Deprived of specific voting rights

- Holders of non-voting share are entitled to vote on matters allowed in the Corporation
Code, which are the following: (Sec. 6) (ABISIMID)
i. Amendments of AOI;
ii. Adoption and amendments of by-laws;
iii. Incurring, creating, or increasing bonded indebtedness;
iv. Sale, lease, exchange, mortgage, pledge, or other disposition of all or
substantially all of the corporate property;
v. Increase or decrease of capital stock;

14
 vi. Merger or consolidation of the corporation with another corporation or other
corporations;
vii. Investment of corporate funds in another corporation or business in accordance
with this Code; and
viii. Dissolution of the corporation
- No need to vote during liquidation
- These pertains to a fundamental change in the corporation and therefore must be
decided by the entirety of the constituency between the corporation – like sovereign
power

- In order to deprive voting rights, the AOI must be explicit as to said deprivation
- If the AOI is silent, the shares are presumed to be voting

- Example:
- Your services was engaged by a start-up company who wants to engage 10M and have
given you instructions whether or not the 10M would be classified into the following number
of shares:
- ACS = 10M
- Shares of stocks = 1M
- It was agreed among the incorporators that they would realize 10M in cash minimum out
of the sale or disposition of 1M shares. How to classify the shares?

- Common shares may also be par value shares – True.

- Preferred shares can also be no par value shares – False. It can only be issued with a stated par
value.

- Voting shares can be common shares – True. Common shares cannot be deprived of voting
rights. Only preferred and redeemable shares may be deprived of voting rights, but may be given
the right to vote.

- Non-voting shares can also be common shares – False.

- No par shares are always common shares – True. Because preferred shares cannot be no par

- Combinations allowed by law:

1. Par shares + Common shares

2. No par shares + Common shares
3. Par shares + Preferred shares
4. Par shares + Voting shares
5. Common shares + Voting shares
6. Preferred shares + Voting shares
7. Preferred shares + Non-voting shares
8. Common + Par + Voting
9. Preferred + Par + Voting
10. Preferred + Par + Non-Voting
11. Common + No Par + Voting

- No par value shares have no value = False. There is just no amount fixed in the AOI and
certificate of stock but it has value.

- There is no problem if all the shares, out of which the ACS to be divided into, are all similar
- If the AOI is silent, apply the Principle of Equality of Shares: That all shares are equal in all
respect
- However, the AOI may also provide for valid classification of the capital stock

- Based on the Classifications of Shares, the following are the minimum rules:
1. There should always be a class of shares enjoying full voting rights
2. Only preferred or redeemable shares may be deprived voting rights
3. Preferred and redeemable shares must always be with par value

H. Listing of the names of the initial subscriber to the capital stock of the proposed corporation –
Subscribed Capital Stock (SCS) – Eight Paragraph
- The name must also specify the number of shares subscribed

15
- Subscribed Capital Stock
- This refers to the total number of shares and their respective aggregate value that are in the
hands of person other than the corporation
- Where the shares are the subject of existing subscription contracts

- As to number of shares, cannot go beyond the ACS because the ACS is the limit

- For purposes of incorporation, in order to secure the approval of SEC, the law requires that
the subscribed capital stock is at least 25% of the ACS

- The subscribers named in the AOI are also the incorporators – False

- The names of the incorporators must also be listed in the subscribers but not always
incorporators

- 25% refers to the ACS as basis. Both as to actual number of shares and value
- As to the value however, the law does not require that it must be paid – that is why we have
Paragraph 9

I. Listing of the subscribers who have paid, either partially or fully, their initial subscriptions – Paid-
Up Capital Stock (PCS) – Paragraph Nine
- For purposes of incorporation, the law requires that at least 25% of the subscribed capital stock
be already paid-up, otherwise SEC will not approve the registration and therefore will not issue
the certificate of registration

ACS 10M divided into 1M all common

shares at par value of 10.00 per
share
SCS 25% of ACS 2.5M representing 250,000 shares
(1/4)
PCS 25% of SCS, not less than 5,000, unless special 625,000 (1/16)
law requires a higher minimum, depending on the
business

- If failed to comply with this minimum – no certificate of registration is to be released

- Actually paid in cash or property in the proposed corporation

- Under the draft of the AOI, Pogi Inc. has OCS of total 30M shares. 20M common and
valued 1.00 per share and the last 10M shares are preferred valued at 10.00 per share.
Compute the subscribed capital stock and the paid-in capital stock.

20M x 1.00/share = 20M

10M x 10.00/share = 100M
OCS 120M

Subscribed Capital Stock = 25% x 120M = 30M

Paid-In Capital Stock = 25% x 30M = 7,500,000

- Is there a need to amend the AOI if all 20M common shares are actually issued
10.00/share? If the par value of the common shares is increased to 10.00/share while the
par value of the preferred shares is raised to 100.00/share?
- There is a need to amend the AOI. You are increasing the par value; therefore you are
increasing the capital stock.

J. Treasurer in Trust – Paragraph Ten

- Requires TIT – Treasure in Trust
- Who: Person appointed by incorporators to hold in custody and in trust all moneys or
properties paid for the capital stock of the proposed corporation
- Name of the TIT must be identified in the AOI
- Legal duty of the TIT: Must execute and submit the treasurer’s sworn statement or affidavit
(the treasurer’s affidavit is an affirmation or certification that indeed 25% of the ACS has
been subscribed and that 25% of the subscribed capital stock has been paid in and that the
paid-in capital stock is not less than Php 5,000.00)
- The TIT is a mere provisional treasurer. Another one may be appointed or elected during the
regular elections for the board.
16
 - In case of a non-stock corporation, paragraphs 7, 8, and 9 may be modified to show contribution
to an initial capital to the non-stock corporation and to list the names of those contributors.

K. No Transfer Clause – Paragraph Eleven

- This is a mandatory provision for both stock and non-stock corporations
- This is a statement that no transfer of shares of stocks shall be recorded in the books of the
corporation if such transfer has the effect of reducing below the required percentage ownership
by Filipino citizens.
- The purpose of this clause is to make corporations abide by the citizenship requirement under
the 1987 Constitution and special laws.
- If shares of stocks are transferred to disqualified persons, the obligation of the corporation is to
refuse to register said transfer, because otherwise, the corporation will be in breached of the
Constitution thereby warranting the revocation of the certificate of incorporation.

- The AOI shall be signed by all incorporators and be notarized. The act of notarizing the AOI
converts it to a public instrument. After which, attach the following:
1. Treasurer’s Affidavit
2. When required by the SEC, bank certificates to prove the paid-up capital stock
3. Favorable recommendation (technically referred to in the Corporation Code as the Certificate
of Authority to Register) from the appropriate government agency (this attachment is
necessary only if the business of the corporation is imbued with public interest or is regulated
by special law)
a. If the business is insurance, it shall be the Insurance Commission which shall issue the
favorable recommendation
b. If it is banking, then the Bangko Sentral ng Pilipinas
c. If it is land transportation, then the LTFRB
d. For maritime transportation, it should be the MARINA
e. If it is air transportation, then the Civil Aeronautics Board (CAB)
f. If it is basic education, then the DEPED
g. If it is for higher education, then the CHED
h. For nursing or child – caring, then the DSWD
i. For power generation, then the Department of Energy
j. For pawnshops, it is the Bangko Sentral ng Pilipinas
k. For unregulated business, usually the DTI
- After submitting the abovementioned documents, then pay all the necessary fees.

- The SEC, after referring the same to the Legal Department, may recommend any of the
following:

1. The SEC rejects the AOI (Sec. 17)

- This means that the AOI is disapproved on the following grounds: (FPT-FNM)
a. That the AOI is not in the form prescribed by law (here, the SEC usually gives the
applicant time in order to comply);
b. The purpose or purposes stated in the AOI are illegal, immoral, contrary to public policy,
public order, etc.
c. That the treasurer’s affidavit contains falsities or misrepresentations (relate with Section
61: pre-incorporation subscriptions are irrevocable once the AOI is submitted to the SEC)
d. The minimum Filipino percentage is violated (as early as the incorporation phase, the
citizenship requirement shall already be observed) (e.g. 100% Filipino-owned in case of
mass media and small – scale mining)
e. If the name is identical to an existing corporation;
f. If the mandatory contents of the AOI are not present

2. Approval by the SEC of the AOI

- Here, the SEC will issue a Certificate of Incorporation; the date indicated in the said
certificate is the date when the corporation starts its being as a body politic having its own
separate personality throughout the term indicated in AOI and for purposes likewise stated
therein; from that moment on, the corporation is considered a person; it has acquired its legal
existence for which it is entitled to legal recognition unless it is a de facto corporation

- The power to reject or approve is discretionary upon the SEC.

III. De Jure Corporation

- It has been issued a certificate of incorporation because it has complied with all the requirements
set forth by law
17
 - A de jure corporation can sue and be sued in its own name as stated in the AOI. When
impleaded as a defendant, summons must be served in the principal office stated in the AOI.
Here, if judgment was rendered against the corporation, the properties subject of the levy would
be that belonging to the corporation alone.

IV. Section 20 – De Facto Corporation

- Does not legally exist but merely exists as a fact

A. Elements (LIPC)
1. There must be a valid law allowing the formation and incorporation of corporations;
2. There must be a bona fide attempt on the part of a group of persons to incorporate (meaning,
there is an agreement among a group of at least 5 persons trying to incorporate in good faith
a corporation)
3. There must be a bona fide user of corporate powers (meaning, the group of individuals
started assuming themselves as a corporation in good faith for the purpose of their
corporation in the latter’s name) – mere colorable title as a corporation
4. That the de facto corporation possesses a certificate of incorporation (here, the certificate
was issued in error because of some serious flaw in its incorporation; e.g. oversight)

- As far as all third persons, except the State, are concerned, a de facto corporation has all the
rights and powers as a de jure corporation. That is why, no collateral attack is allowed to
question the legal existence of a corporation.

- The error of the SEC may be corrected thru a Quo Warranto proceeding. This is actually an
action for the revocation of a certificate of incorporation. The provision against a de facto
corporation is enforceable only by the State.

- Can a de facto corporation assert its rights against the Republic? = No

- A de facto corporation can also sue in its own name as stated in the AOI. When impleaded as a
defendant, summons must be served in the principal office stated in the AOI. Here, if judgment
was rendered against the corporation, the properties subject of the levy would be that belonging
to the corporation alone.

V. Section 21 – Corporation by Estoppel (a.k.a. Ostensible Corporation)

- This is not a corporation at all; based on the principle of estoppel; a group of persons
misrepresenting themselves as a corporation knowing that the same is without authority; here,
they are liable as general partners
- GR: Only those persons who are injured by the transactions involving a corporation by estoppel
can enforce that liability
- XPN: When the corporation by estoppel acted in good faith and is entitled to the performance of
a right by another, the latter cannot raise the defense that the corporation is a corporation by
estoppel (here, the estoppel will prevent denial)

- In a corporation by estoppel, the persons misrepresenting themselves as a corporation cannot

sue under the name of said corporation. Here, the persons impleaded are those who are
misrepresenting themselves as a corporation

- Example: A and B, doing business under the name and style of Pogi, Inc. Here, if judgment was
rendered against the ostensible corporation, the liability of the persons misrepresenting
themselves is akin to that of general partners (subsidiary and solidary). Subsidiary liability
because there is a need to exhaust first all the partnership assets.

VI. Once a certificate of incorporation was issued, the following subsequent conditions must
be complied with:

A. It must obtain a secondary franchise (a.k.a. Certificate of Authority to Engage in Business)

- Purpose: For the duly constituted corporation to lawfully engage in a business stated in the AOI
- This secondary franchise must be obtained from the appropriate agency which issued the
favorable recommendation
- This franchise is needed only when the business is regulated by law as when the business is
imbued with public interest (e.g. banking, insurance, transportation)

- Regulated business: Money from the public in exchange for a service

18
 - If the secondary franchise was not obtained and the corporation engaged in the prohibited
business, then, this would warrant the revocation of the primary franchise.

- The certificate of incorporation is the primary franchise.

- Pilipinas Loan, Inc. v. SEC

- SC: Here, Pilipinas Loan was allowed to engage in lending but not allowed to engage in the
business of pawnshop; but, it was found out that Pilipinas Loan was engaging in the
pawnshop business and that it was issuing pawnshop tickets; hence, the corporation was
dissolved.

- Corporations must abide by the following:

1. Constitution
2. Corporations Code
3. Special Laws
4. Government Rules and Regulations
5. AOI
6. BL

B. The corporation must organize itself and commence its business or purpose within 2 years from
the date of incorporation (Sec. 22)
- This requires that the corporation must exercise its privilege thru positive acts
- Example: Ribbon-cutting; hiring of employees; actually entering into contracts etc., otherwise, the
corporation will be guilty of non-user of corporate powers
- Consequence of non-user of corporate powers:
- Revocation of the Certificate of Incorporation vîs-a-vîs Automatic Dissolution – there is no
such thing as an automatic dissolution of a corporation; the corporation, although guilty of
non-user of corporate powers, is still entitled to notice and hearing

- Non-user is not the same as continuous inoperation. In continuous inoperation, the presumption
is that the corporation commences its business operation within the first 2 years except that it
was rendered inoperative for 5 years continuously. Continuous inoperation is also a ground for
the revocation of the certificate of incorporation upon notice and hearing conducted by the SEC

- Revocation will ensue only if the ground or cause is directly attributable to the fault or negligence
of the corporation.

- Who are to be notified in case of continuous inoperation?

1. SEC
2. DOLE (in case of retrenchment)
3. SSS
4. PhilHealth
5. BIR

- Notice again in case of revival.

VII. Theory of Corporate Fiction

- A corporation is an entity separate and distinct from those of persons comprising it.
- Under the Theory of Corporate Fiction, a corporation is entitled to utmost respect. Property
belonging to the corporation is not the property of its members. Likewise, its liability cannot be
extended to those persons comprising it. The rights granted to the corporation cannot be
extended to its shareholders or board members.

- Breach of authority as a corporation will give the court the power to pierce the veil of corporate
fiction.

- Under the Doctrine of Corporate Fiction, the separate and distinct personality of a corporation
should be disregarded of the said personality was used to perpetuate fraud, commit crime,
defend wrongdoing, avoid lawful obligation, evade public convenience or confuse legitimate
issues.

- Kapamilya, Inc. was sued by Vivian for illegal dismissal and damages. Kapamilya, Inc.
was ordered to pay damages amounting to 5M in favor of Vivian. When a writ of execution
19
 as enforced there was no property to be seized in the name of the defendant. Can levy be
made on personal and real property owned by Kapuso, Inc., a duly registered corporation
and owns 90% of outstanding capital stock of Kapamilya, Inc., located in the same
address?
- No. Mere showing that one corporation owns 90% of the OCS of another corporation is not of
itself a basis for piercing the veil of corporate fiction, unless the 3 pronged test can be shown.

- Would levy and execution be proper on the personal and real property owned by Charot
Santos who owns 90% of the OCS of both Kapamilya, Inc. and Kapuso, Inc?
- No. Apply Doctrine of Corporate Fiction that the corporation has a distinct and separate
personality from that of its officers. The exception here is when there is convincing evidence
that the veil of corporate fiction should be pierced.

VIII. Piercing the Veil of Corporate Fiction (PFI)

- Piercing the veil of corporate fiction is applied in the following cases:

A. Public convenience cases

- Villa Rey Transit v. Public Corporation

- Manila to Dagupan route and vice – versa; its Certificate of Public Convenience was
assigned to the Pantranco; it was agreed upon that for 10 years, Mr. Villarama (assignor)
should not compete with the assignee; later on, a certificate of public convenience was
issued to Villa Rey Transit. It was however found out that the properties and the office of Mr.
Villarama are the same as those of Villa Rey Transit. It was also Mr. Villarama who
supervises the day-to-day conduct of Villa Rey and also finances said corporation. Hence,
the corporate identity of Villa Rey was disregarded.
- See: Norton and Harrison Case; Jackbuilt Case

B. Fraud cases
- When the perpetration of malice, ill will, and other forms of deceit is concealed through a
corporation.
- A generic allegation of fraud committed under a corporate structure is sufficient to pierce the veil
of corporate fiction

C. Instrumentality or Alter-ego Cases

- Concept Builders v. NLRC

- Here, the mere fact that a corporation is the subsidiary of another corporation is not enough.
It must be further shown that the following indicative signs are present in the relationship of
the parent company and its subsidiary:
1. The parent and the subsidiary have the same members of the Board of Directors and
other key officers;
2. That the parent and the subsidiary have the same stockholders or that the parent
company owns the entirety of the capital stock of the subsidiary;
3. That the subsidiary was created precisely for the business of the parent company;
4. That the subsidiary engages in business with no other except the parent company;
5. That the entirety of the assets as well as the capital of the subsidiary were furnished by
the parent;
6. That the parent treats the subsidiary as a mere department or division;
7. That the employees of the subsidiary are treated as employees of the parent company

- When a majority of these facts are proved, the subsidiary is considered the same as that of the
parent company. Thus, any liability incurred by the subsidiary may be enforced against the
parent company. The subsidiary is treated as an ordinary adjunct or extension of the parent.
Here, the piercing must apply only to that particular action. It does not justify subsequent
revocation of the certificate of incorporation of the parent or the subsidiary. Courts cannot pierce
the veil of corporate fiction unless there is an allegation to that effect.
- Here, the parent company is the principal whole the subsidiary is the agent (principal-agent
relationship)

- Requisites: (CFH)

1. Control test
- This shows that one corporation exercises absolute domination over another corporation.
- By absolute domination means not only majority control in the stockholdings but control in
the business policies and practices, finances, as well as in the management.
20
 - The controlled corporation is left without a separate and independent will. It cannot act out of
its volition.

- Probative factors:
a. That between the two corporations, there is identity of stockholders;
b. Identity of businesses;
c. Identity of management including Board of Directors;
d. And other similar factors as would lead to the conclusion that one of these corporations is
merely used as a business conduit for the convenience of the other

- After satisfying the control test, the next is the fraud test.

2. Fraud test
- There must be a showing that the control exercised by a corporation over another facilitated
or in fact the principal motivating factor for the commission of the fraud to injure or prejudice
the plaintiff

3. Harm test
- The control exercised by one corporation over another is the proximate cause of the injury
suffered by the plaintiff

- The concurrence of the three tests is sufficient to pierce the veil of corporate fiction and to
disregard the corporate entity.

- Whether the corporate fiction is to be pierced is a question of fact. The purpose of piercing the
veil of corporation is not to dissolve the corporation but merely to determine liability.

IX. Section 16 – Amendment of AOI

- This can only be done after the issuance of the Certificate of Incorporation and all amendments
to the AOI or charter must be formally done
- This requires a majority vote of the BOD (majority of the number fixed in the AOI)
- The majority vote must be reflected in a resolution executed and signed by them and fully
certified by the Corporate Secretary
- The said Resolution must be submitted for ratification by the shareholders of members in case of
non-stock corporation (at least 2/3 vote of the OCS or the membership)

A. The 2/3 votes may be obtained under Section 16 in two ways:

1. By written assent
- This does not require the conduct of actual meeting by the shareholders or members
- This is done by ballots sent to the addresses of stockholders or members of record (eg.
Check the box)
- It is the duty of the corporate secretary to appreciate the number of the ballots returned and
to determine whether a majority votes was obtained
- Example: Innocuous or innocent changes in the AOI such as change of name (here, the SHs
rights will not be unduly prejudiced by such change)

2. In a Meeting held for that purpose

- This must be with prior written notice to the stockholders or members on record
- If the proposed amendment seeks to reorganize the business or restructure the corporation if
involves substantial change in the nature and character of the corporation, the second option
is the only option – meaning, the 2/3 vote can only be obtained in a meeting called for that
purpose.
- After the 2/3 votes have been obtained, a copy of the original AOI along with the
amendments underscored shall be submitted to the SEC for approval.
- However, if the business of the corporation is regulated, then the favorable recommendation
of the appropriate government regulator must also be obtained.
- The proposed amendments may also be rejected by the SEC on the same grounds as the
original.

B. When shall the amendments take effect?

- The amended AOI cannot take effect without approval.

- However, approval may be obtained two ways:

1. Express on the part of SEC

21
- The amended AOI takes effect from the date of the said approval (proof: certificate of
amended articles)
- The following amendments must be expressly approved by the SEC:
1. Increase or decrease of the capital stock;
2. Merger or consolidation;
3. Any amendment that will dilute the existing rights of the current stockholders or would be
prejudicial to the existing stockholders

2. Through lapsation
- If within 6 months from the date the proposed amendments were submitted to the SEC and
the SEC does not take any specific course of action, then the amended AOI are deemed
approved and effective from the date of filing with the SEC (retroactive to the date of filing)

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 TITLE V – By Laws

I. By-Laws (BL)
- Set of instruments that confer but likewise limit power and authority within the corporation.
- This serves as the internal rules for government within the corporation and regulate the
relationship of the corporation and its SHs or members.
- Since the by-laws are merely internal in both enforcement and application, third persons have no
positive duty to know the corporate by-laws.

II. Section 46 – Kinds of BL Based on Time of Adoption:

A. Pre-Incorporation BL
- At the option of the incorporators, they may already draft and submit to the SEC along with the
AOI and favorable recommendation at the time when they applied for registration.
- This is optional.
- Here, all incorporators must sign the same.

B. Post-incorporation BL
- This is mandatory for all registrants who have not yet filed their BL with the SEC earlier.
- It must be submitted within 1 month from the issuance of the certificate of incorporation.
- Failure to file BL within the reglementary period is one ground under PD 902-A for involuntary
dissolution. Here, it is enough that the same is adopted and approved by a majority vote of
Board as well as a majority vote of the OCS or the members.
- Part of user of corporate powers

III. Section 47 - Contents of the BL

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

B. General Attributes of Valid BL

1. Must be consistent with law, public policy, public order;
2. Must be consistent with the AOI; in case of conflict between the AOI and the BL, the AOI
shall prevail
3. Must be general and uniform in application (the BL cannot be used as a discriminatory tool
within the corporation)

C. The following had been invalidated by the SC:

1. A BL provision allowing a person to sit as a director even if he is not a SH;
2. In case of stock corporation, a BL provision which provide a term longer than 1 year for the
directors;
3. A BL provision that restricts without valid justification SHs’ or members’ rights
- Example:
a. A right of first refusal;
b. One that prohibits transferability of shares;
c. One that forbids examination and inspection of corporate books and records;
d. One that prohibits the SHs to appoint an agent

IV. Section 48 – Amendment to BL

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- When the BL are amended, or was totally rejected and a new one was adopted, the following is
the method to amend or adopt BL:

A. By a majority vote of the Board and majority vote of the OCS or membership
- Here, the majority vote of the OCS can only be obtained in a meeting; here, each and every
amendment must undergo this process; the vote must be reflected in a Board Resolution which
must be submitted to the SEC for approval

B. By majority vote of the Board only

- If earlier the Board was granted delegated authority or power to amend by 2/3 OCS; here, each
succeeding amendments of the BL need not go back to the OCS or members; the same may be
directly submitted to the SEC for approval (from Board to the SEC); here, the delegated power
may be revoked by a mere majority of the OCS

- When the BL are amended and the amendment is approved by the SEC, there must be a
Certificate of Amended BL issued by the SEC.

- Amendment BL must always be with the approval of the SEC as opposed to AOI which can take
effect by mere lapsation

- The new BL cannot be given retroactive effect if the same would prejudice or impair vested
rights.

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 TITLE III – Board of Directors/Trustees/Officers

I. Management of a Corporation
- One benefit of a corporate structure is that regardless of the number of owners of the capital
stock, the law always vests management of the business or the corporation in a collective
collegial body known as the Board of Directors (BOD) that is why there is a centralized
management in a corporation.

- What is the legal consequence if Pinoy alone signs and executes alone the verification
and certificate of non-forum shopping in a complaint for collection of money filed against
the corporation?
- Cagayan Valley Case – Ideally, the persons who are allowed to sign such document are the
members of the BOD by a majority vote. In the absence of which, it is the person designated
by the BOD either by resolution or by way of provision in the by-laws. Exceptionally, if there
is no resolution or a provision in the by-laws, the President, the general manager can sign if
the complaint arises from the ordinary course of business, therefore considered inherent. In
the case of labor cases or disputes, even without written authority, the HR or personnel
manager can sign the same.

- If Pinoy alone without prior approval by the BOD enters into a 1-year contract with
another corporation for the latter to provide service contract of the products at a cost of
500,000 a month.
- Invalid. As a general rule, the power to bind the corporation into contracts is vested with the
BOD and so there must be a prior approval by them by a majority vote. Unless, it has been
customary within the corporation to allow the President alone to enter into said similar
contracts.

II. Section 23 – The Board of Directors (BOD) of Trustees

A. Stock Corporation
- Management body is always called BOD
- Minimum no. is 5
- Maximum no. is 15, except for consolidated banks or merged banks where 21 BOD is allowed
- For public companies, which are required to be stock corporations, at least 20% of the members
of the BOD must be independent

B. Non-Stock Corporation
- In case of non-stock corporations – minimum of 5 trustees is required but there is no maximum
fixed by the law, as long as a definite number is chosen

C. Essential and indispensable qualifications

- All BOD must be owners of at least 1 share recorded in their name at the time of their election
- In case of trustees in a non-stock corporation, they must be at least members of record

- In case of BOD for stock corporations – ownership may be mere legal title over the share – he
has legal title if his/her name appears as owner of the shares in the stock and transfer book of
the corporation, whether or not held in trust or for the benefit of another – nominee director

- In case of non-stock corporation, to qualify as a trustee, he/she must be a voting member

D. Where will the candidates for directorship come from?

- The SH themselves
- All SH can file certificate of candidacy

III. Section 24 – Election of Directors or Trustees

A. How to install BOD/Trustees into office: 2 ways

1. Through election
- Popular vote on the part of the sovereign power of the corporation who are the voting
stock
- Those SH who owns voting shares are not just entitled to vote but to be voted for, unless
there is a special class called founder’s shares – has the right to vote and be voted for
but only for a maximum period of 5 years

B. How often should elections be held in the corporation?

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 - If it is stock corporation:
- GR: Every year – because maximum time of being a BOD is only 1 year
- If non-stock corporation
- If the AOI provides for a term of the Trustees longer than 1 year, then the election shall be
held at the end of such term – maximum term is 3 years
- For education non-stock corporations the maximum is 5 years

C. When should elections be conducted?

- Regular elections – Must be held on the date fixed in the AOI
- If BL/AOI is silent – on any day on April or under SEC Rules, along with the annual SH’s meeting
as fixed in the BL
- Under SEC Rules, the annual meeting of SH is on the 1st Tuesday following the 1st Monday of
the year (1st Tuesday of the year)
- If the BL fixes the date and no election was conducted, an explanation in written form must be
submitted to SEC, otherwise penalties shall be imposed

IV. Section 25 – Corporate Officers, Quorum

A. During the election, upon prior notice, there must be a quorum

- There is quorum if there is majority of SH entitled to vote who are actually present or are
represented
- If there is no quorum and elections are conducted, the results are void, no one can sit as BOD

- Example: Based on the stock and transfer book of the corporation, the following are the
outstanding shares:
1. 1M common shares
2. 200,000 preferred shares
3. 300,000 redeemable shares
- How many of these shares are voting – All because in order to deny voting rights the AOI
must expressly deny the preferred and redeemable shares
- Quorum: 750,000 + 1

- Example:
- Based on the AOI, the following are the outstanding shares, shares held by persons not a
corporation, those that have been issued
1. 1M common shares
2. 200,000 preferred non-voting shares
3. 300,000 redeemable non-voting shares
- Since only the 1M common shares is voting, the quorum is 500,000 + 1
- Quorum is majority of those entitled to vote
- There must be 500,000 + 1 share either present or represented

- There is presence when the owner of the share is actually, physically present in the room

- If represented – this is usually used by corporations owning shares – the following are the
methods:
1. Proxy
2. Voting Trust Agreement (VTA)
3. Any other acceptable deed of assignment
4. Special Power of Attorney (SPA)

- Once there is a quorum, the elections must now be conducted in the manner prescribed in the
BL
- If the BL requires balloting, that is the only manner by which elections must be held
- If BL is silent, Corporation Code requires voting viva voce – raising the hand

B. During elections, how many votes may a voting SH cast?

- Example:
- Multiply the number of shares with the number of vacant seats
- The maximum number of votes that may be cast in this election should not exceed 5M votes
(1M x 5)
- They may cast in a straight voting or through cumulative voting

SH 1M Common Shares x 5 BOD Votes

(5M)
1 500,000 5 2.5M
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 2 100,000 5 500,000
3 100,000 5 500,000
4 100,000 5 500,000
5 50,000 5 250,000
6 50,000 5 250,000
7 25,000 5 125,000
8 25,000 5 125,000
9 25,000 5 125,000
10 25,000 5 125,000

C. Straight voting
- Example: SH 1 wants to do straight voting. He has a total of 2.5M votes. He can equally
distribute to all the candidates for BOD. Another choice is to give 2M to one candidate and then
the 500,000 remaining to several others. Apportion them as he may choose

D. Cumulative Voting
- This may be exercised by a group of minority SH and also majority SH
- The legal purpose and intention of this is to assure minority SH of representation in the BOD so
that cumulative voting allows them to vote as a block for a common candidate that they choose
- Basic principle for election of SH is that the BOD got elected as such because they voted for
themselves and they voted for themselves because they own the voting stock in the corporation
- In the example above, SH 1 can already install at least 3 BODs
- In case of stock corporations, the right to exercise cumulative voting is inherent and therefore
cannot be removed by AOI and BL of the corporation
- In case of non-stock corporation, the AOI and BL may remove or eliminate cumulative voting

E. Who shall be proclaimed as winners?

- Those who obtained the plurality of the votes, not majority of votes
- Plurality of votes: Highest number of votes

V. Section 26 – Report of Election of Directors, Trustees and Officers

- Once a BOD is elected and proclaimed, the Corporate Secretary is required by the Corporation
Code to submit a report of the results of the elections. This is a mandatory positive duty

- Case
- There were 2 respective BOD in the corporation. The incumbent directors were ousted,
meaning not re-elected by the SH, instead a new BOD was elected. The latter set of BOD
entered into transactions involving the corporation or in the name of the corporation. On the
other hand, the other set of BOD who was ousted refused to accept their defeat and also
continued representing the corporation in various transactions under the name of the
corporation. Who has legitimate right to bind the corporation in a contract?
- SC: Only the BOD whose names are registered and listed in the SEC can validly bind the
corporation.

VI. Section 30 – Compensation of Directors

- GR: Once elected as BOD, they are entitled to no salaries or compensation
- XPN: They are only entitled to such if:
1. The BL allows or grants them compensation; or
2. A subsequent resolution of a majority of SH or members is passed conferring salaries or
compensation to the BOD
- When compensation is allowed, there is a legal limit on how much they can receive. It should not
go beyond 10% of the annual net income of the corporation before taxes
- Under Tax Law, salaries paid to BOD are deductible expenses of the corporation
- Fringe benefits enjoyed by BOD and other officers of a corporation, as far as the corporation is
concerned, those are deductible expense. If a BOD is enjoying these fringe benefits, they are not
liable to pay an income tax on these benefits because it is a company expense.
- The law provides salary cap to prevent BOD from unduly benefitting from their position and to
provide a disincentive to commit conflicts of interest in other forms of corporate corruption

- If the BL is silent or if there is no resolution of the majority of OCS, can BOD, in the discharge of
their given duties demand salaries? – No. They serve pro bono. Therefore, are entitled only for
reasonable per diems – reimbursement of actual expenses incurred in the performance of official
functions

- One view is that since BOD are SH, when they are not entitled to salaries, there is a greater
need or necessity on their part to earn profits for the corporation because whenever the
27
 corporation makes profit, the likelihood is that they are entitled to dividends – this is their
compensation that they can expect

- Other view, as BOD, the per diem is very high

VII. Section 27 – Disqualification of Directors, Trustees or Officers & Section 28 – Removal of

Directors or Trustees

A. How long must BOD serve as such?

- For the term provided for under AOI, unless that term is cut short by any of the following events:

1. Resignation
- Resignation as BOD does not mean termination of relationship as a SH.

2. Death in office or during the term

3. Withdrawal as a SH
- This may take place thru transfer of all shares to another because the requirement that
s/he remains as SH is a continuing requirement

4. Disqualification during the term

- The following are statutory grounds to disqualify a BOD:
a. That s/he has been convicted of any crime involving the penalty of 6 years or more
(Sec. 27)
b. Has committed a criminal violation of the Corporation Code committed within 5 years
prior to the election (Sec. 27)
- Other disqualifications may be provided for in the AOI or BL of the corporation

- Gokongwei v. SEC
- The BL provision of San Miguel Corporation was upheld by the SC even if it
prohibited an existing SH from running as BOD of corporation on the ground that the
SH candidate was also the incumbent or controlling SH of a competing corporation.
Such disqualification is a valid one although not expressed in the Corporation Code
because it is for the protection of the corporation against rival corporations.

5. Removal
- Who can remove an incumbent BOD – the same power that elected such BOD – the SH
- To remove an incumbent BOD, there must be an actual meeting called and conducted
and at least 2/3 of the OCS must vote to remove
- Since BOD are elected based on trust and confidence, when removed, there is no need
for SH to show cause of removal because the law already presumed that it is a
withdrawal or revocation of the trust and confidence. SH need not present any ground
- However, if the BOD being removed as elected as the minority representative, there must
be a just and valid cause for the removal to prevent the majority from exercising their
powers with oppression
- If the meeting to remove an incumbent BOD cannot be called by the President thru the
Corporate Secretary because they refuse, the meeting to remove may be held upon
order of the special commercial court – petition for conduct of a meeting – this is an intra-
corporate controversy – and in the same order, it may appoint a presiding officer –
furthermore, once a BOD is removed in said meeting, the said meeting may be continued
for purposes of electing the replacement

6. Expiration of term

7. Increase in the number of BOD

- These are the grounds for vacancy in the BOD
- This means that in the original AOI, there were fewer BOD but an amendment is later
approved to increase the same

VIII. Section 29 – Vacancies in the Office of Director or Trustee

Ground for Ending the Filling up the vacancy

Term
1. Resignation 1. Appointment
2. Death - This must be done by the remaining members of the BOD for
3. Withdrawal as long as they still constitute a quorum
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 4. Disqualification - Who can be appointed: Can choose among the SH – BOD
must be SH
- The one appointed will only serve the unexpired term; have
same power as a regular BOD and same benefits

1. Removal
2. Expiration of term
3. Increase in the number
of BOD
2. Special Election
- If there is no longer a quorum in the BOD
- There must be a quorum of the voting stock, either present or
represented
- Votes must be cast in the manner provided by the AOI/BL
1. Election
- The only way to fill up the vacancy

- Africa v. Valleverde
- A, B, C, D and E were enjoying their first term as duly elected BOD. Their first term is from
2011-2012. However, before their regular term expired, they already called for an election.
Notices were sent to SH but during the appointed time and date, very few showed up so
there was no quorum so any election cannot be conducted. As a matter of law, the
incumbent BOD cannot abandon their offices. Thus, if no subsequent election is held by the
BOD, then the last one elected must remain in a hold over capacity. By 2012-2013, A, B, C,
D and E remained in office in a hold over capacity – hold over BOD. Hold over BOD de facto
officers because the right to office has already ceased, the right to hold office is only for the
purposes of preventing vacuum in the management of the corporation. When the first hold
over term was again about to expire, they called for elections, but the same happened so
they extended their hold over term for another year. It was during the last hold over term that
A and B resigned. C, D and E chose X and Y to serve the remaining term of A and B. Is this
valid?
- SC: The appointment of X and Y are void because the mere fact that C, D and E were
already in their hold over term at the time they appointed X and Y shows that their regular
terms have already expired and as such under the Corporation Code, when the terms had
expired, there is only one way to fill up the vacancy which is election. Hold over BOD can no
longer fill up vacancies in the BOD.

- Once directors have been chosen and elected and have qualified and their respective names
registered with the SEC, the power to represent the Corporation in all its acts is inherent upon
them and in fact the representative capacity or power shall likewise be considered as exclusive
upon the BOD. That is the power to give consent to contracts or perfect the contract or bind the
corporation in a suit is lodged exclusively upon the BOD.

IX. Delegated Powers

- Even the complexity of the business or purpose of the corporation, there may be a necessity for
practical purposes to delegate some powers of the BOD to some persons.
- Who may exercise in a limited and delegated capacity the power to represent a corporation?
(SBEM)
1. Statutory corporate officers
2. To those created and described in the BL
- May create additional corporate officers and provide for their specific tasks and
responsibilities and for as long as done within the scope of said authority, the acts of
these officers shall be binding upon the corporation
- Example: Vice-President, Vice-President for Finance, Vice-President for Academics,
COO
3. Executive Committee
4. Managing Corporations under Management Contract
- Their acts are considered as valid and binding and enforceable upon the corporation for as
long as authorized by the BOD
- As far as the delegees and BOD are concerned, apply the principles of agency. They are
considered as agents of the corporation, therefore, for as long as they act within the scope of
their given authority, their acts are binding upon their principal – the corporation.
- And acting as mere agents, they cannot be held personally liable. Personal liability may arise
from breach of the so-called fiduciary duties of corporate directors and officers.

A. Who are Statutory Corporate Officers?

1. President
2. Secretary
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 3. Treasurer

- They can enter into contracts or perform acts in the name of the corporation for as long as:
1. There is prior approval of the BOD
- Any act entered into by these corporate officers cannot bind the corporation and cannot
be enforced against the corporation until and unless there is subsequent approval by the
BOD itself
- Once approved, it is as if it is the act of the BOD and therefore, the act of the corporation
2. In the absence of such approval, the BL or resolution of the BOD authorizes them to do so
- If the BL or a written resolution of the BOD authorizes the specific acts, they need not go
back to the BOD for approval or ratification, the act per se is valid and binding upon the
corporation because there is a written instrument allowing them to exercise such power
or enter into said contract

- Who is the President of the corporation?

- By law, s/he must come from the BOD itself. This means that you cannot have a President of
a corporation who is not incumbent BOD – this is violative of the Corporation Code
- The President shall be chosen in the manner prescribed in the BL
- If BL is silent, then President can be chosen by the BOD itself from among themselves
- Inherent to the function of the President is that s/he is the chief executive or operating officer
of the corporation and therefore administers the day to day operation and management of
the business
- He is also the implementor and executor of the policies laid down by the BOD (policy-making
body)

- Who is the Corporate Secretary?

- S/he is the official custodian of all corporate books and records
- S/he has the legal duty to maintain and update and record transfer of all shares of stock in
said stock and transfer book – in case of non-stock corporation, to maintain the membership
book
- S/he signs, along with the President, all stock certificates issued by the corporation
- S/he has the legal duty to take down and prepare minutes of meetings, whether of the BOD
or the SH
- S/he can represent the corporation in acts inherent to said office
- S/he may or may not be a BOD, this will largely depend on the qualification provided in the
BL but must be a resident of the Philippines

- Who is the Corporate Treasurer?

- Custodian of all corporate funds, money, and property, inclusive of those received by the
corporation out of the disposition of the capital stock
- Tasked by law to prepare and submit financial statements to the SEC and government
regulators
- S/he may or may not be a BOD, this will largely depend on the qualification provided in the
BL

- Under Civil Procedure, service of summons upon a corporation must be made upon the
President, Managing Partner, General Manager, Corporate Secretary, Treasurer or In-House
Counsel (Sec. 11, Rule 14, ROC)

- The law has put in place the system of checks and balances that is why:
1. President cannot concurrently serve as secretary not treasurer
2. Secretary can concurrently serve as treasurer

- Whether or not a person is a corporate officer is determined by the following:

a. If the position is provided for in the Corporation Code
b. If the position is provided for in the in the AOI or in the BL
- Other than these, they are not corporate officers

- Ringaw v. Sangu; Matling v. Coro

- The disputed positions here involved Vice-President and Comptroller, respectively. They
claimed that were illegally dismissed and as such they filed with the NLRC illegal dismissal
cases. The NLRC initially dismissed for lack of jurisdiction claiming that since they occupied
a very high rank in the corporation, this is not an ordinary labor case and this is in fact
cognizable by the special commercial court being an intra-corporate controversies. Are these
corporate officers?
30
 - SC: The position of the Vice-President and Comptroller are not found in the Corporation
Code (president, secretary, treasurer, BOD). In the BL it stated that the BOD is granted the
power to create such other positions as the BOD may deem necessary and convenient but
nothing in the BL were these positions written. Thus, the positions are not corporate officers.
Therefore, the illegal dismissal case is not an intra-corporate controversy; it is an ordinary
labor dispute cognizable by the NLRC.

B. Executive Committee (Sec. 35)

- This is a mere adjunct of the BOD and can only be created if BL permits
- At minimum, the executive committee must be composed of at least 3 incumbent BOD,
additional officers may be provided for by the BL
- This may be tasked with specific powers and responsibilities to assist the BOD in the discharge
of its functions
- The source of the power of the executive committee may be the BL as well as resolutions of the
BOD
- Under the Corporation Code, the executive committee cannot perform the following acts,
otherwise it is void:
1. Pass a resolution that requires SH’s approval
2. Fill up vacancies in the BOD
3. Declare dividends
4. Amend the BL
5. Amend any resolution of the BOD that by its terms is not so amendable

C. Managing Corporations under Management Contract (Sec. 32)

- The delegated power here is the power to manage some or all of the business of another
corporation
- Who exercises the delegated power – managing corporation
- This is also a valid form of tax avoidance

- Requisites for validity and enforceability of management contract between 2 corporations:

1. Approval of the management contract by majority vote of their respective BOD; and
2. Majority of their respective capital stock or membership
- The management contract shall not exceed a period of 5 years, unless the contract is for
exploration development and utility of natural resources, in which case the Constitution and
special law that shall govern – co-production, joint-venture, profit sharing

X. Section 33 – Contracts between Corporations with Interlocking Directors

- In case there is interlocking directorship or interest, then the law requires that the management
contract be approved by 2/3 of the OCS of the managed corporations

A. Interlocking interest
- When the majority of the members of the respective BOD of the 2 corporations are one and the
same
- This is to prevent or minimize conflict of interest
- There is interlocking interest when between both the managed corporation and the managing
corporation, at least 1/3 of their common capital stock is held by one and the same person or
group of persons
- Example: 40% of the managing corporation is owned by A and 35% of the managed corporation
also owned by A. Therefore, 2/3 of the OCS of the managed corporation must now approve the
same, not just by a mere majority.

- Under management contracts, both the managing and managed corporation retain their separate
and distinct personalities, unless when there are circumstances where there are particular
transactions that would lead to piercing the veil of corporate fiction

- Managed corporation is actually a “shell” corporation. It is passive and not actually engaged in
business because the purpose stated in the AOI is in fact operated by another corporation.

B. Doctrine of Apparent Authority

- Some other persons, without authority may in fact bind the corporation under the Doctrine of
Apparent Authority or Doctrine of Ostensible Agency

- Requisites:
1. The unauthorized person must first have acted in a manner that would lead a reasonable
person to believe that s/he is an officer, employee or agent of the corporation

31
 2. The corporation is guilty of knowledge of the acts of unauthorized person or acquiesced to
said acts
3. Third person relied on the appearance of said authority conferred by the corporation upon
the person
- The person really has no representative power as far as the corporation is concerned.
However, by performing acts that made it appear that authority or agency is present, when in
truth there is none and the corporation is guilty of allowing said person to act on its behalf,
then the corporation is bound.

- Francisco v. GSIS
- In the charter and by-laws of the corporation, all loan restructuring contracts or agreements
must be approved by the BOD upon proper review. However, one of the assets of the
corporation was facing default and in order to prevent the foreclosure of the mortgage
property, the debtor or borrower offered a loan restructuring agreement. The offer in writing
was referred to the legal counsel and vice-president of the corporation, the office of the vice-
president and legal counsel started to make communication with the borrower. When they
were in the midst of negotiation, the vice-president and legal counsel assured the borrower
that the foreclosure of the mortgage will not push through and that the loan restructuring
agreement is consistent with the requirements of the corporation. In the meantime, the
borrower has stopped the payment of monthly amortization of the mortgage debt because
the borrower was in belief that the loan shall be put in place. Under the loan restructuring
agreement, there will be lower monthly amortization, longer paying period, and lower interest.
After waiting for final word under the loan restructuring agreement and believing that it has
ben approved at least verbally, the borrower was surprised to find that her property was
already sold at public auction pursuant to foreclosure ordered by the BOD of the corporation.
Apparently, the BOD was unaware of the negotiation between the borrower and vice-
president and legal counsel. Thus, the borrower questioned the action of the BOD and
sought nullification of the foreclosure sale in order to restore the property contending that
there is a loan restructuring agreement perfected with the voce-president. Initially, the BOD
earlier repudiated the power of the vice-president and legal counsel to enter into such loan
restructuring agreement and that under BL; such power is exclusive to the BOD alone.
- SC: There is evidence that the BOD or at least some members of the BOD were aware of the
ongoing negotiation between its legal counsel and vice-president and the borrower, under
the principle of estoppel, the corporation is now deemed bound by the act of its unauthorized
vice-president and legal counsel because it appears to have clothe said vice-president and
legal counsel with apparent authority to deal with a third person.

XI. Section 31 – Liability of Directors, Trustees of Officers – What are the duties of the BOD
and officers as fiduciaries? – 3-Fold Duty – ODL
- They are not acting as ordinary agents for and in behalf of the corporation, their position is
reposed with trust and confidence given that the BOD exercises all corporate powers, it is the
BOD that has custody of all corporate property and it is the BOD that undertakes and
administers all business of the corporation, they mist observe their 3-fold duties as fiduciaries
- The 3-fold duty is expressed in the negative form under Sec. 31

A. Obedience
- Members of the BOD as well as all other officers of the corporation must observe the limits of
their authority by following the 1987 Constitution, all statutes specially the Corporation Code, and
the law that regulate their business. They must obey the AOI and the BL.
- Flagrant and deliberate violation of these instruments shall subject the offending BOD or officers
to criminal, civil and administrative liabilities.

- NBI v. Pi
- In an entrapment proceeding organized at the complaint of Shell, Caltex and Petron, it was
alleged that the respondents who were the members of the BOD of the corporation was
engaged in illegal refill of LPG tanks. The alleged crime was committed when they knew that
pursuant to PD, it was mandatory for all corporations and businesses, partnership or
individuals engaged in such kind of business to first secure a prior permit from DOE and yet,
it came to the knowledge of the big oil companies that their LPG tanks were being refilled by
the corporation without the necessary permit and without the consent of the owners of the
tanks. During the entrapment proceedings, they indeed discovered in the premises of the
corporation that various LPG tanks marked with the logos of another oil companies and they
are being refilled by a generic brand of LPG and refilling was committed by corporation’s
employees. What was included in the criminal charge are the BOD and other officers of the
corporation together with the employees.

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 - SC: The criminal cases must stand against them because they should have known that
under the law a prior permit was necessary to engage in that kind of business and yet they
deliberately ignored or refused to secure said permit. It was also stated that for criminal
liability for corporate acts, only those officers mentioned in the law may be charged and held
liable. If the law does not mention the members of the BOD, they should not be included.

B. Diligence
- Opposite of negligence
- Diligence is taking the necessary steps to prevent harm or injury
- The duty of diligence is imposed upon the BOD whenever they decide on matters or enter into
acts for and in behalf of the corporation
- Under the business judgment rule – decisions of the BOD regarding policies and practices
pertaining to the business of the corporation are not subject to judicial review and court has no
authority to substitute its own judgment with that of the BOD
- Such respect must be accorded to decisions of the BOD only if said decisions were arrived at
with honesty and good faith and for as long as these decisions are toward the best interest of the
corporation, the BOD be held personally liable even if he decisions would result to losses
- Losses alone suffered by the corporation in its operations is not enough to hold the BOD
personally liable
- Steinberg v. Velasco
- Several SH of the corporation sued their BOD on their personal capacity alleging that the
BOD were guilty of abuses on office and mismanagement leading to the losses. Sued and
impleaded as defendants were all members of the BOD. Unique in the defense of one of the
BOD is that he cannot be held personally liable because he did not know any better.
Whenever he was told to vote yes, he voted yes or vice-versa. He did what the others told
him. He had no knowledge o anticipation that those transactions would lead to the financial
distress and suffering of the corporation.
- SC: The fact that he did not arm himself with the requisite knowledge and information as to
make an independent judgment makes him negligent. Ignorance is negligence for directors.

- Towards 3rd person, the degree of diligence required of the BOD is the same degree of diligence
imposed by the law depending on the business
- Degree of diligence for all businesses that involve public health, public safety, public order,
common carriage selling guns, banking – extraordinary diligence – the BOD must exercise the
same degree

C. Loyalty
- During the incumbency of BOD, they cannot serve 2 masters at the same time
- This requires that in all cases and in all matters, the best interest and welfare of the corporation
must be upheld by its agents rather their own personal benefit even if it means personal sacrifice
on their part, they have to protect the corporation
- There are safeguards under the Corporation Code to make sure that loyalty is always observed
by BOD and officers of the corporation

XII. Self-Dealing Director or Officer

- Director who in his or her own capacity enters into a contract with the corporation during his or
her incumbency

- Example: Pogi, Inc. is engaged in the business of estate developers; the contracts must always
be approved by the Board unless otherwise stipulated. Contract of Sale = 16 has. Parcel of land
for P 1 billion
- Buyer: Pogi, Inc.
- Seller: A (a member of the Board)
- Hence, A is a self-dealing director. The contract is voidable at the instance of the corporation
because the law presumes that there is either fraud or undue influence exerted in the
corporation.

A. XPN: (Steps) – Sec. 32

1. If the presence of the self-dealing director is not necessary to obtain quorum in a meeting to
approve the contract. (no quorum, no meeting, unless, it is a close corporation) (if the
presence is necessary for the quorum, the contract is voidable)

2. The vote of the self-dealing director is not needed to approve the same.
- No approval because there is no majority of the quorum
A - abstained
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 B - yes
C - yes
D – no
- To resolve the impasse, A voted. The contract is voidable because his vote is necessary for
the quorum.

3. Fair and reasonable

4. Approved by BOD

5. Call for a SHs meeting - ratification

- Here, the self-dealing director must make a full and honest disclosure of his adverse interest.
If despite said disclosure, 2/3 of the SHs representing the OCS approved, then the contract
is valid.

6. Even if the three steps have been met, the courts may still inquire into said contracts and
determine whether it is fraudulent or whether it is fair and reasonable to the corporation
(Standard: fairness and reasonableness to the corporation)

- Prime White Cement v. CA

- Action to annul the contract entered into by the incumbent President and director of the
corporation with his own corporation. Under the exclusive dealership and distributorship
contract, the President shall in his own personal capacity distribute and sell to various
retailers in Mindanao and certain parts of Visayas in a five years the products of the
corporation. The President is the middleman. During the 5 years, the corporation and the
President agreed to a P 9.00 price per sack. This cannot be increased or decreased. In the
middle of the contract, the production cost increases. Thus, the corporation wanted to
increase the selling price of each bag of cement. The dealer however refused to do so citing
the contract. As a result, one of the SHs filed an action for the annulment of the contract on
the ground that the President is a self – dealing director.
- SC: President is a self-dealing director. Losses were incurred by the corporation. The
provision not to adjust the price is considered unfair on the part of the corporation.

XIII. Section 33 – Contracts between Corporations with Interlocking Directors

- Another safeguard to ensure loyalty is the exceptional clause under Section 33 regarding
contracts between corporations with interlocking directors.
- Interlocking director – A director who sits simultaneously in the Board of two or more
corporations who are parties to a contract.
- The danger regarding interlocking directors is their divided loyalty whenever their corporations
transact with one another.
- For management contracts, apply Section 44.
- Nominal interest – 20% and below of the OCS
- Substantial interest – Above 20%

- Example:

Pogi, Cutiepie,
Inc. Inc.
A 20% 80% Both nominal and substantial (here, in case of conflict, the likelihood is that
A will side with Cutiepie, Inc. because of his substantial interest in the said
corporation. This contract shall revert to Section 32 – meaning the
interlocking director is now a self – dealing director as far as the
corporation where he has nominal interest is concerned.) (A director must
serve the corporation with utmost loyalty)
A 15% 60% Self-dealing director (the net percentage difference is 45%)
A 30% 90% Not self-dealing (he owns substantial interest in both) (the net percentage
difference is 60%)
A 5% 20% Not self-dealing (he owns nominal interest in both) (the net percentage
difference is 15%)
A 20% 21% Self – dealing (he owns substantial interest in one corporation) (the net
percentage difference is 1%)

- The best way: the interlocking director should not participate at all in the decision.

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XIV. Section 34 – Disloyalty of a Director
- Doctrine of Corporate Opportunity – A director commits disloyalty when he acquires or seizes a
business opportunity rightfully belonging to the corporation that the corporation is able to
undertake but which the director acquires for himself. In short, directors are liable whenever they
compete their own corporation.
- Gokongwei v. SEC
- Provision in the BL of SMC: “any person shall be considered ineligible or if elected as a
director is disqualified as a director if he or she is a controlling stockholder or director of a
corporation whose business is antagonistic with San Miguel.”

A. Sanction
- All profits derived by the disloyal director in the competing business are deemed forfeited in favor
of the corporation even if he uses his own capital.
- You cannot profit from the idea of others.
- Under the law, the disloyal director is considered as a mere trustee of the corporation.
- If in the process, the disloyal director misappropriated corporate funds and property, then the
entire business may be forfeited in favor of the corporation.

B. Redeeming Clause in Section 34

- Those profits may be retained by the disloyal director upon ratification by 2/3 of the OCS.
- It is a form of condoning the disloyalty.

XV. Violation of the 3-Fold Fiduciary Duties

- For violation of the three-fold fiduciary duties, go back to Section 31.
- Directors shall be liable for patently assenting to the unlawful or illegal acts of the corporation or
for gross negligence in conducting the affairs of the corporation or for acquiring a pecuniary
benefit, interest or advantage directly in conflict with that of their position as a director.

A. However, personal liability may also be borne or acquire by the directors or officers in the
following instances in addition to Section 31:
1. Section 65 for assenting to the issuance of watered down shares;
2. Failing to object in writing after knowing of said watered down shares;
3. If the directors agree to hold themselves personally liable with the corporation; and
4. When they are held liable by specific provision of law

- Example:
1. Under the Labor Code, directors or officers may be help personally liable for illegal dismissal
if they acted with evident bad faith or malice;
2. Under SEC, directors or officers may be help personally liable for insider trading or for
manipulation of security prices and other frauds;
3. Under the Trust Receipts Law, directors or officers may be help personally liable for failing to
remit the proceeds of the sale of the entrusted goods or failing to return said goods under a
trust receipts;
4. Under BP 22, directors or officers may be help personally liable if they knowingly issue a
check which is unfunded or failing to maintain sufficient funds for the encashment of the said
checks;
5. Under the Corporation Code, directors or officers may be held personally liable for willful
violation of the Corporation Code or for refusing without a valid cause the inspection and
examination rights of the SHs
6. Under RPC, the white collar crimes such as monopoly and illegal combination of trade

B. How may the personal liabilities be enforced?

1. By way of a criminal case (here, there is a need for a specific provision of law imposing
criminal liability upon a specific officer);

2. Civil liability by way of a civil action against an erring director either by a SH or by a third
person who suffered an injury (individual action or class suit);

3. As a derivative suit – civil action to enforced the civil liability of the offending directors or
officers of a corporation
- It may be in the form of:
a. An action for damages or action for specific performance; or
b. By a petition for mandamus when a director failed or refuse to perform a ministerial duty;
or
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 c. An action to annul a contract entered into by the Board such as in the case of Section 32;
or
d. An action for injunction

- Requisites:
a. That it must be filed by a SH (regardless of the amount of shares held in the corporation)
or member at the time of the commission of the acts complained of;
b. That there is exhaustion of all available administrative or intracorporate remedies; (similar
to Article 151, FC)
c. That the corporation is impleaded or named in the derivative suit, otherwise, the case will
be dismissed (a derivative suit is a representative suit; the SH who initiates the suit is a
mere nominal party; the real-party-in-interest is the corporation because the suit is for its
protection against abusive officers); and
d. It must be proved that the appraisal right is not available – this is to prove that the
derivative suit is not a harassment suit filed by the minority SH

- A derivative suit is a deterrent to the members of the Board to continue with the business of the
corporation. It serves as checks against abuses committed by the Board.

- Quantum of evidence: Substantial evidence

- Once the offenses are proved, the damages awarded by the court will inure to the benefit of the
corporation since it is the real-party-in-interest. The SH who initiates the suit is only entitled to
reimbursement of the necessary expenses in bringing the suit, which expenses is recoverable by
way of cost.
- Since a derivative suit is for the protection of the corporation, it would be wrong for the court to
dissolve the corporation.

- As a rule, a corporation is not entitled to moral damages because a corporation cannot

experience mental anguish, etc. because it has no central nervous system. XPN: besmirched
reputation or tainted goodwill

C. Appraisal right
- The right of a SH to demand from the corporation that the latter pay back or repurchase the
shares of stocks; surrendering back the shares of stocks to the corporation and the corporation
will pay those shares; this terminates the intra-corporate relation between the SH and the
corporation
- Appraisal right is available to the stockholders under those instances provided in Section 81.

XVI. Doctrine of Forbidden Profits

- Refers to all kinds of profits of pecuniary advantages acquired by BOD of Officers of a
corporation in violation of their fiduciary duties. (Par. 2, Sec. 31, BP 68)

- Legal consequence of Pinoy receives a 10% commission from one of the exclusive
dealers of Pinas, Inc. as a token of gratitude.
- Forbidden profits doctrine. This is a kickback. Apply Sec. 31.

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 TITLE IV – Powers of Corporations

- A corporation can only enjoy rights or exercise powers that are expressly granted by law or
implied to those express powers or inherent or incidental to its existence as a corporation
- What a corporation can and cannot do is based on the law itself.

I. Section 36 – Corporate Powers and Capacity – Theory of Special Capacities

A. Powers granted under the Corporation Code (SSAAB-SRM-DPO)

1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the articles of
incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal the
same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal property, including securities and bonds of other
corporations, as the transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in this Code;
9. To make reasonable donations, including those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar purposes: Provided, That no corporation,
domestic or foreign, shall give donations in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its directors, trustees,
officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.

- Source of general powers of a corporation (inherent but general powers)

- During its term, a corporation may decide to introduce fundamental changes either by way of
corporate restructuring or reorganization.
- This involves the exercise of the special powers of a corporation.
- Between the general and special powers, if an act or contract, whether involving the use of the
corporate funds is related to the general powers, then only the Board needs to approve the same
because it is part of the ordinary course business unless the law or the AOI or BL require
otherwise.
- On the other hand, the exercise of special corporate powers requires not only the approval of the
Board but assent of the OCS or membership.

- General powers of a corporation: In the exercise of these powers, only the approval of the
members of the Board is necessary because the same is pursuant to the business judgment
prerogative of the management of the corporation.

- Special Powers of the corporation: The exercise of these powers requires the approval of both
the members of the Board and the shareholders representing 2/3 of the OCS

- Power to donate: Valid if the following are present:

1. That the donation is approved by the proper authority within the corporation. Generally, this
would only require the approval of the Board regardless of the amount of the donation.
However, if the BL require the SHs approval, then the BL prevail. The approval must be in
accordance with the manner provided by the by – laws;
2. The amount of the donation must be reasonable. The reasonableness of the amount
depends upon the financial condition of the corporation at the time of the giving of the
donation. Hence, an insolvent corporation has no right to make a donation;
3. It must be for any of the following legitimate purposes: For charity or any charitable
organizations.

- No donation can be given by a corporation to any political candidate, political parties, or partisan
political activity (void donations)

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 - Rationale: Corporations are not voters. They cannot directly or indirectly influence the outcome
of the election. Political elections are left by the Constitution to the electorate.

- Ochoa Case on RH Law

- Here the SC ruled that if a medical practitioner is a “conscientious objector”, he cannot be
compelled to provide reproductive health services on religious grounds.

II. Section 37 – Power to Extend or Shorten Corporate Term – Special Powers

- This power may be exercised anytime
- It is not dependent on the present financial condition of the corporation.

III. Section 38 – Power to Increase and Decrease Capital Stock – Special Powers
- The AOI must state the maximum number of shares, which the corporation is legally permitted to
issue. This is both a right and a limitation.
- Example: Original AOI = the ACS 10 million divided into 1 million par value common shares at 10
pesos per share
- This empowers the corporation to sell a total of 1 million shares (maximum)
- The sale of shares is the first corporate financing of the corporation.
- Assuming that all the 1 million shares are sold and subscribed, the corporation can realize at
minimum, P 10 million pesos.
- Remember that corporations cannot sell below par. Can only sell at par or above par.
- For expansion of business, the corporation decided to embark on an expansion program. It
needs a total of P 50 million. And the corporation does not want to contract loans. With P 10
million on hand, it still needs P 40 million. However, the corporation can no longer sell more
shares under its AOI since the maximum number of shares which it can sell were already
subscribed. The remedy of the corporation here is to amend its AOI to increase its capital
stock. The said amendment requires the approval of the majority of the members of the
Board and the assent of the SH representing 2/3 of the OCS. This shall be submitted for
approval to the SEC together with the certificate of favorable recommendation from the
appropriate government regulator. Lastly, a new treasurer’s affidavit shall likewise be
submitted in order to attest that at least 25% if the increased capital stock has been
subscribed and at least 25% of the increased subscribed capital stock has been paid.
- New AOI of the corporation now states: P 50 million divided into 5 million shares at 10 pesos
per share (of the 5 million, 1 million are the original shares and 4 million are the new shares)
- If the corporation sells all the 5 million shares: 10 million is old money; the additional 40
million comes from the new shares

- This also requires formal amendment to the AOI expressly approved by the SEC and the
government regulator

- Legal capital (imaginary value on paper) and assets must always be balanced.

A. What would prompt a decrease in the capital stock:

1. To eliminate surplus capital
2. To reflect the true value of the present assets of the corporation – assets of the corporation
depreciates through time
3. To forestall losses suffered by the corporation (losses represent liabilities)

- Instances when a corporation may reduce its capital stock.

- When there is amendment of the AOI and when the trust fund doctrine is followed.

- 2nd Ground for Reduction of the Capital Stock – To Reflect the Value of the Present Assets of the
Corporation
- Assets of the corporation depreciates overtime and those assets were acquired by the
corporation from the proceeds of the sale of its capital stock
- Example: Legal capital is an imaginary value on paper, it represents the total value of all
shares of the corporation that have been subscribed, less treasury shares, whether fully paid
or not. Assume that as of the end of December 2016 – status of the capital stock is that all
1M shares have been sold in the hands of the person not the corporation and the corporation
has 10M – it received 10M out of the sale of its SS. Its legal capital is 10M and it has no
liabilities. The 10M cash is asset. This 10M was used to purchase equipment, machineries,
motor vehicles, and all other assets necessary to pursue the business. But over time, the
equipment will depreciate in value that is why over 10 years, the equipment depreciated to
2M. Should also reduce the capital stock to 2M – reduce by 8M to reflect the value of your
assets.
- In such a case, the SH are not entitled to anything
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- 3rd Ground for Reduction of the Capital Stock – Forestall Losses of the Corporation Suffered by it
during its Operation
- Losses represents liabilities
- Example: In the course of the operation of the corporation it suffered losses amounting to
2M, so there is asset amounting to 8M. The 2M represents liabilities.

- In reducing the capital stock, there must first be a certification executed by the Secretary and
affirmed and signed by the majority of the BOD stating the present value of the assets, the total
liabilities of the corporation, as of the amended and a certification that creditor’s rights are not
affected by the reduction – This should be done because the reduction of the capital stock also
reduces the trust fund reserve for corporate creditors.

- If the reduction of the capital stock would be prejudicial to the rights of the creditors of the
corporation, the SEC will not approve the reduction. Under the trust fund doctrine, the assets of
the corporation represent a fund that corporate creditors may look upon for the satisfaction of the
debts

- Madrigal Shipping Company v. CA

- The corporation allegedly suffered form persistent losses in the operation of its business.
Thus, it adopted several amendments to its AOI purposely to reduce the CS. In the first
reduction, the original ACS was cut by 50%. In the second reduction, the reduced CS was
further reduced to ½ and the third reduction another ½. At the time of its final reduction, only
1/8 of its original CS was reflected in its AOI. At the time when these reductions were
adopted by the corporation, the corporation was in the midst of negotiating a CBA with his
Union and the corporation refused to accede to the demands of the Union for salary or wage
increases during the period of that CBA citing the losses as ground and proving said losses
by way of the reduced CS. A scrutiny of the records would show that the corporation was not
in fact suffering from losses; the reduction took place at the time when the corporation was
making profit from its investments.
- SC: The reduction of the CS is void on the grounds that: (1) Not affirmed by 2/3 of the OCS;
(2) Prejudicial to the rights of corporate creditors. Corporate creditors in this sense include
the corporate Union.

- Phil Trust v. Rivera

- Phil Trust is the bank assigned as the receiver in insolvency of Sibuge Corporation. The
corporation went into insolvency and the receiver examined all the records of the corporation
and discovered that a resolution of the BOD was passed prior to the formal insolvency and
the resolution states: “That all subscribers are hereby released from all their obligations to
pay their subscription to the corporation and such release will be valid to the extent of 50%.”
On the basis of what the receiver discovered, Phil Trust filed actions for collections of sum of
money against all subscribers of the corporation on the ground that the resolution of the BOD
had the effect of reducing the CS and such reduction was injurious to the rights of the
corporate creditors. It is injurious to the rights of the corporate creditors because
- If X subscribes to 1,000 shares at an agreed price of 10.00 per share – total consideration is
10,000. X owes 10,000. They can agree that the 10,000 shall be paid in lump sum or
accelerated installments or if silent, upon fault. Once a valid subscription contract has been
entered into the entire consideration forms part of the trust fund reserve for corporate
creditors. Although outstanding and subscribe on the part of the corporate creditors, it is a
fund that they can look upon for satisfaction of the debts.
- In this case, the SH made a down payment of, let us say, 5,000. He has still a pending
unpaid balance of the corporation of 5,000 of his subscription. Under the questioned
resolution of the BOD, X is not obliged anymore to pay the balance of 5,000 because the
BOD resolution permitted all affected subscribers to be released from their obligations to the
corporation to the extent of 50% of their subscription. If X is not obliged to pay the remaining
balance of 5,000 there is now impairment to the trust fund. That impairment is due to a
reduction of the CS.
- SC: The reduction of the CS here is an absolute nullity. It injures the rights of the creditors
specially given that the corporation was already insolvent.

- When a corporation turns insolvent, all subscribers who have not yet paid in full their subscription
can be sued directly by the receiver or the assignee of insolvency.

B. Pre-Emptive Right

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 - The disposition of the new shares is subject to the pre-emptive right of existing shareholders.
This is the statutory right of existing stockholders to be offered first and subscribe new shares to
be offered by the corporation.

- Rationale: to prevent dilution of the existing equity and interest of the existing SHs. In effect, to
maintain said interest or equity. The new shares must be offered first to the existing SHs in the
same proportion as their current interests in the corporation.

- In pre-emptive right offering, the Board may also set a time limit. This means that the offering
must be under reasonable terms and conditions as the Board may decide and at the price set by
the Board. The price here is not always at par value because the corporation has to make
money. The customary period for pre-emptive right offering is 30 days.

- Example: A owns 500,000 of the total 1 million shares. This means, that A has 50% of the voting
rights, dividends, and seats in the Board. This is actually a sufficient control of the corporation.
Without the pre-emptive right, X will own 500,000 over the 5 million shares if the
abovementioned amendment of the AOI was approved. Hence, A’s interest dwindles to 10%.
With the pre-emptive right however, the corporation must offer 2 million of the 4 million to A. It is
up to A whether to subscribe it or not. If A rejects it, the corporation can now sell it to others.

- If the corporation offers the shares to others without first offering the same to its existing SHs,
then any subsequent dispositions shall be considered null and void. The SHs who were
prejudiced of their rights may nullify the sales in order for them to exercise their pre-emptive
right. However, despite said offer, the SHs do not have the obligation to buy.

- Once the shareholder rejects the offer, the sale of the shares to others can no longer be
questioned, except in a close corporation. The pre-emptive right in a close corporation is
demandable in all cases and in every disposition of the shares.

C. The pre-emptive right cannot be asserted in the following instances: (PND)

1. When the issuances of the new shares are in compliance with legal requirements for
minimum ownership by the public
- There are certain businesses operated by corporations that are regulated by special laws
and many of these businesses are public utilities or service companies. Various special laws
require that a voting percentage of these public companies must belong to the public
indiscriminately.
- Example:
a. Oil Deregulation Law of 1998, as amended in 2001= at least 20% of the voting stock
must be sold or traded to the public thru the PSE
b. Public Service Act = all grantees of certificate of public convenience and necessity shall
sell at least 15% of the voting stock to the public to widen the ownership of the
corporations
- It is considered as a public utility because of the fact that the business is imbued with public
interest or that the business is in fact covered by the sovereign power of the State except
that it is conferred to a private entity.

2. If the issuance of the shares is for the payment of the existing rights of the corporation or to
acquire property needed by the corporation for the business
- Example: Dacion en pago such as a loan for equity swap – This means that the bank would
agree to have the loan be paid by way of shares of stocks of the debtor. This means that the
creditor becomes the shareholder of the debtor corporation.
- Barter – Such as paying shares of stocks in exchange with the supply or equipment given

3. If the pre-emptive right is expressly denied in the AOI, either in the original or amended AOI
- Here, the amended AOI shall be approved by majority of the Board and SHs representing 2/3
of the OCS.
- Once the approved, the dissenting SH can exercise his right of appraisal.

IV. Section 38 – Power to Incur, Create or Increase Bonded Indebtedness

- First form of corporate financing is sale of corporate SS
- Second form of corporate financing is to borrow money for the corporation to prosecute or
continue for the purpose it was organized

A. 2 Kinds of Corporate Borrowing

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 1. Ordinary Loans
- The New Civil Code shall apply
- In case of loan, the practice is that the borrower shall deliver some security or collateral –
specific property belonging to the corporation is used as a mortgage in order to ensure the
payment of the principal loan
- Corporate securitization – corporate assets are used to ensure the payment of the principal
obligation

2. Bonded Indebtedness
- Borrowing from the public in general in the form of bonds or similar evidence of debt
- Bond as Debt Insurance: Evidence on writing of an obligation contracted by the corporation
that the public may subscribe to at a predetermined interest rate
- The consideration for the bond may be the same as consideration of SS under Sec. 62

- Under SRC – Bonds may either be, as to maturity date:

a. Short Term – 365 or less from issue becomes demandable or has matured
b. Long Term – more than 1 year becomes demandable or has matured

- Who can buy the bonds?

- Anyone
- It means that the corporation is entering a contract with you to borrow an amount and that
the corporation guarantees that you will be paid back the amount or the fair value of the
bond after a stipulated date and a fixed interest

- Floating of Bonds
- Public offer of bonds

- Bond holders are not SH, they are creditors of the corporation, unlike owners of redeemable
shares, they are co-owner of the capital stock of the corporation until the corporation buys
back their shares

- What is the collateral?

- None. Unlike ordinary loans.
- The only collateral there are other general assets of the corporation. The owners are not
secured creditors.

- This activity must first have prior permit from the SEC

- To create such bonded indebtedness, there must be approval of the majority vote of the BOD
and 2/3 of the OCS

V. Section 40 – Sale or Other Disposition of Assets

- This does not necessarily require an amendment to the AOI but it always involves a restructuring
of the business itself.
- A corporation sells SS to finance the business and once the financing is ready, you now have
cash – you need the cash to buy the assets such as materials, equipment to further the business
and then you sell these assets.
- If the sale renders the corporation unable to pursue or continue the business for which it was
originally organized, the sale requires majority vote of the BOD and 2/3 of the OCS – because
this means abandonment of the original business and therefore entails a change in the nature of
the investment made by the SH – that is why they must approve the same
- The abandonment of the original business here does not necessarily result to the dissolution of
the corporation. It is an opportunity for the corporation to embark on an entirely new business

- Example: Prior to recession, X is a manufacturing company for the export market, producing
tablecloth, napkins, etc. for the market of the US. But the export business is continued based on
the equipment you have. You have 2,000 units of high speed swing machines and several units
of iron. And then recession hits. So the US does not necessarily need anymore X’s products. X
no longer has a market for its products. So it sold all its equipment – liquidating its assets – by
this it frees its capital – convert them into cash. One way to cut the losses. And from the
proceeds, X can now think a new business or embark on the secondary purpose.

- If the proceeds of the sale of all the assets are intended for an entirely new primary purpose, the
AOI must be amended.
- No amendment is necessary if the proceeds of the sale are to be invested for the secondary
purposes already laid down in the AOI.
41
 - In all cases however, the asset sale must comply with the bulk sales law:
a. That the prior written consent of all the creditors of the seller must be procured
- Otherwise, the sale may be annulled at the instance of any of the creditors because the
sale of the assets transfers your trust fund – the asset constitute a trust fund reserve by
law for the corporate creditors – if you sell all assets, then the creditors are bereft of such
assets

- Edward J. Nel v. Pacific Funds

- As far as the buyer of the assets is concerned, can the buyer be held liable for the
subsisting debt of the seller?
- GR: No because there is no privity of relationship – the buyer of the assets of one
corporation cannot be held liable for the unpaid obligations of the seller
- XPNs:
1) When the buyer expressly or impliedly assumes that liability (e.g.: contract of sale
with assumption of mortgage)
2) If the sale of the assets amount to a merger or consolidation – not just an asset
transfer but also a debt transfer
3) When the buyer corporation is a mere continuation of the business of the seller –
buyer-corporation was created precisely to acquire those assets
4) When the transaction was entered into to defraud its creditors – it is rescissible
- Under the 3rd and 4th exception, you pierce the veil of corporate fiction between the
buyer and the seller because they are considered as one and the same

- If the sale of the assets is done in the ordinary course of the business, the transactions
are valid even without SH’s consent – e.g.: sale of mineral ores of mining companies
- Example: Real Estate Development Company’s asset was a raw parcel of land and which
was subsequently developed into subdivision and houses. Over the 69 has lot of he
corporation there are now 600-subdivision lot with uniform houses. Each house is sold to
a direct buyer. At the end of the sale, the corporation is no longer has any real estate
asset. Can the SH complain? – No because this is done in the ordinary course of
business.

VI. Section 42 – Power to Invest Corporate Funds in Another Corporation or Business or for
any Other Purpose
- The investment of funds here must be construed as a means by which the corporation acquires
passive income or additional profits.
- If the investment of corporate funds is for its secondary purpose or in a corporation whose
business is not related to the business of the investing corporation, majority vote of the BOD and
2/3 of the OCS is required
- The investment here is authorized by law but requires SH’s approval because it has both positive
and negative effect – positive because the investment tends to increase the sources of profits for
the corporation – negative because it poses a greater risk for the SH because their money will
now be used by the corporation to buy SS of another corporation, so there is additional risk for
the SH of the investing corporation
- If the investment is for a contract or a business or a corporation directly related or auxiliary to the
business of the investing corporation, SH’s assent is not necessary

- Example: When you are a SH of a corporation, your measure of profit is your dividends. San
Miguel corporation wants to use about 1B of its cash to buy SS of other companies.
1) Buy SS of PAL – 2/3 vote of the SH is necessary
2) Buy SS of ABC 5 – A television company – 2/3 vote of the SH is necessary because SMB is
a food and beverage corporation
3) Buy SS of Bank of Commerce – 2/3 vote of the SH is necessary
4) Buy SS of Nestles Philippines – 2/3 vote of the SH is not necessary because this is directly
contributory to the main business of the investing corporation – only requires BOD’s approval

- Maaw Sugar v. Delarma

- A SH of the sugar-producing company questioned the decision f the BOD to buy SS of
another company whose business is to produce jute sacks. Overtime, the investing
corporation was already the owner of the 60% of the outstanding voting stock of the jute sack
producing company. The SH filed a directive suit to question the board on the ground that:
(1) SH’ s assent was not procured; and (2) The investment is not at all related to the
corporation.
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 - SC: SH’s assent is not necessary because the business of the investing corporation is in fact
related to the business of the invested corporation because of the present arrangement
between the two corporations whereby the sugar-producing company packages its products
using the bags produced by the other company and by becoming a SH of such jute sack
producing company it is able to attain control over the business and derive profits through
discounts.

- Example:
- Smart Company and PLDT – Both telecommunication companies. Consumer mobile
telecommunication was pioneered in the Philippines of Smart. All other telecommunication
companies followed – pioneered texting. PLDT went also in this business through its
subsidiary – PilTel but it failed. PLDT bought all Smart’s assets including its legislative
franchise, the name Smart, all its equipment – an asset sale made by Smart to PLDT. For
Smart to sell to PLDT all its assets what does it require? – Majority vote of the BOD and 2/3
of OCS. But for PLDT to buy all of those assets, it only requires the vote of the BOD because
done only in the ordinary course of business.

VII. Section 41 – Power to Acquire its Own Shares

- In the reacquisition of its own shares, the corporation must meet the following requisites:

a. The reacquisition must be for a valid purpose – valid if legitimate and authorized by law or by
AOI and BL
- When you reacquire the shares from holders thereof you are actually diminishing your
assets and trust fund because you treat the reacquired shares as treasury shares
- In order to treat these shares as treasury shares, the purpose must be any of the
following:

1) To eliminate fractional shares

- Fractional shares emanate whenever stock dividends are declared
- Example: 4th quarter 2015 profits were earned by the corporation and a portion
were used for dividends. One stock dividend for every 5 common shares. 2 SH –
(1) X owns 100 shares – 20 shares – return on his investment – on record X have
120 shares; (2) Y has 18 shares – 3 and 3/5 – 21 and 3/5 shares in the record.
How to vote a fractional shares – the corporation will buy from Y the 3/5. One way
of reacquiring the shares.

2) To compromise any indebtedness owing to the corporation arising out of the sale of
its shares
- This arises from delinquency of subscription

3) To pay the fair value of its dissenting or withdrawing SH

- Pursuant to appraisal rights

4) To redeem the redeemable shares

b. The reacquisition is out of an unrestricted retained earnings or surplass profits

- Retained earnings are derived from profits earned by the corporation out of the operation
of its business
- Example: Gross sale of the corporation in 2014 amounted to 100M but to achieve
those gross sales, the 100M, it had to operationally spend about 80M = 20M net sales
– this is the profit for the year, which will form part of the assets. The following year,
the BOD of the corporation discusses what to do with the 20M – retained earnings.
The BOD decided that 15M shall be used to pay certain obligations – appropriated or
restricted retained earnings – do not have to use your legal capital. What is left is 5M
– unrestricted retail earning – represents portion of the retained or profits of the
corporation that is not otherwise intended for some legal, managerial or contractual
purpose and the only source of fund for:
1) Reacquisition of shares
2) Dividends

- In the absence of unrestricted retained earnings, the corporation cannot reacquire its own
shares except in the case of redeemable shares.

- Redeemable shares constitutes debts incurred by the issuing corporation – when they
are redeemed or bought back this is tantamount to paying the obligations or liabilities of
the corporation – redemption of redeemable shares is not reacquisition of shares per se
43
 but it is payment of debt by the corporation – payment of debt is not anchored on
unrestricted retained earnings
- The following are limitations:
1. The corporation must not be insolvent;
2. The corporation should not suffer from illiquidity as a consequence of such
redemption
- If in the meantime the corporation is suffering cash flow or liquidity problem the right
of the holder of the redeemable share is simply suspended until such time that the
corporation has sufficient cash but not invalidated – can still demand pay back from
the corporation

- Why does the law as a GR may require unrestricted retained earnings before a
corporation may reacquire its own shares – to protect the trust fund reserve for corporate
creditors because by obtaining the fund necessary for said reacquisition out of the
unrestricted retained earnings, then the legal capital of the corporation remains
untouched or unimpaired

- Spouses Turner v. Lorenzo Shipping

- The spouses were SH of Lorenzo Shipping but because of an amendment of the AOI that
they disagreed with, they exercised their appraisal rights pursuant to Sec. 81 – they were
trying to withdraw from the corporation and the corporation agreed that it will buy back the
shares from spouses Turner by paying the fair value of said shares once the parties have
determined the value of said shares the obligation on the part of the corporation became
demandable.
- SC: Actual payment should be suspended because at that time when the corporation
reacquired the shares of the Turner Spouses, the corporation did not have unrestricted
retained earnings. The reacquisition must be deferred until such time that the corporation
realized unrestricted retained earnings

VIII. Section 45 – Ultra Vires Act of Corporations

- Opposite of intra vires – refers to any act within the lawful exercise of the power of the
corporation
- Power of the corporation – Express, implied or inherent powers
- If the act is intra vires, whether executed by the BOD or through any authorized officer – the
corporation will be bound by such transaction even if it creates liability on the part of the
corporation
- If the act is ultra vires, the act or contract is outside the powers granted by law for corporations

A. 2 Kinds of Ultra Vires Act

1. Merely Outside of the Present Power or Rights of the Corporation

- Merely in excess of what the current powers of the corporation are and the ultra vires but not
illegal act of subject to ratification – to cleanse it from its defect and to make it binding to the
corporation

- Who can ratify an ultra vires but not illegal act?

a. BOD – If the ultra vires act was committed by an authorized employee or officer
b. SH – If the ultra vires act was committed by the BOD
c. Amend the AOI/BL – If the BOD or the 2/3 of the OCS committed the ultra vires act;
conform the instrument with the act

2. Illegal Acts
- Not all ultra vires acts are illegal but all illegal acts of the corporation are ultra vires

- Consequences:

a. As to the Corporation
- Sufficient ground for revocation of the certificate of incorporation
- PD 902-A – This is involuntary dissolution

b. As to the BOD or Officer

- They are held directly and personally liable for:
i. Any crime – corporation itself cannot commit a crime, any criminal liability is
imputable upon the agent or officer of the corporation
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 ii. Civil case filed by any party who may be injured
iii. Administrative case

c. As to SH
- They are held directly and personally liable for:
i. Any crime – corporation itself cannot commit a crime, any criminal liability is
imputable upon the agent or officer of the corporation
ii. Civil case filed by any party who may be injured
iii. Administrative case

- Asebedo Optical v. CA
- The allegation of the City Mayor is that Asebedo Optical is committing an illegal act of
practicing its profession. The issue arose when Asebedo Optical tried to get a business
permit from the City but the Mayor refused to issue the same on constitutional grounds that
the practice of profession is only restricted to Filipino individuals and not corporations. It
stated that Asebedo Optical is engaged in the illegal practice of profession because it was
directly engage in optometry and ophthalmology.
- SC: Asebedo Optical is not engaged in the illegal practice of optometry and ophthalmology
because as stated in its AOI it is engage in manufacture of optical lenses – this is legitimate.
And in selling and manufacturing these lenses it is necessary for it to hire and engage the
help of professional – ophthalmologist – in engaging the services of these professionals, it is
not itself engage in the practice of profession. Part of the pursuit of the business for which
the corporation is created.

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 TITLE VII – Stock and Stockholders
These provisions are optional for non-stock corporations and are mandatory for stock corporations

I. 3 General Ways for a Person to Own SS

1. By subscription – this is a special kind of sale contract
2. By repurchase of treasury shares which are reissued
3. By acquiring the shares of existing stockholders

First Way

II. Subscription Contract (Sec. 60)

- This is a contract for the sale and disposition of capital stock for the first time – this is the original
or first disposition of the capital stock
- This is a contract for the simultaneous disposition or acquisition shares of stocks coming from
the original and unissued shares of the corporation (disposition of the capital stock for the first
time). This will always be treated as a subscription contract regardless of how the parties call it.
- Example: If the corporation has 1M shares in the ACS and let us say the minimum has been
subscribed, so 75% is left unsubscribed – whenever shares involving the sale of the 25% is
called the subscription contract, regardless of how the parties denominate the same in their
contract

A. Parties
- Depends as to the time of perfection of the contract – As to time:

1. Pre-incorporation subscription
- This is irrevocable from the moment of perfection.

- GR: It cannot be cancelled

- XPNs:
a. By initial subscriber for whatever ground for as long there is a unanimous consent of all
other initial subscribers; or
b. Unilaterally by said subscriber of the corporation is not formed and organized within 6
months from the perfection of the subscription contract. Here, there is no need to obtain
the consent of all other initial subscriber because of the failure of condition.

- Once the draft of the AOI and the Treasurer’s Affidavit has been submitted to the SEC, no
revocation of the pre-incorporation subscription shall be permitted.
- The pre-incorporation subscriber’s name is listed in the AOI.
- Violation of this rule will justify denial of the issuance of the certificate of incorporation on the
ground of misrepresentation.

- Parties:
a. The promoter (whether acting in his own name of for and in behalf of the proposed
corporation); and
b. The subscriber

- Example: 10 million common shares @ par value of 10 pesos per share for a total of 100
million
SCS = 25 million
PCS = 6,250,000

2. Post-Incorporation subscription

- Parties:
a. Corporation, as represented by the Board; and
b. The subscriber (individual or another juridical entity)

- Note:
a. With par value: Sell not below the par value
b. No par value: Sell not below the stated value which cannot be less than P 5.00

B. What makes a subscription contract unique are the following:

1. Subject matter: shares of stocks only
2. Like any contracts of sale, a creditor-debtor relationship is established.

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 - Here, the debtor is the subscriber as to the obligation to pay the full consideration. Once
there is full payment, the obligation of the corporation to issue certificate of stocks now
arises. (Reciprocal obligation)

- The obligation of the subscriber to pay is mandatory and absolute. The moment the contract is
perfected, the entirety of the consideration forms part of the trust fund.
- No rescission is allowed because it will be prejudicial to the creditors. The only remedy of the
corporation is to enforce the obligation.
- The trust fund doctrine should be observed in all subscription contracts.

- Example: Pogi, Inc. decided to perfect a subscription contract in favor of X. (1 million shares @
minimum 10 pesos shares = 10, 000,000) = here, the 10,000,000 already forms part of the trust
fund.

C. How will the total consideration be paid? (Sec. 62)

- In determining the price of each share, the minimum is the par or stated value.

1. Cash (Philippine legal tender or foreign currency)

- Promissory notes, checks and other debt instruments are not allowed because encashment
is uncertain.
- Manager’s check or cashier’s check is allowed only when allowed by the BL or by the
resolution of the Board.

2. Property other than cash needed by the corporation for its business (real or personal)
- Form of barter
- The property must first be appraised by the Board and the appraisal shall be approved by the
SEC.
- This is to prevent the watering down of shares.
- Example: Watering down of shares – overvaluing the property

3. Labor or services
- Minimum requirement here is that the shares shall be issued only after the service has been
performed to the corporation. Hence, it always pertains to past services.
- The appraisal rule shall likewise be applied here.

4. Previously incurred indebtedness of the corporation – dacion en pago

- In corporate rehabilitation, it is known as debt for equity swap.

5. Pursuant to conversion rights stated in the AOI, by-laws and subscription contracts
- This is unique to those shares of stocks where the AOI permit their conversion from one
class to another. Without any express stipulation in the AOI, the conversion will not be
allowed.

- Example: AOI allows conversion of preferred shares into common shares after the
preferences or privileges have lapsed. 100,000 preferred shares, the preference is good for 5
years from subscription. Here, the shareholder has two options: (1) to sell back to the
corporation the preferred shares, if allowed; or (2) exercise the right of conversion

- Example: 1 preferred share shall be equivalent to 10 common shares. Thus, if there is 1,000
preferred shares, then the common shares will be 10,000 common shares. The original
certificate of stocks corresponding to the 1,000 preferred shares will be cancelled and a new
one will be given for the 10,000 common shares.

6. By way of unrestricted retained earnings

- The surplus profits are transferred to the legal capital of the corporation
- Stock dividends are declared

D. When are shares issued in violation of Section 65? Watering down of shares
1. When shares are issued below par or stated value
2. When the stock dividends are declared and distributed to the shareholders without
unrestricted retained earnings
3. When shares are issued in exchange of property less than the par or stated value of the
shares
4. When shares are donated by the corporation to another (the donation is void)

- Consequences when watered shares are issued:

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 - For the members of the Board who voted in favor, or those who need not vote but failed to
object in writing after obtaining knowledge of such watered down shares, shall be solidarily
liable with the subscriber who acquired the same. It becomes a personal obligation.

- How to enforce the personal liability?

- Action for sum of money under a derivative suit plus damages in case of fraud

E. When to pay the subscription price?

1. On the date stipulated by the parties

- The payment can be lump sum or fixed or by stated installments
- In case of stated installments, the arrival of each installment dispenses with demand.

2. If no date was stipulated, then the remaining balance is due upon Call by the Board.

- For as long as not delinquent, one who subscribes already has all the rights of a fully paid
stockholder even if the subscription is not yet paid or fully paid. He can already enjoy voting and
dividend rights as well as asset rights in case of dissolution. But, he cannot still have the right to
transfer the shares and demand a certificate of stock.
- For as long as not delinquent, one who subscribes already have all the rights of a fully paid SH
even if the subscription is not yet paid.
- As far as proprietary rights pertain to the shares concerned, there is really no crucial difference
between one who has paid in full and one who has not paid in full. In fact, once the subscription
contract has been perfected, the subscriber, even if did not pay anything; can already demand
that his/her name be entered in the corporate stock and transfer book or records.

- Example: 1M shares for 10M. There was a stipulation in the subscription between Pogi Inc. and
X that X should make a down payment of 2M in cash at the time of signing the subscription
contract, leaving a balance of 8M. And then, the balance of 2M, there was no stipulation as to
when it shall be paid. Therefore, X, from the moment that this contract was perfected, X has all
the rights as a fully paid SH and can already enjoy voting rights, dividend rights or if the
corporation is dissolved, is already entitled to asset rights. Thus, the only rights that X cannot
demand yet from the corporation would be the right to transfer to shares and the right to demand
a certificate of stock.
- X still has a pending balance of 2M. 2 months after the contract has been perfected, election
is to be conducted in the corporation. Can X vote during said election? – Yes. He can also be
voted for because as far as qualification of BOD, only legal title is necessary which is
determined by the mere fact that the name appears in the stock and transfer book
- In case of the right to vote and the right to be voted for, how many votes is X entitled to cast?
– All 1M shares.
- If dividends are to be declared, he is entitled to 10M even if he has not yet paid in full
because he is not delinquent.
- In voting the subscribed shares, the right may be exercised personally and directly or by way
of representation.
- In the above example, X is entitled to notice in case of meeting. He is also entitled to attend
such meeting and to vote in the same for 1M shares either personally or by representation.

- Legal title: Once the name of the subscriber is entered in the STB of the corporation

Second Way

III. Treasury Shares

- Treasury shares were outstanding shares issued by the corporation and sold but which the
corporation reacquired through redemption, buy-back, donation or similar means.
- The holders of the same are not entitled to the following rights because they belong to the
corporation, they are the corporation’s own shares:
1. The right to vote
2. The right to dividends
3. The right to the assets
- Example: The corporation wants to raise additional cash so it issued 1,000 redeemable shares in
the amount of 1,000/share. If the corporation sells all of these, it is as if the corporation is
borrowing from you and the corporation is allowed to buy-back those shares at the end of the
stipulated period. Let us say the period of 5 years, upon reaching this period, the corporation will
offer to buy-back these shares by returning your initial investment from the interest rate and upon
payment by the corporation to you, you will now surrender those shares. These redeemed
shares are now treasury shares.
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 A. When the corporation has treasury shares, it has 2 options:

1. Cancel and retire the treasury shares

- There must be an appropriate reduction of the CS by amending the AOI

2. Reissue treasury shares

- Reselling
- The resale price can be below par because it is already used share “wagwag”
- Affects the rights of the existing SH that is why the pre-emptive right must be accorded – it
must be first offered to the existing SH
- May be by ordinary contract of sale between the corporation and the buyer

IV. Section 70 – How may the Corporation Enforce the Delinquent Balance

A. Judicially
- By filing an action for collection against the subscriber
- This is an intra-corporate controversy even if it is a simple collection case
- Regardless of the amount due, it must be filed before the commercial court

1. Extra judicially
- Cheapest means
- By the corporation conducting a delinquency sale – auction – the highest bidder will be the
one who offers the least number of shares for the highest price
- A notice of delinquency must also be served upon the affected subscribers – so that they can
still pay before the auction
- Example: A tenders a bid of 8M for 1M shares (10.00/shares). B tenders a bid of 8M for
800,000 shares (8.00/share). C tenders a bid of 10M for 800,000 shares (12.00/share). The
highest bidder is C. once C pays the 10M, the corporation must issue a certificate of stock in
favor of the highest bidder C for 800,000 shares. The corporation is now allowed to
compromise the sale because the subscription contract is for 1M- meaning the corporation
may opt to issue to X a certificate of stock for the 200,000 because as far as the corporation
is concerned, all the shares are now fully paid and this is the only concern of the corporation
which is to obtain full payment.
- In the meantime, before the certificates are issued to C, C’s right as SH are suspended.
Delinquent shares are not voting shares.
- Are they entitled to dividends during the delinquency – yes except that in case of cash
dividends, the cash will be applied to the balance; in case of stock dividends the stock
certificate shall be issued until full payment

- What if there is No Bidder

- This is indicative that the corporation’s shares are not in demand in the market, there are no
investors willing to take that risk
- The corporation may acquire those delinquent shares provided that it has unrestricted
retained earnings

- Assuming that there is No Delinquency and there is No Full Payment yet

- Example: X has already paid a down payment of 2M but has a subsisting unpaid balance of
8M not yet delinquent. He is entitled to vote, be voted for, dividends, etc. But let us say that X
is no longer interested in pursuing this contract with Pogi Inc. In order to recover his initial
investments, X enters into a deed of assignment with Y (assignee). The assignment pertains
to all the 1M shares. After the deed of assignment was executed and Y pays X the 10M, Y
goes to the corporate secretary seeking that those shares be transferred in his name. Will
you register the shares in the name of the assignee?
- No. A subscription contract that has a pending balance is not subject to novation of
debtor. No substitution of the person of the subscriber or debtor shall be allowed because
it will be injurious to the rights of the corporate creditors. The assignment will be valid and
binding but only as between the parties. The corporation can refuse any attempt to
register the same because of the unpaid claim against X which is 8M.
- Remedy of Y – Registration of the transfer shall only be valid or allowed if the corporation
receives a consideration for its consent. Y can pay the balance of 8M. Y’s name will now
appear in the stock and transfer book and the name of X will now be cancelled.
- With a pending balance not yet delinquent can X already demand a stock certificate – No.
Because a certificate of stock is issued only upon full payment – similar to a contract to
sell.

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 - Can X allege that he is entitled to a certificate of stock at least for the number of shares
partially paid – No. It violates the law because a subscription contract is an indivisible
contract. One certificate shall only issue for one subscription regardless of the number of
shares subscribed.
- The condition of X to be entitled as a matter of right for the issuance of certificate of stock
is full payment

- The subscription is already paid. It is now a ministerial duty on the part of the corporation to
issue a stock certificate. It must be:
1. In writing under the name of the corporation
2. Stating the number of shares
3. Par value or stated value
4. Name and address of SH
5. Serial number of the certificate
6. Signature of both president and corporate secretary.
- Once a stock certificate is issued by the corporation, the proper entry in the stock and transfer
book must now be made as well
- The certificate of stock, once issued is itself personal property of the SH but it is paper
representative of ownership of capital stock in the corporation
- In general, a certificate is not necessary to enjoy rights as a SH. All that is sufficient is the name
must be in the stock and transfer book
- Because the issuance of stock certificate is ministerial on the part of the corporate secretary
once there is full payment, it may now be compelled by mandamus
- The stock certificate, being a property itself, is actually a convenient tool to transfer the shares
and the certificate itself – acquiring the shares of an existing SH (3rd mode of how to acquire SS)

Third Way

- Under the Corporation Code, in order to transfer the property represented by the certificate and
all the rights pertaining thereto, there must be indorsement and delivery of the physical certificate
to the transferee
- A stock certificate is a quasi-negotiable instrument
- Example: X has now paid in full so all that he needs to do is follow the quasi-negotiability
principle as regard the stock certificate to sell his shares. Indorse the certificate of stock – the
indorsement must contain the name of the transferee. If it is indorsed in blank, it becomes a
street certificate – similar to negotiable instrument – it is now a bearer instrument – Street
Certificate – Any certificate of stock indorsed in blank – one that does not contain the name of
the transferee – that is why it becomes a bearer instrument.
- When Y makes full payment, Y must insure that he obtains physical custody of the certificate,
that is why there must be indorsement plus delivery and from that moment on, when the 2
step process has been completed the transferee is placed in ownership over the property
and has now a right against the corporation to have the transfer registered.
- If it was indorsed but was not delivered – the transferee cannot compel the registration of the
transfer – No.
- If it was delivered but was not indorsed – the corporate secretary can refuse registration
- Complete the 2 step process
- XPN: Uncertificated securities under the SRC/over the counter transactions
- Transfer of shares in the stock exchange, there is no physical certificate because of the
volume of transactions in the stock exchange in a given date
- Only for SRC regulated transactions is the 2 step process applicable

- Once the transfer is complete and regular, it now becomes a ministerial duty on the art of the
corporation to register the same.

- There is valid transfer only if the indorsement and delivery was made by the SH of record or the
latter’s agent. If there was no valid transfer because it was unauthorized or a result of a forgery
or theft of the certificate – the corporate secretary can refuse to register the transfer – when the
title of the transferee is in doubt no registration can take place

V. Ownership of Shares in a Corporation Entails 3 Principal Rights in favor of the SH or

Subscriber

A. Right to Participate in the Management of the Corporation

- SHs in general, enjoy only limited residual management rights, limited to those instances where
their ratification or assent is required by the Corporation Code, by statute or by the AOI or BL

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- It is merely residual management right because in a corporate set-up, there is a centralized
management vested by law in favor of the BOD
- How do SH exercise this residual management right – Through voting
- The right to vote includes the right to be voted for.

- However, this right to vote and be voted for cannot be invoked by the holders or owners of the
following shares:

1. Delinquent Shares
- Subscribed shares that have outstanding balances on their total subscription price and where
there is already default in the payment of said balance
- During the period of delinquency, the subscriber on record is deprived of the right to vote and
be voted for

2. Shares Subject to Appraisal

- Pursuant to the appraisal right stated in Sec. 81, from the moment that a written demand is
made by a dissenting SH upon the corporation to pay the fair value of said shares, then the
shares are suspended in all their rights, the only right remaining to the shares subject of
appraisal is the right to be paid by the corporation as part of he withdrawal process

3. Treasury Shares
- Shares reacquired by the corporation which are former outstanding shares whether the
reacquisition is by redemption, buy-back or even donation to the corporation
- While they are in the treasury, they are not outstanding it would be absurd for the corporation
to vote its own treasury shares

4. Shares that are Classified as Non-Voting in the AOI

- Unless deprived, the right to vote in the AOI, all shares are deemed to be voting shares
- The kinds of shares that may be denied voting rights in the AOI – preferred or redeemable
- Even if the shares are classified as non-voting, the denial is limited to the right to vote
directors. They still enjoy the right to vote in ABISIMID

- Heirs of Gamboa Case

- It is the right to vote that translates control

B. Right to a Share in the Profits Derived by the Corporation

- SH are investors, they use their own money or funds in order to acquire SS of the corporation
and by using their own funds to acquire said property, they invest and therefore acquire risk in
said acquisition
- The risk would be in the form of losses suffered by the corporation

- Every SH has a reasonable expectation to receive a proportionate distribution of the profits of the
corporation in the form of dividends
- The power to declare dividends is exclusive to stock corporations, absolutely prohibited for non-
stock corporations

- Dividends
- Constitutes a proportionate distribution of the profits earned by the corporation out of its
business
- The source of said dividends must be limited to the so-called surplus profits or unrestricted
retained earnings
- The basic rule is that no part of the CS, whether subscribed or paid-in may used by the
corporation to pay its own SH dividends
- Whenever the corporation has unrestricted retained earnings, it is absolutely discretionary
upon the BOD whether to declare all or some of the unrestricted retained earnings for
distribution

- GR: The BOD cannot be compelled to declare dividends

- XPN: When the corporation has already accumulated surplus profits or unrestricted retained
earning (URE) in excess of 100% of its subscribed capital stock – totality of all shares which
are in the hands of persons other than the corporation subject of existing subscription
contracts whether fully paid or not
- The law allows an action for mandamus for the BOD to declare dividends in such situation –
To prevent the corporation from accumulating profits for its own and denying its investors
their rightful share to said profits

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 - Such action for mandamus may be dismissed based on the following: (Sec. 43)
1. URE or surplus profits are needed by the corporation to finance a definite expansion
program already approved by the BOD
2. That the corporation is bound by a subsisting agreement with a creditor prohibiting it from
declaring dividends without the consent of the creditor and such consent has not been
obtained
3. That there is a need to provide for possible contingencies such as probable losses and
similar external factors where the URE may be used

- Whenever these defenses are proved that the corporation cannot be compelled to declare
dividends and therefore can keep the excess profits for itself
- The power to declare dividends if the BOD in all cases regardless of class, but if they are
cash or property dividends, assent of the SH are not necessary but in case of stock
dividends, 2/3 of the OCS must assent
- The right to dividends constitute beneficial ownership of the shares

- Kinds of Dividends that a Corporation may Declare

1. Cash Dividends
- Kind of dividend payable in actual cash denominated in a sum of money per share
belonging to a SH
- Example: 5 centavo dividend for every share
- Whenever cash dividends are declared and already announced, the declaration is
deemed irrevocable and therefore, the corporation must now pay to the SHs of record
- Whenever they are paid by the corporation, their arises a depletion in the assets of the
corporation commensurate to the amount necessary for the dividends

2. Property Dividends
- Actually cash dividends but they are payable by way of property belonging to the
corporation and no longer needed for the business
- Example: SH of SM, SM will issue a gift certificate
- Whenever they are paid by the corporation, their arises a depletion in the assets of the
corporation commensurate to the amount necessary for the dividends

3. Stock Dividends
- This is the better alternative of cash and property dividends
- The URE derived by the corporation is used by the corporation to acquire unissued SS
- The amount of URE never leaves the corporation – know as capitalization of profits –
URE are merely transferred from assets to legal capital – this is a paper transfer – it is as
if the URE will be used by the corporation to buy its own SS so that its own shares will be
distributed to its SHs – there is no diminution in the property, assets or money of the
corporation even if dividends are distributed – but on the part of the SH, there is an
increased in the actual number of shares held of record
- Example: At the time when stock dividends are declared, the outstanding shares of the
corporation are 8M. The unsubscribed or unissued is 2M. It earned URE amounting to
50M. When stock dividends are declared, the 50M will be used to acquire the
unsubscribed portion of the capital stock and distribute them to SH of record. There may
be an increase in the number of shares in the book of record but there is no increase in
the interest, equity or control in the corporation.
- Until such time that the stock dividends for the dividends are issued to the SH, the stock
dividend declaration may still be revoked

C. Right to Assets
- The assets cannot be distributed to any of the shareholders for as long as the corporation is still
existing because those assets, whether in the form of cash, equipment, or land, are reserved by
law for the benefit of corporate creditors.
- Any distribution of assets during the existence of the corporation may be questioned by the
creditors if such distribution impairs the rights of the creditors.

- Distribution of the assets during the term is allowed only in the following: If there is surplus
capital

- SEC v. NTC and PLDT v. NTC

- SC determined the trust fund reserved for corporate creditors as the totality of the assets and
the value of all shares issued by the corporation less treasury shares. At issue in these cases
is the obligation of PLDT to pay regulatory fees to the NTC.
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 - The dispute arose as to the valuation of the regulatory fee. PLDT insists that the regulatory
fee shall be based on the par value of all of its outstanding shares issued and subscribed.
But, NTC argued that the amount should be based on the actual disposition price paid to the
PLDT by the subscribers.
- Note: Once the subscription contract is perfected, the amount indicated therein will already
form part of the trust fund.
- SC: The regulatory fee must be based on the actual consideration paid by the subscribers to
PLDT.
- Also, the trust fund is not limited to the par value. All subscription contracts form part of the
corporate trust fund. The subscribed capital stock is the limit to said trust fund. Lastly, the SC
ruled that the trust fund includes stock dividends.

- Summary: Trust fund is equivalent to:

- Subscribed capital stock, which includes all subscribed shares at subscription price not par
value plus Stock dividends minus Treasury shares (these are not outstanding shares).

VI. Citizenship of a Corporation – Grandfather Rule

- In determining the citizenship of a corporation, where the corporation is engaged in activity,
enterprise or business which is wholly or partly nationalized, the said determination must be
based on the voting control and beneficial ownership. (Gamboa v. Teves)

- Public utilities (e.g. telecommunications): 60-40 requirements (this represents a maximum and a
minimum: 60% is the minimum for Filipino citizens while the 40% is the maximum for non –
Filipino citizens). Breach of this threshold is a violation of the Constitution.

A. To determine compliance with the Constitution, apply the two pronged tests: (concurrent
requirements)

1. Voting control test

- It must be shown that 60% of the voting rights in the corporation are enjoyed by Filipino
shareholders. It is the right to vote for directors that effectively translates to control.
- Case: The preferred shares of PLDT are not voting shares. Voting in ABISIMID is not control
but it is the right to vote for directors which translates to control. PLDT fell short of the
standard required by law.

2. Beneficial ownership test

- The 60% of all benefits shall inure to Filipinos.
- This is determined in two ways:
a. By way of dividends
b. In the market value of the shares (based on stock exchange price)
- Common norm in re-sale of shares: buy low, sell high

- SC: In issuing mix classes of shares, this is how the 60-40 requirement shall be observed: 60-40
in each type of share issued and the total must still result to 60-40

- Express Investment v. Bayantel – same ruling as the PLDT case

B. Corporate Layering Case: MPSA

1. MPSA (1)

SMMI

Deed of Assignment in favor of MMC

MacArthur Mining (SEC Registered Corporation)

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Covered by MMC (60% Filipino corporation + 40% MBMI) (MBMI is 100% Canadian – owned
company)

Grandfather Rule: 60% OLMDC (Filipino) + 40% MBMI

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 2. MPSA (2) 3. MPSA (3)

SMMI Alpha Mining Palawan Development

Tesoro Mining Narra Nickel

60% MBMI
40% SMMI (OLMDC 60% and MBI 40%) MBMI = 40%
PLMDC = 60% (PASRDC 60% + MBI 40%)

- All the three MPSAs were declared null and void for violating the 60-40 requirement.
- The grandfather rule is to be applied when the citizenship of the corporation is in doubt.
Under this rule, there is a necessity to look into the various layers of corporate ownership to
determine the ultimate owners of the corporation. It is a way of piercing the veil of corporate
fiction.

- Note: corporate layering per se is not prohibited.

C. Application of the Grandfather Rule

- Note, this is applicable only when a corporation is a stockholder of another corporation

- Example: Pogi, Inc. = organized and registered with the SEC. It has OCS:
a. 60% of the controlling stock belongs to A, B, and C. All of them are Filipino citizens. Each
owns 20%
b. 40% belongs to X, an American citizen
- Pogi, Inc. is a Philippine corporation. As such, it can enter into the exploration, development,
and utilization of natural resources through joint venture agreement, production – sharing or
co – production agreement with the State. It can even own private lands in the Philippines. It
can apply for a leasehold contract with the DENR for alienable lands of the public domain or
it can even acquire alienable lands by purchase. It is even allowed to operate an educational
institution.

- Example: Cute, Inc. = registered with the SEC. It has 1 million voting and outstanding shares. Of
the 1 million, Pogi, Inc. owns 600,000 (60% of the voting stock). The remaining 400, 000 belongs
to X directly.
- X is an indirect stockholder of Cute, Inc. and at the same time a direct stockholder of Cute,
Inc.
- A, B, C and X are the grandfather shareholders. Pogi, Inc. is their child corporation. Cute,
Inc. is their grandchild corporation.

- Question: WON Cute, Inc. can acquire lands in the Philippines or enter into contracts involving
the exploration, development and utilization of natural resources or qualified to operate an
educational institution or hold a public utility franchise?
- Multiply the percentage of Filipino shareholders owned in the child corporation by the actual
number of shares owned by that child corporation in the grandchild corporation. Hence:
- 60% x 600,000 = 360,000 of 600,000 are treated as Filipino – owned shares
- Out of the 600,000 owned by Pogi, Inc. in Cute, Inc., 240,000 is not Filipino – owned
- For the 240,000 indirectly held by a foreigner and the 400,000 directly held by a non –
Filipino = 640,000 is not Filipino – owned.

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 - Hence, Cute, Inc. cannot enter into the abovementioned agreements.

D. Agencies tasked to encourage foreign investments (direct or indirect) in the Philippines:

1. SEC
2. Board of Investments (BOI)
- These agencies apply the ordinary control test, even with corporate layers – meaning, for as long
as one of the parents is a Filipino citizen, their child is Filipino. This is actually the liberal
interpretation of the grandfather rule. (Thus, Cute, Inc. is a Filipino since Pogi, Inc. is a Filipino.)

VII. Right to Transfer SS

- The stock certificate serves as paper evidence of ownership of SS. As evidence of ownership, it
also serves as a convenient tool to transfer the SS themselves.
- The right to transfer shares possessed by a fully paid SH is almost an absolute and unbridled –
this right emanates from the ownership of the SS – part of jus dispodendi. As a rule, any
restrictions imposed by the corporation upon its own SH as to their right to transfer is considered
void as an undue restriction on trade.

A. The following provisions in the BL are held by SC as void:

1. Inscription on the stock certificate as well as on the AOI and BL classifying shares as non-
transferable
- This is void because it restricts the ownership right of the SH

2. Right of first refusal is void

- This is an imposition of restriction imposed by the corporation that before any SH can
transfer or convey the shares, the same must first be offered to the corporation or to the
other existing SH
- This is void because it restricts the ownership right of the SH
- XPN: Close corporation – by their very nature and or as long as stated in the AOI, BL and
certificates, a right of first refusal is a valid one even the very limited ownership or
membership in a close corporation since ownership of shares in a close corporation is
subject to specified eligibilities

B. Valid Restrictions in the Exercise of the Right to Transfer

- While the right to transfer cannot be restricted it can be regulated

1. Manner by which the certificate may be transferred

- Such as indorsement + delivery – as long as this is present there is no need for a separate
instrument such as deed of sale executed by the parties

2. If the consent of the proper government agency is required to be first obtained prior to
recording of the transfer
- This is a legal regulation to allow the government to determine whether there is compliance
with citizenship requirement
- Example: For transfer of shares in corporations that are registered with the Department of
Tourism, the DOT Secretary must first be obtained; or companies which are granted a
franchise or privilege under Environmental Laws for EDU of natural resources – DENR’s
consent must first be obtained

3. No Transfer Clause
- Constitutionally founded
- This is any transfer that would reduce ownership that would reduce Filipino ownership that is
below that which prescribed by the Constitution or special law shall not be recorded in the
books of the corporation

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 - For as long as the transfer was validly made – it is by the owner or the latter’s agent and in the
manner prescribed by the corporation and the law, whoever holds and whose name appears as
the indorser of the certificate acquires all the rights founded thereon and therefore will have the
right to compel the corporation to register the transfer

VIII. Section 73 – Lost or Destroyed Certificate

- In case of lost or destroyed certificates, an affidavit of loss is required to be executed and
published at the expense of the SH concerned
- But no new certificate shall issue in case there is an ownership dispute as to the certificate and
to the shares and until such time that such dispute is resolved judicially

- Example: The certificate of stock of X was stolen by Y. Y sold the stolen certificate to Z for a
valuable consideration. X discovered the loss of the certificate and applies for the replacement of
the certificate with the corporate secretary – should the corporate secretary issue a new
certificate?
- No.
- The certificate is not lost, it is with Z.
- Only when the certificate is lost or destroyed

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 TITLE VIII – Corporate Books and Records

- All valid transfers must be registered in the books of the corporation

I. Purpose for Recording in the Stock and Transfer Book (STB)

1. For the corporation to track change in the ownership of its capital stock
2. Enable the transferee to exercise the rights of a SH as against the corporation – including the
right to vote and be voted for
3. To allow the government to monitor the changes in the ownership and ascertain compliance
with law, rules and regulations

- Only those transfers that convey upon the transferee absolute title or ownership of the shares
may be registered or should be registered
- Any transaction that creates a mere lien or encumbrance whether voluntary or involuntary of the
shares are not registerable
- Modes to transfer absolute title: Sale by way of indorsement and delivery; donation

- Question: If you want to donate your SS covered by a certificate, do you need to indorse and
deliver the certificate?
- Yes. There is no need to execute a deed of donation as far as the corporation is concerned.
From the perspective of Civil Law, the deed of donation is necessary to show a perfected
donation – there must be acceptance by the donee

- Question: Writ of attachment over SS – can this be registered in the books of the corporation?
- No.

- Question: Writ of execution covering SS supported by a certificate – can this be registered in the
books of the corporation?
- No. There is not yet a conveyance of title

- Question: Confirmation of sale – can this be registered in the books of the corporation?
- No. Title is not yet absolute

- Question: Registration of the sale of SS is also registerable in the register of deeds – can this be
registered in the books of the corporation?
- No. There is still one year redemption period – the title is not yet absolute
- Only absolute conveyances may be registered in the books of the corporation

- Question: Can the attaching creditor compel the corporate secretary to register the writ of
attachment in the books of the corporation?
- No because it is not an absolute conveyance of title
- Regardless of the writ of attachment issued by the court, the writ itself cannot be registered
in the books of the corporation – the corporate secretary cannot be compelled by mandamus
to do so

- Without registration of this writ in the books, does the attaching creditor lose the priority
under the NCC over the SS?
- No. Because the writ of attachment created a legal lien on the SS

- Debtor sells the SS by indorsing and delivering the certificate to another, after the writ of
attachment has been issued. If those shares are used to pay a judgment debt, who has a better
right?
- Attaching creditor even if the attachment is not recorded in the books of the corporation

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 - During the pendency of the writ of attachment indorsement + delivery of the certificate was made
by the debtor to a 3rd person – X. X was able to have the corporate secretary issue a new one.
Who has a better right over the shares?
- Buyer. The lien is only as to the old certificate before it was cancelled – if a new one was
issued to the transferee – the transferee acquires a better right over the SS

II. What Transfers are Not to be Registered in the Books of the Corporation

A. In all instances where the title of the transferee is in doubt the corporate secretary may validly
refuse any request or demand for registration
- When may such doubt arise or exist?
1. In case of unauthorized transfers
2. In case of forged indorsements or falsified indorsements
3. Where the certificate itself was stolen

- Example: At the back of the certificate of stock it contains blank lines for the purpose of
accommodating any indorsement made by the SH or the latter’s agent in favor of the transferee.
If the indorsement appearing at the back of the instrument is X to Y. Y must obtain physical
delivery of the certificate in order to present it to the corporate secretary, so that she may register
the sale in the name of Y. the corporate secretary would register the transfer in favor of Y by
cancelling the certificate of stock by X and then a new certificate will be issued in the name of Y.

- Example: Let us say that X kept the certificate of stock in his office drawer and Y stole it. Y made
it appear that X indorsed and delivered it to him. This is a complete forgery. Can Y present this
certificate and compel the corporate secretary to register the transfer?
- No. A thief cannot acquire a right over the stolen property even by prescription.

- But Y now indorses the same certificate to Z. Z pays 10M to Y for the SS and the certificate
itself. Z is not aware that Y merely stole the SS of X. This indorsement is not a forgery. Z is
an innocent purchase for value. Z now presents to the corporate secretary. Can Z compel the
corporate secretary to register the transfer?
- No.
- Because Z acquired no title over the property.
- Z acquired it from the thief and the forger and therefore, no title passed even to an
innocent 3rd party or innocent purchaser.

B. Rules
1. The principle here is that while a certificate of stock is a quasi-negotiable instrument, it is not
a negotiable instrument because there are only 2 negotiable instrument under the Philippine
law – PN and BoE
2. In stock certificates, the holder in due course defense is not applicable.
- Whoever acquires. Even if in good faith, a certificate stock that was transferred without
authority from its lawful owner cannot assert rights superior to the lawful owner
- Regardless of how many transferees and no matter how innocent these subsequent
transferees are – no one can defeat the right of the owner

- XPN: The certificate holder/owner is negligent – negligence gives rise to estoppel

- Example: X and Y are best friends. Y needs assistance because he plans to go abroad. Y goes
to X and borrows the certificate of X and promises that once he gets his visa, he will re-indorse it
to X. X indorses and delivers the certificate to Y. In violation of their agreement, Y sells the
certificate to Z who pays valuable consideration. Between X and Z, who has a better right?

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 - Z. Because X was negligent by clothing Y with apparent title over the property. A stock
certificate is validly conveyed through indorsement + delivery made by the owner or the
latter’s agent. Z can validly cause the registration of the transfer.

- What if X goes to the corporate secretary and reports the loss and demands a certificate.
- Do not issue a certificate of stock and force the parties to litigate and settle the ownership
dispute.

- Rivera v. Florendo
- X indorsed the certificate to Y but their agreement is that X will not deliver until Y pays him in
full. Y pays in full and presents a receipt showing that he paid in full but X refuses to deliver
the certificate of stock. Can Y go to the corporate secretary and demand to issue a certificate
of stock for him?
- SC: No. Because as far as the corporation is concerned, the transfer is not yet complete.
There was indorsement but there is not yet delivery. The remedy of Y is to file an action for
specific performance against Y to compel him to deliver the certificate.

- Abejo v. CA
- X delivered the certificate without indorsement. The condition is that the indorsement will be
made once certain conditions agreed upon the parties have been fulfilled. The other party
fulfilled none of these conditions that is why the SH refused to sign the indorsement of the
certificate. Can the one in physical possession of the certificate demand registration? Can an
unendorsed certificate, but which was delivered later be the basis of registration?
- SC: No. The transfer is not yet complete. Only those that are complete can be the subject of
registration in the books of the corporation.

- Example: X and Y agreed to transfer the shares. X is the transferor and the registered owner of
the shares. Y is the transferee-buyer. However, instead of indorsing and delivering the certificate
of stock, they executed a deed of sale of SS duly notarized. It is now the deed of sale being
presented to the corporate secretary for registration, is this sufficient basis to register the
transfer?
- No. He must present the certificate of stock.

III. Other Rights of a SH

A. Right to Inspect and Examine Corporate Books and Records

- This stems from ownership of shares in stock corporation or membership in a non-stock
corporations because members pay contributions
- This right is inseparable from title of the property
- Not all books or records of the corporation are subject to these right

- Books that are required to be kept and maintained under the law

1. Public and inspectable books and records

- Refer to all corporate books and records that are required to be submitted and filed with the
SEC, government regulator, as well as other government agencies pursuant to statute, rules
and regulations
- These refer to all official filings made by the corporation
- Example: AOI, BL, all amendments of the AOI, all amendments of the BL
- Once submitted pursuant to law, they acquire the character of public records – benefit of
public records in evidence – they enjoy the presumption of regularity in the discharge of
official duties; prima facie evidence of the correctness of entries
- Who may inspect: Anyone upon proper request

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2. Non-public and inspectable books and records
- They are required to be kept and maintained within the corporation
- Books required under the Corporation Code
- They are inspectable only by SH or members of the corporation – they are not accessible to
the public in general – any subsisting SH or member of the corporation may demand as a
matter of right inspection and examination which includes the right to make copies and
excerpts
- The inspection and examination right may be exercised directly by the SH of record or by the
latter’s duly authorized agent anytime during reasonable hours of business days of the
corporation
- Any restriction on this right, even if found in the BL should be nullified

- Case
- The corporation refused to have the books be inspected by a SH by signing a provision in
the BL which states that inspection rights may only be exercised within 1 month prior to
annual SH’s meeting.
- SC: The BL provision is an absolute null.

- Case
- SH appointed some other person by way of SPA to make copies of certain contracts to
which the corporation was a party but the corporate secretary refused to give copies of
said contracts because the BL of the corporation. In the BL, it stated that inspection may
only be done personally.
- SC: That BL provision is void because it is absurd for the SH requesting the copies is a
corporation. So how could corporate SH examine the books of the corporation.

- Examples:
a. All minutes of meetings of SH;
b. Minutes (reflects matters that are resolved or decided; summary) of all meetings of the
BOD;
c. Records of all business transactions;
d. All contracts or dealings where the corporation is a party to, including all communications
prior to said contract and subsequent thereto;
e. For stock corporations – stock and transfer book which is an alphabetical listing of all
subscriber and SH of the corporation – beside the name if each must be the number of
shares; class of such share; par value; consideration or price; payment; balance to be
paid; and if fully paid, serial number of the certificate of stock
f. Financial statements
- Required for all stock and non-stock corporations on an annual basis
- These are under the custody of the corporate treasurer – any request must be forwarded
to him
- The financial statements include:
i. SALN of corporations
ii. Statement of financial condition
iii. Profit and loss statement
iv. Audit report by an independent auditor – required for all corporations

- Equivalent of a stock and transfer book in a stock corporation is a membership book

- Any unjustified denial of the right to inspect and examine corporate books and records gives
rise to personal liability on the part of the secretary and if the denial was affirmed by the
BOD, then all of them shall be solidarily liable to the injured SH

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 - When an action to compel access to the books and record is filed, and the same is denied,
the corporation through its BOD or corporate secretary may invoke the following grounds:
a. That the requesting SH is not founded by a legitimate purpose or interest
b. That the requesting SH is motivated by bad faith in exercising the rights
c. That the requesting SH has misused information obtained from prior inspection to the
prejudice of the corporation
- Corporate Espionage: Very lucrative illegal undertaking – knowledge is proprietary –
knowledge as to one’s corporation is flowed outside of it

3. Non-public and non-inspectable books and records

- Non – public because the circulation of said information or record is very limited. Not even a
director or shareholder is allowed.
- Relates to trade secrets and other confidential information within the corporation that cannot
be open to its shareholders.
- The aim here is to protect the business interest of the corporation.

- PNB v. Gonzales
- The right to inspect and examine corporate books and records must be coupled with a
legitimate purpose. It must be connected with the proprietary interest, which the stockholder
has in the corporation.

- Te v. Te
- Mere pendency of a criminal case against a shareholder who happens to be in this case to
be the corporate secretary will not terminate nor suspend inspection and examination rights.
This right is effective for as long as he or she is a shareholder.

IV. Section 74 – Stock and Transfer Agent

- For stock corporation, the stock and transfer book may be kept by the corporation which is
usually in the official custody of the corporate secretary, but at the discretion of the corporation, a
stock and transfer agent may be hired or engaged
- However, the stock and transfer agent must be licensed as such by the SEC
- This is specially necessary for corporations whose shares are listed in the PSE

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 TITLE VI – Meetings

I. Exercising the Right to Vote through Representation

- For individual SH, they can choose both – personally or representation
- For corporate SH, they can vote only through representative

II. Section 58 – Proxies

- To be understood in 3 senses:

a. Legal authority conferred by the SH or subscriber to another for the latter to attend and vote
in a meeting – refers to agency

b. Refers to the written form containing such legal authority – under the Corporation Code it
must be in writing and submitted to the corporate secretary before the meeting, unless the
BL prescribes a different form
- Regardless of the provision in the BL, it is only for maximum period of 5 years
- If the proxy is silent, it is good and valid only for 1 year

c. It refers to the person authorized – agent – pursuant to the rules on agency, the agent can
only vote to what that is instructed

- The proxy cannot be voted for on the basis of the proxy, he acquires no legal title to the shares
represented

III. Section 59 – Voting Trust Agreement (VTA)

- This is an agreement between a SH or subscriber (trustor) and another trustee granting to the
latter the right to vote and be voted for the duration of their agreement
- It is a private contract entered into by the SH pertaining to the shares
- Example: X subscribed to 1M shares. X incurred a loan obligation from Y. Y imposed the
condition that as a collateral, X must issue a voting trust agreement.
- A voting trust agreement is normally a credit transaction – the debtor if the SH – trustor –
creditor is the trustee
- This is a specie of an express trust under the Civil Code
- Unless the BL prescribes differently, the voting trust agreement must be duly notarized
- A copy of the VTA must be submitted to both the corporate secretary and the SEC – because
VTAs are considered as securities under the SEC Regulation Code it must be exposed publicly
- The trustee must cost the registration of the VTA in the books of records which is the duty of the
corporate secretary – the registration is a two-step process:
a. Corporate secretary will now cancel the stock certificate issued in the name of the trustor
b. A new stock certificate will be issued in the name of the trustee
- The new certificate will bear an annotation that it is pursuant to a VTA
- From this moment on, the trustee is the legal owner of the shares for a period of 5 years,
unless the VTA is pursuant to a loan contract, it is valid until the loan is extinguished
- In turn, the trustee must now issue and execute a voting trust certificate (VTC) after the
issuance of a new stock certificate – it shall be in the name of the trustor – must be delivered
to the trustor – have now effectively dichotomized legal title (trustee) and beneficial title
(trustor) over the shares

- Other SH may accede other existing VTA, that is why a VTA is a contract of adhesion – belated
parties may join in an existing one
- Once VTA expires, then the parties are restored to their original status quo

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 - The voting trust certificate is transferable like a stock certificate by indorsement and delivery –
The VTC is held by the trustor so the trustor can indorse and deliver it to another even while the
VTA is still pending, however, the transferees of the VTC cannot vote – because the right to vote
is inherent in the trustee
- It is a management controlled device

- Example: In the unending saga of the SMC shares arising from the heavily contested coconut
levy funds were used to create the so-called Coconut Industry Investment Fund (CIIF) Industries.
The CIIF Fund was used to incorporate about 14 corporations and these corporations have their
own subsidiaries and that both the 14 corporations and their subsidiaries through various
transactions acquired SS of the San Miguel Corporation. One of the targets of the PCCG was
the ill-gotten shares of stocks in the San Miguel Corporation. If SMC, through writs of
sequestration affirmed by the Sandiganbayan, about 33% of the voting shares were held by the
PCGG. Even if sequestered, 20% of the voting stocks is in SMC was retained by N. Cojuangco –
If you have 20% then you are entitled to at least 1 seat in the BOD. In the basis of these
sequestered but still registered in the name of N. Cojuangco, he remained a director of the SMC.
There were about 3 directors nominated by the PCGG. Whenever N. Cojuangco would suggest
on new matters, the PCGG BOD would refuse it he was always overpowered. He cannot get his
will enforced in the SMC unlike he was used to. Then he invited a person from Japan to invest in
the Philippines who invested buy buying SS of SMC which were VTAs – 15%. N. Cojuangco has
now 35% - slightly higher than that of the government. He also has another 15% SMC retirement
fund which were also under VTAs in favor of N. Cojuangco. He now holds 50% of the control
through VTA.
- A management controlled device is formed in the form of VTA
- Just have to persuade the SH to make a VTA for you

- A VTA as a management-controlled device may not be used to circumvent the Constitution.

IV. When may the Right to Vote and be voted for be Exercised
- In the absence of specific dates prescribed in the subscription contract between the parties –
GR: Any portion of the entire balance of the subscription is due and must be paid when a call is
made by the BOD – a call is a demand of payment of the subscription – a call must be embodied
in a resolution passed by the BOD stating the:
1. Amount of percentage of the total balance due
2. The date when payment must be made
3. Any interest and penalties that may be imposed on the balance
4. The same call must also carry a warning that if no payment is received by the corporation
under on the date specified, then the SS will be declared delinquent and may be sold at
public auction
- Each affected subscriber is entitled to a notice of call at the address specified in the books of the
corporation

- Case:
- Involves a proprietary shares in a golf club. He SH here were unable to pay their
membership dues as well as the unpaid balance despite repeated written calls from the
BOD, their shares were sold at public auction.
- SC: The sales in public auction were nullified on the ground of improper notice and the
improper notice violated the right to due process of the delinquent SH. The notice of call and
delinquency was sent to the SH after he has died, necessarily, he could have not received it.
Also the corporation was guilty of fraud because despite the notice if the death of said SH, it
still sent repeated calls of the same address. Having known of the death of the SH, it now
became the duty of the corporation to send the demand to the estate or the administrator of
the estate of the decedent.

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- Case
- The notices were sent to a PO Box address. When no payment was received by the
corporation, the shares were sold to another and that was the only time when the SH learned
of the same when he was not allowed to paly golf.
- SC: According to the corporation, when the SHs are asked to provide an address, it is his
own representation that his address was a PO Box address but the fault of the corporation is
that the letters were indicated as return to sender. The corporation did not make an effort to
send those letter to a home address.

- For all SHs who received a valid call, they must pay as required
- In case they fail to pay, then those who renege on his obligation may now be declared delinquent

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 TITLE X – Appraisal Right

I. Section 81 – Instances of Appraisal Right

- This is a right that may be invoked only by the following:

A. Shareholders who dissented or objected to specific corporate acts (the dissenting vote must be
in writing or reflected in the minutes of the meeting)
- That it is invoked under the following instances:
1. Any amendment to the AOI with the following effects:
i. Restricting the rights of current shareholders
ii. Granting preferences not presently enjoyed by the OCS;
iii. Shortens or extends corporate term;
2. Proposed sale of all or substantially all assets of the corporation;
3. Merger or consolidation;
4. Investment of corporate funds in another corporation;
5. All other instances as may be described in the AOI or BL

B. That the dissenting stockholder has paid in full the subscription price

C. That the corporation must have unrestricted retained earnings

- Example: May 15, 2015. The resolution was approved. X = minority SH who dissented; his
dissent must be recorded in the minutes of the meeting; without the record, the appraisal right
cannot be exercised. Within 30 days from the said meeting, the dissenting shareholder must
write a demand letter addressed to the Board asking payment of the fair value of the his shares.
From the time that the letter was received, all the rights of the dissenting shareholder shall be
suspended including the right to vote and be voted for. Within 10 days from the written demand,
the dissenting shareholder shall now surrender the certificate of stock to the corporate secretary.
The surrender enables the corporate secretary to annotate the fact of the exercise of the right of
appraisal.
- The only right left to the dissenting stockholder at this point is the right to be paid the value of
the shares.
- Who will pay? – The corporation

II. Surrender Value

A. The price voluntarily agreed upon by the parties;

B. If they did not agree, then the price fixed by the Corporation Code
- Price of the share prior to the time the dissenting vote was cast – in the example above, its May
14, 2015

C. Either:

1. By way of final judgment of a court in an appropriate proceeding (action for sum of money or
consignation) (this is an intra-corporate controversy)
- The decision of the court is considered final and executory and the cost of judicial appraisal
shall be borne by all.
- If the price determined is equal to or near the offer of the corporation, the shareholder pays
for the cost of judicial appraisal.
- If the price determined is equal to or close to the amount demanded by the dissenting
shareholder, the cost of judicial appraisal shall be borne by the corporation.

2. Extrajudicial means
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 - Convening an ad hoc committee of three:
a. Appointed by the corporation;
b. Appointed by the shareholder; and
c. Appointed by the both the corporation and the shareholder

- The decision of the committee is final and executory. The corporation must pay within 30
days.

III. Section 84 – When Right to Payment Ceases

- The right to be paid of the dissenting shareholder is extinguished under the following:
1. The corporation voluntarily abandons the proposed corporate act;
2. The proposed corporate act was disapproved by the SEC;
3. That the SEC determined that the dissenting shareholder is not entitled to appraisal;
4. When the shareholder transfers the shares to another; and
5. When the corporation has no unrestricted retained earnings

- Spouses Turner v. Lorenzo Shipping

- Here, the AOI of the corporation was amended to the effect of denying the shareholders of
the right of pre – emption. The dissenting shareholders opted to exercise their right of
appraisal. A committee was formed to determine the surrender value. The committee set the
surrender value at a price higher than that demanded by the dissenting shareholder. The
corporation refused to pay them on the ground that the corporation, at that time, has no
unrestricted retained earnings. By reason of this, the right to payment was suspended. Here,
the court also ruled that the prescriptive period to file a claim against the corporation will only
commenced to run from the time the corporation has URE.

- The appraisal right is actually a peace-setting mechanism.

- Once paid, the stock certificate will be cancelled. The re-acquired shares are called treasury
shares.

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 TITLE IX – Merger and Consolidation

I. Merger or Consolidation
- Marriage or union between 2 or more corporations to form among them a single entity.
- The parties here are called constituent corporations.

A. Merger
- A Corp + B Corp = A Corp
- Some of them being absorbed in one of them; the latter being the surviving corporation

B. Consolidation
- A Corp + B Corp = C Corp
- An entirely new corporation

II. Section 76 – Plan of Merger or Consolidation

- How: Plan of Merger or Consolidation – must be perfected among the constituent corporations. It
must be a common one among them.

- The plan must include the following:

1. The name of the constituents;
2. Manner that would carry out the proposed merger or consolidation (what is included or
excluded as to assets, liabilities, etc.);
3. In case of merger, the provision in the AOI of the surviving entity that will be amended

- In case of consolidation, the plan, in writing, shall set forth all contents of the AOI that are
required by law (new corporation).

- Once the plan is complete, submit it for the approval of the constituents (majority vote and at
least 2/3 OCS for each constituent).
- Thereafter, submit the plan to the SEC, Fair Competition Commission, and the government
regulator.

- The government regulator can reject the proposed merger or consolidation on the following:
1. Unlawful combinations of trade;
2. The merger or consolidation will result to unfair competition (takes place when one entity or
merchant gains undue advantage of a market segment – e.g. predatory pricing (pricing the
product too low)
3. If it creates monopoly (Anti-trust)

- If any of the said causes are not present, then the plan shall be approved. The SEC will issue the
so-called Articles of Merger or Consolidation which is an offshoot of the duly approved plan.

- The plan of merger or consolidation must be expressly approved by the SEC. Once approved,
the following are the legal consequences:
1. Only a single entity will exist (the surviving corporation or the new corporation);
2. That corporation will have powers and privileges like any corporation;
3. The corporate personality of the constituents shall be extinguished;
4. The assets and liabilities except those expressly excluded in the plan shall be transferred
without further act or deed.

- Example: Merger between A and B = approved

- The properties of B become the properties of A, the surviving corporation.
- PN = at the maturity date, the merger took place. B shall indorse the PN to A.

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- A is entitled to indemnity from an insurance secured by B. There is no transfer since B
became A.
- As to action filed in court, the action will be continued in the name of the surviving
corporation. Notify the court about the merger.
- As to employees, without any stipulation in the plan of merger, the employees of B
automatically become the employees of A.

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 TITLE XI – Non-Stock Corporations

I. Stock Corporation vs. Non-Stock Corporation

Stock Private Non-Stock Corporation

Corporation
Purpose For profit or For non-profit purposes (e.g. charity, education, religious
gain purposes)

Specify the purpose. The secondary purpose must not contravene

the nature of the corporation itself.
Management Board of Board of Trustees or some other name by which the AOI refer to
Directors the management or governing body (minimum of 5; can go beyond
15; for as long as a definite number is stated in the AOI)
Director Must be a Must be members of the corporation and their names must appear
shareholder in the membership book.

The directors may be classified in such a way that certain kinds of

members can vote a specified number. (e.g. out of the 15 trustees,
the 10 shall be voted only by the original members and the
remaining 5 shall be voted only by the subsequent members)
Same statutory officers (President, Secretary, and Treasurer). For non – stock,
additional officers may be provided in the by – laws.

II. Chapter 1 - Members

- The Board shall have the power to determine who may be qualified to be admitted as members.
- Provided that said qualifications are prescribed in the AOI and by-laws.
- The qualifications must be reasonable. The same is true with respect to the expulsion of
members.

A. Section 90 – Non-Transferability of Membership

- In non-stock corporations, membership is purely personal.
- The State cannot interfere with the affairs of the corporation in such a way as to impose or
dictate as to who the members should be.
- Once membership is granted, the member cannot transfer the membership at will because
members shall pass the qualifications prescribed in the AOI. Here, non-transferability clause is
allowed. (as opposed to stock corporations)

B. Section 91 – Termination of Membership

- Payment of membership dues is one of the qualifications for the maintenance of one’s
membership in the corporation. Failure to continue paying the same can be a valid ground for
expulsion. Expulsion, however, cannot be arbitrarily exercised. Due process must be observed.

C. Who can be members?

- GR: Only natural persons
- XPN: Upon special application and for as long as written in the AOI and by-laws, juridical
persons can be admitted as members.
- However, they are denied the right to vote within the corporation and only non-stock
corporations may be admitted.
- Stock corporations cannot be members of non-stock corporations.

- The membership does not entitle the member to a share in the profits derived by the corporation.
- Dividend declarations are absolutely prohibited.

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- All the profits earned by the corporation must be devoted to the furtherance of its non-profit
purpose.

- For taxation purposes, there must be proof that not more than 30% of the funds of the
corporation is used for administrative purposes and the remainder shall be utilized for its non –
profit purposes.

- Non-stock educational and religious corporations – express exemption from RPT and income tax
under the Constitution.

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 TITLE XIII – Special Corporations

Chapter I – Educational Corporations

I. Section 106 – Incorporation

- Technically, it can be organized as stock or non-stock corporation.
- But beginning the Education Act of 1982, all educational corporations in the Philippines are
required to organize as non-stock.

II. Section 108 – Board of Trustees

- In educational corporation, whether stock or non-stock, the members of the Board must not go
beyond 15 and always in multiples of 5.
- The AOI may prescribe a maximum period of 5 years for the term of the members of the Board.
- They may also adopt a staggered system whereby 1/5 of the entire Board shall have terms
expiring every year.

- Example: Elected in 2005 (1/5 of 10 = 2)

Initial 5 years
2005

1 2005-2006 2006-2011
2

3 2005-2007 2007-2012
4

5 2005-2008
6

7 2005-2009
8

9 2005-2010
10

III. Educational corporations are required to obtain a secondary franchise.

1. Basic education – DepEd
2. Higher/tertiary education – CHED

- Not all tertiary educational corporations can use the term university in their names.
- College: Bachelor’s degree only
- University: Confers post-graduate degrees

- Purpose in the AOI: To confer degrees (tertiary)

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 Chapter II – Religious Corporations

I. Classes of Religious Corporations

1. Corporation Sole
2. Corporation aggregate/religious society
- Both are organized principally to manage and administer the temporalities or properties of the
church and to promote and further their religious belief.
- They are covered by the freedom of religion under the Constitution.
- As such, once their AOI is filed to the SEC, it is deemed approved right away and the SEC has
no power to deny the same.
- The State has no power to involuntarily dissolve a religious corporation and cannot be subjected
to the usual regulatory mechanisms imposed on ordinary corporations such as reporting
requirements.
- They are not required to state a definite term. Hence, they can exist perpetually.

II. Section 110 – Corporation Sole

- Called the “freak” in corporation law
- Composed of only one individual; that individual may the bishop, archbishop, or the head of the
church or denomination that is seeking to organize.
- This merely serves as a fiduciary or trustee of the church as well as its properties.
- The beneficial owner of said properties is the members of the religious corporation.
- The only limitation to its power is that in case there is a necessity to dispose, alienate or
mortgage its properties of the church, there must be a petition filed with the RTC where the
property is located.
- The RTC will ascertain whether or not the sale or disposition is for the benefit of the members of
the church.
- If the corporation sole is changed, the substitute shall submit to the SEC a copy of the
assignment, designation or appointment.
- Once a voluntary dissolution (decided by the bishop, archbishop, or the head) is prayed for by
the corporation sole, there is no need to file a petition in court. A mere notice to the SEC is
sufficient.

III. Section 116 – Religious Societies

- Corporation aggregate/religious society – religious corporation aggregate (e.g. CICM)
- It must still comply with the AOI prescribed under the Corporation Code.
- The filing thereof to the SEC shall be approved by the majority of the governing Board as well as
2/3 of the members.
- As to the term of the governing Board, the limitation imposed by the Corporation Code is not
necessary. The same is governed by the rules internal to the church.

- INC Methodica Case

- The members of the church do not have any right to the property of the church; a corporation
sole can be transformed into a corporation aggregate by merely amending the AOI. The
amendment will be approved by the corporation sole. He has the sole authority to amend or
dissolve whichever he chooses.

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 TITLE XII – Close Corporations

I. Section 96 – Definition and Applicability of Title

- This is actually a stock corporation except that by law, it has the following unique features:
1. Based on the AOI, it shall have a limited number of shareholders which shall not exceed 20.
That number shall be fixed in the AOI.
2. Acquisition and ownership of shares in the corporation is subject to certain stated restricted
limitations and qualifications. Not everyone can buy shares of stocks in a close corporation.
3. No close corporation is permitted to list its shares in any exchange because the stock
exchange is the public market for shares of stocks. This contravenes the nature of a close
corporation. If more than 2/3 of the OCS is already owned by an open corporation, then the
close corporation losses its character as such.

- An example of a closed corporation is a family corporation but not all family corporations are
closed corporations.

- A close corporation is actually an incorporated partnership. It is organized primarily because of

the close affinity or perianal trust and confidence which the incorporators and shareholders enjoy
with one another.

II. Section 97 – Articles of Incorporation

- Special provisions which a close corporation may provide in its AOI:

A. As to its management, there are two ways by which it may decide to manage itself:

1. Thru the ordinary BOD

- Here the right to elect the members of the Board is given only to a certain class of
shareholders
- Any meeting of the Board is rendered unnecessary in all cases in order for the Board to bind
the corporation

- Example: 10 members of the Board – the first 8 shall be elected only by Class A
shareholders while the last 2 shall be elected by Class B shares within the corporation

2. By all of the shareholders

- Here, all shareholders are directors; here, there is no need to conduct election; the
shareholders acquire all the rights, privileges and liabilities of directors except when they
obtain adequate insurance against such liability.
- The liability of the corporation becomes a personal liability of the shareholders.

B. In cases of dissention, the following are the remedies available:

1. Amendment of the provision of the AOI or by-laws
2. Amendment of any resolution of the Board or stockholders’ agreement
3. Appointment of a provisional director (must not come from the shareholders; appointed to
break the impasse within the corporation); he is entitled to all the emoluments of the office
but the same duties and responsibilities as well; shall serve until the tie is broken

- For actions which are intra-corporate in character, provisional remedies can only be resorted to
by way of an intra-corporate complaint. The SEC is no longer possesses of the authority to issue
provisional orders or remedies.
- Controversies within a close corporation are intra-corporate in nature; hence, it is RTC which has
jurisdiction.

- The most drastic provisional remedy is the order of the dissolution of the close corporation.
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III. Section 105 – Withdrawal of Stockholder or Dissolution
- In a close corporation, every shareholder has the right to petition the dissolution of the
corporation for any ground but especially for the following as provided by the Corporation Code:
1. Dissipation or wastage corporate assets by the management or members of the Board
2. When any of the members of the governing body is guilty of fraud or misrepresentation

- The petition shall be filed either with the SEC or the RTC.

IV. Appraisal Right

- In a close corporation, shareholders have a broader appraisal right.
- The said right can be exercised at any time regardless of the cause and the same is not
anchored on the presence of unrestricted retained earnings.
- The only limitation is that the corporation has sufficient assets to pay the withdrawing
shareholders.
- Similar to a partnership, a shareholder cannot be forced to remain in a corporation.

V. Right of First Refusal

- Another unique right is the right of first refusal.
- It serves both as a right and a restriction. It is a restriction to the shareholders who are intending
to sell their shares. It is a right for the other shareholders of the corporation.
- Before any shareholder can sell or transfer the shares, the same must first be offered to the
other shareholders within the corporation. If none of them bought the shares, the sale shall be
offered to the corporation.
- Ownership and acquisition of shares in the close corporation are subject to certain requirements
or eligibilities.
- If the transferee did not pass the prescribed eligibilities, the disposition of the shares shall not be
binding upon the corporation.

- Example: if a stranger pays for the shares of one of the shareholders in a close corporation, he
can enforce his right over the shares by obtaining the consent of the corporation by the
unanimous consent of all the other shareholders and if necessary, the corresponding
amendments to the articles.

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 TITLE XIV – Dissolution

I. Section 117 – Methods of Dissolution

A. Expiration of the term or lapse of time when the term has not been extended or renewed by
amendment or if the extended period has also expired; it is ipso facto dissolved the day after its
last day
- Without waiting for the original period to elapse, the corporation may file a petition for the
shortening of its corporate term (amend the AOI to shorten the term = does not require the
approval of the Articles of the Amendment to take effect); dissolved upon the expiration of the
shortened term

B. By way of a petition
- This is voluntary because it is initiated by the corporation itself
- Must be approved by majority of the Board and 2/3 of the OCS (this must be alleged in the
petition)
- SEC has jurisdiction.

- Two kinds of petition:

1. If at the time of the filing of the petition, the corporation has no existing liabilities, the
corporation is dissolved as of the date of filing of the petition with the SEC. (summary in
nature and immediately effective)
2. If there are unpaid obligations on the part of the petitioner, the petition must enumerate the
names of the creditors of the corporation so that once filed the SEC must set a date of
hearing and notify the creditors of the pendency of the said petition. The hearing enables the
SEC to verify the claims of the various creditors and to ensure that the petitioner corporation
makes adequate provisions to pay the creditors. The presence of the outstanding debts will
not prevent an issuance of an order dissolving the corporation. Here, the corporation is
dissolved upon finality of the order of the SEC dissolving it.

C. Section 121 – Involuntary dissolution

- Here there is a finding that the corporation has infringed its franchise or privilege.
- Dissolved from the date of finality of the order issued either by the SEC or RTC.
- This entails the revocation of the certificate of incorporation and may or may not carry with it the
revocation of the secondary franchise.

- Grounds for involuntary dissolution under P.D. No. 902-A:

1. Fraud or misrepresentation as to what the corporation can or is doing to the great damage
and prejudice of the public
2. Willful defiance to a cease and desist or other orders issued by the SEC or the government
regulator
3. Non-user or continuous inoperation
4. Failure to file the BL (when to file: within one month from the issuance of the certificate of
incorporation)
5. Failure to comply with the reportorial requirements (annual basis) (e.g. General Information
sheet, annual audited financial statements, current directors and officers)

- In involuntary dissolution, jurisdiction belongs either to the SEC or RTC depending on the
ground.
1. SEC:
a. Failure to comply with the reportorial requirements
b. Non-user or continuous inoperation
c. Willful defiance to SEC

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 2. RTC
- All other grounds (since they affect the franchise, file a petition for quo warranto)

- Involuntary dissolution is forfeiture of the franchise.

- Voluntary dissolution is surrender of the franchise.
- Expiration is the lapse of the franchise.

- Once the corporation is dissolved, its civil personality is terminated but only for the purpose for
which it was created. That is why it is prohibited to enter into any transactions that would further
its business operations.

II. The dissolved corporation retains a limited civil personality for the following purposes
(powers at liquidation):
1. To prosecute and defend suits
2. To settle or wind up its affairs; Liquidate the assets and close the business
3. Convey assets or property in favor of another who will acquire legal title while retaining
beneficial ownership in favor of creditors and ultimately the shareholders or members

III. Section 122 – Methods of Corporate Liquidation – Who may Enjoy the Powers During the
Liquidation

A. Liquidation by the corporation itself

- Once the corporation decides to liquidate its own affairs the BOD ceased the power to manage
the affairs if the corporation and now convert and transfer their roles into liquidators – they
cannot enter into any contract that would further the business but they are still authorized to act
for and in behalf of the dissolved corporation to enter into any contract relevant to the following
1. Prosecute or defend the corporation in suits
2. Settle and wind up the business and affairs of the corporation
3. Convey legal title over the property or assets of the corporation
- When the corporation per se is liquidating itself, all the transactions arising from the above-
mentioned powers may still be entered into in the name of the dissolved corporation
- However, such powers are time bound that is why the BOD must observe the 3-year limitation –
after this, exercise of the these powers can no longer be in the name of the corporation because
for all intents and purposes, the corporation has ceased when the 3-year period elapses – these
powers in the name of the corporation are abated

B. Receiver/Assignee
- The liquidator in case of involuntary dissolution of the corporation
- They are always court appointed and therefore cease the power of the BOD for purposes of
closing the business and enjoying transactions
- If the liquidation process is not limited to the 3-year period unlike if the liquidation is taken by the
corporation itself

C. Trustee
- The trustee is voluntarily named by the corporation – not judicially appointed
- The selection of the trustee may be done prior to dissolution or during the 3-year period
- If the liquidation process is not limited to the 3-year period unlike if the liquidation is taken by the
corporation itself – it may continue for as long as necessary until the business and all its affairs
will be finally terminated
- Example: Y Corporation was dissolved as of 31 December 2010. After its voluntary dissolution,
the corporation did not bother to appoint a trustee. So within the 3-year period from 31
December 2010 to 31 December 2013 – the corporation attempted to liquidate the corporation
but could not finish all the transactions. Within the 3-year period, the corporation may still enter
into contracts under its own name, prosecute and defend suits in its own name because the

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 BOD is empowered to do acting now as liquidators. But, by 01 January 2014, no new suit may
be filed in the name of the dissolved corporation. It should now be under the name of the
receiver/assignee/trustee
- Example: Within the 3-year period, there is a case Pogi, Inc. v. X. This is still a valid complaint
but the corporation is no longer existing so indicated “duly registered corporation but has been
subsequently dissolved and the action is filed pursuant to its liquidation.” In case the liquidation
is done by some other entity or person – “A, on behalf of dissolved Pogi, Inc. v. X” – can be done
even after the 3-year period
- Questions:
1. Dissolved corporation sell shares – cannot be done within the 3-year period
2. Dissolved corporation declare dividends – if the dividends are earned by the dissolved
corporation, it is prohibited within the 3-year period; if liquidating dividends – a pro rata
distribution of the assets of the dissolved corporation after creditors has been paid – can be
done within the 3-year period
3. Dissolved corporation conducting an annual elections – cannot be done within the 3-year
period
4. Would the BOD be required to conduct meetings – can be done within the 3-year period
because they hold the powers at liquidation, unless they have appointee a receiver or trustee
5. Can the dissolved corporation enter or perfect contracts – can be done within the 3-year
period provided the contracts are related to liquidation
a. Contract for sale of its property – can be because this is inherent in liquidation
b. Purchase of new property or new assets – GR: No
c. Perfect a lease or renew a lease – can be assuming it has no own office – necessary for
liquidation purposes. In one decision of the SC the dissolution of the corporation does not
ipso facto terminate a subsisting lease contract to which the corporation is a party. If the
lease is for a definite period and in the intervening period the corporation is dissolved,
this is not a valid ground for the lessor to pre-terminate the lease
6. Do the SH of such corporation has the same rights as against the corporation as they have
prior to dissolution (right to vote, right to be voted for, right to dividends, right to assets, right
to inspect and examine books, right to attend meetings) – No with respect to right to vote and
be voted for except in decisions necessary to liquidation where they have limited right. Right
to dividends is absolutely prohibited except for liquidating dividends. Right to inspect and
examine books still subsists for them to know how much is the asset of the corporation and
their shares.
7. If after dissolution, still some of the SH has not yet paid in full their subscriptions – The
balance will not be extinguished, they must still pay the same

- If there is no receiver or trustee appointed

- Metrobank v. CA
- SC: In the absence of a duly appointed trustee or receiver or assignee, then the BOD are
ipso facto and ipso jure considered as trustees of the corporation. They must continue
representing their corporation in their capacity as their trustees. Even if the 3-year period
has been expired, the members of the BOD may still be sued and sue in their own name
representing the dissolved corporation because by law, they are now considered as
trustees.

- Helano v. CA
- The lawyer in this case filed a motion to be discharged as counsel of the corporation
alleging that the corporation has already been dissolved and he has experiencing
difficulties in continuing the case for lack of instruction from his principal. The case was
already appealed before the CA.

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 - SC: In such a situation in cases of pending litigation when no new trustee or receiver is
appointed, counsel of record is deemed to be the trustee of the corporation, therefore
cannot be discharged as counsel.

- Chung Ka Biok v. CA
- The corporation had so many assets that they were undivided several years after it was
dissolved. The members of the BOD abandoned their offices after dissolution after the
termination of the life of the corporation. Some of the SH petitioned for distribution of the
assets.
- SC: One of the SH was appointed as trustee of the corporation.

- Case
- SC: A creditor was appointed as trustee subject to specified safeguards in order to
prevent abuse.

D. Petition of Liquidation under FRIA

- When there is full distribution of the assets, the corporation ceases for all legal intents and
purposes, it is now considered as fully terminated but this corporation does not prevent it from
incorporating with the same persons and personalities

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 TITLE XV – Foreign Corporations

I. Section 123 – Definition and Rights of Foreign Corporations

- Measure used by the Corporation Code as to whether or not a corporation is foreign is simple – it
is a foreign corporation if its was formed and organized under laws of another state
- Therefore, if a corporation is formed and organized under Philippine law, it is a domestic
corporation
- A corporation which is foreign has no legal personality outside the territory where it was created
– the conferment of a status as a corporation is a mere privilege exclusive to the state
- As such, outside of those territory, the corporation may be denied the right to exist or may be
subjected to certain requirements before it may be afforded legal recognition – we adopt this is in
the Philippines

II. Section 125 – Requirements to Allow a Foreign Corporation here in the Philippines –
Apply for a License

A. License
- That license is necessary whenever it seeks to engage or transact in business in the Philippines

B. Acts of doing or transacting business here in the Philippines: Under Foreign Investments Act

1. It solicits orders or purchases in the Philippines

2. It opens a branch or an office in the Philippines even if such office is called a liaison office
- For the first 2, and example is that not all foreign airlines are granted landing rights in the
Philippines and they are able to sell tickets here in the Philippine through agents or agencies
or partnerships with other airlines to sell ticket for them; they are considered as doing
business here in the Philippines – for the foreign airlines granted landing rights they are
definitely doing business here in the Philippines

3. Appointing any person or representative for the conduct of its business here in the
Philippines where such agent is domiciled in the Philippines for at least 180 days in a given
year
- The 180 days may be continuous or cumulative
- From point of view of the Corporation Code, the domestic agents of foreign recruitment
agencies are in fact doing business here in the Philippines through their domestic licensees

4. Participating in the management of a domestic business whether organized as sole

proprietorship, partnership or corporation
- Mere exercise of a right as a SH should not be construed as doing business on the part of
the foreign corporation – means that if a foreign corporation happens to be a SH of a
domestic corporation and as a domestic corporation it is entitled to vote and be voted for this
is an exercise of his ordinary rights being a SH of the corporation and the foreign corporation
should not be construed as doing business for which it is required a license
- Participating in the management is tantamount to doing business in the Philippines and
therefore a license is required if the participation is active in character
- It is active participation is it is beyond the ordinary participation of a mere SH, like when
the foreign corporation is able to: - active participation here must amount to control in the
corporation
a. Elect its representative in the BOD or governing body
b. Appoint key officers
c. Dictate or even influence policies, rules and practices within the corporation

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 5. When the foreign corporation engages in series of commercial dealings intended to
prosecute and promote the main body of the business for which it was organized
- It is not the number of dealings but it is the nature and purpose of such dealing to determine
whether or not it is doing business
- If there is showing that the dealings entered into by the foreign corporation in the Philippines
is toward a progressive prosecution of its business, then it must obtain a license

C. Where should a license be applied?

- Principally, it is with the SEC
- Subject to Foreign Investors Act, which they also need to comply with certain documentary
requirements with the Board of Investments
- The application for a license require certain documentary submissions such as:
1. Copy of the AOI and BL
2. Financial condition of the foreign corporation
3. List of current BOD and officers
- But, among these documents, it must also appoint a so-called resident agent

D. Section 127and 128 – Resident Agent

- Resident agent may be a natural or juridical person who is domiciled in the Philippines and is
authorized to receive and accept summons and papers for and in behalf of the foreign principal
- Service of summons upon the resident agent is service to the foreign corporation
- In case the resident agent previously appointed should die or resign and no one has been
appointed in the meantime, the foreign corporation is required to execute an undertaking that
service to the SEC is service to the foreign corporation – This is to prevent the foreign
corporation from thwarting any case against it on the mere lack of jurisdiction as a ground

- The application for license must specify the kind of business that the foreign corporation seeks to
engage in in the Philippines – if this business is regulated, a secondary franchise must also be
obtained from the BSP, IC, etc.
- The license to do business is limited to the business applied for and approved – no other
transactions may be validly entered into if it is not directly connected to the licensed business
- The license may be amended to add other businesses, subject to approval of SEC and other
government agencies
- For current and new laws have opened or allowed foreign business to engage in retail, specially
in categories of B, C and D of Retail Trade (open to at least 100% to foreign corporation because
it is as to retail of high end and luxury goods) – category A is exclusive to Filipinos

- Once the license has been issued, whether the original or the expounded one, the foreign
corporation is now subject to Philippine laws – agrees to bind itself to Philippine law, rules and
regulations

- Once it is already enjoying such license (privilege), it may surrender the same. However, as a
condition for such surrender, it must prove that it has paid all its outstanding liabilities in the
Philippines

E. Section 134 – Revocation of License

- The license may be cancelled or revoked by the SEC for reasons such as:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the Securities and
Exchange Commission a statement of such change as required by this Title;
4. Failure to submit to the Securities and Exchange Commission an authenticated copy of any
amendment to its articles of incorporation or by- laws or of any articles of merger or
consolidation within the time prescribed by this Title;

81
 5. A misrepresentation of any material matter in any application, report, affidavit or other
document submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf of any foreign
corporation or entity not duly licensed to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in the Philippines.

III. Power to Sue and be Sued

- One principal right that arises whenever a foreign corporation shows that it has obtained the
necessary license is that it has the power to sue and be sued

Doing Business
With License Without License
To ✓ GR: ✗
sue By establishing domicile in the Philippines for its business without
the requisite authority, it cannot seek the intervention of Philippine
courts for the protection of its interest.

XPNs: ✓
1. May prosecute any case under the RPC or other penal laws – no
need to show license because criminal cases in the Philippines
are instituted in the name of the People of the Philippines –
therefore it may be a private offended party or complainant in a
criminal case – no need to show capacity to sue
2. Estoppel on the part of the defendant to question the legal
personality of the corporation– no need to show capacity to sue

Case
- A foreign corporation was a manufacturer of computers and it
entered into 2 contracts for the sale and repair or servicing of
these computers sold in the Philippines. The contracts were
called representative agreement. The domestic dealer as well as
the domestic providers for repairs were not allowed to enter in
their own name but always in the name of the foreign corporation
and before any employee can be hired by the domestic
corporation, the said employee must first be approved and must
pass the standards imposed by the foreign corporation.
Furthermore, in all communications entered into by the domestic
dealer and domestic service provider, they must always use the
letterhead provided for by the foreign corporation. Under the
representative agreement, all sales made by the domestic dealer
it will be entitled to a commission, however it is absolutely
prohibited from selling computer products of other companies
and it bound itself to sell and distribute in the Philippines only
products of the foreign company. The domestic service provider,
whenever it enters into repair or any of these computers, he is
also entitled to only a commission and does not charge or fix the
fees for its services – percentage agreement. The foreign
corporation discovered that the dealer was selling computers
bearing brands of other companies and because of such, the
foreign corporation suffered losses by reason of such breach of
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 trust and confidence prompting it to file a suit in the Philippines
against its own dealer for breach of contract and for accounting
and for breach of damages. In am motion to dismiss filed by the
domestic corporation, it alleged that the plaintiff is an unlicensed
foreign corporation and therefore has no legal capacity to sue. Is
the foreign corporation doing business in the Philippines, for
which a license was necessary?
- SC: Yes. A scrutiny of the representative agreement shows that
the domestic dealer and service provider are both reduced to
mere agents of the foreign corporation and they have no will and
volition of their own as to the manner by which the business may
be conducted because the entire methodology and
administration of the business is dictated by the foreign
corporation. Thus, the domestic corporations are agents of the
foreign corporation and under the Foreign Investment Act,
appointment of agents is an act of doing or engaging in
business. The foreign corporation can also maintain the
complaint because the defendant is in estoppel – after so many
years of maintaining the arrangement with the unlicensed foreign
corporation, knowing it to be without the authority to do such
business, the domestic corporations reap benefits out of said
arrangement. They cannot now repudiate their arrangement
whenever they are held liable.

3. Foreign corporation is merely defending itself in an action filed

against it in the Philippines

Time, Inc. v. Reyes

- This involves a civil action for damages filed by Enrile against
Time. Enrile felt seriously impugned or maligned and
embarrassed by a particular story that appeared in one of the
issues of Time Magazine about the 1986 EDSA Revolution.
According to Enrile, he was pictured as a power hungry and a
corrupt defense minister. (In libel, file the case should be filed in
the RTC of the place where the first publication was made.) Time
immediately filed a motion to dismiss on the ground of lack of
jurisdiction citing that the suit should have been filed in Makati
where the first distribution was made. The RTC judge denied the
motion to dismiss. Felling aggrieved, Time filed a petition for
certiorari with CA (original action although a mode of review).
Enrile filed a motion to dismiss this certiorari case saying that
Time is doing business in the Philippines without a license and
therefore it has no right to sue on a certiorari.
- SC: Since Enrile sued Time, Time is entitled to avail of all
remedies that are extended by the Philippine law to all
defendants alike and since defendants, if feeling aggrieved, can
petition for certiorari under Rule 65, when Time availed of this
remedy, it was merely defending itself in the suit filed by Enrile
against it. The certiorari case is an offshoot of the case filed by
Enrile.

It is the licensed that capacitates it to sue in case a foreign

corporation wants to sue.
To be ✓ ✓

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Sued Can be held liable Sanction for failing to comply with Philippine law.
for any claim arising
from its business in How to sue: Where to serve the summon – if it has an office in the
the Philippines Philippines, then send it in their office or to the person representing
the foreign corporation for its business in the Philippines
If it has no office here in the Philippines: Amended rules for service
of summon to unlicensed foreign juridical entities
a. By personal service of summon to the unlicensed juridical
entity at the place of its residence or domicile abroad through
the DFA and a court in said foreign jurisdiction
b. Summons by publication in a newspaper of general
circulation abroad where the unlicensed foreign corporation
has its domicile or last known address – this must be
accompanied by proof of service through registered mail of
the summons
c. Electronic mail – facsimile – cannot use personal e-mail to
serve summon it must be the court’s e-mail
d. Any other means with leave of court

If all these are not available, file the case abroad

Not Doing Business

Not required to obtain a license
To GR: ✗
sue XPNs: ✓
1. Isolated transactions
- The suit must arise out of a contract or transaction that is not directly related to its main
body of its business
- It is not the number of transaction but the nature and purpose of the transaction that
determines whether he is doing business or not

- Case
- A foreign bank not licensed to do business in the Philippines was able to negotiate
and extended a loan to a domestic company. All the phases of the contract were
done abroad and the proceeds of the loan were forwarded by the foreign bank to
the local deposit of the domestic borrower. Unfortunately, the domestic borrower
reneged on its obligation to pay back so it negotiated for a loan restructuring.
Foreign corporation agreed under new conditions and terms but again the domestic
borrower failed to pay the loan. Foreign bank files an action in court for collection of
sum of money against the domestic borrower. Borrower moves to dismiss on the
ground that the foreign bank is doing business without license. The foreign bank
raised the defense that the suit arose from a single loan contract and it cannot be
deemed doing business on the basis of one loan transaction it granted.
- SC: The business of banking is the business of lending and therefore, when it
extended that single loan to a domestic borrower; it was already engaged in
business. The suit was barred.

- Case
- Import-export transaction – Importer: Japan; Exporter: US – the exporter loaded the
imported cargo on board a vessel, the vessel en route to its final destination in
Japan. Vessel made a stop at the port of Manila. Because of negligence of the
arrastre operator, vessel and cargo got burned. The importer and exporter sued the
arrastre operator for negligence to recover both the vessel and cargo on board.
Arrastre operator filed a motion to dismiss citing that these foreign corporations are
84
 not licensed to do business in the Philippines, so they cannot file a case here in the
Philippines.
- SC: The suit is not related to any of the business of these foreign corporations. The
suit arose from a quasi-delict liability enforced against the arrastre operator – this is
an isolated transaction – it should be given due course

2. May sue to protect their intellectual property rights (IPL)

- IPR is a right in rem and not required to be registered
- Cases involving infringement or unfair competition may be litigated without necessity of
showing capacity to sue by virtue of a license
- International norm is that intellectual property rights must be afforded protection
(members of WTO)
To be ✗
Sued Lack of jurisdiction

85
Securities Regulation Code

Republic Act No. 8799

86
 Table of Contents
CHAPTER I – Title and Definitions ............................................................................................... 88
I. Securities Regulation Code ................................................................................................ 88
II. Capital Markets ................................................................................................................. 88
III. Section 31 – Definition of Terms – Securities................................................................... 88
IV. In securities transactions, there are 2 stages regulated by the SRC: (1) Primary Market
Transaction .............................................................................................................................. 89
V. How does SRC Regulate Primary Market Transaction – Registration Statement (Sec. 8),
Chapter III ................................................................................................................................ 90
VI. In Securities Transactions, there are 2 staged regulated by the SRC: (2) Secondary
Market Transactions ................................................................................................................ 92
CHAPTER II – Securities and Exchange Commission ................................................................ 95
I. Securities and Exchange Commission (SEC) .................................................................... 95
II. Section 5 – Powers and Functions of the Commission...................................................... 96
III. Section 7 – Reorganization .............................................................................................. 96
CHAPTER VII – Prohibition on Fraud, Manipulation and Insider Trading................................ 104
I. Insider Trading ................................................................................................................. 104
II. Tender Offer ................................................................................................................... 105
III. Margin Trading .............................................................................................................. 106
IV. Fraudulent Transactions and Manipulations of Security Prices ...................................... 107
V. Short Sale/Short Order.................................................................................................... 109
CHAPTER XIII – General Provisions .......................................................................................... 110
I. Settlement Offer ............................................................................................................... 110

87
 CHAPTER I – Title and Definitions

I. Securities Regulation Code

- Primary legal and preparatory framework for capital markets in the Philippines

II. Capital Markets

- Capital Markets: Serves a function similar to all other financial markets in the Philippines

- Several Capital Markets in the Philippines

A. Financial Capital Market

- Where you go in case you need money for your business
- This serve as a financial intermediary – because they make available money, property or goods
to those in need from those who are in need of them – like banks

- Capital Market is further divided into 2:

1. Equities Market
- The underlying or principal asset sold here would be SS
- Provisions on the Corporation Code regarding transfer of SS

2. Debt Market
- What is being sold or traded here are debt instruments – the purpose of the debt is to raise
capital or finance a business
- Provisions on the Corporation Code regarding the power to create or increase bonded
indebtedness

- Capital market is governed by SRC that is why the primary object in the capital market are the
so-called securities – SS or debt instruments are securities
- Reason why there is a need to regulate this: To prevent unscrupulous parties from committing
fraud by promising high rate of return of investment – this is also called the Blue Sky Law
- Blue Sky because they promise very high impossible returns as high as the sky only that
once they get what they want they will leave you with nothing – run away with your money
- The SRC requires that no security shall be sold or offered for sale in the Philippines without a
permit or license from the SEC

B. Non-Capital Market
- You have the so-called commodities market (agricultural products), foreign exchange market –
no centralized location
- Forward Contracts – contract for the sale or delivery of future things – like oil companies
- This is not governed by the SRC

III. Section 31 – Definition of Terms – Securities

“Securities are shares, participation or interests in a corporation or in a

commercial enterprise or profit-making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in character. It includes:
a. Shares of stock, bonds, debentures, notes, evidences of
indebtedness, asset-backed securities;
b. Investment contracts, certificates of interest or participation in a
profit sharing agreement, certificates of deposit for a future subscription;
c. Fractional undivided interests in oil, gas or other mineral rights;
d. Derivatives like option and warrants;
e. Certificates of assignments, certificates of participation, trust
certificates, voting trust certificates or similar instruments;
88
 f. Proprietary or non-proprietary membership certificate in
corporations; and
g. Other instruments as may in the future be determined by the
Commission.”

- Securities may partake of shares, interests or participation of a:

1. Corporation
2. Commercial enterprise
3. Profit-making venture
- Whether such share, interest or participation is evidenced by a written contract, agreement, or
even if the same is electronic or digital in form
- However, the definition under Sec. 3 go further by enumerating kinds of securities – such
enumeration shall not be considered as exclusive – this is a definition by enumeration
- Examples of Securities:
1. Shares of stocks – called equities
2. Bonds – debts instruments
3. Investment contracts
4. Similar profit sharing agreement
- The term securities should be understood in the sense that it is the Howey Test – it is essentially
an investment contract

A. Howey Test
- It is pursuant to the decision of the United States SC in the case of Howey v. SEC

- The following are the elements of securities or investment contract:

1. That there is investment of money or property
2. In a common or commercial enterprise
3. Where the investor is led to expectation of profit
4. Solely out of the efforts of another or third persons
- Meaning, an investment or securities transaction leads the investor to an expectation of passive
income or profit – the income here is passive because there are third persons who ensure that
such profits are gained and such gained profits are distributed to the various investors – all those
who buys SS in a company are investors, they are entering into an investment contract because
they are led to an expectation of profit – SH are investors and investors are risk takers

IV. In securities transactions, there are 2 stages regulated by the SRC: (1) Primary Market
Transaction
- Initial regulations of these contracts take place in the so-called primary market transactions
- Who are the parties in a primary market transaction:
a. Issuer
b. Initial subscribers of the security
c. Underwriter – between the 2

- Example: Pogi, Inc. after it recently amended its AOI to increase the capital stock – there are
now 100M new common shares available for disposition. The issuer here the maker or originator
of the security. Pogi, Inc. is the issuer. It wants to raise, out of the 100M common shares, 1B
worth of new capital within a period of less than 6 months. For Pogi, Inc. to sell all 100M new
shares – it may not have the time or inclination to do so and it wants to do a public offering of
such – what it can do is to appoint an underwriter under an underwriting agreement so that the
underwriter will guarantee that all or a portion of the 100M new shares will be sold within a
definite period. The 10M new shares are the securities.
- The business of underwriting can be performed by investment houses as well as universal
banks

89
 - BDO Capital, Inc. entered into an underwriting contract with Pogi, Inc. as the underwriter,
BDO guarantees that all 100M new shares of Pogi, Inc. shall be sold within 3 months. Thus,
BDO capital will sell or offer for sale to its own customers said 100M new shares under a so-
called Initial Public Offering (IPO) of those securities in the form of SS. They are being sold
publicly because the sale or disposition is being done unlimited to the existing SH of the
corporation – anyone who may have the money to buy can buy.
- Let us say the agreement is that within 3 months, BDO shall be able to sell those 100M
shares and generate in favor of Pogi the desired target of 1B. Within the 3-month period, out
of the 100M shares, only 90M were sold. But despite best and diligent effort, 10M are unsold.
For the 90M shares sold through BDO – A, B, C and so on are now considered as SH –
Under a clearing agency, their names will now be entered in the books of Pogi, Inc – they are
required to pay under the terms of IPO (usually in cash). The compensation of BDO is
entitlement to a commission.
- The 10M unsold – because BDO underwrote the entire 100M SS, it is now obligated for the
unsold shares – BDO capital is now the SH of Pogi, Inc. – in banking, a universal bank has
the power of a commercial bank as well as an investment house and every licensed
investment house does not just engaged in the business of underwriting but also it engages
in the business of securities dealer – this means BDO would be interested in acquiring this
shares so that in some future time, it can resell them (buys SS for its own account and in the
ordinary course of business)

- From the time that Pogi, Inc. made available for sale or disposition those 100M shares and up to
the time the IPO period expired – the parties are the issuer and the subscribers
- From issuer to subscriber – that is a primary market transaction – it refers to the original
disposition of the security
- Under the Corporation Code, from corporation to another under a subscription contract – that is a
primary market transaction

V. How does SRC Regulate Primary Market Transaction – Registration Statement (Sec. 8),
Chapter III
- First requirement is that no security of any class or kind may be offered for sale in the Philippines
without a registration statement
- Registration statement is an application filed by the issuer with the SEC to obtain a license or
permit to sell the security publicly
- Example: Before Pogi, Inc. can offer these 100M new shares to the public, it must comply with a
registration statement

A. What must be contained in the Registration Statement:

- There must be a complete and detailed historical and financial information regarding the issuer
and the security sought to be offered publicly – describe who is the issuer; how long has it been
in business; kind of business; who are its officers and directors; what is his financial condition,
etc.

B. Why is there a need for a registration statement?

- To inform the investing public regarding the issuer and the security
- The SRC does not guarantee that investors will generate profit out of their investment
- What the SRC guarantees is that the investing public is duly informed of all material facts relating
to the issuer and security to enable the investing public to make presumed investment decisions

C. Disclosure Regime
- It mandates that all necessary and relevant information for investment decisions are available to
the public
- How: Through requiring disclosures in every step of the securities transaction

90
D. Registration Statement must be accompanied by the Following:
1. Resolution of the BOD of the issuer authorizing the filing of registration statement
2. If any, a due diligence
- In securities transaction, a due diligence is actually an independent third party review of the
financial condition of the issuer and the security
3. Written consent of the SH if the public offering includes securities currently owned by person
other than the issuer
4. Prospectus
- This is the selling document that is circulated to the public
- SEC must approve the contents thereof

E. Who must Sign the Registration Statement

- This is a legal duty
- Chief/Principal Executive Officer (CEO/PEO), Principal/Chief Operating Officer (POO/ COO),
Principal of Chief Administrative Officer (PAO/CAO), Chief/Principal Financial Officer
(CFO/PFO), Comptroller and all other persons who have contributed to any portion of the
registration statement
- Why: Because they are the persons who can be held liable for any false or misleading statement
contained in the registration statement or for omitting a material fact or statement in the said
document

F. Section 13 – Rejection and Revocation of Registration Securities

- Once the registration statement is submitted to the SEC – the power of the SEC to consider the
same is discretionary – the SEC may reject the same

- Grounds for Rejection:

1. Grounds based on Status or acts of the issuer

a. That the issuer is either judicially insolvent
b. That the issuer has committed, is about to commit or committing a fraudulent transaction
c. That the issuer has disobeyed any order of the SEC related to any of its securities
d. That the issuer has made any false or misleading statement regarding the security

2. Grounds arising from the issuers officers and directors if any of them should have been
convicted by a final judgment for the following crimes:
a. Involving moral turpitude
b. Fraudulent transactions
c. Has been legally restrained from engaging in any securities transaction
- Such conviction by final judgment may come from a domestic or even foreign tribunal

3. Grounds based on the statement itself

- SEC will reject the registration statement if it contains false or misleading statements or omits
to state a material fact

- If rejected, the issuer or any of its Directors, Officers, Employees or Agents cannot sell or offer
for sale the security

- If the SEC approves the registration statement, the SEC will now issue in favor of the issuer a
license or permit to sell – this is the time that the issuer can publicly offer for sale the shares and
enter into an underwriting agreement with an underwriter or make any transaction related to that
original disposition
- The security now covered by the permit will now be entered by the SEC in its own registry of
securities
- All licensed securities must be entered in this registry of security

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 G. Section 9 – Exempt Securities
- Exempt from registration requirements – thus no permit is necessary from the SEC before these
securities may be sold in the Philippines

1. Those issued by the Republic of the Philippines or any of its agencies, instrumentalities,
including LGUs – Sovereign Bonds
- Treasury bonds – issuer is the Republic
- Code NGO v. BIR
- The Peace Bonds offered for sale and actually sold by Code NGO belong to this category
of exempt securities because, while the Philippine Government does not directly issue
them, the same guarantees them. In order for these Peace Bonds to be sold, there is no
necessity for them to be covered by the SEC – because sovereign bonds are licensed by
a different government agency – Department of Finance through the Bureau of Treasury

2. Securities Sold by a Foreign Government with who the Philippines enjoy diplomatic relations
and that also allows securities of the Philippine government to be sold in its territory
3. Securities Regulated by the Following Agencies:
a. HLURB – Contracts to Sell subdivisions or condominium units – you are already paying
for a unit when the building has not been constructed yet – this is an investment
b. Insurance Commissioner (IC) – Insurance contracts – this is an investment because
premium payments earn dividends overtime
c. BIR – Tax credit certificate (TCC) – these are overpayments to the BIR
d. Similar specialized government agencies

4. Issued by banks except its own SS

- Saving account is an investment contract – passive investors because the bank pays you
interest
- When a bank offers for sale to the public its own SS, it must obtain a permit not just from
BSP but also from the SEC

5. Securities which are authorized for sale but are by a court pursuant to a bankruptcy or
insolvency proceedings or other similar proceedings
- Increase of capital stock in FRIA – those new SS for a corporation under rehabilitation are
already judicially authorized

- These are exempt from registration because there is no need for a registration statement to
protect public interest because of the status of the issuer as a trusted entity and that the security
is not speculative in character – return to investor is somewhat guaranteed

- Non – speculative: The return to investor is somewhat guaranteed.

VI. In Securities Transactions, there are 2 staged regulated by the SRC: (2) Secondary Market
Transactions
- Under the SRC, all transactions involving securities shall likewise be registered.

A. Requirements:

1. Registration
- All transfers involving or arising from secondary market transactions must in themselves be
registered because of the disclosure regime enforced by the SRC so that people can keep
track of the changes in the ownership of the registered security.

- Two kinds of registration under the SRC:

92
 a. Original registration; and
b. Subsequent registration
- Akin to registration of property.

- Exempt transactions: Registration is not required due to:

a. Limited scope of the offering;
b. Does not involve the public;
c. Small amount involved
- Examples:
a. Pre-incorporation subscriptions
- Means by which the corporation obtains the minimum capitalization. Atleast 5
incorporators are required; hence, the public is not involved.
b. Pre-emptive rights offering
- The offerer is the corporation and the offeree is its own existing shareholders. The
public is not involved here as it is limited to within the corporation.
c. Stock dividends:
- When declared, the unrestricted retained earnings is transferred to the capital stock.
The public is not involved here because only the shareholders are entitled to
dividends.
d. Any transfer involving 20 persons or less:
- Same threshold in banking; not an offering to the public
e. Brokers’ transactions:
- Because they do not do it for their own account. The corporations involved are the
one who are required to report the same.
f. Sale of securities to any of the following:
i. Banks
ii. Investment houses
iii. Other trusted entities

2. The secondary transactions are likewise required to be reported to the SEC.

- Who must comply with the reportorial requirements: all public companies as defined under
the SRC

- A public company is any of the following:

a. Any corporation where any class of its securities are covered by a registration statement
with the SEC (all with permits or license to sell)
b. All companies whose shares are listed in any exchange
c. Those which have assets of atleast P 50 million, with atleast 200 shareholders on record
owning atleast 100 shares in their names

- Philippine Veterans Bank v. SEC

- The reportorial requirements is applicable even if the entity is a GOCC with original
charter.

- Union Bank v. SEC

- SC: whenever a bank issues its shares of stocks, it is now governed by the provisions of
SRC. Hence, all reportorial requirements shall be filed with the SEC and not only with the
BSP.

B. Stock Exchange
- Stock Exchange = public market for shares of stocks. Transactions here are secondary market
transactions since the issuer corporation is no longer involved. The parties here are existing
holders of the security in favor of buyers. This is still governed by the SRC.

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- Secondary market transaction under the Corporation Code is acquiring shares of stocks of an
existing shareholder. This is done by indorsement coupled with delivery.

- Securities broker:
- A person, whether natural or juridical, licensed to engage in the business of buying and
selling securities for the account of others (either buyer or seller).
- They are required to incorporate.
- And for them to enjoy the facilities of the Philippine Stock Exchange (PSE), they must be
members of the PSE, Inc.
- They do business through associated persons who must in themselves be licensed by the
SEC.
- The associated persons are those who are authorized to trade in the name of the broker.
They must be individually licensed. Salesmen are not necessarily associated persons.

- The transactions in the PSE are uncertificated because there are no certificates of stocks which
are indorsed and delivered. The PSE follows a digital book entry system.

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 CHAPTER II – Securities and Exchange Commission

I. Securities and Exchange Commission (SEC)

- SEC, as far as the Corporation Code is concerned, is the primary government agency that is
tasked in enforcing and implementation of the provisions of the Corporation Code
- SEC has exclusive power, authority and jurisdiction and supervision over all associations and
corporations as well as partnerships that are the grantees of a primary franchise

A. However, the SEC also grants secondary franchises to the following corporations:

1. All financing companies

- Both primary and secondary franchise of these companies come from SEC

- Financing Company: A company or entity engaged in the business of lending for agricultural,
consumer or similar loans
- Financing: A special arrangement whereby the purchase price of certain facilities or
equipment shall be advanced by the financing company payable on installment by the
borrower – aside from banks, all financing companies are required to comply with the Truth
and Lending Act

- Financial Leasing Company: A specie of financing; under the jurisdiction of the SEC – This is
a company advances the purchase price of certain machineries or equipment for purposes of
agriculture, industrial or commercial purposes and the borrower is given one or two or more
options: Metrobank v. CA
a. To pay rental on a regular or periodic basis
- At the end of the period fixed in the contract, the machinery or equipment shall be
returned to the financing company
- It is an ordinary lease arrangement
- The repairs will be paid by the financing company and not the borrower
b. Traditional financing scheme
- The borrower shall pay the purchase price back at periodic installment
- At the end of the period fixed in their contract, ownership shall vest upon the borrower
- If the machineries are in need of repair in the course of the period of the contract, the
repair is paid by the borrower because it is the borrower’s asset

2. Investment Houses
- Under Investment House Act, these are entities engaged in business of underwriting
securities
- Business of underwriting: Guaranteeing the sale of any class of securities within the
Philippines

3. All Entities Engaged in Securities Transactions under the SRC

- This entities are:
a. Securities Dealers: Those who buy and sell securities for their own account
b. Securities Brokers: Those who buy and sell securities for the account of others
c. Clearing and Settlement Agencies: Those who effect payment as well as delivery of
securities including SS between buyers and sellers (SRC)
d. Third Party Custodian: Those who are entrusted with either the digital or physical
certificates of stocks needed in securities transactions effected through a stock exchange
- Example: Bought SS through the stock exchange but you bought them without any intent
of buying and selling them in the ordinary course of business – you want them as a long
term investment – you will not meet the seller instead a clearing and settlement agency
will register your name in the books of the corporation as the buyer and current owner of
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 the property and pursuant to SEC rules, a third party custodian will be in-charged of
getting your certificate of stock from company secretary and delivering it to you physically
e. Stock exchanges as well as all the SROs under the SRC
- Stock Exchange: A public market for buying and selling of SS
- Self-Regulatory Organization (SRO): This may pertain to stock or non-stock corporations
engaged in providing facilities for a stock exchange (Philippine Stock Incorporated in the
Philippines operates and administers the PSE)

II. Section 5 – Powers and Functions of the Commission

A. Issue Certificates of Incorporation

B. Suspend or Revoke Certificates of Incorporation

- In revoking certificates of stocks the SEC has concurrent power with the special commercial
courts depending on the ground

C. Investigate Compliance or Violations by Companies of the Corporation Code and All other
Special Laws placed under its enforcement

D. Pursuant to its Investigatory Powers, it can Issue Sub Poena

- Both duces tecum and ad testificandum
- If the SEC finds that there is indeed violation, it can only impose administrative fines and
sanctions
- SEC does not have prosecutorial powers

E. Policy-Making Body
- Most important power of the SEC
- SEC has the power to promulgate rules and regulations

III. Section 7 – Reorganization

- Looking at the provisions of RA 8799, it reorganized and restructured the Securities and
Exchange Commission from its former structure designed under PD 902-A
- RA 8799 did not completely repealed PD 902-A
- Although PD 902-A created the SEC, RA 8799, merely reorganized the SEC and part of such
organization under RA 8799 is to focus the function of the SEC into capital market development
and part on the focus of capital market development is to remove from the SEC its quasi-judicial
powers
- Thus, the various cases formerly cognizable by the SEC under Sec. 5 of PD 902-A have now
been transferred, pursuant to RA 8799, to the RTC – that is why instead of quasi-judicial, these
are now judicial controversies or cases

A. The following are various categories of cases covered by the so called transferred jurisdiction
(Sec. 5, PD 902-A)
- Special Commercial Courts (SCC)
- SEC has no quasi-judicial powers they are now judicial and special jurisdiction was conferred
under RA 8799 to the SCC, which is a branch of the RTC
1. Devices or schemes amounting to fraud or misrepresentation committed by the corporation,
partnership or association, its directors or officers, SH or members or their agents and
associates
2. All cases involving intra-corporate relations
3. All cases arising out of hiring or termination as well as election or appointment of corporate
officers
4. All petitions for suspension of payments by corporations

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 - However, under Financial Rehabilitation and Insolvency Act (FRIA) – the 4th cognizable
cases cognizable under the SCC is not limited to suspension of payments but petitions under
the FRIA – petitions under the FRIA but applicable to corporate debtors

B. SCC has the Power to Hear and Decide all so-called Intra-Corporate Controversies
- It is an intra-corporate controversy when:
- While it may appear on its face that it is an ordinary civil action, if the 2-pronged test is
applicable then it is the RTC that should exercise jurisdiction as a special commercial court –
it does not belong to the general jurisdiction of the MTC or RTC – usual rules on jurisdiction
shall not apply for this category of cases – because, first and foremost, under the 2-pronged
test, plaintiff and defendant has an existing intra-corporate relationship
- In order to vest jurisdiction upon the SCC, that intra-corporate relationship must have been
present and existing at the time when the dispute or controversy arose between the parties
- There is an intra-corporate relationship when:

1. Relationship Test

a. Corporation vis-a-vis:

i. State/Republic/Public – with respect to its franchise

- To the State: A quo warranto petition for the revocation of the certificate of
incorporation – involuntary dissolution – this falls under the jurisdiction of the SCC

- To the Public: Special jurisdiction is necessary in instances when the corporation or

its agents are guilty of committing corporate fraud, devises of schemes amounting to
fraud or misrepresentation even if the victim of such fraud is a SH or one who is a
complete stranger to the corporation – for as long as the complaint specifically avers
fraud committed by a duly registered corporation or any of its duly constituted agents
or officers, whether the plaintiff or complainant is a SH or a stranger – the SCC must
exercise jurisdiction – it is the corporate fraud itself that characterizes special
jurisdiction
- At present, M Incorporated (pyramiding). They did not deliver the money they
promised. You tried to recover your capital but they cannot be found. You will now
file an action for recovery of money or property. But since the fraud was
committed against you by a duly registered corporation, it is the SCC that has
jurisdiction.
- The amount involved in cases of corporate fraud is immaterial – always with the
SCC

- Aleje v. Shape, Inc.

- Shape, Inc. is a duly registered non-stock, non-profit company. It is a sports,
physical fitness and recreational corporation. It operated a gymnasium
equipped with facilities for fitness. In order to support the expenses incurred
by the company for the operation of such, it required membership. It had a
long list of members who were required to pay an initial membership fee and
regular monthly dues from all the members. One of its members was elected
as treasurer of the company. While acting as treasurer, he used company
money and property to put up a branch in another part of the city. He also
called this branch Shape, Inc. That branch solicited and maintained its own
members’ list – they also paid initial membership dues and regular monthly
dues. All profits and income from this branch were not submitted to the main
office instead he misappropriated them. Upon knowing such, he was
terminated as a member and company treasurer but he continued operating

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 said branch and opened another branch. A case was filed against him for
recovery of public funds and property.
- SC: This is an intra-corporate controversy despite the fact that the defendant
is no longer a member or a treasurer of the company. First, because of the
presence of intra-corporate relationship between the parties at the time the
controversy started – he was still a treasurer and a member. When he
continued such fraud, he used company property to entice unwitting members
of the public to become members of the same. He did not tell them that he
was merely operating on his own and that they are not formally members of
the main corporation. He perpetrated a fraud upon the public and he used the
corporation as a device to continue such fraud. This case belongs to the SCC.
- All civil actions for recovery of money and property or for specific performance for
a fraud committed by a company must be filed with the SCC.

- Example: Pyramiding scams - Fraud was perpetrated or continued by the

corporation or any of its known associate, then the action to redress the fraud is
an intra-corporate controversy

ii. SH or members
- Under the relationship test, to confer special jurisdiction upon the RTC, there must
exist an intra-corporate relationship at the time of the commission of the act
complained of

- Stock Corporation: When does an intra-corporate relationship begin between the

corporation and a SH – how a SH becomes a member of capital stock – 3 ways:
1) By subscription
2) By purchasing re-issued treasury shares
3) By acquiring SS of an existing SH

- Case:
- The following subscription contract was executed between the corporation and
another. For 100 SS at 100/share coming form the capital stock of the
company payable through a potestative condition (“kapag ako’y
nakapagpahuli na ng isda”)
- SC: This contract is void because the obligation to pay the subscription price
is entirely dependent on the sole will of the debtor – whether or not she will
caused fish to be harvested is left entirely to her discretion and therefore it is a
purely potestative one and a potestative condition makes a contract void
- If this is decided today when the corporation now judicially demands the
payment of the SS – it is the regular court that has jurisdiction – there is no
intra-corporate relationship because the contract is void because of the
potestative condition – the contract was never perfected at all

- Example: 1,000 SS at 1,000 per subscription – under the subscription contract,

the entire balance shall be payable upon call by the BOD. A call was made but
subscriber refuses to pay. Corporation decided to file a judicial action for
collection of sum of money from the subscriber. Is there an intra-corporate
relationship between the corporation and the subscriber?
- None. Nothing was paid yet. The intra-corporate relationship has not yet
begun.
- Intra-corporate relationship, for purposes of fixing the jurisdiction, it begins
during the name of the subscriber is entered in the stock and transfer book of
the corporation.

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 - If the subscriber’s name is not indicated in the stock and transfer book –
collection of sum of money must be filed before the regular courts –
depending on the amount

- Example: If the name of the subscriber has been entered in the stock and transfer
book and that the entire consideration has been paid. Upon full payment, the
subscriber can now demand for a certificate of stock. The corporate secretary
refuses to issue one. Subscriber who has paid in full filed a mandamus. Is this
intra-corporate or not?
- Yes. Certificate of stock is not material for the exercise of a subscriber of his
right as such for as long as he is already fully paid; it becomes a matter of
right for the subscriber to be issued a certificate of stock.

- Example: A certificate of stock was issued to X. X now sells the shares to Y. Valid
method to transfer this is indorsement + delivery. The agreement between X and
Y is that the purchase price shall be paid by Y in 2 installments. There was initial
payment by Y so X indorsed the same but does not deliver the same until the final
payment is given by Y. Y now pays the last installment but X still refuses to deliver
the certificate. Y now requests the corporate secretary to register the stocks in his
name but the corporate secretary refuses.
- This is under the jurisdiction of the regular court because Y is a complete
stranger. Under the Corporation Code, to bind the corporation, there must be
indorsement + delivery. Y’s remedy is against X

- Embassy Farms v. CA
- Agreement between X and Y is for the sale and transfer of the SS covered by
a certificate. X owns 90% of the outstanding controlling stock of the company.
The agreement is that X shall deliver the 90% plus several other parcels of
land belonging to X (not to the corporation) in favor of Y. It is also stipulated
that Y shall pay in installments. Once Y has paid the earnest money, he will be
given control of the business operated by the company. Y did not pay. X now
files an action to rescind their agreement on the ground of non-payment. Is
there an intra-corporate relationship?
- SC: None. The company here was improperly impleaded because the
company here is not privy to the contract between X and Y. As such, it is an
ordinary breach of contract case between the seller and buyer. The mere fact
that the buyer was given temporary control over the business does not make
him a SH of the corporation specially that he has not yet paid in full.

- Razon v. IAC
- Pursuant to their conditional sale, buyer must first pay in full the contract price
before the seller will indorse the certificate of stock. Upon down payment, the
unendorsed certificate will be delivered to the buyer as a token of trust
between them, but the seller will not yet indorse it. The buyer will merely have
physical possession of the certificate. Full payment was already made but
seller refuses to indorse. Buyer presents the certificate of stock to the
corporate secretary. Is there an intra-corporate relationship?
- SC: None. Transfer is binding upon the corporation if there is indorsement +
delivery. The transfer was never complete under the law. There is no prima
facie title over the certificate.

- Example: Indorsed in blank and physically delivered (no specific transferee)

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 - Effect: The certificate of stock is converted into a street certificate (whoever holds
it is presumed to have acquired title over the certificate; same with bearer
instrument)

- Case: Transferee pays in full and transferee presents the certificate to the corporate
secretary. The secretary refused to register the transfer on the following grounds:
- Violates the right of first refusal of the secretary (private agreement between the
transferor and the corporate secretary);
- SC: Despite the private agreement between the transferor and the corporate
secretary, that agreement did not divest the transferor of the right to sell the
shares. The remedy of the secretary is to file a case against the transferor. He
cannot refuse the registration because there was already an indorsement and
delivery. Since the transfer is complete, registration becomes ministerial.

- Example: A (registered owner). B stole the certificate and forged the indorsement. B
presents it to the corporate secretary for registration. The secretary refused to
register. B filed a case. Is there an intracorporate relationship?
- None. He did not acquire title to the certificate. The case is not within the
jurisdiction of the commercial court.

- Example: B (the thief) indorses and delivers the certificate to C, an innocent

purchaser for value. C presents the certificate to the secretary. The secretary refuses
to register. C appealed to the Board. The Board upheld the denial. C filed a
mandamus case. Is there an intracorporate relationship?
- None. C never became the owner of the shares because the certificate originated
from one who has no authority over the same.

- How to end the intra-corporate relationship? (here, the commercial court losses
jurisdiction over the case)

- Spouses Turner v. Lorenzo Shipping

- Here, the corporation refuses to pay the shareholders because of the absence of
unrestricted retained earnings. When Lorenzo Shipping realizes unrestricted
retained earnings, the spouses filed a civil action for collection.

- Is there still an intra-corporarte relationship? When does the intra-corporate

relationship between the dissenting stockholder and the corporation end?
- From the time that the certificate of the dissenting stockholder are cancelled in the
stock and transfer books.

iii. Directors/Trustees/Officers/Corporate Agents

- Dismissal of the corporate officers – If the controversy revolves around the legality of
the dismissal, the intra-corporate relationship remains until the final determination by
the court. The case is still cognizable by the special commercial courts.
- As corporate officers, they are entitled to security of tenure.

- Who are corporate officers?

1. Those whose positions are provided for by law (President, Secretary, Treasurer,
and the members of the Board);
2. Those created by the AOI of BL

- PSBA v. SEC
- During the stockholders meeting, elections were also conducted. After the
election, the Board immediately assumed office. As their first act, they declared all

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 other management positions in the corporation as vacant (termination). Hence, a
case for illegal dismissal was filed by the vice – president whose position was
affected by the said declaration.
- SC: Even if the position is not the AOI or BL of the corporation, there still remains
an intra-corporate relationship because by way of further allegations in his
complaint, he alleged that he was appointed as the Vice-President on the
condition that he is a stockholder. Meaning, for as long as stockholders are
qualified to a particular position, the Board would give preference to those inside
the company. Aside from that, his complaint also alleged that his position was
declared vacant by an illegal act of the Board because the meeting was without
notice (illegal meeting). Hence, he has the right to maintain an action against the
Board. (Filing the case as a stockholder)

b. SH or members among themselves

2. Nature of the Controversy Test

- After satisfying the relationship test, prove now that the nature of the controversy requires the
exercise of such special jurisdiction. Because even if there is an intra-corporate relationship
between the parties, if such relationship is merely incidental to the controversy, it is not an
intra-corporate controversy.

- Would the case survive in the special commercial court without the intra-corporate
relationship?
- If no, it is not an intra-corporate controversy. If yes, it is.
- To make it an intra-corporate controversy the cause of action must pertain to the
enforcement of rights and obligations under the Corporation Code, and or the AOI or BL
of the corporation. If the cause of action is different, then regular courts have jurisdiction.

- Perrera v. IAC (nature of the controversy test)

- The corporation owned a building where it had its main office. One floor of the building is
used by the corporation as the employees’ canteen. The canteen is operated by a
canteen concessionaire who is a stockholder of the corporation. The concessionaire shall
pay regular rents and a portion of the sale. When there was failure to regularly pay the
rent, a notice to terminate and a notice to vacate was given by the corporation. The
corporation filed a case for collection of sum of money with a prayer to vacate. The
concessionaire questions the jurisdiction of the regular court raising that being a
stockholder of the corporation, then the matter should be resolve before a commercial
court.
- SC: The intra-corporate relationship here is merely incidental to the issue. Hence, the
regular court has jurisdiction over the case. What belongs to the nature of the controversy
test as to make it an intra-corporate controversy is a derivative suit.

- Example of intra-corporate controversies:

1. Action to collect balance under a subscription contract;
2. Mandamus to compel the issuance of a certificate for fully paid shares;
3. To register the transfer when the right of the transferee is not in doubt;
4. Mandamus to compel the corporation to declare dividends = this happens when the
corporation has accumulated surplus profits in excess of its subscribed capital stock;
5. Petition to conduct an election

- If the two tests concur, then definitely, it shall be the special commercial courts that shall take
cognizance of the case.

- Ang Co v. NLRC

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 - He is a stockholder of a corporation but still has a pending subscription balance (balance is
payable upon call). He was chosen as a director and president of the Corporation. He later
resigned as President. He demanded that the corporation pay him his salaries and other
money claims. The corporation ignored said demand. He then filed a money claim with the
NLRC. Does the NLRC have jurisdiction?
- If a corporate officer is not questioning his dismissal and all he is questioning is his
entitlement to his money claims, then it should be the NLRC which has jurisdiction.
- Answer if the corporation = that the corporation refuses to pay his claim because the same
was applied to his pending subscription balance. As such, NLRC dismissed the case. The
matter is an intra-corporate controversy. As such, the matter was brought to the commercial
court which however dismissed the case on the ground that since the NLRC has already
acquired jurisdiction, then it should continue hearing the case. When the matter was brought
back to the NLRC, NLRC dismissed it again. Hence, the case was brought to the SC.
- SC: The answer effectively converted the matter into an intra-corporate controversy because
there is a need to determine the validity of the set-off alleged by the corporation. The fact that
he resigned as president did not terminate his relationship with the corporation as a
stockholder. The trial court should have heard the case.

- Sunset View v. Campos

- He bought a condominium unit and pursuant to the contract to sell, he paid a part of the
purchase price and the remainder is payable by monthly installment. Even if there is yet no
full payment, the possession of the condominium was already given to him. Part of the
obligation is the payment of monthly dues. Non-payment thereof for 6 months will entitle the
seller to file an action for ejectment against the buyer. When the buyer defaulted in the
payment of the monthly dues, an action for ejectment was filed with the MTC. The defendant
questions the jurisdiction of the MTC on the ground that having purchased a condominium
unit, he automatically becomes a member of the condominium corporation (to administer the
common areas). As such, the case should be filed with the commercial court.
- SC: The SC did an investigation to determine whether there is a stipulation in the contract to
sell as well as in the master or enabling deed that in fact automatically confers membership
in the corporation in favor of every buyer. There was none. Hence, there is a need to look
into the provision of the Condominium Act. And under the Condominium Act, a buyer
becomes a shareholder of the corporation only upon full payment of the purchase price. As
such, MTC retains jurisdiction.

- QPB+7, Inc. v. Aguirre

- The corporation was formed to operate an agri-business. It bought a parcel of land for the
said business. However, after that, the corporation becomes inactive. No meeting and
election was held. The initial set of directors and officers remain the same. Until Aguirre
discovered recently that election was being conducted without him being informed. He went
to the SEC and learned that for the past three years, elections and meetings were in fact
held. He did not receive any notice for these meetings. None of the elected directors and
officers was known to him. He also discovered that the land which was in the name of the
corporation was in the possession of the persons whom he calls impostors. He then filed a
petition before the trial court for accounting, recovery of the property, and nullification of the
contract, elections, and meetings. The petition is in the nature of a personal suit to protect his
right and a derivative suit. The impostors moved to dismiss on the ground that the special
commercial court has no jurisdiction over the case because at the time of the filing of the
case, the corporation has already been dissolved by order of the SEC for failure to comply
with the reportorial requirements.
- SC: The dissolution of the corporation does not extinguish the intra-corporate relationship
between and among the parties. It is only upon final liquidation of a corporation that the
relationship dies.

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- The derivative suit (action for accounting of corporate funds and property as well as nullification
of certain contracts) is actually a suit inherent/intrinsic in the liquidation process. There is
necessity, in liquidation, to gather all assets to pay off all creditors.

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 CHAPTER VII – Prohibition on Fraud, Manipulation and Insider Trading
ITMFS

I. Insider Trading
- Criminalization or prohibition of insider trading
- There is insider trading whenever insiders buy or sell securities while in possession of material
non-public information

A. Insiders refer to:

1. Issuer of shares of stocks

2. Directors or officers of the issuer when by virtue of their position they come into possession
of information which are not generally available to the public
- See: Section 31 and 34 of the Corporation Code

3. Any person who by virtue of said relationship or past relationship has access to material and
non-public information

4. Officers or employees of:

a. Government agencies (e.g. SEC)
b. Clearing agencies (these are entities engaged in the business of delivering securities for
settlement or payment)
c. Stock exchanges
d. Or other similar self-regulatory organizations that may have access to material non-public
information
e. Constructive insider: Any person who obtains material non-public information from any of
the above and this may include but is not limited to:
i. Spouse (legitimate or common law)
ii. ii. Relatives up to the 4th degree of consanguinity or affinity

B. Material information
- Any information that will affect or likely to affect the price of the security on being made public.
This refers to objective facts such as:
1. Any propose or plan merger of consolidation;
2. Infusion of new capital;
3. Increase or decrease in the capitalization;
4. Losses or profits in the operation of its business;
5. Election of officers or directors
6. In the case of companies engaged in wasting assets, discovery of new mines or minerals
7. Other similar information

- Under the SRC, all material information are required to be covered by a disclosure statement
filed with the SEC and publish in a newspaper of general circulation in the Philippines.

- The disclosure statement under the SRC is different from that of the Truth and Lending Act.

- Disclosure statement is also required for facts of special significance: These are facts that a
reasonably prudent person would consider important in making an investment decision (to buy,
to sell, or to hold on to those shares)
- Example: Apple Company (Steve Jobs)

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 - Strong v. Rapide
- The respondent here is the President of the company. He was appointed by the company to
negotiate with the Republic of the Philippines. The Philippine government offered to buy all
the lands belonging to the company. As a negotiator, he knew that the government is very
willing to buy the lands which would actually have a positive effect on the company as the
market price of the shares will eventually increase upon consummation of the contract. He
then instructed his brokers to buy shares of stocks of the existing shareholders of his
company and not to his disclose his identity to the sellers. After the contract, Rapide owned
80% of the shares.
- SC: Rapide is guilty of insider trading.

C. Defenses for insider trading:

1. That the material non-public information was not known to the insider at the time of the
transaction;
2. That the insider disclose the material non-public information to the other party; or
3. That the insider had reason to believe that the other party to the transaction also knew of the
material non-public information

- Insider trading warrants the imposition of imprisonment of 7 to 21 years or a fine of not more than
P 1 million, but civilly, triple the amount of the transaction.
- Correlate with the duties of the officers and directors of the corporation not to take advantage of
information which come into their knowledge by reason of their position.

II. Tender Offer

- A tender made by a person or a group of persons acting in concert with one another to acquire
the controlling stockholdings or equity in a public company.
- It is one means by which a person (either a stockholder or third person) may gain control over
the management of the company by purchasing the OCS within the company.
- A tender offer may either be voluntary or mandatory.

A. Voluntary
- May be made at any time and for any reason

B. Mandatory

- Made in the following instances:

1. Whenever a person or a group of persons acquire in a single transaction atleast 15% of the
outstanding controlling equity in a company. If they acquired 30% (may be in a series of
transactions) over a 12 -month period, this is known as a creeping transaction.
2. Acquires more than 50%, whether in a single or a series of transactions regardless of the
stand of the company

- Current Rules on Mandatory Tender Offer: (pursuant to the rule-making power of the SEC)

- If a person or group of persons acquires in a single or series of transaction atleast 15% of the
outstanding equities in public company, then a declaration shall be filed with the SEC. the
declaration is tantamount to disclosure. The declaration, however, will not yet trigger a
mandatory tender offer.

- When is mandatory tender offer triggered? = When a person or group of persons actually
acquire atleast 35% of the outstanding voting equities in the company or acquires such
percentage of the outstanding voting stock as would influence and control the company.
(Even below 35% for as long as it translates to control)

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 - Example: Coca – Cola Company sought to buy a controlling interest in Cosmos Bottling
(under a Concepcion group of companies) without need of entering into a formal merger.
Both of their stocks are listed in the stock exchange; hence, both are public companies. Offer
of Coca – cola is to buy the shares at market price. The Concepcion family refused. Coca –
cola made another offer at P 5 per share. Again, it was refused. Next offer was P 20 above
market price. The final price was around P 70. This offer was accepted. (320 million shares
were then bought by Coca – cola). Thereafter, the members of the Concepcion family were
removed in the Board since they were no longer shareholders of Cosmos. Coca – cola then
placed its own directors in the Board without the necessity of calling for a meeting.

- The aim of the mandatory tender offer is to afford the minority stockholders of the public
company an equal opportunity to withdrawal under the same terms and conditions and for
the same price as the controlling shareholders

- A tender offer is not an unlimited tender offer. The acquirer can fix the time within which the
tender offer may be exercise by the minority shareholders. The customary period is 30 days.
When the tender offer is mandatory, it must be publish once a week for three consecutive
weeks in a newspaper of general circulation before the offer period begins.

- Before the CEMCO v. National life, the interpretation of the mandatory tender offer is limited
to direct acquisition.

- CEMCO v. National Life

- CEMCO is a stockholder of Union Cement (UC). It owns 30% OCS. The controlling state
in UC is held by UCHC. UCHC is owned by Atlas (21%), Bacnotan (30%), and CEMCO
(9%). CEMCO is both a direct and an indirect stockholder of UC. After a series of
transactions, both Atlas and Bacnotan sold their shares in UCHC in favor of CEMCO.
Hence, CEMCO now owns 60% of UCHC. National Life is a minority and direct
stockholder of UC. It demanded that CEMCO make a mandatory tender offer under the
SRC.
- SC: A mandatory tender offer covers both direct and indirect acquisitions in the absence
of any provision under the SRC as to how control is gained in one company.

- If the mandatory tender offer is violated, the SEC will not approve the acquisition by the
acquirer and it has the power to invalidate it. This is to protect the minority shareholders.

III. Margin Trading

- Margin trading is highly regulated
- Margin trading is buying and/or selling shares of stocks on margin, meaning, on credit furnish by
the broker to the customer or investor.

- Example: X = investor and customer of broker A; he places an order of 1 million shares from
Pogi, Inc.. Usually, he must already pay the same. P 10 per share. Hence, pay 10 million. But X
only has P 1 million. X predicted that the amount of the shares will double the following year.

- Broker A can open a margin account for X (this must consist of a margin and debit balance =
credit advance or lent by the broker for the customer). Margin is the amount of cash deposited by
the customer to the broker to effect the transaction. This is a collateralized loan, the shares being
the collateral.

- Brokers earn by commission.

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 - The following year, the prediction of X came true. The shares are now at P 20 per share. X can
then get P 20 million from the sale of said shares.

- As a whole, he makes a profit of 10 million (20 million – 9 million loan – 1 million initial
investment)

- If the prediction however proves to be wrong, then cut the losses by selling all shares
- The regulation of the margin trading is to protect the credit and banking system.

A. How is margin trading regulated:

- By prescribing maximum or ceiling to the lending or credit provided by the broker to the customer
(not the margin deposit)

- Maximum: The debit balance or credit cannot exceed 65% of the current market price of the
security (based on the trading price at the stock exchange) or 100% of the lowest market price
over the last 36 months but not more than 75% of current market price, whichever is higher

- Example: P 10 per share at trading price = 10 million for 1 million shares = can only lend P 6.5

- Example: In the last 36 months, the lowest market price of Pogi shares is P 2.00 per share. =
only 2 million can be lent

- Between the two examples, the lending can be up to P 6.5.

B. If no deposit can be furnish, then the following are the options:

1. Reduce the volume of the transaction; or
2. Not execute the transaction at all

IV. Fraudulent Transactions and Manipulations of Security Prices

- There are various ways by which market manipulation may be committed
- The persons interested in performing market manipulation are either:
1. Those who have existing shares that they want to unload or sell off at a higher price; or
2. Those want to acquire more

A. Various Forms of Manipulation of Security Prices

1. By giving the false appearance of active trading of security

- Refers to dormant equities or SS
- It might trigger manipulation when suddenly there is someone who bought in bulk a
previously inactive SS

2. By artificially increasing the price in order to effect a purchase thereof; or artificially

decreasing the price in order to effect a sale thereof

3. By disseminating or stipulating false information regarding the security

- Example: BW Resources Case

- It has its SS listed in the Philippines Stock Exchange (PSE) but for along time its shares
were dormant – meaning the existing SH even of they wanted to sell cannot sell because
no one was willing to buy. However, BW Resources was a company headed by the best
friend of then Pres. Estrada – Dante Tan. Dante Tan was able to make known publicly
that he was a close friend of the Pres. Estrada. To give the appearance of active trading
over BW Resources shares, he went on public relations campaign so that slowly his
company will be known. Dante Tan made the following press release: (1) BW Resources

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 has applied a gaming license with PAGCOR; (2) He is applying the first online gambling
franchise in favor of BW Resources; (3) He will go into gambling partnership with Stanley
Ho; (4) Stanley Ho will invest in a joint venture with Dante Tan not on land-based casinos
but on floating casinos; (5) Stanley Ho came into the Philippines and they went to
Malacañang. From 1.00 per share, BW Resources’ shares went up to 140.00 per share.
When Stanley Ho went bank to Macau, he announced that he has no plans in investing in
the Philippines. At this point, BW Resources’ shares steeply went down.

4. Wash Sales
- Period is 60 days (under Tax Code)
- Under SRC, a wash sale involves a transaction or series of transactions involving the same
security of the same size or volume without a change in the beneficial ownership

- Example:

Time Broker A Broker B Price

(All on the same day)
9:15 Sell 10.00
9:30 Buy 12.00
Investor X
Owner of 1M shares of Pogi, Inc. 10:00 Sell 15.00
10:30 Buy 20.00

11:00 Sell 22.00

11:30 Buy 30.00
- The seller is X and the buyer is also X. There is no change in the ownership. This is
illegal. The purpose here is to artificially increase or decrease – it is artificial because
share prices must be market driven – it depends on legitimate demand or supply. Here
there is no legitimate demand.

5. Illegal Match Order

6. Painting the Tape

- If the wash sale also has the result of an artificial price, whether increase or decrease, the
manipulation of the security price during the trading day
- At the time that there was a piece of paper generated by the machine, they erase to place
the artificial price and this will become known to other brokerage houses and announce to
their own customers – no legitimate demand

7. Marking the Close

- Manipulating the security prices at the end of the trading day
- Ends a few minutes before 12 noon in the PSE ends
- The last price at the end of the trading day will be the opening price the following day – either
to make it lower so that they can buy more or to make it higher so that they can sell more

8. Hype and Dump

- This is part of the strategy to give the false appearance of active trading in dormant security
– make a press release – circulate false information regarding the security just so you can
generate activity
- When you hype, there is a tendency that people will buy more and increase the price – it
because there is a limited supply, when you reach the level that you are comfortable with,
this is the time you dump the market with the shares – there is now an over supply making
the prices decrease

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 9. Squeezing the Float
- Float means the availability to the public
- When you hold, you stifle the supply side while the demand side is increasing – the tendency
is to increase the price
- The existing SH has the capacity to squeeze the float

10. Daisy Chain

- Series of wash sales

11. Boiler Room Operations

- This is a form of aggressive marketing of securities usually employing fraudulent promises to
lure investors – like using scare tactics

V. Short Sale/Short Order

- When you short a security, it means that you are selling the security which does not belong to
you – meaning the security is borrowed by the investor without knowledge of the true owner
- This contradict the fundamental rule in securities transaction that you buy low so that you can
sell high – in this case the investor buys high and then sells low
- This is usually done in conspiracy with brokers – because they hold in their custody the
securities purchased by their customers until such time that the loan is fully paid
- Example: X studied that Pogi, Inc. shares will go down. He borrowed Pogi shares from Broker A
which is owned by Y who is abroad. Y did margin trading and so his shares are in the custody if
A. X sells the 1M shares of Y for 25M. After 6 months, it went down to 15.00 from 25.00. This is
the time that he will purchase again for 15M only. He gained 10M from shares he does not own.
- What if his prediction is wrong – there will be a lost and the likelihood is that the security will no
longer be returned and an innocent 3rd person will be prejudiced

- The only agency that can investigate or make formal inquiries regarding such violation is the
SEC and it can invoke all of its powers in order to determine violations and impose administrative
sanction is whenever necessary
- All civil or criminal prosecutions involving violations of the SRC must come from an investigation
coming from the SEC
- Nonetheless, when a person or group of persons, natural or juridical, broker, dealers or
investors, are the subject of an inquiry by the SEC, they may stop said investigation by making a
so-called settlement offer to the SEC

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 CHAPTER XIII – General Provisions

I. Settlement Offer
- It is a combination of a consent decree and nolo contendere plea

- Consent decree: Usually in administrative investigations conducted by the federal commission in

the US if a person is found to be guilty of wrongdoing, such person may enter into such – I agree
or consent to any judgment being impose upon me (summary judgment) – this is not admission
on liability you just want to do away with litigation
- Nolo Contendere: This is used in criminal cases; neither a guilty or not guilty plea; to avoid
negative publicity brought about by long trials – I will not contend or contest – also not an
admission of criminal guilt

- Under settlement offer, the person under investigation may make an offer to the SEC which may
include a promise not to commit similar acts in the future as well as payment of a sum of money
to SEC
- The sum of money is not in the nature of a fine
- When settlement offer is received by the SEC the SEC must desire to meet based on the
following:
1. Timing – if you make a settlement offer too late in the course of investigation and a decision
is about to be reached, SEC will accept it
2. Public Interest – If there is no material interest in the public confidence in the stock market
caused by said wrongdoing, the SEC may accept the settlement offer

- If settlement offer was accepted by the SEC, SEC must publish it and in the absence of any
objection, the SEC will conform said offer biding upon the offeror – so the offeror now must
comply with whatever is stipulated and then pay sum of money to SEC
- The acceptance of the settlement offer will stop the inquiry by SEC
- The money paid by the offeror to the SEC becomes public and not money to be paid to the victim

- Whether acceptance of the SEC of the settlement offer is tantamount to dismissal of criminal
cases – not yet settled by any jurisprudence – Ma’am Lulu: No – what evidence will you have, all
the records are with the SEC – under seal against the public – it takes a court order to unseal

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Financial Rehabilitation
and
Insolvency Act of 2010

FRIA

(RA No. 10142)

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 Table of Contents
CHAPTER I – General Provisions ............................................................................................... 113
I. FRIA ................................................................................................................................ 113
II. Old Insolvency Law: Remedies for individual and corporate debtors ............................... 113
III. Remedies of Corporate Debtors under the FRIA: .......................................................... 113
IV. Corporate debtors under FRIA: ...................................................................................... 113
V. Since corporations exist for profit or gain, the operation of their business may be beset by
internal or external problems. ................................................................................................ 113
CHAPTER II – Court-Supervised Rehabilitation ........................................................................ 114
Remedies of Corporate Debtors ............................................................................................. 114
I. Petition for Corporate Rehabilitation ................................................................................. 114
II. Petition for Approval of Pre-Negotiated Rehabilitation Plan............................................. 121
III. Petition for Assistance in Out of Court/Informal Restructuring Agreement (OCRA) ........ 121
IV. Petition for Liquidation ................................................................................................... 122

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 CHAPTER I – General Provisions

I. FRIA
- It completely repealed the old insolvency act, which came into force in the Philippines in 1902.

II. Old Insolvency Law: Remedies for individual and corporate debtors
1. Filing of a petition for suspension of payments (a.k.a. technical insolvency) = allowed only if
the debtor has sufficient assets to cover all the liabilities but cannot pay the obligations as
they fall due because of lack of liquidity; the objective here is to defer and to re-schedule
payments
2. Filing a petition for insolvency = the objective of insolvency is to effect a pro-rata distribution
of the assets of the debtor and to comply with the preferences and concurrences of credit
under the NCC

- In either petition, it shall be filed with the RTC of the place where the debtor resides.

III. Remedies of Corporate Debtors under the FRIA:

A. Petition for Corporate Rehabilitation

1. Voluntary
2. Involuntary

B. Petition for approval of a Pre-Negotiated Rehabilitation Plan

C. Petitions for OCRA

D. Petition for Liquidation

1. Voluntary
2. Involuntary

IV. Corporate debtors under FRIA:

A. Juridical Debtors
- Partnerships, corporations, associations duly registered with the SEC and even sole
proprietorships which are franchised by their respective LGUs and duly recorded in the DTI

B. Individual Persons
- Natural persons who operate business in their own name

V. Since corporations exist for profit or gain, the operation of their business may be beset
by internal or external problems.

A. Internal problems include:

1. Mismanagement
2. Inability to expand its operations or market based

B. External problems include:

1. Political events;
2. Radical adjustments as to the foreign currency of value of goods and services

- General notion: An uncompetitive enterprise shall be removed in the market place.

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 CHAPTER II – Court-Supervised Rehabilitation

Remedies of Corporate Debtors

I. Petition for Corporate Rehabilitation

- The objective here under the old SEC Rules is to prevent a closure of the business of the
corporation whole it is undertaking means and method to address it financial difficulties.
- RA 8799: Petition for corporate rehabilitation is now under the jurisdiction of special commercial
court
- The petition is by law a proceeding in rem.
- Rehabilitation refers to the restoration of financial solvency and economic viability of a
corporation where there is reasonable hope or expectation that its creditors will recover more by
continuing the business rather than liquidating or dissolving it. The corporation remains open for
business despite the pendency of the petition in court.

A. Two Kinds:

1. Voluntary
- This is a debtor-initiated petition.
- It is the financially distressed corporation itself that is filing the petition.

- Who is a debtor?
- Any of the juridical entities.
- But for purposes of corporate rehabilitation, it may include a group of companies who are
affiliated with one another.
- If it can be shown that the financial difficulties of one of the member group shall affect the
other companies within the same group, then the petition may cover all of them even
those who are not suffering from financial difficulties Because it may happen that the
close affiliation of these companies may pertain to certain commonality of ownership in
the assets.

- The petition shall be approved by majority of the Board and 2/3 OCS.

- It must be alleged in the petition that the corporation is suffering from insolvency and that it
consistently failed to answer for its outstanding obligations as they fall due.

- The petition itself must already be accompanied by:

a. A draft or proposed rehabilitation plan with a list of nominees for appointment as receiver;
b. Financial statement;
c. Tax clearances from the BIR and BoC; and
d. All other annexes that are considered part and parcel of the petition

2. Involuntary
- Creditor-initiated petition

- To vest legal personality to file the petition, the following must be alleged and proved:

1. The creditors or group of creditors hold at least 1 million worth of liabilities or claims
against the corporation; or That their aggregate claims is equivalent to at least 25% of the
subscribed capital stock of the corporation, whichever is higher (non-compliance of this
requirement shall cause the dismissal of the case because the petitioner is devoid of any
right to initiate the proceeding)

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 - Example: SCS of the corporation is valued at 100 million representing 10 million shares
(25% of that is 25 million)
- Creditors X, Y, and Z = combined claim of 30 million, then X, Y, and Z can already file
the petition for corporate rehabilitation.

2. It must likewise be alleged that there is no substantial issue in fact regarding the
outstanding liabilities of the corporation;

3. That the corporation is remiss in paying its obligations to various creditors at least 60
days prior to the petition; and

4. That another creditor/s not the petitioners have initiated foreclosure proceedings or about
to perfect a lien over the assets of the debtor.

- Between ordinary and unsecured creditors and preferred and secured creditors, the former will
ordinarily file a petition for corporate rehabilitation.

- Once the petition has been filed in court, the court must immediately make an ex-parte
determination as to whether the petition is sufficient in form and in substance.
- If it sufficient in form and in substance, it must now issue a commencement order.
- On the other hand, if it finds that the petition is deficient either in form or in substance, then the
court can simply issue a corrective order to be addressed to the petitioner specifying the
rectifications to be made to the petition. It will require an amended petition.

- One common ground for a corrective order is the failure to attach a rehabilitation plan in the
petition.

B. Rehabilitation Plan
- This is a detailed plan specifying the various methods by which the rehabilitation or restoration of
financial viability of the corporation may be achieved.
- It must be based on logical assumptions as to how profit may be obtained to address the
condition of the corporation and to eliminate or reduce its current debts.

- It may include the following mechanisms or modes:

1. Debt restructuring agreement

- Form of objective novation; can reduce the debt or the interest or imposing a different rate of
interest, etc.

2. Debt condonation
- Gratuitous abandonment of the debt. It may pertain to accrued penalties and interest or
principal, or both

3. Debt for equity swap

- Dacion en pago; special form of payment whereby the monetary debts of the corporation is
paid by way of its own shares of stocks delivered to the creditors. Make the creditors as
shareholders.

4. Corporate restructuring or reorganization

- Example: lose some branches, eliminate non-profitable business, minimize the number of
corporate managers, retrenchment of employees, sale of all or some of the assets no longer
needed for the business, sale of the business or parts of the business, or proposal for the
infusion of new capital

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 5. White knight
- Infusion of new capital
- An entirely new entity or individual may express interest in bringing in new money to the
corporation in exchange for shares of stocks; a professional investor.
- The money is not necessarily from the white knight. Usually it is from investment baking
(consortium of lenders).
- The infusion of capital may also come from existing shareholders.

Voluntary Petition

In re: The Petition for Corporate

Rehabilitation of Pogi, Inc.

Pogi, Inc.,
Petitioner

Involuntary Petition

In re:
____________________________________

Creditors X, Y, and Z,
Petitioners

v.

Pogi, Inc.,
Defendant

C. Commencement Order
- Deemed effective from the date of issue.
- This is required to be publish is a newspaper of general and national circulation in the Philippines
once a week for two consecutive weeks after its issuance.
- Without the publication, the proceedings cannot commence formally to trial.

- The order must contain, among others, the following:

1. Set the case for initial hearing with a statement that all creditors of the debtor corporation
must file verified claims with the court at least 5 days before the said hearing.
- As a summary proceeding, the notice by publication vest jurisdiction upon the rehabilitation
or special commercial court not just jurisdiction upon the matter but also jurisdiction over all
persons.
- Should there be any creditor holding at least 10% of the total liabilities of the corporation, that
creditor is entitled to separate notice as a matter of right (separate summons). If the creditor
is not furnished with any notice, he can contest any matter taken up during the proceeding.

2. Declaration or pronouncement that the corporation is now under rehabilitation.

- Thus, such judicial pronouncement affects the legal capacity of the debtor corporation
because it can no longer freely enter into transactions.

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 - The commencement order serves as a valid and legal basis to declare null and void all
unauthorized or voluntary unilateral actions or acts made by the debtor from the moment that
the proceeding started. It is under court supervision.

3. Appoint a rehabilitation receiver.

- This may be a natural or juridical entity with known skills and expertise in the industry where
the business of the corporation is engaged in, whose character is beyond reproach and is not
suffering from a conflict of interest.
- The rehabilitation receiver is the extension of the court, hence, considered as an officer of
the court whose duty is to balance the competing interest of the creditors and debtor.

- The rehabilitation is suffering from a conflict of interest if:

1. He or she is the owner of the business; or
2. Shareholder of the corporation; or
3. One of the corporation’s creditors; or
4. Had such relationship with the debtor within 5 years prior to the filing of the petition; or
5. Relative by affinity or consanguinity of any of the above within the 4th degree;
6. In case of juridical entity, it must not be an underwriter of the securities of the debtor or its
creditors

D. Receiver
- The receiver must be capable of the exercise of independent judgment in order to prevent
allegations of fraud or partiality. He must not be in a position as to be materially influenced by
either party.
- There must be an investigation by the court to determine whether or not the nominees for
rehabilitation receiver are suffering from any of the disqualifications under the FRIA.

- The one who qualifies and is willing shall be appointed by the court as the receiver. Mere
appointment does not automatically vest powers upon the appointee because he is still required
to take an oath.

- The receiver has a series of positive legal duties under the FRIA, like:

1. Filing an initial report that would serve as a basis whether or not the rehabilitations court can
give due course or dismiss the petition. The report is due 20 days from the initial hearing.

2. To meet with creditors. At least one meeting for each class of the creditors to obtain the
approval of the creditors to any propose rehabilitation plan.

3. The most important duty of the receiver is to draft and finalize the rehabilitation plan so that it
may be approved by the creditors and confirmed by the court. Finalization of the
rehabilitation plan is by the receiver, approval thereof is by the creditors, and confirmation of
the plan is by the court.
- Once approved and confirmed, the plan must now be implemented. The plan is legally
binding upon all involved whether or not consented to by all.

4. The receiver shall ensure that the duly approved plan is properly implemented. Nonetheless,
the receiver will not directly manage or operate the business of the corporation because the
corporation still has its Board of Directors. The receiver, however, has the power to review
the action of the Board and recommend nullification or annulment of any transaction entered
into by the Board that would obstruct, delay or violate the rehabilitation plan.

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 - The receiver is entitled to compensation from the moment of assumption to the office. He is
also allowed to engage the services of professionals to assist the court in the proceedings
(akin to that of trial by commissioners).

- From the moment of appointment, all the assets of the corporation will be placed under
custodia legis and under trust by the receiver (fiduciary).

5. Prohibition imposed upon all suppliers of goods and services to the debtor from withholding
or stopping said supplies and delivery. This is because the corporation is still open for
business.

6. Authorize the payment of administrative expenses (expenses incurred in the filing and
continuation of the court proceedings, expenses requiring payment incurred in the course of
business as well as professional fees of the receiver and the professionals engaged by the
receiver)

7. Stay or suspension order = equivalent to an injunction or restraining order.

- This covers the following:
a. All actions whether judicial or otherwise for the enforcement of claims against the
debtor.
- A claim is a demand for money or otherwise against the debtor or its property whether
liquidated or unliquidated, fixed or contingent, matured or unmatured, including claims
against the corporation by the Republic of the Philippines for taxes, tariffs, customs
fees or duties.

- Conserve all present assets of the debtor for the benefit of all creditors and to prevent any of
them from taking said assets to the detriment of the others.

- The rehabilitation court shall notify the other courts (taking cognizance of cases involving the
debtor) regarding the rehabilitation proceeding. The petitioner (voluntary or involuntary petition)
has the duty to inform the rehabilitation court of the pendency of such cases. The parties
involved in the pending case/s shall file their respective claims in the rehabilitation court
(consolidation of all claims in one proceeding).

- The suspension of all actions has several exceptions like – not covered by suspension order:

1. Actions that are already pending before the SC;

2. All other actions pending against sureties (personal liability) of the debtors or those solidarily
liable with the debtor;

3. Actions against issuers of letters of credit;

- They are usually banks
- The other party here is the debtor – the debtor of credit is for payment of goods that are
usually imported abroad and those goods are necessary for the rehabilitation process – to
maintain the business of the corporation as an ongoing concern – that is why those are not
stopped

4. Criminal Cases against the Directors, SH, Officers of the Debtor

- Panlilios v. CA
- Fanillo, et. al. are accused for violation of the SSS Law for non-remittance of SSS
contributions of both employees and employer. They are members of the BOD and
Officers of Puerto Azul Land Inc. It was discovered that over 10 years the employer and
employee contribution to the SSS were never remitted. While the criminal case was

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 already pending, Puerto Azul underwent rehabilitation. The Panlilios sought the outright
dismissal of the criminal cases against them citing that since there is now corporate
rehabilitation ongoing, then the corporate rehabilitation proceedings pose a prejudicial
question to their criminal liability because the reason why they did not remit the
contributions is that the corporation did not have cash.
- SC: There is no prejudicial question because the mere fact that they deducted from the
salaries of their employees and the fact that they are registered with the SSS means that
they have the mandatory obligation, regardless of the financial condition of the
corporation, to remit said contributions.

5. Civil Cases initiated by the Debtor

- They may be allowed by the court
- The suspension is only over all actions for enforcement of claims against the debtor
corporation – so where the corporation is the defendant – but if it is the debtor who is the
plaintiff at the discretion of the rehabilitation court, it may be exempt form the coverage of the
suspension order

6. All other cases pending before highly specialized administrative or quasi-judicial tribunals
- At the discretion of the rehabilitation court
- If the rehabilitation court finds that these specialized administrative or quasi-judicial bodies
can resolve the claim more fairly, expeditiously, then the rehabilitation court can yield its
authority – this constitutes as a waiver on the part of the rehabilitation court for highly
specialized courts such as the Insurance Commission (dispute involving an insurance policy
or claim by the debtor) – rehabilitation court can waive its jurisdiction momentarily – or in
favor of the SEC or NLRC
- This is discretionary upon the rehabilitation court
- Without the express waiver by the rehabilitation court, all these cases are deemed
consolidated in the rehabilitation proceedings

- The enforcement of any judgment, attachment or provisional remedy against the debtor
- Even if there is already a writ of execution issue against the debtor corporation at the time
when the commencement took effect, no levy on execution, sale on execution must be
conducted – because if sale was remove, such property will be removed from the reaches of
the rehabilitation court – that is why there shall be no enforcement even of final judgment

- All forms of voluntary payment made by the debtor in favor of any of its creditors
- In fact, these are prohibited
- The only payments allowed, once the proceedings begin, would be the so-called
administrative expenses – expenses incurred in the ordinary course of business
- Extrajudicial claims or enforcement or remedies against the debtor are likewise prohibited
and suspended
- Example:
- As of December 5, 2015 – NLRC already rendered a final and executory judgment
awarding 30M to several allegedly illegally dismissed employees of Pogi, Inc. – Effect of
the stay order on this judgment by the NLRC is that it cannot be enforced from December
15. The illegally dismissed workers entitled to the award will have to file a claim with the
rehabilitation court. However, because the award is already final, it will be considered as
an undisputed claim – workers do not have to prove their right over the same before the
rehabilitation court
- For the current employees of Pogi, Inc. the schedule of payment of salaries is every 15 th
and 30th of the month. As of December 15 (first day of effectivity of commencement
order) should the employees be paid their salaries? – No payment shall be made if the
expense or obligation is incurred prior to commencement date

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 - Payroll for December 31 (from period of December 16-30) – it must be paid –
administrative expenses
- Rentals due from Pogi, Inc. for the period January 1, 2015 up to December 31, 2015 –
the lease contract stipulates that the rentals shall be paid per annum – should it be paid?
– No because it was incurred prior to the effectivity of the commencement order
- Present rentals should be paid if authorized by the rehabilitation court because they
are in the nature of administrative expense
- You represent a creditor-bank – that holds a mortgage right of a land belonging to Pogi,
Inc. The maturity date of such loan is November 30, 2015. After the period expired
without payment, the bank has the right to either demand cash or foreclose the mortgage.
Can you file for extrajudicial foreclosure of the mortgage? – Under Act No. 3135 – after
December 15 no more – you must now file and prove your claim over the property with
the rehabilitation court

- For purposes of commencement or stay order, all creditors are considered on equal footing – all
of them will be affected by the prohibition of transfer of assets, payments and suspension of all
their claims – this is to prevent one unscrupulous creditor from having unnecessary advantage to
the detriment of the others
- With all the assets reserved and in tact, it have the rehabilitation receiver the opportunity to craft
a rehabilitation plan
- From the time of filing, a rehabilitation plan must be approved and confirmed within 1 year – if
none is approved within said period, the proceedings are deemed terminated – the petition must
be dismissed by the court – dismissal on said ground will now restore the creditors to all their
prior rights and claims – all proceedings must now be resumed
- Once a petition for rehabilitation is filed, all taxes, fees and duties due to the Philippine
Government are waived for that 1 year period – the period is directory rather than mandatory

- While ideally, the rehabilitation plan, being reflective of collective nature process, must be
consented to by at least majority of the creditors per class should any of them object to any
proposed rehabilitation plan recommended by the receiver to the court, their objective may be
overridden, and the rehabilitation plan confirmed and implemented

- Pacific White v. Puerto Azul

- Despite the serious objections posed by the creditors against the rehabilitation plan
submitted for approval, the court confirmed it. Puerto Azul never gained profit that is why it
filed a petition for its own rehabilitation. By the time that a corporate rehabilitation was filed, it
was already indebted to 60B accumulated over 30 years. Initially, a group of creditors were
able to negotiate certain terms for the payment of their claims against Puerto Azul and was
allowed by the rehabilitation court. When a more comprehensive rehabilitation plan was
recommended by the rehabilitation receiver and approved by the court, the group of lenders
objected citing that their constitutional right (non-impairment clause) was violated. The
rehabilitation plan imposed upon these creditors a 50% cut on the principal; condonation of
all accrued penalties and interest; for the amounts remaining a new interest rate is allowed
by the court – 2% per annum for the first 5 years as penalty - for the last 5 years, 5% per
annum – all of these obligations were given a new payment period; and only when there is
cash available – because pay first the administrative expenses.
- SC: We are not talking of a law here, the rehabilitation plan is a measure approved by the
rehabilitation court. That is why it is improper to raise the constitutionality of the rehabilitation
plan on the non-impairment clause because they are questioning a law but a rehabilitation
plan. Assuming that indeed that there is impairment of existing obligations of contracts – the
FRIA was intended to serve public policy and public interest and therefore, private
contractual rights in favor of these group of creditors must always give to the greater
demands of the police power of the State – the power of the State to enacts laws or
measures to serve the common good and general welfare – this is serve when the

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 corporation rehabilitation plan is to be closed, hundreds of employees and their respective
families will be rendered without livelihood – the State itself will be deprived of potential
source of taxes and other revenues and the business to be closed will open for the creditors
to have the company pay without any rational allocation or distribution. Thus, even objections
of these creditors, they must accept the rehabilitation plan.

Express Investment v. BayanTel

- Two of the most salient provisions in the rehabilitation plan are: (1) For the group of foreign
creditors be allowed to take 77% of the common and outstanding stock of BayanTel in exchange
for payment of debt; (2) Abide by the pari passu provision in the rehabilitation plan. For the
second agreement, pari passu means equity in equality – it is commonly used as a principle in
insolvency proceedings whereby all creditors shall be treated alike and on equal footing in the
distribution of moneys and assets of the debtor. Since the debtor is already insolvent, the
objective of pari passu is to pay all creditors regardless of class by distributing those assets pro
rata so that secured ad preferred creditors will lose those securities and preferences and they
will stand side by side with ordinary unsecured creditors – disregards preferences and
concurrence of credits. These foreign banks objective to the second agreement stating the pari
passu violate their security rights – because they also held in a separate agreement the security
over above 80% of all assets of BayanTel.
- SC: Nullified the first agreement because as a telecommunication company, it must abide by the
citizenship requirements. For the second, applying the pari passu principle, it serves general
welfare and common good better than allowing these group of creditors to maintain and enjoy
their securities to the detriment of other creditors of BayanTel.

- Rehabilitation plan is a summary proceeding in rem. After the confirmation and approval of the
rehabilitation plan, all orders by the court may be issued ex parte.
- Until such time that the corporation is rehabilitated or restored to financial viability, in such a case
the court will issue a termination order.
- If the rehabilitation plan is not successfully implemented, the court will likewise issue a
termination order to convert the proceedings into a liquidation petition.

II. Petition for Approval of Pre-Negotiated Rehabilitation Plan

- Less hostile
- Before going to court, the debtor and the creditors have already finalized extra-judicially and
among themselves a rehabilitation plan – this is tantamount to approval of the court of a
compromise agreement

- For judicial approval – it must be alleged and shown that the pre-negotiated rehabilitation plan is
with the consent of the debtor and creditors representing 2/3 of the total liabilities, provided that
the 2/3 includes more than 50% of secured and 50% of the unsecured creditors
- Example: 30B outstanding liabilities of Pogi, Inc. A holds 20B with security – various real estate
mortgages. B and C hold 2.5 B each. The remaining 5B is to various hundred creditors. The
parties to the negotiated rehabilitation plan are Pogi, Inc. (debtor) and A. Should the court
approve it?
- No. The 2/3 does not include the unsecured creditors.
- Assuming the minimum requirements are present, the court shall likewise issue, upon approval
of the petition a commencement order
- This is the same legal concept as the commencement order in a court supervised
rehabilitation – binding upon all even those who objected or even those who did not
participate

III. Petition for Assistance in Out of Court/Informal Restructuring Agreement (OCRA)

- Actually a piecemeal judicial intervention
- They still are negotiating – they are still in the middle of negotiating a rehabilitation plan

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 - The policy of the law is to encourage such out of court to settle any dispute among the parties
- Parties to the negotiation are the debtor and the creditor

- Forms of Assistance the Law Gives the Parties Negotiating under OCRA

1. The law allows them a so-called “stand still”

- This is similar to an injunctive period
- It has the same effect as a commencement order
- During the stand still period, which is 120 days, none of the creditors of the debtor can
enforce or perfect a claim of lien against the debtor – similar to a status quo order because
should any creditor start claiming debt or requiring payment of enforcing mortgage rights –
then the other creditors who are still in the midst of negotiating with the debtor would be
affected – it would render useless any potential restructuring agreement
- The stand still may be considered binding upon all creditors for as long as it is published and
it is agreed upon by 50% of the secured and 50% of the unsecured creditors
- However, if during the stand still period there is restructuring agreement or rehabilitation plan
that is undertaken by the parties, the court can only recognize it if the OCRA is with the
consent of the following:
a. Debtor
b. Creditors representing 67% (2/3) of secured as well as 75% (3/4) of unsecured for as
long the totality is at least 85% of all creditors – totality of the claim that they have against
the debtor-corporation as against the totality of the obligation
- For the ongoing creditors, the parties to the ongoing negotiation must be approved of the
50% of the unsecured and 50% of the secured – there shall be a stand still among them –
once the stand still agreement is in place, it shall be published and it shall be effective for a
period of 120 days – so that they can complete their negotiation – if during the 120-day stand
still period they come up with an OCRA, the OCRA is binding upon all of them for as long as
it is consented to by the debtor and creditors representing 67% of secured as well as 75% of
unsecured for as long the totality is at least 85% of all creditors
- Once these minimum requirements are met, the publication of the OCRA makes it binding
upon all parties concerned, whether or not they took part on the OCRA negotiations
- Should any of them refuse to abide by the OCRA the court may issue a so called “cram-
down”
- Being forced to accept it

IV. Petition for Liquidation

- This is court supervised liquidation

- How may the petition for liquidation of a corporation come about? 2 Ways

1. When a petition for rehabilitation is converted by the court into a liquidation petition

2. By a separate and distinct petition originally filed with the court

- This may either be:

a. Voluntary
- It is debtor-initiated
- It must be through a majority vote of the BOD of the debtor-corporation and 2/3 of the
OCS – secretary certificate must be attached
- Allegation: When the corporation is no longer able to discharge its obligations as they fall
due

b. Involuntary
- It is creditor initiated

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 - Requirement: Creditor or group of creditors holding at least 1M or at least 25% of the
equivalent of the subscribed capital stock, whichever is higher
- Allegations: (1) No substantial issue of fact or law; (2) That the debtor corporation has
been unable to pay its maturing obligation for the last 180 days

- In liquidation, there is no substantial likelihood of rehabilitation of the debtor

- The only recourse here is to extinguish its right to continue the business, close, settle, wind up
said business by reason of its insolvency
- If the petition is sufficient in form and in substance, within 5 days a liquidation order shall be
issued
- The liquidation order shall state that the corporation is dissolved – can no longer continue the
business
- A liquidator must be appointed – same qualifications as a receiver except that the primary
objective of the liquidation court and the liquidator is to allocate the assets based on preferences
and concurrence of credits under the NCC and Labor Code – similar to a commencement order,
from the moment that the liquidation order takes effect (takes effect from issuance), all current
actions or pending actions against the debtor shall be suspended – the same must now be filed
with the liquidation court
- Who would be entitled to payment in liquidation: Only those creditors who have proved or
undisputed claims – those which are subject to judgment, no longer open to controversy, those
which were admitted and allowed by the liquidator

- RCBC v. CA
- If a corporation is ordered dissolved and liquidated, and its assets severely deficient to pay
all creditors, the court may order a pari passu distribution of the assets. Pari passu is equity
in equality that all creditors regardless of class or rank shall be treated alike.
- This is not as if you will disregard the preference

- Example: Total assets amount to 1B. Inclusive of the 1B are the mortgage assets amounting
to 100M subject of other secured assets. Unsecured assets 600M. If there are 12 creditors
who hold liens or securities over these 400M worth of assets – apply pari passu – they do not
really lose their preference as far as these assets are concerned they will still be the first to
be paid except that it will be distributed pro rata among them. Out of the 12 creditors who
hold 800M total. From the 1B segregate the secured assets – they are the ones with
preference. Therefore, distribute that among them proportionately – from the 800M pay them
400M from the assets, which they hold in their favor. The unpaid is 400M – add this to the
unsecured claims. Among themselves, they are equal but they enjoy priority from others.

- Alemars v. Ilbiñas
- The preferences were disregard. All were distributed pro rata.

- Property in trust held by the corporation in trust for another shall be excluded. These belong to
the beneficiary or the trustor.

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