CORPORATION

 LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    

 
burdens   on   the   corporation,   such   as   the   need   to   provide   for   a   position  of  the  stockholders  or  members  that  they  would  have  
sinking  fund  to  answer  for  the  maturity  value  of  the  bonds  and   had  if  the  indebtedness  were  not  a  bonded  indebtedness.  
the   creation   of   first   liens   of   important   assets   of   the   corporation.    
Usually   bonded   indebtedness   involve   very   large   amounts   and   E.  Sell  or  Dispose  of  Assets  (Section  40)  
the   burdens   created   on   the   operations   of   the   corporation    
usually  covers  a  long  period  of  time.   Section  40.  Sale  or  other  disposition  of  assets.  
• The  rationale  for  the  rather  strict  requirements  under  the  Code   Subject  to  the  provisions  of  existing  laws  on  illegal  combinations  and  
for   the   incurring,   creating   or   increasing   of   bonded   indebtedness   monopolies,   a   corporation   may,   by   a   majority   vote   of   its   board   of  
is  to  ensure  that  not  only  the  board  of  directors  alone  can  bind   directors   or   trustees,   sell,   lease,   exchange,   mortgage,   pledge   or  
the   corporation   to   such   burdensome   affairs,   but   that   the   otherwise  dispose  of  all  or  substantially  all  of  its  property  and  assets,  
qualified   concurrence   of   the   stockholders   or   members   should   including   its   goodwill,   upon   such   terms   and   conditions   and   for   such  
be  obtained.         consideration,   which   may   be   money,   stocks,   bonds   or   other  
• Atty.  Hofileña  à  even  without  Section  38,  the  2/3  requirement   instruments   for   the   payment   of   money   or   other   property   or  
would  still  be  necessary  because  incurring  bonded  indebtedness   consideration,   as   its   board   of   directors   or   trustees   may   deem  
is  burdensome.   expedient,   when   authorized   by   the   vote   of   the   stockholders  
3. Appraisal  Right   representing  at  least  two-­‐thirds  (2/3)  of  the  outstanding  capital  stock,  
• No   appraisal   right   is   granted   to   dissenting   stockholders   when   or   in   case   of   non-­‐stock   corporation,   by   the   vote   of   at   least   to   two-­‐
the   corporation   either   validly   incurs,   creates   or   increases   thirds   (2/3)   of   the   members,   in   a   stockholder's   or   member's   meeting  
bonded  indebtedness  since,  the  granting  of  such  appraisal  right   duly   called   for   the   purpose.   Written   notice   of   the   proposed   action   and  
under   such   circumstances   would   drain   the   corporation   of   of   the   time   and   place   of   the   meeting   shall   be   addressed   to   each  
financial   resources   contrary   to   the   purpose   for   which   the   power   stockholder   or   member   at   his   place   of   residence   as   shown   on   the  
is   exercise   to   raise   funds   for   corporate   affairs.   Also,   the   books   of   the   corporation   and   deposited   to   the   addressee   in   the   post  
incurring,   creation   or   increasing   of   bonded   indebtedness   does   office   with   postage   prepaid,   or   served   personally:   Provided,   That   any  
not   really   go   into   the   original   intent   or   corporate   relationship   of   dissenting   stockholder   may   exercise   his   appraisal   right   under   the  
the  stockholders  or  members  with  the  corporation.  Even  when   conditions  provided  in  this  Code.  
such   indebtedness   is   not   bonded   under   the   principles   of   the    
trust   fund   doctrine,   corporate   creditors   have   priority   over   the   A   sale   or   other   disposition   shall   be   deemed   to   cover   substantially   all  
assets  of  the  corporation;  therefore,  adding  the  feature  of  being   the   corporate   property   and   assets   if   thereby   the   corporation   would   be  
a   bonded   indebtedness   did   not   really   take   anything   from   the   rendered   incapable   of   continuing   the   business   or   accomplishing   the  

 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
purpose  for  which  it  was  incorporated.   Consequently,   nowhere   is   the   consent   of   the   State   required   or  
  referred   to   under   Section   40   when   the   corporation   sells   or  
After  such  authorization  or  approval  by  the  stockholders  or  members,   disposes  of  all  or  substantially  all  of  its  assets.  
the  board  of  directors  or  trustees  may,  nevertheless,  in  its  discretion,   2. Nature  of  Transactions  Covered  2  
abandon   such   sale,   lease,   exchange,   mortgage,   pledge   or   other   • Theoretically,   there   is   no   change   in   the   basic   relationship  
disposition  of  property  and  assets,  subject  to  the  rights  of  third  parties   between  the  corporation  and  the  stockholders,  other  than  as  if  
under  any  contract  relating  thereto,  without  further  action  or  approval   the   corporation   were   again   at   the   starting   point   of   it   business  
by  the  stockholders  or  members.   life.   The   reason   why   a   stockholders'   ratification   is   required  
  when   the   board   sells,   disposes   or   encumbers   all   or   substantially  
Nothing   in   this   section   is   intended   to   restrict   the   power   of   any   all  of  the  corporate  assets  is  that  it  recognizes  the  stockholders  
corporation,   without   the   authorization   by   the   stockholders   or   right  to  the  nature  and  status  of  the  corporate  business,  as  well  
members,   to   sell,   lease,   exchange,   mortgage,   pledge   or   otherwise   as   future   developments   proceeding   therefrom,   when   they   put  
dispose  of  any  of  its  property  and  assets  if  the  same  is  necessary  in  the   their   investments   into   the   corporation.   When   the   corporation,  
usual   and   regular   course   of   business   of   said   corporation   or   if   the   through   its   board,   attempts   to   alter   or   dispose   of   such   level,  
proceeds   of   the   sale   or   other   disposition   of   such   property   and   assets   even   when   the   corporation   ends   up   with   the   same   value  
be  appropriated  for  the  conduct  of  its  remaining  business.   covering   the   cash   or   other   form   of   consideration   received   for  
  the   sale   or   disposition,   it   must   get   the   confirmation   of   the  
In   non-­‐stock   corporations   where   there   are   no   members   with   voting   stockholders.  
rights,   the   vote   of   at   least   a   majority   of   the   trustees   in   office   will   be   o Stockholders   have   a   common   law   proprietary   or  
sufficient   authorization   for   the   corporation   to   enter   into   any   beneficial   interests   on   the   corporate   business  
transaction  authorized  by  this  section.  (28  1/2a)   enterprise,   and   any   sale,   transfer,   disposition,   or  
  encumbrance   thereof   would   be   void   if   effected   by   the  
1. Nature  of  Power  1   Board   of   Directors   without   the   appropriate  
• In   other   words,   the   exercise   of   such   a   power   really   affects   the   stockholders’  approval.  
business  enterprise  level  of  corporate  set-­‐up,  an  area  much  left   • The   property   of   the   corporation   is   not   the   property   of   the  
by  the  State  to  the  judgment  of  the  managers,  and  does  not  in   stockholders   or   members,   and   as   such,   may   not   be   sold   without  
any  way  affect  or  alter  the  juridical  entity  granted  by  the  State.  
                                                                                                                                                                                                                               
1 2
 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.    Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.  
(2013  ed.).  Manila,  Philippines:  Rex  Book  Store.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
express   authority   from   the   Board   of   Directors.   Litonjua   v.   remaining   business,   since   the   sale   or   disposition   of   "all"   assets  
Eternit  Corp.,  490  SCRA  204  (2006).   or  property  means  there  is  no  remaining  business  to  conduct.2  
3. Transactions  NOT  Covered  by  Ratificatory  Vote  Requirements  1   • The   Corporation   Code   defines   a   sale   or   disposition   of  
• Section  40(4):   substantially  all  assets  and  property  of  a  corporation  as  one  by  
a. If   it   is   necessary   in   the   usual   and   regular   course   of   which   the   corporation   “would   be   rendered   incapable   of  
business  of  such  corporation;  or     continuing  the  business  or  accomplishing  the  purpose  for  which  
b. If   the   proceeds   of   the   sale   or   other   disposition   of   such   it   was   incorporated”   –   any   sale   or   disposition   short   of   this   will  
property  and  assets  be  appropriated  for  the  conduct  of   not   need   stockholder   ratification,   and   may   be   pursued   by   the  
its  remaining  business.   majority  vote  of  the  Board  of  Directors.  Strategic   Alliance   Dev.  
• There  is  a  clear  distinction  between  the  assets  of  a  corporation   Corp.  v.  Radstock  Securities  Ltd.,  607  SCRA  413  (2009).  
and   its   business   enterprise   (which   is   also   termed   as   “the   going    
concern”   in   other   disciplines),   which   the   author   would   equate   Strategic  Alliance  Dev.  Corp.  v.  Radstock  Securities  Ltd.,  
as   the   “capability   to   earn   profit   from   the   business   activity.”    
When   the   law   therefore   says   “all   or   substantially   all   of   the   Facts:   The   Construction   Development   Corporation   of   the   Philippines  
assets,”  it  means  that  what  is  being  sold  or  encumbered  is  the   (CDCP)   had   a   30-­‐year   franchise   to   construct,   operate   and   maintain   toll  
“business  enterprise,”  because  even  if  most  assets  remain  after   facilities   in   the   North   and   South   Luzon   Tollways.   Basay   Mining  
the   transaction,   the   ability   to   earn   profit   may   no   longer   be   Corporation   (an   affiliate   of   CDCP)   obtained   loans   from   Marubeni  
present.   Corporation  of  Japan  amounting  to  P10  billion,  which  CDCP  guaranteed  
4. Sale  or  Disposition  of  All  Corporate  Assets  or  Property   solidarily.   Thereafter,   CDCP   changed   its   corporate   name   to   PNCC   to  
• Such   a   sale,   disposition   or   encumbrance   cannot   be   covered   by   reflect  the  government’s  (90.3%)  shareholding  in  the  corporation.  
the  exemption  provided  in  Section  40  where  no  stockholders'  or    
members'   approval   is   necessary   because   the   sale   of   all   of   the   The   money   owed   Marubeni   remained   unpaid   and   unacknowledged   for  
assets  or  property  of  a  business  can  never  be  "in  the  usual  and   20  years.  But  in   October   2000,   PNCC   recognized   this   financial   obligation  
regular   course   of   business   of   such   corporation,"   nor   can   it   be   to  Marubeni.  Barely  3  months  after,  Marubeni  assigned  its  entire  credit  
argued  that  the  proceeds  of  the  sale  or  other  disposition  of  such   to  Radstock  Corporation  for  less  than  P100  million,  who  in  turn  sought  
property   and   assets   be   appropriated   for   the   conduct   of   its   to   collect   from   PNCC.   Eventually,   Radstock   and   PNCC   entered   into   the  

                                                                                                                                                                                                                               
1 2
 Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.    Villanueva,  C.  L.,  &  Villanueva-­‐Tiansay,  T.  S.  (2013).  Philippine  Corporate  Law.  
(2013  ed.).  Manila,  Philippines:  Rex  Book  Store.   (2013  ed.).  Manila,  Philippines:  Rex  Book  Store.  
 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)