Ecce Ancilla Domini!

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TOM Notes on the Corporation Code

and the Securities and Regulations Code
The Corporation Code 2
A. Corporation 2
B. Classes of Corporations 10
C. Nationality of Corporations 20
D. Corporate Juridical Personality 24
E. Incorporation and Organization 40
F. Corporate Powers 58
G. Board of Directors (BOD) and Trustees (BOT) [Title III] 76
H. Stockholders and Members 96
I. Capital Structure 108
J. Dissolution and Liquidation 122
K. Other Corporations 127
L. Mergers and Consolidations 145
Other matters on the Corporation Code 149
VII. Securities Regulation Code (R.A. No. 8799) 149
A. State Policy, Purpose 150
B. Securities Required to Be Registered 151
C. Procedure for Registration of Securities 154
D. Prohibitions on Fraud, Manipulation and Insider Trading 155
E. Protection of Investors 157
F. Civil Liability 159
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The Corporation Code

A. Corporation

1. Definition

CORPORATION DEFINED
1. An artificial being
2. created by operation of law
3. having the right of succession,
4. and the powers, attributes and properties expressly authorized by law and incident to its existence. (Sec. 2, BP 68: The
Corporation Code of the Philippines)

GOVERNING LAW: Batas Pambansa Blg. 68

1. [] This Code shall be known as "The Corporation Code of the Philippines” [Sec 1]
2. Effectivity: May 1, 1980.

CORPORATION vs. OTHER BUSINESS ORGANIZATIONS

1. Corporation vs. Sole Proprietorship
CORPORATION SOLE PROPRIETORSHIP

Separate & distinct juridical not an artificial being; business has no legal
personality personality separate from proprietor
created by operation of law not created by law
corporation fiction doctrine; assets and liabilities of the single proprietorship
doctrine of limited liability are likewise the assets and obligations/liabilities of
the proprietor and vice versa
JDC, Inc. vs. Defendant; Juan Dela Cruz doing business under the trade
name and style of Mabango Flower Shop vs.
Defendant (Juan dela Cruz and Mabango Flower
Shop are one and the same). In contrast with an
action involving Juan Dela Cruz himself: Juan Dela
Cruz vs. Defendant
a. A suit seeking to enforce the contractual rights of a single proprietorship, that is, collection of
receivables arising from a construction agreement, must be brought in the name of the proprietor himself.
Such suit cannot be brought either in the name of a corporation organized by the proprietor in view of
the separate personality of a corporation there being no showing that the proprietor assigned the
receivables to the corporation, or even in the registered name of the single proprietorship as a sole
proprietorship is not vested with any juridical personality to file or defend an action. Excellent Quality
Apparel, Inc., vs. Win Multi-Rich Builders, Inc.,578 SCRA (2009)
b. The doctrine of piercing the veil of corporate fiction is **applicable not only to corporations but
also to a single proprietorship as when the corporation transferred its employees to the company owned
by the controlling stockholder of the corporation and yet despite the transfer, the employees’ daily time
records, reports, daily income remittances and schedule of work were all made, performed, filed and
kept in the corporation. The corporation is clearly hiding behind the supposed separate and distinct
personality of the company. As such, the corporation and the company should be solidarily liable for the
claims of the illegally dismissed employees. Prince Transport, Inc.,vs. Garcia, January 12, 2011
c. When the corporation is the mere alter ego or business conduit of a person, the separate
personality of the corporation may be disregarded. This is commonly referred to as the “instrumentality rule”
or the “alter ego doctrine”, which the courts have applied in disregarding the separate juridical personality of
corporations. Where the owner of a business operating as a single proprietorship authorized her daughter to
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constitute a mortgage on the proprietor’s property to secure a loan and the **single proprietorship was
eventually formed into a corporation, the loans incurred by the single proprietorship should be
considered obligations of the corporation where the proprietor and her husband are the majority shareholders of the
corporation; both firms were managed by their daughter, engaged in the garment business and held office in
the same building owned by the spouses; the business operations of the corporations were so merged with
the spouses; the corporate funds were held by the latter with the corporation itself having no visible assets;
and that the latter benefited from the loans secured from the Bank to finance their business both locally and
abroad, then the corporation should be treated as a CONDUIT of and having merely succeeded the
single proprietorship. Thus, the obligations under the mortgage contract secured under the name of the
corporation cannot be evaded on the pretext that it was signed for the benefit of the and under the name of
the single proprietorship only. Lipat vs. Pacific Banking Corp., 402 SCRA 339 (2003)
2. Corporation vs. Partnership
PARTNERSHIP (NCC) PRIVATE CORPORATION (BP68)
With regard (created by MERE (created by OPERATION OF
to (wrt) AGREEMENT of the LAW—the CorpoCode (general
CREATION
partners, Art 1767) law) or by a Special Law; Sec 19:
created by VOLUNTARY commences only from issuance
AGREEMENT OF THE of CERTIFICATE of
PARTNERS INCORPORATION by SEC, or
in proper cases, the passage of a
special law. ALWAYS created BY
SOME EXPRESS
LEGISLATIVE AUTHORITY
either in the form of a SPECIAL
LAW or of a GENERAL LAW
number of may be formed by 2 or more formed by 5 to 15 persons, except
organisers persons [Art 1767] a corporation sole [Secs 10, 110]
right of partnership has no such right corporation has [Sec 2]
succession [Art 1828], as death of a
general partner DISSOLVES
the partnership.
powers SUBJECT TO MORE RESTRICTED because
AGREEMENT: may exercise of its LIMITED personality: can
any power provided it is exercise only the powers
authorized by the partners and expressly authorized by law or
is not contrary to law, morals, incidental to its existence [Sec 2]
GC, PO, PP. [Art 1306]
authority of MUTUAL AGENCY; each SH are NOT AGENTS of the
those who general partner can represent & corporation in the absence of
compose it
bind the partnership EXPRESS AUTHORITY
Ecce Ancilla Domini!
managemen acts through all the general
t; who partners, each of whom is
exercises its
powers? considered an agent of the
partnership unless otherwise agreed
[Art 1803]
commence upon execution of the
ment of partnership contract unless a
existence
different date is set by the partners
[Art 1784; **created from the
moment of meeting of the
minds of the persons to contribute
money, industry and property to a
common fund with the intention of
dividing the profits among
themselves.
Purpose of Articles of Partnership: To get
registration a license or permit—one
of Articles
with SEC cannot operate a business
unless registered with SEC.
term of may be formed for an
existence indefinite period [Art 1785],
unless there is a ground to dissolve it
dissolution may be dissolved by the
partners [Art 1830]
wrt (General partners are liable
LIABILITY of with their separate assets for
members
debts) partners are USUALLY
LIABLE to P creditors not
only to the extent of their
capital contribution to the firm
but EVEN WITH THEIR
OWN PRIVATE
PROPERTY
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generally acts through its BOD
[Sec 23], except for powers
reserved to SHs; or joint BOD
and SHs.
on the date of issuance of its
Certificate of Incorporation [Sec
19]; not created from the moment
the five (5) incorporators sign the
AOI; likewise it is not created
upon filing of AOI with the SEC
but it acquires legal personality
from the moment that SEC issues
a certificate of incorporation.
term specified, not exceeding 50
years; renewable [Sec 11]
cannot be dissolved without the
consent of the State [Secs
117-122]
(SH/members not liable for
obligations/debts)
stockholders (SHs) of a
corporation, after they have paid
their shares, are NOT SUBJECT
TO ANY FURTHER
LIABILITY, unless otherwise
provided by law (as when
directors/officers/agents who are
also SH can be made personally
liable for certain acts)
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wrt EFFECT CONSENT OF OTHER
OF PARTNERS NEEDED:
TRANSFER
OF (partner cannot transfer his interests
INTEREST to a third person without the
(transferabilit consent of the other partners
y of interest) [Art 1813] by reason of the
element of delectus personae,
which is inherent in a
partnership contract); Because
of the rule of “DELECTUS
PERSONARUM”, the third
person (3P) to whom a partner
has TRANSFERRED HIS
INTEREST in the P DOES
NOT BECOME a
PARTNER WITHOUT
THE CONSENT of ALL
THE OTHER PARTNERS
wrt EFFECT OF the D/B of a partner
DEATH or
BANKCRUPTCY
USUALLY CAUSES THE
DISSOLUTION OF THE
FIRM; hence there is no right
of succession
limitations there is no limitation provided
that it is not contrary to law,
morals, good customs, public
policy and public order.
wrt EFFECT as a GR, the partners are
OF ACTS OF AGENTS OF THE P; hence,
MEMBERS
acts of the partners DONE
FOR THE ACCOUNT OF
THE P are BINDING NOT
ONLY ON THE
PARTNERSHIP BUT
ALSO ON THE
MEMBERS
3. Corporation vs. Partnership vs. Joint Venture vs. Joint Account
a. It would seem that under Philippine law, a joint venture is a form of partnership and should thus
be governed by the law of partnerships. The Supreme Court has however recognized a distinction between
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CORPORATE SHARES ARE
FREELY TRANSFERABLE
without consent of other SH,
unless there is a stipulation: (SH
can transfer his shares to another
person without the consent of the
other SH, Sec 60); the 3P to
whom a SH has transferred his
shares becomes
AUTOMATICALLY A
STOCKHOLDER even
without the consent of other
SH; ***if the corp requires its
consent before sale, that’s
contrary to law, except its right
of first refusal embodied in the
AOI.
the D/B of a SH does NOT
RESULT IN SUCH
DISSOLUTION; there is right of
succession, hence, a corporation
is “immortal”— the power to
exist continuously because it can
extend the corporate term.
delimited only WON an action or
transaction of the corporation is
consistent with the powers
conferred to it by law.
whatever acts the SHs might
execute for the account of the
corporation, either
INDIVIDUALLY or
COLLECTIVELY, are NOT
BINDING on the corporation
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these two business forms, and has held that **although a corporation cannot enter into a partnership
contract, it may however engage in a joint venture with others. Aurbach vs. Sanitary Wares, G.R. No. 75875,
December 15, 1989.
b. Particular partnership distinguished from a joint venture, to wit: a joint venture (an American
concept similar to our joint accounts) is a sort of informal partnership, with no firm name and no legal personality. In a
joint account, the participating merchants can transact business under their own name, and can be individually liable
thereof. Usually, but necessarily a joint venture is limited to a SINGLE TRANSACTION, although the business
of pursuing to a successful termination may continue for a number of years; a partnership generally relates to
continuing business of various transactions of certain kind. Heirs of Tang Eng Kee vs. Court of Appeals and
Benguet Lumber Company, 341 SCRA 740 (2000)

2. Attributes of the Corporation

FOUR ATTRIBUTES OF A CORPORATION

A. It is an artificial being (with separate & distinct personality)
B. It is created by operation of law
C. It enjoys the right of succession
D. It has the powers, attributes and properties expressly authorized by law (conferred by law) or incident to
its existence

A. ON THE CORPORATION AS AN ARTIFICIAL BEING (cf. infra)

1. It is an artificial being: it exists only by FICTION OF LAW; hence, it is subject to limitations that are inherent
because of its nature;
2. What if it’s not registered? When the corporation (BB Sportswear, Inc.) which was erroneously impleaded in a
collection case was not the party to the actionable agreement and turned out to be not registered with the SEC,
the judgment may still be enforced against the corporation (BB Footwear, Inc.) which filed the answer and
participated in the proceedings, as well as its controlling shareholder who signed the actionable agreement in his
personal capacity and as a single proprietorship doing business under the trade name and style of BB Sportswear
Enterprises. Benny Hung vs. BPI Finance Corporation, G.R. No. 182398, 20 July 2010
3. **The corporation can invoke the right against illegal search and seizure (Stonehill v. Diokno), but it cannot
invoke the right against self-incrimination (PASECO vs. PCGG)

B. ON THE CORPORATION AS CREATED BY OPERATION OF LAW

1. a corporation does not come into existence by mere agreement of the parties; those desiring to form a private
corporation must comply with the requirements of the law governing its creation.
2. THEORIES ON THE FORMATION OF A CORPORATION
a. Concession theory or fiat theory: a corporation was conceived as an artificial person owing existence
through creation by a foreign power. It has without any existence until it has received the imprimatur of the
state acting according to law, through the SEC. (Tayag v. Benguet Consolidated, Inc., Nov. 29, 1968). Note: Philippine
jurisprudence adopted this theory as the underlying basis for the existence and powers of corporate entities.
Here, the life of the corporation is a CONCESSION made by the State.
b. Theory of Corporate Enterprise or Economic Unit: the corporation is not merely an artificial
being, but more of an aggregation of persons doing business, or an underlying business unit (this doctrine is
being used in support of other doctrines). Note: it recognizes the existence of a business enterprise as the
bases of several contracts and transactions apart from the issue of whether there was a duly constituted a juridical person.
c. Genossenschaft theory: treats a corporation as “the reality of the group as a social and legal entity,
independent of State recognition and concession”. (Tayag v. Benguet Consolidated, Inc., Nov 29, 1968).
3. FRANCHISES OF CORPORATIONS; KINDS OF FRANCHISE
a. CORPORATE or PRIMARY/general franchise: grant given to exist as a corporation; refers to the
right and privilege granted by the State to exist as a corporation; the primary franchise is vested in the
INDIVIDUALS who compose the corporation and NOT on the corporation itself [JRS Business Corp vs.
Imperial Assurance, 31 July 1964]; **the primary franchise is conferred through the issuance of the
Certificate of Incorporation by the SEC for its juridical personality to commence [Sec 19]
b. Special or SECONDARY franchise – certain rights and privileges conferred upon existing as a
corporation (e.g. right to use the streets of a municipality to lay pipes of tracks, erect poles, or string wires); refers to
different rights, privileges and powers which are obtained by a corporation, which are not a pre-requisite to corporate
existence, such as the right to occupy and use public places for the operation of a water system, gas works,
electricity lighting plants, railroad, etc., or to operate a messenger and express delivery service [JRS Business vs.
Imperial Assurance]; **granted by Congress; the business involves PUBLIC INTEREST; the franchise is
vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a
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corporation to dispose of its property, except such franchises charged with public use; subject to LEVY and
SALE on execution together and including all the property necessary for the enjoyment thereof.
4. HOW ARE CORPORATIONS CREATED?
a. General Law: private corporations are generally created under the provisions of the Corporation
Code. How? By filing the appropriate Articles of Incorporation with the Securities & Exchange Commission
(SEC); the life of the corporation starts from the issuance of the Certificate of Incorporation.
i. Can congress enact a special law creating a private corporation? NO. See Article XII, Section
16 of the Constitution [Art XII, Section 16. The Congress shall not, except by general law, provide for the
formation, organization, or regulation of private corporations. Government-owned or controlled corporations may
be created or established by special charters in the interest of the common good and subject to the test of
economic viability.] Congress cannot enact a law creating a private corporation with a special charter.
Such legislation would be unconstitutional. Private corporations may exist only under a general law. If the
corporation is private, it must necessarily exist under a general law. Feliciano vs. Commission on Audit, 464
Philippine 439 (2004)
ii. Why such prohibition? i. to avoid conflict of interest; ii. avoid bribery/corruption
(lobbying—lobby money/firm, so they would skip the general law); iii. avoid favoritism.
b. Special Law: public corporations are created through special laws; They are **created for the
governance of a portion of the state (vs. private corporations which are organized for private ends), its
instrumentality, agency, subsidiary (that’s why GOCCs cannot be public corporations—it just so happened that
they are majority-owned by the government) ; hence, **just because it is owned by the government does not make it
a public corporation.
i. Corporations created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to them, supplemented by the provisions of
CorpCode, insofar as they are applicable [Sec 4]
ii. The test to determine whether a corporation is government owned or controlled or
private in nature is simple: is it created by its own charter for the exercise of a public function, or by
incorporation under the general corporation law? Those with special charters like the Philippine
National Red Cross are government corporations subject to its provisions and its employees under the supervision of
the Civil Service Commission. Baluyot vs. Holganza, 325 SCRA 248 (2000).
iii. Please see however the case of Liban vs. Richard Gordon 593 SCRA 68 (2009): Liban said
that the PNRC is a GOCC, since it was created by special law. Therefore, Gordon’s insertion as the Chairman of
PNRC violated the Constitution and he should forfeit his Senate seat. SC said that PNRC is NOT a GOCC
because the funds of Red Cross did not come from the Government. It comes from donations. Does that mean
the law creating Red Cross is unconstitutional? SC initially said it is. But upon intervention of PNRC in the M/R,
SC said that it is SUI GENERIS and valid. They turned a blind eye on the rules and recognized PNRC for what
it is—an important ally of the government in providing humanitarian service to all people. PNRC did not need
to re-organize anymore as a private corporation. So what happens if an employee of PNRC is removed? SC said
that the termination dispute should be handled by the CSC, since the PNRC has a charter of its own.
iv. A Local Water District is a GOCC with an original charter and is not a private corporation
because it is not created under the Corporation Code. Feliciano vs. COA 14 January 2004
v. Boy Scouts of the Philippines (BSP) is a public corporation, according to Justice Teresita
Castro because of the following: (a) it was created by charter; (b) it was owned and controlled by the
government; (c) Congress cannot enact a law to create a private corporation. BSP argued that since it is now
privately owned, it is no longer subject to COA audit. So if it is not controlled and owned by the government,
does it automatically become a private corporation? Justice De Castro said there is another kind of corporation
—that organized for a public purpose, found in the civil code [Sec 44]. These are corporations ORGANIZED
FOR A PUBLIC PURPOSE. Thus, since it was organized for a public purpose, it is subject to COA audit.
c. On GOCC’s—There are two kinds: Chartered and Non-Chartered. A chartered GOCC means
there is a law creating the GOCC, thus it is governed primarily by the special law creating it. The Corporation
Code is only suppletory. If it is a NON-chartered GOCC, the governing law is the Corporation Code.
Who has jurisdiction over employees of chartered GOCCs? The Civil Service Commission Non-chartered
GOCCs? The Labor Arbiter and NLRC. EG: Philippine National Bank was created by a special law, and thus
governed by its charter. Before it was privatized and acquired by Lucio Tan, it was a GOCC. And so, in
GONZALES v. PNB (1983), Ramon Gonzales wanted to inspect the books of PNB to inspect behest loans, but
he wasn’t a stockholder. So he bought one share of stock and invoked his stockholder’s right of inspection of
the corporate books under the Corporation Code. After examining the charter of PNB, **SC said that its
charter limits those allowed to examine the books of PNB, only allowing the President, the Governor of
the Central Bank, and the Secretary of Finance, and only those authorized by the board. It did not
include stockholders. Thus, the charter of PNB prevails over the general law of the Corporation Code. But
of course it is not anymore applicable today since PNB is no longer a GOCC but a private corporation.
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i. GR: private corporations cannot be created by a special law

ii. XPN: Government-owned or controlled corporations (GOCC) which are actually private
corporations. [Corporations created by special laws or charters. Section 4. – Corporations created by special laws or
charters shall be governed primarily by the provisions of the special law or charter creating them or applicable
to them, supplemented by the provisions of this Code, insofar as they are applicable].
iii. What makes a stock corporation a GOCC? only when the Government directly or indirectly
owns or controls at least a majority or 51% share of the capital stock. Consequently, RPN was neither a
government-owned nor a controlled corporation because of the Government’s total share in RPN’s capital
stock being only 32.4%. ***To be considered a GOCC, it must be conclusively proven that the government
owns at least 51% of the outstanding capital stock. Carandang vs. Desierto, January 12, 2011
iv. Funa vs. Manila Economic and Cultural Office (MECO). MECO is our cultural office in
Taipei. Taiwan that acts as our “embassy” there since under the One China Policy, we only recognize the People’s
Republic of China (CHINA) and not Taiwan, and so we don’t have any diplomatic ties with Taiwan.
SC said MECO is NOT a GOCC, because it is organized as a non-stock corporation and their funds don’t come
from the government, but the fees collected by it partake of governmental funds and thus subject to COA audit.
v. Bar 2008: May the composition of the board of directors of the National Power Corporation
(NPC) be validly reduced to three (3)? Yes. NPC is a GOCC created by a special charter. Its charter allows
the composition of its board of directors to be reduced. The prohibition only applies to private
corporations (BP 68, where the number of directors of trustees shall not be less than five nor more than
fifteen). Since NPC is not governed by the Corporation Code, the standard number of directors is not
required.
5. Hence, included under PRIVATE CORPORATIONS are:
a. GOCCs: refer to corporations created under a special law [Sec 4] other than those for the
government of a portion of the State (EG: Landbank, GSIS, etc.), and those formed under the Corporation
Code, where the government owns at least a majority of its outstanding voting capital stock; they may be
performing governmental or proprietary functions.
i. GOCCs are majority owned and controlled by the government. EG: SSS, GSIS, ECC whose
employees follow the Civil Service law, while for private corporations, they follow Labor Law.
ii. what kind of a corporation is a GOCC? A private corporation; the latter includes quasi-
public corporations.
b. Quasi-public corporations (QPCs): those organized for profit which are granted a franchise by the
State to perform public service (EG: Meralco); they involve the performance of a function that involves
public interest; one needs a FRANCHISE from congress; the latter is the proper body to grant secondary
franchises (see notes on primary and secondary franchises)
i. NB: Philippine Society for the Prevention of Cruelty to Animals vs. Commission on Audit, 25
Sept 2007: the fact that a juridical entity is impressed with public interest does not make it by that
circumstance alone a public corporation; a corporation may be private although the charter contains
provisions of a public character, incorporated SOLELY for the public good; they are classed as QPC:
(a) they render public service;
(b) supply public wants;
(c) or pursue eleemosynary (charitable) objectives.
- while purposely organized for the gain/benefit of its members, they are required by
law to discharge functions for the public benefit. Examples: utility, railroad, warehouse, telephone, telegraph,
water supply corporations and transportation companies.
ii. QPC is a species of private corporations, but the qualifying factor is the TYPE OF
SERVICE that the former render to the public: if it performs a public service, then it becomes a QPC.
6. TEST TO DETERMINE WON A CORPORATION IS PUBLIC OR PRIVATE: the TRUE CRITERION
to determine WON a corporation is public or private is found in the TOTALITY of the RELATION of the
corporation to the State—if the corporation is created by the State as its own agency or instrumentality to help it
in carrying out its governmental functions (like provinces…barangays created by the State as its own device and
agency for the accomplishment of parts of its own public works), then it is considered public; otherwise, it
is private.

C. ON THE CORPORATION ENJOYING THE RIGHT TO SUCCESSION

1. It enjoys the right of succession: capacity to have continuity of existence despite the changes on the
persons who compose it;
2. Thus, the personality continues despite the change of stockholders, members, board members or officers;
3. The existence of a corporation is not affected by the death, insolvency or incapacity of the individual SH
or members.
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D. ON THE CORPORATION HAVING POWERS, ATTRIBUTES & PROPERTIES

1. It has the powers, attributes and properties expressly authorized by law (conferred by law) or incident to its
existence:
2. DOCTRINE OF LIMITED CAPACITY
a. Theory of Special Capacities [Limited Capacity Doctrine]: no corporation under the Code shall
possess or exercise any corporate powers, except those:
i. EXPRESS: conferred by law and its AOI;
ii. IMPLIED: those implied from express powers, and
iii. INCIDENTAL: those that are necessary or incidental to the exercise of the powers so
conferred.
b. In short, the DOCTRINE OF LIMITED CAPACITY means that a corporation can exercise
ONLY the powers EXPRESSLY conferred upon it by law and its AOI, those IMPLIED from such powers
expressly granted, and those that are INCIDENTAL to its existence. Any act outside of such powers are
UNAUTHORISED and considered ultra vires [cf. Sec 45]**
3. ULTRA VIRES ACTS: an act of the corporation that is not one of those express, implied and incidental
powers. See detailed discussion, infra, after the powers of the corporation.
4. vs. DOCTRINE OF LIMITED LIABILITY (DLL)
*This doctrine is COROLLARY to the SEPARATE PERSONALITY DOCTRINE; it is true
particularly for SH. To put it shortly, **the LIABILITY OF A SH IS LIMITED TO THE VALUE or
AMOUNT OF HIS PARTICIPATION IN THE CORP, i.e., his shares/shareholdings.
a. GR: SH is LIABLE PRO TANTO, i.e., up to the EXTENT of his shares/shareholdings
(ownership of his shares). In general, he cannot be held personally liable; SH/members not liable for
obligations/debts: after they have paid their shares, are SH NOT SUBJECT TO ANY FURTHER
LIABILITY, unless otherwise provided by law; SH/members/D/T/Corporate officers shall not be liable for
an act done on behalf of the corporation if they are done within the scope/bounds of their authority, i.e.,
SH can’t be proceeded against on his personal assets.
b. XPN: when the DP-VCF is applicable; two aspects:
i. corporation to corporation and
ii. president and his corporation, where someone creates a corporation and use it as a corporate
vehicle to perpetuate fraud, avoid existing obligations, avoid payment of tax obligations, etc.
*where directors act outside the SCOPE of the POWERS of the corporation, such acts
performed beyond such powers violate their duty of obedience and may subject them to PERSONAL LIABILITY
for any loss that may be suffered by the corporation (or affect other persons).
c. Advantage of DLL: SH not held personally liable;
d. Disadvantage: its CREDIT STANDING is adversely affected because banks cannot run after
the members of a family, for examples, as in a Close Corporation (Hence, now, banks require the signing of a
JSS: Joint & Several Signature—an undertaking signed by the officers of a corporation, that they assume
SOLIDARY LIABILITY with the corporation on a loan payment, for example)
e. Bar 1994 (where Pablo, a rich merchant, formed a corporation with himself, his wife and his
children (all students and still unemployed) as stockholders and then transferred all his assets and liabilities to
this corporation and a year later, the court rendered judgment against Pablo; the sheriff could not locate any
property; remedy?): the plaintiff can avail himself of the doctrine of piercing the veil of corporate fiction
which can be invoked when a corporation is formed or used in avoiding a just obligation. While it is true that
a family corporation may be organized to pursue an estate tax planning, which is not per se illegal or
unlawful (Delpher Trades Corp. v. IAC, 157 SCRA 349) the factual settings, however, indicate the existence of a
lawful suit that could subject Pablo to a substantial amount of damages. It would thus be difficult for Pablo to
convincingly assert that the incorporation of the family corporation was intended merely as a case of
“estate tax planning.” (Tan Boon Bee v. Jarencio, June 30 1988).

SUMMARY ADVANTAGES & DISADVANTAGES OF A CORPORATION

• advantages
1. Doctrine of Limited Liability; limitation of or exemption from INDIVIDUAL liability of
shareholders.
2. Separate and distinct personality; capacity to act as a LEGAL UNIT.
3. Right of Succession: CONTINUITY OF EXISTENCE: having a separate personality, inspite of
the death, withdrawal, insolvency, resignation of a SH, the corporation subsists, subject to the limitation of
a corporate life of 50 years, renewable to another 50 years (no limitation on the number of times to renew).
4. Corporations are governed by a specific (di ba general?) law, a General Incorporation Law. See notes
on GOCCs.
5. Transferability of interest/shares: no need to ask permission vs. partnership’s delectus personae.
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6. CENTRALIZED management of BOD;

7. Standard method of ORGANIZATION and FINANCE [Salonga’s book]
8. capacity to engage in capital-intensive ventures.
• disadvantages
1. More COMPLICATED in formation & management;
2. HIGHER COST of formation & operation;
3. LACK of PERSONAL ELEMENT;
4. Greater GOVT CONTROL and regulation;
5. Management & control are SEPARATE from ownership; and
6. SH have LITTLE VOICE in the conduct of business [De Leon’s book]
———————————————————————————————

B. Classes of Corporations
[Classes of corporations. Section 3. – Corporations formed or organized under this Code may be: 1. Stock
corporations 2. Non-stock corporations]

STOCK CORPORATIONS
1. Corporations which:
a. have capital stock divided into shares and
b. are authorized to distribute to the holders of such shares dividends or allotments of the surplus
profits on the basis of the shares held; NB: even if there is a statement of capital stock, the corp is still NOT a
stock corp if the dividends are not supposed to be declared, i.e., there is no distribution of retained
earnings [CIR v. Club Filipino de Cebu 1962]
*These are non-stock, non-profit corporations.
2. Three (3) ***basic INHERENT RIGHTS of a stock corporation:
a. right to DISTRIBUTE its assets upon liquidation;
b. right to PARTICIPATION in the management, including the right to VOTE;
c. right to post PROFITS: distribution of DIVIDENDS.
3. Dividends are only declared from
a. SURPLUS earnings;
b. URE: unrestricted retained earnings
4. What if the AOI is silent as to the distribution of profits? Will it still be considered a stock corporation? YES.
Because its silence does not mean it is prohibited. What would make it non-stock is the prohibition to declare
dividends.
If it is silent, Sec. 43 is DEEMED READ into the articles of incorporation. And under Sec. 43, the corporation
can declare dividends in case of surplus profit. And before dissolution, there is nothing that prohibits the
corporation from distributing dividends. And after dissolution, the assets are divided to the stockholders and the
stockholders may freely assign it to a charitable institution. And so, For as long as we have two elements: (1)
capital stock divided into shares; (2) authorized to distribute surplus profits to the stockholders, it is a STOCK
corporation.

NON-STOCK CORPORATIONS (NSC)

1. All other corporations are non-stock corporations.
a. do not issue stocks;
b. do not distribute dividends to members.
2. NSC: no part of the income of which is distributable as dividends to its members, trustees or officers
[Sec 87]
Ecce Ancilla Domini! 11 of 160

CLASSES OF CORPORATIONS
As to STOCK NON STOCK
Corporation CORPORATION: capital CORPORATION: does not
Code; as to stock is divided into issue shares and are created not
EXISTENCE shares and is authorized for profit but for public good
OF STOCKS to distribute to the holders and welfare and where no part
of such shares dividends of its income is distributable as
or allotments or the dividends to its members,
surplus profits on the trustees, or officers. (Sec 87)
basis of the shares held.
( Sec 3 )
As to the number Corporation aggregate: Corporation Sole: religious
of persons who consists of more than one corporation which consists of
compose them member or corporator one member or corporator
only like a bishop or a rabbi
(and his successor)
As to whether Ecclesiastical/religious Lay corporation: organized for 

they are for corporation: organized for a purpose other than
religious purpose religious purpose ecclesiastical/religious.
or not
As to whether Eleemosynary: Civil: established/organized for
they are for established/organized for business or profit
charitable public charity
purpose or not
As to state or Domestic: incorporated Foreign: formed, organized, or 

country under or under the laws of the existing under any laws other
by whose laws Philippines; formed, than those of the Philippines
they have been organized or existing and whose laws allow Filipino
created; AS TO under PH laws.
 citizens and corporations to do
LAWS OF business in its own country or
INCORPORATI state. (Sec 123)
ON
Ecce Ancilla Domini!
As to their legal De jure (DJC): existing
right to corporate both in fact and in law;
existence; as to created in strict
LEGAL compliance with all the
STATUS legal requirements &
whose right to exist cannot
be successfully attacked
even in a direct
proceeding for that
purpose by the State.
As to whether Close: shares are limited
they are open to to a few (selected) persons
the public or not or members of the family.
(Sec 96 105), and
restricted as to their
transfer, and not listed in
the stock exchange [Sec
96]
As to their Parent or Holding: one
relation to which owns the shares
another of another corporation
corporation and having the power,
either directly or indirectly,
over the latter, including the
election of the directors
thereof.
12 of 160
De facto (DFC) one existing in
fact but not in law; defectively
created (there is a FLAW in its
incorporation) but there is an
exercise of corporate rights &
franchise resulting from an
attempt in good faith to
incorporate on the part of its
members; it has all the powers
of a DJC but its due existence
can be attacked directly in a
quo warranto proceeding
Open: shares are open to the
public or to any person who
may wish to become a
stockholder or member thereto,
such as those whose shares are
listed in the stock exchanges.
Subsidiary: one whose SOS are
owned by another corporation,
called the parent corporation,
which has the power to elect is
directors; one which is so related
to another corporation that the
majority of its directors can be elected
directly or indirectly by such other
corporation
Ecce Ancilla Domini! 13 of 160

As to whether True: exists by statutory 
 Quasi: exists without formal

they are authority 
 legislative grant: (i) Corporation
corporations in by prescription: one which has
a true sense or exercised corporate powers for
only in a limited an indefinite period without
sense interference on the part of the sovereign
power and which by fiction of
law, is given the status of a
corporation; (ii) Corporation by
estoppel: one which in reality
is not a corporation, either de jure
or de facto, because it is so
defectively formed, but is
considered a corporation in
relation only to those who, by
reason of theirs acts or
admissions, are precluded from
asserting that it is not a
corporation.
As to organizers Public: by the State only Private: by private persons alone
or with the State
As to whether Public: formed or Private: for profit-making; one
they are for organized for the formed for some private
public government of a purpose, benefit or end, like
(government) or portion of the State, like Mang Inasal. This classification
private purpose provinces, cities, includes GOCCs and Quasi-public
municipalities, barangays. corporations.
Other Corporation by Corporation by ESTOPPEL:
classifications PRESCRIPTION: one one which is in reality not a
which exercised corporate corporation but is considered as
powers for such a length one with respect to those who
of time without are precluded by their admission
interference by the State, or conduct from denying its
and which, by fiction of existence. See more notes under
law, is given the status of a Sec 21, infra.
corporation
(1) The due existence of a DFC cannot be attacked collaterally or as an incident to a proceeding; see more notes,
infra.
(2) DE JURE vs. DE FACTO**
a. if there is SUBSTANTIAL COMPLIANCE: de jure corp results;
b. if there is COLORABLE COMPLIANCE: results in de facto corp.
Ecce Ancilla Domini! 14 of 160

DE FACTO CORPORATIONS (DFC) [Sec 20]

1. Four Requisites of a DFC (the 4th is by Soriano):***
a. Organized under a valid law (there must be a VALID LAW under which it is INCORPORATED);
there cannot be a DFC when there cannot be a de jure corporation; hence, there cannot be a DFC under an unconstitutional
statute.
*Bar: A corporation was created by a special law. Later, the law creating it was declared invalid. May
such corporation claim to be a de facto corporation? A: No. A private corporation may be created only under the
Corporation Code. Only public corporations may be created under a special law. ***Where a private corporation
is created under a special law, there is no attempt at a valid incorporation and it cannot claim a de facto
status. Hence, when the law creating it is declared unconstitutional, it cannot claim de facto status, neither is it a
CBE.
*What if a group of lawyers organized a corporation for the practice of law and got a
certificate of incorporation from the SEC? It is neither a DFC nor a CBE because a corporation cannot be
organized for the practice of a profession.
b. Attempt in good faith to form a corporation according to the requirements of the law (there must be
ATTEMPT in GF to incorporate). Without attempt in GF, no DFC. Mere intent is not sufficient; there must
be COLORABLE compliance with the law to make it DFC; SC requires that the AOI have already been filed
with the SEC and the corresponding Certificate of Incorporation (COI) is obtained—hence, as long as there
is no Certificate of Incorporation, there is no DFC yet. If the COI is issued by another entity, not the SEC, there
is no DFC.
*if there’s substantial compliance, it’s already a de jure corp.
*DEFECTS that preclude the creation of a DFC: i. absences of AOI; ii. Failure to file AOI
with SEC; iii. Lack of certificate of incorporation from SEC.
*DEFECTS which do NOT preclude the creation of a DFC: i. AOI failed to state all the matters
required by the Code or stated them incorrectly; ii. name of corp closely resembles (similar) that of a pre-existing corp
or one protected my law—tend to deceive the public; iii. incorporators/a number (majority) of them are not
residents of PH; iv. AOI acknowledged before the wrong officer or is insufficient/defective in form- the acknowledgment is
defective; v. percentage of Filipino ownership is less than prescribed; vi. minimum paid-up capital stock is not paid and
received by the Treasure contrary to his affidavit; vii. failure to submit by-laws on time [Sawadjaen vs. CA 2005]. These
are all inadvertent/minor defects.
c. Use of corporate powers in good faith (there must be an ACTUAL EXERCISE of corporate
powers): the corporation must have performed acts which are peculiar to a corporation, like entering into a subscription
agreement, adopting by-laws and electing directors; it is not enough to show an honest attempt to comply with the
requirements of the law—it is necessary to show an actual use or exercise of corporate powers or franchise;
There is a duty on the part of incorporators to correct the defects that they discovered—without doing
anything to correct the defect, the privilege of DFC existence can no longer be invoked.
i. NB: **Stockholders of a DFC enjoy exemption from personal liability as do SH of de
jure corporations; if it’s neither a DFC nor a DJC, the incorporators shall be held liable as PARTNERS
together with stockholders—it is the regular courts, not SEC that have jurisdiction.
ii. NB: issuance of a Certificate of incorporation (number 4 factor, infra) is a MINIMUM
REQT of continued good faith.
d. A Certificate of Incorporation is issued despite a defect in its incorporation.
2. How is the status of a de facto corporation attacked?
a. The existence of a de facto corporation shall not be inquired into collaterally in any private suit to which
such corporation may be a party; it cannot be collaterally attacked by the State or private individuals. Such inquiry
may be made by the Solicitor General in a quo warranto proceeding. (Sec. 20)
**Rationale against collateral attack: based on public policy, not equitable estoppel;
b. However, as long as it exists, a de facto corporation enjoys all attributes of a corporation until the
State questions its existence.
*The AIIBP was created by RA 6848. It has a main office where it conducts business, has
shareholders, corporate officers, a board of directors, assets, and personnel. It is, in fact, represented by the
Office of the Government Corporate Counsel. At the very least, by its failure to submit its by-laws on time,
the AIIBP may be considered a de facto corporation whose right to exercise corporate powers may not be
inquired into collaterally in any private suit to which such corporations may be a party. Moreover, a corporation which
has failed to file its by-laws within the prescribed period does not ipso facto lose its powers as such. The
SEC Rules on Suspension/Revocation of the Certificate of Registration of Corporations, details the procedures and
remedies that may be availed of before an order of revocation can be issued… Having accepted employment
from AIIBP, and rendered his services to the said bank, received his salary, and accepted the promotion given
him, it is now too late in the day for petitioner to question its existence and its power to terminate his services. **One who
Ecce Ancilla Domini! 15 of 160

assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that
there was in fact no corporation. [Sawadjaan v. CA, June 8, 2005]
3. Powers and liabilities of a de facto corp (DFC):
a. In general, treat a DFC as if it were a DJC.
b. Taxation: same manner as if it were a DJC.
c. binding effect of contracts: valid & binding against all persons, except the State.
d. Entitled to protect itself from unauthorised acts like a DJC.
4. Liabilities of officers & members of a DFC
a. In general: subject to all liabilities like a DJC;
b. Liability as partners to third persons: if there is no intent to omit any requirement but it resulted to
a DFC, they cannot be treated as partners; otherwise, they are treated as partners;
c. Liability among themselves (for advances, commissions): follow theory of estoppel; disregard the test on
whether is a DFC or a DJC; determine their liability according to the tenor of their agreement.
*Where persons associate themselves together under articles to purchase property to carry on a
business, and their organization is so defective as to come short of creating a corporation within the
statute, they become in legal effect partners inter se, and their rights as members of the company to the property
acquired by the company will be recognized. However, such a relation does not necessarily exist, for ordinarily, persons
cannot be made to assume the relation of partners, as between themselves, when their purpose is that no
partnership shall exist, and it should be implied only when necessary to do justice between the parties; thus, one
who takes no part except to subscribe for stock in a proposed corporation which is never legally formed
does not become a partner with other subscribers who engage in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the alleged partnership and contribution. Pioneer
Insurance & Surety Corporation vs. the Hon. Court of Appeals, Border Machinery & Heavy Equipment, Inc.,
(BORMAHECO), Constancio M. Maglana and Jacob S. Lim, July 28, 1989

DE JURE vs. DE FACTO CORPORATIONS

DE JURE DE FACTO
created in strict or SUBSTANTIAL actually exists for PRACTICAL
CONFORMITY with the statutory purposes as a corporation but which
requirements for incorporation. has NO LEGAL RIGHT to corporate
existence as against the State
right to exist cannot be successfully right to exist can be successfully
attacked EVEN IN A DIRECT attacked in a DIRECT
PROCEEDING by the State PROCEEDING by the State (QUO
WARRANTO)

CORPORATION BY ESTOPPEL (OSTENSIBLE CORPORATIONS) [Sec 21]

1. Definition [Sec 21]: persons who **assume to act as a corporation knowing it to be without authority to do
so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof.
a. When such ostensible corporation is sued on any transaction entered by it as a corporation or on
any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate
personality.
b. One who assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.
• a group of persons which HOLDS ITSELF OUT as a corporation and ENTERS INTO a
CONTRACT with a THIRD PERSON on the strength of such appearance, cannot be permitted to
DENY its existence in an action under said contract. NB: it is NOT a real corporation.
• Corporation by estoppel results when a corporation **represented itself to the public as such despite its
not being incorporated. A corporation by estoppel may be impleaded as a party defendant
considering that it possesses attributes of a juridical person, otherwise, it cannot be held liable for
damages and injuries it may inflict to other persons. Macasaet vs. Francisco, June 5, 2013
2. TWO ASPECTS of Corporation by estoppel [Section 21]
a. ALL PERSONS who ASSUME TO ACT as a corporation knowing it to be without authority to do
so shall be LIABLE AS GENERAL PARTNERS (i.e., UP TO THEIR PERSONAL PROPERTIES) for all
Ecce Ancilla Domini! 16 of 160

debts, liabilities and damages incurred or arising as a result thereof. Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by
it as such, it shall not be allowed to use as a defense its lack of corporate personality.
*NB: those NOT aware of the defect are LIABLE ONLY UP TO THEIR INVESTMENT.
*The persons who illegally recruited workers for overseas employment by representing
themselves to be officers of a corporation which they knew had not been incorporated are liable as general partners
for all debts, liabilities and damages incurred or arising as a result thereof. PP vs. Carlos Garcia et al., 18 April 1997
b. (any person who…) One who assumes an obligation to an ostensible corporation as such,
CANNOT RESIST PERFORMANCE thereof on the ground that there was in fact no corporation.
*those who DERIVED BENEFIT from the transaction made by the ostensible corporation,
DESPITE KNOWLEDGE of its legal defects, may be held liable for contracts they ***IMPLIEDLY
assented to or TOOK ADVANTAGE OF [Lim vs PH Gear 1999]. Technically, it is true that petitioner did
not directly act on behalf of the corporation. However, having reaped the benefits of the contract… he is
deemed to be part of said association and is covered by the scope of the doctrine of corporation by
estoppel [ibid]
*an unincorporated association which represented itself to be a corporation will be
ESTOPPED from denying its corporate capacity in a suit against it by a third person who relied in
good faith on such representation; it cannot allege lack of personality to be sued to evade responsibility for a
contract it entered into & by virtue of which it received advantages & benefits [Lim Tong Lim vs. PH Fishing
Gear Industries];
*Note that it is neither a DJC nor a DFC but the INCIDENTS of a corporate existence
may exist by virtue of ESTOPPEL; hence they are also known as OSTENSIBLE CORPORATIONS.
3. Foundation of the Doctrine of CBE: principles of EQUITY, designed to PREVENT INJUSTICE &
UNFAIRNESS
*It applies when: a. persons assume to form a corporation; b. and exercise corporate functions; c.
and enter into business relations; d. with third persons.
*The doctrine of corporation by estoppel cannot override jurisdictional requirements. Jurisdiction
is fixed by law and is not subject to the agreement of the parties. It cannot be acquired through or waived,
enlarged or diminished by, any act or omission of the parties, neither can it be conferred by the acquiescence of the
court.
4. When there is no CBE:
a. **when there is only one person involved and the said “corporation” was unincorporated. The one
who represent an unincorporated corporation is akin to Single Proprietorship [University Publishing
Corporation vs Albert]. The one who represents an unincorporated corporation alone is the one liable just like a
Single Proprietor. The judgment may be enforced against him even if he was not impleaded as a formal party
defendant.
b. where there is no third person involved and the conflict arises only among those assuming the form of a
corporation, who therefore know that it has not been registered, there is NO corporation by estoppel… since
there is a mere proposal to form a unified association, any dispute arising out of the election of officers of
said unified association is therefore not an intra-corporate dispute. [Lozano v. Delos Santos, June 19, 1997]
c. when the petitioner is the one claiming, i.e., he is not running away from liability, this
doctrine finds no application: …while national sports associations may be accorded corporate status, such
does not automatically take place by the mere passage of these laws. (Both R.A. 3135 and P.D. No. 604 recognized
the juridical existence of national sports associations): These laws merely recognized the existence of national
sports associations and provided the manner by which these entities may acquire juridical personality…
The doctrine of corporation by estoppel is mistakenly applied… The application of the doctrine applies to a
third party only when he tries to escape liability on a contract from which he has BENEFITED on the irrelevant
ground of defective incorporation. Here, the petitioner is not trying to escape liability from the contract but
rather is the one claiming from the contract. [International Express Travel v. CA, October 19, 2000].
5. Rationale of the doctrine of CBE:
a. an unincorporated association has NO PERSONALITY; hence, it would be INCOMPETENT
to act and appropriate for itself the power & attributes of a corporation as provided by law;
b. It CANNOT CREATE agents or CONFER AUTHORITY on another to act in its behalf; thus, if
one purports to act on its behalf, it is WITHOUT AUTHORITY and do so at his OWN RISK;
c. Now, a person who acts without authority or without a principal is HIMSELF REGARDED
AS the PRINCIPAL—possessing all the rights & subject to liabilities; a person acting on behalf of a
corporation without valid existence becomes PERSONALLY LIABLE for contracts he entered into.
6. Rule on liability in a CBE
*GR: There ought to be an OVERT ACT or REPRESENTATION that they are a corporation; hence,
if there is no overt act, say, a person is a mere passive subscriber, he is not liable as a general partner.
Ecce Ancilla Domini! 17 of 160

***XPN: In the Philippine Fishing Gear case: there was no overt act or representation but the passive
subscriber reaped/obtained the benefit from his association with his partners in another transaction, hence
he was made liable likewise as a general partner.

DE FACTO CORPORATION vs. CORPORATION BY ESTOPPEL


DE FACTO CORPORATION CORPORATION BY ESTOPPEL
There is existence in law; There is no existence in law;
The dealings among the parties on a The dealings among the parties on a
corporate basis is not required corporate basis is required
When requisites are lacking, it can be It will be considered a corporation in
corporation by estoppel any shape or form
SH are liable as a de jure corporation,
hence, only up to the extent of their share SH are liable as general partners
holdings
1. DFC exist in fact, but not in law, in the sense that the state reserves the right to question its existence owing to
an infirmity in its incorporation. It is allowed by law to exist, but the State reserves the right to question its
corporate existence because of defects in its creation. **So far as the state is concerned it does not exist, but
exists in fact. On the other hand, CBE is a group of persons who assume themselves to be a corporation, who
are precluded from denying the existence of the ostensible corporation with respect to third persons relying on
their representations. They are liable as general partners for the liabilities and damages incurred by the ostensible
corporation.
2. What if a group of 5 persons decided to form a corporation but the lawyer who processed their papers
pocketed the money and issued to them a fake COI? They cannot be a DFC because the COI was not issued by
SEC. But they can be a CBE. Hence, they are precluded or estopped from denying the existence of the
ostensible corporation and they are liable as general partners for all the liabilities and damages caused or incurred
by the ostensible corporation. ***Good faith or bad faith is immaterial to determine a corporation by estoppel.
As long as two or more persons assume themselves to be a corporation and they were not legally authorized to
do so, that would make them liable as general partners for the liabilities and damages incurred by such ostensible
corporation.
***vs. liabilities of directors and officers and stockholders of a DFC: they have the same liabilities as a
de jure corporation, except that the state reserves its right to question the corporate existence through a
QUO WARRANTO proceeding. The liability as general partners only applies to CBE, not DFC. And so, the
liabilities of SH in a DFC are limited to their subscription agreement to the corporation, unless they are also
directors or officers. If they are directors, they can be personally liable in six cases, infra.
3. ABC Corp is a De Facto corporation, it sold merchandise to XYZ Corp. XYZ did not pay ABC, and so the
latter filed a collection suit against the former. XYZ moved to dismiss the complaint on the ground that ABC, as
a de facto corporation, cannot sue or be sued. Will you grant the motion to dismiss? No. For two reasons:***
a. A DFC has the power to sue and be sued, just like a de jure corporation.
b. The existence of a DFC cannot be questioned in a collateral proceeding like in this collection suit.
There must be a direct proceeding (quo warranto), initiated by the state through the Solicitor General, to oust the
corporation from exercising corporate powers.
4. How about suing a CBE? Yes, the CBE can be sued. Macasaet vs. Francisco: A newspaper which the plaintiff
thought was registered with the SEC was sued together with the publisher, editor. The lawyer of the newspaper
company filed a motion to drop Abante Tonight as party-defendant because they were not registered in the SEC.
The court denied the motion. Hence, a CBE may be sued although not registered with the SEC.
a. If the corporation fails to materialize and their articles of incorporation are not filed with the SEC, is
there a partnership created among the incorporators?

Pioneer Insurance case: failure of the incorporators to organize does not necessarily give rise to a partnership,
unless the parties intend to form a partnership in case of failure of incorporation. In a partnership, two or more
persons bind themselves to contribute money or property with the intention of dividing the profits among
themselves, and that is NOT the same as a corporation. There has to be intention to organize as a
partnership in case the corporation fails to materialize. Otherwise, only active subscribers will be liable as
general partners. The others are not liable to share in the losses incurred by those who actively held themselves
to be a corporation.
Ecce Ancilla Domini! 18 of 160

b. In the case of Lozano vs. De Los Santos (June 1997), ***there can be no Corporation by Estoppel
unless there is a third person who relied on the representation that it is a corporation.There were two
associations of Jeepney drivers and operators in Mabalacat, Pampanga, and they agreed to unify to create a
consolidated corporation. They agreed that the election of directors and officers, and the directors elected shall
run the consolidated corporation. They held their election, and typical of the Philippines, the losing party cried
“Cheating!”. The other group refused to recognize the election. Thus a suit was filed with the RTC acting as a
Special Commercial Court. Is it an intra-corporate controversy? There was an attempt to bring it under the rules
on intra-corporate controversies on the argument that there was a corporation by Estoppel among them. **SC
said NO, if the representations made are between them, and it did not involve a third party, there can be
no CBE. Also keep in mind that ***only the aggrieved party may invoke the doctrine of Corporation by
Estoppel.
c. And he who obtained the benefits from the transaction cannot invoke the Doctrine of Corporation
by Estoppel. In the case of International Express Travel vs CA, Henri Kahn, on behalf of the Philippine
Football Federation, purchased airline tickets from Travel and Tours for Philippines athletes who would compete
in the SEA games. The tickets were not paid. Travel and Tours filed a collection case against Kahn, and Kahn
invoked the doctrine of Corporation by Estoppel. Curiously, the Philippine Football Federation, while
registered with the SEC, is still not a corporation, because under the law creating Sports Federations, it
is not enough that they register with the SEC, it must also be accredited by the appropriate governing
agency. So the law requires Sports Federations to be registered with the SEC AND ACCREDITATION with
the appropriate governing agency, TO BE ABLE TO ACQUIRE LEGAL PERSONALITY. The PFF did not
have accreditation from the appropriate governing agency, so it is not a De Jure corporation but a
Corporation by Estoppel. Here, only Henri Kahn represents PFF, and he who represents an
unincorporated corporation is the one personally liable. Likewise, the SC said that ***Kahn cannot invoke
the doctrine because he was the one who benefited from the transaction. Only the aggrieved party and
NOT the offender may invoke the Doctrine of Corporation by Estoppel.
d. Juan dela Cruz was invited by four persons to invest in a financing company. Juan was made the
president. He believed in good faith that the Articles and other documents were filed with the SEC. So, Juan,
with Pedro entered into various transactions with various clients. Thereafter he discovered that no Articles were
filed, no certificate of incorporation issued. So they hurriedly remedied it and had a Certificate of Incorporation
issued from the SEC. Three months after the issuance of the Certification, the corporation collapsed because of
insolvency.
What are the liabilities of Juan and Pedro?
i. Is there a De Facto Corporation? Yes, since a COI was issued by SEC. ***But is the doctrine
of De Facto Corporation available as a defense? No, because that could only be raised in a direct
proceeding and not in a collateral proceeding.
ii. What about the defense of Corporation by Estoppel? NO. They were the ones who claimed
the benefit. They are not the aggrieved party.
iii. How about the liabilities of Juan and Pedro? Are they personally liable? It depends. There
are ***six cases where a director of the corporation may be held personally liable, and they are:
(a) Assenting to a patently unlawful act;
(b) Gross Negligence or Bad Faith in directing the affairs;
(c) Acquiring Interest in conflict with their duty as a director or officer of the
corporation resulting in damage thereof;
(d) Issuance of Watered Down stocks;
(e) By Agreement to be held liable with the corporation;
(f) By Express provision of law.
*Unless these are present, the insolvency of the corporation does not make them
personally liable.

PROCEEDINGS AGAINST CORPORATIONS NOT SEC-REGISTERED

1. Where a corporation, through its president, entered into a contract with another for the exclusive right to publish
his book but the corporation failed to pay the contract price, the judgment rendered against the corporation
may be enforced against the president who participated all through-out the hearings when it turned out
that the corporation is not duly registered with the Securities and Exchange Commission. The real
defendant in a suit against a corporation with no valid existence is the person who has control of its proceedings.
Albert vs. University Publishing Company, Inc., 13 SCRA 84 (1965)
*Why was the president held liable? He was the one who reaped the benefits resulting from the
contract as he represented a non-existing principal.
2. When the corporation (BR Sportswear, Inc.) which the plaintiff erroneously impleaded in a collection case
was not the party to the actionable agreement and turned out to be not registered with the SEC, the
Ecce Ancilla Domini! 19 of 160

judgment may still be enforced against the corporation which filed the answer and participated in the
proceedings, as well as its CONTROLLING SHAREHOLDER  who signed the actionable agreement in his
PERSONAL CAPACITY and as a SINGLE PROPRIETORSHIP doing business under the trade name and
style of BB Sportswear Enterprises. Benny Hung vs BPI Finance Corporation . G.R. No. 182398, 20 July 2010
3. The President of a sports association which is registered with the Securities and Exchange Commission
but which did not comply with the statutory requirements under related laws to be able to acquire a legal
personality is PERSONALLY LIABLE for the airline tickets he purchased from a travel agency even though it is
for the benefit of the athletes who are members of the sports association. International Express Travel & Tours vs. Court of
Appeals, 373 SCRA 474 (2002).
*Why so? It is a settled principle in corporation law that any person acting or purporting to act on
behalf of a corporation which has no valid existence ASSUMES such privileges and becomes
PERSONALLY LIABLE for contract entered into or for other acts performed as such agent.
4. How about a corporation created and organized for the purpose of conducting the business of selling
optical lenses or eyeglasses; is it engaged in the practice of optometry? NO. The determination of the proper
lenses to sell to its clients entails the employment of optometrists who have been precisely trained for that
purpose. Its business is the buying and importing of eyeglasses and lenses and other similar or allied
instruments from suppliers thereof and selling the same to consumers. Samahan ng Optometrista sa Pilipinas,
Ilocos Sur-Abra Chapter, et al. vs. Acebedo International 21 March 1997)
*May a corporation engage in a practice of profession? No, such is limited to natural persons under the
Constitution. Isabela Optical applied for a permit in Iloilo but blocked by the Samahan on the ground that
Isabela Optical by hiring optometrists is engaged in the practice of a profession. SC: No, it is only incidental to
the primary purpose of manufacturing and selling lenses and eye glasses. You cannot manufacture the
appropriate lenses or eye glasses without examining the eyesight or vision of the patients. The
**corporation itself being a juridical person cannot examine eyesight so it has to hire optometrists to carry
out that primary purpose. Therefore, hiring of optometrists is not tantamount to the exercise of a
profession.

CORPORATION BY PRESCRIPTION
1. A corporation that was not formally organized as such but has been duly recognized by IMMEMORIAL
USAGE as a corporation, with RIGHTS & DUTIES maintainable at law.
2. EG: Roman Catholic Church

CORPORATIONS GOING PUBLIC vs. GOING PRIVATE

*These are not in the Corpo Code, but asked in the bar.
1. GOING PUBLIC: when a corp decides to LIST its shares in the stock exchange; this includes corporations
that will make INITIAL PUBLIC OFFERING of its shares; TWO MODES OF GOING PUBLIC (stock
exchange):
a. By Backdoor listing: private corporation acquiring a corporation that is ALREADY LISTED—
the corp becomes the newly-listed one.
b. By Initial Public Offering (IPO):
2. GOING PRIVATE: when it would RESTRICT the shareholders to a CERTAIN GROUP. In a sense, this
includes close or closely-held corporations.

REAL-ESTATE INVESTMENT TRUST

• A stock corporation established in accordance with the CorpCode and R&R of SEC principally for the
purpose of OWNING INCOME-GENERATING real estate assets [Sec 3cc, RA 9856].

OTHER CORPORATIONS (discussed separately, infra)

1. Closed Corporations
2. Special Corporations
3. Educational Corporations
4. Religious Corporation
a. Corporation Sole;
b. Religious Societies.
5. Foreign Corporations
———————————————————————————————
Ecce Ancilla Domini! 20 of 160

C. Nationality of Corporations
1. GR: generally, the corporation is considered a national of the country where it was incorporated [PLACE
OF INCORPORATION TEST, Sec. 123 BP68].
2. XPN: However, in times of war, it is determined by the nationality of the controlling stockholders
[CONTROL TEST; Public Enemy.
*The corporation was considered an enemy because majority of its stockholders were German
nationals. Filipinas Compañia vs. Christern, Huenefeld and Co., Inc., May 25, 1951
3. And for investment purposes, the Foreign Investment Act of 1991 [RA 7042 aa] provides the following
definition of PHILIPPINE NATIONAL:
(a) Corporations organized under Philippine laws of which 60% of the capital stock outstanding
and entitled to vote is owned and held by Filipino citizens; NB: DOUBLE 60% RULE (where a corporation
and its non-Filipino stockholders own stocks) (i) at least 60% of the capital stock outstanding and entitled to
vote of both corporations and (ii) at least 60% of the members of the board of directors of both
corporations must be Filipino citizens, to be considered a Philippine National [Sec 31, RA 7042 aa by RA 8179];
*EG: ABC Corp. owns 65% of the outstanding shares, entitled to vote in XYZ Corp; the 70%
shares outstanding shares entitled to vote in ABC Corp. are owned by Pedro, a Filipino, and four of its five
directors are also Filipinos. Hence, XYZ Corp is a PH national.
*However, XYZ Corp is not a PH national if 70% of the outstanding shares entitled to vote in
ABC Corp (which owns 65% of XYZ Corp) belong to aliens. The same is true when more than 60% of its
directors are aliens, even if only 55% of the outstanding shares entitled to vote belong to aliens.
(b) Corporations organized abroad and registered as doing business in the Philippines under the
Corporation Code of which 100% of the capital stock entitled to vote belong to Filipinos.
*Bar 1998: What is the nationality of a corporation organized and incorporated under
the laws of a foreign country, but owned 100% by Filipinos? Under the control test of corporate
nationality, this foreign corporation is of Filipino nationality. Where there are grounds for piercing the veil of
corporate entity, that is, disregarding the fiction, the corporation will follow the nationality of the controlling
members or stockholders, since the corporation will then be considered as one and the same.
(c) a citizen of the Philippines
(d) of a domestic partnership or association wholly owned by citizens of the Phils.
(e) a trustee of funds for pension or other employee retirement or separation benefits, where the
trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine
nationals

ONLY FILIPINO CITIZENS CAN ACQUIRE DISPOSABLE LANDS

1. A corporation organized under the laws of the Philippines of which at least 60% of the capital stock
outstanding and entitled to vote is owned and held by citizens of the Philippines, is considered a Philippine
National. As such, the corporation may acquire disposable lands in the Philippines. Unchuan vs. Lozada,
April 16, 2009
2. The fact that the religious organization has no capital stock does not suffice to escape the
Constitutional inhibition, since it is admitted that its members are of foreign nationality. The purpose of the
sixty per centum requirement is obviously to ensure that corporations or associations allowed to acquire
agricultural land or to exploit natural resources shall be controlled by Filipinos;
• and the spirit of the Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens. Register of Deeds vs. Ung Sui Si Temple, G.R. No.
L-6776, May 21, 1955

TESTS TO DETERMINE NATIONALITY

1. Place of Incorporation Test
a. Determined by the state of incorporation, regardless of the nationality of the stockholders.The
nationality of a corporation follows that of the country under whose laws it was incorporated;
b. THIS IS THE TEST APPLIED IN OUR JURISDICTION as can be determined from the definition
of a foreign corporation [cf. Section 123. Definition and rights of foreign corporations. – For the purposes of this
Code, a foreign corporation is one formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state.
It shall have the right to transact business in the Philippines after it shall have obtained a license to transact
business in this country in accordance with this Code and a certificate of authority from the appropriate
government agency.]
Ecce Ancilla Domini! 21 of 160

2. Control Test
a. the nationality of of the corporation follows that of the the controlling stockholders or members
(or the SH owning the CONTROLLING INTEREST).
b. this test is applied in times of war, for the purpose of SECURITY of the State; accordingly, even
if the corporation was formed under our jurisdiction, it shall be considered a foreign corporation if controlled
by foreigners.
c. ***Requisites [Velarde v. Lopez, Inc., Jan. 14, 2004; Heirs of Ramon Durano, Sr. v. Uy, Oct. 24, 2000]:
i. Control, not mere majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked such that the corporate
entity as to this transaction had at that time no separate mind, will or existence of its own;
ii. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest or unjust act in contravention of
plaintiffs legal right; and
iii. The control and breach of duty must proximately cause the injury or unjust loss
complained of.
***SEC explained that under the IRR of RA 7042 [Foreign Investments Act], the control test shall be
applied for purposes of ENTITLEMENT to certain financial privileges; the Grandfather Rule (infra) will
be applied only if there are questions about COMPLIANCE with Filipino ownership requirements.
3. Grandfather Rule
a. a method to determine the nationality of the corporation **by making reference to the nationality of the
stockholders of the INVESTOR corporation.
b. a method of determining the nationality of **a corporation which is in turn owned by another
corporation, by breaking down the EQUITY STRUCTURE of the shareholders of the corporation;
Nationality is attributed to the percentage of equity in the corporation used in **nationalized or partly
nationalized area;
c. the percentage of shares held by the second corporation in the first is multiplied by the latter’s own
Filipino equity: the product of these percentages is determined to be the **ultimate Filipino ownership
of the subsidiary corporation; this applies only if the Filipino equity is less that 60% of the outstanding capital of
a corporation that owns shares in a partly nationalised enterprise—at least 60% must be owned by PH
nationals.
d. applies **only when the 60-40 Filipino-foreign equity ownership is in DOUBT (i.e., in cases
where the joint venture corporation with Filipino and foreign stockholders with less than 60% Filipino
stockholdings [or 59%] invests in other joint venture corporation which is either 60-40% Filipino-alien or the
59% less Filipino). Stated differently, where the 60-40 Filipino-foreign equity ownership is not in doubt,
the Grandfather Rule will not apply. Hence, a corporation that complies with the 60-40 Filipino to foreign
equity requirement can be considered a Filipino corporation if there is no doubt as to who has the
“beneficial ownership” and “control” of the corporation.
e. “Doubt” refers to various indicia that the “beneficial ownership” and “control” of the corporation
do not in fact reside in Filipino shareholders but in foreign stakeholders. Even if at first glance the petitioners comply
with the 60-40 Filipino to foreign equity ratio, doubt exists in the present case that gives rise to a
**REASONABLE SUSPICION that the Filipino shareholders do not actually have the requisite number
of CONTROL AND BENEFICIAL OWNERSHIP in petitioners Narra, Tesoro, and McArthur. Hence, the
Court is correct in using the Grandfather Rule in determining the nationality of the petitioners. Narra Nickel Mining vs.
Redmont Consolidated Mines, April 21, 2014.
f. SEC Opinion, 1977: this is a method by which
i. the percentage of Filipino equity in corporations engaged in NATIONALIZED and/or PARTLY
NATIONALIZED areas of activities, provided for under the Constitution and other nationalization laws, is
accurately computed,
ii. and the diminution of said equity prevented.
*NB: IBP Journal, 1989: if this is not applied, the presence of corporate SH with alien
stockholding would as a result diminish effective control of Filipinos.
*When applicable: registration of a subsidiary if the capital structure of both the parent
corporation and its subsidiary do not comply with the 60:40 Filipino to foreign ratio (this means that Filipinos
should not have less than 60% share); EG: the foreign ownership of the investing corporation exceeds 40%;
when the subsidiary applies for registration to engage in nationalized or partly-nationalized industries, such
application will not be given due course because the Filipino equity will be diminished to as low as 38.5%;
When **not applicable: if both the parent and the subsidiary corporations comply with
the 60:40 ratio, as the parent corporation will be considered 100% Filipino; thus, the application of the
subsidiary for registration will be given due course.
Ecce Ancilla Domini! 22 of 160

4. (not included in the bar outline) DOMICILLIARY TEST: Determined by the principal place of business
of the corporation.

CONTROL TEST vs. GRANDFATHER RULE***

1. GR: In determining the nationality of a corporation, we follow Sec. 123, i.e., the place of incorporation.
2. XPN (in which case we follow the control test and the grandfather rule)
a. in case of investment in economic activities which are considered nationalized or
b. in times of war Before the case of Nara vs Redmont, we only follow the control test in determining
the nationality of the corporation in investment in activities reserved for Filipinos.
3. But in the case of Narra vs Redmont, SC said that we apply cumulatively both the control test and the
grandfather rule to determine the nationality of the corporation engaged in nationalized activities. [Narra
Nickel Mining vs. Redmont Mines, 21 April 2014 quoting DOJ Opinion No. 020, series of 2005, par 7]***
a. shares belonging to corporations at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of PH nationality—this pertains to the CONTROL TEST or LIBERAL RULE;
b. but in case of doubt as to Filipino ownership—if the percentage of the Filipino ownership in the
corporation/partnership is less than 60%, only the number of shares corresponding to such percentage shall be
counted as PH nationality—this pertains to the STRICTER or MORE STRINGENT GRANDFATHER
RULE.
*Why was the grandfather rule applied in Narra? ***Because the subscriptions of the Filipinos were
not paid. So on paper, it was 60-40 but they were not paid. And then there was an agreement between the
Filipinos and the foreign corp. to fund the operations of the mining company. Hence, SC applied the
Grandfather Rule in cases wherein there is DOUBT on whether or not the Filipinos really own 60% of the
capital of the public utility of the mining company. It was just a DOJ opinion, now this opinion has found its
way in Jurisprudence in Narra vs Redmont.
4. Summary: ***Apply control test if on its face, the 60-40 allocation is complied with. But if there is
doubt on whether or not the Filipinos really own 60% of these corporations, resort to the Grandfather Rule.
And so, use the GF rule when:
a. corporation is engaged in a nationalized activity and its shares are owned by a corporation.
b. The Filipino ownership in such a corporate stockholder is less than 60%;
c. The ownership of Filipino citizen in the Investing Corporation is in doubt, meaning if the
60-40 is complied with in paper but there are doubts on the extent of beneficial ownership in such corporation.
Any doubt will trigger the application of the rule.
d. If the ownership of the corporation is hidden by using a layer of corporations (ex: Corp1 is owned
by Corp 2; Corpo 2 is owned by Corpo 3, and so on.) In such a case, you trace the ultimate owner or the
“grandfather” of the corporation. The combined totals of the investee and the investing corporations should
indicate or establish that Filipinos own 60% of the capital of such corporate stockholder. Otherwise, the 60-40
requirement cannot be complied with.
***EG: PH corporation is owned 55% by Filipinos and 45% by foreigners; it invests in 70% of the
capital stock of another PH corp, which is partly nationalized, with the remaining 30% subscribed by foreigners
—the application of the rule would diminish the equity of Filipinos.
COMPUTATION
Filipino equity in new corporation: 55% x 70% 38.5%
Foreign equity in new corporation: from Filipino corporation (45% x 70%) 31.5%
Foreign equity in new corporation: from foreign investor 30%
Total Foreign equity 61.5%
Total equity 100%

ON FOREIGN STOCKHOLDERS
1. Can all SH in a corporation be foreigners?
*GR: Yes
*XPN: in fully or partly NATIONALIZED corporations
*EG: a manufacturer that exports all its products can be wholly-owned by foreigners (see next item on
foreign equity in public utilities)

FOREIGN EQUITY IN PUBLIC UTILITIES

Ecce Ancilla Domini! 23 of 160

1. Art XII, Sec 11 1987C: “NO franchise, certificate or any other form of authorisation for the operation of a
PUBLIC UTILITY shall be granted EXCEPT to citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines at least sixty per centum (60%) of whose capital is OWNED by
such citizens, nor shall such franchise, certificate or authorisation be exclusive in character for a longer period
than fifty (50) years.” It likewise provides that “the participation of foreign investors in the GOVERNING
BODY of any public utility enterprise shall be limited to their proportionate share in its capital, and all the
EXECUTIVE AND MANAGING OFFICERS of such corporation or association must be citizens of the
Philippines.”
2. SC clarified in Tatad v. Garcia 1995: the limit imposed by the Constitution on foreign equity **applies ONLY
to the OPERATION of a PUBLIC UTILITY and NOT TO OWNERSHIP of the facilities. The right to
operate a public utility may exist independently and separately from the ownership of its facilities. EG: a
corporation may own the rail tracks and coaches of a rail station WITHOUT BEING A PUBLIC UTILITY.
Hence, a common carrier may lease it vehicle (EG: airplane) from another corporation which does not have a
franchise. **Ownership of assets only do not require 60% equity.

VOTING CONTROL TEST & BENEFICIAL OWNERSHIP TEST

1. ABC Corporation is Family Corporation, its authorized capital stock consists of common shares 60% owned
by Filipinos, 40% from the foreigners. And then suddenly the corporation decided to issue preferred shares. And
all the preferred shares are to be given to Foreigners (non-voting). Is this issuance of the non- voting preferred
shares given to foreigners allowed? [Gamboa vs. Teves]
a. In the Decision, SC said that the term Capital is limited only to Voting shares, so if the preferred
shares are voting they are included in the term Capital stock, if they are not voting they are not included.
b. In the Resolution of the M/R, SC said the 60-40 Filipino ownership participation must be mirrored
in all classification of shares, i.e., across the board whether common, preferred, voting or non-voting.
Hence, both economic rights and voting rights must reside in the Filipinos by 60%. Why?
Under the Constitution, the State must adopt a self-reliant economy effectively controlled by Filipinos. And
the term control applies to both voting rights and economic rights. RATIO: There are instances where even
non-voting shares may still be allowed to vote [Sec 6, CorpoCode: Dean’s Mnemonics: A2SICMID—when
you’re sick, call MD: Amendment of the AOI, Amendment of the by-laws, Sale, lease or other disposition of
corporate property, Increase of bonded indebtedness, Increase of Capital Stock, Merger or Consolidation,
Investment of Corporate funds in another corporation and Dissolution]
*To comply with the ***BENEFICIAL OWNERSHIP Test, the 60-40 ownership requirement must apply
SEPARATELY to each class of shares. [Gamboa v. Teves 28 Jun 2011 & 9 Oct 2012].
2. What about a financial technical assistant agreement? May a corporation owned by foreigners provide
financial, and technical assistance to a mining company? YES. ***If the intention is to provide financial or
technical assistance to a mining company or a natural resource exploration company, that corporation may be
owned by Foreigners. But a corporation that participated in the exploitation, utilization, development,
exploration of natural resources, you then have to apply or follow the 60-40 limit. The same principle also
applies in investment of public utilities, mining, corporations engaged in exploration of natural resources.
The constitution in all these 3 cases provide that 60% of the capital of these corporations must be owned by
Filipinos.

WHAT ARE THE FULLY or PARTLY-NATIONALIZED CORP?

1. Where NO foreign SH is allowed:
a. Mass media, except recording [Art XVI, Sec 11, 1987C];
*But up to 20% foreign equity: PRIVATE RADIO communications [Ra 3846]
b. Retail trade enterprises with paid-up capital of less than USD2.5M [Sec 5, RA 8762];
c. PRIVATE SECURITY agencies [Sec 4, RA 5487];
d. Small-Scale MINING [Sec 3, RA 7076];
e. Utilization of NATURAL RESOURCES [Art XII, Sec 2, 1987C];
****EDU (exploration, development, utilization) of natural resources is under the full control
and supervision of the State, but the State may do it or enter into co-production, joint venture or production-
sharing agreements with Filipino citizens or corporations at least 60% of whose capital is owned by Filipinos.
f. COCKPITS [Sec 5, PD 449];
g. Manufacture, repair, stockpiling and/or distribution of NUCLEAR WEAPONS [Art II, Sec 8,
1987C];
h. Manufacture of FIRECRACKERS and other PYROTECHNIC devices [Sec 5. RA 7183].
2. Up to 20% foreign equity: PRIVATE RADIO communications [Ra 3846]
3. Up to 25% foreign equity:
a. Private RECRUITMENT, whether for local or overseas employment [Art 27, PD 442];
Ecce Ancilla Domini! 24 of 160

b. CONSTRUCTION and REPAIR of locally-funded works [Sec 1, CA 541];

c. Construction of DEFENSE-related structures [Sec 1, CA 541].
4. Up to 40% foreign equity:
a. Exploration, Development and Utilization (EDU) of natural resources [Art XII, Sec 2, 1987C];
b. REALTY companies and other corporations that own PRIVATE LANDS [Art XII, Sec 7, 1987C];
c. Operation and management of PUBLIC UTILITIES [Art XII, Sec 11];
d. Culture, production, milling, processing, trading, EXCEPT RETAIL of rice and corn and by-
products [Sec 5, PD 194; Sec 15, RA 8762];
e. ADJUSTMENT companies [Sec 323, PD 612];
f. Sauna and steam BATH HOUSES, massage clinics and similar activities [RA 7042];
g. Domestic market enterprises with paid-in capital stock of less than USD200K. However, the
threshold paid-in capital is USD100K if enterprise involves advanced technology or they employ at least 50
direct employees [Sec 8, RA 7042]. Thus, *****it can be 100% owned by foreigners if the corporation is
engaged ENTIRELY in export.
5. Up to 60% foreign equity:
a. FINANCING companies [Sec 6, RA 5980, aa RA 8556];
b. INVESTMENT houses [Sec 5, PD 129, aa RA 8366]
6. Sample scenarios:
a. Q: A Korean national joined a corporation which is engaged in the furniture manufacturing business.
He was elected to the Board of Directors. To complement its furniture manufacturing business, the corporation
also engaged in the logging business. With the additional logging activity, can the Korean national still be a member
of the Board of Directors? Explain (2005) A: The Korean National can still be a member of the Board of
Directors as long as sixty percent (60%) of the Board of Directors are Filipinos. Corporations that are
sixty percent (60%) owned by Filipinos can engaged in the business of exploration, development and
utilization of natural resources (Art. XII, Sec. 2, 1987 Constitution). The election of aliens as members of the
Board of Directors engaging in partially-nationalized activities is allowed **in PROPORTION to their
ALLOWABLE PARTICIPATION OR SHARE IN THE CAPITAL of such entities (Sec. 2-A, Anti Dummy
Law) Nothing in the facts shows that more than forty percent (40%) of the Board of Directors are foreigners.
b. Bell Philippines, Inc. (BelPhil) is a public utility company, duly incorporated and registered with the
SEC. Its authorized capital stock consists of voting common shares and non-voting preferred shares, with equal
par values of P100.00/share. Currently, the issued and outstanding capital stock of BelPhil consists only of
common shares shared between Bayani Cruz, a Filipino with 60% of the issued common shares, and Bernard
Fleet, a Canadian, with 40%. To secure additional working fund, BelPhil issued preferred shares to Bernard
Fleet equivalent to the currently outstanding common shares. A suit was filed questioning the corporate
action on the ground that the foreign equity holdings in the company would now exceed the 40% foreign
equity limit allowed under the Constitution for public utilities. Rule on the legality of Bernard Fleet's current
holdings. (2013) A: The holding of Bernard Fleet equivalent to the outstanding common shares is illegal. His
holdings of preferred shares could not exceed 40%. Since the constitutional requirement of 60% Filipino
ownership of the capital of public utilities **applies not only to voting control but also to beneficial
ownership of the corporation, it should also apply to the preferred shares. Preferred shares are also entitled to
vote in certain corporate matters (Gamboa v. Teves, 682 SCRA 397, 2012). The state shall develop a self-
reliant and independent national economy effectively controlled by Filipinos (Article II, Sec. 19, 1987
Constitution). The effective control here should be mirrored across the board on all kinds of shares.
—————————————————————————————

D. Corporate Juridical Personality

D1. Doctrine of Separate Juridical/Legal Personality

1. a well-settled doctrine that a corporation has a personality distinct and separate from its individual
stockholders or members (Cruz vs. Dalisay, July 31, 1987), directors, and officers composing it; a corporation is an entity
separate and distinct from its stockholders and from other corporations to which it may be connected; but this
separate and distinct personality of a corporation is merely a fiction created by law for convenience and to
promote justice; hence, it may be disregard in cases of fraud, etc (see doctrine of piercing the corporate veil).
2. this separate and distinct personality **COMMENCES UPON THE ISSUANCE of its CERTIFICATE
OF INCORPORATION.
3. As to acquisition of court jurisdiction: Service of summons may be made on the president, (managing
partner), general manager, corporate secretary, treasurer or in house counsel. (Sec. 11, Rule 14, Rules of
Court).
4. As to the effect of changes in individual membership: Corporation remains unchanged and unaffected in its
identity by changes in its individual membership.
Ecce Ancilla Domini! 25 of 160

5. Bar 1: the president of the company should not be solidarily liable with the company itself since the
corporation has a separate juridical personality from its officers. Corporate officers cannot be personally
liable for the consequences of their acts, for as long as these are for and on behalf of the corporation,
within the scope of their authority and in good faith. (Consolidated Bank and Trust Corp. v. CA, 356 SCRA
671)
6. Bar 2: The suit against the corporation can prosper because it is the one renting the office and store space
for its office and business operations, while the suit against its president cannot prosper because the
corporation has a separate and distinct personality from its officers, directors, stockholders and members.
7. When a real estate corporation extra-judicially rescinded a contract to sell but failed to comply with
the conditions for extra-judicial rescission and as such, is required to fulfill its obligation under same contract
to deliver a substitute lot or refund the purchase price, the president of the corporation cannot be held
personally liable even where he appears to be the controlling stockholder absent sufficient proof that he used the
corporation to defraud defaulting lot buyer. Mere ownership by a single stockholder or by another
corporation of all or nearly all capital stock of corporation is not sufficient ground for disregarding the
legal personality of the corporation. Palay, Inc.,vs. Clave, 124 SCRA 638 (1983).
8. The mere fact that the director voted for the approval of a resolution authorizing the purchase of
trucks does not justify disregarding the separate juridical personality of the corporation and holding him personally liable for
the payment of the price. Remo vs. Intermediate Appellate Court, 172 SCRA 405 (1989)
9. A company manager acting in good faith within the scope of his authority in terminating the services of
certain employees and transferring some of them to other positions cannot be held personally liable for
damages. In this particular case, the complainants did not allege or show that the officers of the corporation
deliberately and maliciously designed to evade the financial obligation of the corporation in such exercise
of management prerogatives as a means to perpetrate an illegal act or as a vehicle for the evasion of
existing obligations, the circumvention of statutes or to confuse legitimate issues. Therefore, the doctrine of
separate legal personality applies. Pabalan vs. NLRC 184 SCRA 495 (1990)
10. Bersamin: Stronghold Insurance vs. CA (2013): The assets of the corporation levied on attachment.
Stockholders of the corporation filed a petition before the Court of Appeals to set aside the attachment, on the
ground that it was fraudulently and irregularly issued by the RTC. Can the petition be granted? ***No, because
the assets of the corporation were levied and not the assets of the SH. The SH are not the real party in
interest. So if there is any person who should file the petition, it should be the corporation, not the SH. The
principle will not change even though the SHs control the corporation. Hence, **even if the corporation is
owned and controlled (90%) by the president, the obligation of the corporation do not extend to the
president when there is no foul play on the part of the President and the act of resisting the claim is not
tantamount to bad faith.
*And so, if you will grant a loan to a corporation, how will you make that the controlling SH liable? You
**require a Surety or Guaranty agreement from the SH, where he will not be liable as a SH but a surety or
guarantor of the obligation.

a. Liability for Torts and Crimes

TORTS
1. Is a corporation liable for torts? Yes, whenever a tortuous act is committed by an officer or agent under the
express direction or authority of the stockholders or members acting as a body, or, generally, from the
directors as the governing body. (PNB v. CA, G.R. No. L 27155, May 18, 1978). The corporation has separate
legal personality from the persons composing the corporation, therefore the properties of the corporation are
neither the properties of the SH or vice versa. Hence, the obligations of the corporation are not enforceable
against the SH and vice versa—The cause of action of the corporation can be enforced by the SH and vice
versa.
2. A corporation is civilly liable in the same manner as natural persons for torts, because the rules governing the
liability of a principal or master for a tort committed by an agent or servant are the same whether the
principal or master be a natural person or a corporation, and whether the servant or agent be a natural
or artificial person. A corporation is liable, therefore, whenever a tortious act is committed by an officer or
agent under express direction or authority:
a. from the stockholders or members acting as a body, or,
b. generally, from the directors as the governing body. PNB vs. Court of Appeals, May 18, 1978
3. Can a corporation sue for Moral Damages if it is a victim of tort? Yes.
NB: The corporation was a tenant in a building, its electrical connection or supply was disconnected by Meralco
because of the alleged meter tampering, so it sued Meralco for Moral damages. It lost the case because it did not
establish the connection between the tortious act or conduct and the injury sustained. Therefore, **if the
Ecce Ancilla Domini! 26 of 160

corporation can establish the connection not on account of libel, the corporation may be entitled to
moral damages.
4. Bar: Let’s say the President of McDonalds Corporation was spreading rumors that the hamburger of Jollibee
is made from the meat of cat. So the president of Jollibee was not able to sleep, he suffered from sleepless
nights, anxiety and depression because of the libellous remark uttered against Jollibee. So he filed an action for
damages against McDo. Will the suit prosper based on the allegation of the complaint? **No. The aggrieved
party is the corporation not the president because the corporation has separate legal personality.

CRIMINAL LIABILITY
1. GR: A corporation is NOT liable for crimes. Since a corporation is a mere legal fiction, it cannot be held
liable for a crime committed by its officers, since it does not have the essential element of malice; in such
case the RESPONSIBLE officers would be criminally liable—the ones responsible for the crime shall be
charged & penalized according to the nature of the crime. (People v. Tan Boon Kong, Mar. 15, 1930); Corporations
are INCAPABLE of INTENT, hence, they cannot commit felonies punishable under the RPC; They cannot
commit crimes punishable under Special Laws because crimes are PERSONAL in nature. The penalty of
imprisonment cannot be imposed—they cannot be arrested & imprisoned; however, a corporation may be
dissolved for violations of the CorpCode [Sec 144]
*NB: An officer of a corporation can be held criminally liable for acts or omissions done in behalf of
the corporation only where the law directly makes the person who fails to perform the act in the prescribed
manner expressly liable criminally .(Sia v. People, L 30896, Apr. 28, 1983)
2. ***XPN: If the penalty of the crime is only fine or forfeiture of license or franchise. Even if the statute
prescribes both fine and imprisonment, a corporation may be prosecuted and, if found guilty, may be fined (Ching v
Secretary of Justice, G. R. No. 164317, Feb. 6, 2006)

WHEN CORPORATE OFFICERS CAN BE HELD LIABLE

1. When they ACTIVELY & CONSCIOUSLY PARTICIPATED: An employee of a company or corporation
engaged in illegal recruitment may be held liable as principal, together with his employer, if it is shown
that he actively and consciously participated in illegal recruitment, because the existence of the corporate
entity does not shield from prosecution the corporate agent who knowingly and intentionally causes the
corporation to commit a crime. The corporation obviously acts, and can act, only by and through its human
agents, and it is their conduct which the law must deter. The Executive Secretary, et al. vs. CA, May 25, 2004
2. Not only the BOD but also Corporate Officers can be held liable: The powers to increase capitalization
and to offer or give collateral to secure indebtedness are lodged with the corporation’s board of directors.
However, this does not mean that the officers of the corporation other than the board of directors cannot be
made criminally liable for their criminal acts if it can be proven that they participated therein. Singian, Jr.
vs. Sandiganbayan, December 16, 2005
3. The Trust Receipts Law recognizes the impossibility of imposing the penalty of imprisonment on a
corporation. Hence, if the entrustee is a corporation, the law makes the directors, officers or employees or
other persons responsible for the offense liable to suffer the penalty of imprisonment. Ong, vs. CA, April
29, 2003
• Though the entrustee is a corporation, nevertheless, the law specifically makes the officers, employees or
other officers or persons responsible for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or employees responsible for the
offense. The rationale is that such officers or employees are vested with the authority and
responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so,
are held criminally accountable; thus, they have a responsible share in the violations of the law. Ching vs.
SOJ, February 6, 2006

b. Recovery of Moral Damages

ON MORAL DAMAGES
1. GR: A corporation is NOT entitled to moral damages because it has no feelings, no emotions, no senses,
NO MENTAL STATE. (ABS CBN Broadcasting Corporation v. CA, Jan 21, 1999 and Phillip Brothers
Oceanic, Inc, Nov. 20, 2001); corporations do not have feelings and mental states (no nervous system); a
corporation cannot experience physical suffering or sentiments like wounded feelings, serious anxiety,
mental anguish and moral shock; they cannot claim moral damages for besmirched reputation [NAPOCOR
vs. Philipp Brothers Oceanic 2001; there’s a dissenting opinion, fyi].
*NB: ABS-CBN vs CA 1999: moral damages are awarded to enable the injured person to obtain
means, diversion or amusements that will serve to obviate the moral suffering he has undergone.
2. XPN:
Ecce Ancilla Domini! 27 of 160

a. The corporation may recover moral damages under item 7 of Article 2219 of the New Civil Code
because said provision expressly authorizes the recovery of moral damages in cases of libel, slander, or any
other form of defamation. ***Article 2219(7) does not qualify whether the injured party is a natural or
juridical person. Therefore, a corporation, as a juridical person, can validly complain for libel or any other form
of defamation and claim for moral damages (Filipinas Broadcasting Network, Inc. v. AMEC BCCM, G.R. No.
141994, Jan 17, 2005.
b. When the corporation has a **reputation that is debased, resulting in its humiliation in the business
realm (Manila Electric Company v. T.E.A.M. Electronics Corporation, et. al., G.R. No. 131723, Dec. 13, 2007). But in
such a case, it is imperative for the claimant to present proof to justify the award. It is essential to prove the
existence of the factual basis of the damage and its causal relation to petitioner’s acts (ibid)
c. besmirched reputation: This Court has awarded in the past moral damages to a corporation whose
reputation has been besmirched (citing the case of Mambulao Lumber v. PNB), as when its reputation was
tarnished after it immediately ordered equipment from its suppliers on account of the urgency of the
project, only to be canceled later. [Jardine Davis v. CA, June 19, 2000]
• NB: it is the corporation, as one having separate and distinct personality, that has legal standing to sue,
because what was besmirched is the reputation of the corporation (not its corporate officers, for
example).
• There must be a CAUSAL CONNECTION between (otherwise, there can be no award of moral
damages) the kind of reputation that is debased (this is incomplete—should mean the reputation of
the corporation and the damage caused to it)
• EG: A corporation whose checks were dishonored by the drawee bank despite availability of
funds and because of the negligence of the bank employees can recover moral damages for
besmirched reputation. The standing of the corporation was reduced in the business community
because of the bank’s negligence. (Simex International vs. CA, March 19, 1990)
3. But proof is needed for the award of moral damages: While the Court may allow the grant of moral damages
to corporations, it is not automatically granted; there must still be proof of
a. the existence of the factual basis of the damage and
b. its causal relation to the defendant’s acts.
*This is so because moral damages, though incapable of pecuniary estimation, are in the category of an
award designed to compensate the claimant for actual injury suffered and not to impose a penalty on the
wrongdoer. In this case, there being no wrongful or unjust act on the part of BPI in demanding payment from the spouses
and in seeking the foreclosure of the chattel and real estate mortgages, there is no lawful basis for award of damages in
favor of the spouses. Herman C. Crystal, et al. vs. Bank of the Philippine Islands, G.R. No. 172428, November
28, 2008

SUMMARY OF LEGAL IMPLICATIONS OF HAVING A SEPARATE PERSONALITY

1. It has the POWER to sue and be sued in its own name; the corporation is the actual party-in-interest;
affirmative relief can be obtained for the benefit of the corporation; subject to a derivative suit.
• AS TO RIGHTS:
a. rights belonging to the corporation cannot be invoked by the SH (directors or officers) even if
the latter own substantial majority of the shares; in the same way, the rights of the SH-D-O cannot be invoked
by the corporation [Stonehill vs. Diokno 1967]
b. as to corporate property or affairs, SH cannot maintain actions in their own name and they have
no right to recover possession of property belonging to the corporation or to recover damages for injury thereto.

• EG: the constitutional right of individuals against unreasonable searches & seizure is
PERSONAL to them and cannot be invoked by the corporation; tax exemptions in favor of the
corporation cannot be used by the SH [Manila Gas Corp vs. CIR 1936]
• AS TO CONSTITUTIONAL RIGHTS:
a. Corporations are entitled to certain constitutional rights. EG: right against unreasonable searches &
seizure; it is considered a person under the DUE PROCESS clause [Art III, Sec 1].
b. However, it is not entitled to certain constitutional rights, not only because it is an ARTIFICIAL
being but also because it is a MERE CREATURE of law. EG: the right against self-incrimination,
particularly on the production of corporate documents.
• Does the corporation have to be impleaded before it can be held liable?
a. NO; but SH, YES: In an action against a person, whether natural or juridical, that wholly owns or
controls another corporation and uses this wholly-owned or controlled corporation to evade his or its
obligation or liability xxxx to hide the ill-gotten wealth of any or all of the persons impleaded therein, a
judgment against any or all of the impleaded defendants may be enforced against any or all of the said
corporations which have not been formally impleaded as defendants in the case. On the other hand, the
Ecce Ancilla Domini! 28 of 160

shareholders who were neither charged nor impleaded as defendants are innocent until found guilty by a
court of competent jurisdiction. Consequently, even if the corporate veil of the corporation is
pierced, they can never be divested of their shares of stock until shown to have engaged in allicit activities in
acquiring those shares. At the very least, they have to be impleaded in a complaint for recovery thereof.
Republic vs. Sandiganbayan, 266 SCRA 515 (1997)
• The suit against certain shareholders cannot ipso facto be a suit against the unimpleaded
corporation itself without violating the fundamental principle that a corporation has a legal
personality distinct and separate from its stockholders. PCGG vs. Sandiganbayan, 290 SCRA 639
(1998) & (2001).
• If the RTC had sufficient factual basis to conclude that the two corporations are one and the same
entity as when they have the same President and controlling shareholder and it is **generally known
in the place where they do business that both transportation companies are one, the third
party claim filed by the other corporation was set aside and the levy on its property held valid even
though the latter was not made a party to the case . The judgment may be enforced against the
other corporation to prevent multiplicity of suits and save the parties unnecessary expenses and
delay. Gold Line Tours vs. Heirs Lacsa, 18 June 2012
• When two corporations, one engaged in the coconut plantation and the other into operation of
leisure resorts, have basically the same incorporators and directors; are headed by the same
official; used only one office and payroll; are under one management and their laborers
interchanged work in the two corporations and are under the supervision and control of a
common managing director of both corporations, any attempt to make the two corporations
appear as two separate entities, insofar as the workers are concerned, should be viewed as a devious but
obvious means to defeat the ends of the law. The employees of the leisure resort corporation
could enforce their claims against the plantation company even though the latter was not
impleaded as a party defendant because the two corporations are to be treated as one. It would
certainly be unjust to prejudice the claims of the workers because of the misleading actions of their
employer. Pamplona Plantation Company, Inc., vs. Tinghil, 450 SCRA 421 (2005)
• Commonality of directors, officers and stockholders and even sharing of office between GCC
and EQUITY; certain financing and management arrangements between the two, allowing GCC to
handle the funds of the latter; the virtual domination if not control wielded by GCC over the
finances, business policies and practices of EQUITY; and the establishment of EQUITY by GCC to
circumvent CB rules are circumstances which justify the conclusion that Equity is just an
instrumentality of GCC. Thus, Alsons could enforce payment of the promisorry note of Equity
even against GCC. GCC v. Alsons Development and Investment Corporation 513 SCRA 225 (2007)
• Piercing the veil of corporate fiction is warranted when a corporation ceased to exist only in name
as it re-emerged in the person of another corporation, for the purpose of evading its unfulfilled
financial obligation under a compromise agreement. Thus, if the judgment for money claim could
not be enforced against the employer corporation, an alias writ may be obtained against the
other corporation considering the indubitable link between the closure of the first corporation
and incorporation of the other. Livesey vs. Binswanger Philippines, GR No. 177493, March 19, 2014
b. YES: The writ of sequestration issued against the assets of the corporation is not valid because the
suit in the civil case was against the shareholder in the corporation and is not a suit against the latter. Thus,
the failure to implead these corporations as defendants and merely annexing a list of such corporations
to the complaints is a violation of their right to due process for it would be, in effect, disregarding their
distinct and separate personality without a hearing. Furthermore, the sequestration order issued against
the corporation is deemed automatically lifted due to the failure of the Republic to commence the
proper judicial action or to implead them therein within the period under the Constitution. Palm Avenue
Holding Co., Inc and Palm Avenue Realty and Development Corporation vs. Sandiganbayan, August 6, 2014
• Where the court rendered judgment against a stock brokerage firm directing the latter to return
shares of stock which it sold without authority, but the writ of execution was returned unsatisfied,
**an alias writ of execution could not be enforced against its parent company because the
court has not acquired jurisdiction over the latter and while the parent company owns and controls the
brokerage firm, there is no showing that the control was used to violate the rights of the plaintiff.
Pacific Rehouse Corporation vs. Court of Appeals, GR. No. 199687, March 24, 2014

2. It has sole LIABILITY for acts, torts and contracts, although represented by duly-authorized representatives
appointed by the BOD (through a Secretary’s Certificate, under oath; the Secretary’s certificate should be in the
form of a Special Power of Attorney, e.g., a specific authorisation to sign a loan agreement—hence a bank cannot
sue the President who signed it in official capacity)
Ecce Ancilla Domini! 29 of 160

• NB: like in Nego, to escape personal liability, three things should be there: a) due authorisation; b) include
words indicating that he is signing in a representative capacity (EG: President of ABC Corp); and c) disclose
the name of the principal (ABC Corp).
• As to OBLIGATIONS.
a. It can incur obligations (debts) and its obligations are not the obligations of its SH-D-O
(stockholders, directors, officers) [Vasquez vs. de Borja];
b. Corollarily, the obligations of the SH-D-O are not the obligations of the corporation.
c. Liability for acts or contracts: the acts of the stockholders do not bind the corporation unless they
are properly authorized. The obligations incurred by a corporation, acting through its authorized agents are its
sole liabilities. The obligations of the corporation are not the obligations of its shareholders and members and
vice versa. (Cease v. CA,G.R. No. L 33172, Oct. 18, 1979)
• As to LOSSES:
• Where someone convinced other parties to contribute funds for the formation of a corporation which
was never formed, there is no partnership among them, and the latter cannot be held liable to share in
the losses of the proposed corporation. Pioneer Surety & Insurance Corporation vs. Court of Appeal,
175 SCRA 668 (1989)
• See DOCTRINE OF LIMITED LIABILITY, supra.

3. Corporation has its OWN ASSETS registered in its own name; EG: minimum capital requirements.
• PROPERTY: SH are not the owners of the assets of the corporation, but have only an indirect interest
therein):
a. a corporation is entitled to own properties in its own name;
b. its properties are not properties of its stockholders (SH), directors & officers [Wise vs. Man Sung
Lung]; Right to acquire and possess property: property conveyed to or acquired by the corporation is in law the
property of the corporation itself as a distinct legal entity and not that of the stockholders or members. (Art.
44[3], Civil Code)
c. the properties of the SH are not properties of the corporation;
d. the interest of the SH over the properties of the corporation is merely INCHOATE [Saw vs. CA].
The interest of the shareholder on a particular property becomes actual, direct and existing only upon the
liquidation of the assets of the corporation and the same property is assigned to the shareholder concerned.
• Hence, a SH cannot intervene in an action involving property of a corporation, unless he is appointed as
trustee of the corporation holding its legal interest during liquidation, within the three-year period after dissolution.
• If the title over the land where the Hidden Valley Springs Resort is located is registered in the name of the
corporation, the heirs of a stockholder who occupy houses built at the expense of the corporation
cannot claim ownership over said properties. A stockholder is not the owner of any part of the capital of the
corporation and is not entitled to the possession of any definite portion of its property or assets.
Rebecca Boyer-Roxas and Guillermo Roxas vs. Hon. Court of Appeals and Heirs of Eugenia V. Roxas,
Inc., July 14, 1992
• Even when there is a planned takeover of company and the counsel of the buyer advised the stockholder
through a letter that he may take the machineries he brought to the corporation out with him for his own use and
sale, the stockholder cannot recover said machineries and equipment because these properties
remained part of the capital property of the corporation. It is settled that the property of a
corporation is not the property of its stockholders or members. Ryuichi Yamamoto vs. Nishino
Leather Industries, Inc.,and Ikuo Nishino, April 16, 2008
• Bar 1 (when the SH does not part with a company property given to him earlier as a perk): although SH is a
stockholder of the corporation, it does not translate that the shares owned by him represent a
specific corporate property. It is because the corporation has a separate juridical personality; thus, the
corporate properties it owns do not extend to the shareholders. Shareholders are in no legal sense
the owners of corporate property or credit which is owned by the corporation as a distinct legal
personality.
• Bar 2 (when the president was given a Ford Expedition and he refused to return it when he was no longer
president): The Ford Expedition is a corporate property. A corporation has a separate and distinct
personality that when it owns a property, it shall not be deemed to be the property of its stockholder
no matter how substantial the ownership of his shares is. Shareholders are in no legal sense the owners
of corporate property owned by the corporation as a distinct legal personality. (Concepcion Magsaysay-
Labrador v. CA, 180 SCRA 266)
• The vehicle principally used in the business of the corporation but registered under the name of its
President can not be garnished to satisfy the debt of the corporation. The rule is that obligations
incurred by the corporation, acting through its directors, officers and employees, are its sole liabilities.
Thus, property belonging to a corporation cannot be attached to satisfy the debt of a stockholder
Ecce Ancilla Domini! 30 of 160

and vice versa, the latter having only an indirect interest in the assets and business of the former. Delima
vs. Gois 554 SCRA 731 (2008)
———————————————————————————————

D2. Doctrine of Piercing the Corporate Veil

1. The doctrine that allows the State to disregard the notion of separate personality of a corporation for justifiable
reason/s; **an exception to the Doctrine of Separate Corporate Entity.
2. Note that this is a ***JUDICIAL FUNCTION [Cruz v. Dalisay. 31 Jul 1987]. But is there a need for the court
to first acquire jurisdiction over the corporation? It depends on the facts of the case:
a1. Pacific Rehouse Corp vs. CA (2014): An alias writ of execution on a subsidiary could not be
enforced against its parent company because the court has not acquired jurisdiction over the latter (it was
not made a party defendant), even if the parent company owns and controls the brokerage firm (wholly-owned
subsidiary). Key idea: there is no showing that the control was used to violate the rights of the plaintiff.
a2. Kukan International vs Reyes: What were levied were not the properties of Kukan Corporation but
of Kukan International Corporation. So Kukan International filed a third party claim to the court. The lawyer of
the plaintiff filed a motion to pierce the veil of corporate veil of Kukan International on the ground that Kukan
International and Kukan International Corporation are one and the same entity. Can the court render judgment
against Kukan International Corporation? NO, because the court must acquire jurisdiction over Kukan
International first, since **jurisdiction is not acquired by mere motion. Jurisdiction is acquired by service
of summons and other recognized modes.
a3. PNB vs. Ritratto Group (2001): The fact that PNB is the parent company of PNB International
does not make them one and the same entity. The loan was granted by PNB International Finance Ltd. and not
by PNB therefore the action must be filed against the subsidiary and not the parent company. **How should the
complaint be captioned? The case should be filed against PNB as agent of PNB International Finance Ltd
and not PNB as parent company of PNB International Finance Ltd—then the suit becomes effective because
the suit is against PNB International, the one that granted the loan in favor of Ritratto Group.
a4. DBP vs. HyrdoResource Group: DBP together with PNB foreclosed mortgage on the property of
Marinduque Mining Company. After foreclosure, it consolidated title over the assets, it set up a new mining
company called Nonoc Mining and then transferred the foreclosed assets of DBP to Nonoc. Nonoc, and
engaged a consultant to help Nonoc in its project. The consultant was only paid in part by Nonoc so he filed an
action against both Nonoc and DBP claiming that they are one and the same entity because DBP owns
controlling shares of Nonoc and they have common directors and SH. Can the consultant enforce the collection
against DBP? NO. The existence of interlocking directors, common stockholders, or controlling share
are not enough reason to disregard the separate legal entity of the corporation.
a5. The court must first acquire jurisdiction over the corporation or corporations involved before
its or their separate personalities are disregarded; and the doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a cause of action duly commenced involving parties duly
brought under the authority of the court by way of service of summons or what passes as such service. Kukan
International Corporation vs. Hon. Judge Amor Reyes, G.R. No. 182729, 29 September 2010
b1. Goldline Tours vs. Lacsa (2011): Both Gold Line and Travel Tour Express are owned by the same
family, with interlocking directors, officers and overlapping finances. Although Gold Line was not brought to
the court’s jurisdiction, the judgment of the court can be enforced upon upon it. Compare this with
Rehouse: under the instrumentality test, the ***control must be exercised in three areas—shares, finances,
business values and practices—hence, if the subsidiary has independent operations, then it should have a
separate legal personality from the parent company. SC took judicial notice that the two bus companies are
owned by one and the same family and they have common officers. Moreover, it is common knowledge in the
Albay region that they are one and the same entity.
b2. Livesy vs. Binswanger: There was a compromise agreement between ABC Corp and Juan, and
judgment was rendered based on the agreement. But before the agreement was imposed, ABC closed and re-
emerged as XYZ Corporation, engaged in the same line of business and has the same directors. A writ of
execution was issued by the Court upon motion to levy the properties of XYZ Corporation. Here SC allowed
the writ of execution to served upon XYZ Corporation although it was not impleaded as a party to the case,
because when ABC Corpo closed, XYZ suddenly emerged.
c. So, which of the cases will you use? Look closely at the facts of each cases, and apply them
accordingly. **If there is no abuse or misuse or if there is no third party abused, or if the issue can be resolved
in other ways, forget about piercing the veil of corporate fiction. And so, in Philippine Textile vs. Credit, one
manufactures yarn and the other one sells it. Shall the employees of Filipina Credit form part of the Collective
Bargaining Agreement of Philippine Textile? **NO because no third party was prejudiced.
3. Hence, a sheriff who enforced a judgment against the President of the corporation when it is directed
against the corporation is liable administratively. By choosing to “pierce the veil” of corporate entity, the
Ecce Ancilla Domini! 31 of 160

**sheriff usurped a power that belongs to the court and assumed improvidently that since the
complainant is owner and president of the judgment creditor, they are one and the same.
4. When invoked? to make the directors, officers and SH liable for the obligations of the corporation, not
the other way around [Francisco Motors vs. CA]; although there are instances when the corporation may be
held liable for the obligations of SH-D-O under DP-VCF, the latter **cannot be used to support an action
for the enforcement of the personal obligations of D-O-Incorporators [Francisco Motors vs CA, where
lawyer was collecting from the corporation liabilities of its directors, which is the reverse of the application of this
doctrine, i.e., it is usually sued to make the SH-D-O liable for the obligations of the corp].
*However, SC allowed the filing of a complaint by the SH asking a bank to render an accounting of the
income of the vessels that were registered in the name of the corporations wholly-owned by the said SH. SC
ruled that such course would preclude multiplicity of suits and to definitely determine and terminate the
dispute [Bank of America vs. CA 2003]

EFFECTS OF PIERCING THE VEIL

1. Courts will look at the corporation as an aggregation of persons undertaking the business as a group. Two
effects: on the individual and the corporation: the court will often look at the corporation as***
a. (one corporation considered as a mere collection of individuals): a mere collection of individuals
or an aggregation of persons undertaking business as a group, disregarding the separate juridical personality of the
corporation unifying the group; The corporation will be treated merely as an ASSOCIATION OF
PERSONS and the SH or members will be considered as the corporation, i.e., the liability will ATTACH
PERSONALLY or DIRECTLY to the officers and SH [Yao vs. PP 19 June 2007].
b. (two corporations considered as one and the same): Another formulation of this doctrine is that
when two (2) business enterprises are owned, conducted and controlled by the same parties, both law and equity will, when
necessary to protect the rights of third parties, disregard the legal fiction that two corporations are distinct
entities and treat them as identical or one and the same.[GCC v. Alsons Dev. & Inv. Corp., January 29, 2007]
2. Note: When the veil of corporate fiction is pierced in proper cases, the corporate character is not
necessarily abrogated. It continues for legitimate objectives. The decision applies only for that particular
case. (Reynoso IV v. CA, G.R. Nos. 116124 25, Nov 22, 2000): only in the transaction where the three elements
were present. ***The fact that you pierced the corporate fiction with respect to one transaction does not mean
that you have to pierce the doctrine of corporate fiction in other cases or transaction if these elements are
not present.

D2a. Grounds for Application of Doctrine

1. Bar 2006: What is the doctrine of "piercing the veil of corporate entity? To what circumstances will the
doctrine apply? A: It is a doctrine that allows the State to **disregard for certain justifiable reasons the notion
that a corporation has a personality separate and distinct from the persons composing it. To understand this
further, bear in mind that the Doctrine of Corporate Legal Entity is only a **fiction to promote public
convenience. If this doctrine is misused or abused, then the State shall disregard the separate legal
personality, pierce the corporate fictiom, and shall treat the corporation and the stockholders composing
it as one and the same entity. It applies in three (3) basic areas, namely: ***
a) defeat of public convenience as when the corporate fiction is used as a vehicle for the evasion of
an existing obligation or when the veil is used to evade a contractual duty;
*EG: VillaRey Transit vs. Ferrer: Villarama sold buses to Tranco and its certificate of public
convenience. The contract stipulates that Villarama should not engage in the same line of business. Villarama did
not engage in the same line of business but he formed a corporation engaged in the same line of business,
the stockholders being his spouse and children. The SC said that the corporation was set up to evade a
contractual obligation and the veil was pierced.
b) [fraud test] fraud cases or when the corporate entity is used to justify a wrong, protect fraud, or
defend a crime; or
*AC Ransom vs. NLRC: A group of laborers filed a complaint against AC Ransom for the
payment of monetary benefits. During the pendency of the case, the stockholders of AC set up a run-away
corporation called Rosario Corporation. It is engaged in the same line of business and the assets of AC was
transferred to Rosario corporation. SC said that Rosario was created to evade the obligation of AC to its
laborers and the veil was pierced.
c) [alter ego or instrumentality test] alter ego cases, where a corporation is merely a farce since it is a
mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. In this connection, case law lays down a three-pronged test to determine the application of the
alter ego theory, which is also known as the instrumentality theory, namely:**control, breach, harm (infra).
2. Sample scenarios:
Ecce Ancilla Domini! 32 of 160

a. URC and Oilink had the same Board of Directors and Oilink was **100% owned by URC. The
Court held that the doctrine of piercing the corporate veil has no application here because the Commissioner of
Customs did not establish that Oilink had been set up to avoid the payment of taxes or duties, or for
purposes that would defeat public convenience, justify wrong, protect fraud, defend crime, confuse
legitimate legal or judicial issues, perpetrate deception or otherwise circumvent the law. Commissioner
of Customs vs. Oilink International Corp July 2, 2014
b. As applied to third-party mortgagors:
*GR: A third-party mortgagor is liable only to the value of the mortgaged property. He is not
liable beyond the value of the property because he merely lend his properties to secure the obligation of another
*XPN: Fe Tan Uy v. International Exchange Bank (2013): ABC obtained a loan from the bank
secured by a mortgage given by XYZ corporation. ABC Corp did not pay the loan. The bank foreclosed the
mortgage of XYZ. After foreclosing, there was a deficiency. Should the deficiency be enforced against either
ABC or XYZ or only ABC? SC said that ABC and XYZ are one and the same entity because they have a
common president. The same president who signed the loan agreement of ABC and the mortgage agreement of
XYZ. Both are family corporation. There was overlapping of finances and operations.

SUMMARY OF INSTANCES WHEN DP-VCF WAS APPLIED

1. when the separate personality was used to evade the obligations to employees or used as a pretext to
dismiss employees;
2. when the same was used to evade lawful obligations or a money judgement;
3. corporation is dominated by officers or SH or other persons/entity to the extent that the corporation is a
mere alter ego, adjunct or business conduit;
4. used to defeat public convenience;
5. used to justify wrong;
6. used to protect fraud;
7. used to defend crime;
8. used to confuse legitimate legal or judicial issues;
9. used to perpetrate deception or otherwise circumvent the law [LandBank vs CA 4 Sep 2001; Padilla vs CA
22 Nov 2001].

CIRCUMSTANCES TO CONSIDER
TO JUSTIFY THE APPLICATION OF DP-VCF TO MAKE THE PARENT CORPORATION LIABLE
FOR THE OBLIGATION OF ITS SUBSIDIARY [PNB vs. Ritratto Group 31 Jul 2001]
(a) The parent corporation owns all or most of the capital stock of the subsidiary.
(b) The parent and subsidiary corporations have common directors or officers.
(c) The parent corporation finances the subsidiary.
(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its
incorporation.
(e) The subsidiary has grossly inadequate capital.
(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.
(g) The subsidiary has substantially no business except with the parent corporation or no assets except
those conveyed to or by the parent corporation.
(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a
department or division of the parent corporation, or its business or financial responsibility is referred to
as the parent corporation's own.
(i) The parent corporation uses the property of the subsidiary as its own.
(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but
take their orders from the parent corporation.
(k) The formal legal requirements of the subsidiary are not observed.

D2b. Tests in Determining Applicability of PIERCING THE CORPORATE VEIL

1. Fraud test: when corporate fiction is used to justify a wrong, a shield to protect and perpetuate fraud,
justify wrong or defend crime, a device to defeat the labor laws, this fiction will be DISREGARDED and the
individuals composing it will be treated identically;
a. the corporate veil cannot be used to violate the prohibition against forum shopping [First PH
International Bank vs. CA 1996]
b. where the main purpose in forming the corporation was to evade one’s subsidiary liability for
damages in a criminal case, because to allow it to do so would be to sanction the use of fiction of corporate entity as a
shield to further an end subversive of justice. [Gold Line Tours Inc. v. Heirs of Lacsa, June 18, 2012]
Ecce Ancilla Domini! 33 of 160

c. In a case where an insurance company issued a bond to secure payment of the price for a
tractor sold by another company and the insurance company foreclosed the real estate mortgage constituted
to secure payment to be made under the bond, and thereafter sold the mortgaged land to another
corporation, the separate juridical personalities of the seller of the tractor, the insurance company and the buyer
of the land cannot be disregarded in an action to annul the foreclosure sale. Piercing the veil of corporate entity
is not the proper remedy in order that the foreclosure proceedings may be declared a nullity under the
circumstances obtaining. The legal corporate entity is disregarded only if it is sought to hold the officers
and stockholders liable for the corporate debt or obligation. The declaration of the nullity of the
foreclosure sale is a relief which may be obtained without having to disregard the aforesaid corporate
fiction attaching to the corporations. There is also no showing that the corporations were formed and thereafter
transacted with the petitioner with the sole intention of defrauding the latter. The mere fact that the
businesses of two or more corporations are interrelated is not a justification for disregarding their
separate personalities absent sufficient showing that the corporate entity was purposely used as a shield to
defraud creditors and third persons of their rights. Umali vs. CA, 189 SCRA 529 (1990)
d. NB: ***WRONGDOING & BAD FAITH CANNOT BE PRESUMED; THEY MUST BE
ESTABLISHED CLEARLY & CONVINCINGLY. Not because two foreign companies came from the same
country and closely worked together on certain projects would the conclusion arise that one was the conduit of
another, thus piercing the veil of corporate fiction. To disregard the separate juridical personality of a
corporation, the wrong doing must be clearly and convincingly established. It cannot be presumed. Marubeni
Corporation vs. Lirag, 362 SCRA 620 (2001)
i. While a director or corporate officer may be held liable for corporate debts if he assented or
consented to a patently unlawful act or in case of bad faith or gross negligence in conducting the affairs of
the corporation, the bad faith or wrongdoing of the director or officer must be established clearly and
convincingly. Bad faith is not presumed. Thus, if the lease agreement is between two corporations, the president or
officer of the defaulting corporation cannot be made liable for the debt of the corporation. Seaoil Petroleum v.
Autocorp Group,(2008)
ii. The fact that an employee of the corporation was made to resign and not allowed to
enter the workplace does not necessarily indicate bad faith on the part of the employer corporation if a
sufficient ground existed for the latter to actually proceed with the termination. Abbot Laboratories vs. Alacaraz, July 23, 2013
iii. when petitioner Arco Pulp and Paper’s obligation to Lim became due and
demandable, she not only issued an unfunded check but also contracted with a third party in an effort to
shift petitioner Arco Pulp and Paper’s liability. She unjustifiably refused to honor petitioner corporation’s
obligations to respondent. These acts clearly amount to bad faith. In this instance, the corporate veil may be
pierced, and petitioner Santos may be held solidarily liable with petitioner Arco Pulp and Paper. Arco Pulp vs.
Lim June 25, 2014
2. Control test: the complete control of one corporate entity to another (as to its finances, method of
conducting business, etc. which perpetuated the wrong is the proximate cause of the injury). While the
conditions for the disregard of the juridical entity may vary, the following are some probative factors of
identity that will justify the application of the doctrine of piercing the corporate veil, as laid down in
Concept Builders, Inc.,v NLRC:***
a. Stock ownership by one or common ownership of both corporations;
b. Identity of directors and officers;
c. The manner of keeping corporate books and records, and
d. Methods of conducting the business. Heirs of Fe Tan Uy vs. IE Bank, February 13, 2013
*Example when the doctrine is applied: when the two corporations have the same board of directors
and Y Corporation owned substantially all of the stocks of X Corporation; these facts justify the conclusion
that the latter is merely an extension of the personality of the former, and that the former controls the
policies of the latter. Added to this is the fact that Y Corporation controls the finances of X Corporation
which is merely an adjunct, business conduit or alter ego of Y Corporation. (CIR v. Norton & Harrison
Company, Aug. 31, 1964). ***But the mere fact that Oñate owned the majority of the shares of ECO is not a
ground to conclude that Oñate and ECO are one and the same. Mere ownership by a single stockholder of
all or nearly all of the capital stock of a corporation is not by itself sufficient reason for disregarding the fiction
of separate corporate personalities. Neither is the fact that the name “ECO” represents the first 3 letters
of Oñate’s name a sufficient reason to pierce the veil. A corporation may assume a name provided it is
lawful. There is nothing illegal in a corporation acquiring the name or as in this case, the initials of one of its
shareholders. Land Bank vs. Court of Appeals, 364 SCRA 375 (2001)
3. Alter ego or instrumentality test (or conduit cases): when the corporation is merely an adjunct, a business
conduit or an alter ego of another corporation; where one corporation is so organized and controlled and
its affairs are conducted so that it is, in fact, a mere instrumentality or ADJUNCT of the other, the fiction of the
corporate entity of the ‘instrumentality’ may be disregarded: (a) where a corporation is merely a FARCE since it
Ecce Ancilla Domini! 34 of 160

is a mere alter ego or business CONDUIT of a persons, or (b) where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct to
another corporation.
*For ALTER EGO cases, the doctrine requires the concurrence of three elements [PNB vs. Hydro
Resources Corp 13 March 2013; WPM International Trading vs. Labayen 17 September 2014]: a. Control of the
corporation by the SH or parent corporation; b. Fraud or fundamental unfairness imposed on the plaintiff; c.
Harm or damage caused to the plaintiff by the fraudulent or unfair act of the corporation. Elements in detail
[Concept Builders v. NLRC, May 29, 1996; PNB v. Andrada Electric 17 Apr 2002]***
a. [Control Test] CONTROL: The CONTROL necessary to invoke the rule is not majority or even
complete stock control but SUCH complete DOMINATION OF FINANCES, POLICES &
PRACTICES that the controlled corporation has, so to speak, NO SEPARATE mind, will or existence of
its own, and is but a CONDUIT for its principal.
b. [Fraud Test] BREACH: Such control must have been USED TO COMMIT a fraud or wrong to
perpetuate the violation of a statutory or other positive legal breach of duty, or a DISHONEST and an
UNJUST ACT in contravention of the plaintiff ’s legal right; NB: the CONTROL must be shown to have
been exercised AT THE TIME the acts complained of took place.
*Lanuza vs. BF Corp: Since there was bad faith, the directors and the corporation were regarded
as one and the same. Hence, the arbitration agreement should continue against the directors even if they were
not parties to the arbitration agreement.
c. [Harm Test] PROXIMATE CAUSATION: The said control and breach of duty must
PROXIMATELY CAUSE the injury or unjust loss or harm for which the complaint is made.
***NB: MERE DOMINATION IS NOT ENOUGH, like when AA owns 99% of the corporation,
which is allowed (also, the mere fact of interlocking directors is NOT ENOUGH to pierce the VCF), it has to be
supported by the following (elements above): **But even when there is dominance over the affairs of the
subsidiary, the doctrine of piercing the veil of corporate fiction APPLIES ONLY WHEN such fiction is
used to defeat public convenience, justify wrong, protect fraud or defend crime. [Reynoso v. CA,
November 22, 2000]
**mere existence of the following does not call for the application of this doctrine: 1. Controlling
ownership of the corporation’s share; 2. two corporations have common directors; 3. Substantial identity of
the incorporators of 2 corporations and identity of its business.
*Mere ownership by a single SH or by another corporation of all or nearly all of the capital stock
does not justify the application of the doctrine. Other circumstances must be present [Francisco vs Mejia 14
Aug 2001].
- EG: the two corporations have the same manager, same customers, same office building and business operations are
merged; hence, the adjunct corporation’s obligations are considered the obligations of the other corporation and
the latter’s properties were made to answer for the said obligations [Lipat v. Pacific Banking 30 Apr 2003].
- EG: Richard owns 90% of the shares of the capital stock of GOM Co. On one occasion, GOM
represented by Richard as President and General Manager executed a contract to sell a subdivision lot in favor of
Tomas. For failure of GOM to develop a subdivision, Tomas filed an action for rescission and damages against
GOM and Richard. Will the action prosper? Explain. (1996) A: The action will prosper against GOM
Corporation but it shall not be the same with regard to the action against Richard. Such is the case because
Richard has a separate and distinct personality from the corporation. His mere ownership of 90% of the
shares of the capital stock of GOM does not make him as one with the corporation. Mere ownership by a
single stockholder, or by another corporation, of all or nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding the separate corporate personality (Secosa v. Heirs of Erwin
Suarez Fancisco, 433 SCRA 273)
- Where two banks foreclosed mortgages on certain properties of a mining company and resumed
business operations thereof by organizing a different company to which the banks transferred the foreclosed assets,
the banks are not liable to a contractor which was engaged by the re-organized mining company even though the
latter is wholly-owned by the two banks and they have interlocking directors, officers and stockholders.
While ownership by one corporation of all or a great majority of stocks of another corporation and their
interlocking directorates **may serve as indicia of control, by themselves and without more, however, these
circumstances are insufficient to establish an alter ego relationship or connection between the two banks
and the new mining company on the other hand, that will justify the puncturing of the latter’s corporate cover.
Mere ownership by a single stockholder or by another corporation of all or nearly all of the capital
stock of a corporation is not of itself sufficient ground for disregarding the separate corporate personality.
Likewise, the existence of interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other public policy considerations.
DBP vs. Hydro Resources Contractors Corporation, March 13, 2013.
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- When an operator of a bus transportation sold his two certificates of public convenience to
another corporation with the condition, among others, that he shall not for a period of 10 years from the date of the
sale, apply for any TPU service identical or competing with the buyer, **the organization of a corporation barely 3
months after the sale with the wife of operator and his brother and sister-in-law as the incorporators is a clear violation of
the condition. A seller or promisor may not make use of a corporate entity as a means of EVADING the
obligation of his covenant. Where the Corporation is SUBSTANTIALLY THE ALTER EGO of the
covenantor to the restrictive agreement, it can be enjoined from competing with the covenantee. Villa Rey
Transit vs. Ferrer, October 29, 1968
4. Public convenience or objective test: if the fiction is pierced to make the stockholders liable for the
obligation of the corporation; on defeating public convenience: when the corporate fiction is used as a vehicle
for the evasion of an existing obligation, or EVADE TAXES;
*SC added one test: TEST BY OBJECTIVE. The doctrine of piercing the veil will only apply if the
stockholders are being made liable for the debts of the Corporation. ***So the end result of piercing the veil
is to make the stockholders liable for the debt of the Corporation. If that is not the end result, forget
about the doctrine. Conversely, if the Corporation is being made liable for the debts of the stockholders, do not apply the
doctrine.
- Francisco Motors vs. CA: A lawyer purchased motors from the Francisco Motors. He rendered
services for Francisco Motors but he was not paid. He said that his fees should be applied or offset to the
purchase price of the motors. SC did not apply the doctrine because the end result is that the Corporation is
being held liable for the debt of the stockholders.
5. Equity cases/test

PARENT AND SUBSIDIARY

1. The Parent Corporation controls another corporation, it owns shares in that corporation, and elects the
directors in the other corporation.
2. Holding Company vis-à-vis Parent Corporation: The Holding company is organized for the purpose of
investing in equity of various corporations. Just like JG Summit of the Gokongwei’s or SM Investments of
the Sy’s. On the other hand, a parent company is not necessarily organized for the purpose of investing in
equity since the parent company may have a private purpose.
*Why organize a Holding Company? To achieve SYNERGY among various corporations held, at the
same time to LIMIT LIABILITY with the operations of the various companies. The best examples of
synergy are contracts between companies with interlocking directors. Under Sec. 33, except in case of Fraud
and if it is reasonable under the circumstances.

ON SUBSIDIARIES
1. Concept: If the subsidiary is used to perform legitimate functions, a subsidiary’s separate existence shall be
RESPECTED; And the LIABILITY of the parent company as well as the subsidiary will be CONFINED to
those arising from their RESPECTIVE business [MR Holdings vs. Sheriff Bajar]. The doctrine will not be
followed even if the new corporation was the result of a SPIN-OFF of a former division of the parent
company [SMC Employees Union v. Confessor 1996]
*As applied in Sps. Nisce vs. Equitable PCI: Nisce made money market placements in PCI Capital, a
subsidiary of PCI. Then Equitable merged with PCI to form EPCI. Nisce now wants a set-off of its debts to
EPCIB with its placements in PCI Capital. The Court said: ***any claim against the subsidiary is not a
claim against the parent company and vice versa. The subsidiary has an independent and separate juridical
personality from its parent company, even if the latter OWNS ALL of the stocks of the other corporation.
The latter, TAKEN ALONE, is not sufficient to justify their being treated as one entity.
2. The three tests as applied to subsidiaries:
a. ”instrumentality" or "control" test. This test requires that the subsidiary be completely under the
control and domination of the parent. It inquires whether a subsidiary corporation is so organized and
controlled and its affairs are so conducted as to make it a mere instrumentality or agent of the parent
corporation such that its separate existence as a distinct corporate entity will be ignored. In addition, the control
must be shown to have been exercised at the time the acts complained of took place.
b. ”fraud" test. This test requires that the parent corporation’s conduct in using the subsidiary
corporation be unjust, fraudulent or wrongful. It examines the relationship of the plaintiff to the
corporation. It recognizes that piercing is appropriate only if the parent corporation uses the subsidiary in
a way that harms the plaintiff creditor. As such, it requires a showing of "an element of injustice or
fundamental unfairness."
c. ”harm" test. This test requires the plaintiff to show that the defendant’s control, exerted in a
fraudulent, illegal or otherwise unfair manner toward it, caused the harm suffered. A causal connection
between the fraudulent conduct committed through the instrumentality of the subsidiary and the injury suffered or the
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damage incurred by the plaintiff should be established. The plaintiff must prove that, unless the corporate veil is
pierced, it will have been treated unjustly by the defendant’s exercise of control and improper use of the
corporate form and, thereby, suffer damages. DBP vs. Hydro Resources Contractors Corporation, March 13,
2013
3. Scenarios:
a. A suit against a subsidiary is not one against a parent company; nor a suit against an agent, be that
against a principal: If used to perform legitimate functions, a subsidiary’s separate existence may be
respected and the liability of the parent corporation as well as the subsidiary will be confined to those
arising in their respective businesses. When a borrower failed to pay credit accommodations granted by a
subsidiary of a banking corporation, the suit against the parent company to direct it to re-compute the
rescheduling of the interest to be paid and to enjoin the foreclosure initiated by the parent company as attorney-
in-fact of the subsidiary will not prosper because the two corporations are separate and distinct from each
other. Aside from the fact that the lender is a wholly-owned subsidiary, there is no showing that it is a
mere instrumentality of the parent company. The parent-subsidiary relationship between the two
corporations is not the significant relationship involved in this case since the parent company was not sued
because it is the parent company of the lender. Rather, it was sued because it acted as attorney-in-fact of the
lender in initiating the foreclosure proceedings. A suit against an agent cannot, without compelling reasons,
be considered a suit against the principal. PNB vs. Ritratto Group, Inc., 362 SCRA 216 (2001)
b. The inclusion of the parent company as party defendant in an action for specific performance
filed against its subsidiary is not proper if the parent company does not exercise complete control over
the subsidiary and no management agreement exists between the two. The existence of interlocking
directors, corporate officers and shareholders is not enough justification to pierce the corporate veil.
Jardine Davis, Inc.,vs. JRB Realty, Inc.,463 SCRA 555 (2005)
c. When an investor has a claim against a subsidiary of another corporation which subsequently
became the acquired corporation in a merger, the claim against the subsidiary can not be enforced against
the surviving corporation even though the latter corporation by virtue of the merger acquired all the shares of
the absorbed corporation. This is because the fact that a corporation owns almost all of the stocks of
another corporation, taken alone, is not sufficient to justify their being treated as one entity. Spouses Ramon
Nisce vs. Equitable PCI Bank 516 SCRA 231 (2007)

SCENARIOS WHEN THE DOCTRINE OF PIERCING APPLIES

1. Setting up of a run-away corporation: Aggravating RANSOM's clear evasion of payment of its financial
obligations is the organization of a "run-away corporation," ROSARIO, in 1969 at the time the unfair labor
practice case was pending before the CIR by the same persons who were the officers and stockholders
of RANSOM, engaged in the same line of business as RANSOM, producing the same line of products,
occupying the same compound, using the same machineries, buildings, laboratory, bodega and sales and accounts
departments used by RANSOM, and which is still in existence. This is another instance where the fiction of
separate and distinct corporate entities should be disregarded as the second corporation seeks the protective
shield of a corporate fiction whose veil in the present case could, and should, be pierced as it was deliberately
and maliciously designed to evade its financial obligation to its employees. A.C. Ransom Labor Union-
CCLU vs. NLRC, May 29, 1987
2. When separation pay was not paid: Where an employee was not given any separation pay when a
corporation transferred him to its sister company, the separate juridical personality of the first corporation may
be disregarded. Indino vs. NLRC (1989)
• ONE-NESS OF OPERATION: When two corporations are characterized by oneness of operations
vested in the person of their common president and unity in the keeping and maintenance of their
corporate books and records through their common accountant and bookkeeper, loans obtained by these
corporations together with their controlling shareholder shall be treated as one. Thus, even though the
mortgagor of record is only of the corporations, their properties may be foreclosed to answer for all the
loan obligations of the two corporations, their common president/controlling shareholder and even the
latter’s common law spouse who received certain amount of the loan for the account of the former. Siain
Enterprises vs. Cupertino Realty Corporation, Inc.,et. al. 590 SCRA 435 (2009)
• Where three companies are owned by one family, such that majority of the officers of these
companies are the same, the companies are located in the one building and use the same messengerial
services, and there was no showing that the employee was paid separation pay when he resigned from one
company and then, transferred to the other, the separate juridical personalities of the three companies may be disregarded.
Guatson International Travel & Tours, Inc., vs. national Labor Relations Commission, 230 SCRA 815 (1994)
• Where it appears that three business enterprises are owned, conducted and controlled by the same
family which were all engaged in the construction business and which used the same equipment,
services and workers, both law and equity will, when necessary to protect the rights of third persons,
Ecce Ancilla Domini! 37 of 160

disregard the legal fiction that the (three) corporations are distinct entities, and treat them as identical.
Tomas Lao Construction vs. NLRC, 278 SCRA 716 (1997)
3. Sole supplier of another corporation: Where the production division that manufactures leather products of a
corporation engaged in department store business was organized into a separate corporation but its
incorporators and directors except for one are major stockholders of the department store, and the latter
is the exclusive buyer of the leather products produced by the separate corporation, with the two
corporations housed in the same building and using the same payrolls, their separate juridical personalities
may be disregarded. Thus, where the separate corporation was closed, the separation benefits of its
affected employees may be claimed from the department store. They cannot be ordered reinstated though or
absorbed into the pool of employees of the department store considering the diversity in skills, experience and orientation
between its employees and that of the separate corporation. Shoemart, Inc.,vs. NLRC (1993)
4. The President of a family-owned corporation who committed fraud in selling its vehicle to a
customer and collected down payment from the latter knowing fully well that the vehicle was already sold
to another cannot hide behind the separate corporate personality of the corporation to escape from liability.
Sps. Violago vs. BA Finance Corporation 559 SCRA 69 (2008)
5. When there is GROSS NEGLIGENCE, not mere negligence: In order to pierce the veil of corporate fiction,
for reasons of negligence by the director, trustee or officer in the conduct of the transactions of the
corporation, such negligence must be gross. Gross negligence is one that is characterized by the want of
even slight care, acting or omitting to act in a situation where there is a duty to act, not inadvertently but
willfully and intentionally with a conscious indifference to consequences insofar as other persons may be
affected. Parenthetically, gross or willful negligence could amount to bad faith. Thus, the President’s casual
manner, insouciance and nonchalance, nay, indifference, to the predicament of the distressed corporation, as
gleaned from his court testimony, glaringly exhibited a lackadaisical attitude from a top office of a
corporation, a conduct totally abhorrent in the corporate world constitute gross negligence that will
impute liability to the corporate officer for corporate obligations. Thus, under the circumstances, the investor
who made placement with the corporation could recover the same from the grossly negligent officer. Lucia
Magaling, et al. vs. Peter Ong 562 SCRA 152 (2008)
6. COMPLETE DOMINION: When an officer owns almost all of the stocks of a corporation, it does not
ipso facto warrant the application of the principle of piercing the corporate veil unless it is proven that the
officer has complete dominion over the corporation. WPM International Trading Inc., and Warlito Manlapaz
vs. Fe Corazon Labayen, September 17, 2014
7. FORUM SHOPPING: The separate juridical personality of a corporation may be disregarded where the
majority stockholder filed a derivative suit in behalf of the corporation to declare the sale as
unenforceable against the corporation despite the fact that the trial court in another case had already ruled
that the contract of sale between the corporation and its buyer was deemed perfected. There is forum
shopping where the stockholders, in a second case, and in representation of the corporation, seek to
accomplish what the corporation itself failed to do in the original case. First Philippine International Bank
vs. Court of Appeals, 252 SCRA 259 (1996)
8. SALE OF PROPERTY IN THE MIDDLE OF A LABOR DISPUTE: The sale of Times’ franchise as well
as most of its bus units to a company owned by Rondaris’ daughter and family members, right in the middle
of a labor dispute, is highly suspicious. It is evident that the transaction was made in order to remove Times’
remaining assets from the reach of any judgment that may be rendered in the unfair labor practice cases
filed against it. Times Transportation Company vs. Sotelo, February 16, 2005
9. SALE OF LAND TO AVOID CARP: The **sale of agricultural land covered by the agrarian reform
law by the owner to a corporation owned and controlled by the same owner and his family is null and
void. The corporate vehicle cannot be used to shield the owner from the agricultural claims of the tenant-
beneficiary. The veil of corporate fiction ought to be pierced when it is used to subvert public policy. Sta. Monica
Industrial vs. DAR (2008)

SCENARIOS WHEN THE DOCTRINE OF PIERCING DOES NOT APPLY

1. When it’s a question of rightful employment in a related corporation: The fact that the businesses of two
corporations are related, as one manufactures yarns while the other sells the same product; some employees
of one are the same persons manning and providing for auxiliary services to the other, and the physical plants,
offices and facilities are situated in the same compound, are not sufficient to justify the piercing of the
corporate veil of either corporation. The legal corporate entity is disregarded only if it is sought to hold the
officers and stockholders directly liable for a corporate debt or obligation and not when the only issue is
whether or not the rank and file employees working at the second corporation should be recognized as
a part of and/ or within the scope of the bargaining unit of the first corporation. Indophil Textile Mill
Workers Union PTGWO vs. Calica, 205 SCRA 697 (1992)
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• She based her claim on the SSS form wherein Manuel Villanueva appeared as employer. However, this
does not prove, in any way, that the corporation is used to defeat public convenience, justify wrong, protect
fraud, or defend crime, or when it is made as a shield to confuse the legitimate issues, warranting that its
separate and distinct personality be set aside. Hacienda Cataywa/Manuel Villanueva vs. Rosario Lorenzo,
March 18, 2015
2. When there are NO MALICIOUS ACTS on the president who is a controlling SH: The president of
corporation cannot be held solidarily liable with the corporation for breach of contract in the construction of a
library absent evidence of malicious acts by the former since a corporation has a personality separate and
distinct from its officers and stockholders. The same conclusion cannot be altered even though the president
is the controlling stockholder of the corporation because mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a corporation is not of itself a sufficient
ground for disregarding the separate corporate personality. The fact that the president resisted the claims of
the client does not demonstrate malice or bad faith to make him personally liable. EPG Construction
Company, Inc., vs. Court of Appeals 210 SCRA 230 (1992)
• The liability of a single proprietorship for encroaching on the timber concession area of another cannot
be enforced against a corporation simply because the proprietor, who is the controlling stockholder of the
corporation, transferred all her rights, interest and ownership in the Timber License to the corporation
for and in consideration of shares of stock of the latter. The alleged control of the proprietor in the assignee
corporation was not evident in any particular corporate acts of the corporation wherein the proprietor,
using the corporation, executed acts and powers directly involving the corporation. For the separate juridical
personality of a corporation to be disregarded, the wrongdoing must be clearly and convincingly
established. Matuguina Wood Products, Inc.,vs. Court of Appeals, 263 SCRA 490 (1996).
• Where there is nothing on record to indicate that the president and majority stockholders of a corporation
had acted in bad faith or with malice in carrying out the retrenchment program of the company, the
president cannot be held solidarily and personally liable with the corporation . Asionics Philippines, Inc.,vs.
NLRC, 290 SCRA 164 (1998)
• In as much as the real properties included in the inventory of the estate of a deceased stockholders are in the
possession of and registered in the name of the corporations, which under the law has a personality
separate and distinct from their stockholders, and in the absence of any basis to shred the veil of
corporate fiction, the presumption of conclusiveness of said titles in favor of said corporations should
stand undisturbed. Thus, the inclusion in the estate of the deceased stockholder properties under the name of various
corporations was erroneous even though the corporations were owned and controlled by the deceased stockholder during his
lifetime. Lim vs. CA, 323 SCRA 102 (2000)
• when there is no agreement that Mr. Bautista shall be held liable for the corporation’s obligations in
his personal capacity, he cannot be held civilly liable for the value of the two checks issued in payment for
the corporation’s obligation. Bautista vs. Auto Plus Traders Inc.,561 SCRA 223 (2008)
3. Mere fact of having common directors: An assignee of a promissory note cannot enforce payment thereof if
the same had already been extinguished by compensation as when the maker of the note and the assignor thereof are
mutually indebted to each other. The mere fact that two corporations have a common director is not a
sufficient basis for disregarding their separate juridical personalities. Sesbreno vs. CA (1993).
• Mere substantial identity of the incorporators and similarity of business of two corporations do not
necessarily imply fraud nor warrant the piercing of the veil of corporate fiction. In the absence of
evidence that the second corporation was established and later on closed to defeat the rights of the
workers of the first corporation and that the corporate personalities of the two corporations were used to
perpetrate fraud or circumvent the law, the said corporations should be treated as distinct and separate
from each other. Thus, the laborers of the first corporation whose employment ceased because of the closure
cannot enforce their claims against the second corporation. Laguio vs. NLRC, 262 SCRA 709 (1996)
• The corporate separateness of two corporations should be maintained if other than the allegation that one
is 90% owned by the other, there is nothing else which could lead the court under the circumstances to disregard their
corporate personalities. Thus, where a certificate of indebtedness issued to a corporation was assigned to
another corporation without authority and the assignee, in turn, transferred the same instrument with the
obligation to repurchase but failed to redeem it from the second assignee, the infirmity of the first
assignment cannot be glossed over simply because the registered owner of the instrument is 90%
owned by the second assignor. Traders Royal Bank vs. Court of Appeals, 269 SCRA 15 (1997)
4. Incorporation happened before dissolution of sole proprietorship: Where a corporation engaged in security
services was incorporated before the single proprietorship owned by one of its incorporators engaged in the
same business ceased to operate, the incorporator in question owned the least number of shares, and the assets of the
single proprietorship were not transferred to the corporation, its separate juridical personality cannot be
disregarded. The doctrine of piercing the corporate veil has no application to this case where the purpose is not
to hold the individual stockholders liable for the obligation to the corporation but on the contrary to hold
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the corporation liable for the obligations of stockholders. Thus, the security guards of the single
proprietorship cannot be considered employees of the corporation. Robledo vs. NLRC, 238 SCRA 52
(1994)

5. Even when the corporate officers bound themselves as surety of the corporation’s obligations: The separate
juridical personality of a corporation cannot be disregarded simply because its officers bound themselves as
surety to the corporate obligations. Thus, the doctrine of piercing the veil of corporate fiction cannot be
applied to justify the filing by the individual officers of the corporation of a petition for suspension of payments
with the SEC as the latter has jurisdiction only over corporations and partnerships registered with it. Union Bank
of the Philippines vs. Court of Appeals, 290 SCRA 198 (1998)
6. When it’s the liability of a SH, not the corporation: The lawyer of the stockholder of a corporation in an
estate case cannot sue the corporation for payment of his attorney’s fee nor apply such legal fees in
payment of the purchase price of a vehicle he bought from the corporation. The obligation of the
stockholder is not the liability of the corporation since the two have separate juridical personalities.
Francisco Motors Corporation vs. Court of Appeals, 309 SCRA 72 (1999)
7. When the second corporation was organized PRIOR to the labor disputes in the first corporation: When the
business operations of the corporation ceased because of losses and labor dispute and its customers transferred
their orders for delivery of electronic products to another corporation engaged in the same line of business, the
displaced workers of the first corporation cannot apply the doctrine of piercing the corporate veil to enforce
their monetary claims against the second corporation simply because the two corporations have the
same controlling stockholders, common president, engaged in the same line of business and the latter
hired some of the displaced workers since it is established that the second corporation was an
independent company organized EVEN PRIOR to the labor dispute in the first corporation. The union
failed to show that the primary reason for the closure of the establishment was due to the union
activities of the employees. Complex Electronics Employees Association vs. NLRC, 310 SCRA 403 (1999)
8. When another corporation becomes a controlling SH of another corporation: FBCI’s acquisition of the
“substantial and controlling shares of stocks” of Esses and Tri-Star does not create a substantial change
in the rights or relations of the parties that would entitle FBCI to possession of the Calatagan Property,
a corporate property of Esses and Tri-Star. Esses and Tri-Star, just like FBCI, are corporations. A corporation
has a personality distinct from that of its stockholders. Properties registered in the name of the
corporation are owned by it as an entity separate and distinct from its members. Ricardo S. Silverio, Jr.,
Esses Development Corporation, and Tri-Star Farms, Inc.,vs. Filipino Business Consultants, Inc., August 12,
2005.
9. When one corporation buys the assets of another corporation: A corporation could not be made a party
defendant to a collection case simply because summons could not be served on the debtor corporation on the
mere grounds that the businesses of the two corporations are interrelated and they have common
directors absent sufficient showing that the corporate entity was purposely used as a shield to defraud creditors
and third persons of their rights.
Likewise, the acquisition of some of the machineries and equipment of the seller-corporation was not
proof that the buyer-corporation was formed to defraud creditor of the seller-corporation. No merger
took place between the seller and the buyer. What took place was a sale of the assets of the former to the
latter. Merger is legally distinct from a sale of assets. Thus, where one corporation sells or otherwise transfers
all its assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and
liabilities of the transferor. China Banking Corporation vs. Dyne-Sem Electronics Corporation 494 SCRA 493
(2006).
• The laborers of the Pantranco North Express Inc (PNEI), a corporation which had ceased operations, can
not enforce their claims against PNB just because it acquired PNEI at a time it was suffering financial reverses
nor against PNB Madecor just because it is the owner of PNEI properties and a subsidiary of PNB nor against
Mega Prime just because the latter acquired the shares of PNB over PNB-Madecor, PNB. PNB-Madecor and
Mega Prime are corporations with personalities separate and distinct from that of PNEI. The general
rule is that a corporation has a personality separate and distinct from those of its stockholders and other
corporations to which it may be connected. Moreover, these corporations are registered as separate
entities and, absent any valid reason, their separate identities should be maintained and should not be
treated as one. Neither can the legal personality of PNEI be merged with PNB simply because the latter
acquired the former. Settled is the rule that where one corporation sells or otherwise transfers all its
assets to another corporation for value, the latter is not, by that fact alone, liable for the debts and liabilities
of the transferor. The execution sale on the Pantranco properties to satisfy the laborers’ claims is null
and void. However, only PNB-Madecor or its successors or assigns has the right to annul the sale.
PNB is not a real party in interest to question the sale just because Mega Prime is indebtedness to it. PNB’s right over the
Pantraco properties is only inchoate which could ripen to substantial interest only if Mega does not
pay its indebtedness to PNB. PEA-PTGWO vs. NLRC 581 SCRA 598 (2009)
Ecce Ancilla Domini! 40 of 160

10. When the other SH were appointed merely to comply with the minimum requirement: Where the lawyer of
the controlling stockholder of the corporation advised another stockholder that he could obtain
possession of certain corporate properties by way of return for his equity investment but the lawyer acted
without board approval, the advice is not binding on the corporation even though it had the approval of
the controlling stockholder.The doctrine of piercing the veil of corporate fiction can not be invoked on the
sole ground that the presence of other stockholders in the corporation was only for the purpose of
complying with the statutory minimum requirements on number of directors. Yamamoto vs. Nishino
Leather Industries, Inc., and Ikuo Nishino 551 SCRA 447 (2008)
11. Even if the business plan did not materialize and the officer signed the loan for that business plan: Other
than mere ownership of capital stock, circumstances showing that the corporation is being used to commit fraud
or proof of existence of absolute control over the corporation have to be proven. In short, before the
corporate fiction can be disregarded, alter-ego elements must first be sufficiently established. The mere
fact that the same controlling stockholder/officer signed the loan document on behalf of the corporation
does not prove that he exercised control over the finances of the corporation. Neither is the absence of a
board resolution authorizing him to contract the loan nor the Corporation’s failure to object thereto support
this conclusion. While he is the signatory of the loan and the money was delivered to him, the proceeds of
the loan were intended for the business plan of the corporation. That the business plan did not materialize is also
not a sufficient proof to justify a piercing, in the absence of proof that the business plan was a
fraudulent scheme geared to secure funds from the lender. Saverios vs. Puyat, November 27, 2013
12. Even if the company is owned 100% by another: URC and Oilink had the same Board of Directors and
Oilink was 100% owned by URC. The Court held that the doctrine of piercing the corporate veil has no
application here because the Commissioner of Customs did not establish that Oilink had been set up to
avoid the payment of taxes or duties, or for purposes that would defeat public convenience, justify
wrong, protect fraud, defend crime, confuse legitimate legal or judicial issues, perpetrate deception or
otherwise circumvent the law. Commissioner of Customs vs. Oilink International Corp July 2, 2014
• The fact that the businesses of private respondent and Acrylic are related, that some of the employees of
the private respondent are the same persons manning and providing for auxilliary services to the units
of Acrylic, and that the physical plants, offices and facilities are situated in the same compound, it is
the Court’s considered opinion that these facts are not sufficient to justify the piercing of the corporate veil
of Acrylic. Hence, the Acrylic not being an extension or expansion of private respondent, the rank-and-
file employees working at Acrylic should not be recognized as part of, and/or within the scope of the
petitioner, as the bargaining representative of private respondent. Indophil Textile Mill Workers Union-
PTGWO vs. Voluntary Arbitrator, February 3, 1992
• The defense of separateness will be disregarded where the business affairs of a subsidiary corporation
are so controlled by the mother corporation to the extent that it becomes an instrument or agent of its
parent. But even when there is dominance over the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction
applies only when such fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime. Bibiano O. Reynoso, IV vs. Hon. Court of Appeals and General Credit Corporation, G.R.
Nos. 116124-25, November 22, 2000
—————————————————————————————

E. Incorporation and Organization

(TITLE II: INCORPORATION AND ORGANIZATION OF PRIVATE CORPORATIONS)

PEOPLE IN THE CORPORATION [Sec 5]

1. Corporators: those who compose a corporation, whether as stockholders or as members.
a. Corporators in a stock corporation are called stockholders or shareholders.
b. Corporators in a non-stock corporation are called members.
2. Incorporators: those stockholders or members mentioned in the articles of incorporation as:
a. originally forming and composing the corporation and
b. who are signatories thereof.

1. Promoter
a. Liability of Promoter
b. Liability of Corporation for Promoter’s Contracts

RULE ON PROMOTERS
*Promoter: an agent of the 5 Incorporators before the incorporation or the agent of the Corporation after
incorporation. They promote the idea of the Corporation
Ecce Ancilla Domini! 41 of 160

1. GR: a corporation should have a full and complete organization and existence as an entity before it can enter
into any kind of a contract or transact any business.
2. XPN: a contract made by the promoters of a corporation on its behalf may be adopted, accepted or
ratified by the corporation when organized. Rizal Light & Ice Co vs. Morong, Rizal September 28, 1968
3. In short, the Corporation is not liable for the contracts entered into by the promoter, unless the Corporation
ratifies or affirms as its own those contracts.

2. Number and Qualifications of Incorporators [Section 10]

QUALIFICATIONS OF INCORPORATORS [Sec 10]***

1. They must be natural persons
*GR: an artificial being cannot create another artificial being;
*XPN: corporations previously created to hold the shares of RURAL BANKS &
COOPERATIVES: these are CORPORATE shareholders [ Rural Banks Act of 1992, where incorporated
cooperatives are allowed to be incorporators of rural banks]
*NB: Can juridical persons be incorporators? ***No, but they can be subscribers. EG: BDO would
like to organize an insurance company [BDO Generali]. How can BDO own 99.9% of BDO Generali if under
the law you need to have natural persons as incorporators? While BDO cannot be an incorporator, it can be a
subscriber. So it can own 99.9% of the outstanding capital stock of BDO generali. The 5 persons can be
nominees of BDO.
2. not less than five (5) but not more than fifteen (15)
*XPN: a. corporation sole; b. NSC which can have more than 15
3. all of legal age and
4. a majority of whom are residents of the Philippines
*NB: An incorporator can be a corporator. Non residents may be incorporators because the law only
requires the majority to be residents of the Philippines; An incorporator remains to be an incorporator even if
he will later on cease to be a shareholder. However, an incorporator who ceases to hold a share cannot be considered a
corporator.
***Is Citizenship a requirement? NO, as long as majority of them are Philippine residents, except if it
is engaged in nationalized activities. If it is nationalized, obviously you cannot have foreigners as
incorporators of mass media, etc. If partly nationalized, foreigners can be incorporators to the extent of the
allowable equity participation. Also, foreigners can be elected to the board to the extent of the allowable
foreign equity. But can they be elected officer of the mining company? No, while they can be incorporators or
elected directors to the extent of allowable equity participation, they cannot be appointed as officers under
the anti–dummy law. A ***foreigner cannot be appointed to any executive positions of any corporation
engaged in a nationalized activity whether wholly or partly.
5. (Additional requirement for INCORPORATORS): Each of the incorporators of a stock corporation must
own or be a subscriber to at least one (1) share of the capital stock of the corporation.
[] It is possible for a business to be wholly owned by one individual. The validity of its
incorporation is not affected when such individual gives NOMINAL OWNERSHIP OF ONLY ONE SHARE of
stock to each of the other four incorporators. This is **NOT NECESSARILY ILLEGAL. But, this is valid
only between or among the incorporators privy to the agreement. It does bind the corporation which, at the
time the agreement is made, was non-existent. Thus, INCORPORATORS CONTINUE TO BE STOCKHOLDERS of a
corporation unless, subsequent to the incorporation, they have validly transferred their subscriptions to
the real parties in interest. As between the corporation on the one hand, and its shareholders and third persons
on the other, the **CORPORATION LOOKS ONLY TO ITS BOOKS for the purpose of determining
who its shareholders are. A person is considered a stockholder if the Articles of Incorporation and By-
laws, as well as the General Information Sheet filed with the SEC indicated that such person was an
incorporator and subscriber of one share. Even granting that there was an agreement that he is holding
the share only in trust for another, the same is binding only as between the parties. As such, HE CAN
EXERCISE HIS RIGHT OF INSPECTION under the Corporation Code. Nautica Canning Corporation v.
Yumul 473 SCRA 415 (2005)

COMPONENTS OF A CORPORATION
TITLE ROLE
CORPORATORS Those who compose a corporation, whether as stockholders or
members, including the incorporators who are still SH.
Ecce Ancilla Domini! 42 of 160

TITLE ROLE
INCORPORATOR Those mentioned in the Articles of Incorporation as originally
S forming and composing the corporation and who are
signatories thereof. (NB: even if one is mentioned in the AOI
but if he is not a signatory thereto, he is a mere SH or member,
not an incorporator)
DIRECTORS & The Board of Directors is the governing body in a stock corporation
TRUSTEES while the Board of Trustees is the governing body in a non stock
corporation. They exercise the POWERS of the corporation.
CORPORATE The officers who are identified as such in the Corporation Code, the
OFFICERS Articles of Incorporation, or the By laws of the corporation.
STOCKHOLDERS Owners of shares of stock in a stock corporation; corporators of a
stock corp
MEMBERS Those who compose NSC. Corporators of a corporation which have no
capital stock. They are not owners of shares of stocks, and
their membership depends on terms provided in the articles of
incorporation or by laws (Sec. 91)
PROMOTER Self-Constituted OrganizeR who finds an enterprise or venture and
helps attract investors, forms a corporation & launches it in
business, all with a view to promotion of profits; A person who,
acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives
consideration therefor. (Sec. 3.10, R.A. No. 8799, SRC)
SUBSCRIBER** A person who agreed to take and pay for original, unissued shares
of a corporation formed or to be formed.
UNDERWRITER A person who guarantees on a firm commitment and/or declared best
effort basis the distribution and sale of securities of any kind
by another
1. X is a Filipino immigrant residing in Sacramento, California. Y is a Filipino residing in Quezon City,
Philippines. Z is a resident alien residing in Makati City. GGG Corporation is a domestic corporation - 40%
owned by foreigners and 60% owned by Filipinos, with T as authorized representative. CCC Corporation is a
foreign corporation registered with the Philippine Securities and Exchange Commission. KKK Corporation is a
domestic corporation (100%) Filipino owned. S is a Filipino, 16 years of age, and the daughter of Y.***
a. Who can be incorporators? Who can be subscribers? X, Y, Z, and T can be incorporators. The
corporations and S cannot be incorporators since the former are not natural persons and the latter is
not of legal age. (Sec. 10, Corporation Code). All of the foregoing can become subscribers except S since
she is not yet of legal age.
b. What are the differences between an incorporator and a subscriber, if there are any? The difference
between the two is as follows: a) an incorporator is a signatory of the AOI while a subscriber is not; b) there is
a limit for the number of incorporators while there is no limit in the number of subscribers; c) an
incorporator must be a natural person while a subscriber can be either natural or juridical person and d)
incorporators has a residence requirement while there is no such requirement in case of subscribers.
c. Who are qualified to become members of the board of directors of the corporation? A natural
person, of legal age, and who owns at least one share of stock registered in his name in the books of the
corporation and must have all the qualifications and none of the disqualifications provided for by the law
and AOI or the by-laws of the corporation. (Sec. 23, Corporation Code)
d. Who are qualified to act as Treasurer of the company? A natural person, of legal age, whether or
not a Filipino citizen but under the SEC rules he must be a resident of the Philippines and provided that he is
not the president of the same corporation at the same time. (SEC Opinion No. 10-24)
Ecce Ancilla Domini! 43 of 160

[] Unless duly authorized, a TREASURER whose powers are limited cannot bind the
corporation in a sale of its assets. **Selling is obviously foreign to a corporate treasurer’s functions, which
generally has been described as TO RECEIVE AND KEEP THE FUNDS of the corporation and TO DISBURSE
THEM in accordance with the authority given by the board or the properly authorized officers. When the corporate
officers exceed their authority, their actions cannot bind the corporation unless it has ratified such acts or is estopped
from disclaiming them. A receipt of the payment of the price for a parcel land belonging to a corporation which
was sold by the treasurer without authority **does not constitute ratification of the sale, since the receipt was
not issued by the corporation but is only the handwritten note of its treasurer. San Juan Structure and Steel
Fabricators, Inc.,vs. Court of Appeals, 296 SCRA 631 (1998)
e. Who can be appointed Corporate Secretary? (2012) A natural person, of legal age, and a Filipino
resident citizen may become a secretary of the corporation provided that he is not the president of the same
corporation at the same time.
f. the president: The authority of certain individuals to bind the corporation is generally derived from
law, corporate by-laws or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business. In the absence of a charter or by-law provision to the contrary,
the president is presumed to have the authority to act within the domain of the general objectives of its
business and within the scope of his usual duties. And **even if a certain contract is outside the usual
powers of the president, the corporation’s ratification of the same and acceptance of the benefits make it
BINDING. Thus, where the president of a corporation hired a consultant to prepare an operations manual in
connection with the corporation’s application for license as a bonded warehouse, the **corporation
accepted the operations manual and allowed the contractor to conduct a seminar for its employees, the contract is
binding on the corporation even though there was no written authorization from the board which is DEEMED TO
HAVE RATIFIED the contact. People’s Aircagro and Warehousing Company, Inc.,Court of Appeals, 297 SCRA
170 (1998)

INCORPORATOR vs. CORPORATOR

INCORPORATOR CORPORATOR/SUBSCRIBER/SH
May or not be signatory of the Articles of
Signatory of the Articles of Incorporation
Incorporation; SH or member
Cease to be a corporator by sale of his shares
Does not cease to be an incorporator upon in case of stock corporation. In case of non
sale of his shares stock corporation, when the corporator
ceases to be a member.
GR: 5 to 15

XPN: corporations sole; mergers of banks (up No limit;
to 21)
GR: must be natural persons. XPN:
can be natural or juridical persons
Cooperatives/Rural Banks
Originally forms part of the corporation Not necessarily
GR: Filipino citizenship is not a requirement. 

Depending on the nature of business of the
XPN: When engaged in a business which is
corporation. If it is nationalized, the
partly or wholly nationalized where
citizenship is material
majority must be filipinos
majority must be residents No such requirement for subscribers.
must have contractual capacity may be such through his guardian
**Bar 2006: What is the minimum and maximum number of incorporators required to incorporate a stock
corporation? is this also the same minimum and maximum number of directors required in a stock corporation?
Any number of natural persons not less than five but not more than fifteen may form a private corporation
(sec. 10, Corporation Code). Likewise, the number of directors must not be less than five nor more than
fifteen as indicated in the AOI (Sec. 14, Corporation Code). 

Must all incorporators and directors be residents of the Philippines? No. The Corporation Code only
provides that majority of incorporators and directors of a corporation must be residents of the
Philippines (Sec. 10 and Sec. 23, Corporation Code)
Ecce Ancilla Domini! 44 of 160

STEPS IN SETTING UP A CORPORATION

1. Determine the Incorporators: not less than 5 not more than 15.
2. Execute the Articles of Incorporation: must conform with the form prescribed by the corporation code
3. Execute the By laws: May be submitted together with the AOI or 1 month after incorporation; NB: **If the
corporation does not submit by laws one month after incorporation, it is a de-facto corporation.
4. Treasurer’s Affidavit showing that at least 25% of the authorized capital stock has been subscribed and 25%
of the total subscription must be paid in money or property.
5. Verification Slip (can now reserve name online) stating that the proposed name is not identical or confusingly
similar to other corporate names
6. Undertaking to Change Corporate Name, in case the SEC finds out that the corporate name is identical with
another corporation. This is a fall back mechanism. Remedy: file a petition to SEC to revoke or direct the
corporation to change such corporate name because it is confusingly similar to a previously registered
corporate name. Can Equitable PCI Bank ask “Equitable Disco Club” to change its name? NO. **You cannot
preclude the use of a trademark or tradename for goods not related to the certificate of registration unless it
will affect its goodwill.
7. Payment of fees
8. In case of Banks and other special Corporations, the favourable recommendation from the appropriate
government agency.
9. Issuance by the SEC of the Certificate of Incorporation: Certificate includes: Certificate of Filing of the AOI
and the Certificate of Filing of the By-laws. You have two years to organize.

3. Corporate Name — Limitations on Use of Corporate Name [Sec 18]

RULES ON CORPORATE NAME

1. To fall within the prohibition under Section 18 two requisites must be proven:
a. that the complainant corporation acquired a prior right over the use of such corporate name; and
b. the proposed name is either:
i. identical or
ii. deceptively or confusingly similar to that of:
a) any existing corporation or
b) any other name already protected by law or
c. is patently deceptive, confusing or contrary to existing laws.
2. Who duty is to to prevent confusion in the use of corporate names? SEC. It has authority to de-register at
all times and under all circumstances corporate names which in its estimation are LIKELY TO GENERATE
CONFUSION. Note that likelihood of confusion is enough.
3. Purposes of SEC’s authority:
a. for the protection of the corporations involved
b. more so, for the protection of the public
4. EG: Petitioner’s corporate name which is “Industrial Refractories Corp. of the Phils.” and respondent’s
corporate name which is “Refractories Corp. of the Phils.” obviously contain the identical words “Refractories”,
“Corporation” and “Philippines;” hence, petitioner’s corporate name clearly falls within the prohibition. Industrial
Refractories Corporation of the Philippines vs. CA, SEC Refractories Corporation of the Philippines October 3,
2002. ***Elements so that a corporation may bar the proposed corporate name
a. Complainant corporation must have a PRIOR RIGHT over the corporate name; How is prior right
acquired? By registration, so the complainant corporation must have registered first.
b. The proposed corporate name of the applicant corporation must be SIMILAR OR
CONFUSINGLY OR DECEPTIVELY SIMILAR with the name registered with the SEC or the NAME
ITSELF IS DECEPTIVE OR CONTRARY TO LAW.
5. Bar: Can a single proprietorship adopt the name ABC Marketing Incorporated?
No. One cannot adopt the name of a corporation, you cannot use the name incorporated or corporation or
their abbreviation.
a. National, Maharlika, Barangay: words reserved for the government. How about National Bookstore?
It’s not the name of the corporation registered with SEC, but the name of the bookstore.

CHANGE OF CORPORATE NAME

1. Principles on corporate name:
a. A change of corporate name is not a mode of dissolution.
Ecce Ancilla Domini! 45 of 160

b. Does the corporation have the obligation to inform its customers or clients about change of
corporate name? NO. There is no provision in the Corporation Code or any law for that matter that obligates
the corporation to do so. It is not a matter of legal obligation.
2. Rule: a change in the name of the corporation does not make it a new corporation and does not affect its
properties, right and liabilities. It is the same corporation with a different name, and its character is in no
respect changed. Republic Planters Bank vs. CA, December 21, 1992.
*the corporation upon such change in its name, is in no sense a new corporation, nor the successor
of the original corporation. P.C. Javier & Sons, vs.Paic Savings & Mortgage Bank. June 29, 2005.
3. Consequences:
a. A bank that changes its corporate does not have the obligation to notify a debtor of such change
absent any law, circular or regulation requiring it. For the court to require so would amount to judicial legislation.
Unless there is a law, regulation or circular from the SEC or BSP requiring the formal notification of all debtors of banks of
any change in corporate name, such notification remains to be a mere internal policy that banks may or
may not adopt. P.C. Javier & Sons vs. Paic Savings & Mortgage Bank, June 29, 2005.
b. **The Javier case applies to a private or non-public company. If it is a public company, it is required
to disclose to the PSE and SEC any material change involving or affecting the company. A change of corporate
name is definitely a material change that needs to be disclosed to PSE and SEC.
c. The renamed corporation remains liable for the illegal dismissal of its employee separated under
that guise. Verily, the amendments of the AOI of Zeta to change the corporate name to Zuellig Freight and
Cargo Systems, Inc., did not produce the dissolution of the former as a corporation. Zuellig Freight and
Cargo Systems vs. NLRC, July 22, 2013.
—————————————————

4. Corporate Term [Sec 11]

RULE ON CORPORATE TERM & ITS EXTENSION**

1. Term of Corporate Existence
GR: It depends on the period stated in the Articles of Incorporation; shall not exceed 50 years.
XPN: Unless sooner dissolved or unless said period is extended (may be extended for periods not
exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation) in
accordance with this Code;
*Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent
expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and
Exchange Commission.
[] Section 11 of Corporation Code provides that a corporation shall exist for a period not exceeding fifty
(50) years from the date of incorporation unless sooner dissolved or unless said period is extended. Upon the expiration
of the period fixed in the AOI in the absence of compliance with the legal requisites for the extension of the
period, the **corporation ceases to exist and is DISSOLVED IPSO FACTO. PNB vs. CFI Rizal, G.R. No.
63201, May 27, 1992
2. As to the time to file extension:
*How? by an amendment of the articles of incorporation
*GR: no extension can be made earlier than five (5) years prior to the original or subsequent expiry
date(s)
*XPN: unless there are justifiable reasons for an earlier extension as may be determined by the SEC.
3. Summary of Extension of Corporate Existence: Extension may be made for periods not exceeding (50)
years in any single instance by an amendment of the articles of incorporation. However, extension must be made
a. within 5 years before the expiry date of the corporate term.
b. must comply with procedural requirements for amendment of AOI.
4. Doctrine of relation or RELATING BACK doctrine**
*GR: Generally: the filing and recording of a certificate of extension after the term cannot relate back
to the date of the passage of the resolution of the stockholders to extend the life of the corporation.

*XPN: However, the doctrine of relation applies if the failure to file the application for extension
within the term of the corporation is due to
a. the neglect of the officer with whom the certificate is required to be filed
b. or to a wrongful refusal on his part to receive it (Aquino, Philippine Corporate Law Compendium, 2006).
5. What is the remedy available to a corporation in case of a failure to extend corporate term due to
inadvertence? REINCORPORATE! Same corporators, same authorized capital stock, same everything,
including the corporate name. The trustees of the defunct corporation may authorize the adoption of that
corporate name. The trustee will simply authorize the new corporation to adopt the same corporate name.
Ecce Ancilla Domini! 46 of 160

**NB: The term of the corporation may only be extended during the term of the corporation and not when the
term has expired.
a. Are the assets of the defunct corporation transferred automatically?
No. Expiration of the term automatically dissolves the corporation. Next step? SC: the SHs from the
defunct corporation may assign (not sale or conveyance) their right to the properties of the defunct
corporation as their subscriptions to the newly incorporated corporation.
b. Is that subject to tax? Every corporation has a different registration number. The defunct and the new
have different registration numbers. No taxable gain. Last year, Kim Henares issued a regulation not to process
reincorporation without affidavit from the incorporators that taxes have been paid. So that remedy is no longer
economically viable. It is still a valid legal option but you have to deal with the issue of taxation. Pay the tax
otherwise SEC will not approve it.

POWER TO EXTEND OR SHORTEN THE CORPORATE TERM [Sec 37]

1. Requisites:
a. Vote required:
i. approved by a majority vote of the board of directors or trustees
ii. and ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations.

***You cannot extend a corporate term by mere referendum or written assent of the
stockholder—there must be a meeting, to wit:
(a) Section 16 provides Amendment of Articles of Incorporation by a majority vote of the
board of directors or trustees and the vote or written assent of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock/members, without prejudice to the appraisal right of dissenting
stockholders
(b) Section 37 provides that extension or shortening of corporate term as stated in the articles
of incorporation must be approved by a majority vote of the board of directors or trustees and ratified at a
MEETING by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at
least two-thirds (2/3) of the members in case of non-stock corporations.
b. AOI are amended to effect such extension or shortening of corporate term.
2. Exercise of APPRAISAL RIGHT: any SH who DISSENTS from the act to extend or shorten the corporate
term may exercise his appraisal right.
**Appraisal right: the right of a SH to DEMAND PAYMENT of the fair value of his shares when he
dissents from certain corporate acts [Sec 81]
[] Section 81. Instances of appraisal right. – Any stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his shares in the following instances:
1. In case any amendment to the articles of incorporation has the effect of
a. changing or restricting the rights of any stockholder or class of shares, or of
b. authorizing preferences in any respect superior to those of outstanding shares of any class,
or of
c. extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the Code; and
3. In case of merger or consolidation.
3. Notice Requirement
a. Written notice shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation of the:
i. proposed action and of
ii. the time and place of the meeting
b. and deposited to the addressee
i. in the post office with postage prepaid,
ii. or served personally.
4. Bar 2012: AAA Corporation is a bank. The operations of AAA Corporation as a bank was not doing well. So,
to avert any bank run, AAA Corporation, with the approval of the Monetary Board, sold all its assets and
liabilities to BBB Banking Corporation which includes all deposit accounts. In effect then, BBB Corporation
will service all deposits of all depositors of AAA Corporation.
a. Will the SALE OF ALL assets and liabilities of AAA Corporation to BBB Banking Corporation
automatically dissolve or terminate the corporate existence of AAA Corporation? NO. AAA Corporation is an
artificial being created by law and has a legal personality of its own. **A corporation does not owe its
existence upon the presence of assets and properties. It can only be dissolved in cases provided for by
Ecce Ancilla Domini! 47 of 160

law. As such, AAA Corporation will SUBSIST REGARDLESS OF THE SALE OF ALL of its assets and liabilities to
another corporation.
b. What are the LEGAL REQUIREMENTS in order that a corporation may be dissolved? A corporation
may be dissolved****
i. VOLUNTARILY, by shortening of the corporate term and
*How? through amendment of the AOI. The action for dissolution must be
approved by majority of the directors or trustees and 2/3 of the stockholders representing the outstanding
capital stock or members, publication requirement and filed with SEC which will issue certificate of
dissolution. If there are creditors affected, there must be a hearing to hear the objections and claims of the
creditors.
ii. through INVOLUNTARY DISSOLUTION.
*How? through filing of a verified complaint with the SEC based on any ground
provided by law or rules.
——————————————

5. Minimum Capital Stock and Subscription Requirements [Sections 12-13]

MINIMUM REQUIREMENTS
1. Requirements for the amount of capital stock to be subscribed and paid for the purposes of incorporation:
a. at least 25% of the authorized capital stock (ACS) as stated in the articles of incorporation (AOI)
must be subscribed at the time of incorporation, and
b. at least 25% of the total subscription must be paid upon subscription; ***Unless
otherwise required by special law, there is no minimum amount of authorized capital stock. Provided, that the
paid up capital is not less than Php5,000.
*Is it important that each subscriber must pay 25% of the subscription? No. As long as 25% of the
TOTAL subscription is paid in cash or property.
2. Let’s say if A subscribed to 50M and paid 20M, when does he pay the balance of the subscription?
a. on a date or dates fixed in the contract of subscription without need of call, or
b. in the absence of a fixed date or dates, upon call for payment by the board of directors (BOD).
*So “call” in corporate jargon or parlance means demand. Demand is not necessary to put the obligor
in default if the contract specifies the due date. According to the SEC, it is one of those cases where demand
is not necessary to put the obligor in default, i.e., when the law so provides.
3. Let’s say the due date is June 1, 2015. On June 1, he did not pay. On June 15, the Corporation declared cash
dividends. Is he entitled? Yes, he is entitled to dividends because unpaid shares are not delinquent shares
and holders of unpaid shares under Section 72 of the Corporation Code have all the rights corresponding to
the subscribed shares.
a. Can you apply the dividends to unpaid subscription even if the subscription contract is silent? No.
The ***right to offset only applies to delinquent stocks not unpaid shares.
b. Supposing on June 30 the Corporation called a stockholder’s meeting to elect the directors of the
corporation. Can A vote the shares? Second, is he qualified to be elected as a director? Yes to both questions.
Because, again, ***unpaid shares are not delinquent shares, they have all the rights corresponding to the
subscribed shares.
c. Therefore, the question is, when do shares become delinquent? They ***become delinquent if not
paid within 30 days from due date. After 30 days, the shares are no longer entitled to vote, receive stock
dividends. As to cash dividends, it shall be applied against unpaid subscription.
d. How many unpaid shares of A are entitled to receive dividends? 50M shares. The standing of a
shareholder in a corporation is measured by subscription. So ***even though he paid only 20M, he is
entitled to receive dividends for the entire 50M shares.
e. How many shares can he vote during the election of directors? Same, 50M shares. So again, the
***standing of a stockholder is measured or dependent on his subscription and not based on what he
actually paid, until his shares become delinquent.
f. Next point, may the corporation apply dividends against unpaid subscription or unpaid shares?
The answer is no, unless of course the contract of subscription allows set-off. In which case it is set-off by
agreement of the parties, or conventional set-off but not legal set-off.
g. Now why is it that the corporation cannot apply dividends against unpaid subscription? Because
Section 43 is very clear. It can ***apply dividends against unpaid subscription only on delinquent stocks
not on unpaid shares.
4. Issuance of shares taken from the unissued portion of the authorized capital stock is not subject to 25%
payment requirement. The price, terms and conditions of payment, may be determined by the Board of
Ecce Ancilla Domini! 48 of 160

Directors, which can be less than 25%. It can be 10% payment only, and the balance at a later date, depending on
the contract of subscription. So the only 2 cases when you are required to pay 25% of the subscription are:
a. upon incorporation and
b. increase in the authorized capital stock.
**XPN: according to SEC, if the corporation is insolvent or about to be insolvent, in which case, you
have to pay 25% of the subscription.
*Supposing the corporation will issue shares from the unissued portion of the authorized capital
stock (no longer from the subscribed capital)—is that subject to stockholders’ approval? [Ruby Industrial,
penned by Bersamin] NO., because it is only in increase in capital stock when you are required to secure
stockholders’ approval. But ***issuance of shares from the unissued portion of authorized capital stock
only requires board approval (majority of the quorum, not majority of the entire board). However,
according to the Supreme Court, the ***issuance of shares from the unissued portion of authorized capital
stock is subject to registration requirement under the SRC because shares of stock are securities. And
securities cannot be distributed or sold to the public unless registered with the SEC. And by registration
under SRC, it is a different concept from registration of mortgage and sale. When you say securities are
registered, it means that the corresponding registration statement has been filed with and approved by the
SEC and the sale or distribution of those securities, as stated in the registration statement, has been approved by
the SEC. So that’s the only case subject to the approval of the majority of the quorum of the BOD.

PAID-UP CAPITAL
1. Not all funds or assets received by the corporation can be considered paid-up capital for this term has a technical signification in
Corporation Law. Elements to be PUC:
a. it must form part of the ACS;
b. subscribed and
c. actually paid up.
2. Hence, the submission of the Board that the value of the assets of Asturias Sugar Central, Inc., transferred
to MSCI, as well as the loans or advances made to MSCI should have been taken into consideration in computing the
paid-up capital of MSCI is unmeritorious, at best, and betrays the Board's sheer lack of grasp of a basic
concept in Corporation Law, at worst. MSCI-NACUSIP Local Chapter vs. National Wages and Productivity
Commission and Monomer Sugar Central, Inc. March 3, 1997
3. The same test should also be applied in determining if
the paid-up capital of the Corporation has been impaired so as to quality it for exemption from the increase
in the minimum wage. MISCI-NACUSIP Local Chapter vs. National Wages and Productivity Commission,
269 SCRA 173 (1997)

CAPITAL vs. 60-40 CONSTITUTIONAL REQUIREMENT

1. The term “capital” in Section 11, Article XII of the Constitution refers only to shares of stock that can
vote in the election of directors.
• To construe broadly the term “capital” as the total outstanding capital stock, including both common and non-voting
preferred shares, grossly contravenes the intent and letter of the Constitution that the “State shall develop a
self-reliant and independent national economy effectively controlled by Filipinos.” A broad definition
unjustifiably disregards who owns the all-important voting stock, which necessarily equates to control
of the public utility. Gamboa vs. Teves, et al. June 28, 2011.
2. On the other hand, **the constitutional requirement of at least 60 percent Filipino ownership applies
not only to voting control of the corporation but also to the beneficial ownership of the corporation.
Hence, it applies uniformly and across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation. Since a specific class of shares may have rights and privileges or restrictions
different from the rest of the shares in a corporation, the 60-40 ownership requirement in favor of Filipino
citizens in Section 11, Article XII of the Constitution must apply not only to shares with voting rights but
also to shares without voting rights. Heirs of Gamboa vs. Teves, et al. October 9, 2012.
———————————————-

6. Articles of Incorporation [AOI; Sec 14-15]

TECHNICAL REQUIREMENTS ON AOI

• Who are required to submit: All corporations organized under this code
• Where: SEC
• Language: in any of the official languages
• What: AOI duly signed and acknowledged by all of the incorporators
Ecce Ancilla Domini! 49 of 160

a. Nature and Function of Articles

AOI & BL: BEST PROOF OF THE CORP’S PURPOSE

1. The best proof of the purpose of a corporation is its articles of incorporation and by- laws.
2. EG: a perusal of the AOI of Ellice and Margo shows no sign of the allegedly illegal purposes that
petitioners are complaining of. It is well to note that, if a corporation’s purpose, as stated in theAOI, is
lawful, then the SEC has no authority to inquire whether the corporation has purposes other than those
stated, and mandamus will lie to compel it to issue the certificate of incorporation. Gala, et al. vs. Ellice
Agro-Industrial, December 11, 2003.
3. The AOI contain the power of the corporation and under Section 45 of the CC, the corporation ***cannot
exercise powers other than those conferred upon it by the CC, the AOI, and powers implied or
incidental to it. Hence, it’s important to know the powers of the corporation as contained in the AOI. Why?
Because any act of the corporation, any activity of the corporation that is outside or contrary to express,
implied or incidental powers of the corporation is ULTRA VIRES under Section 45. So the enumeration
of corporate powers under the AOI serves also as a limitation on what the corporation can do, because
outside these powers, that would be ultra vires.
4. The AOI is the FUNDAMENTAL LAW of the corporation. It defines the relation of the corporation
between it and the State, the corporation and its stockholders.
**Bar: the stock and transfer book of the corporation indicated that Juan dela Cruz only owns 300
common shares but the AOI provides that he owns X number of founder shares and X number of common
shares. So which one prevails? The SC said in Lanuza vs. CA that the ***AOI prevails over the stock and
transfer book because it is the instrument or document that defines the relation between the
corporation and the State and the corporation and the stockholders.
5. As regards form, well it has to be in official language, Filipino is the official language, so the AOI may be in
Tagalog or Filipino.

b. Contents
*The AOI shall contain SUBSTANTIALLY the following matters:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being incorporated. If many:
a. Primary purpose;
b. Secondary purpose/s: As long as these purposes are capable of being lawfully combined; Test to
determine if they are capable of being lawfully combined: If there is no law that prohibits the combination
of these purposes in the AOI. EG: purposes cannot be a bank and an insurance company at the same time
because under the law, a bank cannot engage in insurance business or vice versa. What banks do is to put
up a subsidiary, a corporation engaged in insurance. Correlate this with Sec 42, infra.
**NB: a non-stock corporation may not include a purpose which would change or contradict its
nature as such
***SEC has no authority to inquire whether the corporation has purposes other than those stated,
and MANDAMUS will lie to compel it to issue the certificate of incorporation. Gala, et al. vs. Ellice Agro-
Industrial, December 11, 2003.
3. The place where the principal office of the corporation is to be located, which must be within the Philippines;
a. Where is the residence of the corporation? The principal office as specified in the AOI, not the
place of actual operations. (Hyatt v. Goldstar). The venue in a civil case is the domicile or residence of the
plaintiff/defendant, at the option of the plaintiff. SC said that it is the **place specified in the AOI and not
the place of actual operation. Otherwise, it will be very easy on the part of the corporation to evade
service of summons because all it will have to do is to keep on changing its area of operations. [Hyatt
Elevators and Escalators vs. Goldstar Elevators, October 24, 2005].
b. The fact that it maintains branch offices in some parts of the country does not mean that it can be
sued in any of these places because to allow an action to be instituted in any place where a corporate entity
has its branch offices would create confusion and inconvenience to the corporation. The residence of a
corporation is the place where its principal office is established. Clavecillia Radio System vs. Antilles
February 18, 1967.
c. What about Metro Manila? In 2012, SEC required all corporations to amend their AOI which
provided for Metro Manila as their principal office, in order to indicate the specific address.
4. The term for which the corporation is to exist;
a. counting starts from and after the date of issuance of the certificate of incorporation
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor more than fifteen (15);
Ecce Ancilla Domini! 50 of 160

*Assuming that there are five directors, can the articles and the by-laws decrease it to two? No, because
the law provides that the number of directors should not be less than five.
*Is it possible for the number of directors in a quorum to be less than majority? Let us say that the
number of directors is fifteen and the articles provided that the quorum for certain corporate acts will be seven.
NO: Section 25 provides that unless the articles of incorporation or the by-laws provide for a greater majority,
a majority of the number of directors or trustees as fixed in the AOI shall constitute quorum for the transaction
of corporate business. There is no prerogative for the by-laws to reduce for quorum purposes the number of
directors to less than majority.
***Every decision of at least a majority of directors or trustees present in a meeting at which there
is quorum shall be valid as a corporate act, except for the election of officers which shall require the majority
vote of a majority of all the members of the board.
7. The names, nationalities and residences of persons who shall act as directors or trustees until the first regular
directors or trustees are duly elected and qualified in accordance with this Code;
**Even though under Section 23, it is enough that majority of the directors are Philippine
RESIDENTS, under “contents” of the AOI, you must likewise indicate the NATIONALITY of the
incorporators and directors, whether or not involved in a nationalized activity.
8. If it be a stock corporation:
a. the amount of its authorized capital stock in lawful money of the Philippines,
b. the number of shares into which it is divided, and
c. in case the share are par value shares, the par value of each,
• **That the authorized capital stock of the corporation is Php___ in lawful money of the
Philippines, divided into ___shares with the par value of Php__ per share.
d. the names, nationalities and residences of the original subscribers, and
e. the amount subscribed and paid by each on his subscription, and
f. if some or all of the shares are without par value, such fact must be stated;
• That the capital stock of the corporation is __shares without par value.
• (In case some shares have par value and some are without par value): That the capital stock of said
corporation consists of __ shares of which ___ shares are of the par value of Php__ each, and of
which ___shares are without par value.
9. If it be a non-stock corporation,
a. the amount of its capital,
b. the names, nationalities and residences of the contributors and
c. the amount contributed by each; and
10. Such other matters as are not inconsistent with law and which the incorporators may deem necessary and
convenient.
11. Additional requirement for stock corporations (ow, SEC shall not accept the AOI):
a. a sworn statement of the Treasurer elected by the subscribers showing that
i. at least 25% of the ACS has been subscribed, and
ii. at least 25% of the total subscription has been fully paid to him in actual cash and/or in
property the fair valuation of which is equal to at least twenty-five (25%) percent of the said subscription,
iii. such paid-up capital being not less than P5,000.00.
• I hereby certify under oath that at least 25% of the authorized capital stock of the corporation has been
subscribed and at least 25% of the total subscription has been paid, and received by me, in cash or property, in
the amount of not less than P5,000.00, in accordance with the Corporation Code.
12. (Corporations which will engage in any business or activity reserved for Filipino citizens shall provide the
following): “No transfer of stock or interest which shall reduce the ownership of Filipino citizens to less than
the required percentage of the capital stock as provided by existing laws shall be allowed or permitted to be
recorded in the proper books of the corporation and this restriction shall be indicated in all stock
certificates issued by the corporation.”
[] If the AOI substantially conforms to the requirement of the Code, does the SEC have the power to
reject the AOI? The requirements are not fully complied with but substantially complied with, does the SEC
have the discretion to reject the AOI? NO. Sections 17 and 10 of the Corporation Code clearly provides that
**SUBSTANTIAL COMPLIANCE IS ENOUGH. It is enough that the AOI substantially complies with
the form prescribed by the Corporation Code. This is also found in Section 10. The SEC has NO
DISCRETION TO REJECT the AOI if it substantially complies with the form prescribed by the Corporation
Code.

c. Amendment of the AOI [Sec 16]

RULES ON AMENDMENT OF AOI

Ecce Ancilla Domini! 51 of 160

1. GR: any provision or matter stated in the AOI may be amended

a. by a majority vote of the board of directors or trustees and
b. the vote or written assent of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders
*For non-stock corporations (NSC): the vote or written assent of at least two-thirds (2/3) of the
members.
2. XPN: unless otherwise prescribed by this Code or by special law, and for legitimate purposes.
3. How to indicate amendments:
a. by underscoring the change or changes made, and
b. a copy thereof duly certified under oath by
i. the corporate secretary and
ii. a majority of the directors or trustees stating the fact that said amendment or amendments have
been duly approved by the required vote of the stockholders or members.
* Now, with respect to amendment, you have to submit the original and amendment articles of
incorporation and not just the highlighted portion. You must submit both and underscore the changes made.
You also have to indicate “that as approved by the board on this date and approved the stockholders on this
date.” Why does it have to be done that way? First, that is what the law says and for practical purposes. ***When
is it effective? Upon the APPROVAL of the SEC or the INACTION of the SEC within 6 months from
application for reasons not attributable to the corporation. So you have express approval or approval by inaction
but the inaction must be for causes beyond or not attributable to the corporation.
4. When do amendments take effect?
a. upon their approval by the SEC or
b. six (6) months from the date of filing if not acted upon and for a cause not attributable to the
corporation.
5. ***Grounds when AOI or its amendment may be rejected or disapproved [Sec 17]. General ground: if the
same is not in compliance with the requirements of this Code; NB: SEC shall give the incorporators a
reasonable time within which to correct or modify the objectionable portions of the articles or amendment.
The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not substantially in accordance with
the form prescribed herein;
2. That the purpose or purposes of the corporation are patently unconstitutional, illegal, immoral,
or contrary to government rules and regulations;
3. That the Treasurer’s Affidavit concerning the amount of capital stock subscribed and/or paid is
false;
4. That the percentage of ownership of the capital stock to be owned by citizens of the Philippines
has not been complied with as required by existing laws or the Constitution (i.e., the required percentage of
Filipino ownership in cases prescribed by law, the constitution are not complied with)
**Are the grounds under section 17 exclusive? NO. P.D. 902-A provided other grounds for rejection
of the AOI or its amendment such as:
5. If there is fraud in procuring the AOI; 

6. Misrepresentation as to the purposes of the Corporation; 

7. Non-compliance with the laws, rules and regulations administered by the SEC; 

8. Non-submission of the reports required by the SEC; and
9. Non-payment of the filing fees.
6. Additional requirement of a “favorable recommendation” of the appropriate government agency to the
effect that such articles or amendment is in accordance with law, for the following (BBB-TIP-EO)
a. banks,
b. banking and quasi-banking institutions,
c. building and loan associations,
d. trust companies and other financial intermediaries,
e. insurance companies,
f. public utilities,
g. educational institutions, and
h. other corporations governed by special laws
• NB: The boldfaced institutions are not permitted to issued no-par value SOS under Art. 6: BIT-Pu

SAMPLE AMENDMENT & ITS CONSEQUENCE

• The Corporation does not necessarily prohibit the transfer of proprietary shares by its members when
its amended Articles of Incorporation provides that: "No transfer shall be valid except between the parties,
and shall be registered in the Membership Book unless made in accordance with these Articles and the By-Laws."
Ecce Ancilla Domini! 52 of 160

The authority granted to a corporation to regulate the transfer of its stock **does not empower it to
restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of
regulations as to the FORMALITIES and PROCEDURE to be followed in effecting transfer. Marsh
Thomson vs. CA and the American Chamber of Commerce of the Philippines, October 28, 1998.

d. Non-Amenable Items
1. Bar: Can you amend the names of the incorporator? Can you amend the date of incorporation? Can you
amend the name of the Notary Public before whom all the incorporators appeared? What is common
denominator to all these?
All these things may not be amended because these are matters of ACCOMPLISHED FACT. Matters of
accomplished fact cannot be amended.
2. Case: A female incorporator had a falling out with his husband and it must have been so bad that she wanted
to remove any association with his husband. So she petitioned the SEC to to drop the name of her husband as
incorporator. Of course, the SEC rejected it because you cannot amend the name of the incorporator. So the
SEC suggested that if you want you can change your name as subscriber or stockholder in the stock and
transfer book of the corporation.
————————————————

7. Registration and Issuance of Certificate of Incorporation (COI)

1. When does a corporation commence its corporate existence and juridical personality and is deemed
incorporated? [Section 19]; ***When does the corporation acquire legal personality? from the date SEC
issues a certificate of incorporation under its official seal, not upon the filing of the articles, nor upon the
payment of filing fees.
**Bar: AA subscribed with the shares of stock of the proposed corporation by contributing real
property and the same was considered as treasury trust. Pending incorporation, YY surfaced and claimed
ownership over the property that AA contributed. He files an action for reconveyance against the
PROPOSED corporation. Will the suit prosper? NO, because the corporation has not acquired legal
personality yet. Pending issuance of the certificate of incorporation, it is a mere association of persons
without any legal personality. It acquires legal personality and therefore the power to sue and be sued
ONLY UPON ISSUANCE of the certificate of incorporation.
- Who does he sue then? The (treasury) trustee who received the property in trust for the corporation.
2. Effect of issuance of COI: thereupon the incorporators, stockholders/members and their successors shall constitute a
BODY POLITIC AND CORPORATE under the name stated in the articles of incorporation for the period
of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance
with law. IOW, ***from that time on, the group of persons, associated persons, become a body politic with all
the rights, privileges and attributes of a corporation.
*Section 9 however failed to take into account corporations created by special laws. It pertains only to
corporations created under the corporation code because ***corporations created by special law acquire
legal personality upon the effectivity of the law. EG: Philippine national red cross, Philippine national
railways;
- Travel Tours Express vs CA, with regard to sports federations: it is not enough that they are
registered with the SEC, ***not enough that they are approved for incorporation—in addition to
registration, they only acquire legal personality from the time of ACCREDITATION by the appropriate
government agency as such sports federations.
3. Effects on non-use of corporate charter [Section 22]: If a corporation does not formally organize and
commence the transaction of its business or the construction of its works within two (2) years from the date of
its incorporation:
i. its corporate powers cease and
ii. the corporation shall be deemed dissolved.
4. Effects of continuous inoperation of a corporation [Section 22]: if a corporation has commenced the
transaction of its business but subsequently becomes continuously inoperative for a period of at least five
(5) years, the same shall be a ground for the
i. suspension or
ii. revocation of its corporate franchise or certificate of incorporation.
5. Caveat for (3) & (4): Such rules do not apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is due to causes BEYOND THE
CONTROL of the corporation as may be determined by the SEC.

———————————————————————————————
Ecce Ancilla Domini! 53 of 160

8. Adoption of By-Laws
TITLE V: BY LAWS

a. Nature and Functions of By-Laws

CONCEPT OF BY-LAWS
1. By laws are RULES OF ACTION; they are relatively permanent and continuing rules of action
2. adopted by a corporation
3. for its OWN GOVERNMENT and for the government of its STOCKHOLDERS or MEMBERS and
those having the DIRECTION, management and control of its affairs. [China Banking v. CA 1997]
**By laws are set of rules and regulations for the internal government of the corporation, akin to
implementing rules and regulations. Not everything can be captured in the articles, so the internal governance
of the corporation has to be spelled out in the by-laws. ***In case of conflict between AOI and by-laws, AOI
prevails.

PURPOSE OF BY-LAWS
1. Every corporation has the inherent power to adopt by-laws for:
a. its internal government, and
b. to regulate the conduct and prescribe the rights and duties of its members towards itself and among
themselves in reference to the management of its affairs. Gokongwei, Jr. vs. SEC April 11, 1979.
2. Corporate powers may be directly conferred upon corporate officers or agents by statute, the articles of
incorporation, the by-laws or by resolution or other act of the BOD.
• Since the by-laws are a source of authority for corporate officers and agents of the corporation, a
resolution of the Board of Directors of Citibank appointing an attorney in fact to represent and bind it
during the pre-trial conference of the case at bar is not necessary because its by-laws allow its officers, the
Executing Officer and the Secretary Pro-Tempo to execute a power of attorney to a designated bank officer,
William W. Ferguson in this case, clothing him with authority to direct and manage corporate affairs.
Citibank, N.A. vs. Chua, et al. March 17, 1993.

AOI vs. BY-LAWS

1. Both AOI & BL: The relevant provisions of the AOI and the by-laws of Forest Hills governed the
relations of the parties as far as the issues between them were concerned. The charter and the by-laws are the
fundamental documents governing the conduct of Forest Hills’ corporate affairs; they established norms
of procedure for exercising rights, and reflected the purposes and intentions of the incorporators.
• The prevailing rule is that the provisions of the AOI and the by-laws must be strictly complied with and
applied to the letter. Forest Hills Golf and Country Club vs. Gardpro Inc. October 22, 2014.
2. AOI: defined its charter as a corporation and the contractual relationships between Forest Hills and the State,
between its stockholders and the State, and between Forest Hills and its stockholder; hence, there could be no gainsaying
that the contents of the AOI were binding not only on Forest Hills but also on its shareholders.
3. BL: were the self-imposed rules resulting from the agreement between Forest Hills and its members to
conduct the corporate business in a particular way. In that sense, the by-laws were the private “statutes” by
which Forest Hills was regulated, and would function. Until repealed, the by-laws were a continuing rule for
the government of Forest Hills and its officers, the proper function being to regulate the transaction of the
incidental business of Forest Hills. The by-laws constituted a binding contract as between Forest Hills and its
members, and as between the members themselves. Every stockholder governed by the by-laws was entitled to
access them.
ARTICLES OF INCORPORATION BY-LAWS
constitute the CHARTER of the the RULES OF ACTION adopted by a
corporation corporation
executed BEFORE incorporation adopted BEFORE or AFTER
incorporation
Ecce Ancilla Domini! 54 of 160

ARTICLES OF INCORPORATION BY-LAWS

adopted by the incorporators if adopted before incorporation, they
are adopted by the incorporators; if
after, by the SH or members.
filing of AOI is a CONDITION filing of BY-LAWS is a condition
PRECEDENT for the acquisition by SUBSEQUENT thereto.
the corporation of a JURIDICAL
PERSONALITY

ADOPTION OF BY-LAWS [Sec 46];

**Two ways of adopting by-laws (1: file with AOI; & 2: file within a month after incorporation; NB: SEC now
requires submission of by-laws prior to incorporation). Difference: If the by-laws should be adopted prior to
incorporation, then all incorporators must sign the by-laws. If adopted during one month from incorporation,
only the stockholders representing a majority OCS.
1. Prior to incorporation (may accompany the AOI & SEC will approve them together with the AOI)
a. such by-laws shall be approved and signed by ALL the incorporators
b. and submitted to the Securities and Exchange Commission, together with the articles of incorporation.
2. After incorporation
a. submitted WITHIN one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission;
b. approved by (the affirmative vote of)
i. the stockholders representing at least a MAJORITY of the outstanding capital stock, or
ii. of at least a MAJORITY of the members in case of non-stock corporations.
3. The by-laws shall be SIGNED by the stockholders or members voting for them and shall be KEPT in the
principal office of the corporation, subject to the INSPECTION of the stockholders or members during office hours. A
copy thereof, duly certified to by a MAJORITY of the DIRECTORS or trustees countersigned by the
secretary of the corporation, shall be filed with the Securities and Exchange Commission which shall be attached to
the original articles of incorporation.
4. Note that the NON-FILING of the by-laws within one month is a GROUND to FORFEIT franchise and
WILL NOT RESULT IN AUTOMATIC DISSOLUTION [Loyola Grand Villas Homeowners v. CA 1997]

CONTENTS OF THE BY-LAWS [Sec 47]

[] Subject to the provisions of the Constitution, this Code, other special laws, and the articles of incorporation, a
private corporation may provide in its by-laws for:
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;
**Make a distinction between items #1 and #2—time place and manner v. time and manner. Place is
not specified in #2 because the place of meeting for stockholders is provided for by law, i.e., city or
municipality where the principal office of the business of the corporation is located.
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 QUALIFICATION, 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.
Ecce Ancilla Domini! 55 of 160

EFFECTIVITY OF BY-LAWS [Sec 46]

[] In all cases, by-laws shall be EFFECTIVE only UPON the issuance by the Securities and Exchange
Commission of a CERTIFICATION that the by-laws are not inconsistent with this Code.
—————————————

b. Requisites of Valid By-Laws

REQUISITES FOR VALID BY-LAWS**

1. They must be consistent with the Corporation Code and other pertinent laws and regulations; EG: a
provision granting a permanent seat in the BOD is contrary to the Code [Grace Christian v. CA 1997]
2. They must be CONSISTENT with the CHARTER of the corporation, i.e., the law and AOI; in case of
conflict, AOI prevails.
3. They must be REASONABLE and NOT ARBITRARY or OPPRESSIVE.
4. They must NOT IMPAIR VESTED RIGHTS, impair CONTRACT or PROPERTY RIGHTS of
stockholders or members or CREATE OBLIGATIONS unknown to the law; EG: the absolute restriction on
the right to transfer was disallowed [Thomson v. CA 1998] or the by-laws should not undermine the security of
tenure of an employee by declaring the post non-existent [Salafranca v. Philamlife 1998]
5. They must be CONSISTENT with PUBLIC POLICY;
6. **They must be UNIFORM and GENERAL in application and NOT directed against a particular
individual;
7. They must NOT IMPAIR the obligations of contracts.

PROCEDURAL MATTERS ON BL [Sec 46]

1. Required vote: affirmative vote of the stockholders representing at least a majority of the OCS, or of at
least a majority of the members in case of non-stock corporations, shall be necessary.
• A provision in the by-laws stating that of the 15 members of its Board of Directors, only 14 members
would be elected while the remaining member would be the representative of an educational
institution located in the village of the homeowners, is invalid for being contrary to law. The fact that for
fifteen years it has not been questioned or challenged but, on the contrary, appears to have been implemented by the
members of the association cannot forestall a later challenge to its validity because, if it is contrary to
law, it is beyond the power of the members of the association to waive its invalidity. Grace Christian
High School vs. CA, 23 October 1997.
2. The by-laws shall be signed by the stockholders or members voting for them and
3. They shall be kept in the principal office of the corporation, subject to the inspection of the stockholders or
members during office hours.
4. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of
the corporation, shall be filed with the SEC which shall be attached to the original AOI.
5. Additional requirement for “special” corporations (BBB-TIP-EOs: bank, banking institution, building and
loan association, trust company, insurance company, public utility, educational institution or other special
corporations governed by special laws): SEC shall not accept for filing their by-laws or any amendment
thereto, unless accompanied by a certificate of the appropriate government agency to the effect that such by-
laws or amendments are in accordance with law.

BY-LAWS OF FOREIGN CORPORATIONS

1. Since the SEC will grant a license only when the foreign corporation has complied with all the
requirements of law, it follows that when it decides to issue such license, it is satisfied that the applicant's
by-laws, among the other documents, meet the legal requirements.
• Therefore, petitioner bank's by-laws, though originating from a foreign jurisdiction, are valid and
effective in the Philippines. Citibank, N.A. vs. Chua.
———————————-

c. Binding Effects

BINDING EFFECT OF PROVISIONS OF BY-LAWS

1. As to the Corporation and its components: binding not only upon the corporation but also on its SH,
members and those having direction, management and control of its affairs.
2. As to THIRD PERSONS: NOT BINDING unless there is ACTUAL KNOWLEDGE. Third persons
are NOT even bound to investigate the content because they are not bound to know the By-laws which are
merely provisions for the government of a corporation and notice to them will NOT be PRESUMED [China
Banking Corp v. CA 1997].
Ecce Ancilla Domini! 56 of 160

a. provisions in the By-laws on delinquency sale shall not be binding on a pledgee [ibid];
b. the provision enumerating the contract signatory is NOT binding on third persons who signed the
contract with the corporation as represented by the Chairman who is not one of those enumerated [PMI
Colleges v. NLRC 1997].
[] In order to be bound, a third party must have acquired knowledge of the pertinent by-laws at the
time the transaction or agreement was entered into. ***Thus, a provision in the by-laws of a country club
granting it a preferred lien over the share of stock of a member for unpaid dues is not binding on the
pledgee of the same share of stock if the latter had no actual knowledge of it. China Banking Corporation
vs. CA (1997). CBC is not bound by the provision in the by-laws of the VGCCI granting the VGCCI a
preferred lien over the share of stock of a member for unpaid dues. The by-law restricting the transfer of
shares cannot have any effect on the transferee of the shares in question as he had no knowledge of such
by-law when the shares were assigned to him. China Banking Corporation vs. CA, March 26, 1997
*The corporation refused to transfer ownership over the stocks because of the provision in the by-
laws granting first lien to the corporation in case of non-payment of dues and assessments. Who is entitled?
The court said that the provision in the by-laws is not binding on Chinabank because the latter is a third
person. Exception is when the third person has actual knowledge of the provision. SC added that a
***corporation may refuse to transfer ownership only when it has unpaid claims and the term unpaid
claims means and is limited to UNPAID SUBSCRIPTION. Other obligations such as dues and
assessments does not preclude transfer of shares.
*What about the provision in the by-laws that dues are first lien on the shares? SC said that this
provision is not self-executory. It does not authorize the corporation to sell the delinquent shares not
delinquent in terms of subscription but delinquent in payment of dues. It does not authorize the sale of
the shares. **There must be a complementing pledge or chattel mortgage agreement to authorize the
corporation to sell the shares and apply the proceeds to the payment of dues and assessments and other
obligations owing. ***This is different with condominium units. In the latter, it can be sold for non-
payment of dues and assessments if the deed of restrictions authorized the sale. In case of shares, by-laws
provision is not enough but must be complemented by a pledge or chattel mortgage agreement.
3. BL are not binding to non-SH: PMI College alleged that the employment contract entered into between the
school and Galvan is invalid because the signatory thereon was not the Chairman of the Board as required
by its by-laws. However, **since by-laws operate merely as internal rules among the stockholders, they
cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the
same. SC said “admission by estoppel”—A is not bound by the provision in the by-laws being a third person.
PMI Colleges vs. the NLRC, 15 August 1997.
4. Amendments to be binding to SH must be known by them: When an amendment to a provision in the
Amended By-Laws requiring the unanimous vote of the directors present at a special or regular meeting was
**not printed on the application form for proprietory membership, and what was printed thereon was the
original provision which was silent on the required number of votes needed for admission of an applicant
as a proprietary member, the BOD committed fraud and evident bad faith in disapproving respondent’s application
under Article 31 of the Corporation Code. The explanation given by the petitioner that the amendment was not
printed on the application form due to economic reasons is flimsy and unconvincing because such amendment,
aside from being extremely significant, was introduced way back in 1978 or almost twenty (20) years
before respondent filed his application. Cebu Country Club. vs. Elizagaque, January 18, 2008.
5. Is it necessary to submit a SPA to authorize a lawyer to represent the corporation or will the authority given by
the EBP manager who under the by-laws is empowered to hire lawyers for the corporation suffice? SC said that
the SPA can be dispensed with when there is a by-laws provision authorizing such.
The **SPA in case of corporations is in the form of a board resolution.
*What if the corporation is a foreign corporation and the by-laws were not submitted with the SEC
prior to incorporation, can the provision in the by-laws be invoked, adopted and relied on? YES [Citibank vs.
Chua]: ***the requirement of submitting by- laws as a condition to acquire legal personality is applicable only
to domestic corporations. The CC used the phrase "corporations created under this code". The by-laws of the
foreign corporation are submitted to the SEC **only for the purpose of securing a license and not to
acquire legal personality.
6. Bar [Gokongwei vs SEC]. What is the effect of a provision in the by-laws intended to disqualify any person
from being elected in the board for having interest adverse or in conflict with the business of the corporation?
SC said it is a valid provision. The ***fiduciary duty of a director may be compromised if he sits in the
board of two competing corporations. He may acquire vital sensitive information from one and share it to
the other to the detriment of the former.
***What if there is a provision in the by-laws disqualifying a competitor from being elected to the
board? NOT VALID, because you have section 33 or 32 which allow corporations with interlocking directors.
Ecce Ancilla Domini! 57 of 160

****But is it valid to include a non-compete clause in the by-laws? YES. It is now a standard provision
or clause in the by-laws to disqualify persons who are in conflict with the corporation to be elected in the
board.
*What about the argument that it deprives a stockholder of its rights as a stockholder? SC said that if
you join the corp as a minority, you have to accept the fact that you are subject to the will of the majority.
The manner by which you exercise your rights is dictated by the majority.
7. Indicate whether the following provisions in the by-laws are valid or void.
a. Directors of the corporation may or should be elected from stockholders representing majority of
the outstanding capital stock: Not valid. This is because they have to be elected from among all the
stockholders
b. The meeting of board may be held in UST. - Valid
c. All officers are not required to be directors of the corporation. Not valid (TOM says, void, because
one does not have to be a director to be an officer).
d. The annual compensation of directors as such directors shall not exceed 10% the gross income of
the corporation for the income tax in the preceding year: Not valid. It’s not gross income. Should be net.
e. Proxies must be submitted a day before the stockholders’ meeting: Valid.
f. Proxies must be submitted 30 days before the stockholders’ meeting otherwise the proxy is void:
Valid (this is the by-laws of San Miguel) as long as it is submitted any day before the meeting.
g. By-laws authorized the board to create a corporate office. ***Only the by-laws can create
corporate offices. The board cannot create a corporate office.
h. Can the by-laws require that proxies must be authorized? - Valid. Par 3 of Section 47
i. A director may be removed by his co-directors by a vote of at least majority of the directors in
case of non-payment of dues and assessments and for absences: Not valid. ***Only stockholders can remove
a director.

——————————————

d. Amendment or Revision

AMENDMENT, REPEAL or ADOPTION OF NEW BY-LAWS [Sec 48]**

1. Summary: amendment may be made by the:
a. SH together with the Board: majority of the board + majority of the outstanding capital stock;
b. by the Board as delegated by 2/3 of outstanding capital stock or 2/3 of members.
*Make sure that when you amend the AOI, make the corresponding changes to be mirrored in the by-
laws. You have to amend likewise the by-laws.
2. Vote Required (to AMEND or REPEAL any by-laws or ADOPT NEW by-laws):
a. The board of directors or trustees, by a MAJORITY vote thereof,
b. and the owners of at least a MAJORITY of the outstanding capital stock, or at least a majority
of the members (Soriano: voting & non-voting) of a non-stock corporation,
c. at a regular or special meeting duly called for the purpose
3. Delegation of the power to amend/repeal by-laws or adopt new by-laws to BOD/BOT; Can this power to
amend/repeal/adopt new BL delegable? YES.
a. The owners of two-thirds (2/3) of the outstanding capital stock or two-thirds (2/3) of the members
in a non-stock corporation may DELEGATE to the BOARD of directors or trustees the POWER to
AMEND or REPEAL any by-laws or adopt new by-laws
b. Soriano: in such a case, the BOD/BOT may amend/repeal the by-laws or adopt new by-laws by a
MAJORITY vote of THOSE PRESENT provided there is a QUORUM.
*NB: This delegated power shall be **considered as revoked whenever stockholders owning or
representing a majority of the OCS or a majority of the members in non-stock corporations, shall so vote at
a regular or special meeting
***And so, stockholders, may, by 2/3 vote of outstanding capital stock may delegate the authority to
amend the by-laws solely to directors but the power delegated may be revoked by the vote of stockholders
representing at least majority of the outstanding capital stock.
4. Effectivity of amendment or new by-laws: The amended or new by-laws shall only be EFFECTIVE upon the
issuance by the Securities and Exchange Commission of a CERTIFICATION that the same are not inconsistent with this
Code.
5. Applicable to:
a. amendment;
b. repeal;
c. adoption of new by-laws.
Ecce Ancilla Domini! 58 of 160

6. Procedural: Whenever any amendment or new by-laws are adopted:

a. such amendment or new by-laws shall be attached to the original by-laws in the office of the
corporation, and
b. a copy thereof, duly certified under oath by the corporate secretary and a majority of the directors or trustees, shall
be filed with the SEC the same to be attached to the original AOI and original by-laws.
6. When shall the amended or new by-laws be effective? Only upon the issuance by the SEC of a
certification that the same are not inconsistent with this Code.

DATE OF SUBMISSION [Sec 46]

1. After incorporation: within one (1) month after receipt of official notice of the issuance of its certificate
of incorporation by the SEC.
2. Prior to incorporation: they may also may be adopted and filed prior to incorporation; in such case, such
by-laws shall be approved and signed by all the incorporators and submitted to the SEC, together with the
AOI.
3. NB for both: by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.

EFFECTS OF NON-FILING OF B-L

1. Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section 6(I) of
PD 902-A, the SEC is empowered to ‘suspend or revoke, after proper notice and hearing, the franchise or
certificate of registration of a corporation’ on the ground inter alia of ‘failure to file by-laws within the
required period.’ Loyola Grand Villas Homeowners (South) Association, Inc.,vs. CA, August 7, 1997.

SUMMARY OF RULES ON BY-LAWS***

1. Adoption of by-laws within one month of incorporation – stockholders holding majority of the outstanding
capital stock WITHOUT board. The board is required to certify the copy of the by-laws as approved by the
stockholders.
2. Amendment of by-laws: at least majority of the board and stockholders holding majority.
3. Delegation of authority by stockholders to the board: 2/3 of the outstanding capital stock. Hence, ***as long
as the delegation of authority has been approved by the SH representing at least 2/3 of the outstanding capital
stock, then by the strength of that authority, the board alone may amend the by-laws. This is clear under Section
48 of the Corporation Code.
4. Revocation of the authority delegated to the stockholders – just majority of the outstanding capital stock
5. In all cases, such may be made in a meeting called for the purpose.
———————————————————————————————

F. Corporate Powers

KINDS OF POWERS
1. EXPRESS Powers: those expressly granted to a corporation by its charter; granted by law, Corporation
Code, and its Articles of Incorporation or Charter, and administrative regulations.
a. If organized under the Corporation Code: its charter consists of the Corporation Code, its AOI and other
laws applicable to the corporation;
b. If created by a Special Law: its charter consists of the special law creating it, the Corporation Code and
other laws applicable to the corporation.
2. IMPLIED powers: those which are NECESSARY to carry into effect powers which are expressly granted, and
which must, therefore, be presumed to have been the intention in the grant of franchise; not expressly
stated but are DEEMED to be within the capacity of corporate entities.
3. INCIDENTAL or INHERENT or NECESSARY powers: those that a corporation may exercise by reason of
its very existence as a corporation; they exist as a NECESSARY CONSEQUENCE of the exercise of the express
powers of the corporation or the pursuit of its purposes as provided for in the Charter
——————————————————

F1. General Powers, Theory of General Capacity

EXPRESS POWERS IN GENERAL

SSSAA-IPM-DEO
*Codal [] Section 36. Corporate powers and capacity. – Every corporation incorporated under this Code has the
power and capacity:
1. To SUE AND BE SUED in its corporate name;
Ecce Ancilla Domini! 59 of 160

**Q: When does the power to sue and be sued commence? UPON ISSUANCE by SEC of Certificate of
Incorporation.
*NB: A corporation **can still sue, notwithstanding the fact that its certificate of registration is
suspended or pending revocation. The suspension of corporate franchise and eventual revocation will not
invalidate the action for ejectment filed by the corporation for as long as the suit was initiated during its lifetime.
Pasricha v. Don Luis Dison Realty, Inc., (2008)
[] Under Section 36 of the Corporation Code, read in relation to Section 23, it is clear that where a
corporation is an injured party, its power to sue is LODGED WITH ITS BOARD of directors or
trustees. In this case, petitioner failed to show any proof that he was authorized or deputized or granted specific
powers by Concord's BOD to sue Victor Ang Siong for and on behalf of the firm. Clearly, petitioner as a
MINORITY stockholder and member of the board of directors had NO SUCH POWER OR AUTHORITY TO SUE
on Concord's behalf… Nor can we uphold his act as a derivative suit, infra. [Tam Wing Tak v. Makasiar, January
29, 2001]
[] “Lideco Corporation” had **no personality to intervene since it had not been duly registered as a
corporation. If petitioner “Laureano Investment & Development Corporation” legally and truly wanted to
intervene, it should have used its corporate name as the law requires and not another name which it had
not registered. Laureano Investment & Development Corporation vs. CA, G.R. No. 100468, May 6, 1997
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 TREASURY
STOCKS (in accordance with the provisions of this Code); and to ADMIT MEMBERS to the corporation if it
be a non-stock corporation;
[] A stock corporation is expressly granted the POWER TO ISSUE OR SELL STOCKS. The power
to issue stocks is lodged with the Board of Directors and **no stockholders meeting is required to consider
it because additional issuances of stock (unlike increase in capital stock) does not need approval of the
stockholders. What is ONLY REQUIRED IS THE BOARD RESOLUTION approving the additional
issuance of shares. The corporation shall also file the necessary application with the SEC to exempt these from the
registration requirements under the SRC. Majority of Stockholders of Ruby Industrial Corporation vs. Lim, GR No.
165887, June 6, 2011
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); (explanations, infra)
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; (explanations, infra)
10. To establish pension, retirement, and other PLANS for the BENEFIT of its directors, trustees, officers and employees;
and
[] Providing gratuity pay is one of the express powers of the corporation under the Corporation Code
and therefore, resolutions passed by the board approving the grant of gratuity pay to the employees of the
corporation during a meeting where one of the directors was not notified thereof are NOT ULTRA
VIRES. The grant of gratuity pay does not require shareholders’ approval as it is not tantamount to the
sale, lease, exchange or disposition of all or substantially all of the corporation's assets. Lopez Realty, Inc vs.
Fontecha, et al., G.R. No. 76801 August 11, 1995
11. To exercise such other powers as may be ESSENTIAL OR NECESSARY to carry out its purpose or purposes as stated
in the AOI.
[] The stevedoring services which involve the unloading of the coal shipments into the NPC pier for
its eventual conveyance to the power plant are INCIDENTAL AND INDISPENSABLE to the operation of the
plant. A **corporation is not restricted to the exercise of powers expressly conferred upon it by its charter,
but has the power to do what is REASONABLY NECESSARY OR PROPER to promote the interest or
welfare of the corporation. National Power Corporation vs. Honorable Abraham P. Vera, Presiding Judge,
Regional Trial Court, National Capital Judicial Region, Branch 90, Quezon City and Sea Lion International Port
Terminal Services, Inc., G.R. No. 83558, February 27, 1989
[] The power of a corporation to sue and be sued is exercised by the board of directors. **The physical
acts of the corporation, like the signing of documents, can be performed only by natural persons duly
Ecce Ancilla Domini! 60 of 160

authorized for the purpose by corporate bylaws or by a specific act of the board. Absent the said board
resolution, a petition may not be given due course. Ligaya Esguerra, et al. vs. Holcim Philippines, Inc., G.R. No.
182571, September 2, 2013
[] In a complaint for nullification of mortgage and foreclosure with damages against the mortgagee-
bank, the plaintiff can not compel the officers of the bank to appear and testify as plaintiff ’s initial witnesses
unless written interrogatories are first served upon the bank officers. This is in line with the Rules of Court
provision that **calling the adverse party to the witness stand is not allowed unless written
interrogatories are first served upon the latter. This is because the officers of a corporation are
considered adverse parties as well in a case against the corporation itself based on the principle that
corporations act only through their officers and duly authorized agents. Spouses Afulugencia vs.
Metropolitan Bank and Trust Co. G.R. No. 185145, February 05, 2014

LIMITATIONS OF CORPORATIONS IN DEALING WITH PROPERTY

1. In dealing with any kind of property, it must be in the FURTHERANCE of the purpose for which the
corporation was organized.
2. CONSTITUTIONAL limitations
a. cannot acquire PUBLIC lands except by LEASE;
b. with regard to PRIVATE land, 60% of the corporation must be owned by the Filipinos; same with the
acquisition of a CONDO UNIT.
**NB: No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will
exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.
3. SPECIAL law: subject to the provisions of the Bulk Sales Law

REQUISITES FOR A VALID DONATION

1. Donation must be REASONABLE;
2. Must be for VALID PURPOSES including public welfare, hospital, charitable, cultural, scientific, civic or similar
purposes 

3. Must not be an aid in any
a. Political party,
b. Candidate and
c. Partisan political activity
4. Donation must bear a REASONABLE RELATION to the corporation’s interest and not be so remote and
fanciful. 


RULE ON CORPORATIONS AS SURETIES or GUARANTORS

*Can a corporation act as surety or guarantor?
1. GR: No.
2. XPN: Such guaranty may be given
a. in the accomplishment of any OBJECT for which the corporation was created, or
b. when the particular transaction is REASONABLY NECESSARY OR PROPER in the conduct of
its business.
3. Bar 2002: Determine the validity of the following corporate act: XL Foods Corporation guaranteed the loan
of its sister company XL Meat Products, Inc. (2002): Void – This is an ultra vires act on part of XL Foods
Corporation, and is not one of the powers provided for in Sec. 36 of the Corporation Code. It can be ratified
provided it is not illegal per se but merely beyond the power of the corporation by the approval of the
majority of the board and vote of the stockholders representing at least two thirds of the outstanding capital
stock. Where the contract or act is not illegal per se but merely beyond the power of the corporation, the
same is merely voidable and may be enforced by performance, ratification, or estoppels, or on equitable
grounds (Republic v. Acoje Mining Co., Inc) especially if no creditors are prejudiced thereby and no rights of
the state or the public are involved (Flecher, p.585).
———————————————

IMPLIED POWERS
*(not exhaustive); UP-EPI
1. Acts in the USUAL COURSE of business
2. Acts to PROTECT DEBTS due to the corporation
3. Acts which involve embarking on a DIFFERENT LINE of business
4. Acts designed to PROTECT OR AID employees
5. Acts to INCREASE THE BUSINESS of the corporation [2 Fletcher 1767]
———————————————
Ecce Ancilla Domini! 61 of 160

INCIDENTAL POWERS
*Some of the express powers under Sec 36 (supra) are incidental powers: (SNS-PA)
1. Power of SUCCESSION;
2. Power to have CORPORATE NAME;
3. Power to adopt a CORPORATE SEAl;
4. Power to acquire, hold or dispose PROPERTY as its business may reasonably require;
5. Power to adopt and amend its BY-LAWS.
—————————————

ULTRA-VIRES ACTS [Sec 45]

1. Concept: an ultra-vires act (UVA) is an **ACT OR CONTRACT which is BEYOND THE POWERS that a
corporation can lawfully exercise; iow, it is an act PERFORMED OUTSIDE the express, implied and
incidental powers of a corporation.
[] Section 45. Ultra vires acts of corporations. – No corporation under this Code shall possess or
exercise any corporate powers except
a. those conferred by this Code or by its articles of incorporation
b. and except such as are necessary or incidental to the exercise of the powers so conferred.
2. UVA is one committed OUTSIDE the OBJECT for which a corporation is created as defined by the law
of its organization and therefore BEYOND the power conferred upon it by law [Atrium Mgt Corp v. CA, 28 Feb
2001].
a. The **act of ISSUING the checks was well WITHIN THE AMBIT of a valid corporate act, for it was
FOR SECURING A LOAN to finance the activities of the corporation, hence, not an ultra vires act. Atrium
Management Corporation vs. Court of Appeals, et al., G.R. No. 109491, February 28, 2001
3. Authority from the BOD is needed: Where two parties FORCIBLY took over the management of a
corporation by virtue of a writ of preliminary injunction issued on the basis of their claim that they were
stockholders, their hiring of new employees to replace the original employees (who were validly hired by the
board of directors) **CANNOT BIND the corporation, as the act was DONE WITHOUT AUTHORITY from the
board of directors. The claim of illegal dismissal by the new employees is without merit as they were not
hired by the corporation or its duly authorized officers or agents. Visayan vs. National Labor Relations Commission, 196
SCRA 410 (1991)
a. Hence, a contract to sell cement signed by the president and chairman of the corporation is not
binding upon it where they were not authorized by the board of directors to enter into a contract and the company
board of directors disapproved the contract and the by-laws conferred the POWER TO MANAGE the
business of the corporation UPON THE GENERAL MANAGER. Yao Ka Sin Trading vs. Court of Appeals, 209
SCRA 763 (1992)
b. The assignment of certificates of indebtedness belonging to a corporation made without the
authorization of the board of directors does not bind the corporation. Traders Royal Bank vs. Court of
Appeals, 269 SCRA 19 (1997)
c. A mortgage on corporate property accepted by a bank as basis for restructuring a personal loan
**cannot be annulled even though it could not have been
authorized by the board of directors (for lack of quorum) where the BANK RELIED ON THE SECRETARY’S
CERTIFICATE attesting to the existence of a board resolution approving the mortgage. Metropolitan Bank & Trust Co. vs.
Quilts & All, Inc., 222 SCRA 480 (1993); See also Lee vs. Court of Appeals, 345 SCRA 579 (2000)
d. By the express mandate of the Corporation Code (Section 26), all corporations duly organized
pursuant thereto are required to submit within the period therein stated (30 days) to the Securities and
Exchange Commission the names, nationalities and residences of the directors, trustees and officers elected.
In determining whether the filing of a suit was authorized by the board of directors, **the LIST of directors in the
LATEST general information sheet filed with the Securities and Exchange Commission is CONTROLLING.
Premium Marble Resources, Inc.vs. the Court of Appeals, G.R. No. 96551. November 4, 1996
e. Under Section 36 of the Corporation Code, read in relation to Section 23,it is clear that where a
corporation is an injured party, its power to sue is lodged with its board of directors or trustees. In this
case, the **petitioner failed to show any proof that he was authorized or deputized or granted specific powers by
the corporation’s board of director to sue Victor Ang Siong for and on behalf of the firm, and therefore he had no
such power or authority to sue on Concord’s behalf. Tam Wing Takvs. Hon. Ramon P. Makasiar, G.R. No.
122452, January 29, 2001
4. Examples
a. A banking corp cannot deal in real property in the same manner that a real estate corp conducts its business
because such act is beyond the scope of authority of a bank.
Ecce Ancilla Domini! 62 of 160

b. But a mining corporation can put up a post office! [] While as a rule an ultra vires act is one
committed outside the object for which a corporation is created as defined by the law of its organization and
therefore beyond the powers conferred upon it by law, there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if they are necessary to promote the
interest or welfare of the corporation such as the establishment of the local post office which is a vital
improvement in the living condition of the employees and laborers who came to settle in a mining camp which is
far removed from the postal facilities. The term **ULTRA VIRES SHOULD BE DISTINGUISHED
FROM AN ILLEGAL ACT for the former is merely VOIDABLE which may be enforced by performance,
ratification, or estoppel, while the latter is VOID and cannot be validated. Republic vs. Acoje Mining Company,
Inc., G.R. No. L-18062, February 28, 1963

WHO MAY COMMIT UVA?

1. the corporation itself;
2. the BOD;
3. the corporate officers.

COVERAGE OF UVA
1. (RATIFICATION) Acts beyond the power of the corporation as provided for in the law and in its AOI;
these acts are **MERELY VOIDABLE, and may become binding and enforceable when RATIFIED by the
SH; the ratification of the SH CURES the infirmity of the corporate act, and makes it perfectly valid and
enforceable, especially so if it is not merely executory but executed and consummated and NO CREDITORS
are PREJUDICED [Ma. Carla Pirovano vs. Dela Rama Steamship Co]; they may be **enforced by
PERFORMANCE, RATIFICATION & ESTOPPEL.
a. if the transaction has been PARTLY EXECUTED, an action may be brought directly on it and relief
had according to its terms; the **ACCEPTANCE OF BENEFITS arising from the performance by the other party
may give rise to an ESTOPPEL precluding repudiation of the transaction [Republic vs. Acoje Mining].
b. the principle of **NO UNJUST ENRICHMENT at another’s expense may apply.
c. if the act is **EXECUTORY on both sides, the weight of authority is that it cannot be enforced and
no damages can be recovered under it.
d. Unlike illegal acts which contemplate the doing of an act that is contrary to law, morals, or public policy or public
duty, and are void, **ultra vires acts are those which are not illegal but are merely not within the scope of
the articles of incorporation and by-laws. They are merely voidable and may become binding and enforceable when
RATIFIED by the stockholders. Maria Clara Pirovana, et al. vs. the De La Rama Steamship Co., G.R. No. L-5377,
December 29, 1954
e. The general rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. Directors must act as a body in a
meeting called pursuant to the law or the corporation's by-laws, otherwise, any action taken therein may be questioned by
any objecting director or shareholder; but an action of the board of directors during a meeting, which was **illegal for
lack of notice, may be RATIFIED either expressly, by the action of the directors in subsequent legal meeting,
or impliedly, by the corporation's subsequent course of conduct. Lopez Realty, Inc., and Asuncion Lopez
Gonzales vs. Florentina Fontecha, et al., and the National Labor Relations Commission, G.R. No. 76801 August
11, 1995
2. (ESTOPPEL) Acts or contracts entered into in BEHALF of the corporation by persons who have no
corporate authority.
a. GR: a corporation is only bound by the acts of its duly-authorized representatives;
b. XPN: ***those acting under apparent authority; under the doctrine of APPARENT
AUTHORITY, if a corporation:
i. knowingly permits its officer or any other agent;
ii. to perform acts within the scope of an apparent authority;
iii. holding him out to the public as possessing power to do those acts
[] Apparent authority is derived not merely from practice. Its existence may be ascertained through
(1) the general manner in which the corporation holds out an officer or agent as having the power to act or, in other words
the apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof, within or beyond the scope of his ordinary powers. It is **not the
quantity of similar acts which establishes apparent authority, but the vesting of a corporate officer with the
power to bind the corporation. When the sole management of the corporation was entrusted to two of its
officers/incorporators with the other officers never had dealings with the corporation for 14 years and that the
board and the stockholders never had its meeting, the corporation is now estopped from denying the officers’
authority to obtain loan from the lender on behalf of the corporation under the doctrine of apparent
authority. Advance Paper Corporation vs. Arma Traders Corporation , G.R. No 176897, December 11, 2013.
Ecce Ancilla Domini! 63 of 160

[] A corporation cannot deny the authority of lawyer when they clothed him with apparent
authority to act in their behalf such as when he entered his appearance accompanied by the corporation’s general manager
and the corporation never questioned his acts and even took time and effort to forward all the court
documents to him. The **lawyer may not have been armed with a board resolution but the doctrine of
apparent authority IMPOSES LIABILITY NOT AS A RESULT OF CONTRACTUAL RELATIONSHIP but rather
BECAUSE OF THE ACTIONS OF THE PRINCIPAL or an employer in somehow misleading the public
that the relationship or the authority exists. Megan Sugar Corporation vs. RTC of Ilo-ilo Br. 68, GR no. 170352,
June 1, 2011
[] The doctrine of "apparent authority," with special reference to banks, had long been recognized in
this jurisdiction. Apparent authority is derived not merely from practice. Its existence may be **ascertained through
i. the GENERAL MANNER in which the corporation HOLDS OUT an officer or agent as having
the power to act, or in other words, the apparent authority to act in general, with which it clothes him; or
*When a bank, by its acts and omission, has clearly clothed its manager with
apparent authority to sell an acquired asset in the normal course of business, it is **legally obliged to
confirm the transaction by issuing a board resolution to enable the buyers to register the property in their names. It
has a duty to perform necessary and lawful acts to enable the other parties to enjoy all the benefits of the contract which it had
authorized. Rural Bank of Milaor ( Camarines Sur) vs. Ocfemia, 325 SCRA 99 (2000); Soler vs., Court of Appeals,
358 SCRA 57 (2001); If a corporation consciously lets one of its officers, or any other agent, to act within the
scope of an apparent authority, it will be ESTOPPED from denying such officer’s authority. Since the
records show that Calo, who was an Account Officer, was the one assigned to transact on petitioner’s behalf
respecting the loan transactions and arrangements of Inland as well as those of Hanil-Gonzales and Abrantes, it
is **presumed that he had authority to sign for the bank in the Deed of Assignment. Westmont Bank vs.
Inland Construction and Development Corp., G.R. No. 123650, March 23, 2009.
*When it does not apply on a GM: There having been NO QUORUM present during the
meeting where his authority was supposed to have been given, the filing of a petition for the reconstitution of the
owner’s duplicate of a transfer certificate of title by a branch manager is unauthorized. The **doctrine of
apparent authority CANNOT apply because being a MERE BRANCH MANAGER, he could not be looked upon as a
corporate officer clothed with the implied or “apparent” power to file the suit and the unauthorized action was hidden from
it. New Durawood Company Inc., vs. Court of Appeals, 253 SCRA 740 (1996); Although a branch manager,
within his field and as to third persons, is the general agent and is in general charge of the corporation, with
apparent authority commensurate with the ordinary business entrusted him and the usual course and conduct thereof, yet the
power to modify or nullify corporate contracts remains generally in the board of directors. Being a mere
branch manager alone is insufficient to support the conclusion that he has been clothed with “apparent
authority” to verbally alter terms of written contracts, especially when viewed against the telling circumstances
of this case: the unequivocal provision in the mortgage contract; the corporation’s vigorous denial that any
agreement to release the mortgage was ever entered into by it; and, the fact that the purported agreement was
not even reduced into writing considering its legal effects on the parties’ interests. Banate vs. Philippine
Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No. 163825, July 13, 2010
ii. the ACQUIESCENCE in his acts of a particular nature, with ACTUAL OR CONSTRUCTIVE
KNOWLEDGE thereof, within or beyond the scope of his ordinary powers. [Assoc. Bank v. Sps. Pronstroller, June
14, 2008]; Accordingly, the authority to act for and to bind a corporation may be presumed from acts of
recognition IN OTHER INSTANCES, wherein the POWER WAS EXERCISED WITHOUT ANY OBJECTION from
its board or shareholders. Undoubtedly, petitioner had previously allowed Atty. Soluta to enter into the first agreement without
a board resolution expressly authorizing him; thus, it had clothed him with apparent authority to modify the same
via the second letter-agreement. It is **NOT THE QUANTITY of similar acts which establishes apparent
authority, BUT THE VESTING OF A CORPORATE OFFICER with the power to bind the corporation. Associated
Bank vs. Spouses Pronstroller, G.R. No. 148444, 14 July 2008
*Effect: the corporation will be **ESTOPPED from denying such authority, as against any
person who has dealt in good faith with the corporation through such an agent [Associated Bank vs. Sps
Pronstroller 14 July 2008]; the **corporation will be BOUND by the acts of such agents [Advance Paper Corp vs. Arma
Traders Corp 11 Dec 2013].
c. NB: the **act BENEFITED the corporation; it is considered as a RATIFICATION of the act of
the person acting under apparent authority—it does not matter whether such ratification is express or implied;
the **act of RECEIVING BENEFIT in considered an IMPLIED ratification.
3. (VOID) Acts and contracts that are **ILLEGAL PER SE or contrary to law: these are VOID; hence, they
cannot serve as a basis for court action, nor they acquire validity by performance, ratification or estoppel
[Pirovano vs. Dela Rama]
**ILLEGAL ACTS: contrary to law, morals, public order, contravene some rules of public policy or
public duty.
Ecce Ancilla Domini! 64 of 160

REQUISITES FOR **RATIFICATION OF UVA WHICH IS NOT ILLEGAL

1. the acts must be CONSUMMATED;
2. the creditors are NOT PREJUDICED or all of them have given their CONSENT thereto;
3. the rights of the PUBLIC or of the STATE are not involved;
4. all SH must give their CONSENT [Pirovano vs. Dela Rama]
**NB: When the officers of the corporation exceeded their authority, their actions are not binding upon the
corporation UNLESS RATIFIED by the corporation or is estopped from disclaiming them (Reyes v. RCPI
Credit Employees Union, G.R. No. 146535, Aug. 18, 2006).
—————————————

F2. Specific Powers, Theory of Specific Capacity

SPECIFIC CORPORATE POWERS

*Coverage (TSB-PP-SFDM)
A. Power to extend or shorten the corporate term [Sec 37]
B. Power to increase or decrease capital stock [Sec 38]
C. Power to incur, create or increase bonded indebtedness [Sec 38]
D. Power to deny pre-emptive right [Sec 39]
E. Power to sell, lease, exchange, mortgage, pledge or otherwise dispose all or substantially all of its property
[Sec 40]
F. Power to acquire its own shares [Sec 41]
G. Power to invest corporate funds in another corporation or business or for any other purpose [Sec 42]
H. Power to declare dividends [Sec 43]
I. Power to enter into management contract [Sec 44]
——————————————-

F2a. Power to Extend or Shorten Corporate Term

*See notes under Corporate Term, supra [Sec 11]
——————————————-

F2b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase

Bonded Indebtedness [Sec 38]
1. Requisites:
a. Vote required: the act must be approved by:
i. a majority vote of the board of directors and,
ii. two-thirds (2/3) of the outstanding capital stock at a stockholder’s meeting duly called for
the purpose.
[] **No stockholders’ meeting or approval is necessary for the issuance of unsubscribed
portion of the capital stock. Datu Tagoranao Benito vs. Securities & Exchange Commission, 123 SCRA 722
(1983)
b. Certification: a certificate in duplicate must be signed by a majority of the directors of the corporation
and countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock,
a. the amount of capital stock or number of shares of no-par stock thereof actually
subscribed,
b. the names, nationalities and residences of the persons subscribing,
c. the amount of capital stock or number of no-par stock subscribed by each, and
d. the amount paid by each on his subscription in cash or property, or the amount
of capital stock or number of shares of no-par stock allotted to each stockholder if such increase is for the
purpose of making effective stock dividend therefor authorized;
(4) The amount of stock represented at the meeting; and
(5) The vote authorizing the increase or diminution of the capital stock, i.e., the vote obtained.
*One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original articles of
incorporation.
c. Subscription and paid-in capital requirements in case of INCREASE: [] the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital stock unless accompanied by the
i. sworn statement of the treasurer of the corporation showing that
Ecce Ancilla Domini! 65 of 160

a. at least twenty-five (25%) percent of such increased capital stock has been
subscribed
b. and that at least twenty-five (25%) percent such subscription has been paid (either
in actual cash to the corporation or that there has been transferred to the corporation property the valuation of
which is equal to twenty-five (25%) percent of the subscription)
d. In case of DECREASE: [] no decrease of the capital stock shall be approved by the Commission
if its effect shall prejudice the rights of corporate creditors, i.e., it will not violate the Trust Fund Doctrine (cf. Sec
41).
[] **RESCISSION CANNOT BE DEEMED AS A PETITION TO DECREASE
CAPITAL STOCK because such action never complied with the formal requirements for decrease of capital stock under
Section 38 of the Corporation Code. No majority vote of the board of directors was ever taken. Neither was
there any stockholders’ meeting at which the approval of stockholders owning at least two-thirds of the
outstanding capital stock was secured. Ong vs. Tiu, et al. April 8, 2003
e. **The increase or decrease requires PRIOR APPROVAL of the Securities and Exchange
Commission.
[] Prior to the approval by the SEC of the increase in the authorized capital stock, such
payments cannot as yet be deemed part of a corporation’s paid-up capital, technically speaking, because its
capital stock has not yet been legally increased. **Such payments constitute deposits on future subscriptions, money which
the corporation will HOLD IN TRUST for the subscribers until it files a petition to increase its capitalization and a
certificate of filing of increase of capital stock is approved and issued by the SEC. Central Textile Mills, Inc.vs. National
Wages and Productivity Commission, et al., G.R. No. 104102, August 7, 1996
2. Ways of Increasing capital stock
a. Increasing the number of shares without increasing the par value;
b. Increasing the par value without increasing the number of shares;
c. Increasing both the number of shares and par value.
3. Ways of Decreasing capital stock
a. Decreasing the number of shares without decreasing the par value;
b. Decreasing the par value without decreasing the number of shares;
c. Decreasing both the number of shares and the par value.
4. Notice Requirement
a. Written notice shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation of the:
i. proposed action and of
ii. the time and place of the meeting
b. and deposited to the addressee
i. in the post office with postage prepaid,
ii. or served personally.
5. Bar: The stockholders of People Power Inc (PPI) approved two resolutions in a special stockholders’
meeting: a) Resolution increasing the authorized capital stock of PPI; and b) Resolution authorizing the BOD
to issue, for cash payment, the new shares from the proposed capital stock increase in favor of outside
investors who are non-stockholders. The foregoing resolutions were approved by stockholders representing
99% of the total outstanding capital stock. The sole dissenter was Jimmy Morato who owned 1% of the
stock.
a. Are the resolutions binding on the corporation and its stockholders including Jimmy Morato, the
dissenting stockholder? NO. Sec. 38 of the Corporation Code provides that **no corporation shall increase or
decrease capital stock or incur create or increase bonded indebtedness unless approved by a majority of the
board of directors and at a stockholders’ meeting duly called for the purpose, two-thirds of the
outstanding capital stock shall favor the increase or diminution of the capital stock, or the incurring, creating or
increasing any bonded indebtedness. Written notice of the proposed increase or diminution of the capital
stock or of the incurring, creating, or increasing of any bonded indebtedness and of the time and place of the
stockholder’s meeting at which the proposed increase or diminution of the capital stock or the incurring or
increasing of any bonded indebtedness us to be considered, must be addressed to each stockholder at his
place of residence as shown on the books of the corporation deposited to the addressee in the post office
with postage prepaid, or served personally. In the present case, the resolutions are not binding on the
corporation and its stockholders including Jimmy Morato. **While these resolutions were approved by the
stockholders, the directors’ approval, which is required by law in such case, does not exist.
b. What remedies, if any, are available to Morato? (1998): Jimmy Morato can petition the RTC to
declare the 2 resolutions, as well as any and all actions taken by the BOD thereunder, null and void. (RTC as
Special Commercial Court?).
——————————————-
Ecce Ancilla Domini! 66 of 160

Power to incur, create or increase bonded indebtedness [Sec 38]

1. Requisites:
a. Vote required: the act must be approved by:
i. a majority vote of the board of directors and,
ii. two-thirds (2/3) of the outstanding capital stock at a stockholder’s meeting duly called for
the purpose.
b. Certification: a certificate in duplicate must be signed by a majority of the directors of the corporation
and countersigned by the chairman and the secretary of the stockholders’ meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) the bonded indebtedness to be incurred, created or increased;
(3) The actual indebtedness of the corporation on the day of the meeting;
(4) The vote authorizing the incurring, creating or increasing of any bonded indebtedness, i.e., the
vote obtained.
*One of the duplicate certificates shall be kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange Commission and attached to the original articles of
incorporation.
c. The incurring, creating or increasing of bonded indebtedness **requires prior approval of the
Securities and Exchange Commission.
d. Bonds so issued shall be registered with the Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof.
2. Procedure for non-stock corporations [] they may incur or create bonded indebtedness, or increase the
same, with the approval by
a. a majority vote of the board of trustees
b. and of at least two-thirds (2/3) of the members in a meeting duly called for the purpose.
3. Notice Requirement
a. Written notice shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation of the:
i. proposed action and of
ii. the time and place of the meeting
b. and deposited to the addressee
i. in the post office with postage prepaid,
ii. or served personally.
——————————————-

F2c. Power to Deny Pre-Emptive Rights [Sec 39]

1. What is pre-emptive right? It refers to the right of all stockholders of a stock corporation:**
a. to SUBSCRIBE to all issues or disposition of shares of ANY CLASS
b. in PROPORTION to their respective shareholdings,
c. BEFORE such shares are OFFERED to the public.
pre-emptive right is a common law right, but the power to deny it is given under Sec 39. Hence a
****simple board resolution is not enough to deny it: it has to be denied in the original AOI, if not, the
AOI has to be amended first.
2. Purpose: **to enable the SH to MAINTAIN their PROPORTIONATE CONTROL of the corporation.
*Existing SH are given a certain period within which to exercise the right; failure to do so shall be
deemed as a WAIVER thereof.
3. The following are shares covered by the exercise of pre-emptive right:
a. shares issued as a result of INCREASE in capital stock;
b. shares issued out of the UNSUBSCRIBED portion of the authorized capital stock;
*NB: per SEC-OGC Opinion No. 11-41 (5 October 2011), the pre-emptive right is available to
all shares from the unsubscribed portion, whether they were originally offered or not at the time of
incorporation, since Sec. 39 CorpCode makes NO DISTINCTION as to the source of the share issuances.
This ruling declared that SC’s Benito vs. SEC 25 July 1983 and Dee vs. SEC 16 July 1991—where the Court ruled
that pre-emptive right to the unsubscribed shares is not available when they were part of the shares originally
offered for subscription at the time of incorporation—**no longer hold true because the events that gave rise
to them took place under the old CorpoLaw where the pre-emptive right was not expressly provided [because it
is ANOTHER TYPE (any shares of any class) of issuance of shares, hence, pre-emptive right still applies].
c. other shares that may be disposed by the corporation including TREASURY shares. [since SEC
opinion says that “any class” is provided by law, hence, treasury shares are included; but according to Riano,
Ecce Ancilla Domini! 67 of 160

treasury shares are only covered by close corporations as specifically provided by law, not open
corporations].
4. When the right is NOT available:****
a. when such right is DENIED by the AOI or an amendment thereto;
b. when shares are to be issued in compliance with laws REQUIRING stock offerings or MINIMUM
stock ownership BY the public;
c. when shares are to be issued in GOOD FAITH faith with the approval of the stockholders
representing two-thirds (2/3) of the outstanding capital stock,
i. in exchange for property needed for CORPORATE PURPOSES or
ii. in payment of a previously contracted DEBT.
5. Even if pre-emptive right does not exist either because the issue comes within the exceptions in Section 39
of the Corporation Code or because it is denied in the articles of incorporation, an issue of shares may **still
be objectionable if
a. the directors acted in BREACH of trust and
b. their PRIMARY PURPOSE IS
i. to perpetuate or shift CONTROL of the corporation or
ii. to “freeze out” the MINORITY interest.
*The issuance of unissued shares out of the original authorized capital stock pursuant to a
rehabilitation plan the propriety and validity of which was on question by the minority stockholders and
subsequently disapproved by the court **AMOUNTS TO UNLAWFUL DILUTION of the minority
shareholdings. Majority of Stockholders of Ruby Industrial Corporation vs. Lim, GR No. 165887, June 6, 2011
6. Old vs. New Corporation Code on pre-emptive right:
a. In the old Corporation Code, the pre-emptive right of existing stockholders to subscribe to new
issuances is not expressly provided, and affirmed by the Court in Benito vs. SEC (July 25, 1983), and in the
case of Dee vs. SEC, July 16, 1991 (where the Supreme Court ruled that stockholders are not entitled to pre-
emptive right to additional shares to be issued from existing authorized capital stock before offering them to
third parties)
b. In the present law, (BP Blg. 68) the **grant of pre-emptive right is made MANDATORY except
in those situations falling under the exceptions enumerated therein. Unless denied in the AOI or except in cases
where the issuance falls under any of the exceptions enumerated in the above cited provision, all issuances or
disposition of shares by a corporation after the effectivity of the Corporation Code shall be subject to
Section 39 of the Corporation Code. SEC Letter-Opinion Dated March 10, 2000.
—————————————

F2d. Power to Sell or Dispose of Corporate Assets

*Power to sell, lease, exchange, mortgage, pledge or otherwise dispose all or substantially all of its property [Sec
40. Sale or other disposition of assets]
1. Coverage: sell, lease, exchange, mortgage, pledge or otherwise dispose of
a. all or substantially all of its property and assets,
b. **including its goodwill,
*upon such terms and conditions and for such consideration, which may be
a. money,
b. stocks,
c. bonds
d. or other instruments for the payment of money
e. or other property or consideration, as its board of directors or trustees may deem expedient.
2. Meaning of sale or disposition of substantially all of its corporate property: [] A sale or other disposition shall
be deemed to cover substantially all the corporate property and assets if thereby
a. the corporation would be rendered incapable of continuing the business
b. or accomplishing the purpose for which it was incorporated.
*NB: transfer of all or substantially all of corporate property **should NOT PREJUDICE creditors.
Hence, if the corporation assigned such properties, the ASSIGNEE IS LIABLE for the obligations of the
assignor, so as not to prejudice creditors; the acquisition by the assignee of all or substantially all of the
assets of the assignor NECESSARILY INCLUDES THE ASSUMPTION OF THE ASSIGNOR’S LIABILITIES, unless the
creditors who did not consent to the transfer choose to rescind the transfer on the ground of fraud; to allow the assignor to
transfer all of his business, properties and assets without the **consent of its creditors and without requiring
the assignee to assume the assignor’s obligations will defraud the creditors [Caltex PH vs. PNOC Shipping 10
August 2006].
3. Vote required. The act must be approved by:
a. a majority vote of its board of directors or trustees, and
Ecce Ancilla Domini! 68 of 160

b. at least two-thirds (2/3) of the outstanding capital stock, or in case of non-stock corporation, by
the vote of at least to two-thirds (2/3) of the members, in a stockholder’s or member’s meeting duly called for the
purpose.
*For non-stock: In non-stock corporations **where there are no members with voting rights, the vote
of at least a majority of the trustees in office will be sufficient authorization for the corporation to enter into
any transaction authorized by this section.
[] Where an asset constitutes the **only property of the corporation, its sale to a third- party is a
sale or disposition of all the corporate property and assets of said corporation falling squarely within the
contemplation of Section 40 of the Corporation Code. Hence, for the sale to be valid, the majority vote of the
legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the
corporation should have been obtained. Islamic Directorate of the Philippines, Manuel F. Perea and Securities &
Exchange Commission,vs. Court of Appeals And Iglesia Ni Cristo, G.R. No. 117897, May 14, 1997
4. NB: when the vote of the BOD/BOT is SUFFICIENT: [] Nothing in this section is intended to restrict the
power of any corporation, without the authorization by the stockholders or members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its property and assets if:
a. the same is NECESSARY in the usual and regular course of business of said corporation;
*EG: Megamotors Corp sold all its 100 units of cars to Taxi Corp; the 100 units of cars
constitute 90% of the assets of Megamotors. Although the disposition consists of substantially all of the assets
of Megamotors, it **does not require ratification by its SH because it was made in the regular course of
business.
b. or if the proceeds of the sale or other disposition of such property and assets be APPROPRIATED
for the CONDUCT of its remaining business.
5. Abandonment of such approved act: **After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion,
1. abandon such sale, lease, exchange, mortgage, pledge or other disposition of property and assets,
2. subject to the rights of third parties under any contract relating thereto,
3. without further action or approval by the stockholders or members.
6. Limitation to this power: Subject to the provisions of existing laws on illegal combinations and
monopolies.
*NB: any dissenting stockholder may exercise his appraisal right under the conditions provided in this
Code.
7. Notice Requirement
a. Written notice shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation of the:
i. proposed action and of
ii. the time and place of the meeting
b. and deposited to the addressee
i. in the post office with postage prepaid,
ii. or served personally.
8. Bar 2005: Divine corporation is engaged in the manufacture of garments for export. In the course of its
business, it was able to obtain loans from individuals and financing institutions. However, due to the drop in the
demand for garments in the international market, Divine Corporation could not meet its obligations. It
decided to sell ALL its equipment such as sewing machines, perma-press machines, high speed sewers, cutting
tables, ironing tables, etc., as well as its supplies and materials to Top Grade Fashion Corporation , its competitor.

a. How would you classify the transaction? The transaction is deemed classified as **sale of all or
substantially all of the corporate assets because the corporation would be rendered incapable of continuing
the business or accomplishing the purpose for which it was incorporated.
b. Can Divine Corporation sell the aforesaid items to its competitor, Top Grade Fashion Corporation?
What are the requirements to validly sell the items? YES. The law does not prohibit sale of all or substantially
all of corporate assets to competitor company **provided said sale is subject to laws against illegal
combination, monopoly or restraint of trade and Bulk Sales Law. Nowhere in the facts states that the
competitor company lies within the restrictions provided for by law. For the transaction to be valid, it needs a
majority vote of its board of directors and stockholder’s approval representing at least 2/3 of
outstanding capital stock. Further, since bulk sales apply to sale of all or substantially all of corporate assets,
it also requires the following: a) list of creditors under oath must be given by the seller to the buyer 10 days
before the sale containing the list of their respective names, addresses, due dates and amount owing to each; b)
inventory of goods or properties to be sold, cost price and the amount for which it has been sold, and c.) the
list of inventory is filed with the DTI, otherwise, it will be null and void for being in fraud of creditors.
Ecce Ancilla Domini! 69 of 160

9. Bar 1999: As a result of perennial business losses, a corporation's net worth has been wiped out. In fact, it is
now in negative territory. Nonetheless, the stockholders did not like to give up. Creditor-banks, however, do not
share the confidence of the stockholders and refuse to grant more loans.
a. What tools are available to the stockholders to replenish capital?: In the **case where the creditor-
banks refused to grant more loans to the stockholders, the stockholders can PUBLICLY SELL their shares
and assets. They can also demand payment from stockholders of their unpaid subscriptions where there is
no due date inscribed in the subscription contract.
b. Assuming that the corporation continues to operate even with depleted capital, would the
stockholders or the managers be solidarily liable for the obligations incurred by the corporations? NO. The
stockholders or managers cannot be held solidarily liable for the obligations incurred by the corporation. They
**cannot be held personally liable for as long as their acts are for and in behalf of the corporation, WITHIN the
scope of their authority and in good faith. Also, a corporation has a PERSONALITY SEPARATE AND
DISTINCT from its individual stockholders. (Consolidated Bank and Trust Corp. v. CA, 356 SCRA 671)
—————————————

F2e. Power to Acquire Own Shares [Sec 41]

1. Two Requisites:
a. The acquisition must be for a LEGITIMATE corporate purpose or purposes, including but not
limited to the following cases:
i. To eliminate fractional shares arising out of stock dividends;
ii. To collect or compromise an indebtedness to the corporation, arising out of unpaid
subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale;
iii. (to pay SH who are entitled to the appraisal right when they dissent from certain corporate
acts) To pay dissenting or withdrawing stockholders entitled to payment for their shares under the
provisions of this Code [Secs 41 & 81]
iv. To purchase or take up redeemable shares [Sec 8: this is according to Soriano, but it does
not comply with requisite (b) because **redeemable shares can be acquired “regardless of the existence of
unrestricted retained earnings”]
v. When the SEC orders a close corporation to purchase the shares of SH in the case of
deadlock in its management [Sec 104];
vi. To acquire treasury shares [Sec 9];
vii. To effect a decrease in capital stock [Sec 38]
b. The corporation must have UNRESTRICTED RETAINED EARNINGS in its books to cover
the shares to be purchased or acquired
[] The **requirement of unrestricted retained earnings to cover the shares is based on the trust
fund doctrine which means that the capital stock, property and other assets of a corporation are regarded as
EQUITY IN TRUST for the PAYMENT OF CORPORATE CREDITORS. The reason is that creditors of a
corporation are preferred over the stockholders in the distribution of corporate assets. Boman Environmental
Development Corporation vs. CA, G.R. No. 77860, November 22, 1988
3. Bar 2005: Under what conditions may a stock corporation acquire its own shares? A: The corporation may
acquire its own shares **when it has unrestricted retained earnings in its books to cover the shares to be
purchased/acquired and if it is for a legitimate corporate purpose/s.
—————————————

F2f. Power to Invest Corp Funds in Another Corporation/Business [Sec 42]

1. What it is: subject to the provisions of this Code, a private corporation may invest its funds in any other
corporation or business or for any purpose other than the primary purpose for which it was organized.
***Divina: If the funds of the corporation are devoted to the secondary purpose or purposes, then the
Corporation Code requires the corporation to go back to the stockholder and secure their approval by at
least 2/3s of the OCS. And any stockholder not in favor of the proposed investment of corporate funds in
the secondary purpose can exercise his appraisal right. And so, while the CC acknowledges and recognizes the
prerogative of the corporation to have many purposes in its AOI, there can only be one primary and many
secondary purposes. But the funds of the corporation should be devoted to the primary purpose or any
UNDERTAKING INCIDENTAL to the primary purpose. If they invest in a secondary purpose, it requires
not just board approval by majority vote but likewise, stockholders representing 2/3s of the OCS. Now, Section
42 likewise allows a corporation to invest the funds in another business. So, either invest the funds in a
secondary purpose or in another business. But the AOI must be amended to make the business AS A
SECONDARY PURPOSE otherwise it would be ultra vires. (TOM does not agree)
2. Vote required: when approved by:
a. a majority of the board of directors or trustees
Ecce Ancilla Domini! 70 of 160

b. and ratified by the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations, at a stockholder’s
or member’s meeting duly called for the purpose.
**When vote of the BOD/BOT alone will suffice: [] Provided, however, That where the investment by
the corporation is REASONABLE NECESSARY to accomplish its PRIMARY purpose as stated in the
articles of incorporation, the approval of the stockholders or members shall NOT be necessary.
3. Exercise of APPRAISAL RIGHT: any dissenting stockholder shall have appraisal right as provided in
this Code, i.e., Sec 81.
4. Notice Requirement
a. Written notice shall be addressed to each stockholder or member at his place of residence as
shown on the books of the corporation of the:
i. proposed investment and of
ii. the time and place of the meeting
b. and deposited to the addressee
i. in the post office with postage prepaid,
ii. or served personally.
5. Bar 1995/1996: When may a corporation invest its funds in another corporation or business or for any
other purposes? (1996, 1995) A: Under Section 42 of the Corporation Code, a corporation may invest its funds
in another corporation or business or for any other purposes when **approved by a majority of the board of
directors or trustees and ratified by the stockholders representing at least two- thirds (2/3) of the
outstanding capital stock, or by at least two thirds (2/3) of the members in the case of non-stock corporations,
at a stockholder's or member's meeting duly called for the purpose. There must be written notice of the
proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally.
6. Bar: Stikki Cement Co. was organized primarily for cement manufacturing. Anticipating substantial profits, its
President proposed that Stikki invest in a) a powerplant project, b) a concrete road project, and c) quarry
operations for limestone in the manufacture of cement.
a. What corporate approvals or votes are needed for the proposed investments? Explain: Section 42
provides that when the investment of corporate funds is directed at a **PURPOSE NOT PRIMARY in
character or NOT REASONABLY NECESSARY for the accomplishment of the primary purpose,
i. majority of the votes of the board of directors or trustees ii.
along with the ratification of stockholders representing 2/3 of the outstanding capital stock or 2/3 of the
members, in case of a non-stock corporation, are required.
**Since a powerplant project and a concrete road project are neither primary purposes nor
reasonably necessary for the accomplishment thereof, majority votes of the board of directors plus the
ratification of the stockholders representing 2/3 of the outstanding capital stock are needed.
On the other hand, quarry operations for limestone is reasonably necessary or incidental to
attain the primary purpose of the corporation, i.e. the manufacture of cement. ****Hence, only the majority
approval of the board of directors is needed. The ratification by the stockholders is no longer necessary.
b. Describe the procedure in securing these approvals (1995): To secure the aforementioned approvals,
there must be a **written notice of the proposed investment and the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage prepaid, or served personally. (Section 42,
Corporation Code).
7. Case scenarios:
a. A corporation, under the Corporation Code, has only such powers as are expressly granted to it by
law and by its articles of incorporation, those which may be incidental to such conferred powers, those reasonably
necessary to accomplish its purposes and those which may be incident to its existence. In the case at bar, a company
engaged in the practice of lending money is categorically prohibited from “engaging in pawnbroking as
defined under PD 114.” Pilipinas Loan Company, Inc.,vs. Hon. Securites and Exchange Commission and
Filipinas Pawnshop, Inc., G.R. No. 104720, April 4, 2001
b. A mining corporation cannot engage in the highly speculative business of urban real estate
development, and could not have validly acquired real estate property. Heirs of Antonio Pael and Andrea
Alcantara and CrisantoPael vs. Court of Appeals, Jorge H. Chin and Renato B. Mallari, G.R. No. 133547,
February 10, 2000
————————————-
Ecce Ancilla Domini! 71 of 160

F2g. Power to Declare Dividends [Sec 43]

1. Concept of dividend: **portion of ACCUMULATED PROFITS of a corporation which is set aside by the
directors for distribution to stockholders.
[] The board of directors of a stock corporation may declare dividends out of the
UNRESTRICTED RETAINED EARNINGS which shall be payable in cash, in property, or in stock to all
stockholders on the basis of outstanding stock held by them:
2. Kinds of dividends;
a. CASH dividends: dividends payable in cash;
b. PROPERTY dividends: dividends payable in property, whether real or personal; these may include the
shares of stock of, bonds issued by, ANOTHER CORPORATION;
*NB: Property dividends are actually cash dividends payable in property.
c. STOCK dividends: dividends payable in the corporation’s OWN STOCK from its new or unissued
shares;
d. BOND dividends: dividends payable in bonds of the corporation issuing them;
e. SCRIP dividends: in the **form of certificates issued by the corporation to its SH entitling them
to receive cash or other property at SOME FUTURE TIME, in the meantime that the corporation does not have cash or its cash
is insufficient.
f. LIQUIDATING dividends: distributions of the assets of the corporation to its stockholders upon
its dissolution;
g. COMPOSITE dividend: dividends payable in cash and partly in stocks.
3. How dividends are expressed when declared:
a. Stock dividends: at a certain percentage of the shares held;
b. Cash dividends:
i. Par value shares: at a certain percentage of the par value or at a specified amount per share;
ii. Non-par value shares: at a specified amount per share.
*From what funds are cash and stock dividends sourced? A: Dividends either cash or stock dividend
must be **declared out of unrestricted retained earnings because of the Trust Fund Doctrine. The Trust Fund
Doctrine provides that subscription to the capital stock of a corporation constitute a fund to which the creditors
have the right to look for the satisfaction of their claims (Ong vs Tiu, G.R. No. 144476, April 8, 2003). Thus,
dividends must never impair the subscribed capital stock.
CASH DIVIDENDS STOCK DIVIDENDS
involve ACTUAL do not involve any disbursement since their
disbursement of funds declaration involves a **mere TRANSFER of
retained earnings to capital stock
once declared and paid, they being still part of CORPORATE property, they
become the **ABSOLUTE may be reached by corporate creditors
property of the SH and are
beyond the reach of
corporate creditors
TAXABLE taxed ONLY WHEN DISPOSED OF by the SH, or
when there is a CHANGE in the proportion of
the SH as a result of their exercising the option to
receive cash in lieu of stock dividends
do NOT increase the legal INCREASE the legal capital
capital
require **only the approval require the **approval of both BOD + the 2/3
of the BOD OCS
4. Voting requirements:
a. For Stock dividends:**
Ecce Ancilla Domini! 72 of 160

i. majority vote of the directors present provided there is a quorum (not the majority of the total number
of directors in the AOI); and
ii. not less than two-thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose.
b. Cash dividends: requires **only the majority vote of the directors present provided there is a
quorum.
[] Bar 2002: Determine the validity of the following corporate act: The Board of Directors of
XL Foods Corporation declared and paid cash dividends without approval of the stockholders: **Valid – Approval of
the stockholders is not required in declaring cash dividends
5. Source of dividends: UNRESTRICTED RETAINED EARNINGS**
a. SURPLUS PROFITS: dividends are generally declared out of the surplus profits or retained earnings;
b. PAID-IN SURPLUS (paid-in capital in excess of par value).
*However, as per SEC ruling, **paid-in surplus may be declared only as stock dividends, not
as cash dividends.
*NB: If the shares do not have par value, the entire consideration thereof shall be treated as
capital and **no part thereof shall be available for distribution as dividends [Sec 6].
c. CAPITAL, with respect to dividends from investment in wasting assets of corporations, and
liquidating dividends.
[] ***Dividends cannot be declared for preferred shares which were guaranteed a quarterly dividend
if there are no unrestricted retained earnings. "INTEREST BEARING STOCKS", on which the corporation
agrees absolutely to pay interest before dividends are paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only. Republic Planters Bank vs. Hon.
Agana, Sr., G.R. No. 51765, March 3, 1997
6. Payment when SH is DELINQUENT:****
a. Cash dividends: any cash dividends due on delinquent stock shall first be applied to the unpaid balance
on the subscription plus costs and expenses,
b. Stock dividends: while stock dividends shall be withheld from the delinquent stockholder until
his unpaid subscription is fully paid.
7. **Prohibition on retention of surplus profits: [] Stock corporations are prohibited from retaining surplus
profits in excess of one hundred (100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate EXPANSION projects or programs approved by the board of
directors; or
(2) when the corporation is prohibited under any LOAN AGREEMENT with any financial
institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such
consent has not yet been secured; or
(3) when it can be clearly shown that such retention is NECESSARY under SPECIAL
CIRCUMSTANCES OBTAINING in the corporation, such as when there is need for special reserve for
PROBABLE CONTINGENCIES.
8. Who gets the dividends? Dividends are distributed to stockholders PURSUANT TO THEIR RIGHT TO
SHARE IN CORPORATE PROFITS. When a dividend is declared, it **belongs to the person who is the
SUBSTANTIAL AND BENEFICIAL OWNER of the stock at the time regardless of when the
distribution profit was earned. Nora A. Bitong vs. Court of Appeals, et al., G.R. No. 123553, July 13, 1998)
9. Bar 2005: a. Under what circumstances may a corporation declare dividends? A: A corporation may
**declare dividends when there is unrestricted retained earnings, a resolution of the Board of Directors and
in case of declaration of stock dividends, a ratification of the stockholders representing two-thirds (2/3) of the
outstanding capital stock
b. From what funds are cash and stock dividends sourced? A: Dividends either cash or stock dividend
must be **declared out of unrestricted retained earnings because of the Trust Fund Doctrine. The Trust
Fund Doctrine provides that subscription to the capital stock of a corporation constitute a fund to which
the creditors have the right to look for the satisfaction of their claims (Ong vs Tiu, G.R. No. 144476, April 8,
2003). Thus, **dividends must NEVER IMPAIR the subscribed capital stock.
[] Stock dividends **cannot be issued to one who is not a stockholder of a corporation for
payment of services rendered. Nielson & Company, Inc., vs. Lepanto Consolidated Mining Company, G.R. No.
L-21601, December 17, 1966
10. Bar 2001: For the past three years of its commercial operation, X, an oil company, has been earning
tremendously in excess of 100% of the corporation’s paid-in capital. All of the stockholders have been
claiming that they share in the profits of the corporation by way of dividends but the Board of Directors failed
to lift its finger.
Ecce Ancilla Domini! 73 of 160

a. Is Corporation X guilty of violating a law? If in the affirmative, state the basis: Corporation X is
guilty of violating Section 43 of the Corp Code. This provision prohibits stock corporations from retaining
surplus profits in excess of 100% of their paid-in capital.
b. Are there instances when a corporation shall not be held liable for not declaring dividends? see
number 7, immediately supra.
11. Bar 1990: At least 2/3 of the stockholders of Solar Corporation, meeting upon the recommendation of the
BOD, declared a 50% stock dividend during their annual meeting. The notice of the annual stockholders’
meeting **did not mention anything about a stock dividend declaration. The matter was taken up only
under the item “other business” in the agenda of the meeting. C.K. Senwa, a stockholder, who received his
copy of the notice but did not attend the meeting, subsequently learned about the 50% stock dividend
declaration. He desires to have the stock dividend declaration cancelled and set aside, and wishes to retain
your services as a lawyer for the purpose. Will you accept the case? Discuss with reasons. (1990) A: I will not
accept the case. Sec 43 of the Corp Code states that no stock dividend shall be issued without the approval of
the stockholders representing not less than 2/3 of the outstanding capital stock at a regular or special meeting
duly called for that purpose. Conformably with Sec 50 of the Corp Code, a **written notice of the holding of
the regular meeting sent to the shareholders will suffice. The notice itself specified the said subject matter.
Alternative answer: Yes, I will accept the case. The problem does not indicate that there is action by
the BOD which is also necessary for the declaration of 50% stock dividend.
12. Bar 1991: During the annual stockholders meeting, Riza, a stockholder proposed to the body that a part of
the corporation’s unreserved earned surplus be capitalized and stock dividends be distributed to the stockholders,
arguing that as owners of the company, the stockholders, by a majority vote, can do anything. As chairman of
the meeting, how would you rule on the motion to declare stock dividends? A: As the chairman of the meeting, I
would rule against the motion considering that a **declaration of stock dividends should initially be taken
by the BOD and thereafter to be concurred in by a 2/3 vote of the stockholders [Sec 43]. There is no
prohibition, however, against the stockholders’ resolving to recommend to the BOD that it consider a
declaration of stock dividends for concurrence thereafter by the stockholders. Sec 43 of the Corporation Code
provides that the board of directors of a stock corporation may declare dividends out of the unrestricted
retained earnings which shall be payable in cash, property, or in stock to all stockholders (UPLC).

ON DIVIDENDS PAID TO THE CORPORATION (as a SH)

1. The **dividends received by a corporation from CORPORATE INVESTMENTS IN OTHER COMPANIES are
CORPORATE EARNINGS. As such shareholder, the dividends paid to it were its own money, which may then be
AVAILABLE FOR WAGE INCREMENTS. Madrigal & Company, Inc.,vs. Hon. Ronaldo B. Zamora, et al., G.R. NO.
L-48237, June 30, 1987
——————————————-

F2h. Power to Enter Into Management Contract

F2hi. Ultra Vires Acts (supra)
F2hi. Applicability of Ultra Vires Doctrine
F2hii. Consequences of Ultra Vires Acts

POWER TO ENTER INTO MANAGEMENT CONTRACT [SEC 44]

1. Concept of Management Contract: a contract whereby a **corporation DELEGATES the MANAGEMENT
OR OPERATION of its business to another corporation; it is also called a SERVICE CONTRACT or
OPERATING AGREEMENT.
*Applicability: [] apply to ANY CONTRACT whereby a corporation undertakes to manage or operate ALL OR
SUBSTANTIALLY ALL of the business of another corporation, whether such contracts are called service contracts,
operating agreements or otherwise
2. Voting requirement: it must be approved by:
a. a MAJORITY of the board of directors/trustees present provided there is a quorum, and
b. the stockholders owning at least the MAJORITY of the outstanding capital stock at a meeting
duly called for the purpose.
****NB: these apply to BOTH the managing and the managed corporations,
3. ****QUALIFIED voting requirements: when the management contract must be approved by the stockholders of the
MANAGED corporation owning at least two-thirds (2/3) of the total outstanding capital stock entitled to
vote, or by at least two-thirds (2/3) of the members in the case of a non-stock corporation.
a. [INTERLOCKING SH]: where a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control MORE THAN ONE-THIRD (1/3) of the total
outstanding capital stock entitled to vote of the managing corporation; or
Ecce Ancilla Domini! 74 of 160

b. [INTERLOCKING DIRECTORS]: where a MAJORITY of the members of the board of directors

of the managing corporation also constitute a majority of the members of the board of directors of the
managed corporation,
3. DURATION of management contract:
*GR: [] No management contract shall be entered into for a period longer than FIVE YEARS for any
one term.
**XPN: service contracts or operating agreements which relate to the EXPLORATION, DEVELOPMENT,
EXPLOITATION OR UTILIZATION OF NATURAL RESOURCES may be entered into for such periods as may be
provided by the pertinent laws or regulations.
4. Bar 1991: ABC Management Inc. presented to the DEF Mining Co, the draft of its proposed Management
Contract. As an incentive, ABC included in the terms of compensation that ABC would be entitled to 10% of any
stock dividend which DEF may declare during the lifetime of the Management Contract. Would you approve
of such provision? If not, what would you suggest as an alternative? A: I would not approve a proposed
stipulation in the management contract that the managing corporation, as an additional compensation to it,
should be entitled to 10% of any stock dividend that may be declared. **Stockholders are the only ones
entitled to receive stock dividends (Nielsen & Co v Lepanto Mining 26 s 569) I would add that the
**unsubscribed capital stock of a corporation may only be issued for cash or property or for services already
rendered constituting a demandable debt (Sec 62 Corp Code). As an alternative, I would suggest that the managing
corporation should instead be given a NET PROFIT PARTICIPATION and, if it later so desires, to then
convert the amount that may be due thereby to equity or shares of stock at no less than the par value thereof.
——————————————
F3. How Exercised
F3a. By the Shareholders
F3b. By the Board of Directors
F3c. By the Officers
*See introductory notes on corporate powers, supra.
——————————————

F4. Trust Fund Doctrine

1. Concept: the **capital stock, property and other assets of the corporation are regarded as EQUITY IN
TRUST and they HELD IN TRUST for creditors, ultimately for the payment of corporate creditors.
2. Accordingly, there shall be NO DISTRIBUTION of assets to shareholders until the claims of creditors
have been paid or an appropriation of such assets has been made for the payment of such claims.
3. The **SUBSCRIBED CAPITAL STOCK of the corporation is a TRUST FUND for the payment of
debts of the corporation which the creditors have the right to look up to satisfy their credits. The corporation
may NOT dissipate this and the creditors may SUE the stockholders DIRECTLY for the UNPAID
SUBSCRIPTION [Phil Trust Co v. Rivera 1923; Lumanlan v. Cura 1934; CIR v. CA 1991]
***Which is part of the TFD? The TOTAL SUBSCRIPTION—they are considered FUNDS HELD
IN TRUST for the benefit of the corporate creditors. Those subscriptions should be untouched and
unimpaired. They are funds held for the benefit of the creditors, so they cannot be used, they cannot be
distributed to the stockholders. Now, ***TFD has been expanded to include not just subscriptions but even
PROPERTIES. So properties of the corporation cannot be distributed to the stockholders except in cases
allowed by law and equity. The moment you distribute the properties to stockholders, other than those cases
allowed by law and equity, you violate likewise the TFD. When are you allowed to distribute properties to the
stockholders? What's the most **common form or distribution of properties to stockholders?
a. Dissolution,
b. liquidation,
c. Reduction of capital stock,
d. Redemption of redeemable shares and w
e. When you pay dissenting stockholders in the exercise of their appraisal right.
***vs AUTHORIZED CAPITAL STOCK (ACS): the maximum number of shares that the
corporation may issue without amending the Articles of Incorporation. It doesn’t represent the maximum
amount of capital the corporation may raise because shares of stock can be issued for an amount higher
than par value. EG: ACS is 1 billion, par value is 1 peso. So 1 billion is not the maximum amount that the
corporation may raise, but it represents the maximum number of shares that the corporation may issue
without amending the AOI. So if the corporation wants to issue more than 1 billion, the OVER-ISSUANCE
WOULD BE VOID. So you have to amend the AOI to be able to issue additional shares. Now, if the share is
issued for 10 pesos, then your ACS and fully subscribed would be more than 1 billion—it would 10 billion
pesos, because the par value is only the minimum value for which the shares may be issued, otherwise they will
be called watered shares.
Ecce Ancilla Domini! 75 of 160

***vs. the term “CAPITAL STOCK” has a precise meaning under the Corporation Code. As held in
MISCI-NACUSIP Local Chapter v. National Wages and Productivity Commission, the term capital stock is the
PORTION of the authorized capital stock subscribed and ACTUALLY PAID UP. EG: if a wage order
says that “employer whose paid up capital is impaired by 25%, it is not obligated to pay minimum wage.”
When it says paid up capital stock, you don’t include the properties received by the corporation, neither the
assets
of the corporation because the term “capital stock” has a precise meaning under the Code. Now, under
Section 43 of the Corporation Code, if the surplus profit is 100% in excess of the PAID IN CAPITAL, any
excess should be distributed. Since the term used is PAID UP CAPITAL, it does NOT include the
properties or assets of the corporation?
***Summary: Capital is difference from Capital Stock (or Paid Up Capital)
a. Capital [in Gamboa v. Teves] only applies to nationalized activities, particularly mining, natural
resources, and public utilities. Narra v. Redmont also made reference to Gamboa v. Teves' definition of
capital, and to corporations engaged in exploitation, exploration, development of natural resources. Again, A
foreign corporation could provide financial agreements and technical service agreements to mining companies,
and that will not be a violation of the law. It’s only when the foreign corporation participates in exploration,
exploitation and development of natural resources that it could be subjected to the 60-40 foreign
ownership requirement.
b. Capital Stock: portion of the ACS which is subscribed and actually paid up.
4. **But money received for subscription of increase of authorized capital are NOT COVERED by the
TFD prior to the approval of such increase by the SEC [Central Textile Mills v. NWPC 1996].
[] A corporation has **no power to release an original subscriber from paying for his shares
without a VALUABLE CONSIDERATION for such release. This is because subscriptions to the capital of the
corporation constitute a fund to which creditors have a right to look for satisfaction of their claims and
that an ASSIGNEE IN INSOLVENCY can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of debts. Philippine National Bank vs. Bitulok Sawmill, Inc., 23 SCRA
1366 (1968)
5. PLDT vs NTC 4 December 2007: TFD considers the subscribed capital as a trust fund for the payment of
debts of the corporation, to which the creditors may look for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital may be returned or released to the SH—**except in the
redemption of redeemable shares—without violating the TFD. Thus,
a. dividends must NEVER IMPAIR the subscribed capital,
b. subscription commitments cannot be condoned or remitted,
c. nor can the corporation buy its own shares using the subscribed capital as the consideration
thereof.
6. TFD is the underlying principle in the procedure for the distribution of assets embodied in the
CorpoCode, which allows the **DISTRIBUTION of corporate capital ONLY IN THREE INSTANCES:
a. the amendment of the articles of incorporation to reduce the authorized capital stock;
b. purchase of redeemable shares, regardless of the existence of unrestricted retained earnings (URE);
c. dissolution and eventual liquidation of the corporation [Ong vs. Tiu 8 April 2003].
7. Bases of TFD:
a. Sec 41 CorpoCode on the power of the corporation to acquire its own shares; and in
b. Sec 122 CorpoCode on the prohibition against the distribution of corporate assets and property
unless the stringent requirements therefor are complied with.
8. Coverage of TFD:
a. it pertains to the SUBSCRIPTION to the CAPITAL STOCK of the corporation.
b. **However, when the corporation is insolvent, the TF encompasses not only the subscription to
the capital stock, but also the other property and assets of the corporation [Halley vs. Printwell 30 May
2011]. The subscribed capital in such a case is the amount that the corporation receives, inclusive of premiums,
if any, in consideration of the original issuance of the shares [NTC vs. CA].
c. When negotiations ensued in light of a planned takeover of company and the counsel of the
buyer advised the stockholder through a LETTER that he may take the machineries he brought to the corporation out
with him for his own use and sale, the previous stockholder cannot recover said machineries and equipment
because **these properties remained PART OF THE CAPITAL PROPERTY of the corporation. Under
the trust fund doctrine, the CAPITAL STOCK, PROPERTY, AND OTHER ASSETS of a corporation are
regarded as equity in trust for the payment of corporate creditors which are preferred over the stockholders
in the distribution of corporate assets. Ryuichi Yamamoto vs. Nishino Leather Industries, Inc.,and Ikuo Nishino, G.R. No.
150283, April 16, 2008.
d. A corporation **cannot purchase the shares of a stockholder if it has no unrestricted retained
earnings to cover for the payment of the shares. This requirement is BASED ON THE TRUST FUND
Ecce Ancilla Domini! 76 of 160

DOCTRINE which means that the CAPITAL STOCK, PROPERTY AND OTHER ASSETS of the
corporation are regarded as equity in trust for the payment of corporate creditors. Boman Environmental
Development Corporations vs. Court of Appeals, 167 SCRA 540 (1988)
9. EXAMPLES WHEN TFD VIOLATED**
a. When the corporation releases or condones payment of unpaid subscription;
b. When there is payment of dividends without URE;
c. When properties are transferred in FRAUD of creditors;
d. When properties are DISPOSED or undue preference is given to some creditors even if the
corporation is insolvent.
10. CASE DOCTRINES APPLYING TFD
a. The **rescission of a pre-subscription agreement which will effectively result in the unauthorised
distribution of the capital assets and property of the corporation, thereby violating the Trust Fund Doctrine
and the Corporation Code, since rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed. The Trust Fund Doctrine
provides that subscriptions to the capital stock of a corporation constitute a fund to which the creditors have a
right to look for the satisfaction of their claims. [Ong vs. Tiu];
b. The reversal of the additional paid-in capital and its reinvestment as capital or subsequent
conversion into a loan, which is considered a reduction of the corporate trust fund [SEC Opinion No. 14-13
dated 11 June 2014 citing Ong vs. Tiu and Turner vs. Lorenzo Shipping 24 November 2010].
c. The distribution of corporate assets and property cannot be made to depend on the WHIMS &
CAPRICES of the stockholders, officers or directors of the corporation, or even, for that matter, on the earnest
desire of the court “to prevent further squabbles and future litigations”, unless the indispensable conditions and
procedures for the protection of corporate creditors are followed [Ong Yong v. David Tiu, 8 Apri 2003].
11. SAMPLE PROBLEM: ABC Corp was originally incorporated with an ACS of P500K shares with the
members of the TT family owning P450K shares representing the outstanding capital. The TT family invited
the OO family to invest in ABC as stockholders necessitating an increase in the ACS to give each family equal
(50-50) shareholdings, as agreed upon in a Pre-Subscription Agreement (PSA). Pursuant to the PSA, the ACS
was thus increased from P500K to P2M shares with a par value of P100 each, with the OO family subscribing to
the P1M shares and the TT to P550 more shares in addition to their P450 shares to complete the P1M shares.
The PSA likewise provides that the TT family shall nominate the VP & Treasurer and 5 directors while the OO
family shall nominate the President and 6 directors. The OO family is supposed to manage the mall owned by
ABC. Later, alleging non-compliance with the obligation under there PSA, the TT family filed an action for
RESCISSION of the PSA and asked for the liquidation of the assets of ABC.
a. Will the action prosper? NO. The TT family cannot rescind the contract because they are NOT
the real parties in interest. The subject matter of the contract is the P1M unissued shares of ABC stock
allocated to the OO family. The parties’ PSA was a subscription contract as defined under Sec 60 CorpCode.
A subscription contract necessarily involves the corporation as one of the contracting parties since the
subject matter is property owned by the corporation, i.e., its shares of stock. Thus,** the subscription
contract (denominated by them as PSA) was from the viewpoint of law, one between the OO family and
ABC, not between OO and TT. Hence, it is the corporation, not TT that has the PERSONALITY to
rescind the contract. Even if there was a violation of the agreement, TT has other remedies, but rescission is not
one of them.
b. Granting but not conceding that the members of the TT family possess the legal standing to sue for
rescission based on breach of contract, said action will **still not prosper since the rescission will violate the
Trust Fund Doctrine and the procedures for the valid distribution of assets and property under CorpCode.
The rescission of the PSA will effectively result in the UNAUTHORISED distribution of the capital
assets and property of the corporation, thereby violating the TFD and CorpCode, **since rescission of a
subscription agreement is NOT one of the instances when distribution of capital assets and property
of the corporation is allowed. Rescission will, in the final analysis, result in the PREMATURE
LIQUIDATION of the corporation without the BENEFIT OF PRIOR DISSOLUTION in accordance
with Sections 117, 118, 119 & 120 of the Corp Code [Ong v. Tiu, 8 Apr 2003].
———————————————————————————————

G. Board of Directors (BOD) and Trustees (BOT) [Title III]

THE BOARD OF DIRECTORS (BOD)

1. A juridical person cannot be considered essentially a formal party to a case where it was not duly represented
by its legitimate governing board.
2. When they are two sets of BOD claiming to be legitimate in an action involving the validity of the sale of its
corporate property and the issue on who is the legitimate board is still pending at the time of the sale: any
Ecce Ancilla Domini! 77 of 160

decision in a court suit does not become not final and executory insofar as the corporation is concerned
because it was effectively denied its day in court for want of legitimate representation. Islamic Directorate
of the Philippines vs. Court of Appeals, 272 SCRA 454 (1997)

G1. Doctrine of Centralized Management

1. GR: the BOD/BOT has the mandate to do the following [Sec 23]***
a. exercise its corporate powers
b. conduct its business
c. control and hold all its property
2. XPN: Unless otherwise provided in the Corporation Code.
***Under the doctrine of centralized management, stockholders—regardless of their number (5, 15, or
thousands)—will have to delegate the power to run the corporation to a centralized body called Board of
Directors. So BOD is the body which exercises the powers of a corporation. Under Section 23, there is a
qualification unless otherwise provided, i.e., there are certain cases where the law
a. confers corporate powers only to the SH and
b. there are corporate powers exercised jointly by the board and the SH. But other than
these, corporate powers are exercised by the BOD. They decide what is best for the corporation. ***Questions
on policy and management are left to the sound discretion of the BOD.
[] Bar: A general counsel of the corporation and the lawyer who handled the case for the corporation
entered into a compromise agreement with a party in a civil case without approval of the board. Is this
compromise agreement binding? No, because the general counsel does not have the power. It has to be the
board unless authorized by the by-laws or board to enter into a compromise agreement. The lawyer himself
without authority from the board or the by-laws cannot approve any compromise agreement.
3. Case scenarios as to powers of the board
a. POWER TO ENTER INTO CONTRACTS: Where a department store entered into a contract with a
concessionaire who sold fake Louis Vitton items in the department store, the executive vice president of the
department store cannot be convicted for entering into a contract which enabled the concessionaire to engage in
acts allegedly amounting to unfair competition, for the corporation has a legal personality separate from its
officers and **the power to enter into contracts is vested in the board of directors. Louis Vitton, S.A. vs.
Villanueva (1992).
b. POWER TO SUE & BE SUED: The power to sue and be sued in any court by a corporation is
lodged in the board of directors that exercises its corporate powers and not in the president or officer
thereof. A derivative suit should not prosper if it is filed by a person who is not authorized by the corporate share
for whose benefit the shares are held. Bitong vs. CA (1998)
c. POWER TO ELECT CORPORATE OFFICERS—cannot be delegated: The Board of Directors of
Matling could not validly delegate the power to create a corporate office to the President, in light of
Section 25 of the Corporation Code requiring the Board of Directors itself to elect the corporate officers.
Verily, the POWER TO ELECT THE CORPORATE OFFICERS WAS A DISCRETIONARY POWER
that the law EXCLUSIVELY vested in the BOD, and could not be delegated to subordinate officers or agents. Matling
Industrial vs. Coros, October 13, 2010.
d. It’s the BOD, not the President, that exercises corporate powers: The acts of an agent beyond the
scope of his authority do not bind the principal unless the latter ratifies the same expressly or impliedly.
**When the third person knows that the agent was acting beyond his power or authority, the principal cannot
be held liable for the acts of the agent. If the said third person is aware of such limits of authority, he is to
blame and is not entitled to recover damages from the agent, unless the latter undertook to secure the principal’s
ratification. When the President entered into a contract (for speculative trading of oil) with another corporation
without securing Board consummation, such that there was no occasion at all for ratification, the counterparty
cannot enforce such contract. **The board of directors, not the president, exercises corporate power. Safic
Alcan & Cie vs. Imperial Vegetable Co., Inc., 355 SCRA 559 (2001)

THREE LEVELS OF CONTROL IN A CORPORATION

(1) the BOARD OF DIRECTORS, which is responsible for
a. corporate policies and the
b. general management of the business affairs of the corporation;
(2) the OFFICERS, who in theory execute the policies laid down by the board, but in practice often have wide
latitude in determining the course of business operations; and
*NB: Board resolution authorizing a lawyer to represent the corporation during the pre-trial is not
necessary if the officer who is expressly authorized under the by-laws of the corporation to make the appointment
had in fact made such appropriate appointment in favor of the handling lawyer. Citibank, N.A. vs. Chua, 220
SCRA 75. 1993
Ecce Ancilla Domini! 78 of 160

(3) the STOCKHOLDERS who have the residual power over fundamental corporate changes, like amendments of
the articles of incorporation.
——————————————-

G2. Business Judgment Rule (BJR)

1. BJR: This means that ***questions of policy and management are left to the discretion of the board and
the actions of the board are not reviewable by the courts and they cannot be interfered with by the courts
and the stockholders for as long as the board acts in good faith and not contrary to law.

2. Case scenarios:
a. Can the stockholders pass a resolution repudiating the resolution adopted by the board on
questions of policy and management? No. ***SH cannot interfere with the board on how to run corporate
affairs. Remedy of SH: Remove the director by 2/3 of vote and elect new directors but never to supplant
BOD’s judgment because the powers were not granted to them by law. It is to the BOD.
b. Can the court interfere on purely business matters? No. For as long as the board acts in good faith
and not contrary to law, their (BOD) actions are not reviewable by the courts.
c. If the Board made a mistake, they erred in making an investment or in buying a property they thought
would increase in value but six months after the value decreased, can they be made liable for damages? No.
Under Section 23, 34, and 31 of Corporation Code they are not liable. They are only liable in case of gross
negligence or bad faith in directing the affairs of the corporation.
Simple negligence and error in judgment are all part of their administrative prerogative. So directors are
not infallible. There are no certainties that they will not make mistakes or they will not err in the exercise of
their judgment. What is important is that they act in good faith and not contrary to law and if they do make
a mistake, their actions are not reviewable by the courts and even by the SH.
3. Can the board create positions? Yes. The board also may create a department. The board may create
ordinary positions, appoint ordinary officers. ***What the board cannot do and cannot be justified by the
business judgment rule [Filipinas Port Services v. Go] is to create an executive committee that would function
like an executive committee under the Corporation Code. Neither can they create corporate offices. So they
cannot create officers and committees which, by law, can only be created by the by-laws.
a. ***In short, the board cannot create corporate offices, but they can create ordinary office: The
distinction is not in the importance of the position or office in the corporation. The importance lies with the
jurisdiction in case of removal or incrimination dispute. So the holder of a corporate office is considered a
corporate officer and any issue about the removal, appointment of a corporate officer is an intra-corporate
controversy cognizable by the RTC acting as a special commercial court. Other officers, in case of election,
removal, or appointment disputes, the same becomes a labor issue or dispute cognizable by Labor Arbiters
and not the RTC acting as a special commercial court.
b. ***What makes an office a corporate office? It’s not anymore WON it is appointed by the board. The
test is: Is that office specified in the by-laws? If it is in the by-laws, it becomes a corporate office. If not, it is
not a corporate office but just an ordinary office.
c. Is the office of the dean a corporate office? The test is WON it is in the by-laws. In this case, it was
not in the by-laws. So where can the Dean go in case he’s been removed? Go to the LA, not RTC. Even if the
position is highfalutin, he is not a corporate officer if his position is not in the by-laws.
d. Can the board be authorized by the by-laws to create corporate office? Is the officer thereto
holding an ordinary or corporate office? SC said it’s ordinary. So the ***remedy is not for the by-laws to
authorize the board. The remedy is for the by-laws to be amended to make the office a corporate office.
4. MANAGEMENT PREROGATIVE: The determination of the necessity for additional offices and/or
positions in a corporation is a MANAGEMENT PREROGATIVE which courts are not wont to review in
the absence of any proof that such prerogative was exercised in bad faith or with malice. Indeed, it would be an improper
judicial intrusion into the internal affairs of Filport for the Court to determine the propriety or impropriety
of the creation of offices therein and the grant of salary increases to officers thereof. Filipinas Port
Services, Inc vs. Go March 16, 2007
5. The BOD orders are NOT REVIEWABLE by the courts if they acted in GF and without malice: Issues
relating to the directive of the board of directors of the issuing corporation to issue a stock certificate in favor
of the buyer are QUESTIONS OF POLICY OR MANAGEMENT and are left SOLELY to the honest
decision of officers and directors of a corporation, and so long as they act in GOOD FAITH, their orders
are NOT REVIEWABLE by the courts. Sales vs. SEC (1989)
6. Sample scenarios:
a. SALES MADE PRESUMED VALID: Where the corporation sold its shares to an investment
house on the condition that the same shall be sold to the public through stockbrokers in block of 1 million shares per buyer
and **the condition was not fulfilled, the sale is, nevertheless, presumed to be valid unless set aside by a
Ecce Ancilla Domini! 79 of 160

competent court. Thus, the buyer, as a stockholder, cannot be deprived of his right to vote his shares as it is a right
inherent to ownership. The stockholder may be deprived of the right to vote only upon clear showing of
its lawful denial under the articles of incorporation or by-laws of a corporation. Sales vs. SEC (1989)
b. SECRETARY’S CERTIFICATION PRESUMED VALID ON ITS FACE: A stockholder cannot
invalidate the sale of corporate properties for failure to comply with Section 40 of the Corporation Code, where
the buyer relied on the secretary’s certificate that the sale had been authorized by resolution of the board of
directors and of the stockholders. **Being regular on its face, a Secretary’s Certificate is sufficient for a third
party to rely on. It does not have to investigate the truth of the facts contained in such certification,
otherwise business transaction of corporations would become tortuously slow and unnecessarily hampered. Esguerra vs. CA (1997)
c. INDIVIDUAL DIRECTOR WITHOUT AUTHORIZATION—sale of land is void, hence, cannot
be ratified: Contracts or acts of a corporation must be made either by the board of directors or by a
corporate agent duly authorized by the board. Absent such valid delegation/authorization, the rule is that the
declaration of an individual director relating to the affairs of the corporation, but not in the course of, or
connected with, the performance of authorized duties of such director, are held not binding on the
corporation. Thus, where a director was not authorized by the board to sell corporate property, its sale is not
binding on the corporation. The sale cannot be ratified despite acceptance by the corporation of partial
payment if what is involved is sale of land. Considering that the officers who represented and acted as agents in
behalf of the corporation were not authorized, the contract of sale is null and avoid under Art.1874 of the
Civil Code. Being a void contract, it is not susceptible to ratification. A.F realty & Development, Inc.,vs.
Dieselman Freight services Company (2002)
——————————————-

G3. Tenure, Qualifications and Disqualifications of Directors or Trustees

1. Qualifications to be BOD/BOT:
a. elected from among the holders of stocks;
b. must own at least one (1) share of the capital stock of the corporation, which share shall stand in
his name on the books of the corporation. NB: Any director who ceases to be the owner of at least one (1)
share of the capital stock of the corporation shall thereby cease to be a director.
*Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a party to its execution—
**from legal titleholder or owner of the shares subject of the VTA, he becomes the equitable or
beneficial owner. Any director who executes a VTA over all his shares ceases to be a stockholder of record
in the books of the corporation and therefore ceases to be a director. Lee and Lacdao vs. CA, 4 February 1992.
***Bar: Can the by-laws enlarge the qualification for a director to own at least one share? Yes,
as long it is not intended to deprive the minority representation. Can the by-laws prescribe other
qualification? For example only law deans be elected as directors of trustees? Yes.
2. Qualifications to be BOT: must be a member of the corporation;
a. Additional qualifications: Under section 21 of the Corporation Law, a corporation may prescribe in
its by-laws the qualifications, duties and compensation of directors, officers and employees. A provision in the by-
laws of the corporation that no person shall qualify or be eligible for nomination for elections to the board of
directors if he is engaged in any business which competes with that of the Corporation is valid, as long as
DUE PROCESS is observed. Gokongwei, Jr. vs. SEC, April 11, 1979
3. Majority rule: majority of the directors or trustees must be residents of the Philippines.
4. Tenure [Sec 23]: one (1) year until their successors are elected and qualified
a. The board of directors of corporations must be elected from among the stockholders or members.
Thus, a provision in the by-laws of the corporation stating that of the fifteen members of its Board of
Directors, only 14 members would be elected while the remaining member would be the representative
of an educational institution located in the village of the homeowners, is invalid for being **contrary to law
as it violates the one-year term limit of the directors. Grace Christian HS vs. CA, 23 October 1997.
5. DISQUALIFICATION OF DIRECTORS/TRUSTEES or OFFICERS
***The following are disqualified from becoming a D/T/O [Sec 27]: those convicted
a. by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or
b. a violation of the Corporation Code committed within five (5) years prior to the date of his election
or appointment.
*(a) refers to the gravity of the offense, while (b) refers not to the gravity but WHEN the violation was
committed.
***Suppose that SEC en banc, found that a director violated the corporation code but he filed a
petition for review with the CA. During the pendency of his appeal can he still run as a director in another
corporation?
Ecce Ancilla Domini! 80 of 160

No because decisions of the SEC en banc are IMMEDIATELY EXECUTORY, although they are not final
can be appealed with the CA. The appeal will not stay the enforcement of the decision. XPN: If the
petitioner obtains a TRO or injunction from the CA

——————————————-

G4. Elections [Sec 24]

a. Cumulative Voting/Straight Voting
b. Quorum

REQUISITES FOR A VALID ELECTION

1. Notice of the meeting to the Stockholders in accordance with the form and mode under the by-laws 

2. There will be present either in person or by representative authorized to act by written proxy the owners of a
majority of the outstanding capital stock or majority of the members entitled to vote. 

3. Presided by the officer under the by-laws. 

4. The stockholder may cast such number of votes base on his shares registered in his name in the books of
corporation multiplied by the directors to be elected. 

*EG: Let us say a stockholder has 1000 shares, 15 directors to be elected. So 1000 shares x 15 – the
answer is the number of votes allowed for such SH to cast (15,000 votes)
5. And the candidate having the highest number of votes shall be duly elected as director.
***Number of shares not number of warm bodies present. So one person can constitute a quorum,
if that person is Henry Sy of SM OR BDO. His presence accounts to more than majority.
6. Bar: Which shares are not included in the determination of majority of outstanding capital stock?
a. Non-voting shares;
b. Delinquent shares;
c. Treasury shares;
*but includes unpaid shares which are not delinquent.

VOTING IN STOCK CORPORATIONS

1. every stockholder entitled to vote shall have the right to vote
a. in person or
b. by proxy
2. SH votes according to:
a. the number of shares of stock standing, at the time fixed in the by-laws, in his own name on the
stock books of the corporation, or
b. where the by-laws are silent, at the time of the election;
3. Mode of voting: SH may vote
a. such number of shares for as many persons as there are directors to be elected or
b. he may cumulate said shares and give one candidate as many votes as the number of directors to
be elected multiplied by the number of his shares shall equal, or
c. he may distribute them on the same principle among as many candidates as he shall see fit:
• Provided:
a. That the total number of votes cast by him shall not exceed the number of shares owned by him
as shown in the books of the corporation multiplied by the whole number of directors to be elected;
b. That no delinquent stock shall be voted.
4. CUMULATIVE VOTING – SH may cast his votes in favor of one nominee or he may spread out equally
or various portions to various nominees as long as it does not exceed the number of shares owned by him as
shown in the books of the corporation multiplied by the whole number of directors to be elected.
Such cannot be denied to a stockholder because it is a right granted by law. The by-laws cannot deprived that
right from a stockholder.

VOTING IN NSC
1. GR: members may cast as many votes as there are trustees to be elected but may not cast more than one
vote for one candidate.
2. XPN: Unless otherwise provided in the articles of incorporation or in the by-laws
3. Bar: If there are 6 trustees, how many votes can one member cast?
6 but not more than once per nominee. There is ***no cumulative method voting in non-stock non-profit
corporation unless provided in the by-laws.

WINNER IN THE VOTING

Ecce Ancilla Domini! 81 of 160

1. Candidates receiving the highest number of votes shall be declared elected.

2. The secretary, or any other officer of the corporation, shall submit to the SEC the names, nationalities and
residences of the directors, trustees, and officers elected within thirty (30) days after the election. Should
a director, trustee or officer die, resign or in any manner cease to hold office, his heirs in case of his death, the
secretary, or any other officer of the corporation, or the director, trustee or officer himself, shall immediately
report such fact to the SEC [Sec 26]

INDEPENDENT DIRECTOR
1. He is one who is not part of management and not subject to any circumstance, relationship or factor
present that may impair the exercise of the independent judgment of a director of the corporation
*EG: Legal counsel of the corporations, adviser
2. Bar: what corporations are required by law to have an independent director?
a. Public companies
b. whose shares of stock are listed in the stock exchange or with P50 million assets
c. with at least 200 stockholders and
d. each SH owning 100 shares.
3. How many?
a. 5 directors: 2 independent directors at least
b. 15 directors: 3 independent directors
4. How many election are you going to have if you are required to have an independent director? Only one
5. How many directors will you elect? Same: the number of directors fixed in the AOI
6. How many votes may the SH cast? Same formula, number of shares under their name X number of directors
to be elected inclusive of the number of independent directors. One nominee for regular director or one
nominee for independent director, or spread the votes among regular only or independent only or combination
of both as long as the votes do not exceed the shares of stock in his name multiplied by the number of
directors to be elected
*EG: 13 directors, 2 independent directors. There are 18 nominees to the positions of regular directors.
The top 13 will be considered regular directors.
What if the shares or votes of the 2 independent directors are less than 14th nominees as general directors?
***The top 13 nominees for regular directors are considered elected and top 2 nominees for
independent directors are elected as independent directors even though these 2 independent directors obtain less
votes than the nominees for regular directors.

QUORUM
*Requisites before the election is held for both BOD & BOT
1. MAJORITY PRESENT: there must be present, either in person or by representative (authorized to act by
written proxy), the owners of a majority of the outstanding capital stock, or if there be no capital stock, a
majority of the members entitled to vote.
*if majority is not achieved or no final results: the meeting called for an election may adjourn from day
to day or from time to time but not sine die or indefinitely.
2. BALLOT VOTING, if requested: election must be by ballot if requested by any voting stockholder or
member.
3. ***Under Section 25, Quorum means majority of the directors as stated/fixed in the AOI, not fixed in the by-
laws. Unless there is a higher number required in the AOI to constitute a quorum, majority of the entire board
is sufficient to transact business.
*If you see the phrase the BOD as distinguished from majority of the BOD, the phrase BOD simply
means majority of the quorum. So this language is evident in Sections 43-44 of the Code regarding Declaration
of Dividends, as compared to Sections 37-38, 40, 42. If the act is not provided for or is not covered by the
Corporation Code or the by-laws, then majority of the the quorum is sufficient to transact business.
*Can the by-laws prescribe lesser number? No. It can be greater number but not lesser number.
*PENA VS CA: 3 would have been a quorum of 5, but the by-laws provide that 4 out of 5 constitutes a
quorum. This involves loan secured by mortgage. Loan was not paid; mortgage was foreclosed. Then the right
to redeem was assigned to another and the assignee wants to file an action for ejectment against the
mortgagor. Was there a valid assignment of the right to redeem considering that only 3 out of 5 were present
and approved the assignment of the right to redemption? NO, because the by-laws prescribed a greater
number and ***likewise under Sec 40 if what is assigned is the right to redeem involving the only
property of the corporation that amounts to a sale of substantially all the corporate assets and that
requires not only board approval but likewise votes of the stockholder representing at least 2/3 of the
outstanding capital stocks.
Ecce Ancilla Domini! 82 of 160

FIRST ACTS AFTER ELECTIONS [Sec 25]

1. Immediately after their election, the directors must formally organize by the election of
a. a president, who shall be a director,
b. a treasurer who may or may not be a director,
c. a secretary who shall be a resident and citizen of the Philippines, and
**The signature of the corporate secretary gives the minutes of the meeting probative
value and credibility. People of the Philippines vs. Hermenegildo Dumlao and Emilio La’o 580 SCRA (2009)
d. such other officers as may be provided for in the by-laws.
[] Under Section 25 of the Corporation Code, three officers are specifically provided for which a
corporation must have: president, secretary, and treasurer. **The law, however, does not limit corporate
officers to these three. Section 25 gives corporations the widest latitude to provide for such other offices, as
they may deem necessary. The by-laws may and usually do provide for such other officers, e.g., vice-president,
cashier, auditor, and general manager. In this case, there is **no basis from which it may be deduced that the
manager of petitioner is also a corporate officer such that he may be held liable for the money claims
awarded in favor of respondents. Even assuming that he is a corporate officer, still, there is no showing that he acted
with evident malice and bad faith. The manager may have signed and approved the payrolls;
nevertheless, it does not follow that he had a direct hand in determining the amount of respondents’ corresponding salaries and
other benefits. The manager, therefore, should not have been held liable together with the employer corporation.
Pamplona Plantation Company vs. Ramon Acosta et al. 510 SCRA 249 (2006)
2. GR: Concurrent positions are allowed, i.e., two (2) or more positions may be held concurrently by the same
person
*XPNs: the following cannot act at the same time:
a. president and secretary or
b. president and treasurer.

CORPORATE OFFICERS
1. Conformably with Section 25 of the Corporation Code, a position must be expressly mentioned in the
By-Laws in order to be considered as a corporate office. Thus, the creation of an office pursuant to or
under a By-Law enabling provision is NOT ENOUGH to make a position a corporate office. Matling Industrial vs.
Coros, October 13, 2010.
[] Where a corporate office is NOT SPECIFICALLY INDICATED in the roster of corporate offices in
the by-laws of the corporation, the board of directors may also be empowered under the laws to create
additional officers as may be necessary. And where the by-laws authorized the directors to create office, the
directors may create the office comptroller. ***Since the appointment as comptroller required the formal action
of the board, petitioner is a corporate officer whose dismissal may be subject of intra-controversy
cognizable by the SEC under Sec. 5 (c) of PD 902-A (now the Regional Trial Court). Nakpil vs. Intercontinental
Broadcasting Corporation, 379 SCRA 653 (2002)
2. Employment matters on Corporate Officers:
a. If employed based on Trust & Confidence—can be terminated anytime: The employment of a
corporate officer who under the by-laws holds office at the pleasure of the Board of Directors, may be
TERMINATED AT ANY TIME once said trust and confidence cease. The ouster of such corporate
officer is **NOT ONE OF REMOVAL BUT EXPIRATION OF TERM. De Tavera vs. Philippine
Tuberculosis Society, Inc., 112 SCRA 243. (1982)
3. Liability of Corporate Officers:
a. Criminal—only when specified by law: An officer of a corporation can be held criminally liable for
acts or omissions done in behalf of the corporation only where he is MADE BY SPECIFIC PROVISION OF
LAW to personally answer for his corporate action. Sia vs. People, 121 SCRA 655. (1983)
b. Self-serving: A general manager who implemented the decision to cease operations and to
terminate the services of the employees is liable to the latter where he sold the assets of the corporation
and applied the proceeds thereof to SATISFY HIS OWN CLAIMS to the PREJUDICE of the employees.
Such act does not amount to set-off since it was done without deference to the legitimate claims of the
other employees and creditors, in ***contravention of the provisions on CONCURRENCE AND
PREFERENCE OF CREDIT. De Guzman vs. National Labor Relations Commission, 253 SCRA 46 (1996)
4. Case scenarios on Corporate Officers:
a. The president as default responsible officer: If the records do not clearly identify the “officer or officers”
directly responsible for the payment of monetary benefits to the employees, the president of a corporation, as the
responsible officer of corporation, may be ordered to respond personally in case of closure of the
corporation. AC Ransom Labor Union vs. NLRC 142 SCRA 269 (1986); Villanueva vs. Adre 172 SCRA 876
(1989).
Ecce Ancilla Domini! 83 of 160

b. IMPLIED AUTHORITY—not personally liable even without Board resolution if previously allowed
without Board resolution: A corporate officer, entrusted with the general management and control of its
business, has IMPLIED AUTHORITY to make any contract or to do any other act which is necessary or
appropriate to the conduct of the ordinary business of the corporation. The GENERAL MANAGER of
the corporation who entered into contracts for the sale of copra products could not be held personally
liable for losses incurred because of said contracts despite
the fact that she did not obtain prior approval of the Board if based on CUSTOMS AND PRACTICES within the
company and given the SPECULATIVE NATURE of the contracts which required on the spot decision, the
**Board had PREVIOUSLY ALLOWED him to enter into similar contracts WITHOUT PRIOR BOARD
APPROVAL. Board of Liquidators vs. Kalaw, 20 SCRA 987 (1967); IOW, when the practice of the corporation
has been to allow its general manager to negotiate and execute contracts in its copra trading activities for and
in behalf of the corporation without prior board approval, the board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval. Settled jurisprudence has it that where similar acts have
been approved by the directors as a matter of GENERAL PRACTICE, custom, and policy, the
**GENERAL MANAGER MAY BIND THE COMPANY WITHOUT FORMAL AUTHORIZATION of the board of
directors. ibid.
c. Lack of involvement in the negotiation for the transaction is not a defense to a treasurer of the
corporation who signed a check in his capacity as an officer of the corporation. Llamdo vs. Court of
Appeals, 270 SCRA 423 (1997)
d. sue, not take law into one’s hands: It is the corporate secretary’s duty and obligation to register valid
transfers of stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully
bring suit to compel performance. But, the transferor, even though he may be the controlling stockholder of
the corporation, cannot take the law into his own hands and cause himself the recording of the transfers
of qualifying shares to his nominee-directors in the stock and transfer books of the corporation. Torres, Jr. vs.
Court of Appeals, 278 SCRA 793 (1997)
e. A **board resolution authorizing a corporate officer to obtain a loan includes the authority to
assign the receivables to secure the loan if the resolution also empowers the officer to agree to the terms and
conditions of the loan and sign implementing documents. The officer who signed the deed of assignment is,
however, not personally liable if he indicated in the deed that he was signing in behalf of the corporation. Great
Asian Sales Center Corporation vs. Court of Appeals, 381 SCRA 557 (2002)
f. The signature of the branch manager appearing below the typewritten word "NOTED" at the
bottom of the offer to purchase is a clear indication that there is no perfected contract of sale to speak of. The
representation of the clerk that the manager had already approved the sale, even if true, cannot bind the bank to a
contract of sale, it being obvious that such a clerk is not among the bank officers upon whom such putative
authority may be reposed by a third party. There is, thus, **no legal basis to bind the bank into any valid
contract of sale with the supposed buyer given the absolute absence of any approval or consent by any
responsible officer of the bank. DBP vs. Sps. Francisco and Leticia Ong, 460 SCRA 170 (2005)
g. declarations are not sufficient, board resolution needed: The property of a corporation may not be
sold without express authority from the board of directors. Physical acts, like the offering of the properties of the
corporation for sale, or the acceptance of a counter-offer of prospective buyers of such properties and the execution of the deed of sale
covering such property, can be performed by the corporation only by officers or agents duly authorized for the
purpose by corporate by- laws or by specific acts of the board of directors. Absent such valid delegation/
authorization, the rule is that the declarations of an individual director relating to the affairs of the
corporation, but not in the course of or connected with, the performance of authorized duties of such
director, are NOT BINDING on the corporation. While a corporation may appoint agents to negotiate for the sale
of its real properties, the final say will have to be with the board of directors through its officers and agents
as authorized by a board resolution or by its by-laws. An unauthorized act of an officer of the corporation is
not binding on it unless the latter ratifies the same expressly or impliedly by its board of directors. **Any sale of real
property of a corporation by a person purporting to be an agent thereof but without written authority
from the corporation is null and void. The declarations of the agent alone are generally insufficient to
establish the fact or extent of his/her authority. Litonjua, Jr. vs. Eternity Corporation 490 SCRA 204 (2006)

CORPORATE OFFICER VS. EMPLOYEE

1. The president, vice president, secretary and treasurer are commonly regarded as the principal or executive
officers of a corporation but other offices are sometimes created by the charter or by-laws of
corporation, or the board of directors may be empowered under the by-laws of a corporation to create
additional offices as may be necessary. It has been held that an “OFFICE” is created by the charter of the
corporation and the OFFICER is elected by the directors or stockholders.
** “Corporate officers” in the context of PD 902-A are those officers of a corporation who are
given that character either by the Corporation Code or by the corporation’s by-laws.
Ecce Ancilla Domini! 84 of 160

2. On the other hand, an “EMPLOYEE” usually occupies no office and generally is employed not by
action of the directors or stockholders but by the managing officer of the corporation who also
determines the compensation to be paid to such employee.
** In this case, respondent was appointed vice president for nationwide expansion by the
petitioner’s general manager, not by the board of directors of petitioner. It was also the General Manager
who determined the compensation package of respondent. Thus, respondent was an employee, not a
“corporate officer. Easycall Communications Phils., Inc., vs. Edward King 478 SCRA 102 (2005)
3. Application:
a. Since the petitioner, unlike an ordinary employee, was **appointed by the corporation’s Board of
Trustees, she is DEEMED AN OFFICER of the corporation. A corporate officer’s DISMISSAL is ALWAYS A
CORPORATE ACT, or an INTRA-CORPORATE CONTROVERSY, and the nature is not altered by the reason or
wisdom with which the Board of Directors may have in taking such action. Tabang vs. National Labor
Relations Commission, 266 SCRA 462 (1997)

RULE ON QUORUM FOR THE EXERCISE OF CORPORATE BUSINESS

1. GR:
a. majority of directors/trustees as fixed in the AOI: for the transaction of corporate business;
b. majority of the directors/trustees present at a meeting at which there is a quorum: shall be valid
as a corporate act.
2. XPN:
a. Unless the articles of incorporation or the by-laws provide for a greater majority.
b. except for the election of officers which shall require the vote of a majority of all the members
of the board.
3. NO PROXY RULE: Directors/trustees cannot attend or vote by proxy at board meetings.
——————————————-

G5. Removal

CAUSE FOR REMOVAL

1. Removal may be with or without cause;
2. Provided: That removal without cause may not be used to deprive minority stockholders or members of the
right of representation (under Section 24)

REQUISITES FOR REMOVAL/PROCEDURE TO CARRY OUT REMOVAL OF DIRECTORS/

TRUSTEES:
1. Notice of the meetings and the procedures prescribed by the by-laws. 

2. Notice of the meeting must specify the purpose that there includes the proposed intention to remove a
director although the code does not require that the name of the director to be removed be specified. Just
include in the agenda that there is intention to remove a director. 

3. Presence of stockholders representing 2/3 of the outstanding capital stock. 

4. The removal may be with or without just cause. However, ***if the removal is intended to deprive the
minority of their representative, the removal has to be with cause. 

5. The vacancy brought about by the removal of the director may be filled up at the same stockholder’s
meeting where the removal was effected or in a separate meeting called for that purpose.

PROCEDURAL REQUIREMENTS
a. Vote requirement to remove a D/T from office: by a vote of
i. the stockholders holding or representing at least two-thirds (2/3) of the outstanding capital
stock, or
ii. (for NSC) by a vote of at least two-thirds (2/3) of the members entitled to vote.
b. When does the removal shall take place? either at
i. a regular meeting of the corporation or at
ii. a special meeting called for the purpose: must be called by the secretary:
(a) on order of the president or
(b) on the written demand of the stockholders representing or holding at least a majority of
the OCS, or on the written demand of a majority of the members entitled to vote for NSC.
• Should the secretary fail or refuse to call the special meeting upon such demand or fail or refuse
to give the notice, or if there is no secretary, the call for the meeting may be addressed directly to
the stockholders or members by any stockholder or member of the corporation signing the
demand.
Ecce Ancilla Domini! 85 of 160

c. Subject to notice requirement: previous notice to stockholders or members of the corporation of the
intention to propose such removal at the meeting.
i. Notice of the
(a) time and place of such meeting; and
(b) the intention to propose such removal
ii. must be given
(a) by publication or
(b) by written notice prescribed in the Code.
——————————————-

G6. Filling of Vacancies

SUMMARY***
1. Q: There are 3 cases/instances under Section 29 where vacancies in the board may exist:
a. In cases of expiration of term,
b. removal
c. When the Articles of the corporation is amended to increase the number of the directors.
*In these three cases, the stockholders shall fill up the vacancy.
****NB: The power to remove requires 2/3 of votes of the stockholders representing the
outstanding capital stock while the filling up of the vacancy require only majority of the outstanding capital
stock.
*The stockholders have the sole power to remove a director. It does not belong to the board or
jointly by the board and the stockholders. So if the board passes a resolution that a director who is absent for
three consecutive meetings or if the director fails to pay dues and assessment of the corporation, the director
may be removed, that board resolution is invalid because the sole power to remove a director belongs to the
stockholders even though this is in the by-laws. ***Even if the by-laws says that a director who is absent for
three meetings or more or delinquent to pay the dues and assessment, the same cannot be a valid ground for the
directors to remove him because again the power to remove a stockholder belongs to the stockholders. In
case of absences or in case of non-payment of dues and assessment, it amounts to just cause and even
though he is the representative of the minority, he can be removed by the stockholders as long as you have 2/3
of the outstanding capital stock.
2. For the board to fill up vacancies the causes may be other ground than removal, expiration of term and
increase in the number of the board seats. It could be
a. resignation,
b. withdrawal,
c. retirement,
d. abandonment,
e. death,
f. insanity and
g. incapacity
*as long as it is not removal, expiration of term or increase in the number of the board seat.
***The other requisite for the board to fill up vacancy is there must be a quorum. EG: There are 15
directors under the articles of incorporation, 7 went to Brazil to watch a football game. For example, there was a
plane crash and all of them died. The 8 called a special board meeting to fill up vacancies and all of them
showed up but they were in disagreement as to who will be elected. 5 out of 8 voted to fill up the vacancies by
nominating certain individuals. Is this valid?
A: Yes, the Code says the ***majority of the directors present if they constitute a quorum.
Quorum of the board meeting constitutes the number of directors fixed by the articles of
incorporation. If a director abstains but is physically present in the meeting, his presence is counted for
quorum purposes.
3. CASES WHEN THE STOCKHOLDERS MAY FILL UP VACANCIES IN THE OFFICE OF
DIRECTORS/TRUSTEES:***
a. If the ground or the cause is expiration, removal or increase in the number of the board seats. 

b. The ground is not expiration, removal nor increase in the number of the board seats but the
remaining directors do not constitute a quorum. 

c. The ground is not expiration, removal nor increase in the number of the board seat and the
remaining directors who constitute a quorum decided to delegate the power to the stockholders. 

4. REQUISITES FOR THE BOARD TO FILL UP VACANCIES IN THE OFFICE OF DIRECTORS/
TRUSTEE:
Ecce Ancilla Domini! 86 of 160

a. The cause of the vacancy must be resignation, withdrawal, retirement, abandonment, death,
insanity or incapacity or any ground other than removal or increase in the number of the board seat.
b. The remaining directors must constitute a quorum. 

5. The term of the director who is elected or appointed to fill up the vacancy is the unexpired portion of the
term of the director replaced.
*Bar: AA was the director appointed June 1, 2013 and then he resigned. On August 1, 2013, DD was
appointed by the board. By September, DD died and was replaced by XX. What is the term of XX? A: The
term of X is the unexpired portion of the one year term. He can serve only up to June 1, 2014.
- Is it mandatory on the part of the board to fill up the vacancy in case somebody resigns, withdraws or
was incapacitated? No. It is discretionary on the part of the board and not mandatory.
6. STAGGERED ACCEPTANCE OF RESIGNATION. Let’s say that your client buys 75% of a company and
it is customary in any sale transaction for nominees of the seller to tender resignation of the directors in order to
pave the way of the nominees of the buyer. So the nominees of the seller tend to resign. To avoid calling a
SH meeting, can you request the old directors to stay and accept the resignation on staggered basis so even
though 10 tendered resignation, 5 will stay for one meeting and only 5 will resign and the new nominees of the
buyer will be accepted by the 10? After the 5 have been filled up, the remaining 10 will then reside and accept the
resignation of the 5 remaining directors? It is valid. The only requirement is the quorum to fill up the
vacancy brought about by the grounds other than the expiration, removal or increase in the number of the board.
You do not have to call a stockholder’s meeting. All you have to do is to call a meeting of the remaining
directors and accept the resignation on a staggered basis.

HOW VACANCIES IN THE BOARD ARE FILLED UP

1. On vacancies due to REMOVAL by the stockholders/members or by EXPIRATION of term: supra
2. On any other vacancies:
a. if there is still a quorum: vote of at least a MAJORITY of the remaining directors or trustees;
b. if there is no more quorum: must be filled by the stockholders in a regular or special meeting
called for that purpose.
3. Term of elected director/trustee (to fill a vacancy): only up to the UNEXPIRED term of his predecessor in
office.

ON FILLING UP A DIRECTORSHIP/TRUSTEESHIP BY REASON OF AN INCREASE IN THE

NUMBER OF D/T
*How? they shall be filled only
1. by an election at a regular or at a special meeting of stockholders or members duly called for the
purpose, or
2. in the same meeting authorizing the increase of directors or trustees if so stated in the notice of the
meeting.

TERM OF OFFICE
1. D/T shall hold office for 1 year and until their successors are elected and qualified [Sec 23];
2. **PRINCIPLE OF HOLDOVER: the incumbent directors do not automatically cease to hold office upon
the expiration of their term if they have yet no successors.
*Q: Is permanent representation allowed in the BOD?
- A: No, the board of directors of corporations must be elected from among the stockholders or
members directors every year. Estoppel does not set in to legitimize what is wrongful. (Grace Christian High
School v. CA, G.R. No. 108905, Oct. 23, 1997)
*If there's no quorum during the regular annual stock holder's meeting to elect BOD, the incumbent
BOD shall continue to serve in a hold-over capacity. Say during the hold over period, a director resigns; can the
remaining directors constituting the quorum to fill such vacancy? No. The ***BOD holds the position merely
in a hold over capacity. The reason/cause for such vacancy is expiration of the term and not resignation.
Therefore only the stockholders can fill the vacancy in the board [Africa v. Valle Golf and Country Club]
3. TERM.. as the time during which the officer may claim to hold the office as of right, and fixes the
interval after which the several incumbents shall succeed one another. The term of office is not affected by
the holdover. The term is FIXED by STATUTE and it does not change simply because the office may
have become vacant, nor because the incumbent holds over in office beyond the end of the term due to the fact that a
successor has not been elected and has failed to qualify. Section 23 of the Corporation Code declares that "the board of
directors...shall hold office for one (1) year until their successors are elected and qualified," we construe the
provision to mean that the term of the members of the board of directors shall be only for one year; their term
expires one year after election to the office. **The HOLDOVER period - that time from the lapse of one year
from a member's election to the Board and until his successor's election and qualification - is **not part of the director's
Ecce Ancilla Domini! 87 of 160

original term of office, nor is it a new term; the holdover period, however, constitutes PART OF HIS
TENURE. Corollary, when an incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, and the incumbent is holding the
succeeding term. [Valle Verde Country Club v. Africa, September 4, 2009]
*When an incumbent member of the board of directors continues to serve in a holdover capacity, it
implies that the office has a fixed term, which has expired, and the incumbent is holding the succeeding term. A
vacancy resulting from the resignation of an officer in a hold-over capacity, by the terms of Section 29 of
the Corporation Code, **must be filled by the stockholders in a regular or special meeting called for the
purpose. Valle Verde Country Club, Inc., et al. vs. Victor Africa, 4 September 2009
*** Is there a difference between term and tenure? TERM is the 1year period in which he has the right
to hold office—the length of time during which a person has an official or political office. TENURE (if it
exceeds the 1year period—until his successor has been elected) is the amount of time that a person holds a
job, office, or title.
4. NB: ***Directors shall have all the qualifications under Sec. 23 and the by-laws, and none of the
disqualifications under Sec. 27 and the by-laws. One of the qualifications is ownership of a share in the books
of the corporation.
Let's say ABC Corp obtained a loan from XYZ Bank secured by a voting trust agreement on the shares of A
in ABC Corp. A is the controlling stockholder of ABC Corp, so by signing a voting trust agreement in favor of
XYZ Bank , A conveyed the legal title to his shares in ABC Corp in favor of XYZ Bank. The loan was not
paid, promptly XYZ filed an action for collection. Summons is served on A. Is A still qualified to act as
director of ABC Corp.? No more. A can no longer act as director of ABC Corp. ***The moment the director
loses legal title over his shares, he automatically ceases to be a director of the corporation [Lee v. CA]
—————————————-

G7. Compensation [Sec 30]

RULE ON COMPENSATION
1. GR: the directors shall not receive any compensation, as such directors, except for reasonable per diems
**Why no compensation? They are not presumed to render services gratuitously. The presumption is
the return of their investment is enough compensation.
2. XPN: if there is a provision in the ***by-laws fixing their compensation.
*Provided: any such compensation other than per diems may be granted to directors by the vote of the
stockholders representing at least a majority of the OCS at a regular or special stockholders’ meeting.
***Limit to the compensation: it shall not exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year.
3. They can receive compensation if they serve a post other than directorship: The proscription against
granting compensation to directors/trustees of a corporation is not a sweeping rule as worthy of note is the
clear phraseology of Section 30 which states: “xxx [T]he directors shall not receive any compensation, as such
directors, xxx.” The unambiguous implication is that members of the board may receive compensation, in
addition to reasonable per diems, when they render services to the corporation in a capacity other than as
directors/trustees. WIT vs. Salas, 21 August 1997
4. Bar: The corporation has been losing money for many years and to motivate the SH, directors, and officers,
the board adopted series of resolutions invoking the business judgment rule. So in good faith, in the first
resolution, it says, “pay dividends to the SH.” Second, pay bonuses to all directors. Third, pay bonuses to officers.
So can they be justified by the good faith of the board? Of course in business judgment rule is subject to the
condition that the board acts in good faith.
a. Now, can the company declare dividends if it is losing? ***No it cannot. Under Section 43 of the
Corporation Code, a corporation can only declare dividends if there is surplus profit.
b. Can the director authorize payment of compensation for themselves?
No because compensation of directors ***as such directors is valid only if authorized by the by-laws or
approved by the SH owning or representing majority of the outstanding capital stock under Section 30.
c. What about payment of bonuses to officers if the company is losing?
It is unreasonable. So all of the resolutions cannot be justified by the business judgment rule.
5. If the old secretary keeps the stock and transfer book (STB) and the new secretary acquired a new STB, is the
invocation of the business judgment rule valid to make all entries in the old void and the in the new book, valid?
Can the SEC recall that erroneously registered STB? SC: If the book is not lost, no amount of business
judgment can justify the request for additional STB.
The erroneously STB can be recalled by the SEC. It does not require court intervention. It falls within the
general authority of the SEC over all corporations. ***Can the SEC decide WON the entries in the new book be
valid?
Ecce Ancilla Domini! 88 of 160

No, because they become intra-corporate controversies cognizable by RTC acting as special commercial
court.
——————————————

G8. Fiduciary Duties and Liability Rules


SUMMARY OF ACTS WHEN A CORPORATE D/O IS PERSONALLY LIABLE***

1. when he assents to a patently unlawful act of the corporation (Directors/trustees who willfully and
knowingly vote for or assent to PATENTLY UNLAWFUL ACTS of the corporation); or
2. when he is guilty of bad faith or gross negligence in directing its affairs (D/T who are guilty of GROSS
NEGLIGENCE or BAD FAITH in directing the affairs of the corporation)
3. when he is guilty of CONFLICT OF INTEREST; (D/T who acquire ANY PERSONAL or
PECUNIARY INTEREST in CONFLICT with their duty as such directors or trustees)
4. when he consents to the issuance of watered stock or having knowledge of it, does not file with the
corporate secretary his written objection,
5. when he agrees to hold himself solidarily liable with the corporation or
6. when he is made by specific provision of law to personally answer for his corporate action
**Hence, a president cannot be held personally liable for the payment of the price of a tractor the
corporation purchased. Tramart Mercantile, Incl. vs. Court of Appeals, 238 SCRA 14 (1994);

SOLIDARY LIABILITY [Sec 31]

1. Such D/T shall be liable jointly and severally for all damages resulting therefrom suffered by
a. the corporation,
b. its stockholders or members and
c. other persons.
2. Rules on liability
*GR: obligations incurred by the corporation, acting through its directors, officers and employees, are its
sole liabilities
*XPN: To hold a director or officer PERSONALLY LIABLE for corporate obligations, two
REQUISITES must concur:**
(1) it must be alleged in the complaint that the director or officer ASSENTED to PATENTLY
UNLAWFUL acts of the corporation or that the officer was guilty of GROSS NEGLIGENCE OR BAD
FAITH; and
**the bad faith or wrongdoing of the director must be established clearly and
convincingly. BAD FAITH IS NEVER PRESUMED. Moreover, bad faith does not automatically arise
just because a corporation fails to comply with the notice requirement of labor laws on company closure or
dismissal of employees. The failure to give notice is not an unlawful act because the law does not define such
failure as unlawful. Such failure to give notice is a violation of procedural due process but does not amount to an
unlawful or criminal act. PATENTLY UNLAWFUL ACTS ARE THOSE DECLARED UNLAWFUL BY LAW which
imposes penalties for commission of such unlawful acts. **There must be a law declaring the act unlawful
and penalizing the act. Carag v. NLRC 520 SCRA 28 (2007)
(2) there must be PROOF that the officer acted in bad faith (Ico vs. STI, July 9, 2014) or the
complainant clearly and convincingly proved such unlawful acts, negligence or bad faith. (FVR Skills and
Services Exponents, Inc., et al., vs. Jovert Seva October 22, 2014
*As to the application of the two requisites: petitioners are correct to argue that it was not alleged,
much less proven, that Uy committed an act as an officer of Hammer that would permit the piercing of the
corporate veil as what the complaint simply stated is that she, together with her errant husband Chua, acted as surety of
Hammer, as evidenced by her signature on the Surety Agreement which was later found by the RTC to have
been forged. Heirs of Fe Tan Uy, vs. International Exchange Bank, February 13, 2013.
3. Malice and bad faith needed for personal liability to kick in:
a. A corporation has its own legal personality separate and distinct from those of its stockholders,
directors or officers. Hence, absent any evidence that they have exceeded their authority, corporate officers
are not personally liable for their official acts. Corporate directors and officers may be held solidarily liable with
the corporation for the termination of employment only if done with malice or in bad faith. (Rolando DS.
Torres v. Rural Bank of San Juan, Inc., March 13, 2013)
b. To hold the general manager personally liable alone for the debts of the corporation and thus pierce
the veil of corporate fiction, it is required that the bad faith of the officer be ESTABLISHED CLEARLY
AND CONVINCINGLY. Petitioner, however, has failed to include any submission pertaining to any
wrongdoing of the general manager. Necessarily, it would be unjust to hold the latter personally liable. Mercy
Vda. de Roxas vs. Our Lady's Foundation, Inc., March 6, 2013
Ecce Ancilla Domini! 89 of 160

c. Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are NOT their
PERSONAL liability but the DIRECT responsibility of the CORPORATION they represent. As a rule,
they are only solidarily liable with the corporation for the illegal termination of services of employees if
they acted with malice or bad faith. The fact that the **corporation ceased its operations the day after the
promulgation of the SC resolution finding the corporation liable does not prove bad faith on the part of the incorporator
of the corporation. Polymer Rubber Corporation vs. Ang, July 24, 2013
d. Where the corporate treasurer **falsely certified to the endorsee that the negotiated crossed check
was issued as payment for petroleum products, the treasurer should be made personally liable when the drawer
subsequently dishonored the check because the negotiation was unauthorized. Atrium Management Corp.
vs. Court of Appeals, 353 SCRA 23 (2001)
4. When an officer is deemed acting in his PERSONAL CAPACITY:
a. The execution of a document by a bank manager called “pagares” which guaranteed purchases
on credit by a client is contrary to the General Banking law which prohibits bank officers from guaranteeing loans
of bank clients. In this case, it is plain from the guarantee Grey executed that he was acting for himself, not in
representation of UCPB; hence, UCPB cannot be bound by Grey’s above undertaking since he appears to have made it in
his personal capacity. UCPB vs. Planters Products, Gregory Grey, June 13, 2012
5. In relation to labor law: Article 212(e) of the Labor Code, by itself, does not make a corporate officer
personally liable for the debts of the corporation. The governing law on personal liability of directors for
debts of the corporation is still Section 31 of the Corporation Code. Alert Security vs. Pasawilan, September 14,
2011.
* The rule is still that the doctrine of piercing the corporate veil applies only when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud, or defend crime. Neither Article
212[e] nor Article 273 (now 272) of the Labor Code expressly makes any corporate officer personally liable for the debts of the
corporation. Carag vs. NLRC, April 2, 2007.
a. A corporation, as a juridical entity, may act only through its directors, officers and employees.
Obligations incurred as a result of the directors’ and officers’ acts as corporate agents, are not their
personal liability but the direct responsibility of the corporation they represent. As a rule, they are **only solidarily
liable with the corporation for the ILLEGAL TERMINATION of services of employees IF THEY
ACTED WITH MALICE OR BAD FAITH. Rolando DS. Torres v. Rural Bank of San Juan, Inc., March 13, 2013
* Corporate directors and officers are solidarily liable with the corporation for the termination
of employment of corporate employees done with malice or in bad faith. Directors who signed the
board resolution retrenching the employees on the feigned ground of serious business losses that had no
basis are guilty of bad faith and can held solidarily liable with the corporation. Uichico vs. National Labor
Relations Commission, 273 SCRA 35 (1997)
b. The officers of the corporation who MALICIOUSLY TERMINATED the employment of certain
employees without any valid ground and in order to suppress their right to self-organization, having acted
in bad faith in directing the affairs of the corporation, are solidarily liable with the corporation for the
unlawful dismissal. Park Hotel vs. Soriano, September 10, 2012;
*The corporate officers who were aware that the corporation was violating the provisions
of labor standards but did not correct the violations and closed the corporation without paying the
employees their separation benefits are solidarily liable with the corporation for the claims of the employees.
Reahs Corporation vs. National Labor Relations Commission, 271 SCRA 247 (1997)
*The employer’s acts of conducting audits and investigation on the alleged irregularities
committed by an employee and in re-assigning him to another place of work pending the results of the
investigation are valid and do not amount to constructive dismissal. However, the **officers who knew and
allowed the withholding of the salaries and bonuses of an employee pending his investigation but without being placed
under preventive suspension are SOLIDARILY LIABLE with corporation despite the valid dismissal of the employee.
Consolidated Food Corporation vs. National Labor Relations, 315 SCRA 129 (1999)
c. The board members of the corporation who purport to act for and in behalf of the corporation
within the lawful scope of their authority and act in good faith do not become liable whether civilly or otherwise
for the consequences of their acts. But when the directors abolished the benefits and eventually dismissed in
bad faith and without procedural due process the general manager who tried to implement remedial measures to prevent
unwarranted payment of per diem and other allowances to the board members and other irregularities, they are guilty
of bad faith and personally liable for damages. Benguet Electric Cooperative, Inc., vs. NLRC (1992)
d. Although joint and solidary liability for money claims and damages against a corporation attaches
to its corporate directors and officers under R.A. 8042 [Migrant Workers and OFW Act], it is **not
automatic. To make them jointly and solidarily liable, there must be a finding that they were remiss in directing
the affairs of the corporation, resulting in the conduct of illegal activities. Absent any findings regarding the same, the
corporate directors and officers cannot be held liable for the obligation of the corporation against the judgment debtor. Gagui
vs. Dejero, October 23, 2013
Ecce Ancilla Domini! 90 of 160

6. When BOD is guilty of ABUSE OF RIGHT [Art 19 NCC]:

a. The Board of Directors is liable for damages under the ABUSE OF RIGHT provision of the Civil Code
and Article 31 of the Corporation Code for disapproving the application for proprietary membership on
the basis of an amendment to the by-laws requiring the unanimous vote of the directors present at a special or regular meeting
but which was not printed on the application form. What was printed thereon was the original provision which
was silent on the required number of votes needed for admission of an applicant as a proprietary member. The
explanation that failure to print was due to economic reasons is flimsy and unconvincing considering that the
amendment was introduced almost twenty (20) years ago. Cebu Country Club Inc., et al., v. Elizagaque, (2008)
7. When there is no liability:
a. It is a common banking practice to require the JSS (joint and solidary signature) of a major stockholder
or corporate officer, as an additional security for loans granted to corporations. However, there was no reason for
the corporation to assume that the officer who signed as surety would still agree to act as surety in the restructuring
agreement (which is a new contract) because at that time, he is no longer an officer of the corporation. The
restructuring agreement NOVATED, not merely extended the period of, the old contract in view of the
express provision to “liquidate” the principal and interest of the earlier indebtedness. Hence, while the
indemnity (surety) agreement, which was an accessory contract to the first loan agreement merely
extended the first loan, the officer is still released from liability because **an extension granted by the creditor to the
debtor without the consent of the guarantor EXTINGUISHES the guaranty (Art 2079, NCC). Security
Bank and Trust Co. vs. Cuenca, 341 SCRA 781 (2000)
8. No subsidiary liability for malum prohibitum like BP 22: In the B.P. Blg. 22 case, what the trial court should
determine is whether or not the signatory had signed the check with knowledge of the insufficiency of funds
or credit in the bank account, while in the civil case the trial court should ascertain whether or not the
obligation itself is valid and demandable. The litigation of both questions could, in theory, proceed
independently and simultaneously without being ultimately conclusive on one or the other. It might be argued
that under the current rules, if the signatory were made liable for the amount of the check by reason of the B.P.
Blg. 22 case, such signatory would have the option of recovering the same amount from the corporation. Yet
that prospect does not ultimately satisfy the ends of justice. If the signatory does not have sufficient assets to
answer for the amount of the check — a distinct possibility considering the occasional large-scale transactions
engaged in by corporations — the corporation would not be subsidiarily liable to the complainant, even if it in
truth the controversy, of which the criminal case is just a part, is traceable to the original obligation of the
corporation. **While the Revised Penal Code imposes subsidiary civil liability to corporations for
criminal acts engaged in by their employees in the discharge of their duties, SAID SUBSIDIARY LIABILITY
APPLIES ONLY TO FELONIES, and not to crimes penalized by special laws such as B.P. Blg. 22. And nothing
in B.P. Blg. 22 imposes such subsidiary liability to the corporation in whose name the check is actually issued. Clearly then,
should the check signatory be unable to pay the obligation incurred by the corporation, the complainant
would be bereft of remedy unless the right of action to collect on the liability of the corporation is recognized and given flesh.
James U. Gosiaco vs. Leticia Ching and Edwin Casta 585 SCRA 471 (2009)
———————————

DOCTRINE OF CORPORATE NEGLIGENCE

1. Under the doctrine of corporate negligence, the hospital’s failure to supervise its resident physicians and
nurses and to take an active step in order to remedy their negligence renders it directly liable. The duty of
providing quality medical service is no longer the sole prerogative and responsibility of the physician.
This is because the MODERN HOSPITAL now tends to organize a highly-professional medical staff
whose COMPETENCE AND PERFORMANCE need also to be monitored by the hospital commensurate with its
inherent responsibility to provide quality medical care. Such responsibility includes the PROPER
SUPERVISION of the members of its medical staff. Accordingly, the hospital has the duty to make a
reasonable effort to monitor and oversee the treatment prescribed and administered by the physicians
practicing in its premises. The hospital is liable where the doctor who performed surgical operation on a
patient left a gauze inside the patient’s body and the hospital did not bother conducting an investigation
despite the report of the nurses on missing pieces of gauzes right after the operation. Professional Services, Inc.,
v. CA 544 SCRA 170 (2008)
—————————————

CONFLICT OF INTEREST OF D/T/O [Sec 31]

*Note that “Officer” is included here
1. When: D/T/O ATTEMPTS to acquire or ACQUIRE, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been reposed in him in confidence, as to which EQUITY
imposes a disability upon him to deal in his own behalf;
2. Liability: he shall be liable as:
Ecce Ancilla Domini! 91 of 160

a. a TRUSTEE for the corporation and

b. must account for the PROFITS which otherwise would have accrued to the corporation.
—————————————-———

G9. Responsibility for Crimes & Damages

1. As applied to the Trust Receipts Law: The Trust Receipts Law recognizes the impossibility of imposing the
penalty of imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes the
OFFICERS OR EMPLOYEES OR OTHER PERSONS RESPONSIBLE for the offense liable to suffer the
penalty of imprisonment. Ong, vs. CA, April 29, 2003
*Though the entrustee is a corporation, nevertheless, the law specifically makes the officers,
employees or other officers or PERSONS RESPONSIBLE for the offense, without prejudice to the civil
liabilities of such corporation and/or board of directors, officers, or other officials or employees responsible
for the offense. The RATIONALE is that such officers or employees are vested with the authority and
responsibility to devise means necessary to ensure compliance with the law and, if they fail to do so, are held
criminally accountable; thus, they have a responsible share in the violations of the law. Ching vs. SOJ,
February 6, 2006
—————————————-———
G10. Inside Information
———————————-—————

G11. Contracts

G11a. By Self-Dealing Directors with the Corporation [Sec 32]

1. GR: **a contract of the corporation with one or more of its directors or trustees or officers is VOIDABLE, at the
option of such corporation;
2. XPN: unless all the following conditions are present:**
1. That the PRESENCE of such director or trustee in the board meeting in which the contract was
approved was NOT NECESSARY to constitute a QUORUM for such meeting;
2. That the VOTE of such director or trustee was NOT NECESSARY for the APPROVAL of the
contract;
3. That the contract is FAIR AND REASONABLE under the circumstances; and
4. That in case of an OFFICER, the contract has been PREVIOUSLY AUTHORIZED by the
board of directors.
3. RATIFICATION of the contract; conditions:
a. any of the first two conditions (supra) is absent
b. and the contract was with a director or trustee
c. such contract may be ratified by the vote of the stockholders representing at least two-thirds (2/3)
of the OCS or of at least two-thirds (2/3) of the members in a meeting called for the purpose;
d. FULL DISCLOSURE of the adverse interest of the directors or trustees involved is made at such
meeting;
e. the contract is fair and reasonable under the circumstances. (n)
4. Bar 2002: Determine the validity of the following corporate act: L Foods Corporation, which is engaged in the
fast-food business, entered into a contract with its President Jose Cruz, whereby the latter would supply the
corporation with its meat and poultry requirements: **Voidable – A contract of the corporation with one or
more of its directors or trustees or officers is voidable, at the option of such corporation (Sec 32,
Corporation Code). Such contract can be ratified by the vote of the stockholders representing at least two-
thirds of the outstanding capital stock in a meeting called for the purpose: Provided, that full disclosure of the
adverse interest of the directors or trustees involved is made at such meeting: Provided, however, That the
contract is FAIR AND REASONABLE under the circumstances.

CONTRACT WITH THIRD PERSONS VS. WITH DIRECTORS***

1. The board of directors may expressly delegate specific powers to its president or any of its officers. In the
absence of such express delegation, a contract entered into by its president, on behalf of the corporation, may still
be binding on the corporation if the board should RATIFY the same expressly or impliedly. Furthermore,
**even in the absence thereof, the President, as such, may, as a general rule, BIND the corporation by a contract in the
ORDINARY course of business, provided the same is REASONABLE under the circumstances. These rules apply where the
president or other officer, purportedly acting for the corporation, is dealing with a third person, i.e., a person outside the
corporation.
2. A different rule obtains in case the contract is between the corporation and its directors which is
VOIDABLE unless certain requirements are met, specifically, that the contract is fair and reasonable under the circumstance.
Ecce Ancilla Domini! 92 of 160

A director of a corporation which manufactures white cement cannot enforce a five-year distributorship agreement
executed by the chairman and president on behalf of the corporation when the contract provided for a fixed price, because
the contract is not fair, since the price of cement fluctuates and is expected to rise. Prime White Cement
Corporation vs. Intermediate Appellate Court, 220 SCRA 103 (1993)
—————————————

G11b. Between Corporations with Interlocking Directors [Sec 33]

1. GR: Contracts between corporations with interlocking directors shall not be invalidated on that ground
alone; and provided the contract is fair and reasonable under the circumstances
2. XPN: in cases of FRAUD
3. NB: if the interest of the interlocking director in one corporation is SUBSTANTIAL and his interest in the other
corporation or corporations is merely NOMINAL, he shall be subject to the provisions in Sec 32 (supra) insofar as
the latter corporation or corporations are concerned.
*NB: Stockholdings EXCEEDING TWENTY (20%) percent of the outstanding capital stock shall be
considered substantial for purposes of interlocking directors.
4. When a mortgagee bank foreclosed the mortgage on the real and personal property of the debtor and thereafter
assigned the properties to a corporation it formed to manage the foreclosed assets, **the unpaid seller of the
debtor cannot complain that the assignment is invalid simply because the mortgagee and the assignee
have interlocking directors. There is no bad faith on the part of DBP by its creation of Nonoc Mining, Maricalum
and Island Cement as the creation of these three corporations was necessary to manage and operate the assets
acquired in the foreclosure sale lest they deteriorate from non-use and lose their value. DBP vs. CA, August
16, 2001

G11c. Management Contracts

BUSINESS OPPORTUNITY RULE [Sec 34]

1. GR: Disloyalty of a director: where a director, by virtue of his office, acquires for himself a business
opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such
corporation, he must account to the latter for all such profits by refunding the same;
2. XPN: unless his act has been ratified by a vote of the stockholders owning or representing at least two-
thirds (2/3) of the OCS.
3. NB: This provision shall be applicable, notwithstanding the fact that the director risked his own funds
in the venture.
——————————————-

G12. Executive Committee

ON THE EXECOM [Sec 35]

1. Created in the BY-LAWS of a corporation;
2. Composition: NOT LESS THAN THREE members of the board, to be appointed by the board.
3. Vote required for acts of the Execom: MAJORITY vote of all its members;
4. Can the board create an executive committee functioning as such under Section 35 of the Corporation Code
that can act on matters with the board’s competence?
No. It is beyond the authority of the board. No amount of business judgment rule can justify the creation of
the executive committee which ***can only be created by the by-laws. SC clarified, however, if the committee is
called executive committee but the function is not the same in Section 35, then the board can create it
under the business judgment rule. So, what is so important under Execom in Section 35? It like a MINI-
BOARD which can act on matters within board’s competence. Whatever the board can do, execom can also
do except in those 5 cases under 35. This is why the board cannot create another board. It must be the by-
laws that will create another board but of course, not less than 3 and must come from the members of the
board.

SUBJECT MATTER UNDER EXECOM

1. Allowed: the Execom can decide on specific matters within the competence of the board, as may be
delegated to it:
a. in the by-laws or
b. on a majority vote of the board
2. Not allowed: Execom does not have the following powers:***
(1) approval of any action for which shareholders’ approval is also required;
(2) the filing of vacancies in the board;
Ecce Ancilla Domini! 93 of 160

(3) the amendment or repeal of by-laws or the adoption of new by-laws;

(4) the amendment or repeal of any resolution of the board which by its express terms is not so
amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.
———————————————————————————————

G13. Meetings

PRELIMINARIES ON MEETINGS
1. Their necessity: whether they are meetings of the BOD/T, SH/members—they are necessary in order that
any corporate act may be DECIDED UPON only after the DELIBERATION & CONSULTATION
among themselves. Meetings will give them the OPPORTUNITY to DELIBERATE & VOTE on matters
affecting the corporation.
2. Meetings of Directors or Trustees
a. Kinds: regular or special [Sec 53]
b. Place: anywhere in or outside PH, unless the by-laws provide otherwise [Sec 53]**
c. Quorum: majority, unless the by-laws provide for a greater majority [Sec 52]
d. Presiding Officer: president, unless the by-laws provide otherwise.[Sec 54]
3. Meetings of Stockholders or Members
a. Kinds: regular or special [Sec 50; Sec 51]
b. Place: city/municipality of the principal office [Sec 51]**
c. Quorum: majority of outstanding capital stock/members, unless a greater majority is provided by the
CorpCode or by-laws [Sec 52]
d. Presiding Officer: president, unless by-laws provide otherwise [Sec 54]
e. Who may call the meeting: person authorized by by-laws; a director/trustee/officer; a petitioning
SH/member; secretary or SH/member for special meeting to remove D/T. [Sec 50; Sec 28]
f. Requisites for a valid meeting [Sections 50-52]
g. Effect if meeting is improperly held/called [Sec 51]
h. Manner of voting [Sections 55, 56, 58, 59]
4. Voting Trusts [Sec 59]
5. Summary of Rules on voting by SH/members

MEETINGS OF DIRECTORS OR TRUSTEES

a. Regular or Special
i. When and Where
ii. Notice
b. Who Presides
c. Quorum
d. Rule on Abstention
1. Kinds: regular or special [Sec 53]
a. Regular meeting:
i. Date: held monthly, unless the by-laws provide otherwise;
ii. Notice and contents: Notice of regular or special meetings stating the date, time and place of
the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless
otherwise provided by the by-laws. A director or trustee may waive this requirement, either expressly or
impliedly.
b. Special meeting
i. Date: may be held at any time upon the call of the president or as provided in the by-laws.
ii. Notice and contents: same as regular meeting.
2. Place: anywhere in or outside of the Philippines, unless the by-laws provide otherwise.
3. Quorum: majority, unless the by-laws provide for a greater majority.
[] Section 25… Unless the articles of incorporation or the by- laws provide for a greater majority, a
majority of the number of directors or trustees as fixed in the articles of incorporation shall constitute a quorum for
the transaction of corporate business, and every decision of at least a majority of the directors or trustees
present at a meeting at which there is a quorum shall be valid as a corporate act, except for the election of
officers which shall require the vote of a majority of all the members of the board. Directors or trustees cannot
attend or vote by proxy at board meetings.
4. Presiding Officer: president, unless the by-laws provide otherwise.[Sec 54]
5. Quorum:
a. GR: majority
Ecce Ancilla Domini! 94 of 160

b. XPN: Under Section 25 of the Corporation Code, the **AOI or by-laws of the corporation may fix
a GREATER number than the majority of the number of board members to constitute the quorum
necessary for the valid transaction of business.
c. When only three (3) out of five (5) members of the board of directors of PAMBUSCO convened
on November 19, 1974 by virtue of a prior notice of a special meeting, there was **no quorum to validly
transact business since, under Section 4 of the amended by-laws of the corporation, at least four (4) members
must be present to constitute a quorum in a special meeting of the BOD. Peña vs. CA, February 7, 1991

RULE ON MEETINGS
1. The petitioner assails the validity of sale of shares of stocks to the respondents claiming that there was no
compliance with the requirement of PRIOR notice to the Board of Directors when the Board Resolution
authorizing the sale to the respondent spouses were promulgated. SC ruled that:
*GR: a corporation, through its board of directors, should act in the manner and within the
formalities, if any, prescribed by its charter or by the general law.
*XPN: However, the **actions taken in such a meeting by the directors or trustees may be
RATIFIED expressly or impliedly. Lopez Realty Inc vs. Spouses Tanjangco, November 12, 2014

MEETINGS OF STOCKHOLDERS or MEMBERS

1. Kinds: regular or special [Sec 50]
a. Regular meeting:
i. Date: held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of
every year as determined by the board of directors or trustees [Sec 50]
ii. Notice and contents: written notice of regular meetings shall be sent to all stockholders or
members of record at least two (2) weeks prior to the meeting, unless a different period is required by the by-
laws [Sec 50]; Notice of meetings shall be in writing, and the time and place thereof stated therein [Sec 51];
Notice of any meeting may be waived, expressly or impliedly, by any stockholder or member [Sec 50]
b. Special meeting
i. Date: held at any time deemed necessary or as provided in the by-laws [Sec 50]
ii. Notice and contents: at least one (1) week written notice shall be sent to all stockholders or
members, unless otherwise provided in the by-laws. Notice of any meeting may be waived, expressly or impliedly,
by any stockholder or member [Sec 50]; Notice of meetings shall be in writing, and the time and place thereof
stated therein [Sec 51].
2. Place: held in the city or municipality where the principal office of the corporation is located, and if
practicable in the principal office of the corporation.
*NB: Metro Manila for purposes of this section, shall be considered a city or municipality.
3. Quorum: stockholders representing a majority of the outstanding capital stock or a majority of the members
in the case of non-stock corporations, unless otherwise provided for in this Code or in the by-laws [Sec 52]
[] Quorum is **based on the TOTALITY of the SHARES which have been SUBSCRIBED AND
ISSUED, whether it be founders’ shares or common shares. There is no gainsaying that the contents of the AOI
are binding, not only on the corporation, but also on its shareholders. Jesus V. Lanuza, et al.vs. Court of
Appeals, et al., G.R. No. 131394, March 28, 2005
4. Presiding Officer: president, unless the by-laws provide otherwise.[Sec 54]
**Q: Under the articles of incorporation of Manila Industrial Corp., its principal place of business
shall be in Pasig, Metro Manila. The principal corporate offices are at the Ortigas Center, Pasig, Metro Manila,
while factory processing leather products is in Manila. The corporation holds its annual stockholders'
meeting at the Manila Hotel in Manila and its BOD meeting at a hotel in Makati, Metro Manila. The by-
laws are silent as to the place of meetings of the stockholders and directors.
a. Who shall preside at the meeting of the directors? Section 54 of the Code provides that it is the
President who shall preside over the directors' meeting, unless the by-laws provide otherwise. However, in
practice it is the Chairman who presides because the President only reports to the Chairman. Only in the
absence of a Chairman can a President preside over directors meetings.
b. Can Ting, a stockholder, who did not attend the stockholders' annual meeting in Manila,
question the validity of the corporate resolutions passed at such meeting? No. Sec. 51 provides that the annual
stockholders’ meeting shall be held in the city or municipality where the principal office is located. For this
purpose, the law also provides that Metro Manila is considered a city or municipality. Since the principal
office or business of MIC is Pasig, Metro Manila, the holding of the **annual stockholder’s meeting in Manila
is proper.
c. Can the same stockholder question the validity of the resolutions adopted by the BOD at the
meeting held in Makati? (1993) No. Ting cannot question the validity of corporate resolutions passed in the
BOD meeting because Section 53 of the Code does not require that the meeting must held within the city or
Ecce Ancilla Domini! 95 of 160

municipality where the principal office of the corporation is located. The **directors’ meeting can be held
anywhere in or outside the Philippines.
5. Who may call the meeting:
a. the person authorized in the by-laws [implied in Sec 50];
b. If none is authorized in the by-laws, the director/trustee/officer entrusted with the
MANAGEMENT of the corporation;
c. a petitioning SH/member, on order of the SEC, if for any cause, there is no person authorized to call
a meeting [Sec 50];
d. secretary of the corporation or a SH/member for special meeting to remove D/T. [Sec 28: A special
meeting of the stockholders or members of a corporation for the purpose of removal of directors or trustees,
or any of them, must be called by the secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the outstanding capital stock, or, if it be a non-stock corporation,
on the written demand of a majority of the members entitled to vote].
6. REQUISITES FOR A VALID MEETING [Sections 50-52]
a. it must he held at a proper place [Sec 51];
b. it must be held at the stated date and time [Sections 50 & 51];
c. it must be called by the proper person [Sections 50 & 28]
d. previous notice must have been given [Sections 50, 51]
e. There must be a quorum [Sec 52]
7. Effect if meeting is improperly held/called: All proceedings had and any business transacted at any meeting
shall be valid provided the following requisites are present:
a. they must be within the powers or authority of the corporation, i.e., they are not ultra vires;
b. all the stockholders or members of the corporation are present or duly represented at the meeting
[Sec 51]
8. Manner of voting: SH vote by shares; Members vote on a per head bases unless the by-laws provide
otherwise. The right to vote is exercised through the following:**
a. Directly or personally by the SH/member:
i. if the shares are pledged/mortgaged: the SH pledgor or mortgagor shall have the right to
attend and vote at meetings of stockholders, unless the pledgee or mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on the appropriate corporate books [Sec 55];
ii. in case of joint ownership of stock: in case of shares of stock owned jointly by two or more
persons, in order to vote the same, the consent of all the co-owners shall be necessary, except in the following:
(a) there is a written proxy, signed by all the co-owners, authorizing one or some of
them or any other person to vote such share or shares (b) the shares are owned in an “and/
or” capacity by the holders thereof, in which case, any one of the joint owners can vote said shares or appoint a
proxy therefor.
b. Through representative voting:**
i. By means of proxy, which is understood (concept) in the following three senses:
(a) the formal authority given by the SH/member to another person to exercise the
voting right;
(b) the person given the authority by the SH/member to exercise the voting right;
(c) the written instruction evidencing the authority given by the SH/member for the
exercise of the voting right.
*Limitations on proxies (RE: formal authority):
(a) it must be in writing, signed by the stockholder or member and filed before the
scheduled meeting with the corporate secretary.
(b) it is valid only for the meeting for which it is intended, unless otherwise provided
in the proxy, and except in the case of a CONTINUING PROXY which shall be valid and effective for a
period no longer than (not exceeding) five (5) years at any one time.
ii. By means of a voting trust agreement (VTA), where the trustee shall exercise the voting right
[cf. Sec 59, infra]
iii. Through legal representatives: Executors, administrators, receivers, and other legal representatives
duly appointed by the court may attend and vote in behalf of the stockholders or members without need of
any written proxy [Sec 55, last par].

MINUTES OF MEETINGS vs. RESOLUTION

1. A **resolution is distinct and different from the minutes of the meeting.
a. A board resolution is a FORMAL ACTION by a corporate board of directors or other corporate body
authorizing a particular act, transaction, or appointment. It is ordinarily SPECIAL AND LIMITED in its
Ecce Ancilla Domini! 96 of 160

operation, applying usually to some single SPECIFIC ACT OR AFFAIR of the corporation; or to some specific
PERSON, SITUATION OR OCCASION.
b. On the other hand, minutes are a BRIEF STATEMENT not only of what transpired at a meeting,
usually of stockholders/members or directors/trustees, but ALSO AT A MEETING OF AN EXECUTIVE
COMMITTEE. The minutes are **usually kept in a BOOK specially designed for that purpose, but they may also be
kept in the form of memoranda or in any other manner in which they can be identified as minutes of a meeting.
2. In a criminal case involving a lease-purchase agreement allegedly disadvantageous to the government, the
Sandiganbayan erred in concluding that there was no such agreement entered into and thus negating criminal liability since
only three members out of seven signed the MINUTES of the meeting. The **NON-SIGNING by the
majority of the members of the Board of Trustees of the said minutes does NOT NECESSARILY MEAN THAT
THE SUPPOSED RESOLUTION WAS NOT APPROVED by the Board. The signing of the minutes by all the members of
the board is NOT REQUIRED. There is no provision in the Corporation Code that requires that the minutes of the
meeting should be signed by all the members of the board. The proper custodian of the books, minutes and official
records of a corporation is usually the corporate secretary. Being the custodian of corporate records, the corporate
secretary has the DUTY to record and prepare the minutes of the meeting. The **signature of the
corporate secretary gives the minutes of the meeting PROBATIVE VALUE AND CREDIBILITY.
Moreover, the entries contained in the minutes are PRIMA FACIE EVIDENCE of what actually took place during the
meeting. PP vs. Dumlao, March 2, 2009
———————————————————————————————

H. Stockholders and Members

1. How one becomes a stockholder (SH)
a. By subscription of unissued shares;
b. By purchase of treasury shares (this covers ISSUED shares);
c. By transfer from a SH (this covers ISSUED shares). Some modes of transfer are:
i. Sale;
ii. Barter or exchange;
iii. Dation in payment (dacion en pago);
iv. Donation;
v. Succession.
*A person who is already a SH of a corporation may acquire additional shares when the corporation
declares dividends. However, **stock dividends cannot be issued to non-stockholders even for services rendered
to the corporation as this would CHANGE RADICALLY the proportion of the SH’s interest. Stock
dividends are CIVIL FRUITS of the original investment, and TO THE OWNERS OF THE SHARES BELONG
THE CIVIL FRUITS [cf. Nielson & Co vs. Lepanto Mining, 28 Dec 1968; Art 441 NCC].
2. How to determine who are the SH: **the corporation looks only to its BOOKS for the purpose of
determining who its shareholders are (Nautica Canning vs. Yumul, October 19, 2005)
3. RECORD DATE means the stockholders of record entitled to exercise the right of stockholders, whether
right to vote or right to dividends. Let's say June 1 the corporation declared dividends "the board thus declared
dividends to stockholders of record as of June 15, 2015 payable on June 30, 2015." On June 16 stockholder
sold his shares, between your record date June15 and payment date of June30, there is a change of ownership.
Who is entitled to receive the dividends? The stockholder of record as fixed in the by-laws—the stockholders
of the record date which is June15. Hence it is not the buyer-transferee of the stocks but the seller-
transferor who is entitled to receive the dividends, being the stockholder of record as of the June15, ***even
though he is no longer the owner as of payment date.
———————————————

H1. Rights of a Stockholder and Members

a. Doctrine of Equality of Shares (cf. under shares of stock, infra)

RIGHTS OF STOCKHOLDERS
1. The right to vote;
2. The right to dividends [Sec 43];
3. The right to inspect corporate books and records [Sec 74-75];
4. The right to elect and remove directors [Sec 24, 28];
5. The right to a stock certificate [Sec 64];
6. The right to pre-emption [Sec 39];
7. The right to enter into voting trust agreements [Sec 59];
8. The right to ask for the dissolution of the corporation in proper cases;
9. The right to bring derivative suit
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10. (added by TOM): The right to dispose one’s shares

[] The filing of a **collection suit against a stockholder does not preclude a stockholder from
selling his shares during the pendency of the case, since it is his RIGHT TO DISPOSE of his shares at
any time. Remo vs. Intermediate Appellate Court, 172 SCRA 405 (1989)
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H2. Participation in Management

a. Proxy
b. Voting Trust
c. Cases When Stockholders’ Action is Required
i. By a Majority Vote
ii. By a Two-Thirds Vote
iii. By Cumulative Voting

PROXY vs. VTA

PROXY VTA
a proxy has **no legal title to the a trustee acquires the title of the
shares transferor
generally **revocable irrevocable for the duration of its term
valid only for the meeting for which **not limited to a particular meeting
it was intended, except as provided therein
and in the case of a continuing proxy
a proxy votes **in the absence of a a trustee can vote & exercise the rights
SH of the transferor even in the latter’s
presence in the meeting
need not be notarized **required to be notarized
[] LEGAL TITLE is required over beneficial ownership: By its very nature, a voting trust agreement
results in the separation of the voting rights of a stockholder from his other rights such as the right to receive dividends, the
right to inspect the books of the corporation, the right to sell certain interests in the assets of the corporation and other rights to
which a stockholder may be entitled until the liquidation of the corporation… With the omission of the phrase
"in his own right" the election of trustees and other persons who in fact are not the beneficial owners of the shares registered
in their names on the books of the corporation becomes formally legalized. **Hence, this is a clear indication
that in order to be eligible as a director, what is material is the LEGAL TITLE to, NOT BENEFICIAL
OWNERSHIP of, the stock as appearing on the books of the corporation. [Lee v. CA, February 4, 1992]
***Why is it legal title suffices not full ownership? Because SC [LEE V. CA] the phrase “in his own
right” under the old corporation code has been deleted.
*What about the practice of lodging your shares with a broker? (SCRIPLESS TRADING). Let’s say you want to
sell your shares as a stockholder, what are the requirements under the law? ENDORSEMENT PLUS
DELIVERY. To facilitate Scripless trading, the stock certificate of the stockholder is lodged with the broker. It
will be the name of the broker for the benefit of whoever will be the beneficial owner of the shares. ***For
Director qualification purposes, the one who lodged the shares to a broker is NOT QUALIFIED TO BE A
DIRECTOR because he is no longer the stockholder in record in the books of the corporation. The
ownership of one share is a CONTINUING QUALIFICATION
***Bar: Let’s say X is a director of ABC Corp., six months in his term he sold the shares to Y. So
who is qualified to continue discharging the duties of a Director? Neither X nor Y. X lost the director position
because of the transfer of shares to Y. Y is not qualified because purchase of shares of X is not a mode of
assumption of office.

MORE ON PROXY
1. ***Proxy should be in writing and signed by the stockholder, filed before the meeting (could be an hour
before the meeting), but the by-laws may prescribe additional requirements for the sufficiency of proxy. The
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By laws may, for example, require that the proxy be notarized. So a voting trust agreement is required to be
notarized under Sec. 59. The proxy is not required to be notarized under Sec. 58 and yet the by-laws may
require that the proxy be notarized.
*The by-laws may prescribe a longer period for submission of proxy, San Miguel for example they
require that it be submitted 10days prior to meeting, public companies 5 days before the stockholders
meeting. It cannot be belated or later that that period, otherwise the stockholder whose proxy has been
rejected may not have enough time to seek redress or gain relief. So for a public company, minimum no. of
days for submission of proxy is not less than five days before the stockholders meeting, so it cannot be any
day earlier, to give time to value the proxy and to enable the stockholder to seek redress in cases of unjust,
improper, and unlawful rejection of the proxies.
2. If all matters anteceding the holding of such election which affect its manner and conduct, such as the
PROXY SOLICITATION PROCESS, are deemed within the original and exclusive jurisdiction of the
SEC, then the prospect of OVERLAPPING AND COMPETING JURISDICTIONS between that body
and the regular courts becomes frighteningly real. From the language of Section 5(c) of Presidential Decree
No. 902- A, it is INDUBITABLE that controversies as to the qualification of voting shares, or the
validity of votes cast in favor of a candidate for election to the board of directors are **properly
COGNIZABLE AND ADJUDICABLE BY THE REGULAR COURTS exercising original and exclusive
jurisdiction over election cases. GSIS vs. CA, G.R. No. 183905, April 16, 2009
2. Even if under Section 20.1, the solicitation of proxies must be in accordance with rules and regulations
issued by the SEC, i.e., under the INVESTIGATORY POWER OF THE SEC…. Now, the power of the
SEC to investigate violations of its RULES ON PROXY SOLICITATION is unquestioned when proxies
are obtained to vote on matters UNRELATED to the cases enumerated under Section 5 of Presidential
Decree No. 902-A. However, when proxies are solicited in relation to the ELECTION of corporate directors,
the resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy solicitation, should
be properly seen as an ELECTION CONTROVERSY within the ORIGINAL AND EXCLUSIVE
JURISDICTION OF THE TRIAL COURTS by virtue of Section 5.2 of the SRC in relation to Section 5(c)
of Presidential Decree No. 902-A.
3. The conferment of ORIGINAL AND EXCLUSIVE JURISDICTION ON THE REGULAR
COURTS over such controversies in the ELECTION OF CORPORATE DIRECTORS must be seen as
INTENDED TO CONFINE TO ONE BODY the adjudication of all related claims and controversy
arising from the election of such directors. For that reason, the aforequoted Section 2, Rule 6 of the Interim
Rules broadly defines the term “ELECTION CONTEST” as encompassing all plausible incidents arising
from the election of corporate directors, including:
(1) any controversy or dispute involving title or claim to any elective office in a stock or nonstock
corporation,
(2) **the validation of proxies,
(3) the manner and validity of elections and
(4) the qualifications of candidates, including the proclamation of winners.
VOTING TRUSTS
*VTA = voting trust agreement.
1. Concept: a voting trust is
a. an agreement in WRITING
b. whereby one or more SH of a corporation
c. TRANSFER their shares to a trustee or trustees
d. for the purpose of conferring on the latter VOTING AND OTHER RIGHTS pertaining to such
shares
e. for a period NOT EXCEEDING FIVE (5) YEARS at any one time. *NB: if the
voting trust was a REQUIREMENT for a loan agreement, the period **may exceed 5 years but shall
AUTOMATICALLY expire upon full payment of the loan [Sec 59].
2. A VT is designed to enable SH to DISPOSE their shares but STILL TO RETAIN CONTROL over the
corporation and thus assure CONTINUITY of policy & management.
3. EFFECTS OF THE VTA**
a. the voting trustee acquires LEGAL TITLE to the shares; hence, the trustee can be voted as
DIRECTOR.
b. the SH making the transfer (the TRANSFEROR) becomes mere EQUITABLE OWNERS of the
shares represented by the VT certificates; accordingly, they are **DISQUALIFIED from being elected as
directors, unless they retain at least 1 share of stock in their name (or in such minimum number of shares as
provided in the by-laws); however, they RETAIN CONTROL over the management of the corporation.
c. the trustee votes in accordance with the terms of the VTA; he may vote in person or by proxy as
provided therein [Sec 59];
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d. **both transferor and trustee may exercise the RIGHT OF INSPECTION of all corporate
books and records;
e. any SH may inspect the VTA filed with the corporation in the same manner as all corporate books and
records;
f. any SH may transfer his shares to the same trustee upon the same terms & conditions stated in
the VTA, and thereupon shall be bound by all the provisions therein.
4. PROCEDURE ON THE TRANSFER OF SHARES [Sec 59]
a. the certificate/s of stock covered by the VTA shall be cancelled;
b. new certificates shall be issued in the name of the trustee/s stating that they are issued pursuant to
the VTA; in the books of the corporation, it shall be stated that the transfer in the name of the trustee/s is
made pursuant to the VTA.
c. the trustee/s shall execute and deliver to the transferors VT certificates, which shall be
transferable in the same manner and with the same effect as certificates of stock.
5. REQUISITES & LIMITATIONS OF THE VTA [Sec 59]
a. it must be in writing and duly-notarized;
b. a certified true copy must be filed with the SEC; otherwise, it is ineffective & unenforceable;
c. the VT shall not exceed 5 years at any one time, except if it is specifically required under a loan
agreement, in which case, the period may be for more than five years but shall automatically expire upon full
payment of the loan.
d. unless the VT is renewed, all rights granted in the agreement shall automatically expire at the end
of the agreed period, and the VT certificates and the certificates of stock issued in the name of the trustee shall
be deemed cancelled and new certificates of stock shall be issued in the name of the transferors;
e. no VTA shall be entered into to circumvent laws against monopolies and illegal combinations in
restraint of trade or used for purposes of fraud.
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ON THE RIGHT TO VOTE

1. Stockholder’s Meeting: a SH is given the right to participate in the corporate affairs by giving him the right to
attend meetings after DUE NOTICE and the RIGHT TO VOTE thereat in PERSON **or through a
PROXY or TRUSTEE.
2. See Proxy v. VTA (trustee), supra.
3. PCGG cannot vote sequestered shares, except when there are demonstrably weighty and defensible
grounds or when essential to prevent disappearance or wastage of corporate property. The Court developed the
**“TWO-TIERED TEST” in determining whether the PCGG may vote sequestered shares:
(1) whether there is prima facie evidence showing that the said shares are ill-gotten and thus belong
to the State; and
(2) whether there is an immediate danger of dissipation thus necessitating their continued sequestration and
voting by the PCGG while the main issue pends with the Sandiganbayan.
**The two-tiered test, however, does NOT APPLY in cases involving funds of “public character”.
In such cases, the government is granted the authority to vote said shares, namely:
(1) where government shares are taken over by private persons or entities who/which registered
them in their own names; and
(2) where the capitalization or shares that were acquired with public funds somehow landed in private
hands.
[] It does not also apply when the PCGG had voted the shares and is in control of the
sequestered corporation. Africa vs. Sandiganbayan, Nov.11, 2013
**In sum, when sequestered shares registered in the names of private individuals or entities are
shown, prima facie, to have been
(1) originally government shares, or
(2) PURCHASED WITH PUBLIC FUNDS or those affected with public interest,
- then the two-tiered test does not apply. Rather, the **PUBLIC CHARACTER EXCEPTION
PREVAILS, that is, the government shall vote the shares. Republic of the Philippine (PCGG) vs.
Sandiganbayan and Victor Africa, 402 SCRA 84 (2003)
4. Although a stock certificate is sometimes regarded as QUASI-NEGOTIABLE, in the sense that it may be
transferred by delivery, it is WELL-SETTLED THAT THE INSTRUMENT IS NON-NEGOTIABLE, because the
holder thereof takes it without prejudice to such rights or defenses as the registered owner or creditor may
have under the law, except in so far as such rights or defenses are subject to the limitations imposed by the
principles governing estoppel. That the PCGG found the stock certificates endorsed in blank does not necessarily
make it the owner of the shares represented therein. Their true ownership has to be ascertained in a
proper proceeding. Republic of the Phils. PCGG) vs. Sandiganbayan, ibid.
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5. The registered owner of the shares of a corporation, even if they are sequestered by the government
through the PCGG, exercises the right and the privilege of voting on them. The PCGG as a MERE
CONSERVATOR CANNOT, as a rule, EXERCISE ACTS OF DOMINION BY VOTING these shares. The
registered owner of sequestered shares may only be deprived of these voting rights, and the PCGG
authorized to exercise the same, only if it is able to establish that: see two-tiered test, supra.
Clearly, the **existence of the writ of sequestration alone would NOT legally JUSTIFY BARRING
the STOCKHOLDER from VOTING its shares. **Such preclusion may only occur if there is prima facie evidence
showing that the said shares are ill-gotten and there is an imminent danger of dissipation. However, even though the
stockholder was not allowed to vote the shares which would have been enough to elect a board seat, the **option of
annulling the entire election is TOO DRASTIC a step in light of the fact that only one of the 15 seats
should be necessarily affected upon the seating of the stockholder’s nominee to the Board of Directors. The
more prudent step is to declare that one nominee or representative of the stockholder is entitled to be
seated immediately on the Board of Directors, and to direct the Board of the Directors and Corporate Secretary of the
corporation to admit and recognize said nominee or representative of the stockholder to the Board of
Directors in place of the person who was elected to the Board at the annual stockholders' meeting had the stockholder not
been disallowed to vote its shares. Trans Middle East (Phils.), vs. Sandiganbayan. 490 SCRA 455 (2006)

LIMITATIONS ON THE RIGHT TO VOTE

1. Where the AOI provides for classification of shares pursuant to Section 6, non-voting shares are NOT
entitled to vote, except as provided for in the last paragraph of Section 6;
2. **Preferred or redeemable shares may be DEPRIVED of the right to vote, unless otherwise provided in the
Code [Sec 6];
3. Fractional shares of stock CANNOT be voted, unless they constitute AT LEAST ONE full share [Sec 41];
4. **Treasury shares have NO voting rights as long as they remain in the treasury [Sec 57];
5. Holders of stock declared **DELINQUENT by the BOD for unpaid subscription are NOT
ENTITLED to vote or a representation at any SH’s meeting [Sec 67]
6. A transferee of stock **CANNOT vote if his transfer is not registered in the stock and transfer book of
the corporation [Sec 63];
7. A SH is **ENTITLED to vote even if the shares are MORTGAGED or PLEDGED, unless he authorizes the
creditor in writing to vote [SEC Opinion, 7 Apr 1987].

SUMMARY OF RULES ON VOTING BY SH or MEMBERS

1. If the amendment requires a stockholders’ meeting under the Corporation Code or the By-laws, then written
assent is not enough. But if it is not required in the Corporation Code or in the By-laws that a meeting be
called for that purpose, then any matter in the AOI may be amended by a vote of at least the majority of
the board and written assent of the stockholders representing at least 2/3 of the outstanding capital stock.
Now, the following require a meeting called for the following purposees:
a. Section 24 – Election of Directors 

b. Section 28 – Removal of Directors (replacement of the removed director) 

c. Section 29 – Filling up of vacancy 

d. Section 30 – Compensation of directors 

e. Section 37 – Power to Extend or Shorten Corporate Term 

f. Section 38 – Increase of Decrease of Capital Stock; incur, create or increase bonded indebtedness 

g. Section 39 – Pre-emptive right: debatable! There is no case in the Philippines but in foreign
jurisprudence: Appraisal right can be exercised even without having to call a meeting, so long as he
dissents. EG: if the amendment is to deny pre- emptive right, it can be routed among the stockholders and a
stockholder may dissent on the proposed amendment. Of course, the safe bet is to call a stockholders’ meeting.
But there is this foreign jurisprudence that it need not be in a stockholders’ meeting.
h. Section 40 – Sale of all or substantial corporate assets 

i. Section 42 – Invest corporate funds in another purpose (secondary purpose) 

j. Section 43 – Stock dividends
k. Section 44 – Power to enter into management contract 

*NB: Section 46 – adoption of by-laws: When you adopt the by-laws obviously you do not need to hold
a stockholders’ meeting because it is prior to incorporation.
l. Section 48 – Amendment of by-laws 

m. Section 76 – merger or consolidation 

n. Section 117 – Dissolution 

[] So other than these corporate acts, it may be done by mere referendum even if it is amendment of
AOI. ***But always include this as part of your answer: In case of banks, insurance company, public utility,
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educational corporations and other special corporations governed by special law, the favorable
endorsement of the appropriate government agency must be obtained.
2. Voting shares or members
a. Two-thirds (2/3) of the outstanding capital stock (OCS) or 2/3 of the members entitled to vote:
i. Removal of directors [Sec 28];
ii. Ratification of director’s/trustee’s contract with the corporation [Sec 32];
iii. Ratification of the act of a director who is disloyal [Sec 34];
iv. issuance of stock dividends [Sec 43];
v. entering into a management contract in certain cases of interlocking SH or interlocking
directors [Sec 44], where 2/3 of the OCS/members of the managed corporation is required to vote;
vi. adoption of a plan of distribution of assets of a non-stock corporation upon dissolution
[Sec 95].
b. Majority of the OCS/members entitled to vote:
i. election of directors [Sec 24];
ii. granting of compensation to directors [Sec 30];
iii. entering into a management contract, with respect to both managing and managed
corporations [Sec 34];
iv. fixing of the issued price of no-par shares [Sec 62]
3. Voting and non-voting shares or members
a. Two-thirds (2/3) of OCS/members:
i. amendment of the AOI [Sec 16];
ii. extension or shortening of corporate term [Sec 37];
iii. increase or decrease of capital stock [Sec 38];
iv. Incurring, creating or increasing bonded indebtedness [Sec 38];
v. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property [Sec 40];
vi. Investment of corporate funds in another corporation or business in accordance with this Code,
or for other than the primary purpose [Sec 42];
vii. Delegation to the BOD of the power to adopt, amend or repeal by-laws [Sec 48];
viii. Ratification of merger or consolidation [Sec 77];
ix. Dissolution of the corporation [Sec 118; 119].
b. Majority of the OCS/members:
i. Adoption and amendment of by-laws [Sec 46];
ii. Amendment or repeal of by-laws [Sec 48];
iii. Revocation of the authority to adopt, amend or repeal by-laws [Sec 48].
———————————————

H3. Proprietary Rights

a. Right to Dividends (cf. notes distribution of dividends)
b. Right of Appraisal
c. Right to Inspect
d. Pre-Emptive Right (cf. notes under corporate powers)
e. Right to Vote (cf. notes under meetings)
f. Right of First Refusal

ON APPRAISAL RIGHT
1. CONCEPT OF APPRAISAL RIGHT
a. The **right to WITHDRAW from the corporation and DEMAND PAYMENT of the FAIR
VALUE of one’s shares after DISSENTING from CERTAIN corporate acts involving fundamental
CHANGES in corporate structure [Sec 81].
b. Upon demand, all the RIGHTS ACCRUING to the shares shall be SUSPENDED [Sec 83].
2. INSTANCES WHEN IT MAY BE EXERCISED: 1 to 3 [Section 81]; 4 [Section 42].**
a. When any amendment of the AOI has the effect of changing or restricting the rights of any SH
or class of shares, authorizing preferences superior to those of outstanding shares of any class, or of
extending or shortening the TERM of corporate existence;
b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the
corporate property and assets;
c. In case of merger or consolidation;
d. In case of investment of funds by the corporation in another corporation or business of for other
than the primary purpose.
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3. RULES FOR THE EXERCISE OF APPRAISAL RIGHT**

a. The SH must be a DISSENTING stockholder, i.e., he VOTED AGAINST the proposed action [Sec
82];
b. The SH must make a WRITTEN DEMAND on the corporation WITHIN 30DAYS after the vote
was taken;
c. The proposed action is any ONE OF THE INSTANCES enumerated above;
d. The PRICE to be paid is the FAIR VALUE of the shares ON THE DATE BEFORE the vote was
taken;
e. The FAIR VALUE shall be AGREED UPON. In case there is NO AGREEMENT WITHIN
60DAYS FROM THE DATE the vote was taken, the fair value shall be determined by a MAJORITY OF 3
DISINTERESTED PERSONS, one of whom shall be named by the SH, another by the corporation, an the
third by the two who were chosen [Sec 82]; and
f. The right of appraisal is EXTINGUISHED when, infra number 7.
4. WHO MAY EXERCISE APPRAISAL RIGHT? Any SH who dissented from or voted against the
proposed corporate action [Sec 82]
5. HOW RIGHT IS EXERCISED
a. the SH submits his written demand on the corporation within thirty (30) days after the date on which
the vote was taken for payment of the fair value of his shares. **Failure to make the demand within such period
shall be deemed a waiver of the appraisal right. [Sec 82]
b. Within ten (10) days after demanding payment for his shares, the dissenting stockholder shall submit
the certificates of stock representing his shares to the corporation for notation thereon that such shares are
dissenting shares. His failure to do so shall, at the option of the corporation, terminate his appraisal right. [cf.
Sec 86]
c. If the proposed corporate action is implemented or affected, the corporation shall pay to such
stockholder the fair value thereof within 30 days from the time such fair value is determined, and upon
surrender of the certificate or certificates of stock representing his shares [Sec 82]
6. EFFECT OF DEMAND MADE BY DISSENTING SH FOR PAYMENT OF HIS SHARES
a. all rights accruing to the shares shall be suspended except the right to receive the payment of the fair
value of the shares;
b. **if not paid within 30 days after the award, the voting and dividend rights of SH shall be
IMMEDIATELY RESTORED.
7. WHEN RIGHT TO BE PAID THE FAIR VALUE OF SHARES CEASES (when the right of
appraisal is extinguished)
a. When the dissenting SH withdraws his demand for payment and the corporation consents thereto;
b. If the proposed corporate action is abandoned or rescinded by the corporation;
c. If the proposed corporate action is disapproved by the SEC where such approval is necessary;
d. If the SEC determines that the SH is not entitled to the appraisal right [Sec 84];
e. If the shares are sold by the dissenting SH after notation on the stock certificate that the said shares
are dissenting shares. [Sec 86].
8. Who bears costs of appraisal (Sec 85)? The corporation, unless the fair value ascertained by the appraisers is
approximately the same as the price which the corporation may have offered to pay the stockholder, in which
case they shall be borne by the latter. In the case of an action to recover such fair value, all costs and expenses
shall be assessed against the corporation, unless the refusal of the stockholder to receive payment was
unjustified.
——————————————

ON THE RIGHT TO INSPECT CORPORATE BOOKS AND RECORDS [Title VIII]

1. BOOKS AND RECORDS REQUIRED TO BE KEPT [Sec 74]
a. record of all business transactions
b. minutes of all meetings of directors or trustees
c. minutes of meetings of SH/members which shall set forth in detail the following:
i. time and place of holding the meeting,
ii. how authorized,
iii. the notice given,
iv. whether the meeting was regular or special, and if special, its object or purpose
v. those present and absent, and
vi. every act done or ordered done at the meeting.
d. Stock and transfer book showing the following:
i. names of the stockholders alphabetically arranged;
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ii. the installments paid and unpaid on all stock for which subscription has been made, and the
date of payment of any installment;
iii. a statement of every alienation, sale or transfer of stock made, the date thereof, and by and
to whom made; and
iv. such other entries as the by-laws may prescribe.
[] The books and records of a corporation are not conclusive even against the corporation but are
**PRIMA FACIE EVIDENCE ONLY—PAROL EVIDENCE may be admitted to supply omissions in the
records, explain ambiguities or show what transpired when no records were kept, or in cases where such records were
contradicted. Bitong vs. Court of Appeals, 292 SCRA 503 (1998)
2. PLACE WHERE BOOKS/RECORDS MUST BE KEPT
a. Records of business transactions and minutes of meeting: at the principal office of the corporation;
b. Stock and transfer book:
i. at the principal office of the corporation;
ii. or in the office of the stock and transfer agent.
3. RIGHT TO RECORDS, MINUTES OF MEETINGS, and STOCK AND TRANSFER BOOK OF D/T or
SH/members
a. RIGHT TO INSPECT the business records, minutes and stock and transfer book:
i. **Basis: based upon his OWNERSHIP of shares in the corporation and the NECESSITY
FOR SELF-PROTECTION. It is, therefore, an INCIDENT OF OWNERSHIP of the corporate property,
whether this ownership or interest be termed an equitable ownership, a beneficial ownership, or a
quasi-ownership. John Gokongwei, Jr. vs. SEC, G.R. No. L- 45911, April 11, 1979
ii. Right: After all, a SH has the RIGHT TO BE INTELLIGENTLY INFORMED ABOUT
CORPORATE AFFAIRS. Such right rests upon the SHs’ underlying ownership of the corporation’s assets and
property [Puno vs. Puno Enterprises, Inc]
[] Considering that the foreign subsidiary is wholly owned by the corporation and,
therefore, under its control, it would be more in accord with EQUITY, GOOD FAITH AND FAIR DEALING to
construe the **STATUTORY RIGHT OF A STOCKHOLDER TO INSPECT the books and records of
the corporation as EXTENDING to books and records of such wholly-owned subsidiary which are in the
corporation's possession and control. John Gokongwei, Jr. vs. SEC., G.R. No. L-45911, April 11, 1979
b. RIGHT TO DEMAND the following:
i. the noting in the minutes when a director, trustee, SH or member entered or left the meeting;
ii. the careful recording in the minutes of the yeas and nays taken on any motion or proposition;
iii. the recording of the protest of any director, trustee, SH or member on any action or
proposed action;
iv. a copy of the excerpts from the records and minutes on his written demand, at his expense.
4. TIME OF INSPECTION OF CORPORATE RECORD: at REASONABLE HOURS on business days
[Sec 74]
5. LIABILITY OF OFFICER/AGENT WHO REFUSES TO ALLOW ANY D/T/SH/MEMBER TO
EXAMINE & COPY EXCERPTS
a. He shall be liable to such D/T/SH/member for DAMAGES;
b. He shall be guilty of an offense punishable by a a FINE of
i. not less than P1,000
ii. but not more than P10,000.
*or by IMPRISONMENT for
i. not less than 30 days
ii. but not more than 5 years
*or BOTH, in the discretion of the court.
c. EXCEPTION: **if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the LIABILITY SHALL BE IMPOSED UPON THE DIRECTORS OR TRUSTEES WHO VOTED
for such refusal.
[] A CRIMINAL action based on the VIOLATION OF A STOCKHOLDER'S RIGHT TO EXAMINE OR
INSPECT the corporate records and the stock and transfer hook of a corporation under the second and fourth
paragraphs of Section 74 of the Corporation Code can only he maintained against corporate officers or any
other persons acting on behalf of such corporation. The complaint and the evidence Quiambao and
Sumbilla submitted during preliminary investigation **DO NOT ESTABLISH that Quiambao and Pilapil were
acting on behalf of STRADEC. Violations of Section 74 contemplates a situation wherein a corporation,
acting thru one of its officers or agents, DENIES THE RIGHT of any of its stockholders to inspect the
records, minutes and the stock and transfer book of such corporation. Thus, the dismissal is valid. Yujuico and
Sumbilla vs. Quiambao and Pilapil, G.R. No. 180416, June 02, 2014
6. GROUNDS TO DISALLOW INSPECTION AND COPYING OF EXCERPTS
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a. If the person making the demand IMPROPERLY used any information secured through any prior
examination of the records or minutes of such corporation or of any other corporation.
**Thus, the right will be denied although the information the SH obtained from a prior
examination was from another corporation of which he may be a SH, if he furnished such information to a
competitor of either or both corporations.
b. If such person was not acting in GOOD FAITH OR FOR A LEGITIMATE PURPOSE in
making his demand.
*Legitimate purposes of a SH in inspecting the books include the determination of the value
of his shares and the propriety of a dividend declaration. However, a SH may be **denied the right to inspect
the books of a corporation if his purpose is to obtain sensitive and highly confidential information.
[] **GOOD FAITH NEEDED to exercise the right to demand: Stockholder has the duty of showing
GOOD MOTIVE OR PURPOSES for demanding an examination of corporate books. One who acquired
one share of stock of a bank to be able to examine its books CAN HARDLY BE SAID TO HAVE BEEN
MOTIVATED WITH GOOD FAITH OR PROPER PURPOSE in demanding inspection of the bank’s transactions before
he became a stockholder. Gonzales vs. Philippine National Bank, 122 SCRA 489. (1983)
[] The **BURDEN OF PROOF IS ON THE CORPORATION to show that stockholder’s
action in seeking examination of the corporate records was moved by unlawful or ill motivated design
which could properly call for JUDICIAL PROTECTION against the exercise of such right. Republic vs.
Sandiganbayan, 199 SCRA 39 (1991)
7. The only express LIMITATION on the RIGHT OF INSPECTION, according to the Court, is that**
(1) the right of inspection should be exercised at REASONABLE HOURS on BUSINESS DAYS;
(2) the person demanding the right to examine and copy excerpts from the corporate records and
minutes has not improperly used any information secured through any previous examination of the records
of such corporation; and
(3) the demand is made in GOOD FAITH OR FOR A LEGITIMATE PURPOSE. Victor Africa
vs. PCGG, G.R. No. 83831, January 9, 1992
8. DUTY OF THE BOD/BOT TO PRESENT FINANCIAL REPORT
a. At the regular meeting of the SH/members, the BOD/BOT shall present to such SH/members a
FINANCIAL REPORT of the operations of the corporation for the preceding year, which shall include
i. Financial statements;
ii. duly signed by an independent CPA
b. However, if the paid-up capital of the corporation is less than P50,000.00, the financial statements
may be certified under oath by
i. the treasurer or
ii. any responsible officer of the corporation.
9. RIGHT TO FINANCIAL STATEMENTS: Within ten (10) days from receipt of a WRITTEN
REQUEST of any stockholder or member, the corporation shall furnish to him its most recent financial
statement, which shall include the following:
a. a balance sheet as of the end of the last taxable year showing in reasonable detail its assets and
liabilities; and
b. a profit or loss statement for said taxable year showing the result of its operations.
———————————————

ON THE RIGHT OF FIRST REFUSAL

1. Stockholders may be **given right of first refusal IF SO STIPULATED in the articles of incorporation.
2. If the right is **required to be exercised within 30 days of written notice of intended sale, the
stockholder CANNOT COMPLAIN OF VIOLATION of his right if it did not exercise such right within
the same period from actual knowledge of the intended sale. Republic vs. Sandiganbayan, 346 SCRA 760
(2000)
3. A joint venture agreement giving to the shareholders the RIGHT TO PURCHASE THE SHARES OF
THEIR CO-SHAREHOLDER before they are offered to a third party does **NOT CONSTITUTE A
VIOLATION of the provisions of the Constitution LIMITING LAND OWNERSHIP to Filipinos and Filipino
corporations.
a. If the corporation still owns the land, the **right of first refusal can be validly ASSIGNED to a
QUALIFIED Filipino entity in order to maintain the 60%-40% ratio. This transfer, by itself, does NOT amount
to a VIOLATION of the Anti- Dummy Law, absent proof of any fraudulent intent. The transfer could be made
either to a nominee or such other party which the holder of the right of first refusal feels it can comfortably do
business with.
b. Alternatively, the **corporation may DIVEST of its landholdings, in which case the foreign
shareholder, in exercising its right of first refusal, can exceed 40% of the corporation’s allowable foreign
Ecce Ancilla Domini! 105 of 160

equity participation. In fact, it can even be said that **if the foreign shareholdings of a landholding corporation
exceed 40%, it is not the foreign stockholders' ownership of the shares which is adversely affected but the
capacity of the corporation to own land—that is, the CORPORATION BECOMES DISQUALIFIED to own land.
This finds support under the BASIC CORPORATE LAW PRINCIPLE that the CORPORATION AND ITS
STOCKHOLDERS ARE SEPARATE JURIDICAL ENTITIES. In this vein,
i. the RIGHT OF FIRST REFUSAL OVER SHARES PERTAINS TO THE SHAREHOLDERS
ii. whereas the CAPACITY TO OWN LAND PERTAINS TO THE CORPORATION. J.G.
Summit Holdings, Inc.,vs. CA G.R. No. 124293, January 31, 2005
———————————————

H4. Remedial Rights

a. Individual Suit
b. Representative Suit
c. Derivative Suit****
DERIVATIVE SUIT REPRESENTATIVE SUIT INDIVIDUAL SUIT
the wrong sought to the cause of action is a or PERSONAL suit: the
be redressed is wrong committed against a wrong affects only a
committed against group of STOCKHOLDERS, particular SH, such as
the as where preferred SHs’ rights when he is denied the right to
CORPORATION are violated [Cua vs. Tan] or inspect corporate books and he
ITSELF where a group of SH is denied institutes the suit in his
the right to receive dividends or own name to enforce such
to vote in certain SHs' right [cf. Legaspi Towers vs.
meetings Muer, 18 June 2012]
[]**Although one subscriber was adversely affected by the actions of the other shareholder, RESCISSION
DUE TO BREACH OF CONTRACT IS THE WRONG REMEDY for PERSONAL GRIEVANCES. The
Corporation Code, SEC rules and even the Rules of Court provide for appropriate and adequate INTRA-
CORPORATE REMEDIES, other than rescission. Rescission is certainly not one of them, especially if
the party asking for it has no legal personality to do so and the requirements of the law have not been met.
A contrary doctrine will tread on dangerous ground because it will allow just any stockholder, for just about
any real or imaged offense, to demand rescission of his subscription and call for the distribution of some part
of the corporate assets to him without complying with the requirements of the Corporation Code. Ong vs. Tiu, et al. April 8,
2003

ON THE RIGHT TO BRING DERIVATIVE SUIT/ACTION

1. Concept: it is a suit filed by a SH in the name and in behalf of the corporation:
a. purposes:
i. to protect CORPORATE rights
ii. or redress wrongs committed AGAINST THE CORPORATION
b. whenever:
i. corporate officers REFUSE to bring such actions
ii. or SUCH OFFICERS ARE THE ONES to be sued or held liable [Cua Jr vs. Tan, 4 Dec 2009]
*Rationale: where a corporation is an injured party, its power to sue is lodged with its BOD or BOT;
but an individual SH may be permitted to institute a derivative suit **on behalf of the corporation in order
to protect or vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a
demand upon them to file the necessary action would be **FUTILE because they are the ones to be sued, or
because they hold control of the corporation [Filipinas Port vs. Go, 16 March 2007].
[] The Court has recognized that a stockholder's right to institute a derivative suit is NOT BASED ON
ANY EXPRESS PROVISION of the Corporation Code, or even the Securities Regulation Code, but is
IMPLIEDLY RECOGNIZED when the said laws make corporate directors or officers liable for damages suffered by
the corporation and its stockholders for VIOLATION OF THEIR FIDUCIARY DUTIES. **In effect, the SUIT
IS AN ACTION FOR SPECIFIC PERFORMANCE of an obligation, owed by the corporation to the
stockholders, to assist its rights of action when the **corporation has been put in DEFAULT by the
wrongful refusal of the directors or management to adopt suitable measures for its protection. Alfredo
Villamor Jr. vs. John S. Umale in Substitution of Hernando Balmores, G.R. No. 172843, September 24, 2014,
Ecce Ancilla Domini! 106 of 160

2. Parties in a DS:**
a. the suing SH is regarded as a NOMINAL PARTY;
b. the corporation is the REAL-PARTY-IN-INTEREST.
[] A person who is **MERELY HOLDING IN TRUST the shares of stock in her name CANNOT file a
derivative suit, since she is not a stockholder in her own right. And where the **date of the issuance of
a stock certificate was ANTEDATED, the stockholder cannot file a derivative suit to question transaction
BEFORE THE TRUE DATE of its issuance. Bitong vs. Court of Appeals, 292 SCRA 503 (1998)
[] A derivative action is a SUIT BY A SHAREHOLDER to enforce a corporate cause of action.
Under the Corporation Code, where a corporation is an injured party, its POWER TO SUE IS LODGED
WITH ITS BOARD of directors or trustees. But an INDIVIDUAL STOCKHOLDER MAY BE PERMITTED TO
INSTITUTE A DERIVATIVE SUIT ON BEHALF of the corporation in order to protect or vindicate corporate
rights whenever the officials of the corporation refuse to sue, or are the ones to be sued, or hold control of the
corporation. In such actions, the CORPORATION IS THE REAL PARTY-IN-INTEREST while the suing
stockholder, on behalf of the corporation, is only a nominal party. Hi Yield vs. CA 2009.
[] Petitioners seek the **nullification of the election of the Board of Directors composed of herein
respondents, who pushed through with the election even if petitioners had adjourned the meeting
allegedly due to lack of quorum. Petitioners are the injured party, whose rights to vote and to be voted
upon were directly affected by the election of the new set of board of directors. The party-in-interest are
the petitioners as stockholders, who wield such right to vote. The **cause of action devolves on petitioners,
not the condominium corporation, which did not have the right to vote. Hence, the complaint for nullification of
the election is a direct action by petitioners—the derivative suit filed by petitioners in behalf of the
condominium corporation is improper. Legaspi Towers 300, Inc., vs. Muer G.R. No. 170783, June 18, 2012
3. The relief granted is a JUDGMENT AGAINST A THIRD PERSON IN FAVOR OF THE
CORPORATION.
**Similarly, if a corporation has a DEFENSE to an action against it and is NOT ASSERTING IT, a SH
may intervene and defend on behalf of the corporation [Yu vs. Yukayguan, 18 June 2009]
4. The CAUSE OF ACTION actually devolves on the corporation; the wrongdoing or harm having been or
being caused on the corporation, and **not to the particular SH bringing the suit [Filipinas Port Services,
Inc vs. Go, 16 March 2007].
[] A **suit to enforce preemptive rights in a corporation is NOT a derivative suit because it was
not filed for the benefit of the corporation. The petitioner was suing on her own behalf, and was merely
praying that she be allowed to subscribe to the additional issuances of stocks in proportion to her shareholdings
to enable her to preserve her percentage of ownership in the corporation. Lim vs. Lim-Yu, 352 SCRA 216 (2001)
[] The **personal injury suffered by the spouses cannot disqualify them from filing a derivative
suit on behalf of the corporation. It merely gives rise to an additional cause of action for damages against
the erring directors. Virginia O. Gochan, et al. vs. Richard G. Young, et al., G.R. No. 131889, March 12, 2001
[] The complaint filed by a **stockholder to compel another stockholder to settle his share of the
loan because this will affect the financial viability of the corporation can not be considered as a derivative
suit because the loan was not a corporate obligation but a PERSONAL DEBT of the stockholders. The
fact that the stockholders attempted to constitute a mortgage over “ their “ share in a corporate asset can not
affect the corporation where the wordings of the mortgage agreement reveal that it was SIGNED BY THE
STOCKHOLDERS IN THEIR PERSONAL CAPACITY as the owners of the pro-indiviso share in the corporate
property and not on behalf of the corporation. Ang, for and in behalf of Sunrise Marketing (Bacolod), Inc.,
vs. Spouses Ang., G.R. No. 201675, June 19, 2013
5. REQUISITES. ****The bare claim that the complaint is a derivative suit will not suffice to confer
jurisdiction on the RTC (as a special commercial court) if he cannot comply with the requisites for the existence of a
derivative suit. These requisites are [Reyes vs. RTC Makati Br 142, 11 Aug 2008]:
a) the party bringing suit should be a shareholder (or member) during the time of the act or transaction
complained of, the number of shares not being material; (both at the time the acts or transactions subject of
the action occurred, and at the time the action was filed)
b) ****the party has tried to exhaust intra-corporate remedies, i.e., has made a demand on the board
of directors for the appropriate relief, but the latter has failed or refused to heed his plea, i.e., he EXERTED all
reasonable efforts, and alleges the same with particularity in the complaint, to EXHAUST ALL REMEDIES
available under the AOI, by-laws, laws or rules governing the corporation (or partnership) to obtain the relief
he desires;
[] Thus, a complaint which contained NO ALLEGATION whatsoever of any effort to
AVAIL OF INTRA-CORPORATE REMEDIES allows the court to DISMISS it, EVEN MOTU PROPRIO. Indeed,
even if petitioners thought it was futile to exhaust intra-corporate remedies, they should have stated the
same in the Complaint and specified the reasons for such opinion. The requirement of this allegation in the
Ecce Ancilla Domini! 107 of 160

Complaint is not a useless formality which may be disregarded at will. Nestor Ching and Andrew Wellington
vs. Subic Bay Golf and Country Club Inc., et al., G.R. No. 174353, September 10, 2014
[] Further, while it is true that the complaining stockholder must satisfactorily show that he has exhausted all
means to redress his grievances within the corporation; such remedy is **no longer necessary where the
CORPORATION ITSELF IS UNDER THE COMPLETE CONTROL of the person against whom the suit is
being filed. The reason is obvious: a demand upon the board to institute an action and prosecute the same
effectively would have been useless and an exercise in futility. Where a minority stockholder alleged in his
petition that earnest efforts were made to reach a compromise among family members/stockholders before
he filed the case and that the Board of Directors did nothing to rectify the unauthorized loan and mortgage
by the corporation, the derivative suit is proper. Hi-Yield vs CA 2009
c) the cause of action actually devolves on the corporation; the wrongdoing or harm having been or
being caused to the corporation and not to the particular stockholder bringing the suit.
*Yu vs. Yukayguan add the following [Section 1, Rule 8 Interim Rules]
d. ****NO APPRAISAL RIGHTS are available for the act or acts complained of;
e. the suit is NOT A NUISANCE or HARASSMENT suit.
[] The allegation that the suing stockholder talked to the other stockholder regarding the dispute hardly
constitutes “all reasonable efforts to exhaust all remedies available.” The complaint should also allege the
fact that there was NO APPRAISAL RIGHT available for the acts complained of and that the suit was
not a nuisance or harassment suit. The fact that the corporation involved is a family corporation should not
in any way exempt the suing stockholder from the requirements and formalities for filing a derivative suit. Yu vs. Yukayguan, 588
SCRA 589 (2009).
6. For a derivative suit TO PROSPER, it is required that:
a. the minority stockholder suing for and on behalf of the corporation MUST ALLEGE IN HIS
COMPLAINT that he is suing on a derivative cause of action
[] Since a stockholder filing a derivative suit is not suing in his own behalf but in behalf of
the corporation, **the fact that his shareholding is significant does not preclude him from filing the suit.
It is also not necessary that a stockholder be a director to be entitled to file a derivative suit. San Miguel
Corporation vs. Kahn, 176 SCRA 448 (1989)
b. ON BEHALF of the corporation and all other stockholders similarly situated who may wish to join him
in the suit. A public prosecutor, by the nature of his office, is under no compulsion to file a criminal
information where no clear legal justification has been shown, and no sufficient evidence of guilt nor prima facie case has been
presented by the petitioner. [Tam Wing Tak v. Makasiar, January 29, 2001]
[] For a derivative suit to prosper, it is required that the minority shareholder who is suing for
and on behalf of the corporation must allege in his complaint before the proper forum that he is suing on a
derivative course of action on behalf of the corporation and all other shareholders similarly situated who
wish to join. Thus, the **APPEAL of a minority stockholder from the decision of the trial court in criminal
cases for falsification and estafa against the directors for allegedly falsifying a resolution granting compensation
to the officers and to order them to refund the compensation **cannot be considered a derivative suit, since
he is not suing on a derivative cause of action on behalf of the corporation. Western Institute of
Technology, Inc.,Vs. Salas, 278 SCRA 216 (1997)
7. Grounds
a. Where corporate DIRECTORS ARE GUILTY OF BREACH OF TRUST, a stockholder may
institute a suit in behalf of himself and other stockholders and for the benefit of the corporation, to bring about
a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders. Reyes vs.
Tan, 3 SCRA 198. (1961)
b. An individual stockholder may institute a derivative suit on behalf of the corporation, wherein he
holds stock, in order to PROTECT CORPORATE RIGHTS, whenever the OFFICIALS OF THE
CORPORATION REFUSE TO SUE, or are THE ONES TO BE SUED or hold the control of the corporation.
Republic Bank vs. Cuaderno, 19 SCRA 671. (1967)
c. The complaint is one of derivative suit if it avers DIVERSION OF CORPORATE INCOME by
the President and the relief prayed for is the recovery of a sum of money in favor of the corporation. Commart
(Phils.) Inc., vs. SEC 198 SCRA 73 (1991)
8. Jurisdiction: The action to annul the real estate mortgage should only be seen as **INCIDENTAL to
the derivative suit. The RTC of the city where the principal office of the corporation is located has
JURISDICTION even though the mortgaged properties are situated in different jurisdiction. Hi- Yield,
Inc.,vs. Court of Appeals GR 168863 590 SCRA 548 (2009)
9. **Bar 1993: A became a stockholder of Prime Real Estate Corporation (PREC) on July 10, 1991, when he was
given one share by another stockholder to qualify him as a director. A was not re-elected director in the July 1,
1992 annual meeting but he continued to be a registered shareholder of PREC. When he was still a director,
Ecce Ancilla Domini! 108 of 160

A discovered that on Jan 5, 1991, PREC issued free of charge 10,000 shares to X a lawyer who assisted in a
court case involving PREC.
a) Can A now bring an action in the name of the corporation to question the issuance of the shares to
X without receiving any payment?: As a general rule, A cannot bring a derivative suit in the name of the
corporation concerning an act that TOOK PLACE BEFORE he became a stockholder. However, if the act
complained of is a continuing one, A may do so.
b) Can X question the right of A to sue him in behalf of the corporation on the ground that A has only
one share in his name? No. In a derivative suit, the action is instituted/brought in the name of a corporation
and reliefs are prayed for therein for the corporation, by a minority stockholder. The law does not qualify the
term “minority” in terms of the number of shares owned by a stockholder bringing the action in behalf of
the corporation. (SMC v Khan 176 SCRA 448)
c) Can the shares issued to X be considered as watered stock?: No. Watered shares are those sold by the
corporation for less than the par/book value. In the instant case, it will depend upon the value of services
rendered in relation to the total par value of the shares.
———————————————

H5. Obligation of a Stockholder

1. Stockholders may be sued by a corporate creditor **to the EXTENT OF THEIR UNPAID
SUBSCRIPTION. Edward A. Keller & Co., Ltd. vs. COB Group Marketing, Inc., 141 SCRA 86 (1986)
2. A stockholder and a corporate secretary act in bad faith in assigning to others and in recording the said
transfers IN DISPUTE in the stock and transfer book certificates of stock whose beneficial ownership
belongs to some other persons, more so if the assignees did not pay any consideration for the same shares of stock.
Neugene Marketing, Inc.,vs. Court of Appeals, 303 SCRA 295 (1999)
3. When the corporation obtained loans in consideration for the exclusive right by the lender to market the products of the
borrower corporation but the corporate shareholders who are also key officers prevented the implementation of the marketing
agreement by not accepting the prices offered by the buyers of the lender even though such prices were competitive and fair enough,
the controlling stockholders may be held personally liable for such loans on account of their bad faith in
carrying out the business of the corporation. Aratea v. Suico, 518 SCRA 501 (2007)
———————————————

H6. Meetings of Stockholders

(cf. Meetings under BOD, supra)

———————————————————————————————

I. Capital Structure

I1. Subscription Agreements

ON SUBSCRIPTION
1. Concept
a. it is a CONTRACT for the ACQUISITION of UNISSUED stock in an existing corporation or a
corporation still to be formed;
b. the contract is called SUBSCRIPTION **notwithstanding that the parties may refer to it as a
PURCHASE or some other contract [Sec 60]
*Subscription Agreement: When a subscriber assigned properties and infused capital to the
corporation upon invitation of a majority stockholder and in exchange for shares of stock under a pre-
subscription agreement, the AGREEMENT **CANNOT BE RESCINDED since SUBJECT MATTER of the
contract was the UNISSUED SHARES of the Corporation ALLOCATED TO THE SUBSCRIBER. Since these
were unissued shares, the Pre-Subscription Agreement WAS IN FACT A SUBSCRIPTION CONTRACT as defined
under Section 60, Title VII of the Corporation Code: “ANY CONTRACT for the ACQUISITION of
unissued stock in an existing corporation or a corporation still to be formed shall be DEEMED A
SUBSCRIPTION within the meaning of this Title, NOTWITHSTANDING THE FACT THE PARTIES REFER TO
IT AS A PURCHASE OR SOME OTHER CONTRACT.” A subscription contract NECESSARILY involves the
CORPORATION AS ONE OF THE CONTRACTING PARTIES since the SUBJECT MATTER of the
transaction is PROPERTY OWNED BY THE CORPORATION— its SHARES OF SHOCK. Thus, the subscription
contract was one BETWEEN THE SUBSCRIBER AND THE CORPORATION and NOT
BETWEEN THE STOCKHOLDERS. Ong vs. Tiu, et al. April 8, 2003
Ecce Ancilla Domini! 109 of 160

2. Form of the contract: NO PARTICULAR FORM is provided for in the CorpCode. As it is not one of the
contracts that must comply with the Statute of Frauds, it is **ENFORCEABLE ALTHOUGH NOT IN
WRITING.
*However, for the convenience of both the corporation and the subscriber, the subscription contract
must be in writing, even a private one, **if the amount involved exceeds Php500 [cf. Art. 1358 NCC]
[] Art. 1358. The following must appear in a public document: (last par) All other contracts where the
amount involved exceeds five hundred pesos must appear in writing, even a private one. But sales of goods,
chattels or things in action are governed by Articles, 1403, No. 2 and 1405.
3. Kinds of subscription: PRE AND POST INCORPORATION
a. PRE-incorporation subscription: subscription to the unissued stock of a corporation STILL TO BE
FORMED. They may be revoked:
i. BEFORE the filing of the AOI; the subscription cannot be revoked for for a period of at
least six (6) months from the date of subscription, except in the following cases:
(a) all of the other subscribers consent to the revocation, or
(b) the incorporation of proposed corporation fails to materialize within said period
(i.e., 6 months from the date of subscription) or within a longer period as may be stipulated in the contract of
subscription.
ii. AFTER the filing of the AOI; no pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the Securities and Exchange Commission.
b. POST-incorporation subscription: subscription to the unissued stock of a corporation that has been
formed. As to revocability, the subscription may NOT be revoked AFTER its acceptance by the corporation so
as to release the subscribers from liability, unless consented to by ALL stockholders [cf. Lingayen Gulf Electric
vs. Baltazar].
4. SUBSCRIPTION VS. PURCHASE OF STOCK
SUBSCRIPTION PURCHASE OF STOCK
may be made before or after may be made only after incorporation
incorporation
subscriber becomes a SH even if he purchaser does not become a
has not paid his subscription shareholder until he has paid the
purchase price in full
not governed by the Statute of Frauds governed by the SOF if the price is at
(500) least P500
subscriber can vote on the shares even purchaser of stock can vote only on
if he has not paid his subscription in full the shares he has paid.
as long as the shares are not delinquent

———————————————

I2. Consideration for Stocks

1. Concept
a. Subscription to SOS, being a contract, must have all the requisites of a contract, including cause or
consideration.
b. Since it is an ONEROUS contract, the consideration with respect to the corporation is the
PRESENTATION of the subscriber subject to the rules under Sec 62.
2. Amount of consideration: par value, non-par value, etc.
a. Par value shares: consideration should NOT be less than the par value—that which is stated in the
stock certificate.
b. No-par value shares: consideration should not be less than the issued price. The latter may be
fixed as follows:
i. in the AOI;
ii. by the BOD pursuant to the authority conferred upon it by the AOI or by-laws;
Ecce Ancilla Domini! 110 of 160

iii. in the absence of both, by the SH representing at least a majority of the OCS in a meeting
called for the purpose [Sec 62, last par].
3. FORM of the consideration; the consideration for the issuance of stocks may be any or a combination of the
following:
a. actual CASH paid to the corporation;
b. PROPERTY, tangible or intangible, which must be:
i. ACTUALLY received by the corporation, and
ii. NECESSARY or CONVENIENT for its use and lawful purposes at a fair valuation equal to
the par or issued value of the stock issued.
c. LABOR performed for or SERVICES actually rendered to the corporation;
d. Previously incurred INDEBTEDNESS by the corporation;
e. Amounts TRANSFERRED from unrestricted retained earnings (URE) to stated capital;
f. Outstanding shares EXCHANGED for stocks in the event of reclassification or conversion.
*Determination of VALUATION where consideration is other than actual cash or consists in intangible
property (such as patents or copyrights): the valuation shall be initially determined by the incorporators or
the BOD, subject to the approval of SEC.
*NB: the consideration for stocks may be used for the issuance of BONDS insofar as they may be
applicable.
4. Prohibited considerations:
a. Promissory notes;
b. Future services
*NB: checks may be accepted for subscription; however, the shares shall not be considered paid until the
checks have been encased:
[] NCC Art. 1249. The payment of debts in money shall be made in the currency stipulated,
and if it is not possible to deliver such currency, then in the currency which is legal tender in the Philippines.
The delivery of promissory notes payable to order, or bills of exchange or other mercantile
documents shall produce the effect of payment only when they have been cashed, or when through the fault
of the creditor they have been impaired.
In the meantime, the action derived from the original obligation shall be held in the abeyance.
———————————————

I3. Shares of Stock (SOS)

a. Nature of Stock
b. Subscription Agreements
c. Consideration for Shares of Stock
d. Watered Stock
i. Definition
ii. Liability of Directors for Watered Stocks
iii. Trust Fund Doctrine for Liability for Watered Stocks
e. Situs of the Shares of Stock
f. Classes of Shares of Stock [Sec 6]

ON SHARES OF STOCK
1. Overview: the shares of stock of stock corporations may be divided into:
a. classes of shares, or
b. series of shares, or
c. both classes and series of shares
2. These classes or series of shares may have such rights, privileges or restrictions as may be stated in the
AOI.
*GR: no share may be deprived of voting rights. NB: there shall always be a class or series of shares
which have complete voting rights.
*XPN: except those classified and issued as "preferred" or "redeemable" shares.
*XPN to XPN: unless otherwise provided in the CorpCode
3. Right of the corporation to classify its shares; purpose: A corporation ma, classify its shares for the purpose
of insuring compliance with constitutional or legal requirements.

NATURE OF A STOCK; COMPANY PROPERTY vs. SHARES OF STOCK

1. PROPERTIES registered in the name of the corporation are OWNED BY IT AS AN ENTITY SEPARATE
AND DISTINCT from its members. While SHARES OF STOCK constitute PERSONAL PROPERTY, they do not
represent property of the corporation. The corporation has property of its own. A share of stock only typifies
Ecce Ancilla Domini! 111 of 160

an aliquot part of the corporation’s property, or the right to share in its proceeds to that extent when
distributed according to law and equity but its holder is not the owner of any part of the capital of the
corporation. Nor is he entitled to the possession of any definite portion of its property or assets. The
stockholder is not a co-owner or tenant in common of the corporate property. A corporation can therefore
sue to recover real property being occupied by its former president (who was also a significant stockholder)
for it has a juridical personality separate and distinct from its stockholders even though in the past the
corporation allowed the president to enjoy the possession of the property. Boyer Roxas vs. Court of Appeals,
211 SCRA 470 (1992).
*While shares of stock constitute personal property, they do NOT REPRESENT property of the
corporation. A share of stock only typifies an ALIQUOT PART of the corporation’s property or the right
to share in its proceeds to that extent when distributed according to law and equity. A **CERTIFICATE
OF LIQUIDATION which results in the TRANSFER AND DISTRIBUTION of the assets of the corporation to
the shareholder is in the NATURE OF A CONVEYANCE. Stockholders of F. Guanson vs. Register of
Deeds of Manila, 6 SCRA 373. (1962)
2. **Stockholders cannot claim ownership over corporate properties by virtue of the Minutes of a
Stockholder’s meeting which merely evidence a loan agreement between the stockholders and the corporation.
As such, their interests over the properties are merely INCHOATE. Philippine National Bank vs. Merelo B.
Aznar, G.R. No. 171805, May 30, 2011
**The INTEREST of shareholders in corporate property is purely INCHOATE; and this purely
inchoate interest will NOT ENTITLE them to intervene in a litigation involving corporate property.
Thus, in a JUDGMENT BASED ON A COMPROMISE AGREEMENT between the creditor and the debtor
corporation, the terms of which were violated by the judgment debtor, the stockholders of the judgment debtor
cannot intervene. The COMPROMISE WILL NOT PREJUDICE THEM because their rights to corporate assets
are at
most inchoate, prior to the dissolution of the corporation. Saw vs. Court of Appeals, 195 SCRA 797. (1991)
3. The personality of a corporation is distinct and separate from the personalities of its stockholders. Hence, its
stockholders are not themselves the real parties in interest to claim and recover compensation for the
damages arising from the wrongful attachment of its assets. Only the corporation is the real party in interest
for that purpose. Stronghold Insurance Company, Inc., vs. CuencaMarch 6, 2013
4. In order to give rise to any obligation to pay on the part of the corporation, the **dissenting stockholder
should FIRST make a VALID DEMAND that the corporation refused to pay despite having unrestricted retained
earnings. Otherwise, the corporation could not be said to be guilty of any actionable omission that could
sustain the action to collect. The collection suit filed by the dissenting stockholder to enforce payment of the fair value
of his shares is **PREMATURE IF AT THE TIME OF DEMAND for payment, the corporation had no
surplus profit. The fact that the Corporation subsequent to the demand for payment and during the pendency of the
collection case **posted surplus profit DID NOT CURE THE PREMATURITY of the cause of action.
Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479, November 24, 2010

DOCTRINE OF EQUALITY OF SHARES

Presumed EQUAL VALUE of shares [Sec 6]
1. GR: each share shall be equal in all respects to every other share.
2. XPN: Except as otherwise provided in the AOI and stated in the certificate of stock.

SUBSCRIPTION AGREEMENT ON SHARES OF STOCK

1. A corporation has no power to release an original subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration for such release; and as against creditors a reduction
of the capital stock can take place only in the manner and under the conditions prescribed by the statute or the
charter or the articles of incorporation.
2. **SUBSCRIPTIONS to the capital of a corporation CONSTITUTE A FUND to which creditors have
a right to look for satisfaction of their claims and that the ASSIGNEE IN INSOLVENCY can maintain an
action upon any unpaid stock subscription in order to realize assets for the payment of its debt.
Philippine National Bank vs. Bitulok Sawmill, Inc., et al., G.R. Nos. L-24177-85, June 29, 1968

RULE ON PAR & NO-PAR VALUE SHARES

1. GR: any or all of the shares or series of shares may have a par value or have no par value as may be provided for in
AOI.
2. XPN: the following are not permitted to issue no-par value shares of stock:
a. banks,
b. trust companies,
c. insurance companies,
Ecce Ancilla Domini! 112 of 160

d. public utilities, and

e. building and loan associations

ON THE LIABILITY OF STOCKHOLDERS

1. Liability to the corporation for unpaid stock subscriptions [Secs 67-70]
2. Liability to the corporation for interest on unpaid subscriptions [Sec 66]
3. Liability to corporate creditors for unpaid stock subscriptions.
4. Liability to the corporation and its creditors for watered stock [Sec 65]
5. Liability for dividends unlawfully received [Sec 43]
6. Liability for failure to incorporate [Sec 10]

ON THE LIABILITY OF SUBSCRIBERS FOR UNPAID SUBSCRIPTIONS, AS TO THE

BALANCE OF SUBSCRIPTION
1. Date and amount of payment
a. on the date specified in the contract of subscription; the amount of the payment is that stated to be
paid on the date fixed in the contract of subscription.
b. in the absence thereof, on the date stated in the call made by the BOD; the board may declare due and
payable in its call the payment of either of the following:
i. the whole balance of the subscription; or
ii. a percentage of the unpaid subscription.
2. Effect of failure to pay subscription on due date
a. the entire balance shall become due and payable;
b. the SH shall be liable for interest at the legal rate on such balance, unless a different rate of interest is
provided in the by-laws, compared for such date until full payment.
c. if within 30 days from the said date, no payment is made, all stocks covered by the subscription shall
become delinquent and shall be subject to delinquency sale, unless the BOD orders otherwise [Sec 67].
3. Effect of delinquency
a. the delinquent stock shall not be voted;
b. it shall not be entitled to vote or to representation at any SHs’ meeting;
c. the holder shall not be entitled to any rights of a SH, except the right to dividends [Sec 71].
4. Remedies of the corporation to enforce payment of the contract of subscription
a. by applying the cash dividends due on the shares to the unpaid balance of the subscription plus const
and expenses or withholding the stock dividends until the subscriber pays his obligation [Sec 43];
b. by filing a court action to collect the amount due on the unpaid subscription, with accrued interest,
costs and expenses [Sec 70];
c. by selling the shares at public auction (DELINQUENCY SALE):
i. Procedure of delinquency sale:
(a) the BOD, by a resolution, orders the sale of the delinquent stock;
(b) notice of the sale and a copy of the resolution are given to the delinquent
subscriber; the same shall also be published in a newspaper of general circulation in the province or city where
the principal office of the corporation is located.
(c) if the delinquent subscriber fails to pay on or before the date of the sale, the
balance due on his subscription, accrued interests, costs of advertisement and expenses of sale, said delinquent
stock shall be sold at publicc action to the highest bidder.
ii. Meaning of HIGHEST BIDDER: the one who offers to pay the full amount of the balance
of the subscription, accrued interest, cost of advertisement and expenses of sale for the smallest number of
shares.
(a) if there is a highest bidder: the shares he declared in his bid shall be transferred to
him in the books of the corporation and a certificate of stock issued in his favor; the remaining shares, if any,
shall be credited in favor of the delinquent SH, who shall likewise be issued a certificate of stock covering such
shares.
(b) if there is no highest bidder—as when there are bidders but no one offers to pay
the full amount due—the corporation may bid for the delinquent shares, and the total amount due shall be
credited as paid in full in the books of the corporation. Title to the shares shall be vested in the corporation as
Treasury shares.
5. Right of subscriber to recover shares illegally sold
a. Grounds
i. irregularity or defect in the notice of sale of the delinquent stock;
ii. irregularity in the sale of the delinquent stock.
b. Requisites for recovery
Ecce Ancilla Domini! 113 of 160

i. the party seeking recovery must pay or tender to the party holding the stock the sum for
which the same was sold, with interest from the date of sale at the legal rate;
ii. the complaint must be filed within six (6) months from the date of sale.
6. Bar 2008: Ace Cruz subscribed to 100,000 shares of stock of JP Development Corporation, which has a par
value of P 1 per share. He paid P25,000.00 and promised to pay the balance before December 31, 2008. JP
Development Corporation declared cash dividends on October 15, 2008 payable on December 1, 2008.
a. For how many shares is Ace Cruz entitled to be paid cash dividends? Explain. Ace is entitled to the
whole amount of his shares which is 100,000. A **contract of subscription is an INDIVISIBLE
contract. If only partial payment for the subscription was made, it cannot be the basis for the amount of cash dividend
in favor of the stockholder. **Cash dividends due on delinquent stocks shall FIRST BE APPLIED TO THE
UNPAID BALANCE on the subscription plus cost and expenses. (Sec 43) Stocks become delinquent 30 days
from the due date specified in the contract of subscription or in the date stated in the call made by the board
(Sec 67). In this case, the cash dividend is **not yet delinquent. Ace Cruz, therefore CAN CLAIM THE
ENTIRE CASH dividend payable on December 1, 2008.
b. On December 1, 2008, can Ace Cruz compel JP Development Corporation to issue to him the stock
certificate corresponding to the P25,000 paid by him? NO. **No certificate of stock shall be issued to a
subscriber UNTIL THE FULL AMOUNT of subscription together with interest and expenses (in case of
delinquent shares), if any is due, HAS BEEN PAID (Sec 64). Clearly, since Ace Cruz did not pay the full
subscription yet, the certificate of stock shall not be issued to him.

ON THE LIABILITY OF SUBSCRIBERS FOR UNPAID SUBSCRIPTIONS, AS TO THE

INTEREST
*Subscribers shall pay interest on unpaid subscriptions from the date of subscription if so required by the by-
laws. The rate of interest shall be:
1. rate fixed in the by-laws;
2. if no rate is fixed, at the legal rate which is 6% per annum [effective 1 July 2013 per Monetary Board Circular
No. 799]
——————————

WATERED STOCK; LIABILITY OF D/O

1. Grounds for liability
a. by consenting to the issuance of stocks for a consideration less than its par or issued value or for a
consideration in any form other than cash, valued in excess of its fair value;
b. by not expressing his objection in writing and filing the same with the corporate secretary despite
having knowledge of such issuance.
2. Nature of liability: SOLIDARY.
*such D/O shall be solidarily liable with the stockholder concerned for the difference between the
fair value received at the time of issuance of the stock and the par or issued value of the same.
3. To whom liable
a. to the corporation
b. and its creditors
————————————————

Classes of Shares of Stock [Sec 6]

PAR VALUE SHARES

NO-PAR VALUE SHARES (NPV SHARES)

1. NPV shares shall be:
a. deemed fully paid and
b. non-assessable and
c. the holder of such shares shall not be liable to the corporation or to its creditors in respect thereto:
2. Minimum value allowable for NPV shares: five (P5.00) pesos per share:
3. Note that the entire consideration received by the corporation for its no-par value shares shall be:
a. treated as capital and
b. shall not be available for distribution as dividends.
Ecce Ancilla Domini! 114 of 160

INTEREST-BEARING STOCKS
1. "Interest bearing stocks", on which the corporation agrees absolutely to pay interest before dividends are paid
to common stockholders, is **legal only when construed as requiring payment of interest as dividends from
NET EARNINGS OR SURPLUS ONLY.
2. Clearly, the respondent judge, in compelling the petitioner to redeem the shares in question and to pay the
corresponding dividends, committed grave abuse of discretion amounting to lack or excess of jurisdiction in
ignoring both the terms and conditions specified in the stock certificate, as well as the clear mandate of the law.
Republic Planters Bank vs. Hon. Agana, Sr.,G.R. No. 51765, March 3, 1997

PREFERRED SHARES
1. These shares may be given preference in the distribution of the assets of the corporation:
a. in case of liquidation and
b. in the distribution of dividends,
c. or such other preferences as may be stated in the AOI which are not violative of the provisions of
the Code.
2. Preferred shares of stock may be issued only with a stated par value.
3. The BOD, where authorized in theAOI, may fix the terms and conditions of preferred shares of stock or
any series thereof. Such terms and conditions shall be effective upon the filing of a certificate thereof with
the SEC.

VOTING SHARES [Sec 6]

1. GR: the vote necessary to approve a particular corporate act shall be deemed to refer only to stocks with
voting rights.
2. XPN: Except as provided infra; AASIIMID
3. NB: UCPB is a sequestered corporation: 90% of its outstanding capital stock is voted by PCGG under the
***PUBLIC CHARACTER TEST, i.e., shares acquired through public funds can be voted by the
Government.

NON-VOTING SHARES [Sec 6]

1. GR: non-voting shares are not entitled to vote
2. XPN: the holders of such shares shall nevertheless be entitled to vote on the following matters: (AASIIMID)
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other corporations;
7. Investment of corporate funds in another corporation or business in accordance with the Code; and
8. Dissolution of the corporation.

FOUNDER’S SHARES [Sec 7]

1. They are classified as such in the AOI;
2. They may be given certain rights and privileges not enjoyed by the owners of other stocks
3. Where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a
limited period not to exceed five (5) years subject to the approval of the SEC.
• The five-year period shall commence from the date of the aforesaid approval by the SEC.

REDEEMABLE SHARES (RS) [Sec 8]

1. The authority to issue must be expressly so provided in the AOI.
2. They may be purchased or taken up by the corporation:
a. upon the expiration of a fixed period, regardless of the existence of unrestricted retained
earnings (URE) in the books of the corporation, and
b. upon such other terms and conditions as may be stated in the AOI
• such terms and conditions must also be stated in the certificate of stock representing said shares.
• Unrestricted Retained Earnings (URE): surplus profits not subject to encumbrance.
• Like preferred shares, they can be deprived of voting rights.
3. **This is part of the express powers of a corporation: the power to acquire back its own shares that it
previously issued [Sec 41] under a buy-back program, for example.
Ecce Ancilla Domini! 115 of 160

*GR on buy-back: only surplus profits can be used to buy back—never the capital, ow, you violate
the TF doctrine.
**XPN: buying back redeemable shares, “regardless of the existence of unrestricted retained earnings”
- but SH can’t compel the corporation to redeem; they can be sold to other SH.
4. Rules/Limitations on Redeemable Shares:
a. Issuance of redeemable shares must be expressly provided in the articles of incorporation [Sec 8];
b. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless
of the existence of unrestricted retained earnings in the books of the corporation
c. The terms and conditions affecting said shares must be stated both in the articles of
incorporation and in the certificates of stock [Sec 8];
d. Redeemable shares may be deprived of voting rights in the articles of incorporation, unless
otherwise provided in the Code. (Sec. 6, par. 6)
e. Redemption cannot be made if it will cause insolvency of the corporation.

TREASURY SHARES [Sec 9]

1. These are SOS which have been issued and fully paid for, but subsequently reacquired by the issuing
corporation by
a. purchase,
b. redemption,
c. donation or
d. through some other lawful means.
2. Such shares may again be disposed of for a reasonable price fixed by the board of directors.
————————————————

I4. Payment of Balance of Subscription

a. Call by Board of Directors
b. Notice Requirement
c. Sale of Delinquent Shares
i. Effect of Delinquency
ii. Call by Resolution of the Board of Directors
iii. Notice of Sale
iv. Auction Sale and the Highest Bidder

ON PAYMENT OF SUBSCRIPTION
1. [] Section 66. Interest on unpaid subscriptions. – Subscribers for stock shall pay to the corporation
INTEREST on all unpaid subscriptions FROM THE DATE OF SUBSCRIPTION, if so required by, and at
the rate of interest fixed in the by-laws. If no rate of interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)
**A corporation has no power to release an original subscriber from paying for his shares without a
VALUABLE CONSIDERATION for such release. This is because subscriptions to the capital of the corporation
constitute a fund to which creditors have a right to look for satisfaction of their claims and that an ASSIGNEE
IN INSOLVENCY can maintain an action upon any unpaid stock subscription in order to realize assets for the
payment of debts. Philippine National Bank vs. Bitulok Sawmill, Inc., 23 SCRA 1366 (1968).
2. [] Section 67. Payment of balance of subscription. – Subject to the provisions of the contract of
subscription, the board of directors of any stock corporation may at ANY TIME declare due and
payable to the corporation unpaid subscriptions to the capital stock and may collect the same or such
percentage thereof, in either case with ACCRUED INTEREST, if any, as it may deem necessary.
PAYMENT OF ANY UNPAID SUBSCRIPTION or any percentage thereof, together with the INTEREST
accrued, if any, shall be made on the DATE SPECIFIED in the contract of subscription or on the date
STATED IN THE CALL made by the board. FAILURE TO PAY ON SUCH DATE SHALL RENDER THE
ENTIRE BALANCE DUE AND PAYABLE and shall make the stockholder liable for interest at the legal rate
on such balance, unless a different rate of interest is provided in the by-laws, computed from such date
until full payment. If WITHIN THIRTY (30) DAYS FROM THE SAID DATE NO PAYMENT is made, all
stocks covered by said subscription shall thereupon BECOME DELINQUENT and shall be
SUBJECT TO SALE as hereinafter provided, unless the board of directors orders otherwise. (38)

SALE OF DELINQUENT SHARES

1. EFFECT OF DELINQUENCY: At the **root of the sale of delinquent stock is the NON-PAYMENT OF
THE SUBSCRIPTION PRICE for the share of stock itself. The stockholder or subscriber has yet to fully pay
Ecce Ancilla Domini! 116 of 160

for the value of the share or shares subscribed. In this case, Clemente had already fully paid for the share in
Calatagan and no longer had any outstanding obligation to deprive him of full title to his share. Calatagan Golf
Club, Inc., vs. Sixto Clemente, Jr., G.R. No. 165443, April 16, 2009
2. CALL BY RESOLUTION OF BOD: An **OBLIGATION arising from non-payment of stock
subscription to a corporation CANNOT BE OFFSET against a money claim of an employee against the
employer. xxx **Unpaid subscriptions are NOT DUE AND PAYABLE UNTIL A CALL IS MADE by
the corporation for payment THROUGH A BOARD RESOLUTION and the contract of subscription does not
specify the due date of payment. Apocada vs. National Labor Relations Commission, 172 SCRA 442. (1989)
2. [] Section 68. DELINQUENCY SALE. – The board of directors may, by resolution, order the sale of
delinquent stock and shall SPECIFICALLY STATE THE AMOUNT DUE on each subscription plus all
ACCRUED interest, and the date, time and place of the sale which shall NOT BE LESS THAN THIRTY (30)
DAYS NOR MORE THAN SIXTY (60) DAYS FROM THE DATE THE STOCKS BECOME DELINQUENT.
NOTICE of said sale, with a copy of the resolution, shall be SENT TO EVERY DELINQUENT
STOCKHOLDER either PERSONALLY OR BY REGISTERED MAIl. The same shall furthermore be
PUBLISHED ONCE A WEEK FOR TWO (2) CONSECUTIVE WEEKS in a newspaper of general circulation
in the province or city where the principal office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the date specified for the
sale of the delinquent stock, the balance due on his subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the board of directors otherwise orders, said delinquent
stock shall be SOLD AT PUBLIC AUCTION to such BIDDER WHO SHALL OFFER TO PAY THE FULL
AMOUNT of the balance on the subscription TOGETHER WITH ACCRUED INTEREST, COSTS OF
ADVERTISEMENT AND EXPENSES OF SALE, for the SMALLEST NUMBER of shares or fraction of a
share. The stock so purchased shall be transferred to such purchaser in the books of the corporation
and a certificate for such stock shall be issued in his favor. The REMAINING SHARES, if any, shall be
CREDITED IN FAVOR OF THE DELINQUENT STOCKHOLDER who shall LIKEWISE BE ENTITLED to the
issuance of a CERTIFICATE of stock covering such shares.
Should there be NO BIDDER at the public auction WHO OFFERS TO PAY THE FULL AMOUNT of
the balance on the subscription TOGETHER WITH accrued interest, costs of advertisement and expenses
of sale, for the smallest number of shares or fraction of a share, THE CORPORATION MAY, subject
to the provisions of this Code, BID FOR THE SAME, and the TOTAL AMOUNT DUE SHALL BE
CREDITED AS PAID IN FULL in the books of the corporation. TITLE to all the shares of stock
covered by the subscription shall be VESTED IN THE CORPORATION AS TREASURY SHARES and may be
disposed of by said corporation in accordance with the provisions of this Code. (39a-46a)
4. [] Section 69. When sale may be questioned. – NO ACTION TO RECOVER delinquent stock sold
can be sustained upon the ground of IRREGULARITY OR DEFECT in the NOTICE of sale, or in the SALE
ITSELf of the delinquent stock, UNLESS THE PARTY SEEKING TO MAINTAIN SUCH ACTION
FIRST PAYS OR TENDERS TO THE PARTY HOLDING THE STOCK THE SUM FOR WHICH
THE SAME WAS SOLD, with INTEREST from the date of sale at the legal rate; and no such action
shall be maintained unless it is commenced by the filing of a complaint WITHIN SIX (6) MONTHS
FROM THE DATE OF SALE.
*The SIX MONTH limitation to file an action to nullify the sale of delinquent shares under
Section 69 of the Corporation Code **APPLIES ONLY TO SALE OF DELINQUENT STOCKS DUE
TO NON-PAYMENT of the subscription price for the share of the stock itself. **In case of termination
of membership in a non-stock corporation, due to non-payment of dues of the member, the grounds and
procedures for membership termination under the articles or by-laws should apply. It must also conform to
the requirements of substantial justice. The Corporation is clearly in BAD FAITH when it sent the notices
of sale to the postal office box of the stockholder knowing fully well that the box had already been closed.
Calatagan Golf Club, Inc., vs. Clemente, Jr. 585 SCRA 300 (2009)
5. [] Section 70. Court action to recover unpaid subscription. – Nothing in this Code shall prevent the
corporation from COLLECTING BY ACTION in a court of proper jurisdiction the AMOUNT DUE on
any UNPAID subscription, with accrued interest, costs and expenses. (49a)
6. [] Section 71. EFFECT of delinquency. – NO DELINQUENT STOCK SHALL BE VOTED FOR or be
ENTITLED TO VOTE or to REPRESENTATION at any stockholder’s meeting, nor shall the holder thereof
be entitled to any of the rights of a stockholder EXCEPT THE RIGHT TO DIVIDENDS in
accordance with the provisions of this Code, UNTIL AND UNLESS HE PAYS THE AMOUNT DUE on his
subscription with accrued interest, and the costs and expenses of advertisement, if any.
7. [] Section 72. Rights of unpaid shares. – Holders of subscribed shares NOT FULLY PAID which are
NOT DELINQUENT shall have ALL THE RIGHTS OF A STOCKHOLDER. (n)
Ecce Ancilla Domini! 117 of 160

ON THE RIGHTS OF UNPAID SHARES

*Holders of shares not fully paid, which are NOT DELINQUENT, shall have
1. all the rights of a stockholder [Sec 72];
2. **except the right to a stock certificate [Sec 64].
—————————————

I5. Certificate of Stock

a. Nature of the Certificate
b. Uncertificated Shares
c. Negotiability
i. Requirements for Valid Transfer of Stocks
d. Issuance
i. Full Payment
ii. Payment Pro-Rata
e. Lost or Destroyed Certificates

NATURE OF A CERTIFICATE OF STOCK

1. While shares of stock constitute PERSONAL PROPERTY, they DO NOT REPRESENT PROPERTY OF THE
CORPORATION. A share of stock only typifies an ALIQUOT PART of the corporation's property, or the
right to share in its proceeds to that extent when distributed according to law and equity, but its
**HOLDER IS NOT THE OWNER OF ANY PART OF THE CAPITAL of the corporation.
Stockholders of F. Guanzon and Sons, Inc.,vs. Register of Deeds of Manila, G.R. No. L-18216, October 30,
1962
2. A certificate of stock is the PAPER REPRESENTATIVE OR TANGIBLE EVIDENCE of the stock
itself and of the various interests therein. The **certificate is NOT STOCK in the corporation but is
MERELY EVIDENCE of the holder's INTEREST AND STATUS in the corporation, his ownership of
the share represented thereby, but is not in law the equivalent of such ownership. It expresses the contract
between the corporation and the stockholder, but is **NOT ESSENTIAL to the existence of a share in
stock or the nation (sic) of the relation of shareholder to the corporation. Alfonso S. Tan vs. Securities And
Exchange Commission, G.R. No. 95696 March 3, 1992
3. The certificate of stock itself **once issued is a CONTINUING AFFIRMATION OR
REPRESENTATION that the stock described therein is VALID AND GENUINE and is at least PRIMA
FACIE EVIDENCE THAT IT WAS LEGALLY ISSUED in the absence of evidence to the contrary. A mere
typewritten statement advising a stockholder of the extent of his ownership in a corporation without qualification
and/or authentication cannot be considered as a formal certificate of stock. Nora A. Bitong vs. CA G.R. No.
123553, July 13, 1998

MORE ON THE CERTIFICATE OF STOCK (COS)

1. Concept: it is the WRITTEN ACKNOWLEDGEMENT by the corporation of the SH’s interest in the
a. management,
b. profits and
c. assets of the corporation.
[] The fact that the stock certificates covering the shares registered in the names of certain persons
were found in the possession of another does not necessarily prove that the latter owned the shares. A
STOCK CERTIFICATE IS MERELY A TANGIBLE EVIDENCE OF OWNERSHIP of shares of stock. Its
presence or absence does not affect the right of the registered owner to dispose of the shares covered by the
stock certificates. Republic vs. Estate of Hans Menzi, 476 SCRA (2005)
[] A **mere typewritten statement advising a stockholder of the extent of his ownership in a
corporation without qualification and/or authentication cannot be considered a formal certificate of stock.
Bitong vs. Court of Appeals, 292 SCRA 503 (1998)
2. Requirements when issued the COS; it must be
a. signed by the president or vice president,
b. countersigned by the secretary or assistant secretary,
c. and sealed with the seal of the corporation
3. Requirements for issuance of stock certificates [Sec 64]; No COS shall be issued until the following is paid:
a. the FULL AMOUNT of the subscription
b. the interest and expenses due, in case of delinquent shares.
[] But note this old case: When a stockholder in a stock corporation subscribes to a certain number of
shares but does NOT PAY THE FULL amount for such shares, a certificate of stock shall still be issued to him
Ecce Ancilla Domini! 118 of 160

and he shall be ENTITLED TO VOTE the shares EVEN THOUGH THEY ARE NOT FULLY PAID. Irineo S.
Baltazar vs. Lingayen Gulf Electric Power, Co., Inc., G.R. No. L-16236, June 30, 1965
4. RULE IN CASE OF PARTIAL PAYMENT**
*GR: the partial payment shall be applied PRO-RATA to all the subscribed shares. Accordingly, no
COS shall be issued until the subscription is fully paid. Basis for the rule: a subscription contract is an
INDIVISIBLE CONTRACT [SEC Opinion, Sept 1989]. EG: for a subscription of 1,000 shares at P10 par
value and only P6,000 has been paid, such payment is applied pro-rata to the 1,000 shares at P6 each; no COS
may thus be issued.
**XPN: the BOD, at its option and if not prohibited by the by-laws, may apply the payment to such
number of shares as may be covered by the payment and issue the corresponding certificate therefor [cf.
Lingayen Gulf Electric vs. Baltazar]. EG: same example, supra, hence, the payment may be applied to 600 shares;
a COS may this be issued for the 600 shares.

REGISTRATION & OWNERSHIP OF SOS

1. Since the **law does not prescribe a period for registration of shares in the books of the corporation, the
action to enforce the right to have it done does not begin until a demand for it had been made and was
refused. Africa vs. Hon. Sandiganbayan, ibid.
2. Where the seller **INDORSED the stock certificates BUT DID NOT DELIVER them, OWNERSHIP of
the shares CANNOT BE TRANSFERRED to the buyer. For an effective transfer of shares of stock, the mode and
manner of transfer as prescribed by law should be followed. Embassy Farms, Inc., vs. Court of Appeals, 188 SCRA 492
(1990)
* In order for a TRANSFER of stock certificate to be effective, the certificate must be PROPERLY
INDORSED and that TITLE to such certificate of stock is VESTED IN THE TRANSFEREE BY THE
DELIVERY of the duly indorsed certificate of stock. Thus, where an incorporator organized a corporation
and certain number of shares was issued to a stockholder but the certificate of stock covering said shares
was in the possession of the incorporator who **REFUSED TO DELIVER the same to the heir of the
stockholder after the latter died, the STOCKHOLDER OF RECORD SHOULD BE CONSIDERED
THE OWNER of the shares since he did not indorse the certificate in favor of the incorporator. The
allegation that it was delivered to him by the stockholder because he was the one who paid for it does not
hold. Razon vs. Intermediate Appellate Court, 207 SCRA 234 (1992)
3. Where the stockholders sold his shares of stock and was paid thereof and a NEW STOCK CERTIFICATE HAS
BEEN ISSUED TO THE BUYER but the stockholder did NOT RETURN the stock certificate when it was sent
him for endorsement, the CANCELLATION of the stock certificate is VALID DESPITE THE LACK OF
ENDORSEMENT on the stock certificate. Tan vs. Securities and Exchange Commission, 206 SCRA 740 (1992)
[] Since the **SECRETARY IS THE CUSTODIAN of the corporate records, the entries made by
the controlling stockholder in the stock and transfer of book of his assignment of shares of stock to five persons
are not valid and did not qualify them to be directors. Torres vs. Court of Appeals, 270 SCRA 493 (1997)
4. A stockholder **acquires voting rights ONLY when the shares of stock to be voted are registered in
his name in the books of the corporation. Until registration is accomplished, the transfer though valid between
the parties cannot be effective against the corporation. De Erguiga vs. Court of Appeals, 178 SCRA 1 (1989)
5. Where a stockholder executed a special power of attorney in favor of his wife who, pursuant to the SPA,
sold the shares but after the sale, the stockholder died, the corporation CANNOT REFUSE to register the
shares in favor of the assignee on the pretext that upon death of the stockholder, his shares of stock became the
property of the estate which should be settled and liquidated first before any distribution could be effected. It is the
MINISTERIAL DUTY of a corporation to register the shares of stock which were assigned in the name of
assignees even if there is a pending action in court questioning the validity of the assignment. Rural Bank of
Salinas, Inc.,vs. Court of Appeals, 210 SCRA 510 (1992)
**Mandamus will not lie where the shares of stock are not indorsed by the registered owner who is
specifically objecting to the registration thereof in the corporate books. Rivera vs. Florendo, 144 SCRA 643
(1986)
6. Pursuant to Section 63 of the Corporation Code, a transfer of shares of stocks NOT RECORDED in the
stock and transfer book of the corporation is NON-EXISTENT as far as the corporation is concerned.
Without such recording, the transferee may not be regarded by the corporation as one among its stockholders
and the corporation may legally refuse the issuance of stock certificates in the name of the transferee
even when there has been compliance with the requirements of Section 64 of the Corporation Code. The situation would
be different if the petitioner was himself the registered owner of the stock which he sought to transfer to a third
party, for then he would be entitled to the remedy of MANDAMUS. It has been made clear that before a
transferee may ask for the issuance of stock certificates, he must first cause the registration of the transfer and
thereby enjoy the status of a stockholder insofar as the corporation is concerned. A corporate secretary may
**NOT be COMPELLED to register transfer of shares on the BASIS MERELY OF AN INDORSEMENT of
Ecce Ancilla Domini! 119 of 160

stock certificates. With more reason a corporate secretary may not be compelled to issue stock certificates
without such registration. Ponce vs. Alsons Cement Corporation, 393, SCRA 602 (2002)

ON TRANSFER OF SOS
1. Preliminary consideration: SOS issued are PERSONAL PROPERTY and may be transferred by
a. the DELIVERY of the certificate
b. indorsed by the owner or his attorney-in-fact or other person legally authorized to make the transfer
[Sec 63].
[] The law is clear that in order for a transfer of stock certificate to be effective, the certificate must be
**PROPERLY INDORSED and that TITLE to such certificate of stock is VESTED IN THE TRANSFEREE
BY THE DELIVERY of the duly indorsed certificate of stock. Since the certificate of stock covering the
questioned 1,500 shares of stock registered in the name of the late Juan Chuidian was never indorsed to the
petitioner, the inevitable conclusion is that the questioned shares of stock belong to Chuidian. Enrique Razon vs.
Intermediate Appellate Court and Vicente B. Chuidian, in his capacity as Administrator of the Estate of the
Deceased Juan T. Chuidian, G.R. No. 74306, 16 March 1992
[] In the sale of SOS, PHYSICAL DELIVERY of the stock certificate is one of the ESSENTIAL
requisites for the transfer of ownership of the stocks purchased. The failure of the stockholder to deliver the
stock certificate to the buyer within a reasonable time the shares covered by the stock certificate should have
been delivered is a **SUBSTANTIAL BREACH that entitles the buyer to RESCIND the sale under Article
1191 of the Corporation Code . It is not entirely correct to say the sale had already been consummated as
the buyer already enjoyed the rights a shareholder can exercise. The enjoyment of these rights will not suffice
where the law, by its express terms, requires a SPECIFIC FORM TO TRANSFER OWNERSHIP. Fil-
Estate Golf and Development vs. Vertex Sales and Trading Inc., G.R. No. 202079, June 10, 2013
[] The Corporation whose shares of stock are the subject of a transfer transaction (through sale,
assignment, donation, or any other mode of conveyance) need not be a party to the transaction, as may be
inferred from the terms of Section 63 of the Corporation Code. However, to bind the corporation as well as
third parties, it is necessary that the transfer is recorded in the books of the corporation. In a SHARE
PURCHASE TRANSACTION, the parties are the seller and buyer of the shares. Not being a party to the
sale, the Corporation is in NO POSITION to APPEAL the ruling rescinding the sale of the shares. If the Seller
of the shares filed no appeal against the court decision declaring the rescission of the sale, **then the
rescission is deemed FINAL DESPITE ANY APPEAL BY THE CORPORATION whose shares of stock are the
subject of the transfer transaction. Forest Hills Golf & Country Club vs. Vertex Sales and Trading Inc.G.R. No.
202205, March 6, 2013
2. Validity of UNREGISTERED transfer of shares
a. As between the parties: transfer is VALID
b. As against the corporation and third persons: transfer is NOT VALID UNTIL it is recorded in the
books of the corporation so as to show the following:
a. the names of the parties to the transaction,
b. the date of the transfer,
c. the number of the certificate or certificates
d. and the number of shares transferred [Sec 63].
[] Section 63 of the Corporation Code provides that NO TRANSFER SHALL BE VALID except as between
the parties, UNTIL THE TRANSFER IS RECORDED in the books of the corporation showing the names of
the parties to the transaction, the date of the transfer, the number of certificate or certificates and the number
of shares transferred. Said provision of law **strictly requires the RECORDING of the transfer IN THE
BOOKS of the corporation and NOT ELSEWHERE, to be valid as against third parties. The **UNRECORDED
TRANSFER of a propriety ownership certificate is not valid as against the judgment creditor of the transferor
who can therefore levy the shares pursuant to a judgment despite the unrecorded transfer. Garcia vs. Jomouad, 323 SCRA 424
(2000)
[] The authority granted to a corporation to regulate the transfer of its stock does **not empower it
to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of
regulations on the formalities and procedure to be followed in effecting transfer. Thomson vs. Court of
Appeals, 298 SCRA 280 (1998)
3. Summary: ***For a VALID TRANSFER of stocks, there must be STRICT COMPLIANCE with the
mode of transfer prescribed by law. The REQUIREMENTS are:
(a) There must be DELIVERY of the stock certificate;
(b) The certificate must be ENDORSED by the owner or his attorney-in-fact or other persons legally
authorized to make the transfer; and
(c) To be valid against third parties, the transfer must be recorded in the books of the corporation.
Ecce Ancilla Domini! 120 of 160

A deed of assignment of shares WITHOUT REQUISITE ENDORSEMENT AND DELIVERY

is only valid between the parties. It does not necessarily make the transfer effective as against the corporation.
Consequently, the ASSIGNEES CANNOT ENJOY THE STATUS OF A STOCKHOLDER, cannot vote nor be voted
for and will not be entitled to dividends insofar as the assigned shares are concerned. Parenthetically, the **assignors
can not, as yet, be deprived of their rights as stockholders, until and unless the issue of ownership and transfer of
the shares in question are resolved with finality. Rural Bank of Lipa City, Inc., vs. CA, 366 SCRA 188 (2001) BLTB
Company, Inc., et al., vs. Benjamin Bitanga, et al., 362 SCRA 635 (2001)
4. (Only limitation) Unpaid shares not transferable in corporate books: No shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books of the corporation [Sec 63].
[] The provision in Section 63 of the Corporation Code that no share of stock against which the
corporation holds any unpaid claim shall be transferable **REFERS TO UNPAID CLAIM arising from
subscription and NOT TO ANY INDEBTEDNESS arising from another transaction, such as monthly dues.
China Banking Corporation vs. Court of Appeals, 270 SCRA 503 (1997)
[] Shares originally owned by a sequestered corporation controlled by the nominees of PCGG
REMAIN TO BE PRIVATELY OWNED until such time when the court declares that the subject shares were acquired through
government funds. The PCGG, as a MERE CONSERVATOR, does not automatically become the owner of a
sequestered property in behalf of the government. There must be a final determination by the courts if the
property is in fact “ill-gotten” and was acquired by using government funds. Even on the assumption that the
subject shares are government assets, the sale of the subject shares through the stock exchange is valid and
binding, as there is no law which mandates that listed shares which are owned by the government be sold only through public
bidding. Thus, the transferee/assignee has the right to have the stocks transferred to his name, this being an
**INHERENT RIGHT flowing from his ownership of the stocks. The DUTY of the corporation to
transfer is a MINISTERIAL one and if it refuses to make such transaction without good cause, it may be
compelled to do so by mandamus. The ONLY LIMITATION imposed by Section 63 of the Corporation Code
is when the corporation holds any UNPAID CLAIM against the shares intended to be transferred. Pacific
Basin Securities v. Oriental Petroleum 531 SCRA 667 (2007)

HEIRS DO NOT AUTOMATICALLY BECOME SH UPON DEATH OF SH

1. Upon the death of the SH, the heirs do not automatically become SH of the corporation and acquire the
rights and privileges of the deceased as SH of the corporation;
2. The following must be done firs:
a. stocks must be distributed to the heirs in the estate proceedings, and
b. the transfer of the stocks must be recorded in the books of the corporation [cf. Sec 63: no transfer is
valid until it is recorded in the books of the corporation].
3. During the INTERIM period,**
a. the heirs stand as the EQUITABLE OWNERS of the stocks;
b. the executor or administrator (E/A) duly-appointed by the court being vested with the LEGAL
TITLE to the stock.
*Until the settlement and division of the estate is effected, the stocks of the deceased are held by the
E/A. Consequently, during that time, it is the E/A who is entitled to exercise the rights of the deceased as SH
[Puno vs. Puno Enterprises, 11 Sept 2009].
4. Compare this with Lim vs. CA: Pastor Lim’s wife wanted to include the corporate properties in the settlement
of his estate just because her deceased husband was the controlling SH of the corporation. SC said that the titles
are in the name of the corporation, hence, ownership is conclusively in favor of the corporation. **The fact
that Pastor Lim controlled the corporation during his lifetime is not enough reason to disregard the separate
legal personality. He owned only shares of stock but not the properties of the corporation.

ON LOST OR DESTROYED CERTIFICATES

*A new certificate may be issued in lieu of a lost or destroyed certificate; below is the procedure in brief:
1. Execution of an AFFIDAVIT of loss by the SH;
2. PUBLICATION of the loss for 3 consecutive weeks by the corporation at the expense of the SH;
3. One year from the last publication, a NEW CERTIFICATE will be issued if not contest in presented. A new
certificate may be issued before the lapse of the 1-year period provided the SH files a bond or other security.
4. [] Section 73. Lost or destroyed certificates. – The following procedure shall be followed for the issuance by a
corporation of new certificates of stock in lieu of those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his legal representative shall file
with the corporation an affidavit in triplicate setting forth, if possible,
a. the circumstances as to how the certificate was lost, stolen or destroyed,
b. the number of shares represented by such certificate,
Ecce Ancilla Domini! 121 of 160

c. the serial number of the certificate and

d. the name of the corporation which issued the same.
e. He shall also submit such other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence with the books of the corporation,
said corporation shall
a. publish a notice in a newspaper of general circulation published in the place where the
corporation has its principal office,
b. once a week for three (3) consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed.
The notice shall state the
a. name of said corporation,
b. the name of the registered owner and
c. the serial number of said certificate, and the number of shares represented by such
certificate, and
d. that after the expiration of one (1) year from the date of the last publication, if no contest has
been presented to said corporation regarding said certificate of stock, the right to make such contest
shall be barred and said corporation shall cancel in its books the certificate of stock which has been
lost, stolen or destroyed and issue in lieu thereof new certificate of stock, unless the registered owner
files a bond or other security in lieu thereof as may be required, effective for a period of one (1) year, for
such amount and in such form and with such sureties as may be satisfactory to the board of directors,
in which case a new certificate may be issued even before the expiration of the one (1) year period
provided herein: Provided, That if a contest has been presented to said corporation or if an action is
pending in court regarding the ownership of said certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock in lieu thereof shall be suspended until the final
decision by the court regarding the ownership of said certificate of stock which has been lost, stolen or
destroyed.
Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers,
no action may be brought against any corporation which shall have issued certificate of stock in lieu of
those lost, stolen or destroyed pursuant to the procedure above-described. (R.A. 201a)

—————————————

I6. Stock and Transfer Book (cf. right to inspect corporate books)

a. Contents: A stock and transfer book is necessary as a MEASURE OF PRECAUTION, EXPEDIENCY

AND CONVENIENCE since it provides THE ONLY CERTAIN AND ACCURATE METHOD of establishing the
various corporate acts and transactions and of showing the ownership of stock and like matters. However, a
stock and transfer book, like other corporate books and records, is **NOT IN ANY SENSE A PUBLIC
RECORD, and thus is NOT EXCLUSIVE EVIDENCE of the matters and things which ordinarily are or should be
written therein. Jesus V. Lanuza, et al.vs. Court of Appeals, et al., G.R. No. 131394, March 28, 2005

b. Who May Make Valid Entries: In the absence of any provision to the contrary, the CORPORATE SECRETARY
is the CUSTODIAN OF CORPORATE RECORDS. The transferor, even though he may be the controlling stockholder
cannot take the law into his hands and cause himself the recording of the transfers of the qualifying shares to
his nominee-directors in the stock and transfer book of the corporation. Manuel A. Torres, Jr., (Deceased), et al.
vs. Court of Appeals, et al., G.R. No. 120138, September 5, 1997

—————————————

I7. Disposition and Encumbrance of Shares

a. Allowable Restrictions on the Sale of Shares
b. Sale of Partially Paid Shares
c. Sale of a Portion of Shares Not Fully Paid
d. Sale of All of Shares Not Fully Paid
e. Sale of Fully Paid Shares
f. Requisites of a Valid Transfer
g. Involuntary Dealings with Shares
———————————————————————————————
Ecce Ancilla Domini! 122 of 160

J. Dissolution and Liquidation

ON DISSOLUTION
1. Concept: the TERMINATION of the existence of a corporation
[] WINDING UP is the SOLE ACTIVITY OF A DISSOLVED CORPORATION that does not intend to
incorporate anew. If it does, however, it is NOT UNLAWFUL for the old board of directors to negotiate and
transfer the assets of the dissolved corporation to the new corporation intended to be created as long as the stockholders
have given their CONSENT. Chung Ka Bio vs. Intermediate Appellate Court, 163 SCRA 534 (1988)
2. Kinds of dissolution:
a. Voluntary
b. Involuntary
3. The removal of a stockholder (in this case a majority stockholder) from the management of the corporation
and/or the dissolution of a corporation is a suit filed by minority stockholders is a DRASTIC MEASURE. It
should be resorted to only when the NECESSITY is clear. Chase vs. Buencamino, 136 SCRA 365 (1985)
4. An action to correct entries in the General Information Sheet of the Corporation; to be recognized as a
stockholder and to inspect corporate documents is an intra-corporate dispute which does not constitute a
continuation of corporate business. As such, pursuant to Section 145 of the Corporation Code, this action is not
affected by the subsequent dissolution of the corporation. The **dissolution of the corporation SIMPLY
PROHIBITS it from CONTINUING its business. However, despite such dissolution, the parties involved in the
litigation are still corporate actors. The dissolution does not automatically convert the parties into total
strangers or change their intra-corporate relationships. Neither does it change or terminate existing
causes of action, which arose because of the corporate ties between the parties. Thus, a **cause of action involving
an intra-corporate controversy REMAINS AND MUST BE FILED AS AN INTRA-CORPORATE DISPUTE despite
the subsequent dissolution of the corporation. Aguirre vs. FQB +7, Inc, GR No. 170770, January 9 2013
———————————

1. Modes of Dissolution
a. Voluntary
i. Where No Creditors Are Affected
ii. Where Creditors Are Affected
iii. By Shortening of Corporate Term
b. Involuntary**
i. By Expiration of Corporate Term
ii. Failure to Organize and Commence Business Within 2 Years from Incorporation
iii. Legislative Dissolution
iv. Dissolution by the SEC on Grounds under Existing Laws

KINDS OF VOLUNTARY DISSOLUTION (VD)

1. VD where NO CREDITORS are AFFECTED [Sec 118];
a. vote required: i. majority of the BOD/BOT; ii. Resolution of 2/3 of the OCS/members in a
meeting called for the purpose;
b. copy of the Resolution filed with SEC: duly-certified by a majority of the BOD/BOT and
countersigned by the corporate secretary.
c. thereupon, SEC shall issue a CERTIFICATE OF DISSOLUTION [Sec 118]
[] A **resolution approved by the Board of Directors is NOT SUFFICIENT to dissolve a
corporation. The Corporation Code establishes the procedure and other formal requirements a corporation
needs to follow in case it elects to dissolve and terminate its structure voluntarily and where no rights of
creditors may possibly be prejudiced under Section 118 which should have been strictly complied with by the
members of the club. Teodoro B. Vesagas and Wilfred D. Asis vs. CA, G.R. No. 142924, December 5, 2001
2. VD where CREDITORS are AFFECTED [Sec 119];
a. vote required: i. majority of the BOD/BOT; ii. Resolution of 2/3 of the OCS/members in a meeting
called for the purpose;
b. VERIFIED PETITION filed with the SEC for the dissolution of the corporation;
c. Thereafter, SEC hears the petition and try any issue made by the objections filed.
d. If no such objection is sufficient, and the material allegations of the petition are true, SEC:
i. shall render JUDGMENT DISSOLVING the corporation and directing the disposition of
its assets as justice requires; and
ii. may APPOINT a RECEIVER to collect such assets and pay the debts of the corporation
[Sec 119]
Ecce Ancilla Domini! 123 of 160

3. VD by amending the AOI to shorten the corporate term [Sec 120];

a. Follow the rules on amending the AOI to shorten the corporate term;
b. Submit copy of the amended AOI to SEC;
c. Upon approval of the amended AOI or expiration of the shortened term, as the case may be,
**the corporation shall be DEEMED DISSOLVED without further proceedings [Sec 120].
4. VD of a corporation sole, by submitting to the SEC a **verified DECLARATION of DISSOLUTION
[Sec 115].
a. Submit to SEC a VERIFIED DECLARATION OF DISSOLUTION;
b. **UPON APPROVAL of such declaration by SEC, the corporation shall CEASE to carry on its
operations except for the winding up of its affairs [Sec 115].

KINDS OF INVOLUNTARY DISSOLUTION (ID)

1. ID by the EXPIRATION of the term provided in the AOI [Sec 11];
a. a corporation is dissolved upon expiration of the term provided in its AOI;
b. unless such term is extended [Sec 11; 37].
[] Upon the expiration of the period fixed in the articles of incorporation in the absence of compliance with
the legal requisites for the extension of the period, the **corporation ceases to exist and is DISSOLVED IPSO
FACTO. There is NO NEED for the institution of a proceeding for quo warranto to determine the time or date of
the dissolution of a corporation because the period of corporate existence is provided in the articles of
incorporation. Philippine National Bank vs.the Court of First Instance of Rizal, Pasig, et al.,G.R. No. 63201,
May 27, 1992
2. ID by non-use of Corporate Charter, i.e., its FAILURE to FORMALLY ORGANIZE and commence the
transaction of its business or construction of its works within two (2) years from its incorporation [Sec 22];
a. if a corporation does not formally organized and commence the transaction of its business or
construction of its works within two (2) years from the date of its incorporation, its corporate powers shall cease
and the corporation shall be DEEMED DISSOLVED [Sec 22]
3. ID by LEGISLATIVE enactment [Sec 145];
a. a corporation may be dissolved by an ACT OF CONGRESS subject to the limitation that “No right
or remedy in favor of or accrued against any corporation, its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such corporation, stockholders, members, directors, trustees, or officers,
shall be removed or impaired either by the subsequent dissolution of said corporation or by any subsequent
amendment or repeal of this Code or of any part thereof.” [Sec 145].
4. ID by ORDER of the SEC [Sec 121]: SEC, after NOTICE & HEARING, may dissolve a corporation
upon filing of a VERIFIED PETITION for the dissolution, on the GROUNDS such as the following:
a. in case of a DEADLOCK in the management of the affairs and business of a CLOSE
CORPORATION, the SEC, upon written petition by any SH, shall have the power to make such order as it
deems appropriate, including an order dissolving the corporation [Sec 104];
b. any SH of a CLOSE CORPORATION may, by WRITTEN PETITION to the SEC, compel the
dissolution of the corporation whenever any of the acts of its directors, officers or those in control of the
corporation is ILLEGAL, FRAUDULENT or DISHONEST, or OPPRESSIVE or UNFAIRLY
PREJUDICIAL to the corporation or any SH, or whenever the CORPORATE ASSETS are being
MISAPPLIED or WASTED [Sec 105].
c. VIOLATIONS of the provisions of the Corporation Code not specifically penalized therein [Sec
144];
d. As provided in PD 902-A, Sec 6, as follows:
i. FRAUD in procuring its certification of registration;
ii. Serious MISREPRESENTATIONS as to what the corporation can do or is doing to the
great prejudice of, or damage to, the general public;
iii. REFUSAL TO COMPLY with or DEFIANCE of any lawful order of the SEC restraining
commission of acts which would amount to a grave violation of its franchise;
iv. CONTINUOUS INOPERATION for a period of at least five (5) years;
v. FAILURE to FILE BY-LAWS within the required period.
vi. **FAILURE TO FILE required REPORTS in appropriate forms as determined by the SEC
within the prescribed period.
[] Bar 2005: Malyn, Schiera and Jaz are the directors of patio investments, a close corporation formed
to run the Patio Café, an al fresco coffee shop in Makati City. In 2000, Patio café began experiencing financial
reverses, consequently, some of the checks it issued to its beverage distributors and employees bounced. In
October 2003, Schiera informed Malyn that she found a location for a second café in Taguig City. Malyn
objected because of the dire financial condition of the corporation. Sometime in April 2004, Malyn learned
about Fort Patio Café located in Taguig City and that its development was undertaken by a new corporation
Ecce Ancilla Domini! 124 of 160

known as Fort Patio, Inc., where both Schiera and Jazz are directors. Malyn also found that Schiera and Jaz,
on behalf of Patio Investments, had obtained a loan of P500,000.00 from PBCom Bank, for the purpose of
opening Fort Patio Café. This loan was secured by the assets of Patio Investments and personally guaranteed by
Schiera and Jaz. Malyn then filed a corporate derivative action before the Regional Trial Court of Makati City
against Schiera and Jaz, alleging that the two directors had breached their fiduciary duties by
misappropriating money and assets of Patio investments in the operation of Fort Patio Café.
a. Did Schiera and Jaz violate the principle of corporate opportunity? Explain. Yes, although Malyn
refused the business before, nevertheless, using the resources and credit standing of the company, Schiera
and Jaz clearly demonstrated that the business could have been successfully pursued in the name of the close
corporation. More importantly, Schiera and Jaz are **guilty of diverting the resources of the close
corporation to another entity, equivalent to fraud and bad faith.
b. Was it proper for Malyn to file a derivative suit with prayer for injunctive relief ? Explain: Yes.
**Where corporate directors are guilty of breach of trust, a stockholder may institute a suit in behalf of
himself and other stockholders for the benefit of the corporation, to bring about a redress of a wrong
inflicted directly upon the corporation and indirectly upon the stockholders. (Reyes vs. Tan, 3 SCRA 198). In this
case, Schiera and Jaz breached a fiduciary duty when they used the property of Patio investments in the
operation of Fort Patio café despite the latter’s financial condition to the prejudice of the corporation. Further,
an individual stockholder may institute a suit in behalf of a corporation, wherein he holds stocks, in order
to protect corporate rights whenever the officials of the corporation refuse to sue, or are the ones to be sued or
hold the control of the corporation (Republic Bank v. Cuaderno). Furthermore, the demand on the Board of
Directors to file a derivative suit would be a futile formality since majority of the Board is the precursor of the
wrongful act. Injunction is likewise proper to prevent foreclosure of the assets of the corporation used as
security of the loan availed by the two erring Board of Directors.
c. Assuming that a derivative suit is proper, may the action continue if the corporation is dissolved
during the pendency of the suit? Yes, under Section 145 of the Corporation Code, **no right or remedy in
favor of or against any corporation shall be removed or impaired either by the subsequent dissolution of said
corporation. No reason can be conceived why a suit already commenced by the corporation during its
existence to proceed to final judgment and execution thereof because even a mere trustee (of a dissolved
corporation), who, by fiction, merely continues the legal personality may commence a suit which can
proceed to final judgment even beyond the 3-year period of liquidation (Knecht vs. United Cigarette
Corporation, 348 SCRA 48)
—————————————

2. Methods of Liquidation

CORPORATE LIQUIDATION**
1. Concept: corporation to exist THREE (3) YEARS AFTER DISSOLUTION; Liquidation is the
PROCESS OF WINDING UP the AFFAIRS of the corporation and entails the:
a. COLLECTION of all assets;
b. PAYMENT of all its creditors;
c. and the DISTRIBUTION of the remaining assets, if any, among the SH in accordance with their
contracts, or if there be no special contract, on the basis of their respective interests.
2. The MANNER of liquidation may be provided for in the corporate by-laws and this would prevail unless
it is inconsistent with law [Yu vs. Yukayguan, 18 June 2009].
3. After dissolution, the corporation continues as a BODY CORPORATE for 3 years, not for the continuing
of the business for which it was established, but for the following:
a. to PROSECUTE and DEFEND suits by or against it;
b. to enable it to SETTLE and CLOSE it affairs;
c. to DISPOSE OF and CONVEY its property; and
d. to DISTRIBUTE its assets.
4. Bar 1997: The corporation, once dissolved, thereafter continues to be a body corporate for three years for
purposes of prosecuting and defending suits by and against it and of enabling it to settle and close its affairs,
culminating in the final disposition and distribution of its remaining assets. If the 3 year extended life expires
without a trustee or receiver being designated by the corporation within that period and by that time (expiry
of the 3 year extended term), the corporate liquidation is not yet over, how, if at all, can a final settlement of the
corporate affairs be made? A: The liquidation can continue with the winding up. ****The members of the
BOD can continue with the winding of the corporate affairs until final liquidation. They can act as trustees or
receivers for this purpose.
5. Bar 2000: The SEC approved the amendment of the Articles of Incorporation of GHQ Corp shortening its
corporate life to only 25 years in accordance with Sec 120 of the Corp Code. As shortened, the corporation
Ecce Ancilla Domini! 125 of 160

continued its business operations until May 30, 1997, the last day of its corporate existence. Prior to said date,
there were a number of pending civil actions, of varying nature but mostly money claims filed by creditors,
none of which was expected to be completed or resolved within five years from May 30, 1997. If the creditors
had sought your professional help at that time about whether or not their cases could be pursued beyond May
30, 1997, what would have been your advice? (2000) A: The cases can be pursued even beyond May 30, 1997,
the last day of the corporate existence of GHQ Corp. The Corporation is **not actually dissolved upon the
expiration of its corporate term. There is still the period for liquidation or winding up.

THREE-YEAR BODY CORPORATE EXISTENCE AFTER EXPIRATION

1. GR: When the period of corporate life expires, the corporation ceases to be a body corporate for the
purpose of continuing the business for which it was organized;
2. XPN: but it shall nevertheless be continued as a body corporate for three years after the time when it
would have been so dissolved, for the purpose of:
a. prosecuting and defending suits by or against it and
b. enabling it gradually to settle and close its affairs,
c. to dispose of and convey its property and
d. to divide its assets.
3. NB: There is no need for the institution of a proceeding for quo warranto to determine the time or date of the
dissolution of a corporation because the period of corporate existence is provided in the AOI. PNB vs. CFI
of Rizal, May 27, 1992.
4. Although the cancellation of a corporation’s certificate of registration puts an end to its juridical
personality, Sec. 122 of the Corporation Code, however provides that a corporation whose corporate existence
is terminated in any manner continues to be a body corporate for three years after its dissolution for purposes of
prosecuting and defending suits by and against it and to enable it to settle and close its affairs. Thus, corporations
whose certificate of registration was revoked by the SEC **may still maintain actions in court for the
protection of its rights which INCLUDES THE RIGHT TO APPEAL. Paramount Insurance Corp. vs.
A.C. Ordoñez Corporation and Franklin Suspine, G.R. No. 175109, August 6, 2008
5. To allow a creditor’s case to proceed independently of the liquidation case, a possibility of favorable judgment
and execution thereof against the assets of the distressed corporation would not only prejudice the other
creditors and depositors but would defeat the very purpose for which a liquidation court was constituted as
well. The requirement that all claims against the bank be pursued in the liquidation proceedings filed by
the Central Bank is intended to PREVENT MULTIPLICITY OF ACTIONS against the insolvent bank and
designed to establish DUE PROCESS AND ORDERLINESS in the liquidation of the bank, to obviate the
proliferation of litigations and to avoid injustice and arbitrariness. Barramedavda de Ballesteros vs. Rural
Bank of Canaman, Inc., represented by PDIC, G.R. No. 176260, November 24, 2010

WHO MAY EFFECT LIQUIDATION; 3 WAYS

A. BY THE CORPORATION ITSELF [SEC 122]
a. through the BOD/BOT or by the SH/members who have the power to liquidate.
b. Effect if claims is not presented within the 3-year period: the claims by and against the corporation
which are not presented within the 3-year period shall be UNENFORCEABLE against it as the corporate entity
NO LONGER EXISTS.
c. An ACTION FOR RECOVERY of DEBTS of the corporation may, however, be brought against the
LIQUIDATOR after the lapse of the 3-year period [Republic vs. Marsman]

B. BY MANAGEMENT COMMITTEE OR REHABILITATION RECEIVER

1. By RECEIVERSHIP; Effect of SUBSTITUTION of the corporation by a receiver:
a. The corporation CEASES to exist as a corporate entity;
b. The received is substituted to its place for the purposes of liquidation [In RE VD of Union Guaranty
Co, 37 OG 545];
c. CREDITORS may sue the receiver for VALID CLAIMS against the dissolved corporation even after
the 3-year period [cf. Republic vs. Marsman, 27 Apr 1972].
2. Management committees and receivers are **appointed when the corporation is in imminent danger of
(1) dissipation, loss, wastage or destruction of assets or other properties; and (2) paralysation of
its business operations that may be prejudicial to the interest of the minority stockholders, parties-litigants, or the general
public.
[] Applicants for the appointment of a receiver or management committee need to **establish the
confluence of these two requisites. This is because appointed receivers and management committees will
IMMEDIATELY take over the management of the corporation and will have the management powers specified in
law.
Ecce Ancilla Domini! 126 of 160

3. The **CA has NO POWER to appoint a receiver or management committee. The RTC HAS
ORIGINAL AND EXCLUSIVE JURISDICTION to hear and decide intra-corporate controversies,
including incidents of such controversies. These incidents include applications for the appointment of
receivers or management committees. Villamor Jr. vs. John S. Umale, G.R. No. 172843, September 24, 2014
3. During rehabilitation receivership, the ASSETS ARE HELD IN TRUST for the EQUAL BENEFIT of all
creditors TO PRECLUDE ONE from obtaining an advantage or preference over another by the expediency of an
attachment, execution or otherwise. For what would prevent an alert creditor, upon learning of the receivership,
from rushing posthaste to the courts to secure judgments for the satisfaction of its claims to the prejudice of the
less alert creditors. Alemar's Sibal & Sons, Inc.,vs. Hon Elbinias, G.R. No. 75414 June 4, 1990
4. The appointment of a receiver OPERATES TO SUSPEND THE AUTHORITY of a CORPORATION
and its DIRECTORS and OFFICERS over its property and effects, such AUTHORITY BEING REPOSED IN THE
RECEIVER. Thus, a **corporate officer had no authority to condone a debt. Victor Yam &Yek Sun Lent vs.
CA, G.R. No. 104726, February 11, 1999

C. CONVEYANCE TO A TRUSTEE WITHIN A THREE-YEAR PERIOD

1. By TRUSTEESHIP [Sec 122]: during the 3-year period, the corporation is authorized and empowered to
convey all its property to trustees for the benefit of SH, members, creditors, and other persons in interest.
Effect of conveyance to a trustee:
a. all interest which the corporation had in the property terminates;
b. the LEGAL INTEREST vests in the trustees;
c. the BENEFICIAL INTEREST vests in the SH, members, creditors, and other persons in interest.
d. the corporation CEASES to exist as a corporate entity;
e. the trustee is SUBSTITUTED to its place for the purposes of liquidation [In RE VD of Union
Guaranty Co, 37 OG 545];
f. CREDITORS may sue the trustee for VALID CLAIMS against the dissolved corporation even after
the 3-year period [cf. Republic vs. Marsman, 27 Apr 1972].
2. The word "trustee" as used in the corporation statute must be understood in its general concept which
could include the COUNSEL to whom was entrusted in the instant case, the prosecution of the suit filed by the
corporation. The PURPOSE in the transfer of the assets of the corporation to a trustee upon its dissolution is
more for the PROTECTION of its creditor and stockholders. Gelano vs. CA G.R. No. L-39050 February
24, 1981
3. The trustee (of a dissolved corporation) may commence a suit which can proceed to final judgment
**EVEN BEYOND the three-year period of liquidation. No reason can be conceived why a suit ALREADY
COMMENCED by the corporation itself during its existence, not by a mere trustee who, by fiction, merely
continues the legal personality of the dissolved corporation, should not be accorded similar treatment—to
proceed to final judgment and execution thereof. Indeed, the rights of a corporation that has been dissolved
pending litigation are accorded protection by Section 145 of the Corporation Code which provides “no right or
remedy in favor of or against any corporation, its stockholders, members, directors, trustees, or officers, nor any liability incurred
by any such corporation, stockholders, members, directors, trustees, or officers, shall be removed or impaired either by the
subsequent dissolution of said corporation or by any subsequent amendment or repeal of this Code or of any part
thereof.” Rene Knecht and Knecht, Inc.,vs. United Cigarette Corp. G.R. No. 139370, July 4, 2002

D. LIQUIDATION AFTER THREE YEARS

1. No more beyond 3-years: ADC filed its complaint not only after its corporate existence was terminated but
also beyond the three-year period allowed by Section 122 of the Corporation Code. To allow ADC to initiate
the subject complaint and pursue it until final judgment, on the ground that such complaint was filed for the sole
purpose of liquidating its assets, would be to circumvent the provisions of Section 122 of the Corporation
Code. Thus, it is clear that at the time of the filing of the subject complaint petitioner lacks the capacity to
sue as a corporation. Alabang Development Corporation vs. Alabang Hills Village Association and Rafael Tinio,
G.R. No. 187456, June 02, 2014
[] In the absence of a statutory provision to the contrary, **pending actions by or against a corporation are
ABATED upon the expiration of the period allowed by law for the liquidation of its affairs. –Mambulao
Lumber Company vs. Philippine National Bank, 22 SCRA 359 (1968) . National Abaca & Other Fibers
Corporation vs. Pore, 2 SCRA 989 (1961).
2. See, however, Gelano and Reburiano and the following:
a. A corporation that has a pending action and which cannot be terminated within the three year
period after its dissolution is authorized under Sec. 122 of the Corporation Law to convey all its property to a
trustee to enable it to prosecute and defend suits by or against the corporation beyond the three year period. The
**trustee may commence a suit which can proceed to final judgment even beyond the three-year period.
Ecce Ancilla Domini! 127 of 160

The DIRECTORS MAY BE PERMITTED TO CONTINUE AS TRUSTEES to complete the

liquidation. Clemente vs. Court of Appeals, 242 SCRA 717 (1995).
b. The executed releases, waivers and quitclaims are **valid and binding upon the parties
notwithstanding the fact that these documents were SIGNED SIX YEARS AFTER the Corporation’s
revocation of the Certificate of Incorporation. These documents are thus proof that the employees had
received their claims from their employer-corporation in whose favor the release and quitclaim were issued.
The revocation of the corporation does not mean the termination of its liabilities to these employees.
Section 122 of the Corporation Code provides for a THREE-YEAR WINDING UP PERIOD for a
corporation whose charter is annulled by forfeiture or otherwise to continue as a body corporate for the purpose,
among others, of settling and closing its affairs. As such, **these liabilities are obligations of the dissolved
corporation and not of the corporation who contracted the services of the dissolved corporation. Vigilla
vs. Philippine College of Criminology, GR No. 200094, June 10, 2013
———————————————————————————————

K. Other Corporations

1. Close Corporations

a. Characteristics of a Close Corporation

1. The SH themselves can DIRECTLY MANAGE the corporation and perform functions of directors
WITHOUT THE NEED OF ELECTION:
a. when they manage, SH are LIABLE AS DIRECTORS;
b. there is NO NEED to CALL a meeting to ELECT directors;
c. the SH are LIABLE FOR TORT.
2. Despite the presence of the requisites (infra), the corporation shall not be deemed a close corporation if at
least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation
which is NOT a close corporation (within the meaning of this Code.)
3. Is a Family corporation a closed corporation? Not necessarily. SC held that ***what makes it a Closed
Corporation is whether it has ALL the characteristics of a closed corporation in its AOI. In the case of San Juan
Steel vs CA, there were 5 incorporators/subscribers and the husband and wife owned 98.7% of the corporation.
Does that make it a closed corporation? NO. Because it MUST have the characteristics of a Closed Corporation
to be considered as such (which are the three items in the next thought unit, infra)

CONCEPT OF A CLOSE CORPORATION; REQUIREMENTS**

1. The AOI must state that the NUMBER of SH shall not exceed 20 (statutory limit);
2. The AOI must contain RESTRICTION on the transfer (i.e., one or more specified restrictions on transfer)
of issued stocks, which must appear in the AOI, the By-laws and Certificate of Stock; (NB: restriction of
transfer must not be more onerous than granting the existing SH or corporation the option to purchase the
shares).
3. The stocks CANNOT BE LISTED in the stock exchange nor be publicly offered.
*NB: even if the shares belong to less than 20, the corporation is not a close corp if not all the requisites are
present; the three requisites must concur. [San Juan Structural & Steel vs. CA 1988].
[] A corporation does not become a close corporation just because a man and his wife own 98.86%
of its subscribed capital stock; So too, a narrow distribution of ownership does not, by itself, make a close
corporation. The **features of a close corporation under the Corporation Code must be embodied in the
AOI. San Juan Structural and Steel Fabricators, Inc. vs. CA, G.R. No. 129459, September 29, 1998

WHAT MAY NOT BE INCORPORATED AS A CLOSE CORPORATION

1. (natural resources) mining-oil corporations/companies;
2. (money) stock exchanges-banks-insurance companies;
3. (public concerns) public utilities-educational institutions- other corporations vested with public interest.
———————————————-

b. Validity of Restrictions on Transfer of Shares (Right of First Refusal); Requirements

1. They must appear in the AOI, the by-laws and certificate of stock;
2. They shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares
of the transferring stockholder with such reasonable terms, conditions or period stated therein.

EFFECT IF EXISTING SH FAIL TO EXERCISE OPTION TO PURCHASE

Ecce Ancilla Domini! 128 of 160

1. the transferring stockholder may SELL his shares to any THIRD person [If upon the expiration of said
period, the existing stockholders or the corporation fails to exercise the option to purchase]
——————————————

c. Issuance or Transfer of Stock in Breach of Qualifying Conditions

EFFECT OF ISSUANCE OR TRANSFER OF STOCK IN BREACH OF QUALIFYING

CONDITIONS [Sec 99]
1. The Corp may, at its option, REFUSE TO REGISTER the transfer of the stock in the name of the transferee
when he is CONCLUSIVELY PRESUMED to have notice:
a. That he is INELIGIBLE to be a holder of stock of the corporation, if the AOI and Stock Certificate
show the qualifications to be a holder; or
b. That the transfer of stock to him would cause the stock of the corporation to exceed that which is
(be held by more than the number of persons) permitted by its AOI; or
c. That the transfer of stock is in violation of a restriction on transfer of stock, as shown in the stock
certificate.
2. The Corp, however, may NOT refuse to register the transfer of shares in the following cases:
a. If the transfer was CONSENTED to by ALL stockholders;
b. If the Close Corp has amended its AOI so as to accommodate such transfer.
———————————————

d. When Board Meeting is Unnecessary or Improperly Held

ON THE VALIDITY OF ACTION BY THE BOD WITHOUT A MEETING [Sec 101]

*Unless the by-laws provide otherwise, any action by the directors of a close corporation WITHOUT a
MEETING shall nevertheless be DEEMED VALID if:
1. Before or after such action is taken, written consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied knowledge of the action and make no prompt objection
thereto in writing; or
3. The directors are accustomed to take informal action with the express or implied acquiescence of all the
stockholders; or
4. All the directors have express or implied knowledge of the action in question and none of them makes
prompt objection thereto in writing.
[] If a corporation is classified as a close corporation, a **board resolution authorizing the sale or
mortgage of the corporate property is not necessary to BIND the corporation for the action of its
president. At any rate, corporate action taken at a board meeting without proper call or notice in a close
corporation is DEEMED RATIFIED by the absent director unless the latter promptly files his written
objection with the secretary of the corporation after having knowledge of the meeting which, in this case, petitioner failed to do.
Dulay Enterprises, Inc. vs. CA (1993).

AS TO A DIRECTORS’ MEETING HELD WITHOUT PROPER CALL OR NOTICE

1. An action taken therein within the corporate powers is DEEMED RATIFIED by a director who failed to
attend, unless he promptly files his written objection with the secretary of the corporation after having
knowledge thereof.
————————————————

e. Pre-Emptive Right in a Close Corp [Sec 102]

1. It extends to
a. ALL stocks to be issued,
b. including REISSUANCE of treasury shares,
c. whether for money, property or personal services, or in payment of corporate debts, (compare this
with Section 39 for ordinary corporations, where these could be exceptions)
d. unless the articles of incorporation provide otherwise.
2. NB: Pre-emptive rights in a close corp covers even those that are excluded in Sec 39 CorpCode, to wit:
a. issued in compliance with laws acquiring stock offering or minimum stock ownership;
b. in exchange of property needed for corporate purposes upon 2/3 vote of the outstanding capital.
———————————————

f. Amendment of Articles of Incorporation

Ecce Ancilla Domini! 129 of 160

WHAT THE AOI OF A CLOSE CORP MAY PROVIDE

1. The classification of shares or rights and the qualifications for owning or holding the same and restrictions
on their transfers
2. The classification of directors into one or more classes, each of whom may be voted for and elected solely
by a particular class of stock;
3. A greater quorum or voting requirements in meetings of stockholders or directors than those provided in
this Code.
4. That the business of the corporation shall be managed by the stockholders of the corporation rather
than by a board of directors.
5. That all or some specified officers or employees shall be elected or appointed by the stockholders,
instead of by the board of directors.

ON AMENDMENT OF AOI IN A CLOSE CORP

1. Any amendment to the AOI which seeks
a. to delete or remove any provision required for Close Corp
b. or to reduce a quorum or voting requirement
2. must be approved by
a. the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or
without voting rights,
b. or of such greater proportion of shares as may be specifically provided in the articles of
incorporation for amending, deleting or removing any of the aforesaid provisions,
3. at a meeting duly called for the purpose.
———————————————

g. Deadlocks in Management
1. In case of deadlocks (irreconcilable disputes among the directors or shareholders), the SEC may be asked to
intervene, on a WRITTEN PETITION by any SH.
2. SEC shall have the POWER TO ARBITRATE, including the power to appoint a PROVISIONAL
DIRECTOR (infra). In the exercise of such power, the Commissioner may make an ORDER:
a. cancelling or altering ANY provision contained in the articles of incorporation, by-laws, or any
stockholder’s agreement;
b. cancelling, altering or enjoining ANY resolution or act of the corporation or its board of directors,
stockholders, or officers;
c. directing or prohibiting ANY act of the corporation or its board of directors, stockholders, officers,
or other persons party to the action;
d. requiring the purchase at their fair value of shares of any stockholder, either by the corporation
regardless of the availability of unrestricted retained earnings in its books, or by the other stockholders;
e. appointing a provisional director; (see next item)
f. dissolving the corporation; or
g. granting such other relief as the circumstances may warrant.

APPOINTMENT OF A PROVISIONAL DIRECTOR

1. Who is he?
a. an impartial person
b. neither a stockholder nor a creditor of the corporation or of any subsidiary or affiliate of the
corporation,
c. he is not a receiver of the corporation and does not have the title and powers of a custodian or
receiver.
2. Rights of powers:
a. all the rights and powers of a duly elected director of the corporation,
b. including the right to notice of and to vote at meetings of directors,
c. until such time as he shall be removed by order of the Commission or by all the stockholders.
3. Compensation: his compensation shall be determined
a. by agreement between him and the corporation subject to approval of the Commission,
b. (or SEC) may fix his compensation in the absence of agreement or in the event of disagreement between the
provisional director and the corporation.

EFFECT IF THE BUSINESS OF A CLOSE CORP IS MANAGED BY THE STOCKHOLDERS

1. No meeting of stockholders need be called to elect directors;
Ecce Ancilla Domini! 130 of 160

2. The stockholders of the corporation shall be deemed to be directors (for the purpose of applying the
provisions of this Code, unless the context clearly requires otherwise)
3. The stockholders of the corporation shall be liable as directors.

ON AGREEMENTS BY SH OF A CLOSE CORP [Sec 100]

*Any WRITTEN agreement by the SH of a close corp even if not embodied in the AOI shall be VALID
AMONG THE PARTIES, such as:
1. Agreements (by and among stockholders) executed BEFORE the formation and organization of a close
corporation, if such be their intent, to the extent that such agreements are not inconsistent with AOI
2. An agreement between two or more stockholders on how they may exercise their VOTING RIGHTS;
3. Agreements whose effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders relating to the conduct of the business and affairs of the
corporation as to restrict or interfere with the discretion or powers of the board of directors. The parties thereto
are liable as directors.

ON LIABILITY OF SH FOR CORPORATE TORTS

1. SH who are actively engaged in the management or operation of the business and affairs of a close
corporation, shall be held to strict FIDUCIARY duties to each other and among themselves.
2. Said stockholders shall be PERSONALLY LIABLE for corporate torts unless the corporation has obtained
reasonably adequate liability insurance.
[] To the extent that the stockholders are actively engaged in the management or operation of the
business and affairs of a close corporation, the stockholders shall be held to strict fiduciary duties to each
other and among themselves. Said stockholders shall be PERSONALLY LIABLE for corporate torts **unless
the corporation has obtained reasonably adequate liability insurance. Sergio F. Naguiat vs. NLRC, G.R. No.
116123, 13 March 1997

ON SH’s RIGHT TO WITHDRAW FROM A CLOSE CORP [Sec 105]

1. Any stockholder of a close corporation may, FOR ANY REASON, compel the said corporation to
purchase his shares at their fair value, which shall not be less than their par or issued value,
2. (Conditions): Provided that the corporation has
a. sufficient assets in its books to cover its debts and liabilities
b. exclusive of capital stock:

ON SH’S RIGHT TO COMPEL DISSOLUTION OF CLOSE CORP

1. Any stockholder of a close corporation may, by written petition to the Securities and Exchange Commission,
compel the dissolution of such corporation
a. whenever any of acts of the directors, officers or those in control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder,
b. or whenever corporate assets are being misapplied or wasted.

LIABILITY IN CLOSE CORPORATIONS

1. To the extent that the stockholders are actively engaged in the management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to each other and among themselves. Said
stockholders shall be personally liable for corporate torts unless the corporation has obtained reasonably
adequate liability insurance. Naguiat, doing business under the name and style Sergio F. Naguiat Ent., Inc., &
Clark Field Taxi, Inc.,vs. NLRC March 13, 1997.
2. Where the sale of the apartment was executed by the controlling stock-holder of a corporation who is
also its president, treasurer and general manager and the corporation is classified as a close corporation,
the separate juridical personality of the corporation may be disregarded and the validity of the sale upheld
despite the lack of board resolution authorizing the sale of the subject property. Dulay Enterprises vs. CA
(1993)
———————————————————————————————

2. Non-Stock Corporations

a. Definition

CONCEPT OF NON-STOCK CORPORATION [NSC; Sec 87]

1. One where no part of its income is distributable as dividends to its members, trustees or officers;
Ecce Ancilla Domini! 131 of 160

2. Any profit it may obtain as an incident to its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which it was organized
*Can a NSC offset the UNUSED contributions of members against the BALANCE of receivables from the
same members? NO, because this would amount to distribution of the capital of the corporation.
Members of NSC are not entitled to distribution of capital. They are ONLY entitled to distribution of
capital upon dissolution when it is provided in the AOI or By-laws [Sec Opinion 27 Nov 1985].

CAN IT HAVE CAPITAL STOCK?

1. Nowhere in Article 87 does it state that a NSC does not have a capital stock.
2. Thus, it is possible for a NSC to have capital stock and will be considered as such for as long as it is not
authorized to distribute dividends to its members, trustees or officers [CIR vs. The Club Filipino, Inc. de Cebu,
31 May 1962]. For a stock corporation to exist, two requisites must be complied with, to wit:
(a) a capital stock divided into shares and
(b) an authority to distribute to the holders of such shares, dividends or allotments of the surplus profits
on the basis of the shares held (sec. 3, Act No. 1459).
3. In Club Filipino de Cebu: nowhere in its articles of incorporation or by-laws could be found an authority for
the distribution of its dividends or surplus profits. Strictly speaking, it cannot, therefore, be considered a stock
corporation, within the contemplation of the corporation law.
a. It is conceded that the Club derived profit from the operation of its bar and restaurant, but such
fact does not necessarily convert it into a profit-making enterprise. The bar and restaurant are necessary
adjuncts of the Club to foster its purposes and the profits derived therefrom are necessarily incidental to
the primary object of developing and cultivating sports for the healthful recreation and entertainment of the
stockholders and members. That a Club makes some profit, does not make it a profit-making Club. As has
been remarked a club should always strive, whenever possible, to have surplus (Jesus Sacred Heart College v.
Collector of Int. Rev., G.R. No. L-6807, May 24, 1954; Collector of Int. Rev. v. Sinco Educational Corp., G.R.
No. L-9276, Oct. 23, 1956).
b. The fact that the capital stock of the Club is divided into shares, does not detract from the
finding that it is not engaged in the business of operator of bar and restaurant. What is determinative of
whether or not the Club is engaged in such business is its object or purpose, as stated in its articles and by-laws.
It is a familiar rule that the actual purpose is not controlled by the corporate form or by the commercial
aspect of the business prosecuted, but may be shown by extrinsic evidence, including the by-laws and
the method of operation. From the extrinsic evidence adduced, the Tax Court concluded that the Club is not
engaged in the business as a barkeeper and restaurateur.
c. Moreover, see two requisites for a stock corporation to exist (supra).
d. A tax is a burden, and, as such, it should not be deemed imposed upon fraternal, civic, non-profit,
nonstock organizations, unless the intent to the contrary is manifest and patent" (Collector v. BPOE Elks Club,
et al., supra), which is not the case in the present appeal. Having arrived at the conclusion that respondent Club is
not engaged in the business as an operator of a bar and restaurant, and therefore, not liable for fixed and
percentage taxes, it follows that it is not liable for any penalty, much less of a compromise penalty.
——————————————

b. Purposes [Sec 88]

1. CRE (the traditional NSC): charitable-religious-educational
2. (PCLS: something to do with work & culture) professional-cultural-literary-scientific
3. (FSS: more on socio-civic matters) fraternal-social-civic service
4. (TIA) similar purposes like trade-industry-agricultural and like chambers
5. or any combination thereof
————————————

c. Treatment of Profits
1. And so, what is not allowed in NSC? It cannot be organized for profit or organized for partisan political
activity or political purposes. That’s why it’s NONSTOCK, NONPROFIT.
2. Does that mean the non-stock corporation cannot earn profit? NO. As long as the profits are not distributed
to the members, and are used in the furtherance of the purpose of the corporation. EG: UST is a non-stock,
non-profit corporation, and yet it is in the TOP 500 corporations in terms of profit.
———————————

d. Distribution of Assets upon Dissolution

Ecce Ancilla Domini! 132 of 160

ON THE ORDER OF APPLICATION AND DISTRIBUTION OF ASSETS UPON DISSOLUTION

[Secs 94 & 95]
1. Liabilities and obligations: all its creditors shall be paid.
2. Assets held subject to return on dissolution shall be delivered back to their givers;
3. Assets held subject to LIMITATIONS permitting their use only for charitable, religious, benevolent,
educational or similar purposes, shall be transferred or conveyed to one or more corporations having
similar purposes;
4. Assets provided for distribution to members in accordance with their DISTRIBUTIVE RIGHTS provided in
the AOI or the by-laws;
5. Assets to be distributed in accordance with a MASTER PLAN of distribution adopted by the majority vote of
the BOT and approved by at least 2/3 of the voting members.
———————————————

ON THE RIGHT TO VOTE OF MEMBERS

1. Each member is entitled to one vote except in the following
a. if the right is limited, broadened or denied in the AOI or by-laws [Sec 89]; thus the AOI or By-laws
may provide for the desired voting rights of members, including the number of votes [SEC Opinion, 10 Oct 1989].
b. In the election of trustees, members may cast as many votes as there are trustees to be elected,
but they may not cast more than one vote for one candidate, unless otherwise provided in the AOI or by-laws [Sec 24]
[] Section 89 of the Corporation Code pertaining to non-stock corporations provides that "(t)he right
of the members of ANY class or classes (of a non-stock corporation) to vote may be LIMITED,
BROADENED OR DENIED to the extent specified in the AOI or the BY-LAWS." This is AN EXCEPTION TO
SECTION 6 of the same code where it is provided that "no share may be deprived of voting rights except
those classified and issued as 'PREFERRED' or 'REDEEMABLE' shares, unless otherwise provided in this
Code." The **stipulation in the By-Laws providing for the election of the Board of Directors by districts is
a FORM OF LIMITATION ON THE VOTING RIGHTS of the members of a non-stock corporation as recognized
under the aforesaid Section 89. Section 24, which requires the presence of a majority of the members entitled to
vote in the election of the board of directors, applies only when the directors are elected by the members at large,
such as is always the case in stock corporations by virtue of Section 6. Ao-As vs. CA 491 SCRA 339 (2006)
2. Members may vote:
a. in person;
b. by proxy; or
c. by mail, if authorized by the by-laws with the approval of, and under such conditions which may be prescribed by the
SEC.

ON THE RIGHT TO TRANSFER MEMBERSHIP [TRANSFERABILITY OF MEMBERSHIP]

1. **GR: a member cannot transfer his membership and the rights arising therefrom. Why? Membership and all
rights arising therefrom are PERSONAL and NON-TRANSFERABLE
2. XPN: unless the AOI or the by-laws provide for their transferability [Sec 90].

ON TERMINATION OF MEMBERSHIP [Sec 91]

**Note that the POWER TO ADMIT MEMBERS pertains to the BOT in the absence of any contrary provision in the
AOI and By-laws; consistently, the BOT also has the POWER TO TERMINATE MEMBERSHIP.
1. Standards: a NSC is authorized to terminate the membership in accordance with the standards fixed in the
(manner and for the causes provided in the) AOI or the by-laws [Sec 91];
2. Termination of membership shall have the effect of extinguishing all rights of a member in the
corporation or in its property, unless otherwise provided in the AOI or the by-laws.
**A member of a country club who failed to pay his monthly dues on time can be suspended.
Litonjua vs. Court of Appeals, 286 SCRA 136 (1998)
3. When property rights are involved, e.g., membership in golf clubs where the purchase of a share is a
condition SINE QUA NON [Valley Golf vs Caram 16 Apr 2009]: when loss of property rights is involved, the
manner of deprivation of such property right should also be in accordance with the provisions of NCC
including Articles 19, 20 and 21 on Human Relations [ibid];
4. Lien: **non-payment of dues may be a ground for termination or suspension of membership. The AOI
or By-laws may provide that UNPAID DUES shall CONSTITUTE A LIEN on the member’s share. However,
Sec 68 of CorpCode does not apply if the membership shares are sold under the provisions that provide for the
constitution of lien, i.e., the shares may be sold by virtue of a lien. In such sale, the member had already
fully paid for the share and no longer had any outstanding obligation to deprive him of full title to his share
[Calatagan(?) Golf vs. Caram]
Ecce Ancilla Domini! 133 of 160

[] Termination of membership due to non-payment of dues and assessments may be allowed in a

non-stock non profit corporation if so provided in the articles of incorporation or the by-laws. However, when the
loss of membership in a non-stock corporation also entails the loss of property rights, the manner of
deprivation of such property right should not only be in accordance with the Corporation Code but also in accordance with
substantial justice. The Corporation acted in clear bad faith when it sent the final notice to the stockholder
under the pretense they believed him to be still alive, when in fact they had very well known that he had already died.
**By PRETENDING to assume that stockholder was then still alive, the Corporation would have been
able to capitalize on his previous unresponsiveness to their notices and PROCEED IN FEIGNED GOOD
FAITH with the sale of the Golf Share for non-payment of dues and assessments. The arrangement provided for in
the by-laws of the Corporation whereby a lien is constituted on the membership share to answer for subsequent
obligations to the corporation finds applicable parallels under the Civil Code. **Membership shares are
considered as movable or personal property, and they can be constituted as security to secure a principal
obligation, such as the dues and fees. There are at least TWO CONTRACTUAL MODES under the Civil
Code by which personal property can be used to secure a principal obligation.
a. The first is through a CONTRACT OF PLEDGE,
b. while the second is through a CHATTEL MORTGAGE.
If the stockholder had NOT SIGNED any document that manifests his agreement to constitute
his Golf Share as security in favor of the Corporation to answer for his obligations to the club and there is no
document that it is substantially compliant with the form of chattel mortgages, the BY-LAWS COULD
NOT SUFFICE for that purpose since it is NOT DESIGNED AS A BILATERAL CONTRACT between the
stockholder and the Corporation or a vehicle by which the stockholder expressed his consent to constitute
his Share as security for his account with the Corporation. Valley Golf and Country Club, Inc., vs. Vda. De Caram
585 SCRA 218 (2009)
[] The arrangement provided for in the by-laws of the Corporation whereby a lien is constituted on
the membership share to answer for dues, assessments and subsequent obligations to the corporation cannot
be upheld unless coupled by a corresponding pledge or chattel mortgage agreement. ibid.
5. Notice: for the termination of membership to be valid, there should be REASONABLE NOTICE to the
member concerned and he must be given a FAIR OPPORTUNITY TO BE HEARD in his defense.
6. EFFECT OF DEATH: deceased members who are dropped from the membership roster in the manner and
for the cause provided for in the By-laws (or AOI) are NOT TO BE COUNTED in determining the
REQUISITE VOTE in corporate matters or the requisite quorum for the annual members’ meeting [Tan vs.
Sycip 17 Aug 2006].

ON THE PLACE OF MEETINGS

1. Held in the city or municipality where the principal office is located [Sec 51].
2. The by-laws, however, may provide that they be held outside the place where the principal office of the
corporation is located, but it **must be within the Philippines and proper notice must be sent to all members
indicating the date, time and place of the meeting [Sec 93].

ON CONVERSION OF OR INTO A NSC**

1. A NSC CANNOT BE CONVERTED into a Stock Corporation through MERE AMENDMENT of
its AOI. This would violate Sec 87 which PROHIBITS DISTRIBUTION of income as dividends to members.
Giving the members shares is tantamount to distribution of its assets or income [SEC Opinion, 20 Mar
1995].
2. A NSC CAN BE CONVERTED into a Stock Corp ONLY IF the members DISSOLVE IT FIRST and
then organize a Stock Corp. However, there is a resulting NEW CORPORATION [Sec Opinion, 13 May 1992].
3. **A Stock Corp may be converted into a NSC by MERE AMENDMENT provided all the requirements
are complied with. Its rights and liabilities remain.

ON TRUSTEES [Sec 92]

1. Number of Trustees: it may be more than 15 in number as may be fixed in the AOI or by-laws; but not less
than 5.
2. Qualifications of trustees;
a. They must be MEMBERS of the corporation [Sec 92];
b. Majority of them must be residents of PH [Sec 23].
3. Term of office of trustees: unless otherwise provided in the AOI or by-laws, the term of office shall be as
follows:
a. Three years;
Ecce Ancilla Domini! 134 of 160

b. Trustees first elected shall so classify themselves that the term of office of 1/2 of their number shall
expire every year. Trustees thereafter elected to fill vacancies shall serve only for the unexpired term of the
person they replace.

ON ELECTION OF OFFICERS
1. They may be elected directly by the members and not the BOT, unless the AOI or the by-laws provide
otherwise [Sec 92].
———————————————————————————————

3. Religious Corporations - Exclude

TITLE XIII: SPECIAL CORPORATIONS


CHAPTER I - EDUCATIONAL CORPORATIONS
CHAPTER II RELIGIOUS CORPORATIONS

ON EDUCATIONAL CORPORATIONS
1. Applicable laws
a. Special laws governing them;
b. General provisions of the CorpCode.
2. INDORSEMENT from the Department of Education (DepEd), Commission on Higher Education (CHEd)
or Technical Skills Development Authority (TESDA): the SEC shall NOT accept or approve the AOI or by-laws
of any educational institution without the favourable recommendation of any of these three.

ON THEIR BOT [Sec 108]

1. Number and Term of Office
a. STOCK educational corp: governed by the provisions on STOCK corp;
b. NON-STOCK educational corp:
i. not less than 5, nor more than 15, but the number should be in multiples of 5, i.e., 5, 10 or 15.
ii. unless provided in the AOI or by-laws, the trustees shall so classify themselves that the term
of office of 1/5 of their number shall expire every year; hence, the term of office is 5 years, except for those
that are first elected, which shall be: 5, 4, 3, 2 and 1 years. Those elected thereafter to fill a vacancy arising from
expiration of term shall serve for 5 years. In other cases of vacancy, the one elected shall serve only the
unexpired term of his predecessor.
[] The second paragraph of Section 108 of the Corporation Code, although setting the TERM of the
members of the Board of Trustees at FIVE YEARS, contains a proviso expressly subjecting the duration to
what is otherwise provided in the AOI or by-laws of the educational corporation. **In AUP’s case, its amended
By-Laws provided that members of the Board of Trustees were to serve a term of office of only two years; and the officers,
who included the President, were to be elected from among the members of the Board of Trustees during their
organizational meeting, which was held during the election of the Board of Trustees every two years. Naturally,
the officers, including the President, were to exercise the powers vested by Section 2 of the amended By-Laws
for a term of only two years, not five years. Barayuga vs. Adventist University of the Philippines, G.R. No.
168008, August 17, 2011
2. Quorum: MAJORITY of the trustees.
————————————————

CHAPTER II: RELIGIOUS CORPORATIONS

KINDS OF RELIGIOUS CORPORATIONS [Sec 109]

1. Corporation Sole [Sec 110];
2. Religious Society [Sec 116]
[] In a religious corporation, the Court upheld the expulsion of church members despite the absence of any
provision on prior notice in the by-laws, stating that the members had “WAIVED such notice by adhering to
those by-laws[,] became members of the church voluntarily[,] entered into its covenant and subscribed to
its rules [and by] doing so, they are **BOUND BY THEIR CONSENT. However, a distinction should be
made between
Ecce Ancilla Domini! 135 of 160

RELIGIOUS CORPORATION NON-STOCK CORPORATION

membership in a religious corporation does membership in a non-stock corporation
not involve the purchase of where the purchase of an ownership
ownership shares share is a conditio sine qua non
[] A member of a religious corporation who commits any of the causes for expulsion under its by-laws may
be expelled by the board of directors, through a resolution, EVEN WITHOUT giving that erring
member any NOTICE prior to his expulsion, if so provided for in the by-laws. It may **sound unusual
and objectionable as there is no requirement of prior notice but that is how PECULIAR the nature of a
religious corporation is vis-à-vis an ordinary corporation organized for profit. The BASIS of the
RELATIONSHIP between a religious corporation and its members is the latter’s ADHERENCE to a common
religious or spiritual belief. ONCE THIS BASIS CEASES, MEMBERSHIP IN THE CORPORATION ALSO CEASES.
Long vs. Basa, 366 SCRA 113 (2001)

ON CORPORATION SOLE [Sec 110]

*this is a special form of corporation usually associated with the clergy and consists of one person only and his
successors, who are INCORPORATED BY LAW to give some legal capacities and advantages.
1. Concept: it is one that is
a. incorporated by one person
b. and consists of one member, such as the chief archbishop, bishop, priest, minister or rabbi, or other
presiding officer.
2. Purpose: to administer and manage as TRUSTEE the affairs, property and temporalities of any religious
denomination, sect or church.
3. Submission of AOI: in order to become a corporation sole, the presiding elder must file with the SEC articles
of incorporation setting forth, among other provisions:
a. that he is the LEADER of his denomination;
b. that the RULES of the religious denomination do NOT PROHIBIT his becoming a corporation sole;
c. that he is CHARGED with ADMINISTRATION of the temporalities of his denomination;
d. The FILLING of any VACANCY in the office of the presiding elder;
e. The principal OFFICE of the corporation [Sec 111].
4. **EFFECT of filing of the AOI: from and after the filing of the AOI, accompanied with a copy of
his appointment, the chief archbishop, bishop, priest, minister, rabbi or other presiding elder shall
BECOME A CORPORATION SOLE [Sec. 112]
5. Nationality: it does not have any nationality, but for purposes of applying our nationalization laws, nationality
is determined NOT BY NATIONALITY OF ITS HEAD, but by the nationality of its members constituting the
sect in PH. Thus, the Roman Catholic Church can acquire land in PH even if it is headed by the Pope [Roman
Catholic Apostolic Church vs. Land Registration Commissioner 1957]; SEC Opinion 8 Aug 1994: to can acquire
land if its members constitute at least 60% Filipinos.
6. Effect of separation of members: those who left and who formed a SEPARATE religious group are NOT
ENTITLED to any right over the properties of their former sect [Canete vs CA 1989];
7. Conversion to CORPORATION AGGREGATE: it may be converted into a corporation aggregate
(religious corporation) through the amendment of its AOI. Concurrence of 2/3 of the members of the
corporation sole (and not merely by the head of the church or trustee) is necessary for the amendment of the
AOI [IEMELIF vs. Bishop Lazaro 6 July 2010];
8. DISSOLUTION: by filing a verified DECLARATION OF DISSOLUTION stating:
a. the name of the corporation;
b. REASON for the dissolution;
c. AUTHORIZATION for the dissolution by the particular religious denomination, sect or church;
d. names & addresses of the persons who will supervise the dissolution and winding up.

ON RELIGIOUS SOCIETIES [Sec 116]

*these are non-stock corporations; the group should get approval of 2/3 of its members
1. They are incorporated by an AGGREGATE of persons consisting of at least 2/3 of the membership of a
a. religious order;
b. synod;
c. district organization of any religious denomination.
2. Purpose: to administer or manage its
a. temporalities,
Ecce Ancilla Domini! 136 of 160

b. affairs &
c. property
3. It must filed a VERIFIED articles of incorporation with the SEC [Sec 16]
4. The By-laws of the religious corporation may provide that the member may be EXPELLED or REMOVED
WITHOUT PRIOR NOTICE. This is justified under Sec 91 of the CorpCode which states that the termination
of membership may be in the manner provided in the AOI or By-laws. If no notice is provided in the By-laws,
the members are bound because they consented thereto when they became members. Consequently, where any
member of a religious corporation is expelled from membership for espousing doctrines and teachings contrary
to that of his church, such action is CONCLUSIVE in Court [Alfredo Long vs. Lydia Basa 29 Sep 2001].
———————————————————————————————

4. Foreign Corporations

a. Bases of Authority over Foreign Corporations

i. Consent
ii. Doctrine of “Doing Business” (related to definition under the Foreign Investments Act, R.A.
No. 7042)
b. Necessity of a License to Do Business
i. Requisites for Issuance of a License
ii. Resident Agent

ON FOREIGN CORPORATIONS**
1. Concept: it is a corporation [Sec 123] (two features)
a. formed, organized or existing under any laws other than those of the Philippines, i.e., under
foreign law (FOREIGN LAW element) and
***What if ABC corporation is organized in the USA, composed fully of Filipino citizens, what
is it? It’s a foreign corporation because it is formed, organized, existing under foreign laws. But is it a Philippine
National? Yes. A ****foreign corporation composed entirely of Pinoys is a Philippine National if it is
registered as “doing business” in the Philippines. Can ABC corporation invest in the equity of a Public
Utility company? To determine nationality, the ****test is not the place of incorporation but the
NATIONALITY of the CONTROLLING STOCKHOLDERS, in case of investment in nationalized activities.
The definition of a Philippine National under the Foreign Investment Act, in case of a foreign corporation, is
that it is composed entirely of Filipinos, and registered to “do business” in the Philippines. Thus, it can invest in
public utilities.
b. whose laws allow Filipino citizens and corporations to do business in its own country or state
(element of RECIPROCITY)
***What if there is no element of Reciprocity? Is it still a foreign corporation? Yes. As long as it
is formed, organized, existing under a foreign law. BUT, if the foreign corporation’s laws do not allow Pinoys to
do business in its own country, it cannot be given a license to do business in the Philippines. However, it
does not detract from the fact that it is still a foreign corporation because the test to determine is its PLACE OF
INCORPORATION.
[] vs. Domestic Corporation: One formed, organized, and existing under Philippine laws.
2. **Prerequisite to transact business in PH: the foreign corporate must obtain
a. a BUSINESS LICENSE, and
b. a CERTIFICATE OF AUTHORITY from the appropriate government agency [Sec 123].
3. Requisites to obtain license to do business:
a. Foreign corp should file a VERIFIED APPLICATION containing the following:
i. designated RESIDENT AGENT (who will receive summons & notices for the corp); a
Special Power of Attorney should also submitted for such purpose;
ii. an AGREEMENT that if it ceases to transact business or if there is no more resident agent,
summons shall be served through the SEC: and
ii. OATH OF RECIPROCITY: certificate under oath of the authorized official of the foreign
corp’s country that allows Filipino citizens and corporations to do business in said country.
b. Within 60 days from issuance of license, the foreign corp should DEPOSIT at least Php100K (in
cash, property or bond) for the benefit of creditors subject to further deposit every six (6) months.
4. Purpose of the license: to subject the foreign corporation to the JURISDICTION OF THE COURTS.
Otherwise, a foreign corp illegally doing business in PH, because of its refusal/neglect to obtain the required
license and authority to do business, may successfully, though unfairly, PLEAD such neglect or illegal act so as to
avoid service and thereby IMPUGN the jurisdiction of the local courts [Avon Insurance vs. CA, 278 SCRA 312].
Ecce Ancilla Domini! 137 of 160

5. Consequence of doing business without license: it shall NOT be permitted to maintain or intervene in ANY
ACTION, BUT IT MAY BE SUED or proceeded against before PH courts or administrative tribunals [cf. Sec
133].
6. Applicable law to foreign corp doing business in PH: it shall be bound by all laws, rules and regulations
applicable to DOMESTIC corp, except those in relation to the following:
a. Creation, formation or organization or dissolution of corporations;
b. The fixing of relations, liabilities, responsibilities or duties of SH, members or officers of
corporations to each other or to the corporation [Sec 129].
7. As to the determination of what constitutes doing business, do not be confused: There is no general rule or
governing principle laid down as to what constitutes “doing” or “engaging in” or “transacting” business in the Philippines.
Each case must be judged in the light its peculiar substances. Thus, it has often been held that a single act
or transaction may be considered as “doing business” when a corporation performs acts for which it was created or
exercises some of the functions for which it was organized. The amount or volume of the business is of no moment, for even a
singular act cannot be merely incidental or casual if it indicates the foreign corporation’s intention to do business.
**Participating in the bidding process constitutes “doing business” because it shows the foreign corporation’s
intention to engage in business here. The bidding for the concession contract is but an exercise of the corporation’s reason for creation
or existence. Hutchison Ports Philippines Limited vs. Subic Bay Metropolitan Authority, 339 SCRA 34 (2000)

WHAT “DOING BUSINESS” CONSTITUTE**

1. Apply the TWIN-CHARACTERIZATION TEST [Mentholatum Co vs. Mangaliwan, 72 Phil 524}
a. CONTINUITY TEST: doing business implies a CONTINUITY OF COMMERCIAL
DEALINGS and arrangements, and contemplates to some extent the performance of acts or works or the
exercise of some functions normally incident to and in progressive prosecution of, the PURPOSE & OBJECT
of its organization;
[] A foreign corporation performing acts **pursuant to its primary purpose and functions as
regional/area headquarters for its home office is clearly doing business in the country. It can therefore sue
an employee for non- payment of loan. George Grotjahn GBBH & Co. vs. Isnani, 235 SCRA 216 (1994); A
foreign corporation engaged in the manufacture of cars (BMW) which appointed a Philippine distributor
who merely transmitted to the foreign corporation its orders from buyers, received the payment from the
buyers directly, and shipped the cars directly to the buyers is doing business in the Philippines. Hahn vs. Court
of Appeals, 266 SCRA 537 (1997)
[] Where a foreign corporation engaged in the manufacture and sale of electronic products
**APPOINTED a local electronics firm to be its lOCAL TECHNICAL REPRESENTATIVE and to CREATE A
SERVICE CENTER for the former’s products sold locally and the latter was obliged to provide the foreign
corporation with monthly report detailing the failure and repair of the products and to requisition monthly
the materials and components needed to replace stock consumed, the foreign corporation was deemed to be
doing business in the Philippines. The arrangements with the local entity indicate the foreign corporation’s
purpose to bring about the situation among its customers and the general public that they are dealing with the
foreign corporation. The provisions of the agreement are also highly restrictive in nature thus reducing the
local firm to a mere extension or instrument of the foreign corporation. Nevertheless, the local firm is
estopped to challenge the personality of the foreign corporation after having acknowledged the same by
entering into a contract with it. Thus, the foreign corporation may file an action to enjoin the local firm
from selling or attempting to sell products and equipments which have been copied or manufactured in like
manner similar to the products of the foreign corporation. Communication Materials and Design, Inc., vs. Court
of Appeals, 260 SCRA 673. (1996)
[] A foreign corporation which owns the copyright to foreign films and exclusive distribution
rights in the Philippines and appointed an attorney-in-fact to file criminal cases is not doing business in the
Philippines, if the contracts are consummated abroad, as the hiring of the attorney-in-fact is merely for
the protection of its property rights. **Doing business implies a CONTINUITY of commercial dealings
and arrangement, and contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to or in progressive prosecution of the purpose of the and subject of its organization. Columbia
Pictures, Inc vs. Court of Appeals, 261 SCRA 144 (1996)
b. SUBSTANCE TEST: if the foreign corp is CONTINUING the BODY or SUBSTANCE of the
enterprise of business for which it was organized.
*No general rule or governing principles can be laid down as to what constitutes "doing" or "engaging
in" or "transacting" business. Each case must be judged in the light of its own peculiar environmental
circumstances. The true tests, however, seem to be whether the foreign corporation is continuing the body
or substance of the business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another [Columbia Pictures vs. CA 1994]… The true test, however,
Ecce Ancilla Domini! 138 of 160

seems to be whether the foreign corporation is continuing the body or substance of the business or enterprise for
which it was organized [Avon Insurance vs CA 1997].
- a foreign corporation is "doing," "transacting," "engaging in," or "carrying on" business in the State
when, and ordinarily only when, it has entered the State by its agents and is there engaged in carrying on and
transacting through them some substantial part of its ordinary or customary business, usually
continuous in the sense that it may be distinguished from merely casual, sporadic, or occasional
transactions and isolated acts [ibid].
2. ON SINGLE or ISOLATED TRANSACTIONS: It depends:
a. it is is merely an INCIDENTAL or CASUAL transaction, no, because it lacks the element of
continuity;
b. if it is not merely incidental or casual but indicates its INTENTION to do other business in PH,
such single act/transaction constitutes doing business in PH.
[] When a single act or transaction of a foreign corporation is **not merely incidental or casual but is
of such character as distinctly to indicate a purpose on the part of the foreign corporation to do other
business in the state, such act will be considered as considered as constituting doing business. Thus, a
foreign corporation engaged in the manufacture of uniforms and which purchased thousands of soccer jerseys from the
Philippines is doing business in the Philippines, since the purchase was within its ordinary course of business.
Litton Mill, Inc., vs. Court of Appeals, 256 SCRA 696 (1996)
3. The CONTRACT TEST of doing business in PH:
a. an ESSENTIAL condition of “doing business” in PH is the ACTUAL PERFORMANCE of
SPECIFIC COMMERCIAL ACTS within the territory of PH for the plain reason that PH has no jurisdiction
over commercial acts performed in foreign territories [B. Van Zuiden vs. GTVL Manufacturing, 28 May 2007];
b. Activities within PH jurisdiction that do NOT create earnings or PROFITS to the foreign corp do
NOT constitute doing business in PH [Natl Sugar Trading Corp vs CA 1995; Cargill Inc vs. Intra Strata
Assurance 15 Mar 2010];
c. A foreign corp that MERELY IMPORTS goods from a PH exporter without opening an office or
appointing an agent in PH is NOT doing business in PH [Cargill, supra];
d. A foreign country that exports products to PH without doing any specific commercial act is
NOT doing business in PH [B Van Zuiden supra; Pacific Veg Oil vs. Singsong Apr 1955]
e. The appointment of a distributor in PH is NOT SUFFICIENT to constitute doing business in
PH, unless it is under the FULL CONTROL of the foreign corp. On the other hand, if the distributor is an
INDEPENDENT entity which buys and distributes products, other than those of the foreign corp, for ITS
OWN NAME and ITS OWN ACCOUNT, it cannot be considered doing business in PH [Steel Case Inc vs.
Design International 18 Apr 2012].
4. ****Doing business under RA 7042 [Foreign Investment Act of 1991] and its IRR:
a. Soliciting ORDERS;
*Maintaining a branch: A foreign corporation which solicited orders, purchase or service
contracts **through its Manila branch are doing business in the Philippines and may be sued in the
Philippines. Marubeni Nederland B.V. vs. Tensuan, 190 SCRA 105 (1990)
b. (soliciting) SERVICE contracts;
c. Opening OFFICES, whether called liaison officers or branches;
d. Appointing representatives or distributors domiciled in PH, or who in any calendar year stay in PH
for a period/s TOTALING 180 days or more;
e. Participating in the management, supervision or control of any domestic business, firm or entity or
corporations in PH; or
f. Any other act or acts that IMPLY CONTINUITY of commercial dealings or arrangements, and
contemplate to some extent the performance of acts or works or the exercise of some functions normally
incident to, and in progressive prosecution of, commercial gain, or of the PURPOSE and OBJECT of the
business organization.
5. **When is a foreign corporation deemed to be “doing business in the Philippines?” (1998) A: A foreign
corporation is deemed to “deemed business in the Philippines” if it is continuing the body or substance of
the business or enterprise for which it was organized. It is the intention of an entity to continue the body of its
business in the country. The grant and extension of 90-day credit terms of a foreign corporation to a domestic
corporation for every purchase shows an intention to continue transacting with the latter.
[] A foreign corporation **cannot unilaterally declare that it is not doing business in the
Philippines when in fact it has installed different products in several Philippine corporations, registered its
tradename with the Philippine Patents Office and has made it known that it has a designated distributor in
the Philippines. Wang Laboratories, Inc., vs. Mendoza, 156 SCRA 44 (1987)
6. **What is the legal test for determining if an unlicensed foreign corporation is doing business in the
Philippines? (2002) A: The test is whether or not the unlicensed foreign corporation has performed an act or
Ecce Ancilla Domini! 139 of 160

acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the business corporation.
8. Lack of license cured by subsequent registration: A contract entered into by a foreign corporation not
licensed to do business in the Philippines is not void even as against the erring foreign corporation. **The
lack of capacity at the time of the execution of the contracts was CURED by thE SUBSEQUENT
REGISTRATION. The Home Insurance Company vs.Eastern Shipping Lines, G.R. No. L-34382 July 20, 1983

WHAT “DOING BUSINESS” DOES NOT INCLUDE:**

*The first three (3) come from Sec 3d of FIA 1991:
1. Mere investment as a shareholder by a foreign entity in domestic corporations duly-registered to do business
and/or the exercise of RIGHTS as such investor;
2. Having a nominee director or officer to represent its interests in such corporation;
3. Appointing a REPRESENTATIVE OR DISTRIBUTOR domiciled in PH which transacts business on its
own name and for its own account. SC held that the appointment of a distributor in PH is NOT
SUFFICIENT to constitute “doing business” unless it is under the FULL CONTROL of the foreign
corporation. If the distributor is an independent entity which buys and distributes products other than those of
the foreign corporation, for its own name and its own account, it cannot be considered doing business in PH
[Steelcase, Inc vs. Design International Selections, Inc, 18 Apr 2012].
[] The appointment of a distributor in the Philippines is not sufficient to constitute “doing business”
unless it is under the full control of the foreign corporation. If the distributor is an independent entity which
buys and distributes products, other than those of the foreign corporation, for its own name and its own
account, the latter cannot be considered to be doing business in the Philippines. Steelcase, Inc., vs. Design International
Selections, Inc., G.R. No. 171995, April 18, 2012
4. The publication of a general advertisement through any print or broadcast media;
5. Maintaining a stock of goods in PH solely for the purpose of having the same processed by another
entity in PH;
6. Consignment by a foreign entity of equipment with a local company to be used in the processing of
products for export;
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis,
such as installing in PH machinery it has manufactured or exported to PH, servicing the same, training domestic
workers to operate it, and similar incidental services.
9. **Mere act of exporting from one’s country without doing SPECIFIC commercial acts in importing
country is not doing business in the the importing country [B. Van Zuiden Bros. vs. GTVL Manufacturing
Industries, 28 May 2007]. In the said case, while the PH corporation entered into a series of transactions with a
foreign corp, implying a CONTINUITY of commercial dealings, the perfection and consummation of these
transaction were done OUTSIDE the Philippines, that is , the sale of the lace products was consummated in
Hong Kong and no single activity was performed in PH by the foreign corp pursuant to its purpose as a business
organization.
*A foreign company that merely imports goods from a Philippine exporter, without opening an
office or appointing an agent in the Philippines, is not doing business in the Philippines. Since the contract
between petitioner and NMC involved the purchase of molasses by petitioner from NMC, it was NMC, the
domestic corporation, which derived income from the transaction and not petitioner. **To constitute “doing
business,” the activity undertaken in the Philippines should involve profit-making. Cargill, Inc., vs. Intra
Strata Assurance Corporation, G.R. No. 168266, March 15, 2010
10. Casual activity: A casual activity in the Philippines by a foreign shipping company such as loading cargoes
once in 1963 and another in 1964 does not amount to engaging in trade or business in the Philippines for
income tax purposes, for the **transactions were ISOLATED. N. V. Reederij Amsterdam vs. Commissioner on
International Revenue, 162 SCRA 487 (1988)
11. A foreign firm which does business through the **MIDDLEMEN ACTING IN THEIR OWN NAMES such as
indentors, commercial brokers or commission merchants shall not be deemed as doing business. But such
indentors, commercial brokers or commission merchants corporation shall be the ones deemed doing business in
the Philippines. Schmid & Oberly Inc.,vs. RJL Martinez Fishing Corporation, 166 SCRA 493 (1988)
12. **Mere ownership by a corporation of a property in a certain state, unaccompanied by its active use in
furtherance of the business for which it was formed, is insufficient in itself to constitute doing business. A foreign
corporation which becomes the assignee of mining properties, facilities and equipment and assumes the
loan obligation of its subsidiary cannot be automatically considered as doing business in the Philippines even if its
subsidiary was doing business in the Philippines. MR Holdings, Ltd, vs. Bajar, 380 SCRA 617 (2002)
——————————————————
Ecce Ancilla Domini! 140 of 160

c. Personality to Sue
d. Suability of Foreign Corporations
e. Instances When Unlicensed Foreign Corporations May Be Allowed to Sue Isolated Transactions

SUMMARY OF PERSONALITY TO SUE OF FOREIGN CORP***

1. The following principles governing a foreign corporation’s RIGHT TO SUE IN LOCAL COURTS have
long been settled, to wit:
a) if a foreign corporation does business in the Philippines without a license, it cannot sue before
the Philippine courts;
b) if a foreign corporation is not doing business in the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a cause of action entirely independent of any business
transaction; and
c) if a foreign corporation does business in the Philippines with the required license, it can sue before
Philippine courts on any transaction.
2. Apparently, **it is not the absence of the prescribed license but the “doing (of) business” in the
Philippines without such license WHICH DEBARS the foreign corporation from access to our courts. MR
Holdings, Ltd.vs. Sheriff Carlos P. Bajar, Sheriff Ferdinand M. Jandusay, Solidbank Corporation, and Marcopper
Mining Corporation, G.R. No. 138104, April 11, 2002

SUITS BY OR AGAINST A FOREIGN CORPORATION**

1. Doing business in PH with a license: it may sue and be sued in PH
a. The **primary purpose of the license requirement is to COMPEL a foreign corporation desiring to
do business within the Philippines to submit itself to the jurisdiction of the courts of the state and to enable
the government to exercise jurisdiction over them for the regulation of their activities in this country. If a foreign
corporation operates a business in the Philippines without a license, and thus does not submit itself to Philippine laws, it is only
just that said foreign corporation be not allowed to invoke them in our courts when the need arises.
Steelcase, Inc.,vs. Design International Selections, Inc., G.R. No. 171995, April 18, 2012
2. Doing business in PH without a license:
a. GR: it cannot sue (in any court or administrative agency) but it may be sued in PH [Sec 133]; [] The
grant and extension of 90-day credit terms by a foreign corporation to a domestic corporation over a period of
seven months for every purchase made unarguably shows an intention to continue transacting with the
latter since in the usual course of commercial transaction, credit is extended only to customers in good
standing or to those on whom there is an intention to maintain long-term relationship. Under the
circumstances, the foreign corporation is considered doing business in the Philippines and cannot sue the
buyer to enforce payment if it has no license to do business. Eriks Pte., Ltd. vs. Court of Appeals, 267 SCRA 567 (1997); A
foreign corporation which licensed a domestic corporation to manufacture and market its products and
equipments is doing business in the Philippines and **cannot sue the domestic corporations if it has no
license to do business in the Philippines. For being in PARI DELICTO, the domestic corporation cannot ask
the courts to prohibit the foreign corporation from terminating its contract and giving the license to
produce and market its products to another. Top-Weld Manufacturing, Inc.,vs. Eced, S.A., 138 SCRA 118. See
also Granger Associates vs. Microwave Systems, Inc., 189 SCRA 631 (1990)
b. XPN—when it can sue: a foreign corporation doing business in PH without a license may still sue
before PH courts a Filipino or a PH entity that had derived SOME BENEFIT from their contractual
arrangement because the PH entity is considered to be estopped from challenging the personality of a
corporation after it had acknowledged it by entering into a contract with it [Steelcase, Inc. vs. Design
International, 18 Apr 2012]
3. **DOCTRINE OF QUASI-ESTOPPEL by ACCEPTANCE OF BENEFITS: Putting together (1) &
(2), any foreign corporation transacting business in PH, with or without a license, may be sued before PH courts
or admin tribunals on any valid cause of action recognized under PH laws.
[] A party is estopped from challenging the personality of a corporation after having acknowledged the
same by entering into a contract with it. The principle is applied to **prevent a person contracting with a foreign
corporation from later taking advantage of its noncompliance with the statutes, chiefly in cases where such
person has received the benefits of the contract. Global Business Holdings, Inc., vs. Surecomp Software, B.V.,
G.R. No. 173463, October 13, 2010
[] A foreign corporation doing business in the Philippines may sue in Philippine Courts although not
authorized to do business in the Philippines against a Philippine citizen or entity who had contracted
with and BENEFITED by said corporation. Steelcase, Inc., vs. Design International Selections, Inc., G.R. No.
171995, April 18, 2012
4. Not doing business in PH—may not be sued in PH:
Ecce Ancilla Domini! 141 of 160

a. A reinsurance company is not doing business in a certain state merely because the property or lives which
are insured by the original insurer are located in that state. The reason for this is that a contract of reinsurance is
generally a separate and distinct arrangement from the original contract of insurance. Thus, a foreign
reinsurance company which accepted reinsurance from a domestic insurance company **cannot be sued in the Philippines, since
it is not doing business in the Philippines. Avon Insurance PLC. Vs. Court of Appeals, 278 SCRA 312 (1997)
5. No license and not doing business—can sue:
a. Where the three transactions indicate no intent by the foreign corporation to engage in a
continuity of transactions, as the contract was modified twice principally because of the failure of the seller to deliver,
the foreign corporation, is not doing business in the Philippines and can sue the seller even if has no
license to do business in the Philippines. Foreign corporation not doing business in the Philippines is not
required to obtain a license to do business to have capacity to sue. Antam Consolidated, Inc., vs. Court of
Appeals, 143 SCRA 534 (1986)
b. when it can sue: An unlicensed foreign corporation is nonetheless permitted to bring suit in the
Philippines **if it is suing on an isolated transaction. Thus, the ascertainment of whether a foreign
corporation is merely suing on an isolated transaction or is actually doing business in the Philippines requires the
elicitation of at least a preponderant set of facts. It simply cannot be answered through conjectures or acceptance of
unsubstantiated allegations. Rimbunan Hijau Group Of Companies v. Oriental Wood Processing Corporation, 470
SCRA 650 (2005); A foreign corporation not licensed to do business in the Philippines is not absolutely
incapacitated from filing a suit in local courts. Only when that foreign corporation is “transacting” or
“doing business” in the country will a license be necessary before it can institute suits. It may, however,
bring suits on isolated business transactions, which is not prohibited under Philippine law. Thus, a foreign
insurance company may sue in Philippine courts upon the marine insurance policies issued by it abroad to cover
international-bound cargoes shipped by a Philippine carrier, even if it has no license to do business in this country.
**It is THE ACT OF ENGAGING in business without the prescribed license, and NOT THE LACK
OF LICENSE PER SE, which bars a foreign corporation from access to our courts. Aboitiz Shipping Corp. vs.
Insurance Co. of North America , 561 SCRA 262 (2008)
c. a foreign corporation shipped goods intended for Hong Kong but erroneously unloaded in
Manila has a **right to maintain action to recover the goods although it is not doing business in PH [Swedish
East Asia Co vs. Manila Port Service, 26 Oct 1968]; A foreign corporation not engaged in business in the
Philippines can file an action before Philippine courts for **isolated transaction. Thus, it can sue a domestic
shipping company for failure to deliver goods shipped to it. Bulakhidas vs. Navarro, 142 SCRA 1 (1986)
d. Foreign corporation not engaged in business in the Philippines may maintain a cause for
infringement. Philip Morris, Inc., vs. Court of Appeals, 224 SCRA 576 (1993); a foreign corporation has a
personality to sue to oppose the registration of its trademark (TM) when it is shown that its products using such
TM are being imported and sold in PH, just the same as it may protect its tangible property, real or
personal, against trespass or conversion [cf. Western Equipment & Supply Co vs. Reyes, 51 Phil 115; General
Garments vs. Director of Patents, 41 SCRA 50]; Foreign corporation not doing business in the Philippines may
sue here even if not licensed in order to protect intellectual property rights. Converse Rubber Corporation
vs. Universal Rubber Products Inc., 147 SCRA 154 (1987)
6. Not doing business in PH: it may sue and be sued in PH:
[] A foreign corporation doing business in the Philippines may sue in the Philippine courts although it has no
license to do business here against a Philippine citizen who had contracted with and been benefited by
said corporation where such party is aware that the foreign corporation is doing business in the Philippines without license and
received benefits from transacting business with it, under the principle of estoppel. Merrill Lynch Futures, Inc., vs.
Court of Appeals, 211 SCRA 824 (1992)
a. a foreign corporation shipped goods intended for Hong Kong but
erroneously unloaded in Manila has a right to maintain action to recover the goods although it is not doing
business in PH [Swedish East Asia Co vs. Manila Port Service, 26 Oct 1968];
b. a foreign corporation has a personality to sue to oppose the registration of its trademark (TM) when
it is shown that its products using such TM are being imported and sold in PH, just the same as it may protect its
tangible property, real or personal, against trespass or conversion [cf. Western Equipment & Supply Co vs. Reyes,
51 Phil 115; General Garments vs. Director of Patents, 41 SCRA 50];
c. a foreign corporation doing business in PH without a license may still sue before PH courts a Filipino
or a PH entity that had derived SOME BENEFIT from their contractual arrangement because the PH entity is
considered to be estopped from challenging the personality of a corporation after it had acknowledged it by
entering into a contract with it [Steelcase, Inc. vs. Design International, 18 Apr 2012]
d. likewise, a foreign corporation NOT doing business in PH may be sued in our courts for the reason
that if it can maintain action in PH, it cannot claim exemption from being sued for acts done against a person or
persons in PH [Facilities Management Corp vs. Dela Osa, 89 SCRA].
Ecce Ancilla Domini! 142 of 160

**According to SC, foreign corp not doing business in PH may likewise be subject to the
jurisdiction of our courts either by:
i. consent;
ii. stipulation as to venue;
iii. estoppel;
iv. principle of equity.
7. The liaison office of a foreign corporation is solidarily liable with the latter if the former has been
constituted as the former’s representative and its fully subsidized extension office in the Philippines. As such, the
extension office can be charged for the liabilities incurred by the parent company in the country. And if the
extension office can be so charged, there is no rhyme nor reason why it cannot be adjudged, as solidarily liable
with head office. Mavest (USA) Inc., v. Sampaguita Garment Corporation 470 SCRA 440 (2005)
8. Subrogee has limited capacity to sue: It does not follow that the insurer, as subrogee, has also no capacity to
sue in this jurisdiction simply because the insured party (which is a foreign corporation) has no legal capacity to sue in the
Philippines. The rights inherited by the insurer
pertain only to the payment it made to the insured and which amount it now seeks to recover from the
shipping company which caused the loss sustained by the insured. **Capacity to sue is a right personal to its
holder. It is conferred by law and not by parties. The insurer has satisfactorily proven its capacity to sue,
after having shown that is not doing business in the Philippines, but is SUING ONLY UNDER AN ISOLATED
TRANSACTION, i.e under the one marine insurance policy issued in favor of the consignee/insured. It is also
not correct to say that the insurer is not suing under an isolated transaction because the steel pipes, subject of
this case, are covered by two bills of landing; hence, two transactions. The fact remains that these two bills
of lading spawned from the single marine insurance policy that the insurer issued in favor of the
consignee. The Court has not construed the term “isolated transaction” to literally mean “one” or a mere single act. The phrase
“isolated transaction” has a definite and fixed meaning, i.e., a transaction or series of transaction set apart from
the common business of a foreign enterprise in the sense that there is no intension to engage in a progressive
pursuit of the purpose and object of the business organization. Lorenzo Shipping Corp., vs. Chubb and Sons,
431 SCRA 266 (2004)

KEY DIFFERENCE ON FILING SUITS BY FOREIGN CORP EVEN IF NOT LICENSED TO DO

BUSINESS IN PH [it is not the license per se]
1. A foreign corporation not licensed to do business in the Philippines is not absolutely incapacitated from filing
a suit in local courts.
2. Only when that foreign corporation is transacting or doing business in the country will a license be necessary
before it can institute suits.
3. It may, however, bring suits on isolated business transactions, which is not prohibited under Philippine law.
4. Thus, this Court has held that a foreign insurance company may sue in Philippine courts upon the marine
insurance policies issued by it abroad to cover international-bound cargoes shipped by a Philippine carrier, even
if it has no license to do business in this country. It is the act of engaging in business without the prescribed
license, and not the lack of license per se, which bars a foreign corporation from access to our courts

EFFECT OF ESTOPPEL & SUBSEQUENT COMPLIANCE

1. A party is estopped from challenging the personality of a corporation after having acknowledged the same by
entering into a contract with it;
2. The principle “will be applied to prevent a person contracting with a foreign corp from later taking advantage
of its non-compliance with the statutes, chiefly in cases where such person has received the benefits of the
contract [Steel Case Inc vs Design International];
3. NB: in one case, SC cited IN PARI DELICTO in ruling that no remedy could be afforded to parties if one
party is a foreign corp without a license [Top Weld Mfg vs. ECED 138 SCRA 118]
4. EFFECT OF SUBSEQUENT COMPLIANCE, i.e., securing a license: it will cure the lack of capacity to sue
at the time of the execution of the contract [Home Insurance Co vs. Eastern Shipping Lines 1988].

MATTERS RELATED TO TRIAL INVOLVING FOREIGN CORP

1. For purposes of acquiring jurisdiction by way of service of summons, there is no need to prove first the
fact that defendant is doing business in the Philippines. Where a complaint alleges that defendant has an
agent in the Philippines, summons can validly be served thereto even without prior evidence of the truth
of such factual allegation. If in fact a foreign corporation does not do business here, that is a matter that should be
**ventilated in the trial on the merits but not in a motion to dismiss. Signetics Corporation vs. Court of
Appeals, 225 SCRA 737 (1993)
2. On forum shopping:
Ecce Ancilla Domini! 143 of 160

*GR: An individual signing a certificate of non-forum shopping on behalf of a corporation, must be

armed with specific authorization from the latter to do so. Such specific authorization could only come
from a Board Resolution issued by the corporation’s board of directors, which specifically authorizes the
signatory to execute the certification on behalf of the corporation. Maranaw Hotels & Resort Corporation vs.
Court of Appeals 576 SCRA 463 (2009)
*XPN: In a slew of cases, however, the Court recognized the authority of some corporate officers to
sign the verification and certification against forum shopping. In Mactan- Cebu International Airport
Authority v. CA (G.R. No. 139495, November 27, 2000, 346 SCRA 126, 132-133), the Court recognized the
authority of a general manager or acting general manager to sign the verification and certificate against
forum shopping; in Pfizer v. Galan (G.R. No. 143389, May 25, 2001, 358 SCRA 240, 246-248), the Court
**upheld the validity of a verification signed by an “employment specialist” who had not even presented any proof
of her authority to represent the company; in Novelty Philippines, Inc.,v. CA (G.R. No. 146125, September 17, 2003,
411 SCRA 211, 217-220), the Court ruled that a personnel officer who signed the petition but did not
attach the authority from the company is authorized to sign the verification and non-forum shopping
certificate; and in Lepanto Consolidated Mining Company v. WMC Resources International Pty. Ltd (Lepanto)
(G.R. No. 153885, September 24, 2003, 412 SCRA 101, 109), the Court ruled that the Chairperson of the
Board and President of the Company can sign the verification and certificate against non-forum
shopping even without the submission of the board’s authorization. ***In sum, the Court held that the
following officials or employees of the company can sign the verification and certification without need
of a board resolution: (1) the Chairperson of the Board of Directors, (2) the President of a corporation, (3)
the General Manager or Acting General Manager, (4) Personnel Officer, and (5) an Employment
Specialist in a labor case. While the above cases do not provide a complete listing of authorized signatories to the verification
and certification required by the rules, the determination of the sufficiency of the authority was done on a
case-to-case basis. The rationale applied in the foregoing cases is to justify the authority of corporate officers
or representatives of the corporation to sign the verification or certificate against forum shopping, being
“IN A POSITION TO VERIFY THE TRUTHFULNESS AND CORRECTNESS OF THE
ALLEGATIONS in the petition.” Cagayan Valley Drug Corporation v. CIR 545 SCRA 10 (2008)
a. A corporation exercises its powers through its board of directors and/or any of its authorized
agents/officers. All acts within the powers of the corporation may be performed by agents of its selection
except those limited/restricted by its charter, by- laws or the law. Thus, for natural persons, the parties
themselves must sign the certificate of non-forum shopping. However, in the **case of a corporation, the latter
can do so only through its officers or authorized agents, like its lawyer. BA Savings Bank vs. Court of
Appeals, 336 SCRA 484 (2000); It is not correct to say that a corporation cannot possibly comply with the
requirement of signing the certificate of non-forum shopping. If this were so, it would have been impossible for
the corporation to do anything. This is the reason why corporations have officers and directors, to represent it in
its transaction with others. The same is true for certification against forum shopping. Digital Microwave Corp. vs. Court of
Appeals, 328 SCRA 289 (2000); A petition which did not indicate that the person who signed the
verification/certification on non-forum shopping was authorized to do so and that the corporation
merely relied on the alleged inherent power of its chief financial officer to represent the corporation in all
matters regarding its finances including, among others, the filing of suits to defend or protect it from
assessments and to recover erroneously paid taxes is considered not properly verified and was to be treated
as an unsigned pleading subject to dismissal. San Pablo Manufacturing Corporation vs. Commissioner of
Internal Revenue 492 SCRA 192 (2006); As a juridical entity, Philippine Rabbit may only exercise its right to
file a suit by a specific act of its board of directors or any duly authorized officer or agent. The **counsel
handling the case cannot certify against non-forum shopping unless he is duly empowered by the Board
of Directors of the corporation to do so. Philippine Rabbit Bus Lines, Inc., vs. Aladdin Transit Corp. 494 SCRA
358 (2006)
b. The rule that the lack of certification against forum shopping is generally not curable by the
submission thereof after filling of the petition applies to certifications against forum shopping signed by a
person on behalf of a corporation which are unaccompanied by proof that said signatory is authorized to file
the petition on behalf of the corporation. **BELATED submission, however, may be ALLOWED if there
are SPECIAL CIRCUMSTANCES OR COMPELLING REASONS that justify relaxation of the rule. Shipside
Incorporation vs. Court of Appeals, 352 SCRA 334 (2001)
b. The corporate veil cannot be used to violate the prohibition against forum shopping [First PH
International Bank vs. CA 1996]; No forum shopping if one is a judicial proceeding and the other an
administrative proceeding: The filing of an intra-corporate case before the RTC and a complaint with the
BSP (to compel a bank to disclose its stockholdings ) invoking BSP’s supervisory powers over banking operations
which does not amount to judicial proceeding does not constitute forum shopping. Suan vs. Gonzales,
(2007)
Ecce Ancilla Domini! 144 of 160

b. The separate juridical personality of a corporation may be disregarded where the majority
stockholder filed a derivative suit in behalf of the corporation to declare the sale as unenforceable against
the corporation despite the fact that the trial court in another case had already ruled that the contract of sale
between the corporation and its buyer was deemed perfected. There is forum shopping where the
stockholders, in a second case, and in representation of the corporation, seek to accomplish what the
corporation itself failed to do in the original case. First Philippine International Bank vs. Court of Appeals,
252 SCRA 259 (1996)
c. The RESIDENT AGENT of a foreign corporation doing business in the Philippines is not
necessarily authorized to execute the requisite certification against forum shopping. Under the
Corporation Code, the resident agent was not specifically authorized to execute a certificate of non-forum shopping as
required by Section 5, Rule 7 of the Rules of Court. This is because while a resident agent may be aware of
actions filed against his principal, such resident agent may not be aware of actions initiated by its principal, whether in
the Philippines, against a domestic corporation or private individual, or in the country where such corporation
was organized and registered, against a Philippine registered corporation or a Filipino citizen. Expertravel &
Tours, Inc., vs. CA. 459 SCRA 147 (2005)
———————————————

f. Grounds for Revocation of License

MATTERS TO SUBMIT TO SEC IN APPLYING FOR A LICENSE

1. A copy of its AOI and its by-laws, certified in accordance with law, and their translation into an official
language in the Philippines, if necessary;
2. A CERTIFICATE UNDER OATH by the authorized official or officials on the jurisdiction of its
incorporation, attesting to the fact that the laws of the country of the applicant allow Filipino citizens and
corporations to do business therein—this is known as the PROOF OF RECIPROCITY.
3. A statement under OATH of the President or other Authorized Officer that the applicant is SOLVENT and
in sound financial condition [Sec 127].
4. A WRITTEN POWER OF ATTORNEY designating a person known as RESIDENT AGENT, on whom
summons and other legal processes may be served in all actions against the corporation, and that consenting that
service upon such resident agent shall be admitted and held valid as if served upon the duly-authorized officers
of the foreign corporation at its home office [Sec 128]. Below are QUALIFICATIONS of a RESIDENT
AGENT:
a. an individual RESIDING in PH who must be of GOOD MORAL CHARACTER and of SOUND
FINANCIAL CONDITION; or
b. a DOMESTIC CORPORATION lawfully transacting business in PH [Sec 127].

GROUNDS FOR REVOCATION/SUSPENSION OF A LICENSE by SEC

1. Failure to file its ANNUAL REPORT or pay any FEES as required by the Corp Code;
2. Failure to appoint and maintain a RESIDENT AGENT in PH;
3. Failure, after change of its resident agent or of his address, to submit to SEC a STATEMENT OF SUCH
CHANGE;
4. Failure to submit to the SEC an authenticated COPY of any amendment to its AOI or by-laws or of any
articles of merger or consolidation within the time prescribed;
5. MISREPRESENTATION of any MATERIAL MATTER in any application, report, affidavit, or other
document submitted by such corporation;
6. Failure to PAY any and all TAXES, impost, assessments or penalties, if any, lawfully due to the PH govt or any
of its agencies or political subdivisions;
7. Transacting business in PH outside of the purpose or purposes for which such foreign corporation is
authorized under its license;
8. Transacting business in PH as agent of or acting for and in behalf of any foreign corporation or entity not
duly licensed to do business in PH;
9. Any other ground as would render it unfit to transact business in PH [Sec 134].

WITHDRAWAL OF FOREIGN CORP

1. If licensed, a foreign corp may be allowed to withdraw from PH by filing a PETITION FOR
WITHDRAWAL OF LICENSE;
2. No certificate of withdrawal shall be used by SEC unless the following requirements are met:
a. all CLAIMS which have accrued in PH have been paid, compromised or settled;
b. all TAXES, imposts, assessments, and penalties, if any, lawfully due to the PH govt or any of its
agencies or political subdivisions have been paid; and
Ecce Ancilla Domini! 145 of 160

c. the petition for withdrawal of license has been published once a week for three (3) consecutive weeks
in a newspaper of general circulation in PH [Sec 136].
———————————————————————————————

L. Mergers and Consolidations

1. Definition and Concept

2. Constituent vs. Consolidated Corporation

CONCEPT OF MERGER
1. It is the UNION of two or more corporations, whereby
a. one or more BUT NOT ALL of the CONSTITUENT CORPORATIONS
b. are absorbed by one which continues in existence and retains its name & corporate identity, called
the SURVIVING CORPORATION.
2. The rights, privileges, franchises and property of the constituent corporations are MERGED into the surviving
corporation.
3. It is more in keeping with the dictates of social justice and the State policy of according full protection to
labor to deem employment contracts as automatically assumed by the surviving corporation in a merger, even in
the absence of an express stipulation in the articles of merger or the merger plan. By upholding the
**AUTOMATIC ASSUMPTION of the non-surviving corporation’s existing employment contracts by the
surviving corporation in a merger, the Court strengthens judicial protection of the right to security of
tenure of employees affected by a merger and avoids confusion regarding the status of their various
benefits which were among the chief objections of our dissenting colleagues. Bank of the Philippine Islands vs.
BPI Employees Union, G.R. No. 164301, October 19, 2011
[] Citytrust, therefore, upon sERVICE of the notice of garnishment and its ACKNOWLEDGMENT that
it was in possession of defendants' deposit accounts **became a "VIRTUAL PARTY" to or a "forced
intervenor" in the civil case. As such, it became BOUND by the ORDERS AND PROCESSES issued by the
trial court despite not having been properly impleaded therein. Consequently, by virtue of its merger
with BPI, the latter, as the surviving corporation, EFFECTIVELY BECAME THE GARNISHEE, thus the "virtual
party" to the civil case. Bank of Philippine Islands v. Lee, G.R. No. 190144, August 1, 2012

CONCEPT OF CONSOLIDATION
1. It is the UNION of two or more corporations, whereby
a. the existence of the CONSTITUENT corporations is terminated
b. and a NEW ONE, called the CONSOLIDATED CORPORATION, is created.
2. The rights, privileges, franchises and property of the constituent corporations are UNITED and become
the rights, privileges, franchises and property of the consolidated corporation.
3. Merger vs. Consolidation:
a. In CONSOLIDATION, all the constituents are dissolved and absorbed by the new
consolidated enterprise,
b. while in MERGER, all constituents, except the surviving corporation, are dissolved. The surviving
or consolidated corporation assumes automatically the liabilities of the dissolved corporations, regardless of
whether the creditors have consented or not to such merger or consolidation. John F. McLeod vs. NLRC, G.R. No. 146667
(2007).

TWO TYPES OF CORPORATE ACQUISITION

1. There are two types of corporate acquisitions:
a. ASSET SALES: the corporate entity sells all or substantially all of its assets to another entity.
b. STOCK SALES: the individual or corporate shareholders sell a controlling block of stock to new
or existing shareholders.
2. In ASSET SALES, the rule is that the seller in good faith is authorized to dismiss the affected employees, but is
liable for the payment of separation pay under the law. The buyer in good faith, on the other hand, is not
obliged to absorb the employees affected by the sale, nor is it liable for the payment of their claims. The
most that it may do, for reasons of public policy and social justice, is to give preference to the qualified
separated personnel of the selling firm.
3. STOCK SALES: In contrast with asset sales, in which the assets of the selling corporation are transferred to
another entity, the transaction in stock sales takes place at the shareholder level. Because the corporation
possesses a personality separate and distinct from that of its shareholders, a shift in the composition of its
shareholders will not affect its existence and continuity.
Ecce Ancilla Domini! 146 of 160

*Thus, notwithstanding the stock sale, the corporation continues to be the employer of its people
and continues to be liable for the payment of their just claims. Furthermore, the corporation or its new
majority shareholders are not entitled to lawfully dismiss corporate employees absent a just or authorized
cause. The fact that there was a change in the composition of its shareholders did NOT AFFECT the
employer-employee relationship between the employees and the corporation, because an equity transfer
affects neither the existence nor the liabilities of a corporation. Thus, the **corporation continued to be the
employer of the corporation’s employees NOTWITHSTANDING THE EQUITY CHANGE in the
corporation. This outcome is in line with the rule that a corporation has a personality separate and
distinct from that of its individual shareholders or members, such that a change in the composition of its
shareholders or members would not affect its corporate liabilities.
In this case, the corporate officers and directors who induced the employees to resign with the
assurance that they would be rehired by the new management are personally liable to the employees who were not actually
rehired. However, the officer who did not participate in the termination of employment and persons who
participated in the unlawful termination of employment but are not directors and officers of the corporation are
not personally liable. SME Bank Inc., vs. Gaspar, G.R. No. 186641, October 8, 2013
4. Case scenarios:
a. Where the purchase and sale of identified assets between two companies under a Purchase and Sale
Agreement does not constitute a merger, the seller and the purchaser are considered entities different from one
another. Thus, the purchaser company cannot be held liable for the payment of deficiency documentary
stamp tax against the seller company. Commission of Internal Revenue vs., Bank of Commerce, GR No.
180529, November 25, 2013
b. Indubitably, it is clear that no merger took place between Bancommerce and TRB as the
requirements and procedures for a merger were absent. A merger does NOT become effective upon the
MERE AGREEMENT of the constituent corporations. All the requirements specified in the law must be
complied with in order for merger to take effect. Here, Bancommerce and TRB remained separate
corporations with distinct corporate personalities. What happened is that TRB sold and Bancommerce
purchased identified recorded assets of TRB in consideration of Bancommerce’s assumption of identified
recorded liabilities of TRB including booked contingent accounts. There is no law that prohibits this kind of
transaction especially when it is done openly and with appropriate government approval. Bank of
Commerce vs. Radio Philippines Network Inc., et al., G.R. No. 195615, April 21, 2014
5. Bar 1996: E Co. Sold its assets to M Inc after complying with the requirements of the Bulk Sales Law.
Subsequently, one of the creditors of E Co tried to collect the amount due it, but found out that E Co had
no more assets left. The creditors sued M Inc on the theory that M Inc is a mere alter ego of E Co. A: The
suit will not prosper. The **sale by E Co of its assets to M Inc does not result in the transfer of liabilities of
the latter to, nor in the assumption thereof by, the former. The facts given do not indicate that such transfer or
assumption took place or was stipulated upon by the parties in their agreement. Furthermore, the sale by E Co
of its assets is a sale of its property. It does not involve the sale of the shares of stock of the corporation
belonging to its stockholders. There is therefore no merger or consolidation that took place. E Co continues
to exist and remains liable to the creditor.

THE NELL DOCTRINE (refers to TRANSFER)

[Nell v. Pacific Farms, Inc.. 1965 as cited in Y-I Leisure vs. James Yu 8 Sep 2015]
1. This refers to the rule regarding the TRANSFER of all the assets of one corporation to another
*GR: Generally, where one corporation sells or otherwise transfers all of its assets to another
corporation, the latter is not liable for the debts and liabilities of the transferor,
*XPNs: except:
a. Where the purchaser expressly or impliedly agrees to assume such debts;
b. Where the transaction amounts to a consolidation or merger of the corporations;
c. Where the purchasing corporation is merely a continuation of the selling corporation; (BUSINESS-
ENTERPRISE TRANSFER)
d. Where the transaction is entered into fraudulently in order to escape liability for such debts. [Edward J.
Nell Company vs. Pacific Farms, Inc., 15 SCRA 415 (1965)]
[] Compare this (transfer) to Merger: In the merger of two or more existing corporations, one of the
combining corporations survives and continues the combined business, while the rest are dissolved and all
their rights, properties and liabilities are acquired by the surviving corporation. Associated Bank vs. Court of
Appeals and Lorenzo Sarmiento, Jr., G.R. No. 123793, June 29, 1998
2. Summary: The Nell Doctrine states the ****general rule that the transfer of all the assets of a corporation
to another shall not render the latter liable to the liabilities of the transferor. If any of the above-cited
exceptions are present, then the transferee corporation shall assume the liabilities of the transferor.
3. Legal bases of the Nell Doctrine
Ecce Ancilla Domini! 147 of 160

a. The general rule expressed by the doctrine reflects the principle of relativity under Article 1311 of the
Civil Code. Contracts, including the rights and obligations arising therefrom, are valid and binding only
between the contracting parties and their successors-in-interest. Thus, despite the sale of all corporate
assets, the transferee corporation cannot be prejudiced as it is not in privity with the contracts between the
transferor corporation and its creditors.
b. The first exception under the Nell Doctrine, where the transferee corporation expressly or impliedly
agrees to assume the transferor's debts, is provided under Article 2047 of the Civil Code. When a person binds
himself solidarity with the principal debtor, then a contract of SURETYSHIP is produced. Necessarily,
the corporation which expressly or impliedly agrees to assume the transferor's debts shall be liable to the same.
c. The second exception under the doctrine, as to the merger and consolidation of corporations, is well-
established under Sections 76 to 80, Title X of the Corporation Code. If the transfer of assets of one
corporation to another amounts to a merger or consolidation, then the transferee corporation must take over
the liabilities of the transferor.
d. As to the fourth exception, where the sale of all corporate assets is entered into fraudulently to escape
liability for transferor's debts, can be found under Article 1388 of the Civil Code. It provides that whoever
acquires in bad faith the things alienated in fraud of creditors, shall indemnify the latter for damages
suffered. Thus, if there is fraud in the transfer of all the assets of the transferor corporation, its creditors can
hold the transferee liable.
d. As to the third exception, where the purchasing corporation is merely a continuation of the selling
corporation, is challenging to determine. In his book, Philippine Corporate Law, Dean Cesar Villanueva
explained that this exception contemplates the "business-enterprise transfer." In such transfer, the
transferee corporation's interest goes beyond the assets of the transferor's assets and its desires to acquire
the latter's business enterprise, including its goodwill. In this last exception, the transferee purchases not
only the assets of the transferor, but also its business. As a result of the sale, the transferor is merely left
with its juridical existence, devoid of its industry and earning capacity. Fittingly, the proper provision of law
that is contemplated by this exception would be Section 40 of the Corporation Code, where a sale or other
disposition shall be deemed to cover substantially all the corporate property and assets if thereby the corporation
would be rendered incapable of continuing the business or accomplishing the purpose for which it was
incorporated.
Section 40 suitably reflects the business-enterprise transfer under the exception of the Nell Doctrine because the
purchasing or transferee corporation necessarily continued the business of the selling or transferor
corporation. Given that the transferee corporation acquired not only the assets but also the business of the
transferor corporation, then the liabilities of the latter are inevitably assigned to the former. It must be
clarified, however, that not every transfer of the entire corporate assets would qualify under Section 40. It
does not apply (1) if the sale of the entire property and assets is necessary in the usual and regular course of
business of corporation, or (2) if the proceeds of the sale or other disposition of such property and assets will
be appropriated for the conduct of its remaining business. Thus, the litmus test to determine the
applicability of Section 40 would be the capacity of the corporation to continue its business after the
sale of all or substantially all its assets.
4. As a rule, the corporation that purchases the assets of another will not be liable for the debts of the
selling corporation, provided the former acted in good faith and paid adequate consideration for such
assets or unless the purchase of the assets amounts to merger or consolidation. Omictin vs. Court of
Appeals 512 SCRA 70 (2007)
5. But note RE subsidiary: When an investor has a claim against a subsidiary of another corporation which
subsequently became the acquired corporation in a merger, the claim against the subsidiary cannot be
enforced against the surviving corporation even though the latter corporation by virtue of the merger
acquired all the shares of the absorbed corporation. This is because the fact that a corporation owns almost
all of the stocks of another corporation, TAKEN ALONE, IS NOT SUFFICIENT to justify their being
treated as one entity. Spouses Ramon Nisce vs. Equitable PCI Bank 516 SCRA 231 (2007)

———————————

3. Plan of Merger or Consolidation

4. Articles of Merger or Consolidation
————————————
5. Procedure

PROCEDURE FOR A MERGER OR CONSOLIDATION

1. The BOD/BOT of each corporation, party to the M/C, shall approve a plan of M/C setting forth the
following: see 1-4 in the codal, supra [Sec 76]
Ecce Ancilla Domini! 148 of 160

2. The plan of M/C shall be submitted for approval by the SH/members of each constituent corporation at
SEPARATE MEETINGS duly called for the purpose. The vote of at least 2/3 of the OCS or 2/3 of the
members shall be necessary for the approval of such plan [Sec 77].
3. Articles of M/C shall be executed by each of the constituent corporation, signed by the president or vice-
president and certified by the secretary or assistant secretary of each corporation setting forth the following [Sec
78]:
a. The plan of the merger or the plan of consolidation;
b. As to stock corporations, the number of shares outstanding, or in the case of non-stock
corporations, the number of members; and
3. As to each corporation, the number of shares or members voting for and against such plan,
respectively.
4. The articles of M/C shall be submitted to SEC for approval. In case of special corporations governed by
special laws, the favourable recommendation of the appropriate government agency shall first be obtained [Sec
79].
5. The SEC shall issue a CERTIFICATE OF MERGER or CONSOLIDATION at which time, the M/C shall
be effective [Sec 79].
———————————————

6. Effectivity
1. A merger is not effective unless it has been approved by the Securities and Exchange Commission.
Philippine National Bank & National Sugar Development Corporation vs. Andrada Electric & Engineering
Company, G.R. No. 142936, April 17, 2002
2. The issuance of the CERTIFICATE OF MERGER is crucial because not only does it bear out SEC’s
approval but it also marks the moment when the consequences of a merger take place. By operation of
law, upon the effectivity of the merger, the absorbed corporation ceases to exist but its rights and properties, as
well as liabilities, shall be taken and deemed transferred to and vested in the surviving corporation. Mindanao
Savings and Loan Association, Inc., vs. Edward Willkom, G.R. No. 178618, October 11, 2010
———————————-

7. Limitations
———————————-
8. Effects

ON THE EFFECTS OF M/C

[] Section 80. Effects of merger or consolidation. – The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger; and, in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease, except that of the surviving or the consolidated
corporation;
3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and liabilities of a corporation organized under this Code;
[] A bank which merged with another bank can sue a debtor of the absorbed bank because it
acquired the rights of the latter. **Novation (because of the change of creditor) is not a valid defense because
it is settled that in a merger of two existing corporations, one of the corporations survives and continues the business, while the other
is dissolved and all its rights, properties and liabilities are acquired by the surviving corporation. Babst vs. Court of Appeals,
350 SCRA 341 (2001)
4. The surviving or the consolidated corporation shall thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the constituent corporations; and all property, real or personal,
and all receivables due on whatever account, including subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to, or due to each constituent corporation, shall be
**DEEMED TRANSFERRED to and vested in such surviving or consolidated corporation WITHOUT
FURTHER ACT OR DEED; and
5. The surviving or consolidated corporation shall be **responsible and LIABLE for all the liabilities and
obligations of each of the constituent corporations in the same manner as if such surviving or consolidated corporation
had itself incurred such liabilities or obligations; and any pending claim, action or proceeding brought by or against any
of such constituent corporations may be prosecuted by or against the surviving or consolidated corporation. The
rights of creditors or liens upon the property of any of such constituent corporations shall not be impaired
by such merger or consolidation. (n)
Ecce Ancilla Domini! 149 of 160

**The surviving or consolidated corporation ASSUMES AUTOMATICALLY the liabilities of the dissolved
corporations, REGARDLESS OF WHETHER THE CREDITORS HAVE CONSENTED OR NOT to such merger or
consolidation [McLeod vs. NLRC, 23 Jan 2007]
[] Although there is dissolution of the absorbed corporations, there is NO WINDING UP of their
affairs or liquidation of their assets, because the **SURVIVING CORPORATION AUTOMATICALLY
acquires all their rights, privileges and powers, as well as their liabilities. The fact that the promissory
note was executed after the effectivity date of the merger does not militate against petitioner because the
agreement itself clearly provides that all contracts -- irrespective of the date of execution -- entered into in the
name of the absorbed corporation shall be understood as pertaining to the surviving bank, herein petitioner.
Associated Bank vs. Court of Appeals and Lorenzo Sarmiento, Jr.,G.R. No. 123793, June 29, 1998
———————————————————————————————

Other matters on the Corporation Code

ON TELECONFERENCING
In this age of modern technology, the courts may take judicial notice that persons in the Philippines may have
a teleconference with a group of persons in South Korea relating to business transactions or corporate
governance. However, a court cannot take judicial notice of any fact which, in part, is dependent on the existence or
non-existence of a fact of which the court has no constructive knowledge. The allegation of a foreign corporation that its
board of directors conducted a teleconference and approved the resolution authorizing its resident agent to
file the complaint and execute the certificate against forum shopping, is incredible, given the additional fact that
no such allegation was made in the complaint. If the resolution had indeed been approved, long before the complaint was filed,
the foreign corporation should have incorporated it in its complaint, or at least appended a copy thereof.
Expertravel & Tours, Inc.,vs. CA 459 SCRA 147 (2005)

ON CONDOMINIUM CORPORATIONS
1. A condominium corporation is **NOT ENGAGED IN BUSINESS. The word “business” itself is defined
under Section 131(d) of the Code as “trade or commercial activity regularly engaged in as a means of livelihood
or with a view to profit.” This definition of “business” takes on importance, since Section 143 allows local
government units to impose local taxes on businesses other than those specified under the provision. The
Supreme Court can elicit from the Condominium Act that a condominium corporation is **PRECLUDED
by statute from engaging in corporate activities other than the holding of the common areas, the administration of the
condominium project, and other acts necessary, incidental or convenient to the accomplishment of such purposes. Neither the
maintenance of livelihood, nor the procurement of profit, fall within the scope of permissible corporate
purposes of a condominium corporation under the Condominium Act. Yamane vs. BA Lepanto Condominium
Corporation 474 SCRA 258 (2005)

ON INTEREST IN INVESTMENT
1. EQUITY INVESTMENT is NOT A LOAN OR FORBEARANCE of money and the closure of the
corporation did not constitute a breach of obligation. The guidelines enunciated in Eastern Shipping Lines
(234 SCRA 78) do not apply. CB Circular No. 416, which imposes the rate of 12% per annum on loans and
forbearance of money, is likewise inapplicable. Article 2209 of the Civil Code, which provides for 6% interest
per annum when there is a delay in the payment of a sum of money, does not find application either. However,
upon the finality of the Order of the Liquidation Court ORDERING THE RETURN of the investment, the
award representing said equity investment became a judgment. As such, it shall bear an interest of 12% per
annum from the finality of the Order until its full satisfaction. The President of PDIC as Liquidator of Pacific
Banking Corporation vs. Reyes 460 SCRA 473 (2005)
*NB: the rate is now 6% [July 1, 2013 CB Circular]

——————end of corpo——————

VII. Securities Regulation Code (R.A. No. 8799)

A. State Policy, Purpose 409
B. Securities Required to Be Registered 411
B1. Exempt Securities 415
B2. Exempt Transactions 416
C. Procedure for Registration of Securities 417
D. Prohibitions on Fraud, Manipulation and Insider Trading 419
Ecce Ancilla Domini! 150 of 160

D1. Manipulation of Security Prices. 419

D2. Short Sales 420
D3. Fraudulent Transactions 420
D4. Insider Trading 421
E. Protection of Investors 422
E1. Tender Offer Rule 422
E2. Rules on Proxy Solicitation 423
E3. Disclosure Rule 425
F. Civil Liability 425
———————————————————————————————

A. State Policy, Purpose

1. Under Sec. 2 of the SRC, the State shall:
(a) establish a socially conscious, free market that regulates itself,
(b) encourage the widest participation of ownership in enterprises, (c) enhance the
democratization of wealth,
(d) promote the development of the capital market,
(e) protect investors,
(f) ensure FULL AND FAIR DISCLOSURE about securities,
(g) **MINIMIZE IF NOT TOTALLY ELIMINATE INSIDER TRADING and other fraudulent or
manipulative devices and practices which create distortions in the free market.
2. The rise and fall of stock market indices reflect to a considerable degree the state of the economy.
**Securities transactions are IMPRESSED WITH PUBLIC INTEREST, and are thus subject to public
regulation; in particular, the laws and regulations requiring payment of traded shares within specified periods
are meant to protect the economy from excessive stock market speculations, and are thus
MANDATORY. (Abacus Securities Corporation vs. Ruben Ampil, G.R. No. 160016, February 27, 2006)
3. Persons involved in Issuance and Distribution:
a. Issuer: the originator, maker, obligor or creator of the security. 


b. Broker: person engaged in the business of buying and selling securities for the account of
others 

c. Dealer: any person who buys and sells securities for his/her own account in the ordinary course
of business. 

d. Clearing agency: any person who acts as intermediary in making deliveries upon payment to effect
settlement in securities transactions. 

e. Exchange: the organized marketplace or facility that brings together buyers and sellers and
executes trades of securities and/or commodities. It covers only listed shares. 

f. Promoter: a person who, acting alone or with others, takes initiative in founding and organizing
the business or enterprise of the issuer and receives consideration therefore.
g. Underwriter: a person who guarantees on a firm commitment and/or declared best effort basis the
distribution and sale of securities of any kind by another.
4. UNDERWRITING: the process of marketing NEW issues of securities. There are three types of
underwriting.
a. Firm Commitment: The underwriter agrees to purchase all or specific amount of the offering for
cash, subject to certain market-outs 

b. Stand-by: It is one where a new issue is offered only to existing shareholders. The underwriter
agrees to ‘stand-by’ and purchase any shares not purchased by existing shareholders at the expiration of a
specified period. 

c. Best Efforts: The underwriter neither purchases the securities from the issuer nor resells them to
the investing public; he only agrees to act as an agent of the issuer.
5. SECURITIES MARKET:
a. Primary Transaction: It involves the issuance of the unsubscribed portion of the authorized
capital stock of the corporation.
b. Secondary Transaction: It involves the sale of previously issued and subscribed shares.
c. Over-the-counter Transaction: It refers to transactions done outside the stock exchange.
6. ***BLUE SKIES LAWS: Laws that REGULATE SECURITIES because they seek to prevent the public
from being victimized into investing into speculative schemes which have no more basis than so many feet of
the blue skies. (Hall v. Geiger-Jones Co.)
7. Securities Regulations Code (SRC) is intended to protect the public and also to strengthen the capital
markets through regulations. **Manner by which SRC protects the public:
Ecce Ancilla Domini! 151 of 160

a. By imposing a continuing duty of FULL DISCLOSURE of information to the public;

b. By requiring REGISTRATION of securities; 

c. By requiring CLOSE MONITORING of securities; 

d. By requiring the registration of and monitoring the activities of PERSONS INVOLVED to
ensure compliance with the law;
e. By prohibiting and penalizing different fRAUDULENT PRACTICES AND
TRANSACTIONS; and 

f. By providing the SEC with and strengthening its powers and functions. (Philippine Stock
Exchange vs. CA, 281 SCRA 232) 

***Securities are regulated because of their peculiar nature that they are created rather than
produced. They can be issued in unlimited amounts, virtually without a cost.
8. TWO LEVELS of Regulation
a. Regulation by the Securities and Exchange Commission (SEC) 

b. SELF-REGULATION by the stock exchange
———————————————-

B. Securities Required to Be Registered

1. What are securities? Sec 3, RA 8799: ***Securities are SHARES, PARTICIPATION OR INTERESTS in
a corporation, commercial enterprise, or profit-making venture, and evidenced by a certificate, contract,
instruments, whether WRITTEN OR ELECTRONIC in character. It includes:
(a) shares of stocks, bonds, debentures, notes, evidence of indebtedness, ASSET-BACKED securities;
(b) investment contracts, certificates of interest or participation in a profit-sharing agreement,
certificates of deposits for a future subscription;
*see notes, infra
(c) Fractional undivided interest in oil, gas or other mineral rights;
**These are included because they are notorious subjects of speculation and fraud. The law
prohibits the forms of splitting mineral interest which had been mostly utilized for speculative purposes.
Interest included are those regarded as giving ownership of oil or gas in place as well as to interests which
merely afford the owner the right to produce oil or gas. There is **no fractional undivided interest if the
whole landowner’s royalty is transferred, even though under the terms of the lease holder may be entitled to only a
fraction of the production.
(d) DERIVATIVES like option and warrants;
*see notes, infra
(e) certificates of assignment, certificates of participation, trust certificates, voting trust certificates or
similar instruments;
(f) proprietary or non-proprietary MEMBERSHIP CERTIFICATES in corporations;
(g) other instruments as may be determined by the SEC.
**The enumeration can be broadly classified into:
1. EQUITY SECURITIES (shares of stocks, investment contract, etc.)

2. DEBT SECURITIES (bonds, debentures, notes, etc.)

a. Long term commercial paper: an evidence of indebtedness of any person with a maturity
of more than 365 days.
b. Short term commercial paper means an evidence of indebtedness of any person with a
maturity of 365 days or less.
2. As to INVESTMENT CONTRACTS:
a. An investment contract is defined in the Amended Implementing Rules and Regulations of RA 8799
as a “contract, transaction or scheme whereby a person invests his money in a common enterprise and
is led to **expect profits PRIMARILY FROM THE EFFORTS OF OTHERS.” Thus, a corporation
allowing a principal investor to enroll in its program by paying a certain amount, which in turn entitles him to be
paid a certain amount if the recruit was able to get a minimum recruitment of 4 investors, is engaged in the
sale or distribution of an investment contract. It **must be registered with SEC BEFORE its sale or
offer for sale or distribution to the public, otherwise the SEC cannot protect the investing public from
fraudulent securities. The strict regulation of securities is founded on the premise that the capital markets
depend on the investing public’s level of CONFIDENCE in the system. (Power Homes Unlimited
Corporation v. SEC 546 SCRA 567 2008)
b. For an investment contract to exist, the following ELEMENTS, referred to as the ***Howey test
must concur:
(1) a contract, transaction, or scheme;
(2) an investment of money;
Ecce Ancilla Domini! 152 of 160

(3) investment is made in a common enterprise;

(4) expectation of profits; and
(5) profits arising primarily/solely from the efforts of others. **NB: The term solely must
not be given a strict interpretation as it would lead to UNREALISTIC results.
**NETWORK MARKETING, a scheme adopted by companies for getting people to buy
their products where the buyer can become a downline seller, who earns commissions from purchases
made by new buyers whom he refers to the person who sold the product to him, is NOT an investment
contract. Thus, ***Network marketing as a scheme, does NOT REQUIRE REGISTRATION.
(Securities and Exchange Commission vs. Prosperity.Com, Inc., G.R. No. 164197, January 25, 2012)
c. A **presumption that a contract is an investment contract arises whenever a person seeks to use the money
of others on the promise of profits. Thus, a corporation allowing a principal investor to enrol in its program by
paying a certain amount, which in turn entitles him to be paid in a certain amount if recruit was able to get a
minimum recruitment of 4 investors… (Power Homes Unlimited Corporation v. SEC).
d. A person is liable for violation of Section 28 (Registration of Brokers, Dealers, Salesmen and
Associated Persons) of the SRC where, acting as a broker, dealer or salesman, he is in the employ of a corporation
which sold or offered for sale UNREGISTERED SECURITIES in the Philippines. The transaction initiated
by the investment consultant in this case is an investment contract or participation in a profit sharing
agreement which must be registered prior to sale or offer for sale or distribution to the public. When the
investor is relatively uninformed and turns over his money to others, essentially depending upon their
representations and their honesty and skill in managing it, the transaction generally is considered to be
an investment contract. The **touchstone is the presence of an investment in a common venture premised on
a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others.
(Securities and Exchange Commission vs. Oudine Santos, G.R. No. 195542, March 19, 2014)
3. More in DERIVATIVES, like options and warrants
a. DERIVATIVE means a financial instrument whose value depends on the interest in or
performance of an underlying security, but which **does not require any investment of principal in the
underlying security.
b. OPTIONS are contracts that give the buyer the right to buy or sell an underlying security at a
predetermined price (exercise/ strike price) on or before the expiry date which can only be extended in
accordance with the Exchange rules.
i. Call options are rights to buy. It is a transferrable option to buy a specified number of shares
at a stated price. It entitles the holder to buy securities at a predetermined price within a specified period of time.
An option that in consideration of premium paid entitles buyer the right to compel seller to deliver to him a
certain number of share of named stock within a given time at a stipulated price which is usually higher than the
prevailing market price at the time the “call” is bought
ii. Put options are rights to sell. It is a transferrable option or offer to deliver a given
number of shares of stock at a stated price at any given time during a stated period An option that, in
consideration of premium paid, gives the purchaser the right to make the seller take from him a given number of
shares of a named stock between a given time at a stipulated price, which is usually below a prevailing market
price of the stock at the time the “put” is purchased. 

iii. Straddle option is a double privilege of a “put” and a “call”, and secures to holder the
right to demand of seller at a certain price within a certain time a certain number of shares of specified stock,
or to require him to take, at the price within the time, the same shares of stock. 

**Regulation of Option Trading (Sec 25): The SRC PROHIBITS members of an Exchange
from directly or indirectly endorsing or guaranteeing the performance of a put, call, or straddle.
c. WARRANTS are rights to subscribe or purchase new or existing shares in a company before the
expiry date which can only be extended in accordance with the Exchange rules. Generally, they have **longer
exercise periods than options.
i. WARRANT CERTIFICATE represents the right to a Warrant:
(a) Detachable warrant may be sold, transferred or assigned to any person by the
warrant holder separate from and independent of, the corresponding Beneficiary Securities
(b) Nondetachable warrant may not be sold, transferred or assigned to any person by
the warrant holder separate from and independent of, the corresponding Beneficiary Securities.
ii. WARRANT INSTRUMENT is a written document containing the terms and conditions
of the issue and exercise of a Warrant, which include
(a) A maximum underlying shares that can be purchased upon the exercise 

(b) The exercise period 

(c) Other provisions required by the Commission.
4. Requirement of Registration of Securities - Sec. 8.1 of the SRC provides, **”Securities shall not be sold
or offered for sale or distribution within the Philippines, without a registration statement duly filed with
Ecce Ancilla Domini! 153 of 160

and approved by the Commission. Prior to such sale, information on the securities, in such form and with such
substance as the Commission may prescribe, shall be made available to each prospective purchaser."
a. The SEC is concerned with the requirement of **FULL DISCLOSURE OF INFORMATION to
the public, PRIOR TO AND AFTER the certificates are registered with the SEC, and the merits of the securities
themselves and the issuer. ***Mere registration as a corporation does not automatically authorize it to deal
with unregistered timeshares. Corporate registration is just one of several requirements before they may deal
with time shares. (Timeshare Realty Corporation v Lao and Cortez, 544 SCRA 254)
b. Section 4 of Batas Pambansa Blg. 176, or the Revised Securities Act, generally requires the
registration of securities and prohibits the sale or distribution of unregistered securities. In the instant
case, the checks were issued by ASB in lieu of the securities enumerated under the Revised Securities
Act in a clever attempt, or so they thought, to take the case out of the purview of the law, which
requires prior license to sell or deal in securities and registration thereof. The scheme was designed to
circumvent the law. It is **one thing for a corporation to issue checks to satisfy isolated individual obligations,
and another for a corporation to execute an elaborate scheme where it would comport itself to the public as a
pseudo-investment house and issue postdated checks instead of stocks or traditional securities to
evidence the investments of its patrons. (Betty Gabionza and Isabelita Tan vs. Court of Appeals, G.R. No.
161057, September 12, 2008)
c. Corporate registration is just one of several requirements before Timeshare Realty may deal with
timeshares (its shares). Under The Revised Securities Act, all securities required to be registered shall be
**registered through the FILING by the issuer or by any dealer or underwriter interested in the sale
thereof, with the SEC, of a SWORN REGISTRATION STATEMENT with respect to such securities.
Prior to fulfillment of all the other requirements of Sec. 8, Timeshare is ABSOLUTELY PROSCRIBED
under Sec. 4 from dealing with UNREGISTERED timeshares, thus, no securities, except of a class exempt
under any of the provisions of Section five hereof or unless sold in any transaction exempt under any
of the provisions of Section six hereof, shall be sold or offered for sale or distribution to the public
within the Philippines unless such securities shall have been registered and permitted to be sold as hereinafter
provided.” (Timeshare Realty vs. Cesar Lao, G.R. No. 158941, February 11, 2008)
5. Disclosure: Initially, information is disclosed in Registration Statement and the Prospectus. Thereafter, there
are periodic and other reports submitted to the SEC. Periods for Disclosure:
a. Pre-filing period 

b. The period between the filing of registration statement and the effective date 

c. Post-effective period. 

**Thus, disclosure is a CONTINUING requirement

B1. Exempt Securities

1. The requirement of registration under Sec. 8.1 shall not as a general rule apply to any of the following
classes of securities:**
A) security issued or guaranteed by the government of the Phils.
B) security issued or guaranteed by the government of a country with diplomatic relations with the
Phils.
C) certificates issued by a receiver or by a trustee in bankruptcy approved by the proper adjudicatory
body
D) security whose seal is regulated by the insurance commission, housing and land use regulatory board, or BIR
E) security issued by a bank except its own shares of stocks
**The SRC exempts from registration the securities issued by banking or financial
institutions mentioned in the law. Nowhere does it state or even imply that the Bank, as a listed corporation,
is exempt from complying with the reports required by the assailed Revised Securities Act Implementing Rules.
The exemption from the registration requirement enjoyed by a bank does not necessarily connote that
it is exempted from the reportorial requirements. Having confined the exemption enjoyed by the bank
merely to the initial requirement of registration of securities for public offering, and not to the subsequent
filing of various periodic reports, the SEC, as the regulatory agency, is able to exercise its power of supervision
and control over corporations and over corporations and over the securities market as a whole. Otherwise, the
objectives of the “Full Material Disclosure” policy would be defeated since petitioner corporation and its
dealings would be totally beyond the reach of the Commission and the investing public. A bank, which is also
a corporation, **must adhere not only to banking and other special laws but also to the rules
promulgated by the SEC. (Union Bank of the Philippines vs. Securities and Exchange Commission, G.R. No.
138949, June 6, 2001)
F) any security added by the SEC
Ecce Ancilla Domini! 154 of 160

*NB: Under Sec. 9.2, the Commission may, by rule or regulation **AFTER PUBLIC
HEARING, ADD to the foregoing any class of securities if it finds that the enforcement of this Code with respect
to such securities is not necessary in the public interest and for the protection of investors.

B2. Exempt Transactions

1. The requirement of registration under Sec. 8.1 shall **not apply to the SALE of any security in any of
the following transactions:
A) judicial sale, or sale by an executor, administrator, guardian, receiver or trustee in insolvency
B) sale by a pledgee or mortgagee or other lien holder selling to liquidate debt
C) **isolated transaction—in which any security is sold, offered for sale, subscription or delivery by
the owner, the same not being made in the course of repeated and successive transaction of a like character, and
the owner or representative not being the underwriter of such security.
D) distribution by a corporation of securities as a stock dividend or other distribution out of surplus
E) sale of capital stock of a corporation to its own stockholders exclusively, where no commission or
other remuneration is paid or given directly or indirectly in connection with the sale of such capital stock.
**The issuance by a corporation of previously authorized but unissued capital stock to existing
stockholders is NOT AUTOMATICALLY EXEMPT from registration and requires an application from
exemption with the SEC. (Nestle Philippines, Inc.,vs. Court of Appeals, 203 SCRA 504)
Under the ruling issued by the SEC, an issuance of previously authorized but still unissued
capital stock may, in a PARTICULAR INSTANCE, be held to be an exempt transaction by the SEC under
Section 6(b) **so long as the SEC finds that the requirements of registration under the Revised Securities
Act are "not necessary in the public interest and for the protection of the investors" by reason, inter
alia, of the small amount of stock that is proposed to be issued or because the potential buyers are very
limited in number and are in a position to protect themselves. (Nestle Philippines, Inc.,vs. Court of
Appeals, G.R. No. 86738, November 13, 1991)
F) issuance of bonds or notes secured by a mortgagee where the mortgage and all the bonds or notes are sold
to a SINGLE PURCHASER at a single sale
G) issue of security in exchange for other security pursuant to a right of conversion if the security
surrendered was registered or exempt from registration
H) broker's transactions executed upon customer's orders on a registered exchange
I) subscription for shares of stock prior to incorporation or in pursuance of an increase in the
authorized capital stock
J) exchange of securites by the issuer with the existing security holders exclusively, where no
commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.
K) ***sale of securities to less than 20 persons during a 12-month period
L) sale of securities to any of the following qualified buyers:
i. bank
ii. registered investment house
iii. insurance company
iv. pension fund or retirement plan maintained by the government or managed by a bank or
trust company
v. investment company
vi. other buyers determined by the SEC as qualified, on the basis of such factors as
financial sophistication, net worth, knowledge, and experience in financial and business matters, or amount of
assets under management.
M) other transactions exempted by the SEC (Sec. 10 provides, the Commission may exempt other
transactions, if it finds that the requirements of registration under this Code is not necessary in the public
interest or for the protection of the investors such as by the reason of the small amount involved or the
limited character of the public offering.)
———————————

C. Procedure for Registration of Securities

1. Under Sec. 3.12, "REGISTRATION STATEMENT" is the application for the registration of securities
required to be filed with the Commission.
a. Sec. 12.1 All securities required to be registered under Sec. 8.1 shall be registered through the
FILING by the issuer in the main office of the Commission, of a SWORN REGISTRATION
STATEMENT with the respect to such securities, in such form and containing such information and
document as the Commission prescribe. It shall include any prospectus required or permitted to be delivered.
b. Sec. 12.4. The registration statement shall be SIGNED by the issuer’s executive officer, its
principal operating officer, its principal financial officer, its comptroller, its principal accounting officer, its
Ecce Ancilla Domini! 155 of 160

corporate secretary, or persons performing similar functions accompanied by a DULY VERIFIED

RESOLUTION of the board of directors of the issuer corporation.
The WRITTEN CONSENT of the expert named as having certified any part of the
registration statement or any document used in connection therewith shall also be filed.
Where the registration statement involves shares to be sold by selling shareholders, a written
certification by such selling shareholders as to the accuracy of any part of the registration statement
contributed to by such selling shareholders shall be filed.
c. Sec. 12.5. (a) Upon filing of the registration statement, the issuer shall pay to the Commission a
FEE of not more than one-tenth (1/10) of one per centum (1%) of the maximum aggregate price at
which such securities are proposed to be offered.
(b) NOTICE of the filing of the registration statement shall be immediately PUBLISHED
by the issuer, at its own expense, in two (2) newspapers of general circulation in the Philippines, once a
week for two (2) consecutive weeks, or in such other manner as the Commission by the rule shall prescribe.
d. Sec. 12.6. Within forty-five (45) days after the date of filing of the registration statement, or by
such later date to which the issuer has consented, the Commission shall DECLARE the registration
statement effective or rejected, unless the applicant is allowed to amend the registration statement as
provided in Sec. 14.
The Commission shall enter an ORDER declaring the registration statement to be effective
if it finds that the registration statement together with all the other papers and documents attached thereto, is on
its face complete and that the requirements have been complied with.
e. Sec. 12.7. Upon effectivity of the registration statement, the issuer shall STATE UNDER OATH
in every prospectus that all registration requirements have been met and that all information are true and
correct as represented by the issuer or the one making the statement. Any untrue statement of fact or omission
to state a material fact required to be stated herein or necessary to make the statement therein not misleading
shall constitute fraud.
*NB: “Prospectus” is the document made by or on behalf of an issuer, underwriter or dealer to
sell or offer securities for sale to the public through registration statement filed with the Commission.

D. Prohibitions on Fraud, Manipulation and Insider Trading

[] A **COMMODITY FUTURES CONTRACT is a SPECIES of securities as provided under Sec.
2 of the Revised Securities Act. The Revised Rules and Regulations on Commodity Futures Trading defines
Commodity Futures Contract as an agreement to buy or sell a specified quantity and grade of a
commodity at a future date at a price established at the floor of the exchange. The contract falls under the
kind commonly called "FUTURES". The term "futures" has grown out of those purely speculative
transactions in which there are **CONTRACTS TO SELL FOR FUTURE DELIVERY, but where IN
FACT NO DELIVERY IS INTENDED OR EXECUTED. The seller does not have or expect to have a stock of
merchandise he purports to sell nor does the buyer expect to receive it or to pay for the price. Instead of that, a
percentage or margin is paid, which is increased or diminished as the market rates go up and down, and
accounted for to the buyer. This is **simple speculation or gambling on prices within a given time which
is illegal as against public policy. The SC ruled that the parties never intended to make or accept delivery
of any particular commodity but merely made a speculation on the rise or fall in the market of the contract price
of the commodity on the pretended date of delivery so that if the forecast was correct, one party would make a
profit, otherwise, one party would lose money. The written trading contract in question is not illegal but the
transaction between ONAPAL and Chua is in the nature of a gambling agreement. A contract for the
sale of commodity to be delivered at future time, if entered into without the intention delivering such
commodity but with an understanding that the buyer is merely to receive or pay the difference between
the contract and the market prices, is a transaction which is illegal. (Onapal Philippines Commodities,
Inc.,vs. Court of Appeals, G.R. No. 90707, February 1, 1993)
———————————————

D1. Manipulation of Security Prices.

1. Sec. 24.1 provides, "it shall be unlawful for any person acting for himself or through a dealer or broker,
directly or indirectly:
(a) To **create a FALSE OR MISLEADING APPEARANCE of active trading in any listed
security traded in an Exchange of any other trading market:
i. By effecting any transaction in such security which involves NO CHANGE IN THE
BENEFICIAL OWNERSHIP thereof;
ii. By entering an order for the purchase of such security knowing that a simultaneous order
of substantially the same size, time and price for the sale or purchase of the same security will be
made; or
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iii. By performing similar acts where there is no change in beneficial ownership.

(b) To affect, alone or with others, securities or transactions in securities that:
i. Raises their price to induce the purchase of a security; or
ii. Creates active trading to induce such a purchase or sale through manipulative devices
such as marking the close, painting the tape, squeezing the float, hype and dump, boiler room operations and
such other similar devices.
(c) To circulate or disseminate information that the price of any security listed in an Exchange
will or is likely to rise or fall xxx for the purpose of raising or depressing the price or of inducing the sale
of such security.
(d) To make false or misleading statement xxx for the purpose of inducing the purchase or sale
of any security listed or traded in an Exchange.
(e) To effect, either alone or others, any series of transactions for the purchase and/or sale of any
security traded in an Exchange for the purpose of pegging, fixing or stabilizing the price of such security;
unless otherwise allowed by this Code or by rules of the Commission."

D2. Short Sales

1. Sec. 24.2. provides, "no person shall use or employ, in connection with the purchase or sale of any security
any MANIPULATIVE OR DECEPTIVE DEVICE OR CONTRIVANCE. Neither shall any short sale
be effected nor any stop-loss order be executed in connection with the purchase or sale of any security
except in accordance with such rules and regulations as the Commission may prescribe as necessary or
appropriate in the public interest for the protection of investors."

D3. Fraudulent Transactions

1. Sec. 26 provides, "it shall be unlawful for any person, directly or indirectly, in connection with the purchase or
sale of any securities to:
(a) [Sec. 26.1] Employ any device, scheme, or artifice to DEFRAUD;
(b) [Sec. 26.2] Obtain money or property by means of any untrue statement of a material fact or
any omission to state a material fact; or
(c) [Sec. 26.3] Engage in any act, transaction, practice or course of business which operates or would
operate as a fraud or deceit upon any person."

D4. Insider Trading

1. Sec. 3.8 provides for the definition of an "Insider", which means:
(a) the issuer;
(b) a director or officer (or any person performing similar functions) of, or (c) a person
controlling the issuer; gives or gave him access to material information about the issuer or the security
that is not generally available to the public;
(d) A government employee, director, or officer of an exchange, clearing agency and/or self-
regulatory organization who has access to material information about an issuer or a security that is not
generally available to the public; or
(e) a person who learns such information by a communication from any forgoing insiders.
2. The term “insiders” ***now includes persons whose relationship or FORMER RELATIONSHIP to
the issuer gives or gave them ACCESS to a fact of special significance about the issuer or the security
that is NOT GENERALLY AVAILABLE, and ONE WHO LEARNS SUCH A FACT FROM AN INSIDER
knowing that the person from whom he learns such fact is an insider. Insiders have the DUTY TO
DISCLOSE MATERIAL FACTS which are known to them by virtue of their position but which are not
known to persons with whom they deal and which, if known, would affect their investment judgment.
(Securities and Exchange Commission vs. Interport Resources Corporation, et. al., G.R. No. 135808, October 6,
2008)
3. Sec. 27.2 provides that, the information is “material non-public”, if it:
i. has not been generally disclosed to the public and will likely affect the market price of the
security after being disseminated to the public; or
ii. will be considered by a reasonable person important in determining his course of action
whether to buy, sell, or hold a security
4. Sec. 27 provides for the Insider’s Duty to Disclose When Trading. Under Sec. 27.1, "it shall be unlawful for
an insider to sell or buy a security of the issuer, while in possession of material information with
respect to the issuer or the security that is not generally available to the public, unless:
(a) The insider proves that the information was not gained from such relationship; or
(b) If the other party selling to or buying from the insider (or his agent) is identified, the insider
proves:
Ecce Ancilla Domini! 157 of 160

(i) that he disclosed the information to the other party, or

(ii) that he had reason to believe that the other party is also in possession of the
information.
5. NB: Presumption; A purchase or sale of a security of the issuer made by an insider defined in Subsection
3.8, or such insider’s spouse or relatives by affinity or consanguinity within the second degree,
legitimate or common-law, shall be presumed to have been effected while in possession of material
nonpublic information if transacted after such information came into existence but prior to
dissemination of such information to the public and the lapse of a reasonable time for market to
absorb such information: Provided, however, That this PRESUMPTION SHALL BE REBUTTED upon
a showing by the purchaser or seller that he was AWARE of the material nonpublic information at the
time of the purchase or sale.
Furthermore, Sec. 27.3 provides for an additional prohibition. It states, "it shall be ***unlawful for any
insider to communicate MATERIAL NONPUBLIC INFORMATION about the issuer or the security to
any person who, by virtue of the communication, becomes an insider as defined in Subsection 3.8, where
the insider communicating the information knows or has reason to believe that such person will
LIKELY buy or sell a security of the issuer while in possession of such information.
———————————————

E. Protection of Investors

E1. Tender Offer Rule

1. Tender Offer means a **PUBLICLY ANNOUNCED INTENTION by a person acting alone or in concert
with other persons to acquire equity securities of a public company;
A tender offer is an offer by the acquiring person to stockholders of a public company for them
to tender their shares therein on the terms specified in the offer. It is intended to protect minority
shareholders against any scheme that dilutes the share value of their investments. It gives the minority shareholders a chance to
exit the company under reasonable terms, giving the opportunity to sell their shares at the same price as those of the majority
shareholders.
****The MANDATORY TENDER OFFER is still applicable even if the acquisition, direct or
indirect, is less than 35% when the purchase would result in ownership of over 51% of the total
outstanding equity securities of the public company. (Cemco Holdings, Inc., vs. National Life Insurance
Company of the Philippines, G.R. No. 171815, August 7, 2007)
2. Under Sec. 19, "a PUBLIC COMPANY is any corporation with:
(a) a class of equity securities listed on an Exchange; or
(b) assets of at least [note that in the reviewer of Sundiang, it says in excess of] fifty million pesos
(50,000,000.00) and having two hundred (200) or more stockholders which are holding at least one hundred
(100) shares each."
***A “public company,” as contemplated by the SRC is NOT LIMITED to a company whose shares
of stock are publicly listed; even companies whose shares are offered only to a specific group of
people, are considered a public company, provided they fall under Sub-section 17.2 of the SRC, which
provides: “any corporation with a class of equity securities listed on an Exchange or with assets of at least
Fifty Million Pesos (P50,000,000.00) and having two hundred (200) or more holders, at least two
hundred (200) of which are holding at least one hundred (100) shares of a class of its equity securities.”
Philippine Veterans Bank meets the requirements and as such, is subject to the reportorial requirements for the
benefit of its shareholders. (Philippine Veterans Bank v. Callangan and/or the Securities and Exchange
Commission, G.R. No. 191995, August 3, 2011)
3. Sec. 19 further provides for the rule **when Tender Offers are **MANDATORY, thus, "any person or group
of persons acting in concert who:
(a) intends to acquire at least 35% or more of any class of any equity security of a public company; or
(NB: they must disclose their intention to acquire the shares contemporaneously with the tender offer)
(b) intends to acquire at least 35% or more of such equity in a public company in one or more
transactions within a period of twelve (12) months, shall make a tender offer to all holders of such class for the
number of shares so acquired within the said period."
(c) If any acquisition of even less than 35% would result in ownership of over 51% of the total
outstanding securities of a public company, the acquirer shall be required to make a tender offer for all
the outstanding equity securities to all remaining stockholders of the said company at a price supported by an
independent financial advisor or equivalent third party. The acquirer in such tender offer shall be required to
accept any and all securities this tendered. [Sundiang Reveiwer]
4. Transactions ****exempt from mandatory tender offer requirement:
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(a) any purchase of shares from the unissued capital stock provided that the acquisition will not
result to 50% or more ownership of shares by the purchases;
(b) any purchase of shares from an increase in authorized capital stock;
(c) purchase in connection with foreclosure proceedings involving a duly constituted pledge or
security arrangement where the acquisition is made by the debtor or creditor;
(d) purchase in connection with privatization undertaken by the government of the Phils.;
(e) purchases in connection with corporate rehabilitation under court supervision;
(f) purchase through an open market at the prevailing market price; and
(g) merger or consolidation [Sundiang Reveiwer]

E2. Rules on Proxy Solicitation

1. Sec. 20 provides for the rules on Proxy Solicitation:
(a) Sec. 20.2 Proxies must be in writing, signed by the stockholder or his duly authorized
representative and filed before the scheduled meeting with the corporate secretary.
(b) Sec. 20.3 Unless otherwise provided in the proxy, it shall be valid only for the meeting for which it
is intended. No proxy shall be valid and effective for a period longer than five (5) years at one time.
(c) Sec. 20.4 No broker or dealer shall give any proxy, consent or any authorization, in respect of any
security carried for the account of the customer, to a person other than the customer, without written
authorization of such customer.
(d) Sec. 20.5 A broker or dealer who holds or acquire the proxy for **at least ten percent (10%) or
such percentage as the commission may prescribe of the outstanding share of such issuer, shall submit a
report identifying the beneficial owner of ten days after such acquisition, for its own account or customer,
to the issuer of security, to the exchange where the security is traded and to the Commission.
**The right of stockholder to vote by proxy is generally established by the Corporation Code, but it is the
SRC which SPECIFICALLY REGULATES THE FORM and use of proxies, more particularly PROXY
SOLICITATION, a procedure that ANTECEDES PROXY VALIDATION. When proxies are solicited in
relation to the election of corporate directors, the resulting controversy, even if it ostensibly raised the
violation of the SEC rules on proxy solicitation, should be properly seen as an election controversy within
the original and exclusive jurisdiction of the trial courts. (GSIS vs. Court of Appeals, G.R. No. 183905,
April 16, 2009)
2. As it stands, all matters affecting the manner and conduct of the election of directors are **properly
cognizable by the regular courts. Otherwise, these matters may be brought before the SEC for resolution based
on the regulatory powers it exercises over corporations, partnerships and associations. Accordingly, the power of the SEC to
regulate proxies remains in place in instances when stockholders vote on matters other than the
election of directors. The ***test is whether the controversy relates to such election. Indeed, the
validation of proxies in this case relates to the determination of the existence of a quorum. Nonetheless, it is a
quorum for the election of the directors, and, as such, requires the presence – in person or by proxy – of the
owners of the majority of the outstanding capital stock of Omico. Also, the fact that there was no actual voting
did not make the election any less so, especially since Astra had never denied that an election of directors took
place. Hence, SEC did not have jurisdiction over this case. (Securities and Exchange Commission vs. Court
of Appeals et al., G.R. No. 187702, October 22, 2014)

E3. Disclosure Rule

1. The Supreme Court, in Philippine Stock Exchange v. Securities and Exchange Commission, et. al. (1998),
recognized the policy of 'full material disclosure', adopted by the SEC pursuant to their regulatory authority,
where all companies, listed or applying for listing, are required to divulge truthfully and accurately, all
material information about themselves and the securities they sell, for the protection of the investing
public, and under pain of administrative, criminal and civil sanctions. While the employment of the
***’FULL MATERIAL DISCLOSURE' POLICY is sanctioned and recognized by the laws, nonetheless,
the Revised Securities Act sets SUBSTANTIAL AND PROCEDURAL STANDARDS which a proposed issuer of
securities must satisfy.
2. Sec 30 of the Revised Securities Act provides that insiders are obligated to disclose MATERIAL
INFORMATION to the other party OR ABSTAIN from trading the shares of his corporation. It
explains in simple terms that the insider's misuse of nonpublic and undisclosed information is the gravamen of
illegal conduct. The **INTENT OF THE LAW IS THE PROTECTION OF INVESTORS against
fraud, committed when an insider, using secret information, takes advantage of an uninformed
investor. This duty to disclose or abstain is **based on TWO FACTORS: first, the existence of a
RELATIONSHIP giving access, directly or indirectly, to information intended to be available only for a
corporate purpose and not for the personal benefit of anyone; and second, the INHERENT
UNFAIRNESS involved when a party takes advantage of such information knowing it is unavailable to
Ecce Ancilla Domini! 159 of 160

those with whom he is dealing. **Under the law, what is REQUIRED to be disclosed is a FACT OF
"SPECIAL SIGNIFICANCE" which may be
(a) a MATERIAL FACT which would be likely, on being made generally available, to affect the
market price of a security to a significant extent, or
(b) one which a reasonable person would consider especially important in determining his
course of action with regard to the shares of stock. Insiders are obligated to disclose material information to
the other party or abstain from trading the shares of his corporation. (Securities and Exchange Commission vs.
Interport Resources Corporation, et. al., G.R. No. 135808, October 6, 2008)
—————————————-

F. Civil Liability
*Civil suits falling under the SRC (like liability for selling unregistered securities) are under the
***EXCLUSIVE ORIGINAL JURISDICTION of the RTC and hence, NEED NOT BE FIRST FILED
before the SEC, **unlike criminal cases arising from violations of SRC's provisions wherein the latter body
exercises PRIMARY JURISDICTION. (Jose U. Pua vs. Citibank, N. A. G.R. No. 180064, September 16, 2013)
1. Civil Liabilities on Account of FALSE REGISTRATION STATEMENT - Sec. 56.1 provides, "Any person
acquiring a security, the registration statement of which or any part thereof contains on its effectivity an
untrue statement of a material fact or omits to state a material fact required to be stated therein or
necessary to make such statements not misleading, and who suffers damage, may sue and recover
damages from the following enumerated persons, unless it is proved that at the time of such acquisition
he knew of such untrue statement or omission:
(a) the issuer and every person who signed the registration statement
(b) every:
i. director or partner of the issuer
ii. person named in the registration statement as about to become a director or partner of the
issuer whose written consent is filed with the registration statements
iii. auditor who certified the financial statements used in connection with the registration
statement or prospectus
iv. person who, with his written consent, was named as having prepared or certified any part of
the registration or having prepared or certified any report or valuation used in connection with the registration
statement
v. selling stockholder who contributed to and certified to the accuracy of a portion of the
registration statement
vi. underwriter with respect to such security."
*NB: Under Sec. 56.2, If the person who acquired the security did so after the issuer has made generally
available to its security holders an income statement covering a period of at least twelve (12) months beginning
from the effective date of the registration statement, then the right of recovery under this subsection shall
be conditioned on proof that such person acquired the security relying upon such untrue statement in
the registration statement or relying upon the registration statement and not knowing of such income
statement, but such reliance may be established without proof of the reading of the registration
statement by such person.
*Under Section 62 of the SRC, no action shall be maintained to enforce any liability created under
Section 56 of the SRC (False registration statement) and Section 57 (sale of unregistered security and liabilities
arising in connection with prospectus, communication and other reports) unless **brought within two (2)
years AFTER discovery of the untrue statement or omission or after the violation upon which it is
based but NOT MORE than five (5) years AFTER the security was bona fide offered to the public or
more than 5 years after the sale, respectively. The prescriptive periods under the mentioned sections
**pertain only to the civil liability in cases of violations of the SRC and not to criminal liability under
the same violations. However, given the absence of a prescriptive period for the enforcement of the criminal
liability for violations of the Securities Regulation Code, Act No. 3326 now comes into play. Applying Section 1
of Act No. 3326, a criminal prosecution for violations of the SRC shall prescribe in **twelve years.
(Citibank N.A. vs. Tanco-Gabaldon, et al. G.R. No. 198444, September 4, 2013)

2. Civil Liability of Fraud in Connection with Securities Transactions – Sec. 58 provides, "Any person who
engages in any act or transaction in violation of Sections 19.2 (untrue statements in connection with tender
offers), 20 (rules on proxy solicitations) or 26 (fraudulent transactions), or any rule or regulation of the
Commission thereunder, shall be liable to any other person who purchases or sells any security, grants or
refuses to grant any proxy, consent or authorization, or accepts or declines an invitation for tender of a security,
as the case may be, for the damages sustained by such other person as a result of such act or
transaction."
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While Section 5 of PD 902-A was amended by Sec. 5.2 of RA 8799, there is no repeal of Section 6
thereof declaring that prosecution under the Decree, or any Act, law, rules and regulations enforced and
administered by the SEC shall be without prejudice to any liability for violation of any provision of the Revised
Penal Code. Therefore, the fraudulent devices, schemes or representations which, originally the Prosecution and
Enforcement Department of the SEC would exclusively investigate and prosecute, are those in violation of any
law or rules and regulation administered and enforced by the SEC and shall be without prejudice to any liability
for violation of the Revised Penal Code. Hence, if the fraudulent act is punished under the RPC, like estafa
under Art. 315, the responsible person may be criminally prosecuted before the regular courts ***in
addition to proceedings before the branches of the RTC designated by the Supreme Court to try and
decide intra-corporate controversies. Therefore, since the alleged fraudulent acts committed by petitioner
pertaining to the nonliquidation of cash advances constitute the offense of estafa under Art. 315 of the RPC,
the criminal case may be **prosecuted independently and simultaneously with the corporate/civil case
that may be filed for violation of Sec.5 of PD 902-A, as amended by RA 8799. In light of the amendment
brought about by RA 8799, the doctrine of primary jurisdiction no longer precludes the simultaneous
filing of the criminal case with the corporate/civil case. (Fabia vs. Court of Appeals, 2002)

3. Civil Liability for Manipulation of Security Prices. – Sec. 59 provides that, "Any person who willfully
participates in any act or transaction in violation of Section 24 (manipulation of security prices) shall be liable to
any person who shall purchase or sell any security at a price which was affected by such act or
transaction, and the person so injured may sue to recover the damages sustained as a result of such act
or transaction."

4. Civil Liability with Respect to Commodity Futures Contracts and Pre-need Plans – Sec. 60.1 provides, "Any
person who engages in any act or transactions in willful violation of any rule or regulation under Section
11 (Commodity Futures Contracts) or 16 (Pre-need Plans), which the Commission denominates at the time of
issuance as intended to prohibit fraud, manipulation, fictitious transactions, undue speculation, or other unfair or
abusive practices with respect to commodity future contracts or to prohibit fraud in the offer and sale of pre-
need plans, shall be liable to any other person sustaining damages as a result of such act or transaction."

5. Civil Liability on Account of Insider Trading – Sec. 61.1 provides, "Any insider who violates any rule or
regulation under the SRC, by purchasing or selling a security while in possession of material information not
generally available to the public, shall be liable in a suit brought by any investor who, contemporaneously
with the purchase or sale of securities that is the subject of the violation, purchased or sold securities of the
same class unless such insider, or such person in the case of a tender offer, proves that such investor
knew the information or would have purchased or sold at the same price regardless of disclosure of the
information to him." Further, Sec. 61.2 states, "An insider, by communicating material nonpublic information,
shall be jointly and severally liable with, and to the same extent as, the insider, or person in the case of a
tender offer, to whom the communication was directed and who is liable by reason of his purchase or
sale of a security."

6. Validity of Contracts
(a) Sec. 71.1 provides, "Any condition, stipulation, provision binding any person to waive compliance
with any provision of this Code or of any rule or regulation thereunder, or of any rule of an Exchange
required thereby, as well as the waiver itself, shall be void."
(b) Sec. 71.2 provides, "Every contract made in violation of any provision of the SRC or any rule under
it, and every contract, the performance of which involves the violation of, or the continuance of any relationship
or practice in violation of, any provision of the same, shall be void, as regards:
i. the rights of any person who, in violation of SRC, shall have made or engaged in the
performance of any such contract; and
ii. the right of any person who, not being a party to such contract, shall have acquired any right
thereunder with actual knowledge of the facts by reason of which the making or performance of such contract
was in violation of any such provision, rule or regulation.

REFERENCES
1. UST Notes: mainly lectures of Dean Divina; GN; case doctrines; class discussions with Atty. Tayag;
2. Contributions of Kyle & Lau.