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I NTRODUCTION 3. Business Trust – a legal relation whereby one
person, called the trustor, conveys a property in
confidence to another, called the trustee, for the
Basic Types of Business Organizations benefit of a person called the beneficiary (CIVIL
1. Sole Proprietorship – a form of business CODE, Art. 1440).
organization with only one proprietary owner; a 3. Joint Venture – an association of persons or
single individual conducts business under his own companies jointly undertaking some commercial
name (AQUINO, PHILIPPINE CORPORATE enterprise; generally, all contribute assets and
LAW COMPENDIUM (2014), p. 3) [hereinafter, share risks. It requires a community interest in the
AQUINO, Philippine Corporate Law performance of the subject, a right to direct and
CompendiumCorporate Law]). govern the policy connected therewith, and duty,
Partnership – two or more persons bind which may be altered by agreement to share both
themselves to contribute money, property, or in profits and losses (Kilosbayan v. Guingona,
industry to a common fund, with the intention of G.R. No. 113375, May 5, 1994).
dividing the profits among themselves (CIVIL 3. Cooperative – duly registered association of
CODE, Art. 1767). persons, with common bond of interest, who have
Joint Accounts (cuentas en participacion) – an voluntarily joined together to achieve lawful
arrangement whereby merchants may interest common social or economic end, making
themselves in the transactions of other equitable contributions to the capital required and
merchants, contributing thereto the part of capital accepting a fair share of the risks and benefits of
they may agree upon, and participating in the the undertaking in accordance with the universally
favorable and unfavorable results thereof in the accepted cooperative principles (R.A. No. 6938,
proportion they may determine (CODE OF Sec. 3).
COMMERCE, Art. 239). This is commonly called 3. Association – an unincorporated society or body
an “accidental partnership” and there is no of individuals, formed for moral, benevolent,
indication in the public that there is an existing social, patriotic or political purposes. It is a
arrangement because only the ostensible partner creature of contract without a legal entity separate
is conducting the business (AQUINO, supra at from the individuals composing it. Thus, an
16). It is a partnership constituted exclusively association cannot sue or be sued, it cannot enter
under the name of the ostensible manager or into contracts in the name of the association, and
conductor of business and the existence of which neither can it acquire properties under its common
is only known to those who had an interest in the name (DE LEON & DE LEON Jr.,
same; there being no mutual agreements CORPORATION CODE (2013) [hereinafter, DE
between the partners and without a corporate LEON & DE LEON Jr., Corporation Code]).
name indicating to the public in some way that 3. Condominium Corporation – specially formed
there are other people concerned with the for the purpose of holding title to the common
partnership (Bourns v. Carman, G.R. No. L-2880, areas, including the land, or the appurtenant
December 4, 1906). interests in such areas in which the holders of
separate interest shall automatically be members
or shareholders, to the exclusion of others, in
EXECUTIVE COMMITTEE SUBJECT COMMITTEE MEMBERS ADVISERS
TYRONE LEWIS D. ONG over-all ANNE SHARMAINE P. NIKKA M. BACCAY, DEAN EDUARDO J. F.
chairperson, ULAHMARIA CORTEZ SUBJECT CHAIR, FELIZARDO L. ROMANO, ABELLA, ATTY.
JESUSA NAZARENE L. URUBIO MARIA MIRELLA M. ALVERO ABIGAIL B. COMALING, EFREN VINCENT M.
ASSISTANT SUBJECT CHAIR,
chairperson for academic AMALEA CHRISTINE L. DIZON, ATTY. MARIA
BASTIAN MIGUEL Y.
operations, ANNA PATRICIA M. LOMONGO EDP, JHOANNA TAPEL, OLIVIA PAULA C. ZARAH R.
DERECHO chairperson for hotel STEFFANY G. NARAG, MAURICIO, JOHN VILLANUEVA-
operations, PAOLO ROMEO BANKING LAWS FERNAND DON F. CASTRO, ATTY.
VALENTINO S. GO vice- REINIEL C. SANTOS, MAGCANLAS, BIENZ CHARLENE MAE C.
chairperson for operations, CORPORATION LAWS REINER DRAEION A. QUE, TAPIC-CASTRO
ARTLYN GEM G. SEÑORAN vice- FRANCISCO VICENI G. ALBA SARAH JOY V. LUZON,
I, INSURANCE LAWS
chairperson for secretariat, ELLYSE B. MANUEL, ANNA
JONNAH MARIE D. MORADO,
CLARISA G. BELO vice- LAWS ON INTELLECTUAL RAEZA A. LACADIN,
chairperson for finance, CARLO PROPERTY KRISTOFER ABE B. POJAS,
VIEL C. SAPLAN vice-chairperson IVAN PAULO B. SALANGUIT, JIRAH L. JARETA, LYNK
for audit, MA. CELINE P. NEGOTIABLE INSTRUMENTS JUREN U. BAYSA, JHON
ENRIQUEZ vice chairperson for LAW ROMMEL L. LUMIO
electronic data processing, JAN DARRYL C.
DIMACULANGAN,
DEMETRIO RONALDO L. SIOCO
TRANSPORTATION LAWS
vice-chairperson for logistics, JEREMY M. MERCADER,
JOANNA KRYSTLE MUNGCAL SPECIAL COMMERCIAL
vice-chairperson for membership LAWS
proportion to the appurtenant interest of their Partnership Corporation
respective units in the common areas (R.A. No. partnership debts to
4726, Sec. 2). third persons.
3. Corporation – an artificial being created by As to Transfer of Interest
operation of law, having the right of succession Partner cannot transfer
and the powers, attributes and properties his interest in the
expressly authorized by law or incident to its Stockholder has
partnership so as to
existence (CORPORATION CODE, Sec. 2). generally the right to
make the transferee a
transfer his shares
partner without the
Partnership v. Corporation without prior consent of
unanimous consent of
Partnership Corporation the other stockholders
all the existing partners
As to Creation because corporation is
because the
not based on this
Created by mere partnership is based on
Created by law or by principle.
agreement of the the principle of delectus
operation of law.
parties. personarum.
As to Number of Organizers As to Term of Existence
Requires at least 5 Corporation may not be
May be organized by at Partnership may be
incorporators (except a formed for a term in
least 2 persons. established for any
corporation sole). excess of 50 years
period of time
As to Commencement of Judicial Personality extendible to not more
stipulated by the
Acquires juridical than 50 years in any
partners.
personality from the one instance.
Acquires juridical
date of issuance of the As to Firm Name
personality from the
certificate of Corporation may adopt
moment of execution of Limited partnership is
incorporation by the any name provided it is
the contract of required by law to add
Securities and not the same as or
partnership. the word “Ltd.” to its
Exchange Commission similar to any
name.
(SEC). registered firm name.
As to Powers As to Dissolution
Partnership may May be dissolved at Can only be dissolved
Corporation can
exercise any power any time by any or all of with the consent of the
exercise only the
authorized by the the partners. State.
powers expressly
partners (provided it is As to Governing Law
granted by law or
not contrary to law, Governed by the
implied from those Governed by the NCC.
morals, good customs, Corporation Code.
granted or incident to
public order, public
its existence.
policy). Historical Background of Philippine Corporate
As to Management Law
The power to do Prior to 1906, the law regulating business entities in
Unless agreed upon,
business and manage the Philippines was the Spanish Code of Commerce
every partner is an
its affairs is vested in of 1885. These entities were not, however, referred to
agent of the
partnership.
the board of directors or as “corporations” but as “sociedades” which were
trustees. denominated as “sociedades de cuentas
As to Effect of Mismanagement participaciones,” “sociedades agricolas” or
The suit against a “sociedades anonimas”. Their characteristics are
member of the board of different from the corporations as we know them today
A partner as such can
directors or trustees although they possess some features quite similar to
sue a co-partner who
who mismanages must the latter (LOPEZ, THE CORPORATION CODE OF
mismanages.
be in the name of the THE PHILIPPINES, pp. 2-3 [hereinafter, LOPEZ,
corporation. Corporation Code]).
As to Right of Succession
Partnership has no Corporation has right of Philippine jurisprudence recognized the concept of
right of succession. succession. cuentas en participation (Bourns v. Carman, G.R. No.
As to Extent of Liability To Third Persons L-2880, December 4, 1906).
Stockholders are liable
Partners are liable During the American occupation, Act No. 1459 of 1906
only to the extent of the
personally and (Corporation Law) was enacted aimed at replacing the
shares subscribed by
subsidiarily (sometimes “sociedades” with the concept of “corporations” under
them (limited liability
solidarily) for the American Laws.
feature).

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The Corporation Code of the Philippines was passed The enterprise entity theory hinges itself on the
by the Batasang Pambansa and approved by the fact that there can be no corporate existence
President on May 1, 1980, the date of its effectivity. It without persons to compose it. There can be no
was intended to supplant the Old Corporation Code association without associates (Id.).
(Bourns v. Carman, supra).
Tri-Level Existence in the Corporate Setting
During the American occupation, Act No. 1459 of the 0. The corporation as a juridical entity or a juridical
Philippine Commission (Corporation Law) was fiction, which views the relationship between the
enacted to introduce the American concept of State and the Corporation.
corporations into the Philippines and to replace the 0. The 4 contractual relationships on 4 sub-levels,
Spanish law concept of sociedad anonima (Harden v. namely:
Benguet Consolidated Mining Company, G.R. No. L- . Between the corporation and its agents or
37331, March 18, 1933). representatives to act in the real world, such
as its directors and its officers, governed
Batas Pambansa Blg. 68. Otherwise known as The suppletorily by the Law on Agency;
Corporation Code of the Philippines which took effect . Between the corporation and its shareholders
on May 1, 1980 repealed Act No. 1459 (AQUINO, or members;
Philippine Corporate Law Compendium, supra at 20). . Between and among the shareholders in a
common venture; and
C ONCEPT A ND A TTRIBUTES . Between the corporation and third parties or
“outsiders” which is essentially governed by
O F A C ORPORATION Contract Law, and Labor Law when it comes
to relationship with officers and employees.
0. The corporation becomes in its operation a
A. Corporation
business economic unit, a business enterprise, or
It is an artificial being, created by operation of law,
what is called in accounting as “going concern”
having the right of succession and the powers, (VILLANUEVA, supra at 16).
attributes and properties expressly authorized by
law or incident to its existence (CORPORATION
Advantages of Corporate Medium (SCLF)
CODE, Sec. 2).
0. Strong Juridical Personality – it has legal capacity
to act and to contract as a distinct person in its
Theories on Formation of a Corporation (CE)
own name; and it has continuity of existence;
0. Concession Theory (also known as “Fiat 0. Centralized Management – its management is
Theory,” “Government Paternity Theory,” or
centralized in the Board of Directors to whom also
“Franchise Theory”).
are granted all corporate powers under Sec. 23 of
the Corporation Code;
A corporation is an artificial creature without any 0. Limited Liability to Investors – liability of investors
existence until it has received the imprimatur of
is limited to their shares, subject to certain
the state acting according to law, through the SEC exceptions; and
(Tayag v. Benguet Consolidated, Inc., G.R. No. L- 0. Free Transferability of Units of Investment - as a
23145, November 29, 1968).
general rule, shares of stock can be transferred
without the consent of other stockholders
There is thus a rejection of Gierke's (VILLANUEVA, supra at 22-25).
genossenchaft theory, the basic theme of which is
the reality of the group as a social and legal entity, B. Attributes of a Corporation (SOAP)
independent of state recognition and concession 0. It enjoys the right of Succession;
(Tayag v. Benguet Consolidated Inc., supra).The
0. It is created by Operation of law;
Tayag ruling rejects the Genossenschaft Theory
0. It is an Artificial being with separate and
in which the latter treats a corporation as “the
distinct personality; and
reality of the group as a social and legal entity, 0. It has the Powers, attributes and properties
independent of state recognition and concession.” expressly authorized by law or incident to its
existence (CORPORATION CODE, Sec. 2).
0. Theory of Corporate Enterprise or Economic
Unit
0. Right of Succession
The corporation is not merely an artificial being,
Perpetual succession is that continuous existence
but more of an aggregation of persons doing which enables a corporation to manage its affairs,
business, or an underlying business unit and hold property without the necessity of
(VILLANUEVA, PHILIPPINE CORPORATE LAW,
perpetual conveyances, for purposes of
(2013), p. 14 [hereinafter, VILLANUEVA,
transmitting it. By reason of this quality, this ideal
Corporate Law]).
and artificial person remains, in its legal entity and

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148 2017 CENTRALIZED BAR OPERATIONS
personality, the same, though frequent changes a. By general law – private corporations are
may be made of its members (AQUINO, supra at generally created under the provisions of the
39). Corporation Code. This is done by filing the
appropriate Articles of Incorporation (AOI)
Thus, a corporation continues to exist even if there is with the SEC; the life of a corporation starts
a change in those who compose it. Death of a from the issuance of the Certificate of
shareholder or transfer of his shares will not affect the Incorporation.
continued existence of the corporation (Id. at 40). a. By special law – public corporations are
created through special laws. Private
Right to Acquire and Possess Property corporations cannot be created by special
Property conveyed to or acquired by the corporation is laws except government-owned or controlled
in law the property of the corporation itself as a distinct corporations which are actually private
legal entity and not that of the stockholders or corporations (SUNDIANG & AQUINO,
members (CIVIL CODE, Art. 44(3)). REVIEWER ON COMMERCIAL LAW (2014),
Right to Property pp. 184-185 [hereinafter, SUNDIANG &
Juridical persons may acquire and possess properties AQUINO, Reviewer on Commercial Law]).
of all kinds (CIVIL CODE, Art. 46).
Corporations cannot come into existence by mere
The interest of shareholders in corporate property is agreement of the parties as in the case of business
merely inchoate and therefore does not entitle them to partnerships. They require special authority or grant
intervene in litigation involving corporate property from the State. This power is exercised by the State
(Saw v. CA, G.R. No. 90580, April 8, 1991). through the legislature, either by a special
incorporation law or charter which directly creates the
While a share of stock represents a proportionate or corporation or by means of a general corporation law
aliquot interest in the property of the corporation, it under which individuals desiring to be and act as a
does not vest the owner thereof with any legal right or corporation may incorporate (DE LEON & DE LEON
title to any of the property his interest in the corporate Jr., supra at 44).
property being equitable or beneficial in nature.
Shareholders are in no legal sense the owners of Franchises of Corporation
corporate property (Magsaysay-Labrador v. CA, G.R. . Primary or corporate franchise/ general
No. 58168, December 19, 1989). franchise – The right or privilege granted by the
State to individuals to exist and act as a
Because of the separate personality of the corporation after its incorporation.
corporation, the properties of the corporation are not . Secondary or special franchise – The special
the properties of its shareholders, members or officers right or privilege conferred upon an existing
(AQUINO, Corporate Law, supra at 41). corporation to the business for which it was
created (e.g. use of the streets of a municipality to
The interest of shareholders in corporate property is lay pipes or tracks, or operation of a public utility
merely inchoate and therefore does not entitle them to or a messenger and express delivery service)
intervene in litigation involving corporate property (VILLANUEVA, supra at 19).
(PNB v. Aznar, G.R. No. 171805, May 30, 2011).
Primary v. Secondary Franchise
While a share of stock represents a proportionate or Primary Secondary
aliquot interest in the property of the corporation, it As to Nature
does not vest the owner thereof with any legal right or Refers to the exercise
title to any of the property his interest in the corporate Refers to the
of right or privilege (e.g.
property being equitable or beneficial in nature. franchise of being or
public utility or
Shareholders are in no legal sense the owners of existing as a
telecommunication
corporate property, which is owned by the corporation corporation.
franchise).
as a distinct legal person (Magsaysay-Labrador v. CA, As to Whom Vested
G.R. No. 58168, December 19, 1989). Vested in the
Vested in the corporation after its
The property of the corporation is not the property of individuals who incorporation and not
the stockholders or member, and as such, may not be compose the upon the individuals
sold without express authority from the board of corporation. who compose the
directors (Litonjua, Jr. v. Eternit Corporation, G.R. No. corporation.
144805, June 8, 2006). As to Alienability
Cannot be sold or May be sold or
0. Creature of Law transferred, in the transferred under a
How are Corporations Created absence of legislative general power granted

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authority to do so. This to a corporation to membership (DE LEON & DE LEON Jr., supra at
is because it is dispose of its 22).
inseparable from the properties; may also be
corporation itself. subject to sale on Residence and Nationality
execution or levy. Tests to Determine the Nationality of
Corporations:
3. Artificial Being . Incorporation Test – determined by the state of
Doctrine of Corporate Entity (Doctrine of incorporation, regardless of the nationality of its
Separate Personality) stockholders (SUNDIANG & AQUINO, supra at
A corporation is a legal or juridical person with a 183); and
personality separate and apart from its individual . Control Test (Wartime Test) – determined by the
stockholders or members and from any other legal nationality of the controlling stockholders or
entity to which it may be connected (DE LEON & members (Id.). This test is applied in times of war.
DE LEON Jr., supra at 15). This is used to determine nationality for
investment purposes. This test is adopted under
Consequences: (LAP-JC) Foreign Investments Act (VILLANUEVA, supra at
. Liability for acts or contracts 64).
Obligations incurred by a corporation, acting
through its authorized agents are its sole liabilities. “Philippine National”
Similarly, a corporation may not generally, be . A corporation organized under Philippine laws of
made to answer for acts or liabilities of its which 60% of the capital stock outstanding and
stockholders or members or those of the legal entitled to vote is owned and held by Filipino
entities to which it may be connected and vice citizens; and
versa (Cease v. CA, G.R. No. L-33172, October . A corporation organized abroad and registered as
18, 1979). However, the courts have developed in doing business in the Philippines under the
common law countervailing doctrines to the ultra Corporation Code of which 100% of the capital
vires doctrine, such as the doctrine of estoppel or stocks entitled to vote belong to Filipinos (R.A. No.
ratification, and the doctrine of apparent authority 7042, Sec. 3(a), as amended by R.A. No. 8179).
(VILLANUEVA, supra at 288). Double 60% Rule
Where a corporation and its non-Filipino stockholders
. Right to bring Actions own stocks in a SEC-registered enterprise, at least
It may bring civil and criminal actions in its own 60% of the outstanding capital stock and entitled to
name in the same manner as natural persons vote of both corporations and at least 60% of the
(CIVIL CODE, Art. 46). members of the board of directors of both corporations
. Separate Properties must be Filipino citizens (R.A. No. 7042, Sec. 3(a), as
The properties of the corporation are not the amended).
properties of its shareholders, members or
officers. In the same manner, properties of its Mere legal title is insufficient to meet the 60% Filipino-
shareholders, members or officers are not the owned “capital” required in the Constitution. Full
properties of the corporation (AQUINO, supra at beneficial ownership of 60% of the outstanding capital
41). stock, coupled with 60% of the voting rights, is
required. The legal and beneficial ownership of 60%
Note: A corporation is a juridical person separate of the outstanding capital stock must rest in the hands
and distinct from its stockholders or members. of Filipino nationals in accordance with the
Accordingly, the property of the corporation is not constitutional mandate. Otherwise, the corporation is
the property of its stockholders or members and “considered as non-Philippine national (Gamboa v.
may not be sold by the stockholders or members Teves, G.R. No. 176579, October 9, 2012).
without express authorization from the Applies to all corporations engaged in identified areas
corporation’s board of directors (San Juan of activities or enterprises specifically reserved, wholly
Structural and Steel Fabricators, Inc. v. CA, G.R. or partly, to Philippine Nationals by the Constitution,
No. 129459, September 29, 1998). the Foreign Investments Act, and other existing laws
(SEC Memorandum Circular No. 8, Series of 2003,
. Acquisition by court of Jurisdiction Sec. 1).
Service of summons may be made on the
president, general manager, corporate secretary, Note: The term “capital” under Section 11, Article XII
treasurer or in-house counsel (RULES OF of the Constitution refers only to shares of stock
COURT, RULE 14, Sec. 11). entitled to vote in the election of directors (Gamboa v.
. Changes in individual membership Teves, supra).
Corporation remains unchanged and unaffected
in its identity by changes in its individual

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150 2017 CENTRALIZED BAR OPERATIONS
However, the SEC has issued and promulgated that considered as of Philippine nationality, but if the
for purposes of determining compliance with the percentage of Filipino ownership in the corporation or
ownership requirements in the Constitution and/or partnership is less than 60%, only the shares
existing laws by corporations, the required percentage corresponding to such percentage shall be counted as
of Filipino ownership shall be applied to both: of Philippine nationality.
. The total number of outstanding shares of stock
entitled to vote in the election of directors; and Thus, if 100,000 shares are registered in the name of
. The total number of outstanding shares, whether a corporation or partnership at least 60% of the capital
or not entitled to vote in the election of directors stock or capital, respectively, of which belong to
(SEC Memorandum Circular No. 8 Series of 2013, Filipino citizens, all of the shares shall be recorded as
Sec. 2). owned by Filipinos. But if less than 60%, or say, 50%
of the capital stock or capital of the corporation or
partnership, respectively, belongs to Filipino citizens,
For purposes of determining compliance with the only 50,000 shares shall be counted as owned by
constitutional or statutory ownership requirement, the Filipinos and the other 50,000 shall be recorded as
required percentage of Filipino ownership shall be belonging to aliens (Narra Nickel Mining v. Redmont
Consolidated Mines Co., G.R. No. 195580, April 21,
applied to BOTH:
2014).
the total number of outstanding shares of
“Doubt” refers to various indicia that the “beneficial
stock entitled to vote in the election of ownership” and “control” of the corporation do not in
directors, AND fact reside in Filipino shareholders but in foreign
stakeholders. The following are the indicators of
the total number of outstanding shares of stock, doubt:
whether or not entitled to vote in the election of . The foreign investors provide practically all the
directors (SEC Memorandum Circular No. 8, funds for the joint investment undertaken by these
Series of 2003, Sec. 2; Roy III v. Herbosa, G.R. Filipino businessmen and their foreign partner;
No. 207246, November 22, 2016). . The foreign investors undertake to provide
practically all the technological support for the joint
venture; and
Grandfather Rule . The foreign investors, while being minority
It is the method by which the percentage of Filipino stockholders, manage the company and prepare
all economic viability studies (Narra Nickel Mining
equity in a corporation engaged in fully and/or partly
v. Redmont Consolidated Mines Co., supra).
nationalized areas of activities provided for under the
Constitution and other nationalization laws is
Illustration 1: ABC Corp. was organized as holding
computed, in cases where corporate shareholders are
present in the situation, by attributing the nationality of company, particularly for XYZ Corp., the equity of
the second or even subsequent tier of ownership to which (ABC Corp.) is owned 70% by Filipinos and 30%
determine the nationality of the corporate shareholder by foreigners. ABC Corp. was granted authority by
(VILLANUEVA, supra at 63). BOI under Omnibus Investments Code, as amended,
to accept the additional investments of two Chinese
The Grandfather Rule must be applied to accurately nationals, mounting to P10M, thereby increasing its
determine the actual participation, both direct and foreign equity to 53.34%, subject to the condition that
XYZ Corp. will divest itself of ownership over the land
indirect, of foreigners in a corporation engaged in a
nationalized activity or business such as public utility on which the corporation is situated. The deletion of
(Gamboa v. Teves, supra). this condition is now requested on the claim that XYZ
still meets the nationality requirement for land
General Rule: The Control Test is still the prevailing ownership applying the Grandfather Rule considering
mode of determining whether or not a corporation is a that ABC owns 69% of the equity of XYZ and the
remaining 31% is further of Filipino investment.
Filipino corporation within the ambit of Sec. 2 of Art.
XII of the 1987 Constitution entitled to undertake the
exploration, development, and utilization of the natural Applying the Grandfather Rule, the percentage of
resources of the Philippines. effective Filipino stock ownership therein may be
computed as follows:
Exception: The Grandfather Rule is only resorted to
XYZ Corp.
when there exist a “doubt” in the 60-40 equity
ownership in the corporation. Par. 7 of DOJ Opinion ABC Corp. 69%
No. 20, Series of 2005 states that shares belonging to Filipino Stockholders 31%
Total 100%
corporations or partnerships at least 60% of the capital
ABC Corp.
of which is owned by Filipino citizens shall be

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Foreign Equity 53% may lawfully refuse to answer incriminating questions
Filipino Equity 47% unless protected by an immunity statute, it does not
Total 100% follow that a corporation vested with special privileges
and franchises, may refuse to show its hand when
Grandfather Rule charged with an abuse of such privileges (Bataan
Filipino Equity: Shipyard v. PCGG, G.R. No. 75885, May 27, 1987).
47% x 69% = 32.43%
Add: Three reasons why the right against self-incrimination
Percentage of Individual Filipino Stock is not given to a corporation:
31% . Right against self-incrimination refers only to
32.43% + 31% = 63.43% testimonial compulsion;
. A corporation cannot testify; and
Foreign Equity: . The State can freely open the books of the
53%x69% = 36.57% corporation to ensure that it does not exceed its
powers. Commented [ASPC2]: SOURCE?
TOTAL: 100%
Corporate Liability
Thus, the Filipino Equity in XYZ Corp. is 63.43% while a. Criminal Liability
Foreign Equity is 36.57% (LOPEZ, Corporation Code). General Rule: The corporation itself cannot be Commented [ASPC1]: Page number?
held liable for a crime committed by its officers
Constitutional Rights since it does not have malice.
Corporations are entitled to certain constitutional
rights: This is precisely because of the nature of the
. Due process crime and penalty therefor. A corporation cannot
A corporation is considered a person under the be arrested and imprisoned; hence, cannot be
due process clause pursuant to Sec.1 Art. III of the penalized for a crime punishable by imprisonment
1987 Constitution (SUNDIANG & AQUINO, supra (VILLANUEVA-CASTRO, Take Note: Commercial
at 183; Albert v. University Publishing, Inc., G.R. Law Series (2016), p. 73 [hereinafter,
No. L-19118, January 30, 1965). VILLANUEVA-CASTRO, Take Note]).
a. Equal protection of the law (Smith, Bell & Co. v.
Natividad, G.R. No. 15574, September 17, 1919). Exception: The corporation is held criminally
b. Equal protection against unreasonable liable by express provision of law (e.g. Trust
searches and seizures (Stonehill v. Diokno, G.R. Receipts Law, Anti-Dummy Law and Anti-Money
No. L-19550, June 19, 1967). Laundering Act). Where the business itself
involves a violation of the law, the correct rule is
However, it is not entitled to certain constitutional that all who participate in it are liable” (People v.
rights (e.g. the right against self-incrimination Tan Boon Kong, G.R. No. L-35262, March 15,
particularly production of corporate documents) not 1930).
only because it is an artificial being but also because
it is a mere creature of law (SUNDIANG & AQUINO, A corporation may be charged and prosecuted for
supra at 183). a crime if the imposable penalty is fine. Even if the
statute prescribes both fine and imprisonment as
Note: It is elementary that the right against self- penalty, a corporation may be prosecuted and, if
incrimination has no application to juridical persons. found guilty, may be fined (VILLANUEVA-
While an individual may lawfully refuse to answer CASTRO, supra at 73, citing Ching v. Secretary of
incriminating questions unless protected by an Justice, G.R. No. 164317, February 6, 2006).
immunity statute, it does not follow that a corporation
vested with special privileges and franchises, may The corporation may be proceeded against for the
refuse to show its hand when charged with an abuse civil liability under a violation of B.P. 22 (Gosiaco
of such privileges. It would be a strange anomaly to v. Ching, G.R. No. 173807, April 16, 2009).
hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the Note: Corporate officers or employees, through
exercise of sovereignty, inquire how these franchises whose act, default, or omission, the corporation
had been employed, and whether they had been commits a crime, are themselves individually
abused, and demand the production of the corporate guilty of the crime (Ching v. Secretary of Justice,
books and papers for that purpose (Bataan Shipyard supra). The officers of the corporation may be held
v. PCGG, G.R. No. 75885, May 27, 1987). liable. It is settled that an officer of a corporation
can be held criminally liable for acts or omissions
Note: The right against self-incrimination has no done in behalf of the corporation only (1) where
application to juridical persons. While an individual the law directly requires the corporation to do an

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act in a given manner and (2) the same law makes a. Right to Recover Moral Damages
the person who fails to perform the act in the General Rule: A corporation is not entitled to
prescribed manner criminally liable (Sia v. People, moral damages because it has no feelings, no
G.R. No. L-30896, April 28, 1983). emotions, no senses (ABS-CBN v. CA, G.R. No.
128690, January 21, 1999).
This principle applies to corporate agents who General Rule: The award of moral damages
themselves commit the crime and to those, who, cannot be granted in favor of a corporation
by virtue of their managerial positions or other because, being an artificial person and having
similar relation to the corporation, could be existence only in legal contemplation, it has no
deemed responsible for its commission, if by feelings, no emotions, no senses, it cannot,
virtue of their relationship to the corporation, they therefore, experience physical suffering and
had the power to prevent the act (Ching v. mental anguish, which can be experienced only by
Secretary of Justice, supra). one having a nervous system (ABS-CBN v. CA,
G.R. No. 128690, January 21, 1999).
a. Liability for Torts
A corporation is liable whenever a tortious act is
Exception: When a corporation has a good
committed by an officer or agent under the
reputation that is debased, resulting in its
express direction or authority of the stockholders
humiliation in the business realm (Coastal Pacific
or members acting as a body, or, generally, from
the directors as the governing body (PNB v. CA, Trading, Inc. v. Southern Rolling Mills Co., Inc.,
G.R. No. L-27155, May 18, 1978). G.R. No. 118692, July 28, 2006).
Exception: When the corporation has a
reputation that is debased, resulting in its
The tort liability of the corporation is without
humiliation in the business realm. But in such a
prejudice to a derivative suit being filed by the
stockholders to recover from the responsible board case, it is imperative for the claimant to present
members and officers the damages suffered by the proof to justify the award. It is essential to prove
corporation (VILLANUEVA, supra at 41). the existence of the factual basis of the damage
and its causal relation to the alleged damaging
acts (Manila Electric Company v. T.E.A.M.
Doctrine of Corporate Negligence
Electronics Corporation, G.R. No. 131723,
Regardless of its relationship with the doctor, the
December 13, 2007).
hospital may be held directly liable to the patient for
its own negligence or failure to follow established
standard of conduct to which it should conform as
Note: The award of moral damages to
a corporation (Professional Services Inc. v. CA,
G.R. No. 126297, February 2, 2008). corporations is not a hard and fast rule. Indeed,
while the Court may allow the grant of moral
The direct liability of a corporation may be imposed
under Art. 2176 of the Civil Code. The negligence will damages to corporations, it is not automatically
no longer be imputed but is considered the negligence granted. There must still be proof of the existence
of the factual basis of the damage and its causal
of the corporate entity itself with whom the injured
relation to the defendant’s acts (Crystal v. BPI,
party has a special relationship (AQUINO, Corporate
G.R. No. 172428, November 28, 2008).
Law, supra at 92).

Examples: A juridical person such as a corporation can


validly complain for libel or any other form of
defamation and claim for moral damages. Art.
Regardless of its relationship with the
2219(7) of the Civil Code does not qualify whether
doctor, the hospital may be held directly
the plaintiff is a natural or a juridical person
liable to the patient for its own negligence
(Filipinas Broadcasting v. Ago Medical Center-
or failure to follow established standard of
Bicol, G.R. No. 141994, January 17, 2005).
conduct to which the hospital should
Art. 2216 (7) of the Civil Code, expressly
conform as a corporation (Professional
authorizes the recovery of moral damages in
Services Inc. v. CA, G.R. No. 126297,
cases of libel, slander or any other form of
February 2, 2008).
defamation. It does not qualify whether the plaintiff
The school may be held liable under Art. 2176
is a natural or juridical person (Filipinas
of the Civil Code for accidents and damages
Broadcasting v. Ago Medical Center-Bicol, G.R.
suffered by students due to the school’s
No. 141994, January 17, 2005).
negligence in making sure that all its facilities
are properly maintained (Child Learning
Doctrine of Piercing the Veil of Corporate Entity
Center, Inc. v. Tagario, G.R. No. 150920,
November 25, 2005).

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2017 CENTRALIZED BAR OPERATIONS
General Rule: A corporation has a separate by enforcing the decision against the stockholders
personality distinct from its stockholders and who are not parties to the action (AQUINO,
members. Corporate Law, supra at 67).
. It must be shown to be necessary and with
Exception: The court will not hesitate to disregard the factual basis
corporate veil when it is misused or when necessary To disregard the separate juridical personality of
in the interest of justice. The concept of corporate a corporation, the wrongdoing must be clearly and
entity was not meant to promote unfair objectives convincingly established. It cannot be presumed
(Pantranco Employees Association v. NLRC, G.R. No. (Luxuria Homes, Inc. v. CA, G.R. No. 125986,
170689, March 17, 2009). January 28, 1999).

Exception: The corporate mask may be removed or Any application of the doctrine of piercing the
the corporate veil pierced when the corporation is just corporate veil should be done with caution. A court
an alter ego of a person or of another corporation. For should be mindful of the milieu where it is to be
reasons of public policy and in the interest of justice, applied. It must be certain that the corporate fiction
the corporate veil will justifiably be impaled only when was misused to such an extent that injustice, fraud, or
it becomes a shield for fraud, illegality or inequity crime was committed against another, in disregard of
committed against third persons (Sarona v. NLRC, rights (Sarona v. NLRC, supra).
G.R. No. 185280, January 18, 2012).
Mere ownership by a single stockholder or by another
Nature of Piercing the Corporate Veil Doctrine corporation of all or substantially all of the capital stock
. It has no res judicata effect does not justify the application of the doctrine. There
The corporate mask may be removed and the must be other circumstances that must be present
corporate veil pierced when a corporation is the (Francisco v. Mejia, G.R. No. 141617, August 14,
mere alter ego of another. When that happens, the 2001).
corporate character is not necessarily abrogated.
It continues for other legitimate objective The existence of interlocking directors, corporate
(VILLANUEVA-CASTRO, supra at 84, citing officers and shareholders is not enough justification to
Pamplona Planters Company. Inc. v. Tinghil, G.R. pierce the veil of corporate fiction in the absence of
No. 159121, February 03, 2005). fraud or other public policy considerations (PNB v.
. To prevent fraud or wrong and not available Hydro Resources Contractors Corporation, G.R. No.
for other purposes 167530, March 13, 2013).
The doctrine could not be employed by a Guidelines in Piercing the Corporate Veil
corporation to complete its claims against another Any application of the doctrine of piercing the
corporation and cannot therefore be employed by corporate veil should be done with caution. A
the claimant who does not appear to be the victim court should be mindful of the milieu where it
of any wrong or fraud (Traders Royal Bank v. CA, is to be applied. It must be certain that the
G.R. No. 93397, March 3, 1997). corporate fiction was misused to such an
The court must be sure that the corporate fiction extent that injustice, fraud, or crime was
was misused, to such an extent that injustice, committed against another, in disregard of
fraud, or crime was committed upon another, rights (Sarona v. NLRC, supra).
disregarding, thus, his, her, or its rights. It is the Mere ownership by a single stockholder or by
protection of the interests of innocent third another corporation of all or nearly all of the
persons dealing with the corporate entity which capital stock of a corporation is not of itself
the law aims to protect (Traders Royal Bank v. CA, sufficient ground for disregarding the separate
G.R. No. 93397, March 3, 1997). corporate personality (Wensha Spa Center,
Inc. and/or Xu Zhi Jie v. Yung, G.R. No.
185122, August 16, 2010).
. Essentially a judicial prerogative only While ownership by one corporation of all or a
To pierce the veil of corporate fiction, being a great majority of stocks of another corporation
power belonging to the courts, a sheriff who has and their interlocking directorates may serve
ministerial duty to enforce a final and executory as indicia of control, by themselves, these
decision cannot pierce the veil of corporate fiction circumstances are insufficient to establish an
by enforcing the decision against the stockholders alter ego relationship that will justify the
who are not parties to the action (Cruz v. Dalisay, puncturing of corporate cover (PNB v. Hydro
A.M. R-181-P, July 31, 1987). Resources Contractors Corporation, G.R. No.
To pierce the veil of corporate fiction, being a 167530, March 13, 2013).
power belonging to the courts, a sheriff who has
ministerial duty to enforce a final and executory
decision cannot pierce the veil of corporate fiction

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154 2017 CENTRALIZED BAR OPERATIONS
Areas where Doctrine of Piercing the Veil of One of the instances when the Alter Ego Doctrine
Corporate Entity may be applied: (FAE) is invoked is when there is parent company-
. Fraud cases; subsidiary company relationship. However, the
. Alter ego cases; and general rule is still to the effect that if used for
. Equity cases (PNB v. Hydro Resources legitimate functions, a subsidiary’s separate
Contractors Corporation, supra). existence shall be respected, and the liability of
the parent corporation as well as the subsidiary
. Fraud Cases will be confined to those arising in their respective
The veil of separate corporate personality may be business (AQUINO, supra at 64).
lifted when such personality is used to defeat
public convenience, justify wrong, protect fraud or While confirming that there exists no definite test of
defend crime; or used as a shield to confuse the general application in determining when a
legitimate issues (China Banking Corporation v. subsidiary may be treated as a mere
Dyne-Sem Electronics, G.R. No. 149237, June instrumentality of the parent corporation, it
11, 2006). identified factors that will justify the application of
Fraud refers to all kinds of deception -- whether the treatment of the doctrine of the piercing of the
through insidious machination, manipulation, corporate veil:
concealment or misrepresentation – that would . The parent corporation owns all or most of the
lead an ordinarily prudent person into error after capital stock of the subsidiary;
taking the circumstances into account (Solidbank . The parent and subsidiary corporations have
Corporation v. Mindanao Ferroalloy Corporation, common directors or officers;
G.R. No. 153535, July 28, 2005). . The parent corporation finances the
subsidiary;
Elements: . The parent corporation subscribes to all the
. There must have been fraud or evil motive in capital stock of the subsidiary or otherwise
the affected transaction and the mere proof of causes its incorporation;
control of the corporation by itself would not . The subsidiary has grossly inadequate
authorize piercing; capital;
. The main action should seek for the . The parent corporation pays the salaries and
enforcement of pecuniary claims pertaining to other expenses or losses of the subsidiary;
the corporation against corporate officers or . The subsidiary has substantially no business
stockholders, or vice-versa; and except with the parent corporation or no
. The corporate entity has been used in the assets except those conveyed to or by the
perpetration of the fraud or in justification of parent corporation;
wrong, or to escape personal liability. . In the papers of the parent corporation or in
the statements of its officers, the subsidiary is
Note: There is always an element of malice or evil described as a department or division of the
motive in fraud cases (VILLANUEVA-CASTRO, parent corporation, or its business or financial
supra at 83). responsibility is referred to as the parent
corporation's own;
. Alter Ego Cases (or Conduit Cases) . The parent corporation uses the property of
The corporate veil may be lifted where a the subsidiary as its own;
corporation is merely a farce since it is a mere . The directors or executives of the subsidiary
alter ego or business conduit of a person, or do not act independently in the interest of the
where the corporation is so organized and subsidiary but take their orders from the
controlled and its affairs are so conducted as to parent corporation; and
make it merely an instrumentality, agency, conduit . The formal legal requirements of the
or adjunct of another corporation (PNB v. Hydro subsidiary are not observed (Philippine
Resources Contractors Corporation, supra). National Bank v. Ritratto Group International,
Where a corporation is merely a farce since it is a Inc., G.R. No. 142616, July 31, 2001).
mere alter ego or business conduit of a person, or
where the corporation is so organized and Probative Factors:
controlled and its affairs are so conducted as to . Stock ownership by one or common
make it merely an instrumentality, agency, ownership of both corporations;
conduit, or adjunct of another corporation . Identity of directors and officers;
(General Credit Corporation v. Alsons . The manner of keeping corporate books and
Development, G.R. No. 154975, January 29, records; and
2007). . Methods of conducting the business (Concept
Builders, Inc. v. NLRC, supra).

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2017 CENTRALIZED BAR OPERATIONS
Instrumentality Rule a. By regarding the corporation as an Association of
Where one corporation is so organized and controlled persons or in case of two corporations, treat them
and its affairs are conducted so that it is, in fact, a as one and hold them liable as such (DBP v. CA,
mere instrumentality or adjunct of the other, the fiction G.R. No. 126200, August 16, 2001); and
of the corporate entity of the “instrumentality” may be a. It must be done with Caution (R & E Transport,
disregarded (VILLANUEVA-CASTRO, supra at 81, Inc. v. Latag, G.R. No. 155214, February 13,
citing Concept Builders vs. NLRC, supra). 2004).

Alter Ego Rule v. Instrumentality Rule Cases on Piercing the Corporate Veil
In the Instrumentality rule, a corporation controls . The separate personality of a subsidiary was
another corporation; while in the Alter Ego rule, a disregarded because it was established that the
stockholder or a group of stockholders of a corporation subsidiary was organized for the purpose of
controls another corporation. It can be said that the evading the payment of sales taxes by its parent
instrumentality rule is a species of alter ego doctrine. corporation (Koppel [Phils.] Inc. v. Yatco, G.R. No. Commented [ASPC3]: SOURCE?
47673, October 10, 1946).
Three-pronged Test to Determine the Application . Where a sister corporation is used as a shield to
of Alter Ego Theory: evade a corporation’s subsidiary liability for
. Control Test – Control, not mere majority or damages, the corporation may not be heard to say
complete stock control, but complete dominion, that it has a separate personality separate and
not only of finances but of policy and business distinct from the other corporation (Concept
in respect to the transaction attacked so that the Builders, Inc. v. NLRC, supra).
corporate entity as to this transaction had at the . Petitioner is the operator of Villa Rey Transit and
time no separate mind, will, or existence of its pursuant to an agreement with PANTRANCO, he
own; shall not apply for any competitive service
. Fraud Test – Such control must have been identical with PANTRANCO. However, Villa Rey
used by the defendant to commit fraud or wrong Transit, Inc (VTSI) was incorporated and it
in contravention of plaintiff’s legal rights; and operated buses. The Supreme Court applied the
. Harm Test – The aforesaid control and breach Doctrine of Piercing Corporate Veil and made the
of duty must proximately cause the injury or petitioner and VTSI liable for violation of the
unjust loss complained of (PNB v. Hydro restrictive clause. The involvement of the
Resources Contractors Corporation, supra; petitioner in the complex affairs of the corporation
Concept Builders, Inc. v. NLRC, supra). (PNB v. especially in the management and disposition of
Hydro Resources Contractors Corporation, its funds shows that VTSI is an alter ego of
supra; Saverio v. Puyat, G.R. No. 186433, Villarama (Villa Rey Transit, Inc. v. Ferrer, G.R.
November 27, 2013). No. L-23893, October 29, 1968).
. In any case where the separate corporate identity
. Equity Cases is disregarded, the corporation will be treated
This is applied when piercing the corporate fiction merely as an association of persons and the
is necessary to achieve justice or equity. It is the stockholders or members will be considered as
“dumping ground” where no fraud or alter ego the corporation, that is, liability will attach
circumstances can be culled to warrant piercing personally or directly to the officers and
(VILLANUEVA, supra at 129). stockholders (Umali v. CA, G.R. No. 89561,
September 13, 1990).
How to Pierce the Veil of Corporate Fiction . When the veil of corporate fiction is pierced, the
0. The court must first acquire jurisdiction over the corporate character is not necessarily abrogated.
corporation or corporations involved; and The corporation continues for legitimate
0. It must be raised during a full blown trial (DE objectives (Reynoso IV v. CA, G.R. No. 116124-
LEON & DE LEON Jr., supra at 43-44). 25, November 22, 2000).
. When the veil of corporate fiction is made as a
Note: Mere motion to pierce the veil of corporate shield to perpetuate fraud or confuse legitimate
fiction is insufficient (Id.). issues such as the relation of employer and
employee (VILLANUEVA-CASTRO, supra at 79,
Effects of Piercing the Corporate Veil citing Claparols v. CIR, G.R. No. L-30822, July 31,
Upon showing that grounds exist, the corporate fiction 1975).
or veil may be lifted through any of the following: . When used as a shield for tax evasion (Id., citing
(SLAC) CIR v. Norton & Harrison Co., G.R. No. L-17618,
a. By disregarding the Separate personality of the August 31, 1964).
corporation; . When used to shield violation of the prohibition
a. By holding the corporate officer Liable for the against forum shopping (Id. at 79-80, citing First
corporate obligation (Francisco v. Mejia, supra);

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156 2017 CENTRALIZED BAR OPERATIONS
Phil. International Bank v. Court of Appeals, G.R. General Rule: Corporations cannot ordinarily enter
No. 115849, January 24, 1996). into a partnership with other corporations or with
. When the separate identity of the corporation is individuals (DE LEON & DE LEON Jr., supra at 50).
being utilized to violate intellectual property rights
of third persons (Id. at 80, citing Uy v. Villanueva, Reasons:
G.R. No. 157851, June 29, 2007). 0. A corporation can only act through its duly
authorized officers and agents and is not bound
0. Creature of Enumerated Powers by the acts of anyone else, while in a partnership,
Doctrine of Limited Capacities (Theory of each member binds the firm when acting within
Special Capacities) the scope of the partnership business. In entering
No corporation under the Code, shall possess or into partnership, the identity of the corporation is
exercise any corporate power, except those lost or merged with that of another and the
conferred by law, its AOI, those implied from direction of its affairs is placed in other hands than
express powers and those as are necessary or those provided by the law of its creation (SEC
incidental to the exercise of the powers so Opinion, Jan. 26, 1961).
conferred (CORPORATION CODE, Sec. 45). The 0. Limitation is based on grounds of public policy
corporation’s capacity is limited to such express, since in a partnership, the corporation would be
implied and incidental powers (SUNDIANG & bound by the acts of persons who are not its duly
AQUINO, supra at 194). appointed and authorized agents and officers,
which would be entirely inconsistent with the
Theory of General Capacities policy of the law that the corporation shall manage
A corporation may exercise any and all powers its own affairs separately and exclusively through
that may be exercised by natural persons the directors or officers chosen by the
(AQUINO, supra at 103). stockholders or members.
0. Such an arrangement would permit corporate
Test: Whether the act of the corporation is in assets to be subjected to risks and liabilities not
direct and immediate furtherance of its business, contemplated by the stockholders at the time of
fairly incidental to the express powers and making their investment (DE LEON & DE LEON
reasonable necessary to their exercise. If so, Jr., supra at 50-51).
corporation has the power to do it; otherwise, it
cannot (Montelibano v. Bacolod-Murcia Milling Exceptions: (VAS 2)
Co. Inc., G.R. No. L-15092, May 18, 1962). 0. It may enter into a joint Venture with another
Everything under “Theory of General Capacities” where the nature of that venture is in line with the
business authorized by their charters.
Test: Whether the act of the corporation is in direct 0. Where the partnership Agreement provides that
and immediate furtherance of its business, fairly two partners will manage the partnership so that
incident to the express powers and reasonably the management of the corporate interest is not
necessary to their exercise. If so, corporation has the surrendered, the general rule will not apply.
power to do it; otherwise, not. 0. Cases where SEC has allowed corporations to
enter into partnerships with other corporations or
Consider the logical and necessary relation between with individuals, provided:
the act questioned and the corporate purpose . All corporate partners must be managing
expressed by law or in the charter. If the act is lawful partners; and
in itself and not prohibited, and is done for the purpose . Articles of partnership must stipulate that all
of serving corporate ends, and reasonably contributes partners are and shall be solidarily liable for
to the promotion of those ends in a substantial and not all the obligations of the partnership.
in a remote and fanciful sense (Montelibano v. 0. The Statute or respective charters or AOI must
Bacolod-Murcia Milling Co. Inc., G.R. No. L-15092, expressly allow it and the nature of the business
May 18, 1962). venture to be undertaken is in line with the
business authorized by law or the AOI of the
The language of the Corporation Code under Sec. 45 constituent corporations (DE LEON & DE LEON
appears to confine the term to an act outside or Jr., supra at 51).
beyond express, implied, and incidental corporate
powers. Nevertheless, the concept can also include The corporation-partners shall embody the terms and
those acts that may ostensibly be within such powers conditions of their relationship in the partnership
but are, by general or special laws, either proscribed agreement and upon approval by the SEC, the
or declared illegal (Rural Bank of Milaor v. Ocfemia, partnership shall attain a juridical personality separate
G.R. No. 137686, February 8, 2000). and distinct from the corporation-partners (CIVIL
CODE, Art. 1768). The liability of the corporation-
Corporation as a Partner partners shall not be limited to their contributions

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(CIVIL CODE, Art. 1816) and even the dissolution of a
corporation-partner does not terminate a joint venture Effects of Ultra Vires Act
to which it is a party so as to relieve the corporation of 0. Executed contract – courts will not set aside or
obligations incurred by reason of its entering into the interfere with such contracts;
venture (SEC Opinion, August 24, 1981). 0. Executory contract – no enforcement even at the
suit of either party (void and unenforceable);
Note: A defective incorporation process does not 0. Part executed and part executory – principle of
result into a partnership based on two grounds: (1) it “no unjust enrichment at expense of another” shall
is not the intent of the parties, and therefore does not apply; and
constitute a part of their consent to the contractual 0. Executory contract apparently authorized but
relationship; and (2) the important differences Ultra Vires – the principle of estoppel shall apply
between the corporation and the partnership cannot (Pirovano v. De la Rama Steamship Co., G.R. No.
lead one to the conclusion that in the absence of the 6817, July 31, 1958).
first, the contracting parties would have gone along 1. Illegal Acts – void regardless of performance,
with the latter (VILLANUEVA, supra at 30). ratification, or estoppel;

Ultra Vires Doctrine 2. Committed by Agents within their authority –


Ultra Vires Act liable for corporate torts;
It refers to acts done by a corporation outside of those
conferred to the corporation By-laws, by its AOI and 3. Executed contract (legal) – contract is effective
those that are not implied or necessary or incidental to
and will stand as foundation of rights acquired under
the exercise of the powers so conferred (AQUINO,
supra at 413). it;

It is an act committed outside the object for which a 4. Executory contract – neither party can maintain
corporation is created as defined by the law of its an action; and
organization and therefore beyond the powers
conferred upon it by law (Atrium Mgt. Co. v. Court of 5. Part executed and part executory (legal) – party
Appeals, G.R. No. 109491, February 28, 2001). who has received benefits from the performance is
estopped in claiming that the contract is ultra vires
Ultra vires (“beyond powers”) refers only to an act (AQUINO, Corporate Law, supra at 416).
outside or beyond corporate powers, including those
that may ostensibly be within such powers but are, by Note: A corporation engaged in ultra vires business
general or special laws, either prohibited or declared is liable for torts committed by its agents within their
illegal. It is in this context that the Code has used the authority in the course of that business (Pirovano v.
term (Rural Bank of Milaor v. Ocfemia, G.R. No. De la Rama Steamship Co., supra).
137686, February 8, 2000).
Types of Ultra Vires Act (BAI)
An ultra vires act may be that of: 0. Acts done Beyond the powers of the corporation
0. The corporation – if the act is either illegal or as provided in the law or its AOI;
outside of its express, implied or incidental powers 0. Acts or contracts entered into in behalf of a
as may be provided by law or the charter; corporation by persons who have no corporate
0. The Board of Directors – if the act of the Board is Authority; and
within corporate powers but it is done without the
concurrence of the shareholder whose approval is Note: The President is not specifically authorized
required in the manner expressed by law or if the to sell another portion of lot. This is technically an
act is beyond the Board’s competence to do so; ultra vires acts of officers and not of the
and corporation (Woodchild Holdings v. Roxas
0. The corporate officers – if the act of corporate Electric, G.R. No. 140667, August 12, 2004).
officers is within corporate powers but it is done
without any express or implied authority therefor 0. Acts or contracts, which are per se Illegal as being
from the by-laws, board resolutions or corporate contrary to law (VILLANUEVA, supra at 176-180).
practices (VITUG, COMMERCIAL LAWS AND
JURISPRUDENCE (2006), p. 93-96 [hereinafter, Ultra Vires v. Illegal Acts
VITUG, Commercial Laws]).
Ultra Vires Acts Illegal Acts
An ultra vires act of the corporation cannot be ratified As to Nature
by itself. But an ultra vires act of a corporate officer Unlawful; against law,
Not necessarily
may be ratified by the corporation. This is a case of morals, public policy,
unlawful, but outside the
apparent authority or authority by estoppel. or public order.

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158 2017 CENTRALIZED BAR OPERATIONS
powers of the
corporation. Note: For a stock corporation to exist, the
As to Susceptibility of ratification above requisites must be complied with for
even if there is a statement of capital stock,
Generally, can be the corporation is still not a stock corporation
ratified, expressly or if dividends are not supposed to be declared,
impliedly, by the i.e. there is no distribution of retained earnings
Cannot be ratified
stockholders because (CIR v. Club Filipino, Inc. de Cebu, G.R. No.
because they are void
such acts are merely L-12719, May 31, 1962).
ab initio.
voidable (Pirovano v. Note: Although a corporation has a capital
De La Rama Steamship stock divided into shares, if it is not authorized
Co., supra). to distribute dividends and allotment of
As to Binding effect surplus and profits to its stockholders, it may
Can bind the parties if not be classified as a stock corporation
wholly or partly Cannot bind the because it lacks the second requisite
executed on the basis of parties. (Republic v. City of Paranaque, G.R. No.
estoppel. 191109, July 18, 2012).

Note: A corporation acting as an accommodation


. Non-Stock Corporation
party for a negotiable instrument is an ultra vires act
It is one where no part of its income is
(Crisologo-Jose v. CA, G.R. No. 80599, September
distributable as dividends to its members,
15, 1989).
trustees, or officers (CORPORATION CODE,
Test on Whether or Not a Corporation May
Sec. 87).
Perform an Act
1. As to organizers:
Consider the logical and necessary relation between
. Public – by State only; or
the act questioned and the corporate purpose
. Private – by private persons alone or with the
expressed by law or in the charter.
State (SUNDIANG & AQUINO, supra at 194-
195).
If the act is lawful in itself and not prohibited, and is
done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those ends
1. As to purpose:
in a substantial and not in a remote and fanciful sense.
. Public – organized for the government of a
The test to be applied is whether the act in question is
portion of the State for the general good and
in direct and immediate furtherance of the
welfare.
corporation’s business, fairly incident to the express
. Private – formed for some private purpose,
powers and reasonably necessary to their exercise
benefit or end (VILLANUEVA, supra at 71).
(Montelibano v. Bacolod-Murcia Milling Co., Inc.,
. Government-owned or controlled
supra).
corporation – created by the government or
of which the government is the majority
Remedies in case of Ultra Vires Acts
stockholder (e.g. GSIS, NAPOCOR, PNR,
State
PNB).
. Obtain a judgment of forfeiture;
. Quasi-public corporation – private
. Quo warranto proceedings; or
corporations which have accepted from the
. The SEC may suspend or revoke the
State the grant of franchise or contract
certificate of registration.
involving the performance of public duties but
1. Stockholders
which are organized for profits e.g. electric,
. Injunction; or
water, telephone, transportation companies
. Derivative suit.
(VILLANUEVA, supra at 74).
1. Creditors
a. Nullification of contract in fraud of creditor. Commented [ASPC4]: SOURCE?
Government as a Member of a Corporation
Jurisdiction of SEC
Classification of Corporations
The SEC has no jurisdiction over corporations with
1. As to stock:
original charter or created by special law. It has no
. Stock Corporation
power to interpret the law creating it. However, the
A corporation which has capital stock divided
SEC can rule on the status of a corporation as to
into shares and is authorized to distribute to
whether it is a government-owned or controlled
holders of such shares, dividends or
corporation belonging to this type (National
allotments of the surplus profits on the basis
Construction Corporation v. Pabion, G.R. No.
of the shares held (CORPORATION CODE,
131715, December 8, 1999).
Sec. 3); or

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The SEC has no jurisdiction over Government- A special law creating a private corporation which
owned or Controlled Corporations with original is neither owned nor controlled by the government
charter or created by special law, primarily is void for being violative of the constitutional
because they are governed by their charters. provision (National Development Co. v. Phil.
However, the SEC can rule on the status of a Veterans Bank, G.R. Nos. 84132-33, December
corporation as to whether it is a government- 10, 1990).
owned or controlled corporation belonging to this
type (National Construction Corporation v. Congress cannot enact a law creating a private
Pabion, G.R. No. 131715, December 8, 1999). corporation with a special charter. Such legislation
would be unconstitutional. Private corporations
Rights, Powers or Privileges may exist only under a general law (Feliciano v.
As a member of a corporation organized under the COA, G.R. No. 147402, January 14, 2004).
Corporation Code, the government never
exercises its sovereignty; it merely acts as a Public v. Private Corporations
corporator. The mere fact that the government Public Private
happens to be the majority stockholder of a As to Government Control
corporation does not make it a public corporation. Subject to
As a private corporation, it has no greater rights, Not subject to
Governmental
powers or privileges than any other corporation visitation, control, or
visitation and control
organized for the same purpose under the charge by the State,
being mere
Corporation Code (National Coal Co v. CIR, G.R. except in the exercise
instrumentalities of the
No. L-22619, December 2, 1924). of police power.
State.
As to Consent as to Creation
1. As to governing law:
. Public – Special Laws and Local Government May be created without
Consent of the
Code; or incorporators is
the consent of the
. Private – Law on Private Corporations locality to be affected.
necessary to the
(SUNDIANG & AQUINO, supra at 195). creation.

Corporations Created by Special Laws or 1. As to legal right to corporate existence:


Charters . De jure corporation – corporation created in
Sec. 16, Art. XII of the 1987 Constitution expressly strict or substantial conformity with the
authorizes the legislature to create “government- mandatory statutory requirements for
owned or controlled corporations” through special incorporation and the right of which to exist as
charters only if these entities are required to meet a corporation cannot be successfully attacked
the twin conditions of common good and or questioned by any party even in a direct
economic viability. The intent of the Constitution in proceeding for that purpose by the state; or
requiring the test of economic viability is to prevent . De facto corporation – organized with a
the creation of government-owned or controlled colorable compliance with the requirements of
corporation that cannot survive on their own in the a valid law, and its existence cannot be
market place and thus merely drain the public inquired collaterally but, such inquiry may be
coffers (MIAA v. CA, G.R. No. 155650, July 20, made by the Solicitor General in a quo
2006). warranto proceeding (CORPORATION
Sec. 16, Art. XII of the 1987 Constitution expressly CODE, Sec. 20).
authorizes the legislature to create “government-
owned or controlled corporations” through special Note: It is a corporation which has not
charters only if these entities are required to meet complied with all the requirements necessary
the twin conditions of common good and to be a de jure corporation but has complied
economic viability. sufficiently to be accorded corporate status as
against third parties although not against the
The test of economic viability applies only to State (DE LEON & DE LEON Jr., supra at
GOCCs that perform economic or commercial 190).
activities and need to compete in the marketplace.
In contrast, government instrumentalities vested To constitute a corporation de facto, there must
with corporate powers and performing be a colorable compliance with the statute, but
governmental or public functions need not meet there need not be a substantial compliance. A
the test of economic viability (MIAA v. CA, G.R. substantial compliance makes the body a
No. 155650, July 20, 2006). corporation de jure (Id. at 192).

Basis of De Facto Doctrine

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i. To promote the security of business that cannot always be erased by a new
transactions and to eliminate quibbling judicial declaration (De Agbayani v.
over irregularities. Philippine National Bank, G.R. No. L-23127,
i. A third person dealing with a corporation April 29, 1971). Thus, a corporation
will rarely be prejudiced if the company is defectively organized under the law before
recognized as a corporation in spite of it was declared unconstitutional can claim to
minor defects in its formation. be a de facto corporation (presuming that
i. Seldom would it be just to allow a other requisites are present), since it was
wrongdoer to quibble over such organized under color of law, that the
objections to escape liability for statute is presumptively constitutional until it
wrongdoing. has been judicially declared to be invalid,
i. It would be unjust to allow a claimant and that until it is so declared, men have a
against a supposed company to assert right to act and contract under such
the individual liability of innocent passive presumption (VILLANUEVA, supra at 154).
investors on the ground of flaws in the
formal steps of incorporation, when they The filing of AOI and the issuance of the
have attempted in good faith to comply certificate of incorporation are essential for the
with statutory requirements and the existence of a de facto corporation. An
objecting party is not prejudiced organization not registered with the SEC cannot
(VILLANUEVA, supra at 78). be considered a corporation in any concept, not
even as a corporation de facto. Petitioners
Requisites: (LAC) themselves admitted that at the time of the
. A valid Law under which the corporation donation, they were not registered with the
is organized; SEC, nor did they even attempt to organize to
. A bona fide Attempt in good faith to comply with legal requirements (Seventh Day
incorporate; and Adventist Conference Church of Southern
. An assumption of Corporate Powers Philippines, Inc. v. Northeastern Mindanao
(AQUINO, supra at 211). Mission of Seventh Day Adventist, Inc., G.R.
No. 150416, July 21, 2006).
Note: If after incorporation, the incorporators The filing of AOI and the issuance of the
discovered that they have not complied certificate of incorporation are essential for the
substantially with the law and still continued existence of a de facto corporation. An
transacting business as a corporation, without organization not registered with the SEC cannot
doing anything to correct the defect, the be considered a corporation in any concept, not
privilege of de facto existence can no longer be even as a corporation de facto (Seventh Day
invoked (DE LEON & DE LEON Jr., supra at Adventist Conference Church of Southern
193). Philippines, Inc. v. Northeastern Mindanao
Mission of Seventh Day Adventist, Inc., G.R.
Instances when there is no de facto No. 150416, July 21, 2006).
corporation due to invalid law
0. A corporation under an unconstitutional Example of Defects that will Preclude the
statute; Creation of a De facto Corporation:
. Absence of AOI;
Note: However, a statute is presumed valid . Failure to file AOI with the SEC; or
until it has been judicially declared . Lack of certificate of incorporation from
otherwise. the SEC (VILLANUEVA, supra at 155).

0. When its purpose is prohibited by law or


contrary to public policy; and Instances when there is a de facto
corporation:
0. When its purpose is to practice a learned i. AOI fails to state all the matters required
profession in the absence of a law expressly by the Code;
permitting the organization of such i. The name of the corporation closely
corporations (DE LEON & DE LEON Jr., resembles that of a pre-existing
supra at 190-191). corporation that it will tend to deceive the
public;
Under the “qualified view”, the actual i. The incorporators or a certain number of
existence of a statute prior to such a them are not residents of the Philippines;
determination of constitutionality is an i. The acknowledgement of the AOI or
operative fact and may have consequences certificate of incorporation is insufficient

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or defective in form or acknowledged under said transaction (CORPORATION
before the wrong officer; CODE, Sec. 21).
The percentage of Filipino ownership of
the capital stock required for the business General Rule: All persons, not stockholders
is less than what is prescribed by law; or members, who assume to act as a
i. The minimum paid-up capital stock has corporation knowing it to be without authority
not been paid to and received by the to do so shall be liable as general partners for
corporate treasurer contrary to his all debts, liabilities, and damages incurred or
affidavit; and arising as a result thereof (CORPORATION
The failure to submit its by-laws on time. CODE, Sec. 21).
However, it does not ipso facto lose its
powers as such (Chung Ka Bio v. IAC, Exception: When such persons are not trying
G.R. No. 71837, July 26, 1988). to escape liability from the contract but rather
Failure to give the notice required by the are the ones claiming from the contract
statute for the meeting for its organization; (International Express v. CA, G.R. No.
Failure to fix and limit the amount of 119002, October 19, 2000).
capital stock of the company at the first
meeting; An unincorporated association which
Failure to issue stocks; represented itself to be a corporation will be
Informalities in the proceedings of estopped from denying its corporate capacity
corporate meetings; in a suit against it by a third person who relied
Lack of certificate of organization filed or in good faith on such representation. When
executed; any such ostensible corporation is sued on
Lack of elected Board of Directors; any transaction entered by it as a corporation
Irregularities with respect to the number, or on any tort committed by it as such, it shall
term, place of residence, and of meeting not be allowed to use as a defense its lack of
of the Board of Directors; corporate personality (Lim Tong Lim v. Phil.
Some of the persons elected as directors Fishing Gear Industries, Inc., G.R. No.
are disqualified; and 136448, November 3, 1999).
ii. In general, when there is a defect in the
organization of the corporation and not on An unincorporated association which
represented itself to be a corporation will be
its creation (Chung Ka Bio v. IAC, G.R.
estopped from denying its corporate capacity
No. 71873, July 26, 1988).
in a suit against it by a third person who relied
in good faith on such representation. It cannot
The officers and directors of a de facto allege lack of personality to be sued to evade
corporation are subject to all the liabilities and its responsibility for a contract it entered into
penalties attending to officers and directors and by virtue of which received advantages
duly chosen by a corporation de jure, and benefits (Lim Tong Lim v. Philippine
including the liability under the criminal law, Fishing Gear Industries, Inc., G.R. No.
and their acts are binding when such acts 136448, November 3, 1999).
would be within the power of such officers if
the corporation were one de jure (DE LEON & Reason: Founded on principles of equity and
DE LEON, Jr., supra at 198-199). is designed to prevent injustice and unfairness
(DE LEON & DE LEON Jr., supra at 200).
Note: The only difference between a de facto
corporation and a de jure corporation is that a Note: A corporation which continues its
de jure corporation can successfully resist a business instead of liquidating its affairs after
suit brought by the State challenging its the expiration of its corporate term, is a
existence; a de facto corporation cannot corporation by estoppel for the purpose of
sustain its right to exist as against the State being sued on its contracts, not a corporation
(VILLANUEVA, supra at 78). de facto because it no longer exists in fact and
in law as a body corporate, except only for
. Corporation by estoppel – group of persons purpose of liquidating its affairs (Id. at 203).
that assumes to act as a corporation knowing
it to be without authority to do so, and enters When there is no third person involved and
into a transaction with a third person on the the conflict arises only among those assuming
strength of such appearance. It cannot be the form of a corporation, who therefore know
permitted to deny its existence in an action that it has not been registered, there is no

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162 2017 CENTRALIZED BAR OPERATIONS
corporation by estoppel (Lozano v. De Los Has not
Santos, G.R. No. 125221, June 19, 1997). complied with
Absence of
Complied with all
conditions
A third party who, knowing an association to all mandatory requirements Commented [5]: redundant
precedent
be unincorporated, nonetheless treated it as a requirements but there has
needed for a de
corporation and received benefits from it, may for been a
facto
be barred from denying its corporate incorporation. colorable
corporation.
existence in a suit brought against the alleged compliance.
corporation (Lim Tong Lim v. Phil. Fishing
Gear Industries, Inc., supra). As to liabilities of officers and directors
All who have
Since those who assume to act as a knowledge of
corporation are liable as general partners, its lack of
they are then liable even beyond their Liable only to
authority to act
investment. In other words, their personal the extent of
as such are
properties may be made to answer for what is their Same as de
liable as
purportedly a corporate debt (Salvatierra v. subscription jure.
general
Garlitos, G.R. No. L-11442, May 23, 1958). unless acted
partners.
A person acting or purporting to act on behalf in bad faith.
of a corporation which has no valid existence
assumes such privileges and obligations and
comes personally liable for contracts entered As to capacity to sue or be sued
into or for other acts performed as such
(Salvatierra v. Garlitos, G.R. No. L-11442, Cannot sue or
May 23, 1958). be sued except
by a third party
Can sue and Can sue and
When two or more persons not organized as who relied on
be sued. be sued.
an entity with juridical personality, enter into a its
transaction, they may be sued under the representations
name they are generally or commonly known in good faith.
(RULES OF COURT, RULE 3, Sec. 15). In the
answer of the defendant, the names and . Corporation by prescription – one, which
addresses of persons composing said entity has exercised corporate powers for an
must all be revealed. But it cannot sue under indefinite period without interference on the
the name they are generally or commonly part of the sovereign power e.g. Roman
known (AQUINO, supra at 220). Catholic Church (DE LEON & DE LEON Jr.,
supra at 61).
De Jure Corporation v. De Facto Corporation v.
Corporation by Estoppel 1. As to laws of incorporation:
De jure De facto By Estoppel . Domestic corporation – corporation formed,
As to who can question its corporate organized or existing under Philippine laws
existence (SUNDIANG & AQUINO, supra at 197); or
. Foreign corporation – corporation formed,
State or any
organized or existing under any laws other
third person
No one (not Only the State than those of the Philippines and whose laws
who relied in
even the in a direct allow Filipino citizens and corporations to do
good faith on its
State). proceeding. business in its own country or state
representations
(CORPORATION CODE, Sec. 123).
.
As being subject to a direct and 1. As to whether they are open to the public or
collateral attack not:
. Open – one which is open to any person who
Both collateral
Not subject. Direct. may wish to become a stockholder or member
and direct.
thereto; or
As to creation . Close – one whose AOI provide that: (1) All
the corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding 20; (2) all the issued
stock of all classes shall be subject to one or

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more specified restrictions on transfer 1. As to whether they are for religious purposes
permitted by this Title; and (3) The corporation or not:
shall not list in any stock exchange or make . Ecclesiastical corporation – one organized
any public offering of any of its stock of any for religious purposes; or
class (CORPORATION CODE, Sec. 96). . Lay corporation – one organized for a
purpose other than for religion (DE LEON &
1. As to relationship of management and control: DE LEON Jr., supra at 57).
. Holding corporation – one which controls
another as a subsidiary by the power to elect 1. As to whether they are for charitable purposes
management. It is one that holds stocks in or not:
other companies for purposes of control rather . Eleemosynary corporation – one
than for mere investment (VILLANUEVA, established for or devoted to charitable
supra at 81); or purposes or those supported by charity; or
. Subsidiary corporation – one which is so . Civil corporation – one established for
related to another corporation that the majority business or profit (Id.).
of its directors can be elected either directly or
indirectly by such other corporation. It is Concept of Going Public and Going Private
always controlled. A corporation more than A corporation is deemed to be “going public” when it
50% of the voting stock of which is owned or decides to list its shares in the stock exchange. These
controlled directly or indirectly through one or include corporations that will make initial public
more intermediaries by another corporation, offering of its shares. A corporation is said to be “going
which thereby becomes its parent corporation private” when it would restrict the shareholders to a
(A.M. No. 00-8-10-SC, Rules of Procedure on certain group. In a sense, these also include close and
Corporate Rehabilitation); or closely held corporation (AQUINO, supra at 107).
. Affiliate – a corporation that, directly or
indirectly, through one or more intermediaries, One-Man Corporation
is controlled by, or is under the common It is a corporation where business is actually owned by
control of another corporation, which thereby one individual, it is still possible for him to incorporate
becomes its parent corporation (A.M. No. 00- by giving nominal ownership of only one share of stock
8-10-SC, Rules of Procedure on Corporate to each of 4 other persons (VILLANUEVA, supra at
Rehabilitation). One related to another by 205).
owning or being owned by common
management or by a long-term lease of its
properties or other control device. It may be F ORMATION A ND
the controlled or controlling corporation, or
under common control (DE LEON & DE LEON O RGA NIZATION O F A P RIVATE
Jr., supra at 58); or
. Parent and Subsidiary Corporation – when
C ORPORATION
a corporation has a controlling financial
interest in one or more corporations, the one . Creation of a Corporation
having control is the parent corporation, and Steps in the Creation of a Corporation (PIF)
the others are the subsidiary corporations 1. Promotion
(VILLANUEVA, supra at 81). This includes activities done by promoter for
the founding and organizing of the business
1. As to number of persons who compose them: or enterprise of the issuer (SECURITIES
. Aggregate corporation – a corporation REGULATION CODE, Sec. 3(1) [hereinafter,
consisting of more than one person or SRC]).
member; or
. Corporation sole – a corporation consisting It includes discovery, investigation and
of only one person or member, for the purpose assembly (AQUINO, supra at 209).
of administering and managing, as trustee,
the affairs, property and temporalities of any Note: Promotion is not a formal part of the
religious denomination, sect or church, a organization of a corporation, inasmuch as it
corporation sole may be formed by the chief occurs outside the corporate form and
archbishop, bishop, priest, minister, rabbi or theoretically independent thereof. Hence, a
other presiding elder of such religious corporation may be formed and organized by
denomination, sect or church the incorporators themselves without getting
(CORPORATION CODE, Sec. 110). the services of so-called promoters (DE
LEON & DE LEON Jr., supra at 121).

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1. Incorporation
Steps of Incorporation: (DAPI) 1. Formal Organization and Commencement of
. Drafting and execution of AOI by the the Transaction of Business
incorporators and other documents
required for registration of the Formal Organization:
corporation. The person chosen as . Adoption of By-Laws and filing of the same
temporary treasurer pending with the SEC;
incorporation must also execute: . Election of board of directors/trustees, and
. An affidavit certifying compliance with officers;
subscription and paid-up . Establishment of principal office; and
requirements as to capital stock . Providing for subscription and payment of
(CORPORATION CODE, Sec. 14). capital stock (Id. at 208-209).
. Filing with the SEC of the AOI together
with: . Articles of Incorporation (AOI)
. Treasurer’s Affidavit It is the basic contract document in corporate law,
(CORPORATION CODE, Sec. 15); defining the charter of the corporation
. In case the corporation is governed (VILLANUEVA, supra at 171).
by special law (i.e. educational
institution), a favorable Three-Fold Nature
recommendation of the appropriate 0. A contract between the State and the corporation;
government agency (i.e. DepEd) that 0. A contract between the corporation and its
such AOI is in accordance with law stockholders; and
(CORPORATION CODE, Sec. 17). 0. A contract between the stockholder inter se.
(Government of Philippine Islands v. Manila
Note: SEC determines whether the name of Railroad Company, G.R. No. L-30646, January
the corporation is similar or confusingly similar 30, 1929).
with another corporation’s name. Should
there be none, the proposed name shall be The contents of the AOI are binding not only on the
preserved and a verification slip will be issued corporation but also on its shareholders. It constitutes
by the SEC. the constitution of the corporation (Lanuza v. CA, G.R.
No. 131394, March 28, 2005).
. Payment of filing and publication fees; and
. Issuance by the SEC of the certificate of Contents of AOI:
incorporation (DE LEON & DE LEON Jr., 0. Corporate Name;
supra at 123-124). 0. Purpose;
0. Principal Office;
Documents required by the SEC for incorporation: 0. Term;
. AOI; 0. Names, Nationalities and Residences of the
. Treasurer‘s Affidavit; Incorporators;
. Recommendation of the appropriate government 0. Number of Directors or Trustees;
agency if required by special law; 0. Names, Nationalities and Residences of persons
. Certificate of Authority from the Monetary Board who shall act as Directors or Trustees until the first
of the BSP; regular directors or trustees are duly elected;
. Name Verification Slip from the records of the 0. If it be a stock corporation, the amount of its
SEC whether or not the proposed name has authorized capital stock in lawful money of the
already been adopted by another corporation, Philippines, the number of shares and in case of
partnership or association; par value shares, the par value of each. If shares
. Letter undertaking to change the proposed name are without par value, such fact must be stated.
if already adopted by another corporation, Names, Nationalities and Residences of the
partnership or association; original subscribers, and the amount subscribed
. Bank certificate of deposit concerning the paid-up and paid by each;
capital; 0. If it be a non-stock corporation, the amount of
. Letter authorizing the SEC or Monetary Board or capital, the names, nationalities and residences of
its duly authorized representative to examine the the contributors and the amount contributed by
bank records regarding the deposit of the paid-up each; and
capital; 0. Other matters may be deemed necessary and
. Registration Sheet; and convenient (CORPORATION CODE Sec.14).
. For corporations with more than 40% foreign
equity: application form required by the Foreign 0. Corporate Name
Investments Act of 1991. Commented [ASPC6]: SOURCE?

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A corporation’s right to use its corporate and trade a. Injunction; and
name is a property right, a right in rem which it may a. De-registration (DE LEON & DE LEON Jr.,
assert or protect against the whole world in the supra at 184-185).
same manner as it may protect its tangible property
against trespass or conversion (Philips Export B.V. Change of Corporate Name
v. CA, G.R. No. 96161, February 21, 1992). A corporation can change the name originally
selected by it after complying with the formalities
For as long as a corporation exists, regardless of prescribed by law, to wit:
whether or not it is in operation, its corporate name . Amendment of the AOI; and
cannot be used by any other group (SEC Opinion, . Filing of the amendment with the SEC
Sept. 2, 1993). (Philippines First Insurance Company, Inc. v.
Hartigan, G.R. No. L-26370, July 31, 1970).
Statutory Limitations on the Use of Corporate
Name Authorized changes neither affect the property,
The proposed name must not be: rights, or liabilities of the corporation, nor lessen or
. Identical; add to its obligations. It is in no sense a new
. Deceptively or confusingly similar to that of corporation, nor the successor of the original
any existing corporation or to any other name corporation (P.C. Javier & Sons, Inc. v. CA, G.R.
already protected by law; or No. 129552, June 29, 2005).
. Patently deceptive, confusing or contrary to
law (CORPORATION CODE, Sec. 18).

0. Purpose Clause
Other Limitations The significance of the purpose clause is that it
. Must contain the word “Incorporated” or “Inc.” confers, as well as limits, the powers which a
unless it includes the word “Corporation” or corporation may exercise (VILLANUEVA, supra at
“Corp.”; 195).
. Those prohibited under special laws;
. Use of generic, geographical, and descriptive It must distinguish the primary purpose from that of
terms and names; the secondary. There can only be one primary
. Use of trade name of another corporation; and purpose while the secondary may be several and
. Other policies provided by the SEC need not be related to the main purpose (Id.).
Memorandum No. 14, Series of 2000.
Reason for Classification: To determine which
See: Omnibus Guidelines and Procedure on the investment of corporate funds require the authority
Use of Corporate and Partnership Names, SEC of both the Board of Directors and Stockholders.
Memorandum Circular No. 21 Series of 2013,
December 4, 2013 Significance:
. A person who intends to invest his money in
Doctrine of Secondary Meaning the business will know where and in what kind
General Rule: A corporation whose corporate of business or activity his money will be
name is a word or phrase which is generally invested;
descriptive or geographical cannot prevent another . The directors and the officers of the
corporation, which uses the same word or phrase corporation will know within what scope of
as its corporate name, from using such. business they are authorized to act; and Commented [AM7]: Source
. A third person who has dealings with the
Exception: Under the Doctrine of Secondary corporation may know by perusal of the
Meaning, a word or phrase originally incapable of articles whether the transaction or dealing he
exclusive appropriation with reference to an article has with the corporation is within the authority
on the market because geographically or otherwise of the corporation or not. In the latter case,
descriptive, might nevertheless have been used so they will be known as ultra vires acts
long and so exclusively by one producer with (AQUINO, supra at 165-167).
reference to his article that, in that trade and to that
branch of the purchasing public, the word or phrase Limitations: (ICIN)
has come to mean that the article was his product a. It cannot be created for a purpose of which a
(Lyceum of the Philippines v. CA, G.R. No. 101897, corporate body is Incapable;
March 5, 1993). a. The purpose must not be Contrary to law,
morals, or public policy;
Remedies of Corporation whose Name has a. It cannot be organized for two or more
been Adopted by Another: Incompatible purposes; and

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166 2017 CENTRALIZED BAR OPERATIONS
a. It must not have a purpose that is contrary to
its Nature (Id. at 167). Note: A specific address is now required; Metro
Manila is no longer allowed (SEC Circular No. 3,
A corporation with a primary object of which is Series of 2006).
without statutory authority can have no lawful
existence, even though some of its declared 0. Term of Existence
purposes may be lawful (DE LEON & DE LEON Jr., General Rule: The Corporation shall exist for the
supra at 150). term specified in the AOI.

If a principal lawful purpose is specified, but the Limitations:


articles or certificate assumes for the corporation . The corporate term shall not exceed 50 years,
the existence of powers which it is not permitted to unless:
exercise, then the additional and unauthorized . Sooner dissolved; or
assumption may be treated as surplusage and the . Said period is shortened or extended.
corporation regarded as entitled to exercise the . The extension cannot be made earlier than 5
lawful powers only (Id. at 157). years prior to the expiration date
(CORPORATION CODE, Sec. 11).
Stretching the Purpose Clause
It is legal to stretch the meaning of the purpose Exception: There are justifiable reasons
clause to cover new and unexpected situations. (determined by the SEC) for an earlier extension,
There is no need to amend the AOI to i.e. there is influx of foreign investors who wanted
accommodate new situations (SEC Opinion No. to determine the stability of the corporation or to
08-24, October 22, 2008). encourage prospective investors to place their
investment in the corporation.
0. Principal Office
The AOI must state the place where the principal The corporate term may be extended for periods
office of the corporation is to be located, which not exceeding 50 years in any single instance by
must be within the Philippines (CORPORATION an amendment of the AOI (CORPORATION
CODE, Sec. 14(3)). CODE, Sec. 11).

Existing corporations and partnerships whose Note: There is no limit to the number of extensions
Articles indicate only a general address as their that may be made (DE LEON & DE LEON Jr.,
principal office address such as “Metro Manila” supra at 132).
are directed to file an amended AOI in order to
specify their complete address such that, if Upon expiration of the period fixed in the AOI, in
feasible, it has a street number, street name, the absence of compliance with the legal requisites
barangay, city or municipality and if applicable, the for the extension of the period, the corporation
name of the building, the number of the building ceases to exist and is dissolved ipso facto (PNB v.
and name or number of the room or unit (SEC CFI of Rizal, G.R. No. 63201, May 27, 1992).
Memorandum Circular No. 6, February 20, 2014).
Note: The amendment (for extension) must be
Purpose: effected before the expiration of the corporate term
. To fix the residence of the corporation in a of existence (DE LEON & DE LEON Jr., supra at
definite place, instead of allowing it to be 131).
ambulatory (Young Auto Supply Co. v. CA,
G.R. No. 104175, June 25, 1993); Doctrine of Relations or Relating Back Doctrine
. To determine the venue of court cases The filing and recording of a certificate of extension
involving the corporation (SUNDIANG & after the term cannot relate back to the date of the
AQUINO, supra at 208); passage of the resolution of the stockholders to
. For purposes of stockholders’ or members’ extend the life of the corporation. HOWEVER, the
meeting; and Doctrine of Relations applies if the failure to file the
. To determine the place where the books and application for extension within the term of the
records of the corporation are ordinarily kept. corporation is due to the neglect of the officer with
whom the certificate is required to be filed or to a
For purposes of venue in intra-corporate suits, wrongful refusal on his part to receive it (AQUINO,
when the AOI indicates that the principal place of supra at 151-152).
business is “Metro Manila”, then the action must be
filed in the city or municipality where the head office Where the delay in effecting the amendment is due
is actually located (Interim Rules of Procedure for to the neglect of the officer with whom the
Intra-Corporate Controversies, Rule 1, Sec. 1). application is required to be filed or to the wrongful

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refusal on his part to receive it, the same will be whenever absent for business or pleasure,
treated as having been filed before the expiry date. one intends to return (Hyatt Elevators v.
The doctrine does not apply where the delay is Goldstar Elevators, G.R. No. 161026,
attributable to the corporation (Alhambra Cigar v. October 24, 2005).
SEC, G.R. No. L-23606, July 29, 1968).
General Rule: A corporation composed of
0. Incorporators entirely aliens may be incorporated as long
The AOI must specify the names, nationalities, as the majority of the incorporators are
and residences of the incorporators and must residents of the Philippines (DE LEON & DE
show that at least a majority of the incorporators LEON Jr., supra at 127).
are residents of the Philippines (DE LEON & DE
LEON Jr., supra at 159). Exception: In case of nationalized
corporations (Id.)
Note: The statement of nationalities of the
incorporators will enable the SEC to determine . If the corporation is a stock corporation,
prima facie compliance with constitutional or legal each must Own or subscribe to at least 1
requirements regarding ownership by Filipino share of the capital stock of the corporation;
citizens of certain percentages of capital stock of
certain corporations (Id. at 159-160). Reason: The presumption is that where an
incorporator has a pecuniary interest in the
Components of a Corporation corporation, he will be concerned with the
. Corporators – those who compose a management of its affairs (Id. at 128).
corporation, whether as stockholders (in stock
corporations) or as members (in non-stock . Of legal Age; and
corporations).
. Incorporators – those mentioned in the AOI Note: The incorporators must have the
as originally forming and composing the capacity to enter into a valid contract. It is to
corporation, having signed the AOI and be noted that Sec. 15 of the Corporation
acknowledged the same before a notary Code requires that the AOI must be
public. They have no powers beyond those acknowledged by the incorporators before a
vested in them by the statute (VITUG, supra at notary public. Hence, there is a requirement
49). that the incorporators must be qualified to
enter into a contract.
Note: There is only one set of incorporators.
The incorporators appearing as such in the Reason: The act of forming a corporation
AOI will remain to be incorporators up to the as between parties is contractual.
termination of the life of the corporation. Moreover, the purpose of requiring
acknowledgement is to secure the State
Reason: The AOI cannot be amended to and all concerned against the possibility of
change the names of the incorporators any fictitious name being subscribed to the
because the fact that the persons named Articles and to furnish proof of the
therein as incorporators is an accomplished genuineness of the signatures (Id. at 126).
fact that can no longer be undone (AQUINO,
supra at 149). . Natural person not suffering from any legal
incapacity.
Number and Qualifications of
Incorporators (5-MOAN) (CORPORATION Note: A corporation cannot be an
CODE, Sec. 10) incorporator of another corporation
. Not less than 5 but not more than 15; (Government v. El Hogar, G.R. No. L-26649,
July 13, 1927).
Exception: There is only 1 incorporator in
a corporation sole (CORPORATION Reason: A corporation is an artificial person
CODE, Sec. 110). without brain or body, existing only on paper
through legislative command and incapable
. Majority must be residents of the of thought or action except through natural
Philippines; persons. Hence, it cannot create other
artificial persons, and those others still, until
Note: The term 'residence' as so used is the line is so extended and the capital stock
synonymous with 'domicile”. Residence is so duplicated and reduplicated as to result in
the permanent home— the place to which,

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168 2017 CENTRALIZED BAR OPERATIONS
confusion and fraud (VILLANUEVA, supra at
204). Liability of Corporation for Promoter’s
Contracts
Exception: If the corporation is a General Rule: Corporation is not bound to a
cooperative, it may become an incorporator contract made by a promoter before its
of a rural banking corporation. Duly incorporation (Cagayan Fishing v. Sandiko,
established cooperatives and corporations supra).
primarily organized to hold equities in rural
banks may organize rural banks and / or Exceptions:
subscribe to shares of stock of any rural bank . Adopts or ratifies the contract; or
(R.A. No. 7353, Sec. 4). . Accepts its benefits with knowledge of the
terms thereof (McArthur v. Times Printing, 51
. Stockholders – owners of shares of stock in N.W. 216, 1892; Rizal Light v. Municipality of
a stock corporation. They are holders of Morong, G.R. No. L-20993, September 28,
shares in a corporation with interest over the 1968).
management (control), income (dividends)
and assets (share upon liquidation) of the Limitations:
corporation. i. The contract must be adopted in its entirety;
. Members – corporators of a non-stock i. The corporation cannot adopt only the part
corporation. that is beneficial to it and discard that which
is burdensome; and
Incorporators v. Corporators i. The contract must be one which is within
Incorporators Corporators the powers of the corporation to enter, and
one which the usual agents of the company
As to Nature of Membership have express or implied authority to enter
Stockholder (stock (McArthur v. Times Printing, supra; Rizal
corporation) or member Light v. Municipality of Morong, supra).
Signatory to the AOI.
(non-stock
corporation). Liability of Promoter
General Rule: Promoters are personally liable
As to Contractual capacity
on their contracts even if made on behalf of a
Must have contractual May be such through a corporation to be formed (King Features
capacity. guardian. Syndicate v. Courrier, 43 N.W. 2d 718, 1950).
As to Permanence
Fait accompli; Exception: There is an express or implied
They may cease to be
accomplished fact (the agreement reliving the promoter from liability
such if they
AOI cannot be (How v. Boss, 222 F. Supp. 936, 1963).
subsequently lose their
amended to replace
shareholdings.
them). Note: The fact that the corporation when
As to Number formed has adopted or ratified the contract
does not release the promoter from
Number is limited to 5- No restriction as to responsibility unless a novation was intended
15. number. (Wells v. Fay, 85 S.E. 873, 1915). Commented [AM8]: Source

Other Components Any benefit derived by a promoter for the


. Promoter - a person who, acting alone or with corporation should be given to the corporation
others, takes initiative in founding and organizing (AQUINO, supra at 210).
the business or enterprise of the issuer and
receives consideration therefore (SRC, Sec. 3). . Subscriber – person who has agreed to take
and pay for original and unissued shares of a
He is an agent of the incorporators but not of the corporation formed or to be formed (DE LEON
corporation (Cagayan Fishing v. Sandiko, G.R. & DE LEON Jr., supra at 66).
No. L-43350, 23 December 1937).
Underwriter – person who guarantees on a firm
A promoter could not have acted as agent for a commitment and/ or declared best effort basis the
corporation that had no legal existence. A distribution and sale of securities of any kind by
corporation, until organized, has no life, therefore, another company (SRC, Sec. 3).
no faculties. The corporation had no juridical
personality to enter into a contract (Cagayan Types of Underwriting Contracts:
Fishing v. Sandiko, supra).

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2017 CENTRALIZED BAR OPERATIONS
1. Firm Commitment – underwriting agreement wherein it cannot be determined until all the shares have
the members severally but not jointly agree to been issued (Id. at 73).
purchase the whole issue outright at a particular
price for resale at a price differential to the public, Subscribed Capital Stock
or to dealers who sell at another differential to the It is the total amount of the capital stock
public. subscribed whether fully paid or not (Id. at 74).
1. All-or-Nothing Commitment – the underwriters
agree to accept liability for the purchase of an
issue at a given price only if the entire issue is not
sold. Outstanding Capital Stock
1. Standby Commitment - the underwriters will It is the portion of the capital stock issued to
purchase and distribute at predetermined prices subscribers, whether fully paid or partially paid (as
to the public any amount of the issues not taken long as there is a binding subscription contract)
by stockholders in exercising their pre-emptive except treasury shares (CORPORATION CODE,
rights Sec. 137).
1. Best Efforts Commitment - the underwriters will
use its best efforts to distribute the issue to the Note: Treasury shares are shares of stock which
public. Under this agreement, the underwriter have been issued and fully paid for, but
does not agree to purchase the issue at subsequently reacquired by the issuing corporation
predetermined prices. The security is sold for (CORPORATION CODE, Sec. 9).
whatever price it will bring, the underwriters take
a predetermined spread, and the issuers take the Paid-up Capital
residual (DE LEON & DE LEON Jr., supra at 122). It is the amount paid by the stockholders on
subscriptions from unissued shares of the
Directors and Trustees corporation (DE LEON & DE LEON Jr., supra at
The number of directors or trustees shall not be less 74).
than 5 nor more than 15 (CORPORATION CODE,
Sec. 14(6)). Unissued Capital Stock
It is the portion of the capital stock that is not issued
The AOI must have a statement of the names, or subscribed. It has no rights (Id.).
nationalities and residences of the incorporating
directors and must show that at least a majority of the Legal Capital
incorporators are residents of the Philippines It is the amount equal to the aggregate par value
(CORPORATION CODE, Sec. 23). and/ or issued value of the outstanding capital
stock (Id.).
0. Capitalization
Capital Stated Capital – The capital stock divided into no
It is the value of the actual property or estate of par value shares (AQUINO, supra at 154).
the corporation whether in money or property (DE
LEON & DE LEON Jr., supra at 75). Illustration:
Suppose the AOI of Corporation A provides that
Capital Stock or Legal Stock or Stated Capital the authorized capital stock is P1,000,000 divided
It is the amount fixed in the corporate charter to be into 10,000 shares with a par value of P100/share.
subscribed and paid in cash, kind or property at At its incorporation, only 5,000 shares were
the organization of the corporation or afterwards subscribed and P250,000 was paid by the
and upon which the corporation is to conduct its subscribers. After incorporation, the corporation
operation (Id. at 73). issued 2,000 shares all of which are fully paid. No
additional payments were made from the shares
Authorized Capital Stock issued at the time of incorporation. The Board of
It is the amount fixed in the AOI that may be Directors decided to reacquire 500 shares as
subscribed and paid by the stockholders of the treasury shares.
corporation (Id. at 153).
At Incorporation
Note: Authorized Capital Stock is synonymous a. Authorized Capital Stock P1,000,000
with Capital Stock where the shares of the b. Subscribed Capital Stock P500,000
corporation have par value. If the shares of stock (5,000 shares X P100 par)
have no par value, the corporation has no c. Outstanding Capital Stock P500,000
authorized capital stock, but it has a capital stock (same with subscribed
the amount of which is not specified in the AOI as capital stock since there is
no treasury share)

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170 2017 CENTRALIZED BAR OPERATIONS
d. Paid-up Capital P250,000 No Foreign Equity (100% Filipino-owned)
(CROP2-FUM-SMB)
Note: Since the requirement of the law for the . Cooperatives (R.A. No. 6938, Art. 26);
subscribed capital stock is at least 25% of the . Retail trade enterprises with paid-up capital of
authorized capital stock, the minimum subscribed less than US$2,500,000 (CORPORATION
capital stock in the above example is P250,000. CODE, Sec. 5; R.A. No. 8762);
Correspondingly, using the minimum subscribed . Ownership, operation and management of
capital stock, the minimum paid-in capital is cockpits (CORPORATION CODE, Sec. 5; P.D.
P62,500. No. 449);
After Incorporation . Practice of all professions;
a. Authorized Capital Stock P1,000,000 . Private Security Agencies (CORPORATION
b. Subscribed Capital Stock P700,000 CODE, Sec. 4; R.A. No. 5487);
(7,000 shares X P100 par) . Manufacture of Firecrackers and other
c. Treasury Shares (500 x P50,000 pyrotechnic devices (CORPORATION CODE,
P100 par) Sec. 5; R.A. No. 7183);
d. Outstanding Capital P650,000 . Utilization of Marine Resources in archipelagic
Stock (P750,000 –P50,000) waters, territorial sea, and exclusive economic
e. Paid-up Capital P450,000 zone as well as small-scale utilization of
(P250,000 + 200,000) natural resources in rivers, lakes, bays, and
lagoons (CONST., Art. XII, Sec. 2);
Capital Stock Requirement . Manufacture, repair, stockpiling and/or
General Rule: No minimum authorized capital distribution of nuclear weapons (CONST., Art.
stock as long as the paid-up capital is not less than II, Sec. 8);
P5,000 (CORPORATION CODE, Sec. 12-13). . Small-scale Mining (CORPORATION CODE,
Sec. 3; R.A. No. 7076);
Exceptions (PISFIS) . Mass Media except recording (CONST., Art.
. Private Development Banks; XVI, Sec. 11; Presidential Memorandum dated
. Investment Companies; May 04, 1994); and
. Savings and Loan Corporation; . Manufacture, repair, stockpiling and/or
. Financing Companies; distribution of Biological, chemical and
. Insurance companies; and radiological weapons and anti-personnel
. As provided for by Special laws. mines.

Provided that at least 25% of the authorized capital Up to 20% Foreign Equity
stock has been subscribed at the time of Private radio communications network (R.A. No.
incorporation, and at least 25% of the total 3846).
subscription has been paid upon subscription. In
no case shall the paid-up capital be less than Up to 25% Foreign Equity
P5,000 (CORPORATION CODE, Sec. 13). . Private recruitment, whether for local or
overseas employment (P.D. No. 442, Art. 27);
Filipino Ownership Percentage Requirement . Contracts for the construction and repair of
Since a specific class of shares may have rights locally-funded public works (C.A. 541, Sec. 1;
and privileges or restrictions different from the rest LOI 630) except:
of the shares in a corporation, the 60-40 ownership . Infrastructure/development projects (R.A. No.
requirement in favor of Filipino citizens in Section 7718); and
11, Article XII of the Constitution must apply not . Projects which are foreign funded or assisted
only to shares with voting rights but also to shares and required to undergo international
without voting rights. Thus, if a corporation, competitive bidding (R.A. No. 7718, Sec. 2a);
engaged in a partially nationalized industry, issues . Contracts for the construction of defense-
a mixture of common and preferred non-voting related structures (C.A. 541, Sec. 1).
shares, at least 60 percent of the common shares
and at least 60 percent of the preferred non-voting Up to 30% Foreign Equity
shares must be owned by Filipinos. In short, the Advertising (CONST., Art. XVI, Sec. 11).
60-40 ownership requirement in favor of Filipino
citizens must apply separately to each class of Up to 40% Foreign Equity (C2AP-MO5DE)
shares, whether common, preferred non-voting, a. Culture, production, milling, processing,
preferred voting or any other class of shares (E.O. trading excepting retailing, of rice and corn and
No. 584, December 8, 2006; Gamboa v. Teves, acquiring, by barter, purchase or otherwise,
supra). rice and corn and the by-products thereof (P.D.
No. 194, Sec. 5; R.A. No. 8762, Sec. 15);

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2017 CENTRALIZED BAR OPERATIONS
a. Contracts for the supply of materials, goods a. No par value shares
and commodities to government-owned or The 25% minimum paid-up requirement
controlled corporation, company, agency or applies only to par value shares because a
municipal corporation (R.A. No. 5183, Sec. 1); subscriber to no par value shares must pay in
a. Adjustment companies (P.D. No. 612 as full his subscription (Id. at 138).
amended by P.D. No. 1814, Sec. 323);
a. Project Proponent and Facility Operator of a Note: Shares of capital stock issued without
BOT project requiring a public utilities franchise par value shall be deemed fully paid and non-
(CONST., Art. XII, Sec. 11; R.A. No. 7718, Sec. assessable (CORPORATION CODE, Sec.
2(a)); 6(3)).
a. Manufacture, repair, storage and/or distribution
of products/ingredients requiring PNP Hence, in case of a no par value share, the
clearance (R.A. No. 7042 as amended by R.A. 25% requirement shall be computed on the
8179); basis of the entire number of authorized share
a. Ownership of private lands (CONST., Art. XII, (DE LEON & DE LEON Jr., supra at 139).
Sec. 7; C.A. 141, Sec. 22; R.A. No. 9182, Sec.
4); a. Subsequent subscription to unsubscribed
a. Operation and management of public utilities shares
(CONST., Art. XII, Sec. 11; C.A. 146, Sec. 16);
a. Ownership/establishment and administration Reason: The evils or risks of insolvency
of educational institutions (CONST., Art. XIV, against which the law intents to safeguard the
Sec. 4); public no longer exist (SEC Opinion, June 29,
a. Operation of deep sea commercial fishing 1976).
vessels (R.A. No. 8550, Sec. 27; R.A. 8550);
a. Ownership of condominium units where the It is not required for purposes of incorporation that
common areas in the condominium project are each and every subscriber shall pay 25% of his
co-owned by the owners of the separate units subscription. It is enough that 25% of the total
or owned by a corporation (R.A. No. 4726, Sec. subscription is paid although some subscribers
5); have paid less than 25%, or even have not paid
a. Manufacture, repair, storage and/or distribution any amount (DE LEON & DE LEON Jr., supra at
of products/ingredients requiring DND 137).
clearance (R.A. No. 7042 as amended by R.A.
No. 8179); and Paid-up Capital Requirement
a. Exploration, development and utilization of In no case shall the paid-up capital be less than
natural resources (CONST., Art. XII, Sec. 2). P5,000 (CORPORATION CODE, Sec. 13).

Up to 60% Foreign Equity Exception: Special laws


. Financing companies regulated by the SEC . Insurance corporation – P5 million (P.D. No.
(R.A. No. 5980 as amended by R.A. No. 8556, 1460);
Sec. 6); . Pawnshop – P100, 000 (P.D. No. 114); and
. Investment houses regulated by the SEC (P.D. . Financial Intermediary applying for
No. 129 as amended by R.A. No. 8366, Sec. authority to perform quasi-banking
5). functions – P50 million (CB Circular No. 757).

Pre-Incorporation Minimum Subscription and Note: The minimum 25% subscription and
Paid-up Capital Requirements: 25% paid-up capital is required also in case of
. At least 25% of the authorized capital stock as increase of the authorized capital stock but
stated in the Articles of Incorporation must be only to the amount of increase and not the total
subscribed at the time of incorporation; and increased amount (CORPORATION CODE,
. At least 25% of the total subscription must be Sec. 38(4)).
paid upon subscription. (CORPORATION
CODE, Sec. 13). Numerical Value for the Minimum Authorized,
Subscribed and Paid-up Capital Stock:
Reason: To give assurance to the investing public a. Paid-up capital stock – P5,000
dealing with the corporation that it is financially and (CORPORATION CODE, Sec. 13).
actually able to operate and undertake to do the a. Subscribed capital stock – P5,000 as the
business and meet its obligations as they arise phrase used is “at least 25%”. Thus, it is valid
from the start of its operations (DE LEON & DE to pay 100% of the subscribed capital stock of
LEON Jr., supra at 137). P5,000.00.
Exception:

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172 2017 CENTRALIZED BAR OPERATIONS
a. Authorized capital stock – P5,000.00 as the The stated value of the
phrase “at least 25%” is used again. Thus, the Greater protection to share is not an
law implies that it is valid to subscribe to the creditors. accurate criterion of its
whole 100% of the authorized capital stock of true value. Commented [AM9]: Source
P5,000.00.
No par value shares
Matters Required to be Stated in the AOI of Shares without any stated value appearing on the face
Stock Corporation: (P-WATSAN) of the certificate of stock. The issued value will be fixed
. In case the shares are par value shares, the by the Board of Directors and stated in the certificate
Par value of each; or AOI. No par value stockholders have the same
. If some or all of the shares are Without par rights as holders of par value stock (Id.).
value, such fact must be stated;
. The Amount of its authorized capital stock in Advantages and Disadvantages of No Par Value
lawful money of the Philippines; Shares
. Treasurer’s Affidavit; Advantages Disadvantages
. The names, nationalities and residences of Legalize issuance of
the original Subscribers; Issued as fully paid and
large stock for
. The Amount subscribed and paid by each non-assessable.
property.
original subscribers on his subscription; and Conceal money or
. The Number of shares and kind of shares into Price is flexible. property represented
which it is divided (CORPORATION CODE, by the shares.
Sec. 14). Enjoy wider distribution
Promote the issuance
because it is low-
Matters Required to be Stated in the AOI of a of watered stock.
priced.
Non-Stock Corporation: Tell no untruth
. The amount of its capital or money concerning the value of Lesser protection to
contributed or donated by specified persons; the stockholder’s creditors. Commented [AM10]: Source
. The names, nationalities, and residences of contribution.
the donors or contributors; and
. The respective amount contributed by each Limitations:
(CORPORATION CODE, Sec. 14). . No par value shares cannot have an issued
price of less than P5;
0. Shares of Stock . The entire consideration for its issuance
Doctrine of Equality of Shares constitutes capital so that no part of it should
Where the AOI do not provide for any distinction be distributed as dividends;
of the shares of stock, all shares issued by the . They cannot be issued as preferred stocks;
corporation are presumed to be equal and enjoy . They cannot be issued by: (BPI-TB) Banks,
the same rights and privileges and are also Public utilities Insurance companies, Trust
subject to the same liabilities (CORPORATION companies, and Building and loan
CODE, Sec. 6(5)). association;
. The AOI must state the fact that it issued no
Classes of Shares par value shares as well as the number of said
. Par and No Par Value Shares shares; and
Par value shares . Once issued, they are deemed fully paid and
Shares with a value fixed in the AOI and the non-assessable and the holder of such shares
certificates of stock (DE LEON & DE LEON Jr., shall not be liable to the corporation or its
supra at 82). creditors in respect thereto (CORPORATION
CODE, Sec. 6).
Purpose: To fix the minimum subscription or
issue price of the shares, thus assuring creditors Note: Shares without par value may be converted
that the corporation would receive a minimum to par value shares and vice versa by amending
amount for its stock (Id.). the AOI (AQUINO, supra at 129).
Advantages and Disadvantages of Par Value . Voting and Non-Voting Shares
Shares Voting shares
Advantages Disadvantages Shares with a right to vote (DE LEON & DE LEON
Easily sold as the Subscribers are liable Jr., supra at 83).
public is more to the corporate
attracted to buy this creditors for their
kind of share. unpaid subscription.

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2017 CENTRALIZED BAR OPERATIONS
There shall always be a class or series of i. Have complete voting rights. They cannot
shares which have complete voting rights be deprived of said rights except as
(CORPORATION CODE, Sec. 6). provided by law (DE LEON & DE LEON Jr.,
supra at 84).
Whenever a vote is necessary to approve a
particular corporate act, such vote refers only to General Rule: Common shares have complete
stocks with voting rights except in certain cases voting rights (Id.).
when even non-voting shares may also vote
(CORPORATION CODE, Sec. 6(6-7)). Exception:
. Delinquent shares (CORPORATION
Non-voting shares CODE, Sec. 71);
Shares without right to vote (DE LEON & DE . Treasury shares (CORPORATION CODE,
LEON Jr., supra at 83). Sec. 9); and
. Founder’s shares where the exclusive
The law only authorizes the denial of voting voting rights are granted to them for a
rights in the case of redeemable shares and period not exceeding 5 years
preferred shares (CORPORATION CODE, (CORPORATION CODE, Sec. 7).
Sec. 6(1)).
Preferred shares
These redeemable and preferred shares, when Shares with a stated par value which entitle the
such voting rights are denied, shall holders thereof to certain preferences over the
nevertheless be entitled to vote on the following holders of common stock. The preference may
fundamental matters: (IISA-MAID) be (a) as to asset; (b) as to dividends; or (c) as
. Incurring, creating or increasing bonded may be determined by the board of directors
indebtedness; when so authorized to do so (CORPORATION
. Increase or decrease of capital stock; CODE, Sec. 6(2)).
. Sale or disposition of all or substantially all
of corporate property; Preferred shares may be deprived of voting
. Amendment of AOI; rights in the AOI subject to the limitations
. Merger or consolidation of capital stock; imposed in Sec. 6 of the Corporation Code.
. Adoption and amendment of by-laws.
. Investments of corporate funds in another All preferred stock contracts are, fundamentally
corporation or another business purpose; attempts to endow certain owners with rights
and analogous to creditor rights. The reason why
. Corporate Dissolution (CORPORATION there is an effort to extend such right is to make
CODE, Sec. 6). preferred shares attractive to investors for they
can remain as such and at the same time enjoy
Reason: The immediately preceding certain advantages that are available to
enumeration involves fundamental changes in creditors (AQUINO, supra at 122).
the rights of the shareholders that are therefore
the concern of all shareholder including holders Limitations:
of non-voting shares. Hence, the law deems it . May be deprived of voting rights, but it shall
wise to allow holders of non-voting shares to still be entitled to vote on matters
vote on the above-mentioned matters enumerated in Sec. 6;
(AQUINO, supra at 116). . Preference must not be violative of the
Code;
. Common and Preferred Shares . It may be issued only with a stated par
Common shares value; and
The basic class of stock ordinarily and usually . The board of directors may fix the terms
issued without extraordinary rights and and conditions only when so authorized by
privileges, and the owners thereof are entitled the AOI and such terms and conditions
to a pro rata share in the profits of the shall be effective upon filing a certificate
corporation and in its assets upon dissolution thereof with the SEC (CORPORATION
and, likewise, in the management of its affairs CODE, Sec. 6).
without preference or advantage whatsoever.
Kinds:
These shares: . Cumulative – one which entitles the owner
i. Represent the residual ownership interest thereof to payment not only of current
in the corporation; and dividends but also back dividends not

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previously paid whether or not the past The excess shall be distributed to BOTH
years’ dividends were declared or paid; preferred and common shareholders. Each
. Non-cumulative – one which grants the share shall be entitled to an additional dividend
holders of such shares only to the payment of P1.40 (P1,400/100 shares)
of current dividends but not back dividends
when and if dividends are paid to the extent ii. Non-Participating
agreed upon before any other stockholders Dividends Declared P11,400
are paid the same; Preferred Shareholders
. Participating – one which entitles the (300 shares x P100 par x10%)(P3,000)
shareholder to participate with the common Common Shareholders P8,400
shares in excess distribution at some
predetermined or at a fixed ratio as may be The preferred shareholders have no share on
determined; the excess after they receive their guaranteed
. Non-participating – one which entitles the dividends.
shareholder thereof to receive the stipulated
preferred dividends and no more; and Other Classes
. Cumulative participating – share which is a. Redeemable shares
a combination of the cumulative share and Shares of stocks issued by the corporation which
participating share (AQUINO, supra at 124- said corporation can purchase or take up from
125). their holders as expressly provided for in the AOI
and certificate of stock representing said shares
Note: In the absence of any characteristic as to at a fixed date or at the option of the issuing
the shares, the shares are non-cumulative and corporation or the stockholder or both at a certain
non-participating. redemption price (CORPORATION CODE, Sec.
8).
Illustration:
Limitations:
Suppose the capital stock of X Corporation is . May be issued only when expressly provided
P100,000 divided into 1,000 shares with a par value for in the AOI;
of P100.00 per share. 300 of the shares are . The terms and conditions affecting said
preferred and 700 are common. The preferred shares must be stated both in the AOI and in
shares are entitled to dividends at the preferred rate the certificates of stock representing such
of 10%. shares; and
. May be deprived of voting rights in the AOI
a. On the 5th year, the corporation decided to unless otherwise provided (CORPORATION
declare the regular annual dividend CODE, Sec. 8).

i. Cumulative Preferred Shares Condition on Redemption


Preferred shareholders shall receive Redeemable shares may be redeemed,
P15,000: P3,000 per year (300 shares x regardless of the existence of unrestricted
P100 par x10%) or a total of P12,000 for the retained earnings (CORPORATION CODE, Sec.
4 years dividends in arrears plus P3,000 for 8) provided, that the corporation has, after such
the current year. redemption, sufficient assets in its books to cover
debts and liabilities inclusive of capital stock
ii. Non-Cumulative Preferred Shares (Republic Planters Bank v. Agana, Sr., G.R. No.
Preferred shareholders shall receive 51765, March 3, 1997).
P3,000 only for the current year.
Trust Fund Doctrine
b. The corporation declares a dividend of P11,400 Redemption may not be made where the
corporation is insolvent or if such redemption
i. Participating Preferred Share would cause insolvency or inability of the
Dividends Declared P11,400 corporation to meet its debts as they mature. Such
Preferred Shareholders limitation is based on the principle that corporate
(300 shares x P100 par x10%) assets are a trust fund for creditors (Republic
(P3,000) Planters Bank v. Agana, Sr., supra).
Common Shareholders
(700 shares xP100 par x 10%)(P7,000) Effects of Redemption
Excess P1,400 . When redeemable shares are reacquired, the
same shall be considered retired and no

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longer issuable unless otherwise provided for declared and issued as dividends. The
in the AOI. restriction shall be lifted only after reissuance
. If by provision of the AOI they can be (SEC Rules Governing Redeemable and
reissued, they shall be considered as treasury Treasury Shares Sec. 4(2)).
shares.
c. Where reissuance of redeemed shares is Treasury shares may be declared as property
prohibited, the number of authorized shares of dividend to be issued out of the retained
the capital stock of the corporation reduced earnings previously used to support their
accordingly, and the AOI must be amended acquisition provided that the amount of the
(DE LEON & DE LEON Jr., supra at 105). retained earnings has not been subsequently
impaired by losses (Rules Governing
For tax purposes, there are cases when Redeemable and Treasury Shares, Sec.
redemption of shares is considered a scheme 5(3)).
to circumvent the tax consequences of cash
dividends. Hence, the amounts received by c. Founders' shares
the shareholders shall be treated as cash Shares classified as such in the AOI and issued to
dividends because proceeds of redemption in organizers and promoters of a corporation in
such a case are additional wealth and not consideration of some supposed right or property
merely a return of the capital (AQUINO, supra such as special preference in voting rights and
at 137-138). dividend payments (CORPORATION CODE, Sec.
7).
b. Treasury shares
Shares of stock which have been issued and fully But if an exclusive right to vote and be voted for
paid for, but subsequently reacquired by the as director is granted, this privilege is subject to
issuing corporation by purchase, redemption, approval by the SEC, and cannot exceed 5 years
donation or through some other lawful means from the date of approval (CORPORATION
(CORPORATION CODE, Sec. 9). CODE, Sec. 7).

Treasury shares are not retired shares. They do d. Share in Escrow


not revert to the unissued shares of the Shares held by a third person to be released only
corporation but are regarded as property acquired upon the performance of a condition or the
by the corporation which may be reissued or happening of a certain event contained in the
resold at a price to be fixed by the Board of agreement (SEC Opinion, February 16, 1989).
Directors (SEC Rules Governing Redeemable
and Treasury Shares, CCP No. 1-1982). The escrow deposit makes the depository a
trustee under an express trust (CIVIL CODE, Art.
Treasury shares need not be sold at par or issued 1440-1441).
value but may be sold at the best price obtainable,
provided it is reasonable. When treasury shares Before the fulfillment of the condition, the grantee
are sold below its par or issued value, there can or holder is not yet the owner of the shares and
be no watering of stock because such watering consequently, he is not entitled to the rights
contemplates an original issuance of shares belonging to a regular stockholder (DE LEON &
(CORPORATION CODE, Sec. 9). DE LEON Jr., supra at 87). Commented [ASPC11]: Fix indent

Treasury shares, not having been retired by the Note: Just like treasury shares, escrow shares are
corporation reacquiring it, are subject to the not reflected in the AOI (AQUINO, supra at 132).
following rules:
. They may be re-issued or sold again as long e. Over-issued stock / Spurious stock
as they are held by the corporation as Stock issued in excess of the amount prescribed
treasury shares; or limited by its AOI. It is void even in the hands of
. As long as they are held by the corporation, a bona fide purchaser for value (DE LEON & DE
they cannot participate in dividends because LEON Jr., supra at 339.
dividends cannot be declared by the
corporation to itself; f. Watered stock
. They cannot be represented during Stocks of a corporation issued for less than their
stockholders’ meeting for otherwise equal par or issued value or in any other form other than
distribution of voting powers will be lost; and cash valued in excess of its fair value
. The amount of unrestricted retained earnings (CORPORATION CODE, Sec. 62 & 65).
equivalent to the cost of treasure shares
being held shall be restricted from being

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“Water” in the stock represents the difference
between the fair market value at the time of the h. Fractional share
issuance of the stock and the par or issued value A share with a value of less than one full share
of said stock. Both par and no par stocks can thus (CO UNTIAN, Jr., MERCANTILE LAW DIGEST
be watered stocks. (2016) p. 347 [hereinafter, CO UNTIAN Jr.,
Mercantile Law]).
Kinds of Watered Stocks:
. Stocks issued without consideration (bonus i. Promotion share
share); Shares issued to promoters or those in some way
. Stocks issued as fully paid when the interested in the company, for incorporating the
corporation has received a lesser sum of company, or for services rendered in launching or
money than its par or issued value (discount promoting the welfare of the company (DE LEON
share); & DE LEON Jr., supra at 86).
. Stocks issued for a consideration other than
actual cash such as property or services, the j. Scripless shares
fair valuation of which is less than its par or Shares listed in the stock exchange traded without
issued value; and the necessity of complying with the formalities
. Stocks issued as stock dividend when there under the law on the transfer of shares but only a
are no sufficient retained earnings to justify it computerized book entry is required to effect the
(DE LEON & DE LEON Jr., supra at 584-585). transfer. Commented [ASPC13]: Soucre?

Note: The prohibition to issue “watered stock” 6. Treasurer’s Affidavit


refers only to original issue of stocks but not to a Contents of Treasurer’s Affidavit
subsequent transfer of such stocks by the Sworn statement of the treasurer elected by the
corporation, for then it would no longer be an subscribers showing that:
“issue” but a sale thereof (Id. at 586). a. At least 25% of the authorized capital stock of
the corporation has been subscribed;
Hence, treasury shares may be sold for less than b. At least 25% of the total subscription has been
their par or issued value for they have already fully paid to him in actual cash and/or in
been issued and paid for, provided the price is property the fair valuation of which is equal to
reasonable (CORPORATION CODE, Sec. 9). at least 25% of the said subscription; and
c. Such paid-up capital being not less than
Reason: Only the consideration paid for the P5,000 (CORPORATION CODE, Sec. 14).
issuance of the original unissued shares or first
time issued shares shall form part of the capital 6. Other Provisions
asset of the corporation. Hence, when a treasury Other provisions may be inserted in the AOI so
share is issued for the second time, the long as they are not contrary to law, morals, good
consideration received is not anymore a part of customs, public order and public policy
the capital but the surplus profits. (CORPORATION CODE, Sec. 14). Commented [ASPC12]: Source?

g. Convertible share Acknowledgement, Signature, and Verification


Refers to a share that is changeable by the The Articles must be in any of the official
stockholder from one class to another at a certain languages duly signed, acknowledged and
price and within a certain period (DE LEON & DE verified by all of the incorporators
LEON Jr., supra 87). (CORPORATION CODE, Sec. 14).

If the AOI do not reflect the convertibility feature, Reason: To secure the State and all concerned
it is necessary that the Articles be amended first against the possibility of any fictitious names
before the conversion is formalized (SEC SGC being subscribed to the articles, and to furnish
Opinion No. 10-18, April 12, 2010). proof of the genuineness of the signatures
(Fletcher, p. 506).
Conversion is also subject to appraisal right as it
varies the right of the stockholders (SEC Opinion, . Commencement of Corporate Existence
December 16, 1986). Certificate of Incorporation
A corporation commences to have corporate
Conversion may be mandated by law. Preferred existence and juridical personality and is deemed
stocks of government financial institutions are incorporated only from the moment the SEC
sold to private shareholders the same may be issues to the incorporators a certificate of
converted into common stocks (R.A. No. 7353, incorporation under its official seal
Sec. 8). (CORPORATION CODE, Sec. 19). The date

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appearing on the certificate is the conclusive date need not be taken at a meeting (SEC Opinion,
for the effectivity of the certificate and not the August 16, 1999).
actual date of issue or notice of issuance of the
certificate. Silence or failure to object cannot be
construed as approval by stockholders (SEC
It is the certificate of incorporation that gives Opinion, July 15, 1999).
juridical personality to a corporation and places it
under the jurisdiction of the Commission. This 0. Submission and filing with the SEC of:
jurisdiction is not affected even if the authority to . The original and amended articles
operate a certain specialized activity is withdrawn together containing all the provisions
by the appropriate regulatory body other than the required by law to be set out in the AOI.
commission (Pilipinas Loan Company, Inc. v. Such articles, as amended, shall be
SEC, G.R. No. 104720, April 4, 2001). indicated by underscoring the change or
changes made;
The issuance of the certificate calls the . A copy thereof, duly certified under oath
corporation into being but it is not really ready to by the corporate secretary and a majority
do business until it is organized. The corporation of the directors or trustees stating the fact
must formally organize and commence the that such amendments have been duly
transaction of its business or the construction of approved by the required vote of the
its works within 2 years from the date of its stockholders or members; and
incorporation, otherwise, its corporate powers . A favorable recommendation of the
shall cease and it shall be deemed dissolved appropriate government agency
(CORPORATION CODE, Sec. 22). concerned if required by law
(CORPORATION CODE, Sec. 16).
The dissolution contemplated by Sec. 22 is not
automatic. The corporation continues to exist as Limitations:
such, notwithstanding its non-operational status . The corporation must comply with the
until dissolution or revocation has been lawfully procedure stated above;
declared by the Commission after due notice and . The amendment of any provision or matters
hearing (SEC Opinion, October 4, 1989). stated in the AOI is not allowed when it will be
contrary to the provisions or requirement
Where the Issuance of Certificate of prescribed by the Code or by special law or
Information Not Required changes any provision in the AOI stating an
0. Religious Corporations accomplished fact;
. It must be for legitimate purposes;
Note: From and after the filing with the . The original articles and amended articles
Commission of the AOI, the chief archbishop, together must contain all provisions required
bishop, priest, minister, rabbi or presiding by law to be set out in the AOI;
elder shall become a corporation sole . Such articles, as amended, shall be indicated
(CORPORATION CODE, Sec. 112). by underscoring the changes made, and a
copy thereof duly certified under oath by the
0. Cooperative corporate secretary and a majority of the
directors or trustees stating the fact that the
Note: Cooperatives acquire juridical amendments have been duly approved by the
personality upon registration with the required vote of the stockholders or members
Cooperatives Development Authority (R.A. shall be submitted to the SEC;
No. 6938, Sec. 16). It need not be registered . The amendments shall take effect only
with the SEC. upon their approval by the SEC; Commented [ASPC14]: Source?
. A corporation cannot provide for a different
. Amendment of Articles of Incorporation procedure for the amendment of AOI other
Procedure in Amending AOI: (RVS) than the procedure provided for in Sec. 16;
0. Resolution by at least a majority of the board . Amendment cannot be allowed if it goes
of directors or trustees; against the nature of the corporation (DE
0. Vote or written assent of the stockholders LEON & DE LEON Jr., supra at 169-171).
representing at least 2/3 of the outstanding
capital stock or 2/3 of the members in case of Approval by Inaction
non-stock corporations; and Express approval is not indispensable. This is
because the amendment shall also take effect
Note: The phrase “written assent” means that from the date of filing with the said Commission
the stockholder’s vote on the amendment if it is not acted upon within 6 months from the

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date of filing for a cause not attributable to the documents. Generally, if the AOI and its supporting
corporation (CORPORATION CODE, Sec. 16). documents are in order, the SEC has no recourse
However, this is not applicable in the but to issue the Certificate of Incorporation
amendment of the corporate term because the (AQUINO, supra 190).
date of approval by the Commission may be
before the effectivity date of the extension or . Effects on Non-use of Corporate Charter and
reduction of the corporate term (DE LEON & DE Continuous Inoperation of a Corporation
LEON Jr., supra at 333). 0. If a corporation does not (a) formally organize
and commence the transaction of its business
In case of foreign corporations authorized to or the (b) construction of its works within 2
transact business in the Philippines, they are years from the date of its incorporation, its
merely required to file, within 60 days after the corporate powers cease and the corporation
amendment to the AOI (or by-laws) becomes shall be deemed dissolved (CORPORATION
effective, with the SEC and in proper cases, CODE, Sec. 22);
with the appropriate government agency, a duly
authenticated copy of the AOI (or by-laws) for Note: If the non-use of corporate charter or
record purposes (CORPORATION CODE, Sec. continuous inoperation of a corporation is due to
130). causes beyond its control as found by the
Commission, the effects mentioned shall not take
. Rejection or Disapproval of Amendment in the place (CORPORATION CODE, Sec. 22). Dissolution
AOI is not automatic. Proper proceedings for revocation of
The SEC may reject the AOI or disapprove any the AOI must be initiated (CORPORATION CODE; PD
amendment thereto if the same is not in No. 902-A, Sec. 6).
compliance with the requirements of the
Corporation Code (CORPORATION CODE, Sec. 0. If a corporation has commenced the
17). transaction of its business but subsequently
becomes continuously inoperative for a period
Grounds for Rejection or Disapproval: for at least 5 years, the same shall be a
(NOT-U) ground for the suspension or revocation of its
0. That the AOI or any amendment thereto is Not corporate franchise or certificate of
substantially in accordance with the form incorporation (CORPORATION CODE, Sec.
prescribed therein; 22).
0. That the required percentage of Ownership of
the capital stock to be owned by citizens of the Note: The continuous inactivity for a period of at least
Philippines has not been complied with as five years shall be a ground for suspension or
required by existing laws or the Constitution; revocation of the certificate of incorporation, but notice
0. That the Treasurer’s Affidavit concerning the and hearing in such case are required (PD No. 902-A,
amount of capital stock subscribed and/or Sec. 6).
paid is false; and
0. That the purpose or purposes of the Conditions Precedent – those conditions the non-
corporation are patently Unconstitutional, compliance of which will prevent the legal existence
illegal, immoral, or contrary to government of a corporation.
rules and regulations (CORPORATION
CODE, Sec. 17). Examples:
0. Filing of the AOI with the SEC;
Before rejecting the AOI or its amendments, the 0. Issuance of the Certificate of Incorporation by
SEC should give the incorporators reasonable time the SEC;
within which to correct or modify the objectionable 0. The minimum number of 5 incorporators
portions of the articles or amendments required by Sec. 10 of the Corporation Code;
(CORPORATION CODE, Sec. 17) and
0. The legal requirements under Sec. 13 that 25%
Any decision of the Commission rejecting the AOI of the Authorized Capital Stock must be
or disapproving any amendment thereto is subscribed and 25% thereof paid (DE LEON &
appealable by petition for review to the CA in DE LEON Jr., supra at 207).
accordance with the pertinent provisions of the
Rules of Court (PD No. 902-A, Sec. 6). Conditions Subsequent – those conditions to be
complied with after acquiring corporate existence in
Ministerial Duty order that a corporation may legally continue as
All the grounds enumerated can be determined on such (Id.).
the basis of the AOI itself and the other required

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Example: formal organization and commencement 1. In case of close corporations, the
of business. stockholders may directly manage the
business of the corporation instead, if the AOI
Acts constituting Formal Organization: so provide (CORPORATION CODE, Sec. 97).
0. Adoption of by-laws and filing of the same with
the SEC; Reason: The concentration in the board of the
0. Election of Board of Directors or Trustees and powers of control of corporate business and of
of officers of the board pursuant to the by-laws; appointment of corporate officers and managers is
0. Establishment of principal office; necessary for efficiency in any large organization.
0. Providing for the subscription and payment of Stockholders are too numerous, scattered and
capital stock; and unfamiliar with the business of a corporation to
0. Taking of such other steps as are necessary to conduct its business directly. And so the plan of
enable the corporation to transact business or corporate organization is for the stockholders to
accomplish the purpose for which it was created choose the directors who shall control and
(Benguet Consolidated Mining Co. v. Pineda, supervise the conduct of corporate business
G.R. No. L-7231, March 28, 1956). (Filipinas Port v. Go, G.R. No. 161886, March 16,
2007).
Acts constituting Commencement of Business:
0. Entering into contracts or negotiation for lease Nature of Powers
or sale of properties to be used as business or 0. Under the theory of original power, the
factory site; powers of the board of directors or trustees
0. Making plans for and the construction of the are original and undelegated. The
factory; and stockholders or members do not confer, nor
0. Taking steps to expedite the construction of the can they revoke those powers.
corporation’s working equipment (SEC Rules, 0. They are derivative only in the sense of being
December 29, 1992). received from the State in the act of
incorporation (DE LEON & DE LEON Jr.,
supra at 217).
C ONTROL A ND M ANAGEMENT
General Rule: The board of directors or trustees
O F A C ORPORATION must act together as a body in a lawful meeting, not
individually or separately, in order to bind the
Levels of Corporate Control corporation by their acts (Id. at 219)
0. Board of Directors or Trustees;
0. Corporate Officers; and Unlike its officers, directors are not the agents of
0. Stockholders or Members. the corporation per se and they have no power
acting individually to bind the corporation (Id.).
. Board of Directors and Trustees
General Powers Exceptions:
General Rule: Doctrine of Centralized 0. Contract entered into by the directors without
Management a meeting of the board is binding upon the
All businesses of the corporation shall be corporation where the directors happen to be
conducted and all its properties shall be controlled the sole stockholders (Zamboanga
and held by the Board of Directors or Trustees. A Transportation Co. v. Bachrach Motor Co.,
corporation can act only through its directors and G.R. No. L-27694, October 24, 1928).
officers. Acts of management pertain to the board 0. Corporation is similarly bound by a contract
and those of ownership to the stockholders or entered into by a corporate officer such as a
members (Tan v. Sycip, G.R. No. 153468, August general manager, authorized by the board of
17, 2006). directors either expressly or impliedly, to bind
it by contract (Acuna v. Batac Producers
Exceptions: Cooperative Assoc. Inc., G.R. No. L-20333,
1. In case of an Executive Committee duly June 30, 1967).
authorized in the by-laws (CORPORATION 0. Corporation is also bound by a particular
CODE, Sec. 35); transaction ratified in a subsequent board
1. In case of a contracted manager which may meeting (Ramirez v. Orientalist Co., G.R. No.
be an individual, a partnership or another 11897, September 24, 1918).
corporation; 0. Corporation bound by the acts of one of its
1. In case the contracted manager is another directors or agents held out by the corporation
corporation, the special rule in Sec. 44 to the public as possessing to do those acts
applies; and

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(Yu Chuck v. Kong Li Po, G.R. No. L-22450, the purchase of real property needed by the
December 3, 1924). corporation, the final say will have to be with the
0. Where the stockholders, by acquiescence, Board, whose approval will finalize the
invest, the executive officers of the transaction. A corporation can only exercise its
corporation with powers of the directors as the powers and transact its business through its
usual method of doing business, the board Board of Directors and through its officers and
being inactive, the acts of such officers will agents when authorized by a board resolution or
bind the corporation according to some courts by its by-laws (Sps. Firme v. Bukal Enterprises
although not authorized by any vote either of and Development Corporation, G.R. No. 146608,
stockholders or directors (DE LEON & DE October 23, 2003).
LEON Jr., supra at 221).
0. Under exceptional situations, stockholders’ Business Judgment Rule
agreement, though it provides for the exercise Questions of policy or of management are left
of management ordinarily delegated to the solely to the honest decisions of officers and
board, is valid and enforceable, where no directors of a corporation, and so long as they act
creditors, minority stockholders, or other in good faith, their orders are not reviewable by
persons of the public are affected. However, the courts (VILLANUEVA-CASTRO, supra at 94,
mere lack of quorum in the board alone where citing Saber v. CA, G.R. No. 132981, 31 August
the body is not inactive would not justify 2004).
stockholder’s action (SEC Opinion, December
15, 1987; March 21, 1990). Two Branches of the Business Judgment Rule
0. The by-laws of a corporation may create an 0. Resolutions and transactions entered into by
executive committee with authority to act on the Board within the powers of the corporation
such specific matters within the competence cannot be reversed by the courts not even on
of the board, as may be delegated to it in the the behest of the stockholders (Estacio v.
by-laws of the corporation, or on a majority Pampanga Electric Cooperative, Inc., 596
vote of the board, except on certain matters SCRA 542).
specified in Sec. 35 of the Corporation Code 0. Directors and officers acting within such
(CORPORATION CODE, Sec. 35). business judgment cannot be held personally
0. A corporation is expressly allowed, subject to liable for such acts (VILLANUEVA, supra at
certain limitations provided in Sec. 44 of the 316).
Corporation Code to enter into a management
contract under which it delegates the Note: The corporate powers conferred upon the
management of its affairs to another board of directors usually refer only to the ordinary
corporation for a certain period of time business transactions of the corporation and does
(CORPORATION CODE, Sec. 44). not extend beyond the management of ordinary
0. In a close corporation, any action by the corporate affairs nor beyond the limits of its
directors without a meeting or at least a authority (SEC Opinion, May 2, 1994).
meeting improperly held, shall, unless the by-
laws otherwise provide, be deemed valid or Qualifications of Directors/Trustees
ratified (CORPORATION CODE, Sec. 101). 0. For a stock corporation, ownership of at
0. The stockholders may waive the necessity for least 1 share of the capital stock of the
a meeting of the board of directors, and corporation in his own name, and if he ceases
without such meeting may authorize acts to to own at least 1 share in his own name, he
be done by agents of the corporation or ratify automatically ceases to be a director. For a
acts already done and bind the corporation non-stock corporation, only members in
(DE LEON & DE LEON Jr., supra at 221). good standing of the corporation can be
elected to the Board of Trustees
Special Facts or Special Circumstances (CORPORATION CODE, Sec. 23).
Doctrine
While a director does not stand in fiduciary relation Note: In order to be eligible as a director, what
to the stockholder, he is under legal obligation to is material is the legal title, not beneficial
make fair and full disclosure of pertinent official ownership, of the stocks appearing on the
information where special circumstances exist books of the corporation (VILLANUEVA,
giving rise to the obligation to disclose (Strong v. supra at 325).
Repide, 213 U.S. 419, 1909).
A person who does not own a stock at the
Note: The power to purchase real property is time of his election or appointment does not
vested in the Board of Directors or Trustees. While disqualify him as a director if he becomes a
a corporation may appoint agents to negotiate for

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shareholder before assuming the duties of his 200 or more holders each holding at least 100
office (SEC Opinion, April 5, 1990). shares of a class of its equity securities;
. Finance companies, Investment houses;
A person who is not a stockholder cannot be Brokers and dealers of securities; Investment
a director, but he can be an ex officio member companies; Pre-need companies;
without voting rights in the Board (Grace . Subsidiaries or branches of foreign
Christian High School v. CA, G.R. No. corporations which operate in the Philippines
108905, October 23, 1997). and are listed in the PSE; and
. Stock and other securities exchange/s (SEC
0. Majority of the directors/trustees must be Memorandum Circular No. 16, Series of
residents of the Philippines (CORPORATION 2002).
CODE, Sec. 23).
Note: It is the stockholders themselves who will
Note: The election of aliens as members of elect the independent directors during the annual
the board of directors or governing body of stockholders’ meeting (SEC Opinion dated May
corporations or associations engaging in 24, 2007).
partially nationalized activities shall be
allowed in proportion to their allowable Stock Ownership Requirements
participation or share in the capital of such 1. Holder of legal title – The general rule is that
entities (C.A. No. 108, as amended by P.D. the person who holds the legal title to the
No. 715, Sec. 2-A). stock as shown by the books of the
corporation is qualified although some other
0. He must not have been convicted by final person may be the beneficial owner of the
judgment of an offense punishable by stock recorded in his name (CORPORATION
imprisonment for a period exceeding 6 years, CODE, Sec. 63). Thus, a mere proxy who is
or a violation of the Corporation Code within 5 not a stockholder cannot be elected as a
years prior to the date of his election or member of a corporations’ Board (DE LEON
appointment (CORPORATION CODE, Sec. & DE LEON Jr., supra at 229-230).
27). 1. Voting trustee – considered as legal owner
0. Only natural persons can be elected of shares transferred to him by virtue of a
directors/trustees. He must not be suffering voting trust agreement, hence eligible to the
from any legal incapacity DE LEON & DE office of director (Id. at 230).
LEON Jr., supra at 229). 1. Transferee of qualifying share – a person to
0. Other qualifications as may be prescribed in whom one share of stock has been
special laws or regulations or in the by-laws of transferred for the express purpose of
the corporation (VILLANUEVA, supra at 327). qualifying him as a director is eligible. It is
0. Must be of legal age (SUNDIANG & AQUINO, sufficient that the title to the stock, as it
supra at 231). appears in the books of the corporation is in
the director (Id., SEC Opinion, January 25,
Independent Director 1985).
A person who, apart from his fees and 1. Pledgee/pledgor – a person to whom shares
shareholdings, is independent of management have been transferred on the books of the
and free from any business or other relationship corporation as pledge is not qualified as
which could, or could reasonably be perceived to, director because he holds shares merely as
materially interfere with his exercise of security and not as owner. A director on the
independent judgment in carrying out his other hand is not disqualified when he merely
responsibilities as a director in any of the pledged his shares or entered into an
corporations mentioned below (SEC executor contract to sell the same (Id. at 231).
Memorandum Circular No. 16, Series of 2002). 1. Subscriber of shares held in escrow – he
cannot be eligible as a director since the
Coverage: holder does not become the owner of said
Public companies and those subject to secondary shares until the conditions for their release are
licenses from the Commission, as follows: fully met (Id.).
. Issuers of registered securities to the public 1. Transferee of share previously sold –
whether or not listed in the Philippine Stock where a director makes a valid and effective
Exchange (PSE); transfer of all his stockholdings, he ceases to
. Public companies or those with assets of at be a director and the subsequent purchase by
least P50,000,000 or such other amount as him of shares does not reinvest him with title
the Commission shall prescribe, and having to his former position (SEC Opinion, June 6,
1971).

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1. Transferee at the time of assumption of Stock 5-15
office – it is not essential to the validity of the Ordinary non-stock At least 5
election of one as a director that he be a legal Non-stock educational 5-15; in multiples of 5
owner of stock at the time of the election. His corporations
subsequent acquisition of stock before Religious societies 5-15
entering the duties of his office has the effect Corporation sole None
of validating his election as director (SEC
Opinion, April 5, 1990). Note: Failure of the stockholders or members to elect
1. Co-owners of shares – if absolute the required number of directors or trustees provided
community governs the property relations, for by statute or its AOI does not invalidate the title of
provisions on co-ownership shall apply to the those elected as long as they constitute a quorum. It
community property. As co-owners, the merely gives rise to vacancies, which may be filled up
husband and wife shall be considered as one in a subsequent special stockholder’s meeting duly
stockholder (SEC Opinion, September 4, called for the purpose (SEC Opinions February 2,
1990). 1987 & June 10, 1992).
Note: Additional qualifications may be prescribed Election Rules on Stock and Non-Stock
by the by-laws (CORPORATION CODE, Sec. Corporations
47(5)) but their qualifications may not be modified Stock Corporation Non-Stock Corporation
if such modification would be in conflict with the Presence during Election
requirements prescribed by the Corporation Owners of a majority of
Code. But additional qualifications must be the outstanding capital
approved by stockholders or members and A majority of the
stock, in person or by
contained in the by-laws of the corporation (DE members are entitled to
their authorized
LEON & DE LEON, Jr., supra at 232, SEC vote, in person or by
representative as such
Opinion, July 13, 1966). proxy, if allowed in its
by written proxy, must
AOI or by-laws, must be
be present at the
Hence, the Board does not have the power, by the present in the election.
election of the
exercise of business judgment expressed through directors.
a Resolution, to provide for additional Manner of Voting
qualifications and/or disqualifications Cumulative voting is Cumulative voting is not
(VILLANUEVA, supra at 327).
mandatory; a matter of available unless allowed
right granted by law to by the articles or by-laws.
Disqualification of Directors, Trustees or
each stockholder with
Officers
voting rights.
0. Conviction by final judgment of an offense
Board may be elected by
punishable by imprisonment for a period Directors are elected at region.
exceeding 6 years; or Commented [AM15]: Source
large.
0. Violation of the Corporation Code, committed
within 5 years prior to the date of his election
Methods of Voting
or appointment (CORPORATION CODE,
0. Straight Voting – every stockholder may vote
Sec. 27).
such number of shares for as many persons as
there are directors to be elected.
Note: It is the commission (not conviction)
0. Cumulative Voting for One Candidate – a
that must take place within 5 years prior to
stockholder is allowed to concentrate his votes
election or appointment.
and give one candidate as many votes as the
number of directors to be elected multiplied by the
Grounds Not Exclusive
number of his shares shall equal.
The enumeration of grounds for disqualification is not
0. Cumulative Voting by Distribution – by this
exclusive.
method, a stockholder may cumulate his shares
by multiplying also the number of his shares by the
The by-laws may validly provide that a stockholder is
number of directors to be elected and distribute
ineligible to be director if he is also a director in a
the same among as many candidates as he shall
corporation whose business is in competition with that
see fit (DE LEON & DE LEON Jr., supra at 237-
of the other corporation (Gokongwei, Jr. v. SEC, G.R.
240). Commented [AM16]: Please include an illustration of the
No. L-45911, April 11, 1979). different methods, whenever possible. Thank you.
Cumulative voting being a statutory right, a
Election of Directors or Trustees
corporation is without power to deprive the
Number of
Class of Corporation stockholders of its use or even restrict the right to
Directors/Trustees
vote to only one way or method. A stockholder

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may or may not exercise the right as he shall see = Number of Directors desired to be
fit (SEC Opinion, October 20, 1964). voted
S
In electing directors by cumulative voting, the total = Total number of shares voting at the
number of votes cast by a stockholder shall not meeting
exceed the number of shares owned by him as D
shown in the books of the corporation multiplied = Total number of directors to be
by the whole number of directors to be elected elected at the meeting
(DE LEON & DE LEON Jr., supra at 240).
Illustration:
Note: Members of non-stock corporations may There are 1,000 voting shares, 5 directors will be
cast as many votes as there are trustees to be elected, and the desired number of directors is 2.
elected but may cast not more than one vote for
one candidate. This is the manner of voting in non- 1000 × 2
𝑆1 = + 1 = 𝟑𝟑𝟒
stock corporations unless otherwise provided in 5+1
the AOI (CORPORATION CODE, Sec. 24).
Any fractional part of 1 in the result should be
dropped using this formula. Thus, 334 shares are
necessary to elect the desired number of directors
(AQUINO, supra at 260).
Glasser Iterative Procedure
Formulas: This is a species of cumulative voting wherein the
0. To determine the number of shares needed to number of directors a bloc can be certain of electing
elect a single director depends not only upon the proportion of total shares
which it owns but also upon the absolute number of
𝑆 shares it owns.
𝑆1 = + 1
𝐷+1
𝐷 × 𝑆1 𝐷 × 𝑆11
Where: 𝐼𝑛𝑡𝑒𝑔𝑒𝑟 𝑖𝑠 𝑔𝑟𝑒𝑎𝑡𝑒𝑟 𝑡ℎ𝑎𝑛 𝐼𝑛𝑡𝑒𝑔𝑒𝑟
𝐷1 𝐷 + 1 − 𝐷1
S1 = Number of shares required to vote a
single director D’ Hondt Remainders Table
S = Total number of shares voting at the This table is constructed by dividing the number of
meeting votes each bloc can cast by integers 1 through D (i.e.,
D = Total number of directors to be the total number of directors to be elected), which will
elected at the meeting indicate the number of shares controlled and the
number of candidates for whom are cast.
Illustration:
There are 1,000 outstanding shares in the Illustration:
corporation and 5 directors will be elected and the Bloc I owns 66 shares of stock of ABC Corp. and there
stockholders representing all the shares are are 5 directors to be chosen. Thus, Bloc I is entitled to
present and are going to vote. 330 votes obtained by multiplying 66 by 5. ABC Corp.
has 100 outstanding shares.
1,000
𝑆1 = + 1 = 𝟏𝟔𝟖
5+1 1 2 3 4 5
Bloc I 330 165 110 821/2 66
Thus, 168 voting shares are necessary to elect 1 Bloc 170 85 562/3 421/2 34
director (AQUINO, supra at 259). II
0. To determine the number of shares necessary Thus, Bloc 1 should nominate 5 candidates
to elect a desired number of directors (VILLANUEVA, supra at 338-340).
Classic Formula/ Cole Formula 0. To determine the number of directors that can
be elected by a shareholder holding a specific
𝑆 × 𝐷1 number of shares
𝑆1 = + 1
𝐷+1
Where: (𝑁 − 1)(𝐷 + 1)
S1 𝐷1 =
𝑆
= Number of shares required to vote a Where:
specific number of director D1
D1 =

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Number of Directors that can be 1. In case of failure to hold an election for any
elected reason, meeting may be adjourned from day to
N day but not indefinitely.
= Number of shares of the shareholder 1. Notice must be given.
S 1. Staggered election of directors is not allowed
= Total number of shares voting at the (CORPORATION CODE, Sec. 24).
meeting
D = Total number of directors to be Example: A corporation has 100 common
elected at the meeting shares – 50 for class A and 50 for class B. Class
A shares shall conduct separate election from
Illustration: Class B. The winner of Class A elections shall
There are 100 voting shares, 9 directors to be compete against the winners of Class B
elected and the shareholder has 21 shares. elections.

(21 − 1)(9 + 1) Note: Mere designation by the stockholders or


𝐷1 = =𝟐 by a corporate officer empowered by the
100
stockholders without election of the directors in
Thus, the shareholder may elect 2 directors the manner as provided in the by-laws or
(AQUINO, supra at 260). applicable provisions of the Corporation Code
will not be sufficient. Election of directors cannot
Advantages and Disadvantages of Cumulative be the subject of a contract or agreement
Voting among the stockholders (SEC Opinions, March
Advantages Disadvantages 18, 1981 & March 28, 1985).
0. Prone to partisan
representation; Time of Annual Elections
0. Useful for persons 0. It can be used by Elections must be held substantially once every
thinking alike; members with year. The Code does not provide when the first
0. Generally equitable narrow and selfish election of directors or trustees shall be held. It
as it allows interests to cause authorizes the corporation to provide in the by-laws
stockholders to disharmony and “the time for holding the annual election of directors
vote based on their dissipate or trustees” (CORPORATION CODE, Sec. 47(6)).
holdings; and management; and
0. Allows minority 0. Opposition groups Limitations on the Stockholder’s Right to Vote
group to obtain can use the 0. Fractional shares of stock cannot be voted.
representation in scheme to secure a 0. Treasury shares have no voting rights as long
the Board. toehold in a long- as they remain in the treasury (CORPORATION
run fight for control CODE, Sec. 57).
of the company. 0. Holders of stock declared delinquent by the
board of directors for unpaid subscription are
Limitations on the Election of not entitled to vote or to representation at any
Directors/Trustees: stockholder’s meeting (CORPORATION CODE,
1. At any meeting of stockholder or members Sec. 71).
called for the election of directors or trustees, 0. A transferee of stock cannot vote if his transfer
there must be present either in person or by is not registered in the stock and transfer book
representative authorized to act by written of the corporation (CORPORATION CODE,
proxy, the owners of a majority of the Sec. 63).
outstanding capital stock, or if there is no capital
stock, a majority of the members entitled to vote. Report of Election of Directors, Trustees and
1. The election must be by ballot if requested by Officers
any voting member or stockholder. The secretary or any other officer of the corporation
1. A stockholder cannot be deprived in the AOI or shall submit to the SEC the names, nationalities and
in the by-laws of his statutory right to use any of residences of the directors, trustees, and officers
the methods of voting in the election of directors. elected within 30 days after their election.
1. No delinquent stock shall be voted.
1. The candidates receiving the highest number of Should a director, trustee or officer die, resign or in
votes shall be declared elected. A majority vote any manner cease to hold office, his heirs in case of
is not necessary. However, it is necessary that his death, the secretary, or any other officer of the
there is a quorum. And in the absence thereof, corporation, or the director, trustee or officer himself,
election shall be considered invalid. shall immediately report such fact to the SEC
(CORPORATION CODE, Sec. 26)

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business, and every decision of at least a majority
Objective: To give the public such information, of the directors or trustees present at a meeting at
under sanction of oath of the nature of business, which there is a quorum shall be valid as a
financial condition and operational status of the corporate act, except for the election of officers
company together with information on its key which shall require the vote of a majority of all the
officers so that those dealing with it or intend to do members of the board (CORPORATION CODE,
business with it may know or have means of Sec. 25).
knowing facts concerning the corporation’s financial
resources and business responsibility (Monfort Exception: If the AOI or the by-laws provide for a
Hermanos Agricultural Development Corp. v. greater majority (CORPORATION CODE, Sec.
Monfort III, G.R. No. 152542, July 8, 2004). 25).

Term of Office
One year until their successors are elected and
qualified (CORPORATION CODE, Sec 23). Proxy Not Allowed
Holdover Principle Directors or trustees cannot validly act by proxy
Upon failure of a quorum at any annual meeting, (CORPORATION CODE, Sec. 25).
the directorate naturally holds over and continues
to function until another directorate is chosen and Disqualified Director
qualified. Unless the law or the charter of a A director who is disqualified by reason of personal
corporation expressly provides that an office shall interest (CORPORATION CODE, Sec. 32-33) in
become vacant at the expiration of the term of the matter before a director’s meeting, loses, pro
office for which the officer was elected, the general hac vice, his capacity as a director and he cannot
rule is to allow the officer to holdover until his be counted for the purpose of making a quorum,
successor is duly qualified (Government of the nor can the vote of such director be counted for the
Philippine Islands v. El Hogar Filipino, supra). purpose of determining whether passed by a
majority vote (SEC Opinion, July 21, 1994).
Note: Although the members of the Board are
holdover directors or trustees, they still possess the Removal of Board Members
powers of bona fide members until their successors General Rule: Removal of directors or trustees
are duly qualified. The rule applies to a going may be with or without cause (CORPORATION
concern where there is no break in the exercise of CODE, Sec. 28).
duties of directors.
Exception: Removal without cause may not be
It must be noted that holdover is a situation that used to deprive minority stockholders or members
arises when no successor is elected due to a valid of the right of representation to which they may be
and justifiable reason (e.g. pending election protest entitled under the Code (CORPORATION CODE,
on the outcome of the annual election), in which Sec. 28).
case, the incumbent holds over and continues to
function until another officer is chosen and qualified Requisites for Removal:
(SEC Opinion, June 24, 1998). 0. The removal should take place at a regular or
special meeting duly called for the purpose;
Illustration: Suppose the directors are under a 0. The director or trustee can only be removed by
holdover capacity and later one of the directors a vote of the stockholders representing at least
died. Can the holdover directors elect a director to 2/3 of the outstanding capital stock or 2/3 of the
replace him? members entitled to vote in case of non-stock
corporations;
Answer: No, they are merely in a hold-over 0. There must be a previous notice to
capacity. There must be an election by the stockholders or members of the corporation of
stockholders. the intention to propose such removal at the
meeting;
Quorum Requirement in Board Meetings 0. The removal without cause may not be used to
50% + 1 of the number of directors as fixed in the deprive minority stockholders or members of
AOI. The quorum in the meeting of the board of the right of representation to which they may
directors does not change even though there may be entitled under Sec. 24 of the Code; and
be vacancies (CORPORATION CODE, Sec. 25). 0. The special meeting of the stockholders or
members of a corporation for the purpose of
General Rule: A majority of the number of removal must be called by the secretary on
directors or trustees, as fixed in the AOI, shall order of the president or on the written demand
constitute a quorum for the transaction of corporate of the stockholders representing or holding at

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186 2017 CENTRALIZED BAR OPERATIONS
least a majority of the outstanding capital stock 1. Mere absence or continued failure to attend
or a majority of the members entitled to vote meetings - where there has been no
(CORPORATION CODE, Sec. 28). resignation, it does not have the effect of
vacating his seat or terminating his term of
Note: There is no need to follow the procedure office unless there is some express provision
above if the director is disqualified. By to such effect (Id.).
operation of law, such director is disqualified to 1. Specified number of unjustified absences
act as director thereby creating vacancies in as ground for automatic disqualification - if
the Board. Mere declaration of the provided for in the by-laws, it may be a ground
disqualification as the cause of the vacancy is for an automatic disqualification which need
sufficient (SEC Opinion, February 3, 1992). not be approved again by the stockholders or
members (Id.).
Call for Meeting
Should the secretary fail or refuse to call the special The ultimate power to remove a member of the
meeting upon such demand or fail or refuse to give the Board being denied of the Board of Directors, it
notice, or if there is no secretary, the call for the must follow logically that the Board does not also
meeting may be addressed directly to the have the power to discipline one of its members,
stockholders or members by any stockholder or even for a cause (VILLANUEVA, supra at 348).
member of the corporation signing the demand
(CORPORATION CODE, Sec. 28). Vacancies in the Board
A vacancy in the office of director or trustee may
Resignation be filled as follows (CORPORATION CODE, Sec.
General Rule: A director or trustee may resign any 29):
time. 0. By the stockholders or members if the Commented [AM17]: Legal basis?
vacancy results from:
Exceptions: . Removal by the stockholders or members
By reason of the fiduciary nature, a director or trustee or the expiration of term;
cannot resign if: . Other than by removal or by expiration of
0. It will prejudice the corporation; term, such as death, resignation,
0. It is a part of fraudulent scheme to prejudice the abandonment, or disqualification, if the
corporation or its stockholders and make profit to remaining directors or trustees do not
his own advantage or at an unreasonable time if constitute a quorum for the purpose of
the immediate consequence would be to leave the filling the vacancy;
interest of the corporation without proper care and . Increase in the number of directors or
protection (DE LEON & DE LEON Jr., supra at trustees due to amendment of AOI; and
282). . If the vacancy may be filled by the
remaining directors or trustees but the
Note: A director who has been removed by the board refers the matter to stockholders or
stockholders who elected another person in his member (DE LEON & DE LEON Jr., supra
place cannot be compelled to vacate his office, at 284-285).
where it is shown that the successor is not
qualified not being the owner of any share in the 0. By the members of the Board – if still
corporation and because under the by-laws of constituting a quorum, at least a majority of
said corporation, “directors shall serve until the them are empowered to fill any vacancy
election and qualification of their duly qualified occurring in the board other than by removal by
successors” (Detective and Protective Bureau Inc. the stockholders or members or by expiration
v. Cloribel, G.R. No. L-23428, November 29, of term (Id. at 285).
1968).
A director or trustee so elected to fill a vacancy
Abandonment of Office and Failure to Attend shall be elected only for the unexpired term of
Meetings his predecessor in office (CORPORATION
1. Acceptance of Incompatible Office - it is CODE, Sec. 29).
presumed that he has abandoned his office as
a director (or trustee) (Mead v. McCullough, The by-laws may provide for the procedure for
G.R. No. 6217, December 26, 1911). the filling of vacancy. However, such provision
1. Absence for an unreasonable length of time must be consistent with the Corporation Code.
- abandonment by a director of all his duties for
a number of years must be regarded as an The word “term” which is the time which the
implied resignation of his office as director (DE officer may claim to hold the office as a right is
LEON & DE LEON Jr., supra at 283). not affected by the holdover. “Tenure” on the

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other hand is the term during which the NO one shall act as president and secretary or
incumbent actually holds office. As stated in as president and treasurer at the same time
Sec. 23 of the Corporation Code, the term of (CORPORATION CODE, Sec. 25).
BOD is only 1 year. Therefore, term of Corporate Officers in the By-Laws
members of the Board in a hold-over capacity The By-Laws may provide for such other officers. The
expires after 1 year. Such being the case, the position must be expressly mentioned in the by-laws
filling up of the vacancy lies with the in order to be considered as a corporate office. Thus,
stockholders, not the remaining members of its the creation of an office pursuant to or under a by-law
board of directors pursuant to Sec. 29 of the enabling provision is not enough to make a position a
Corporation Code (Valle Verde Country Club v. corporate office (Barba v. Liceo De Cagayan
Africa, G.R. No. 151969, September 4, 2009). University, G.R. No. 193857, November 28, 2012).

Compensation of Board Members The Board may create appointive positions other than
General Rule: Directors, in their capacity as such, positions of corporate officers but the persons
are not entitled to receive any compensation occupying such positions are not considered as
except for reasonable per diems. corporate officers within the meaning of Section 25
and are not empowered to exercise the functions of
Exceptions: the corporate officers, except those functions lawfully
0. When their compensation is fixed in the by- delegated to them. In view thereof, this Court holds
laws; and that unless and until petitioner corporation’s by-laws is
0. When granted by the vote of stockholders amended for the inclusion of General Manager in the
representing at least a majority of the list of its corporate officers, such position cannot be
outstanding capital stock at a regular or special considered as a corporate office within the realm of
stockholders’ meeting (CORPORATION Section 25 of the Corporation Code (Marc II
CODE, Sec. 30). Marketing, Inc. v. Joson, G.R. No. 171993, December
12, 2011).
Limitation on Compensation
The amount to be given shall not exceed 10% of Although the by-laws of the corporation provided that
the net income before income tax of the the BOD “can appoint such other officers from time to
corporation during the preceding year. Thus, the time,” the SC still considered this insufficient to allow
compensation can be given only if there are profits. the BOD to create a corporate officer (e.g. General
The intent of the legislators is that if the corporation Manager). It must still be specifically stated in the by-
did not earn profits, the directors may not be given laws Code (Marc II Marketing, Inc. v. Joson, supra).
salaries except per diems (AQUINO, supra at 285-
286). The removal of officers is a corporate act which can
be done by the Board (Tabang v. NLRC, G.R. No.
Note: Per diems received without proper 121143, January 21, 1997).
authorization or unreasonably excessive may
ordinarily be recoverable in a stockholders’ or a A Corporation shall not permit or allow any person, not
members’ suit (SEC Opinion, January 20, 1994). possessing the qualifications required by the
Constitution, or existing laws to acquire, use, exploit
A. Corporate Officers or enjoy a right, franchise, privilege, property or
Those who may represent and bind the business, the exercise and enjoyment of which are
corporation in transactions with third persons to expressly reserved by the Constitution or existing laws
the extent that the authority to do so has been to citizens of the Philippines or of any other specific
conferred upon him (VILLANUEVA, supra at 355). country, to intervene in the management, operation,
administration or control thereof, whether as an
Mandatory Corporate Officers officer, employee or laborer therein with or without
0. President – must be a director; he shall not be remuneration except technical personnel whose
concurrently the treasurer or secretary; employment may be specifically authorized by the
0. Treasurer – may or may not be a director but Secretary of Justice(C.A. No. 108 as amended by P.D.
as a matter of sound corporate practice, must No. 715).
be a resident of the Philippines;
0. Secretary – need not be a director unless Director or Trustee v. Corporate Officer
required by the by-laws; must be a resident and Director or Trustee Corporate Officer
citizen of the Philippines (CORPORATION As to Basis
CODE, Sec. 25). The Corporation Code
The Corporation Code
mandates the election
Note: Any 2 or more positions may be held mandates the election
of a president,
concurrently by the same person, except that of directors or trustees.
secretary and

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188 2017 CENTRALIZED BAR OPERATIONS
treasurer. Other other than directors or
position or office is trustees.
provided for in the by- As to Removal
laws. Any director or trustee Where the term of an
As to Election may be removed from officer is not fixed by
Generally, elected by office by a vote of at contract or in the by-
the majority of all the least 2/3 of the laws, he may be
members of the board outstanding capital removed at any time
of directors or trustees. stock or members with or without cause
Elected by the Except in non-stock or entitled to vote. by the board.
stockholders or close corporations
members. where the AOI provide Removal may be with If fixed in the by-laws,
that they shall be or without cause; he has to be re-elected
elected by the Provided, that removal by the board until the
stockholders or without cause may not expiration of the term;
members. be used to deprive otherwise, the
As to Power to Act Individually minority stockholders corporation may be
Directors or Trustees or members of the right held liable for
are not the agents of of representation. damages.
the corporation per se Has the authority to act
and they have no individually to bind the Corporate Officer v. Corporate Employee
power acting corporation. Corporate Officer Corporate Employee
individually to bind the As to Basis
corporation. Employed by the
Position is provided for
As to firms engaged in wholly or partially action of the managing
in the by-laws or under
nationalized activities officer of the
the Corporation Code.
Aliens are banned from corporation.
Aliens may be elected
being appointed to As to Jurisdiction
as directors or trustees
management RTC has jurisdiction in
in proportion to their
positions, such as case of dispute under NLRC has jurisdiction
allowable participation
president, vice- Book VI of the Labor in case of labor
or share in the capital
president, treasurer, Code of the disputes.
of such activities.
auditor etc. Philippines.
As to ownership of stocks As to Reportorial Requirements
Directors are required Within 30 days after
Officers need not be a
to be a stockholder. the election of officers,
stockholder or member
Trustees should be a the names,
except for the
member of the non- nationalities and
president.
stock corporation. residences shall be
No such requirement
As to Compensation submitted to the SEC.
for corporate
In the absence of any
employees.
provision in the by-laws Should an officer die,
fixing their resign or cease to hold
It is within the powers
compensation, the office, such fact shall
of the board to fix the
directors shall not be immediately
salaries of corporate
receive any reported to the SEC.
officers.
compensation, as such
directors, except for Validity and Binding Effect of Acts of Corporate
reasonable per diems. Officers
As to Term Source of Authority:
The term cannot 0. Law;
extend beyond that of 0. By-laws; and
the directors which is 0. Authorization from the Board, either expressly or
Shall hold office for one
one (1) year. However, impliedly by habit, custom or acquiescence in the
(1) year until their
Sec 47(7) permits a general course of business (Inter-Asia Investment
successors are elected
corporation to provide Industries v. CA, G.R. No. 125778, June 10,
and qualified.
in its by-laws a term 2003).
longer than 1 year for
its corporate officers, Extent of Powers or Authority:
1. The authority which he has by virtue of his office;

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1. The authority which is expressly conferred upon 1. Hydro has been dealing with NIA through its
him or is incidental to the effectualness of such administrator in all of its transactions with respect
express authority; to the contract and subsequently the foreign
1. As to third persons dealing with him without notice currency differential claim. It would be
of any restriction thereof, the authority which the preposterous for the NIA Administrator to have the
corporation holds the officer out as possessing or power of granting claims without the authority to
is estopped to deny; verify the computations of such claims (Hydro
1. The nature of the corporate business must also be Resources v. NIA, G.R. No. 160215, November
taken into consideration; and 10, 2004).
1. The personal act of an officer though originally 1. Petitioner had previously allowed its President to
unauthorized may become binding upon the enter into the first contract with respondent without
corporation by a subsequent ratification (DE a board resolution expressly authorizing him;
LEON & DE LEON Jr., supra at 256-257). thus, it had clothed its President with apparent
authority to execute the second contract (People’s
Classification of Powers or Authority Aircargo v. CA, G.R. No. 117847, October 7,
Inherent Express Implied 1998).
That authority 1. Its lawyer may not have been armed with a board
to act and bind Includes all resolution, but the appearance of the director and
the such general manager made the parties assume that
Every power the company had knowledge of its lawyer’s
corporation incidental
or authority actions and, thus clothed the latter with apparent
which the authority as is
expressly authority (VILLANUEVA-CASTRO, supra at 100,
officer has by necessary,
conferred citing Megan Sugar Corporation v. RTC, G.R. No
reason of his usual, and
upon him by 170352, June 1, 2011).
office proper to
law and the 1. The authority to sell Lot 2 did not include a portion
although it effectuate the
by-laws of the of Lot 1 (Id. At 101, citing Woodchild Holdings, Inc.
may not be main authority
corporation. v. Roxas Electric, supra).
sanctioned by expressly
express conferred. 1. Courts are not expected to take judicial notice of
authority. corporate board resolutions on corporate officer’s
authority to represent a corporation. (Id. at 102,
Doctrine of Apparent Authority citing Development Bank of The Philippines v. CA,
If a corporation knowingly permits one of its officers, G.R. No. 147217, 7 October 2004).
or any other agent, to act within the scope of an
apparent authority, it holds him out to the public as Note: The doctrine will not apply if plain from the
possessing the power to do those acts; and thus, the guarantee that the officer or agent executed that
corporation will, as against anyone who has in good he was acting for himself, not in representation of
faith dealt with it through such agent, be estopped the corporation (UCPB v. Planters Products, Inc.,
from denying the agent’s authority (Lapu-Lapu G.R. No. 179015, June 13, 2012).
Foundation Inc., v. CA, G.R. No. 126006, January 29,
2004). A. Liability of Directors, Trustees, and Officers
Three-Fold Duties of Directors (OLD)
When officers of a corporation exceeded their 0. Duty of Obedience
authority, their actions are not binding upon the To direct the affairs of the corporation only in
corporation unless ratified by the corporation or is accordance with the purposes for which it was
estopped from disclaiming them (Reyes v. RCPI organized.
Credit Employees Union, G.R. No. L-146535, August
18, 2006). Basis: The directors or trustees and officers
to be elected shall perform the duties enjoined
Cases where the Doctrine of Apparent Authority on them by law, the AOI and the by-laws
was Applied: (CORPORATION CODE, Sec. 25).
1. An officer of a corporation authorized to purchase
the stock of another corporation has the implied 0. Duty of Loyalty
power to perform all other obligations arising there Basis: Directors or trustees who acquire any
from, such as payment of shares of stock. By pecuniary or personal interest in conflict with
allowing its President to sign the agreement on its their duty as such directors or trustees shall
behalf, petitioner clothed him with apparent be liable jointly and severally for all damages
capacity to perform all acts which are expressly, resulting there from (CORPORATION CODE,
impliedly and inherently stated therein (Inter-Asia Sec. 31).
Investment Industries v. CA, G.R. No. 125778,
June 10, 2003).

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190 2017 CENTRALIZED BAR OPERATIONS
When a director or trustee attempts to acquire Sec. 31(2) Sec. 34
or acquires in violation of his duty, any interest As to applicability
adverse to the corporation in respect of any Applicable to directors, Only applicable to
matter which has been reposed in him in trustees and officers. directors.
confidence as to which equity imposes a As to ratification
liability upon him to deal in his own behalf, he Allows the ratification of
shall be liable as trustee for the corporation Does not allow a transaction by self-
and must account for all the profits which ratification of a dealing directors i.e. by
otherwise would have accrued to the transaction by a self- the vote of stockholders
corporation (CORPORATION CODE, Sec. dealing directors, representing 2/3 of the
31(2)). trustees or officers. outstanding capital
stock.
Where a director, by virtue of his office, As to coverage
acquires for himself a business opportunity Covers stock and non- Covers stock
which should belong to the corporation, stock corporations. corporations only.
thereby obtaining profits to the prejudice of
such corporation, he must account to the Illustration (Sec. 34):
latter for all such profits by refunding the same A is a director of both X Corporation and Y Corporation
(CORPORATION CODE, Sec. 34). which have similar lines of business. If A delivers a
“corporate opportunity” to X, he would be disloyal as
The director or officer owes loyalty and far as Y is concerned and vice versa. However, if A did
allegiance to the corporation—a loyalty that is not profit because he gave it to either X or Y, he does
undivided and an allegiance that is influenced not come under one or both for the profits that have
by no consideration other than the welfare of been obtained by him to the prejudice of the
the corporation. corporation of which he is a director.
The director, as a fiduciary, cannot serve Personal Liability of Directors
himself first and his cestuis, second General Rule: Directors and officers are not solidarily
(Gokongwei v. SEC, supra). liable with the corporation.
0. Duty of Diligence Exceptions:
Basis: Directors or trustees who willfully and 0. Criminal liability of corporate officers or
knowingly vote for or assent to patently employees through whose act, default or
unlawful acts of the corporation or who are omission, the corporation commits a crime.
guilty of gross negligence or bad faith in
directing the affairs of the corporation shall be Sec. 13 of the Trust Receipts Law explicitly
liable jointly and severally for all damages provides that if the violation or offense is
resulting therefrom suffered by the committed by a corporation, as in this case, the
corporation, its stockholders or members and penalty provided for under the law shall be
other persons (CORPORATION CODE, Sec. imposed upon the directors, officers, employees
31). or other officials or person responsible for the
offense, without prejudice to the civil liabilities
Directors and officers are required to exercise arising from the criminal offense (Crisologo v.
due care in the performance of their functions. People, G.R. No. 199481, December 3, 2012).
The standard of care is that of a reasonable
prudent person (AQUINO, supra at 304). Where the check is drawn by a corporation,
company or entity the person or persons who
Gross negligence removes the act or actually signed the check in behalf of such drawer
omission from the operation of Business shall be liable under B.P. No. 22 (Mitra v. People,
Judgment Rule (Id. at 305). G.R. No. 191404, July 5, 2010).
The duty of diligence makes an officer liable 0. Solidary liability in the following cases:
for damages which through his non- (SAWGAV)
performance, the principal may have suffered a. By virtue of a Specific provision of law.
(CIVIL CODE, Art. 1884). a. Agree or stipulate in a contract to hold himself
personally liable with the corporation;
a. Consent to the issuance of Watered stocks,
or, having knowledge thereof, fails to file
objections with the corporate secretary
Disloyalty: Sec. 31(2) v. Sec. 34 (CORPORATION CODE, Sec. 65);

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a. Are guilty of Gross negligence or bad faith in 1. He is negligent in not discovering or acting to
directing the affairs of the corporation prevent it (LADIA, CORPORATION CODE
(CORPORATION CODE, Sec. 31); (2011)).
a. Acquire any personal or pecuniary interest in
conflict with their duty (CORPORATION Remedies in Case of Mismanagement (D-RID)
CODE, Sec. 31); and 0. Dissolution if the abuse amounts to a ground for
a. Willfully and knowingly Vote for and assent to the institution of a quo warranto proceeding but
patently unlawful acts of the corporation the Solicitor General refuses to act;
(CORPORATION CODE, Sec. 31). 0. Receivership;
0. Injunction, if the act has not yet been done; and
Illustration: The President and Chairman of the 0. Derivative suit or complaint filed with SEC.
Board Guevarra was not held personally liable
because he was duly authorized to act on behalf Liability for Watered Stock
of the corporation and he negotiated with the 0. Consenting director or officer – solidary with
Solidbank in his official capacity. Also, there was the participating stockholder for the difference
no sufficient and specific evidence presented that between the fair value received at the time of the
he acted in bad faith. He did not hold himself issuance of the stock and the par or the issued
personally and solidarily liable with the value of the same.
corporation. Neither is there any specific provision
of law making him personally answerable for the 0. Subscriber – liable (1) to be called upon to
subject corporate acts (Solidbank Corp. v. contribute, if necessary for the benefit of creditors
Mindanao Ferroalloy, G.R. 153535, July 28, to the extent of the difference between the amount
2005). paid and the par or issued value of the shares; (2)
for the purpose of adjusting the rights of the
Cases where Directors or Corporate Officers stockholders inter se.
are Made Liable:
0. The action of the board in purchasing the stock Note: Holder of watered stock cannot escape
from the corporation and in declaring the liability by transferring the same to an
dividends on the stock was all done at the irresponsible person or to a bona fide purchaser.
same meeting of the Board of Directors and it
appears that both Ganzon and Mendaros were 0. Subsequent transferee – occupies the same
formerly directors and resigned before the position as his transferor with respect to the right
board approved the purchase and declared the to complain if his transferor was estopped. This is
dividends. It is apparent that the directors did true notwithstanding the fact that he purchased
not act in good faith or that they were grossly the stock in good faith and in ignorance of the
ignorant of their duties (Steinberg v. Velasco, fraudulent or unlawful issue.
G.R. No. L-30460, March 12, 1929).
0. If the State, by statute, defines a crime that Contrary View: Transferee is not liable unless he
may be committed by a corporation but either was a party to the transaction in the first
prescribes the penalty therefore to be suffered instance or has in effect in some manner made
by the officers, directors or employees of such himself a party. The liability of a holder of watered
corporation or other persons responsible for stock to pay to creditors the difference between
the offense, only such individuals will suffer the par value and the amount actually paid is not
such penalty. Corporate officers or employees, based upon his relationship to the corporation as
though whose act, default or omission the a stockholder but upon a fraudulent transaction.
corporation commits a crime, are themselves
individually guilty of crime (Ching v. Secretary 0. Transferor or party to the fraud - It can be made
of Justice, supra). liable for damages (DE LEON & DE LEON Jr.,
0. Where the employee was not given the supra at 586-588).
required 1 month prior written notice that the
corporation will cease its operations and that Basis of Liability: Where the corporation issues
the same employee was dismissed abruptly, watered stocks and thereby assumed an
the corporate officer acted in bad faith and with ostensible capitalization in excess of its real
malice in effecting the employee’s dismissal assets, the transaction necessarily involves the
(Marc II v. Joson, supra). misleading of subsequent creditors and whether
done with that purpose actually in mind or not, is
Misconduct of Co-Directors at least a constructive fraud upon creditor (Id.).
A director is not liable for misconduct of co-directors
or other officers unless: Self-Dealing Directors, Trustees, and Officers
1. He connives or participates in it; or

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Refers to those who personally contract with the
corporation in which they are directors, trustees, or Validity of Contracts
officers. These contracts are valid, provided that:
0. There is no fraud; and
General Rule: Such contracts are voidable, at the 0. The contract is fair and reasonable under the
option of the corporation. circumstances (CORPORATION CODE, Sec.
33).
Exceptions: (FA2Q)
0. The contract is Fair and reasonable under the But if the interlocking director’s interest in one
circumstances; corporation or corporations is “substantial”
0. The vote of such director/trustee in the board (exceeding 20% of the outstanding capital stock)
meeting approving the contract was not and his interest in the other corporation/s is merely
necessary for the Approval of the contract; nominal, then all the conditions prescribed in Sec.
0. In the case of an officer, the contract has been 32 on self-dealing directors must be present with
previously Authorized by the board of directors; respect to the corporation in which he has nominal
and interest (DE LEON & DE LEON Jr., supra at 299).
0. The presence of such director/trustee in the board
meeting approving the contract was not If either of the first two is absent (presence not
necessary to constitute a Quorum for such necessary for quorum or vote not necessary), the
meeting (CORPORATION CODE, Sec. 32). contract can be ratified by the vote of the
stockholders representing at least 2/3 of the
Exception to the Exception: The contract is still valid outstanding capital stock or by the vote of the
notwithstanding the absence of some of the conditions stockholders representing at least 2/3 of the
if: members in a meeting called for the purpose,
0. The corporation elect not to attack or question the provided that:
validity of the contract 0. Full disclosure of the adverse interest of the
0. The contract was ratified by the vote of the director in the meeting;
stockholders representing at least 2/3 of the 0. The contract is fair and reasonable under the
outstanding capital stock or of at least 2/3 of the circumstances (CORPORATION CODE, Sec.
members in a meeting called for the purpose, 33).
provided:
. Full disclosure of the adverse interest of the Note: Sec. 33 applies if the contract results in
director/ trustee involved; and prejudice to one of the corporations. This rule
. The contract is fair and reasonable under the does not apply if the prejudiced party is a third
circumstances (CORPORATION CODE, Sec. party (DBP v. CA, supra).
32).
Doctrine of Corporate Opportunity
Note: This is without prejudice to the liability of A director who, by virtue of his office, acquires for
the director/trustee for damages himself a business opportunity which should
(CORPORATION CODE, Sec. 31). belong to the corporation, thereby obtaining profits
to the prejudice of such corporation, is guilty of
disloyalty and should therefore account to the latter
Inter-locking Directors for all such profits by refunding the same
These are directors in one corporation who are also (CORPORATION CODE, Sec. 34).
directors in another corporation (AQUINO, supra at
323). Applicability
Unless his act is ratified, a director shall refund to
Effect of Interlocking Directorship the corporation all the profits he realizes on a
Interlocking directorship by itself is not prohibited business opportunity which: (FLI)
under the Corporation Code. However, the by-laws 0. The corporation is Financially able to
may contain provisions that disallow interlocking undertake;
directorship (Id.). 0. From its nature, is in Line with corporations
business and is of practical advantage to it;
and
0. The corporation has an Interest or a
reasonable expectancy (CORPORATION
Contracts Involving Interlocking Directorship CODE, Sec. 34).
A contract between 2 or more corporations having
interlocking directors shall not be invalidated on that
ground alone (CORPORATION CODE, Sec. 33).

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Note: The rule shall be applied conferred to it, it may be ratified by the board (SEC
notwithstanding the fact that the director Opinion, July 29, 1995).
risked his own funds in the venture.
Limitations on the Powers of the Executive
When Corporate Opportunity Ceases Committee
A business opportunity ceases to be corporate It cannot act on the following: (FASAD)
opportunity and transforms to personal opportunity 0. Filling up of board vacancies;
where the corporation refuses or is definitely no 0. Amendment, repeal of by-laws or adoption of
longer able to avail itself of the opportunity (SEC new by-laws;
Opinion, March 4, 1982). 0. Approval of any action for which
Shareholders’ approval is also required;
The inability to avail itself of business opportunity 0. Amendment or repeal of any resolution of the
may arise from financial insolvency or legal Board which by its express terms is not
restrictions or any other factor which prevents the amendable or repealable; and
corporation from acting on the advantage 0. Distribution of cash dividends to shareholders
(AQUINO, supra at 328). (CORPORATION CODE, Sec. 35).

Inapplicability
0. Where a director is engaging in a distinct C ORPORATE P OWERS
enterprise of the same general class of
business as that which his corporation is
Classes of Corporate Powers
engaged in, so long as he acts in good faith.
0. Express – those expressly authorized by the
0. Where the opportunity is one which is not
Corporation Code and other laws, and its AOI or
essential to the corporation’s business, or
Charter.
where the director or officer does not exploit
0. Incidental – those which a corporation can
opportunity by employment of company’s
exercise by the mere fact of its being a corporation
resources.
or powers which are necessary to its corporate
3. Where the corporation is no longer able to avail
existence.
itself of the opportunity which may “arise from
financial insolvency or from legal restrictions”
Examples:
(DE LEON & DE LEON Jr., supra at 302-303).
. Right to succession;
. Right to have a corporate name;
Executive Committee
. Right to make by-laws for its government;
It is a body created by the by-laws and composed
. Right to sue and be sued
of not less than 3 appointed members of the board
. Right to acquire and hold properties for the
which, subject to the statutory limitations, has all
purposes authorized by the charter
the authority of the board to the extent provided in
. The right to contract
the board resolution or by-laws (CORPORATION
CODE, Sec. 35).
0. Implied – those that can be inferred from or
necessary for the exercise of the express powers
Note: Non-members of the board may be
(SUNDIANG & AQUINO, supra at 213-214).
appointed as members of the executive committee
provided that there are at least 3 members of the
Doctrine of Necessary Implication
board who are members of the committee (SEC
Reference must be made to a corporation’s AOI and
Opinion, Sept. 16, 1986).
unless the power to carry a particular business is
either expressly or impliedly conferred thereby, it does
Authority
not exist (SEC Opinion, December 5, 2005).
To the extent provided in the resolution of the
board or in the by-laws (CORPORATION CODE,
Express v. Implied Powers
Sec. 35).
Express Powers Implied Powers
As to coverage
Quorum
Majority (CORPORATION CODE, Sec. 35). Refers to the main Refers to the means
business, objects and and methods of
purposes of the attaining those objects
Appeal corporation. and purposes.
Its decisions are not subject to appeal to the board. As to the source of the power
However, if the resolution of the Executive
Committee is invalid, i.e. not one of the powers

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194 2017 CENTRALIZED BAR OPERATIONS
May change according
Determined by the 0. To exercise Other powers essential or necessary
to time, place and
corporate charter and to carry out its purposes;
surrounding
the applicable law. 0. Of Succession;
circumstances.
As to the test applicable 0. To adopt and use of Corporate seal;
The test is whether they
Note: A seal is not required for the validity of any
are fairly incidental to
corporate act. It is not indispensable. However, a
the express powers and
The test is whether they seal serves as a prima facie evidence that the
reasonably necessary
are found in the words instrument to which it is affixed is the act of a
to carry them out in
of the charter of the law. corporation (DE LEON & DE LEON Jr., supra at
furtherance of the
324-325).
corporation’s business. Commented [AM18]: Source

0. To amend its AOI; and


General Powers and Capacity: (PIMPS-DO-SCAB)
0. To adopt its By-laws (CORPORATION CODE,
0. To Purchase, receive, take or grant, hold, convey,
Sec. 36).
sell, lease, pledge, mortgage and deal with real
and personal property, securities and bonds;
Note: Unless otherwise provided by the Code, the
general powers conferred by Section 36 are to be
Requirements:
exercised by the board of directors (DE LEON & DE
. Reasonably and necessarily required by the
LEON Jr., supra at 313).
transaction of the lawful business of the
corporation; and
Specific Powers: (DID-SAC-ME)
. Subject to limitations prescribed by law and
0. Power to declare Dividends out of unrestricted
the Constitution.
retained earnings (CORPORATION CODE, Sec.
43);
Reason: To prevent a situation where
0. Power to Increase or Decrease Capital Stock /
important enterprises are compelled to
Power to Incur, Create or Increase Bonded
conduct their businesses exclusively in leased
Indebtedness (CORPORATION CODE, Sec. 38);
offices – a result which could retard industrial
0. Power to Deny Pre-Emptive Right
growth and be inimical to the best interests of
(CORPORATION CODE, Sec. 39);
the society (Government v. El Hogar Filipino,
0. Sell, dispose, lease, encumber all or substantially
supra).
all of corporate assets (CORPORATION CODE,
Sec. 40);
0. For stock corporations: Issue and sell stocks to
0. Power to Acquire own shares (CORPORATION
subscribers and treasury stocks; For non-stock
CODE, Sec. 41);
corporations: admit members;
0. Invest Corporate funds in another corporation or
0. To enter into Merger or consolidation;
business or for any other purpose other than the
0. To establish Pension, retirement, and other plans
primary purpose (CORPORATION CODE, Sec.
for the benefit of its directors, trustees, officers
42);
and employees;
0. Power to enter into Management contract
(CORPORATION CODE, Sec. 44);
Reason: Such plans promote corporate purposes
0. Extension/Shortening of Corporate Term
and they also promote better relations with (CORPORATION CODE, Sec. 37).
corporate employees.

0. To Sue and be sued;


0. To make reasonable Donations for public welfare,
hospital, charitable, cultural, scientific, civic or
Extending or Shortening of Corporate Term
similar purposes; Requirements:
1. Approval by a majority vote of the board of
Except: Donations to any (i) political party, (ii)
directors/trustees;
candidate, and (iii) partisan political activity.
1. Written notice of the proposed action and the time
and place of meeting shall be served to each
Reason: Business corporations are not organized
stockholder or member either by mail or personal
solely as profit making enterprises but also as
service;
economic and social institutions with
corresponding public responsibility to aid in the
Note: Mere written assent is NOT allowed (DE
betterment of economic and social conditions in
LEON & DE LEON Jr., supra at 333).
the community in which such corporations are
doing business.

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1. Ratification by the stockholders representing at of paying for their unpaid subscriptions without a
least 2/3 of the outstanding capital stock or 2/3 of valuable consideration for such release (DE
the members in case of non-stock corporations; LEON & DE LEON Jr., supra at 344);
and
1. A copy of the amended AOI shall be submitted to Reason: Trust Fund Doctrine
the SEC for approval (CORPORATION CODE, This refers to the principle that the capital stock,
Sec. 37). property and other assets of the corporation are
regarded as equity in trust for payment of
Note: If there is no approval, the amendment is corporate creditors (CORPORATION CODE, Sec.
deemed approved upon the inaction of the SEC 38).
for 6 months from the date of filing for a cause not
attributable to the corporation (CORPORATION 0. It cannot issue stock in excess of the amount
CODE, Sec. 16). limited by its AOI; and

Nature of the Power Note: Such issue is ultra vires and the stock so
0. Power to extend term – not inherent since the life issued is void even in the hands of a bona fide
of the corporation is just a concession of the State purchaser for value.
(DE LEON & DE LEON Jr., supra at 132).
0. Power to shorten term – an inherent right An over issued stock is also known as a spurious
because the decision to shorten the business life stock (DE LEON & DE LEON Jr., supra at 339).
of a certain endeavor should really be addressed
to the decision of the co-venturers. It may be 0. It must follow the manner and conditions provided
designed to have the effect of dissolving of the by the law (DE LEON & DE LEON Jr., supra at
corporation (DE LEON & DE LEON Jr., supra at 337).
333).
Reasons for Increasing Capital Stock:
Note: Although Section 81 expressly allows the 0. To generate more working capital;
exercise of appraisal right even in case of 0. To have more shares with which to pay for
shortening of corporate term, nevertheless, acquisition of more assets; and
Section 37, governing the extension or shortening 0. To have extra shares to meet the requirement for
of corporate life, provides for appraisal right only deduction of stock dividend (Miravite, Bar Review
"in case of extension of corporate term" Materials in Commercial Law (2002)). Commented [ASPC19]: Find page number.
(VILLANUEVA, supra at 467).
Requirements: (PDAF-CART)
Increasing or Decreasing Capital Stock 0. Prior written notice of the proposed increase or
Ways of Increasing/Decreasing Authorized Capital decrease of the capital stock indicating the time
Stock: (CRAC-PaNuNu) and place of meeting addressed to each
0. Cancelling or retiring its shares, including treasury stockholder must be made either by mail or
shares (CORPORATION CODE, Sec. 9); personal service;
0. Redeeming redeemable shares (CORPORATION 0. In case of Decrease in capital stock, the same
CODE, Sec. 8); must not prejudice the right of the creditors;
0. It may Accept a surrender of shares and give the
holders in exchange therefore proportionate Reason: Trust Fund Doctrine
amount of its assets, provided no rights of
creditors are involved; 0. Approval by the majority vote of the board of
0. Cancelling shares which have not yet been directors;
issued; 0. Filing of the certificate with the SEC;
0. By increasing/decreasing the Par value of existing 0. A Certificate in duplicate signed by a majority of
shares without increasing/ decreasing the number the directors of the corporation, countersigned by
of shares; the chairman and the secretary of the
0. By increasing/decreasing the Number of shares stockholders meeting;
and retaining the par value; 0. Approval thereof by the SEC;
0. By increasing/decreasing the Number of shares 0. Ratification by the stockholders holding or
and increasing/decreasing the par value (DE representing at least 2/3 of the outstanding capital
LEON & DE LEON Jr., supra at 342); stock at a meeting duly called for that purpose;
and
Limitations: 0. In case of increase in capital stock, there must be
0. A corporation cannot lawfully decrease its capital a Treasurer’s affidavit showing that at least 25%
stock if such decrease will have the effect of of the approved increase in the capital must be
relieving existing subscribers from the obligation subscribed and that at least 25% of the amount

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196 2017 CENTRALIZED BAR OPERATIONS
subscribed must be paid either in cash or property Debenture
(SEC Opinion, February 19, 1981); It is a debt secured only by the debtor’s earning power,
not by a lien on any specific asset. It is also called
Note: If there is no approval, the amendment is debenture bond, unsecured bond, naked debenture
deemed approved upon the inaction of the SEC and plain bond (DIZON, Securities Regulation Code
for 6 months after submission for causes not due (2011), p. 10) [hereinafter, DIZON, Securities
attributable to the corporation (CORPORATION Regulation Code]).
CODE, Sec. 16).
Requirements:
The capital stock of the corporation stands Same as the power to increase or decrease capital
increased or decreased only from and after stock (CORPORATION CODE, Sec. 38).
approval and the issuance by the SEC of its
certificate of filing that the capital stock shall stand Note: This power is also relevant in non-stock
increased or decreased. corporations (DE LEON & DE LEON, Jr., supra at
347). Non-stock corporations can also earn profit.
The required 25% subscription shall be based on They are only prohibited from distributing dividends
the additional amount by which capital stock is (CORPORATION CODE, Sec. 87).
increased and not on the total capital stock as
increased (SEC Opinion, July 29, 1993). Sale, Disposition, Lease or Encumbrance of All or
Substantially All of Assets
An appraisal right is not available to a dissenting Requirements: (PARDS)
stockholder in case of increase or decrease of the 0. Prior written notice of the proposed action
corporation’s capital stock. indicating the time and place of meeting
addressed to each stockholder must be made
Reasons: either by mail or personal service;
0. In case of increase in capital stock – the grant 0. Approval by the majority vote of the board of
of appraisal right would defeat the purpose for directors;
which the power is exercised. 0. Ratification by the stockholders holding or
representing at least 2/3 of the outstanding capital
Example: To raise funds for the operation or even stock at a meeting duly called for that purpose;
survival of the corporate business.
Note: The vote of the majority of the trustees in
0. In case of decrease of capital stock – the office will be sufficient authorization for the
decrease of capital stock would result in returning corporation to enter into any transaction
part of the investments of the stockholders, authorized by Section 40 in the case of non-stock
including those stockholders who dissented corporations where there are no members with
(VILLANUEVA, supra at 245-246). voting rights (DE LEON & DE LEON Jr., supra at
366).
Incurring, Creating, or Increasing Bonded
Indebtedness 0. Any Dissenting stockholder shall have the option
Nature of the Power to exercise his appraisal right; and
It is an inherent power and is also expressly
recognized (CORPORATION CODE, Sec. 38). Reason: Stockholders have a common law
proprietary or beneficial interest on the corporate
A business corporation, in the absence of restriction, business enterprise, and any sale, transfer,
may borrow money whenever the necessity of disposition, or encumbrance thereof would be
business so requires and issue security or customary void if effected by the Board of Directors without
evidence of debt such as notes, bonds or mortgages the appropriate stockholder’s approval
(DE LEON & DE LEON Jr., supra at 347). (VILLANUEVA, supra at 252).

Corporate Bond 0. The Sale of the assets shall be subject to the


It is an obligation to pay a definite sum of money at a provisions of existing laws on illegal combinations
future time at fixed rate of interest, whether secured or and monopolies and the Bulk Sales Law
unsecured, evidenced by a written debt instrument (CORPORATION CODE, Sec. 40).
called a bond or debenture.
Note: The sale of all or substantially all of the
Bonded Indebtedness assets of the corporation is not binding on the
It is a loan secured by a mortgage on corporate creditors if there is violation of the Bulk Sales Law
property (VILLANUEVA, supra at 248). (CORPORATION CODE; Act 3952 as amended,
Sec. 2).

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1. To Collect or compromise indebtedness to the
Note: SEC approval is not required. corporation, arising out of unpaid subscription, in
a delinquency sale, and to purchase delinquent
Reason: Such power really affects the business shares sold during said sale;
enterprise level of corporate set-up, an area left by 1. To Pay dissenting or withdrawing stockholders;
the State to the judgment of managers, and does 1. To Acquire treasury shares;
not in any way affect or alter the juridical entity 1. Redeemable shares regardless of existence of
granted by the State (VILLANUEVA, supra at retained earnings;
251). 1. To Effect a decrease of capital stock; and
1. In Close corporations, when there is a deadlock in
“Substantially All” the management of the business
Sale or other disposition shall be deemed to cover (CORPORATION CODE, Sec. 41).
substantially all the corporate assets if:
0. The corporation would be rendered INCAPABLE Note: The enumeration provided in Section 41 is not
of continuing the business; or exclusive (AQUINO, supra at 383).
0. INCAPABLE of accomplishing the purpose for
which it was incorporated (CORPORATION Conditions for the Exercise of the Power: (CLUG)
CODE, Sec. 40(2)). 0. That its Capital is not impaired;
0. That it be for a Legitimate and proper corporate
Nell Doctrine purpose;
General Rule: Where one corporation sells or 0. That there shall be Unrestricted retained earnings;
otherwise transfer all of its assets to another 0. That the corporation acts in Good faith and without
corporation, the latter is not liable for the debts and prejudice to the rights of creditors and
liabilities of the transferor. stockholders; and
0. That the conditions of corporate affairs warrant it
Exceptions (Cases where Buyer of the Assets are (SEC Opinion, September 11, 1985, October 12,
Liable for the Debts of the Seller): 1992 and April 11, 1994).
0. Where the purchaser expressly or impliedly
agrees to assume such debts; Note: A corporation can only purchase its own
0. Where the transaction amounts to a consolidation shares when there are unrestricted retained
or merger of the corporations; earnings (CORPORATION CODE, Sec. 41),
0. Where the purchasing corporation is merely a subject to Sec. 104(4), in case of deadlocks in a
continuation of the selling corporation; and close corporation.
0. Where the transaction is entered into fraudulently
in order to escape liability for such debts (Y-1 Reason: Trust Fund Doctrine
Leisure v. Yu, G.R. No. 207161, September 8,
2015). Exceptions:
0. Redemption of redeemable shares in the absence
When Ratificatory Vote of Stockholders/Members of unrestricted retained earnings as long as the
Not Required: (RA) corporation has sufficient assets to meet its
0. If it is necessary in the usual and Regular course liabilities (CORPORATION CODE, Sec. 8;
of business; or Republic Planters Bank v. Agana Sr., supra);
0. If the proceeds of the sale or other disposition of 0. When the shares are reacquired by a close
such property and assets be Appropriated for the corporation in case of a deadlock
conduct of the remaining business (CORPORATION CODE, Sec. 104).
(CORPORATION CODE, Sec. 40).
Investment of Corporate Funds
Acquisition of Corporate Shares Requisites:
Instances: (EC-PAREC) 0. To Pursue Primary Purpose:
1. To Eliminate fractional shares out of stock . Approval of the Majority of the Board
dividends; 0. To Pursue Secondary Purpose: (R2PAM)
. Resolution by the majority of the board of
Note: Fractional shares are shares which are less directors or trustees;
than one corporation share (i.e. 300 ½ shares). . Ratification by the stockholders representing
at least 2/3 of the outstanding capital stock or
Reason: Fractional shares cannot be represented 2/3 of the members in case of non-stock
at corporate meetings (DE LEON & DE LEON Jr., corporation;
supra at 368).
Reason: The law presumes that when
stockholders invest in a corporation, it is with

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the primary expectation that the corporation Reason: The declaration of stock dividends is
through its board will only pursue the primary akin to forced purchase of stocks. By declaring
business indicated in the AOI. stock dividends, a corporation ploughs back a
portion of its entire unrestricted restrained
. Prior written notice of the proposed earnings either to its working capital or for capital
investment and the time and place of the asset acquisition or investments (PLDT v. NTC,
meeting shall be made, addressed to each G.R. No. 152685, December 4, 2007).
stockholder or member by mail or by personal
service; Note: The Board of Directors has the
. Any dissenting stockholder shall have responsibility to declare dividends and determine
Appraisal right; and the timing as well as their amount so long as they
. The ratification must be made at a Meeting act in good faith (DE LEON & DE LEON Jr., supra
duly called for the purposes (CORPORATION at 396).
CODE, Sec. 42).
Dividends
Note: The other purposes for which the funds may be Corporate profits set aside, declared, and ordered to
invested must be among those enumerated as be paid by the directors for distribution among
secondary purposes and must further comply with the shareholders at a fixed time (Fisher v. Trinidad, G.R.
above requirements (CORPORATION CODE, Sec. No. 17518, October 30, 1922).
42).
Classes of Dividends (CaPS-BLOC-CuPS)
Availability of Appraisal Right 0. Cash Dividend - dividend payable in cash.
Any dissenting stockholder shall have appraisal right 0. Property Dividend - dividend distributed to the
because he will be exposed to a line of business which stockholders in the form of property, real or
is not being pursued when he invested in the company personal.
(AQUINO, supra at 387). 0. Stock Dividend – dividend payable in unissued
or increased or additional shares of the
The term “funds” includes any corporate property to corporation instead of in cash or in property out of
be used in furtherance of business. The term “funds” the unrestricted retained earnings of the
may also include donations received by a corporation. corporation.
Thus, a non-stock, non-profit corporation may invest
its funds or subscribe to shares of another domestic Note: While shares of stocks may be issued to a
corporation (SEC Opinion No. 54, November 3, 2003). non-stockholder, shares of stock coming from
stock dividends are payable only to stockholders
Declaration of Dividends and not to strangers or non-stockholders because
Retained Earnings only shareholders are entitled to dividends
The accumulated profits realized out of normal and (Nielsen & Co. v. Lepanto Consolidated Mining
continuous operations of the business after deducting Co., G.R. No. L-2160, December 17, 1968).
therefrom distributions to stockholders and transfers 0. Bond Dividend – dividend distributed in bonds of
to capital or other accounts (SEC Memorandum the corporation to the stockholders.
Circular No. 11, Series of 2008, Sec. 2). 0. Liquidating Dividends – dividends which are
actually distributions of the assets of the
Unrestricted Retained Earnings corporation upon dissolution or winding up of the
Refer to retained earnings which have not been same.
reserved or set aside by the board of directors for 0. Optional Dividend – dividend which gives the
some corporate purpose (SEC Memorandum Circular stockholder an option to receive cash or stock
No. 11, Series of 2008, Sec. 2). dividend.
0. Composite Dividend – It is dividend which is
Note: For purposes of dividend declaration, the term partly in cash and partly in stocks.
“surplus profits” under Sec. 3 may be used 0. Cumulative Dividend – dividend which is
synonymously with unrestricted retained earnings. contracted to be paid at a certain rate at stated
times and if net earnings at any dividend period
Requirements for Declaration of Dividends are sufficient to pay the contract dividend, it is to
0. Unrestricted retained earnings; and be made out of subsequent net earnings.
0. Resolution of the board (cash dividends) or with 0. Preferred or Preferential Dividend – dividend
concurrence of shareholders representing not which is payable to one class of stockholders in
less than 2/3 of outstanding capital stock (stock priority to that to be paid to another class.
dividends) (CORPORATION CODE, Sec. 43). 0. Scrip Dividend – dividend in the form of a writing
or certificate issued to a stockholder entitling him
to the payment of money, stock or other benefit at

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some future time inasmuch as the corporation at participating interest in
the time such dividends are declared has profits the corporation.
not in cash or has no sufficient cash (DE LEON &
DE LEON Jr., supra at 411-415). Illustration:
X Corporation has 100,000 outstanding shares of
Cash Dividend v. Stock Dividend stock, with a par value of P10.00 per share. Because
Cash Dividends Stock Dividends the market price of the shares is considered high, the
As to Authority to Declare board feels that a lower price will improve
marketability of the shares and attract more investors.
Declared by the board It may authorize that the 100,000 shares be replaced
with the concurrence by 500,000 shares with a par value of P2.00. Thus,
of the stockholders each stockholder will receive 5 shares in exchange for
Declared only by the representing at least each share owned. This increase in the number of
board of directors at its 2/3 of the outstanding outstanding shares is referred to as stock split (DE
discretion. capital stock at a LEON & DE LEON Jr., supra at 422).
regular/special
meeting. Note: Declaration of stock dividends will not change
the par value of the shares.
As to Disbursements of Funds
Involves a Dividends v. Profits/ Earnings
disbursement to the Does not involve any Dividends Profits or earnings
stockholders of disbursement of funds. Dividends come from Profits are the source of
accumulated earnings. profits. dividends.
As to Corporate Capital Profits are not
dividends until so
declared or set aside by
Does not increase the Corporate capital is the corporation.
corporate capital. increased.
While cash dividends due on delinquent shares can
As to Creation of Debts be applied to the payment of the unpaid balance, stock
dividends cannot be applied as payment for unpaid
Its declaration creates subscription. Stock dividends shall be withheld from
a debt from the No debt is created by the delinquent stockholder until his unpaid
corporation to each of its declaration. subscription is fully paid (CORPORATION CODE,
its stockholders. Sec. 43).

If stock dividends will be allowed to be applied to the


As to Liability to Corporate Creditors
unpaid balance, the corporation will be receiving its
When declared and own stocks as payment which is not even paid by the
paid becomes the stockholder. The corporation receives nothing.
absolute property of Since it is still part of
the stockholder and corporate property, Reasons:
cannot be reached by may be reached by 0. Trust Fund Doctrine; and
creditors of the corporate creditors. 0. Since the retained earnings of the corporation are
corporation in the already applied as payment to the issuance of
absence of fraud. new shares, the same cannot be reapplied to
As to Applicability to Unpaid Subscription previous subscriptions which are still unpaid as
May be applied to this would be, in effect, acquiring its own shares,
May not be applied. the proceeds of which will be applied to the unpaid
unpaid subscription.
subscription which is not allowed under Sec. 41
Stock Dividend v. Stock Splits (SEC Opinion, July 4, 1984).
Stock Dividends Stock Splits
Limitations on Dividends:
There is capitalization Merely a dividing up of 0. The right to dividend is based on duly recorded
of earnings or profits, outstanding shares of a stockholdings. Accordingly, the corporation is
together with a corporation into a prohibited from declaring dividends in favor of
distribution of the greater number of non-stockholders.
added shares which units, without disturbing 0. As a rule, dividends among stockholders of the
evidence the assets the stockholder’s same class must always be pro rata equal and
transferred to capital. original proportional without discrimination and regardless of the time

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200 2017 CENTRALIZED BAR OPERATIONS
when the shares were acquired DE LEON & DE Stock corporations are prohibited from retaining
LEON Jr., supra at 409-410). surplus profits in excess of 100% of their paid-in
capital stock.
The right of the stockholder to be paid dividends
accrues as soon as the declaration is made. Exceptions: (SLEx)
Neither the same board nor their successors can 0. When it can be clearly shown that such retention
revoke the declaration of a legally declared is necessary under Special circumstances
dividend without the stockholders’ consent. obtaining in the corporation, such as when there
is a need for special reserve for probable
Note: The above rule only applies to cash and contingencies.
property dividends. It does not apply to stock 0. When the corporation is prohibited under any
dividends because the declaration of stock Loan agreement with any financial institution or
dividends adds nothing to the interest of the creditor from declaring dividends without its/his
stockholders. The corporation merely transfers consent and such consent has not yet been
the surplus to capital account and issues shares secured.
of stock to represent the same (SEC Opinion, April 0. When justified by definite corporate Expansion
29, 1987). projects approved by the board of directors
(CORPORATION CODE, Sec. 43).
The corporation does not disburse funds. The
profit surplus remains in the corporation and is Distribution of Dividends
transferred to the capital account. The stock Dividends can only be declared and paid out of actual
dividends are merely representations of such and bona fide unrestricted retained earnings.
surplus of the corporation (SEC Opinion, April 29,
1987). Note: Although stock dividends do not involve
disbursement of funds to the stockholders, the
0. The right to dividend accrues even if there is no corporation still needs surplus profit to be transferred
SEC approval. However, declaration of dividend to its capital asset. Without such surplus profit, there
shall be reported to the SEC within 15 days from is nothing to be transferred to the capital account and
declaration. the stock dividends have no surplus capital to
0. Declaration of dividends is discretionary upon the represent.
board. Dividends are payable only when there are
profits earned by the corporation and as a general Management Contract
rule, even if there are existing profits, the Board of It is an agreement whereby a corporation delegates
Directors has the discretion to determine whether the management of its affairs to another corporation
or not dividends are declared (Republic Planters for a certain period of time (DE LEON & DE LEON Jr.,
Bank v. Agana, supra), subject to the rule on non- supra at 424), In this contract, the managed
retention of retained earnings in excess of 100% corporation is bound by the acts of managing
of paid-in-capital. corporation.
0. Dividends cannot be declared out of paid-in
surplus and revaluation surplus. Any contract whereby a corporation undertakes to
0. Treasury shares cannot be declared as stock or manage or operate all or substantially all of the
cash dividends (CIR v. Manning, G.R. No. L- business of another corporation, whether such
28398, August 6, 1975). contracts are called service contracts, operating
agreements or otherwise (CORPORATION CODE,
General Rule: Dividends cannot be declared out of Sec. 44).
the capital (SEC Memorandum Circular No. 11, Series
of 2008, Sec. 5). Note: This refers only to a management contract with
another corporation. Hence, it does not apply to
Reason: Trust Fund Doctrine. management contracts entered into by a corporation
with natural persons. Such contract will be called
Exception: employment contract.
0. Dividends from investments in wasting assets
corporation (e.g. corporations engaged in mining Requirements: (ARA-5)
or timber cutting); 1. Approval by a majority of the quorum of the board
0. To utilize a lease or patent; and of directors;
0. Liquidating dividends (SUNDIANG & AQUINO, 1. Ratification by the stockholders owning at least
supra at 224). majority of the outstanding capital stock or the
members of both the managing and the managed
General Rule: corporations, at a meeting duly called for the
purpose; and

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1. Approval by the stockholders of the managed The rules and regulations or private laws enacted by
corporation owning at least 2/3 of the total the corporation to regulate, govern and control its own
outstanding capital stock entitled to vote, or by at actions, affairs and concerns, and of its stockholders
least 2/3 of the members in the case of a non- or members and directors and officers in relation
stock corporation: thereto and among themselves in their relation to the
. Where a stockholder/s representing the same corporation (AQUINO, supra at 420).
interest of both the managing and the
managed corporations own or control more Functions:
than 1/3 of the total outstanding capital stock 0. Supplement the AOI;
entitled to vote of the managing corporation 0. Define the rights and duties of corporate officers
(interlocking stockholders); or and directors/trustees as well as of
. Where a majority of the members of the board stockholders/members towards the corporation
of directors of the managing corporation also and among themselves;
constitute a majority of the members of the 0. Regulate business transactions of the corporation
board of directors of the managed corporation in a particular way; and
(interlocking directors 0. Source of authority for corporate officers and
1. The period must not be longer than 5 years for any agents of the corporation (DE LEON & DE LEON
1 term. Jr., supra at 444).

Exceptions: Contracts which relate to the By-Laws in Relation to Articles of Incorporation


exploration, development, exploitation or 0. By-laws are subordinate to the AOI as well as to
utilization of natural resources that may be the Corporation Code and related statutes (Loyola
entered into for such periods as may be provided Grand Villas Homeowners Assoc. v. CA, G.R. No.
by pertinent laws or regulations (CORPORATION 117188, August 7, 1997).
CODE, Sec. 44). 0. By-laws can neither enlarge the rights and powers
conferred by the charter nor restrict the duties and
Required Vote liabilities imposed thereby, and in case it attempts
General Rule: The contract must be approved by a to do so, the charter will prevail (Leeds vs.
majority of the quorum of the board of directors and Harrison, 15 N.J. Super. 82, 1951).
ratified by the majority of the stockholders
representing the outstanding capital stock/members
entitled to vote.

Exception: The contract must be approved by the


stockholders of the managed corporation owning at Articles of Incorporation v. By-laws
least 2/3 of the outstanding capital stock entitled to Articles of
vote/members in case of non-stock corporations By-Laws
Incorporation
(CORPORATION CODE, Sec. 44).
As to Nature
Executive Committee v. Management Contract Condition subsequent;
Management Condition precedent in its absence merely
Executive Committee the acquisition of furnishes a ground for
Contract
corporate existence. the revocation of the
As to Creation franchise.
Its creation must be As to Purpose
Express power of a
provided for in the by-
corporation. Constitutes the charter Merely rules and
laws.
or fundamental law of regulations adopted by
As to Authority the corporation. the corporation.
Management company As to Time of Execution
must always be subject
A governing body to the superior power of May be executed
which functions as the the board to give before incorporation or
board itself. specific directions from within 1 month after
time to time or to recall receipt of official notice
the delegation of Executed before of the issuance of its
managerial power. incorporation. certificate of
incorporation by the
SEC.
Adoption and Amendment of By-Laws
(CORPORATION
By-Laws
CODE, Sec. 46).

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202 2017 CENTRALIZED BAR OPERATIONS
As to Amendment incorporators and filed with the SEC together with
the AOI.
Amended by a majority
0. If it is adopted and filed after incorporation (which
of the directors/ May be amended by a
must be 1 month after receipt of official notice of
trustees and majority vote of the
the issuance of its certificate of incorporation by
stockholders BOD and majority vote
the SEC) – The affirmative vote of the
representing 2/3 of the of outstanding capital
stockholders representing at least a majority of
outstanding capital stock or a majority of
the outstanding capital stock, or of at least a
stock, or 2/3 of the the members in non-
majority of the members shall be necessary. The
members in case of stock corporation
by-laws shall be signed by the stockholders or
non-stock corporations (CORPORATION
members voting for them (AQUINO, supra at 423-
(CORPORATION CODE, Sec. 48).
424).
CODE, Sec. 16).
As to Delegation of Power to Amend Note: A copy thereof duly certified to by a majority
Power to amend or of the directors or trustees and counter-signed by
repeal by-laws or adopt the secretary of the corporation shall be filed with
new by-laws may be the SEC which shall be attached to the original
delegated by the 2/3 of AOI (Id. at 424).
the outstanding capital
stock or 2/3 of the Effectivity
Power to amend/repeal members in the case of Upon the issuance by the SEC of a certification that
articles cannot be non-stock corporation the by-laws are not inconsistent with the Code
delegated by the (CORPORATION CODE, Sec. 46).
stockholders/ members Note: The delegation
to the board ofmay be revoked Note: Until repealed or amended, a by-law is a
directors/ trustees. whenever stockholders continuing rule for the government of the corporation
owning or representing and individuals composing it.
a majority of the
outstanding capital Effect of Non-filing within the Required Period
stock or members in The 30-day period within which to file the by-laws is
case of non-stock NOT mandatory (Loyola Grand Villas v. CA, G.R. No.
corporation, shall so 117188, August 7, 1997).
vote at a regular or
special meeting. Failure to submit the by-laws within 30 days from
Resolution v. By-Laws incorporation does not automatically dissolve the
Resolution By-Laws corporation. It is merely a ground for suspension or
revocation of its charter after proper notice and
As to Nature and Subject Matter hearing. The corporation is, at the very least, a de
Merely a declaration of facto corporation whose existence may not be
will of the corporation in collaterally attacked (Sawadjaan v. CA, G.R. No.
Permanent rule of
a given matter and in 141735, June 8, 2005).
action of the conduct of
the nature of a
corporation affairs.
manifested act; applies Contents of By-laws (DiSQ-Pro-QAMPIO)
only to a single act of 1. Time, place and manner of calling and conducting
corporation. regular or special meetings of the Directors or
As to Rule in Case of Conflict trustees;
1. Time and manner of calling and conducting
Subordinate. Prevail over resolution. regular or special meetings of the Stockholders or
As to Necessity of Approval by SEC members;
1. The required Quorum in meetings of stockholders
Subject to the approval
or members and the manner of voting therein;
of SEC (AQUINO,
No need for approval 1. The form of Proxies of stockholders and members
supra at 420;
unless required by law. and the manner of voting them;
CORPORATION
1. The Qualification, duties and compensation of
CODE, Sec. 46).
directors, trustees, officers and employees;
1. The time for holding the Annual election of
Adoption of By-Laws directors or trustees and the mode or manner of
Required votes: giving notice;
0. If it is adopted prior to incorporation – The by-laws
must be signed and approved by all the

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1. The Manner of election or appointment and the Note: The amended or new by-laws shall only be
term of office of all officers other than directors or effective upon the issuance by the SEC of a
trustees; certification that the same are not inconsistent with
1. The Penalties for violation of the by-laws; the Code (CORPORATION CODE, Sec. 48).
1. In the case of stock corporations, the manner of
Issuing certificates; and The power to adopt the first original by-laws cannot
1. Such Other matters as may be necessary for the be delegated to the board of directors or trustees;
proper or convenient transaction of its corporate only the power to adopt new by-laws and to amend
business (CORPORATION CODE, Sec 47). the by-laws can be validly delegated.

Validity of the By-laws The amended by-laws must be filed with the SEC
0. Must not be contrary to law nor with the and must be attached to the original AOI
Corporation Code; (CORPORATION CODE, Sec. 48).

Note: The Court declared invalid the automatic Binding Effects of By-laws
and permanent seat in the Board of Directors of 0. As to members and shareholders
the petitioner school, which is contrary to Sec. 23 . They have the force of contract between the
of the Corporation Code stating that the board of members themselves.
directors must be elected from among the . There is a conclusive presumption that they
stockholders or members, who shall hold office for know the provisions of the corporate by-laws
1 year until their successors are elected and by the fact of their being such is charged with
qualified (Grace Christian High School v. CA, notice of by-laws. If he remains actually
supra). ignorant of the provision, he does so at his
peril (DE LEON & DE LEON Jr., supra at 452).
0. Must not be contrary to morals and public policy;
0. Must not impair obligations and contracts; 0. As to Corporate Directors and its Officers
0. Must be general and uniform in their operation and . They are bound by and must comply with
not directed against particular individuals; them unless and until they are changed.
0. Must be consistent with the charter or AOI; and . Subordinate employees without actual
0. Must be reasonable, not arbitrary or oppressive knowledge of the by-laws are not bound
(DE LEON & DE LEON Jr., supra at 447-448). (AQUINO, supra at 426).

Note: By-laws may provide for a greater number 0. As to Third Persons


of votes but the minimum requirements cannot be They are not bound to know the by-laws unless
lowered (SEC SGC Opinion No. 08-12, April 29, they have notice, actual or constructive
2008). knowledge (China Banking Corporation v. CA, GR
Amendment of By-Laws No. 117604, March 26, 1997).
Two Ways to Amend By-Laws:
0. The majority of the board of directors or trustees Reason: By-laws operate merely as internal rules
and the owners of at least a majority of the among the stockholders, directors, and officers.
outstanding capital stock, or at least a majority of They cannot affect or prejudice third persons who
the members of a non-stock corporation, at a dealt with the corporation (AQUINO, supra at
regular or special meeting duly called for the 426).
purpose, may amend or repeal any by-law or
adopt new by-laws; or Merger and Consolidation
0. The owners of 2/3 of the outstanding capital stock Merger
or 2/3 of the members in a non-stock corporation One where a corporation absorbs another corporation
may delegate to the board of directors or trustees and remains in existence while the other is dissolved
the power to amend or repeal any by-laws or (Id. at 547).
adopt new by-laws. (CORPORATION CODE,
Sec. 48). Consolidation
One where a new corporation is created and
Note: The delegated power shall be considered as consolidating corporations are extinguished (Id.).
revoked whenever stockholders owning or
representing a majority of the outstanding capital Constituent Corporations
stock or a majority of the members in a non-stock Refer to parties to a merger or consolidation.
corporation shall so vote at a regular or special
meeting (AQUINO, supra at 430). Consolidated Corporation
The new corporation created through consolidation.

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204 2017 CENTRALIZED BAR OPERATIONS
Merger v. Consolidation 1. “Business-Enterprise” Level (Purchase as On-
Merger Consolidation Going Concern)
The transferee merely continues the same
A union whereby one The union of two or
business of the transferor since he obtains the
or more existing more existing
earning capability of the venture.
corporations are corporations to form a
absorbed by another new corporation called
The transferee is liable for the debts and liabilities
corporation which the consolidated
of the transferor.
survives and continues corporation
the combined (VILLANUEVA, supra
1. “Equity” Level (Share Purchase)
business. at 661).
The purchaser takes control and ownership of the
business by purchasing the shareholdings of the
Combination corporate owner. What the purchaser actually
Used to designate an alliance or confederation, sale purchased is the ability to elect the members of
or other transaction between two or more corporations the board of the corporation who run the business
which does not necessarily result in the loss of the (VILLANUEVA, supra at 646-660).
separate existence of the combined corporations
(AQUINO, supra at 549). Merger and Consolidation v. Sale of Assets
Merger and
Merger of a Partnership and a Corporation Sale of Assets
Consolidation
A partnership may not be allowed to merge with a
corporation but the partnership may transfer all its As to Acts involved
assets and liabilities to the corporation which will issue Sale of assets is Merger/consolidation is
its shares of stock to be distributed to the partners in always involved. not always involved.
proportion to their respective interest in the As to Transfer of title
partnership, provided the partnership shall be
dissolved in accordance with the Civil Code (SEC Title to the assets are
Transfer of title is by
Opinion, Jan. 3, 1984). transferred by
virtue of contract.
operation of law.
Common Forms of Corporate Combinations: As to Assumption of liabilities
0. Sale of Assets; Purchasing corporation
0. Lease of Assets; There is automatic is not generally liable
0. Sale of Stock; assumption of for the debts and
0. Merger; and liabilities. liabilities of the selling
0. Consolidation (DE LEON & DE LEON Jr., supra at corporation.
635-640).
Note: Parties to a merger or acquisition As to Dissolution
agreement wherein the value of the transaction The selling corporation
exceeds one billion pesos are prohibited from The constituent is not dissolved by the
consummating their agreement until 30 days after corporations are mere transfer of all its
providing notification to the Philippine Competition automatically property.
Commission. dissolved.

An agreement consummated in violation of this As to Liquidation


requirement to notify the Commission shall be The selling corporation
considered void (R.A. No. 10667, Sec. 17). ordinarily contemplates
There is continuance of
a liquidation of the
Types of Acquisitions the enterprise and of
enterprise (DE LEON &
1. “Assets-Only” Level (Property Only Purchase) the stockholders.
DE LEON Jr., supra at
The purchaser is interested only in the raw assets 647-648).
and properties of the business. He is not
interested in the entity of the corporate owner of
Procedure for Merger and Consolidation: (PAS-HI)
the assets or on the goodwill and other factors
0. Approval of Plan – The Board of each
relating to the business itself.
corporation shall draw up a plan of merger or
The transferee would not be liable for the debts consolidation containing:
and liabilities of his transferor since there is no . names of the constituent corporations;
privity of contract over debt obligations between . terms and mode of carrying the merger or
the transferee and the transferor’s creditors. consolidation;
. statement of changes in the AOI of the
surviving corporation; or statements to be set

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forth in the AOI of the consolidated Note: The merger and consolidation does not become
corporation; and effective upon the mere agreement of the parties
. other provisions. (AQUINO, supra at 557).
0. Submission to stockholders or members for
Approval – The plan of merger or consolidation Articles of Merger or Consolidation
shall be approved by vote of stockholders It shall be executed by each of the constituent
representing at least 2/3 of the outstanding capital corporations and signed by the president, vice-
stock, or members in case of non-stock president and certified by the secretary or assistant
corporation. secretary of each corporation (CORPORATION
0. Execution of formal Contract – Articles of CODE, Sec. 78).
Merger or Consolidation shall be executed by
each of the constituent corporations, signed by the Non-Assumption of Liabilities
President or Vice-President and certified by the General Rule: When one corporation buys all the
secretary or assistant secretary setting forth: shares, stocks or property of another corporation, this
. Plan of merger or consolidation; will not operate to dissolve the other corporation and
. number of shares outstanding or members; as the two corporations still maintaining their separate
and corporate entities, one will not answer for the debts of
. as to each corporation, the number of shares the other.
or members voting for and against such plan.
0. Submission to SEC for approval –4 copies of Exceptions: (FEC2)
the Articles of merger or Consolidation (together 0. If the purchase was in Fraud of creditors;
with favorable recommendation of a pertinent 0. If there is an Express assumption of liabilities;
government agency in certain cases) shall be 0. If there is a Consolidation or merger; and
submitted to the SEC for approval; 0. If the purchaser is merely a Continuation of the
0. Conduct of Hearing by SEC – If, upon seller (DE LEON & DE LEON Jr., supra at 365).
investigation, the SEC has reason to believe that
the proposed merger or consolidation is contrary De facto Merger
to or inconsistent with the provisions of this Code When one corporation acquire all or substantially all of
or existing laws, it shall set a hearing to give the the properties of another corporation in exchange for
corporations concerned the opportunity to be shares of stock of the acquiring corporation. The
heard; and acquiring corporation would end-up with the business
0. Issuance of certificate by SEC – The SEC shall enterprise of the selling corporation whereas the latter
issue a certificate of merger if it is satisfied that the would end up with basically its remaining assets being
merger or consolidation of the corporations the shares of stock of the acquiring corporation and
concerned is not inconsistent with the provisions may then distribute it as liquidating dividend to its
of this Code and existing laws (DE LEON & DE stockholders (VILLANUEVA, supra at 670).
LEON Jr., supra at 642-643).
Effects of Merger and Consolidation under the
Note: Consent of the creditors is NOT necessary Corporation Code:
to effect merger or consolidation (Id. at 646). 0. The constituent corporation shall become a single
corporation;
Amendment of the Plan 0. The separate existence of the constituent
The plan may still be amended before the same is filed corporations shall cease, except that of the
with the SEC. However, any amendment thereto must surviving or consolidated corporation;
be approved by the majority vote of the board 0. The surviving or consolidated corporation shall
members or trustees of the constituent corporations possess all rights, privileges, immunities and
and affirmed by the vote of 2/3 of the outstanding powers and shall be subject to all the duties and
capital stockholders or members (AQUINO, supra at liabilities of a corporation organized under the
554). Corporation Code;
0. The surviving or consolidated corporation shall
Effectivity thereupon and thereafter possess all the rights,
The merger shall only be effective upon the issuance privileges, immunities and franchises of each of
of a certificate of merger by the SEC. The same rule the constituent corporations; and
applies to consolidation which becomes effective upon 0. All property (real or personal) and all receivables
issuance of the certificate of consolidation by the SEC due on whatever account (including subscriptions
(Mindanao Savings and Loan Assoc v. Willkom, G.R. to shares and other choses in action), and all and
No. 178618, October 11, 2010). every other interest of, or belong to, or due to each
constituent corporation, shall be deemed
transferred and vested in such surviving or

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consolidated corporation without further act or process which may constitute into a subsidiary of the
deed (CORPORATION CODE, Sec. 80). original corporation (VILLANUEVA, supra at 671).

Effects of Merger and Consolidation under other It exists when a parent corporation organizes a
laws and jurisprudence subsidiary, to which the parent corporation transfers
0. There is automatic assumption of the liabilities of parts of its assets to a new corporation and stock of
the absorbed corporation or constituent transferee is distributed to shareholders of transferor
corporations which are dissolved (DE LEON & DE without surrender by them of stock in transferor (Id.).
LEON Jr., supra at 645);

The surviving or consolidated corporation shall be R IGHTS O F S HA REHOLDERS


responsible and liable for all the liabilities and
obligations of each of the constituent corporations OR M EMB ERS
in the same manner as if such surviving or
consolidated corporation had itself incurred such A. Right to Attend Meetings
liabilities or obligations; and any pending claim, Kinds of Meetings (CORPORATION CODE,
action or proceeding brought by or against any of Secs. 50-51)
such constituent corporations may be prosecuted 0. Meetings of stockholders or members
by or against the surviving or consolidated (SH/M):
corporation. . Regular
The merger or consolidation does not impair the
rights of creditors or liens upon the property of any When: Annually on a date fixed in the by-
such constituent corporations.
laws, or if not fixed, on any date in April as
decided by the board.
0. The absorbed or constituent corporations are ipso
facto dissolved by operation of law without Where: In the city/municipality where the
necessity of any further act or deed but there is no
principal office of the corporation is located,
winding up or liquidation of their assets for the
and if practicable in the principal office of the
surviving corporation automatically acquires all
corporation: Provided, that Metro Manila shall,
the liabilities of the constituent corporation
for the purpose of Sec. 51, be considered a
(McLeod v. NLRC, G.R. No. 146667, January 23,
city or municipality.
2007);
0. Permits the transfer of the assets to the purchaser
In non-stock corporations, the by-laws may
and the distribution of the consideration received
provide that members may hold their meeting
in a single operation;
at any place within the Philippines even
0. Involve exchanges of properties, a transfer of the
outside the place of the principal office
assets of the constituent corporations in exchange (CORPORATION CODE, Sec. 93).
for securities in the new or surviving corporation
but neither involves winding up of the affairs of the Purpose: Principally for election of new set of
constituent corporations in the sense that their
directors or trustees.
assets are distributed to the stockholders; and
0. Dissolution of the constituent corporations cannot Notice: Written notice must be given to SH/M
be made to retroact to a date prior to the at least two (2) weeks prior to the meeting
ratification of the stockholders but the transfer of
unless:
the assets and liabilities of the constituent
. Otherwise provided in the by-laws; or
corporations could be made effective retroactively
. Waived by the SH/M.
as of the date the said board of directors so
resolved (SEC Opinion, March 4, 1975). . Special
Note: Employment contracts are automatically
When: Any time when deemed necessary or
assumed by the surviving corporation in a merger,
as provided in the by-laws.
even in the absence of an express stipulation in
the articles of merger or the merger plan (BPI v.
Where: Same as that of regular meeting.
BPI Employees Union, G.R. No. 164301, October
19, 2011). Notice: Written notice must be given to SH/M
at least one (1) week prior to the meeting
Spin-off
unless:
It is one where a department, division or portions of
. Otherwise provided in the by-laws; or
the corporate business enterprise is sold-off or
. Waived by the SH/M.
assigned into a new corporation that will arise by the 0. Meetings of directors or trustees (D/T):

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a. Regular Stockholders Board of
Directors/Trustees
When: Monthly unless the by-laws provide Petitioner, person President presides the
otherwise. chosen by majority meetings.
stockholders or
Where: Anywhere in or out of the Philippines, President may preside
unless the by-laws provide otherwise. at meetings.

Notice: Written notice must be given to D/T at As to Allowance of Proxy


least one (1) day prior to the meeting unless: Proxy is allowed. Proxy is not allowed.
. Otherwise provided in the by-laws; or
. Waived by the SH/M. Requirements for Board Meetings
0. Meeting of the directors or trustees duly
a. Special (CORPORATION CODE, Sec. 50- assembled as a Board;
51) 0. Presence of the required quorum;
0. Decision of the majority of the quorum, or, in other
When: Any time upon the call of the president cases, a majority of the entire Board; and
or as provided in the by-laws. 0. Meeting at the place (CORPORATION CODE,
Sec. 51(1)) time, and manner provided in the by-
Where: Same as regular. laws (CORPORATION CODE, Sec. 47(12), 53,
101).
Notice: Same as regular.
Note: The Board of Directors or Trustees may
Note: Directors or Trustees cannot attend or vote by adopt its own internal rules in the conduct of its
proxy at board meetings (CORPORATION CODE, meetings provided the same will not run counter
Sec. 25). to the provisions of the Code, the AOI, and by-
Stockholders Meetings v. Board of laws or the corporation (SEC Opinion, January 25,
Directors/Trustees Meetings 1990).
Stockholders Board of
Directors/Trustees
As to Nature Requirements for Stockholders’ or Members’
Regular: annually, Meeting: (PD-PAD-CS-PQ)
provided that notice is Regular meeting is 0. It must be held at the proper Place;
sent two weeks before held monthly unless 0. It must be held at the stated Date and at the
the meeting; otherwise provided by appointed time or at a reasonable time thereafter;
the by-laws. Notice 0. It must be called by the proper Person;
Special: at any time, must be sent one day 0. The person or persons designated in the by-laws
provided that notice is prior to the meeting, have Authority to call stockholders or members
sent one week before unless held abroad. meeting;
the meeting. 0. In the absence of such provision in the by-laws, it
may be called by a Director or trustee or by an
As to Who may call
officer entrusted with the management of the
Called upon by any Called upon by the corporation;
person authorized or President, unless 0. A stockholder or member may make the Call on
upon petition to SEC otherwise provided in order of the SEC whenever for any cause, there is
by any stockholder. the by-laws. no person authorized to call a meeting;
As to Notice 0. The Special meeting for the removal of directors
Notice may be waived. Notice may be waived. or trustees may be called by the secretary or by a
As to Venue stockholder or member;
0. There must be a Previous notice; and
Must be held in the city 0. There must be a Quorum (CORPORATION
or municipality where CODE, Sec. 50).
May be held in or out of
the principal office is
the Philippines. An e-mail notice may be included as a mode of notice
located, if practicable
in the principal office. in the by-laws of a corporation, since an e-mail is
considered to be “in writing” under The Electronic
As to Who may Preside Commerce-Act of 2000 (R.A. No. 8972). In such a
case, the by-laws must provide for the mechanics of
such sending of notices through e-mail, including the
indication, recording, changing and recognition of e-

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208 2017 CENTRALIZED BAR OPERATIONS
mail addresses of each stockholder/director (SEC stock corporations (SEC Opinion dated November 23,
Opinion dated October 25, 2013). 2013).

Persons authorized to call a meeting: Once a quorum is called, and the meeting was called
0. The person or persons designated in the by-laws to order, even if some people walked out and the
have the authority to call stockholder’s or people left are less than the majority, the proceedings
member’s meeting; will be valid so long as there is a quorum when the
0. In the absence of such provision in the by-laws, meeting was called to order. A minority group cannot
the meeting may be called by a director or trustee prevent corporation by walking out (DE LEON & DE
or by an officer entrusted with the management of LEON Jr., supra at 476).
the corporation unless otherwise provided by law;
or For stock corporations, the “quorum” referred to (for
0. Whenever there is no person authorized to call a stockholders or members meeting) is based on the
meeting, the SEC, upon petition of a stockholder number of outstanding voting stocks (Tan v. Sycip,
or member, and on the showing of good cause, supra).
may issue an order to the petitioning stockholder
or member directing him to call a meeting of the For non-stock corporations, only those who are actual,
corporation by giving proper notice (AQUINO, living members with voting rights shall be counted in
supra at 436). determining the existence of a quorum during
members’ meetings (Tan v. Sycip, supra).
Note: Even if the meeting be improperly held or
called, all proceedings and any business Any matter or transaction must necessarily fail if the
transacted at such meeting shall be valid if within number of votes attained is less than what is
the powers or authority of the corporation, and prescribed for the particular transaction. If an issue to
provided that all the stockholders or members of be resolved requires a majority for it to be passed and
the corporation are present or duly represented at there is a deadlock, the issue or proposition simply
the meeting (CORPORATION CODE, Sec. loses. There, is therefore, no need to break the
51(3)). deadlock (SEC Opinion August 23, 1991 & August 4,
Quorum of Meetings of Shareholders or Members 1995).
Quorum
It is that number of members of a body which, when Other means of voting of D/T:
legally assembled in their proper places, will enable 0. Internet voting
the body to transact its proper business or that number The SEC has ruled that a trustee may be allowed
which makes a lawful body and gives it power to pass to vote through the internet provided that the
upon a law or ordinance or do any valid act (La Carlota internet medium to be used is akin to or similar to
City v. Rojo, G.R. No. 181367, April 24, 2012). the one being used in video-conferencing or
teleconferencing, where a participant can see or
General Rule: A quorum shall consist of the hear the actual proceedings of board meetings
stockholders representing a majority of the and actively participate in the deliberation of the
outstanding capital stock or a majority of the members Board (SEC Opinion, August 9, 2001).
in the case of non-stock corporations.
0. Teleconference or Video-Conference
Exception: Unless otherwise provided for in the Code The Supreme Court has recognized the practice,
or in the by-laws (CORPORATION CODE, Sec. 52). thus: “in the Philippines, tele-conferencing and
video-conferencing of members of the board of
A corporation is authorized to provide in its by-laws a directors of private corporations is a reality in the
quorum less than majority. However, the provision in light of R.A. No. 8792 or the Electronics
the by-laws relative to quorum will not hold true in Commerce Act (Expertravel & Tours, Inc. v. Court
those instances where the Corporation Code or of Appeals, G.R. No. 152392, May 26, 2005).
applicable special law explicitly prescribes the
proportion of stockholders or members necessary to Although the Supreme Court recognized tele-
resolve or carry out a particular corporate proposal conferencing as a form of board meeting, such
(SEC Opinion dated April 13, 2011). method is insufficient to be considered as a
substitute for a written board resolution (Id.).
To determine what constitutes quorum for purposes of
election of directors or trustees under Sec. 24, the Rule on Teleconferencing or Video-Conferencing
phrase “entitled to vote” should be applied to both the
“majority of outstanding capital stock” in stock Teleconferencing
corporations and “majority of the members” of non- An interactive group communication (3 or more people
in 2 or more locations) through an electronic medium

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(R.A. NO. 8792, as implemented by SEC Memo that won the majority vote; since by their act of
Circular No. 15, November 30, 2001). abstention the abstaining directors are deemed to
abide by the rule of the majority (VILLANUEVA, supra
Basic Types: at 350).
0. Video Conferencing – television-like
communication augmented with sound; This manner of counting is based on what is deemed
0. Computer-Conferencing – printed to be a presumption as to the intent of the one
communication through keyboard terminals; and abstaining, namely, to acquiesce in the action of those
0. Audio- Conferencing – verbal communication who vote affirmatively (Lopez v. Ericta, G.R. No. L-
via the telephone with optional capacity for 32991, June 29, 1972).
telewriting or telecopying (Rogan & Simmons
1984). Exception: Being merely prima facie, the presumption
on abstention voting would not hold in the face of clear
Advantages and Disadvantages of evidence to the contrary. It is pertinent, therefore, to
Teleconferencing inquire into the facts and circumstances which
Advantages Disadvantages attended the voting by the members in order to
determine whether or not such a construction would
Communication
govern (Lopez v. Ericta, supra).
between the home Technical failures with
office and field staff is equipment.
maximized.
Who shall preside at meetings
People who would not The president shall preside at all meetings of the
Unsatisfactory for
normally attend a directors or trustees as well as of the stockholders or
complex interpersonal
distant meeting can members, unless the by-laws provide otherwise
communication.
participate. (CORPORATION CODE, Sec. 54). Where officer
Follow-up to earlier Impersonal, less easy to entitled to preside is not present, a stockholder or
meeting can be easily create an atmosphere member who takes the floor may temporarily preside
done. of group rapport. at the meeting of stockholders or members pending
Meetings are shorter Lack of participant’s the selection of presiding officer (DE LEON & DE
and more oriented to familiarity with the LEON Jr., supra at 482).
the primary purpose. equipment.
Notice
Acoustical problem
The writing informing the stockholders or members of
Some routine meetings within the
the meeting (Id. at 471).
are more effective. teleconferencing
rooms.
Requisites:
Severe climate and/or Difficulty in determining 0. Must be issued by one who has authority to issue
unreliable the participant speaking it;
transportation may order, tendency for one 0. Must be in writing;
necessitate person to monopolize 0. Must state date, time and place unless otherwise
teleconferencing. the whole meeting. provided in By-laws;
Participants are Greater participant 0. Must state business to be transacted thereat;
generally better preparation time 0. Must be sent at a certain time before scheduled;
prepared. needed. and
Particularly satisfactory 0. Notice must comply with any other requirements
Informal, one-on-one prescribed by law or corporate by-laws (Id. at
for simple problem
interaction is not 472).
solving, information,
possible.
exchange and
procedural tasks. Note: The notice should state the purpose for
which the meeting is called (Id. at 473).
Group members
participate more equally Record Date
in well-moderated. General Rule: Those who are stockholders on the
teleconferences (Rogan day of the meeting shall have the right to attend the
& Simmons 1984). same.

Rule on Abstention Exception: The by-laws may provide for a record date
General Rule: In case of abstention during a board which means that only those stockholders on record
meeting on a vote taken on any issue, the general rule on the date when the notices were given shall have
is that an abstention is counted in favor of the issue the right to receive notices and attend the meeting. Commented [AM20]: Source

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210 2017 CENTRALIZED BAR OPERATIONS
Where the consideration for the shares
Purposes: subscribed is other than cash, the valuation
0. To determine who among the stockholders have thereof shall be subject to approval by the SEC
the right to receive notices for the purpose of (CORPORATION CODE, Sec. 62). This means
attending meetings; and that before such approval, the subscriber cannot
0. To determine who among the stockholders shall exercise the rights of a stockholder (DE LEON &
receive dividends. DE LEON Jr., supra at 607).

Note: In the absence of record date, only those 0. Sequestered Shares:


who are stockholders on the date of declaration of Two-tiered test to determine whether the PCGG
dividend shall receive the same. may vote sequestered shares: Commented [AM21]: Source
. Whether there is prima facie evidence
Right to Vote showing that the said shares are ill-gotten and
In stock corporations, it is an incident of ownership or thus belong to the state; and
the property in the stock of which the stockholder . Whether there is an immediate danger of
cannot be deprived without his consent and he may dissipation thus necessitating their continued
vote it as he chooses, although not in manner or for sequestration and voting by the PCGG while
purposes contrary to law, public policy or fraudulently the main issue is pending with the
(Id. at 484). Sandiganbayan (Republic v. Sandiganbayan,
Manner of Voting G.R. No. 107789, April 30, 2003).
A stockholder or member may vote:
0. Directly (in person); or Public Character Exception – the two-tiered test
0. Indirectly, through a representative – does not apply in cases involving funds of public
. By means of a proxy; character. In such cases, the government is
. By a trustee under a voting trust agreement; granted the authority to vote said shares, namely:
or . Where the government shares are taken over
. By executors, administrators, receivers, or by private persons or entities who/which
other legal representatives duly appointed by registered them in their own names; and
the court (Id. at 487). . Where the capitalization of shares that were
acquired with public funds somehow landed in
Rules on Meeting/Voting Applicable to Certain private hands (Republic v. Sandiganbayan.
Kinds of Shares supra).
0. Delinquent shares shall not be entitled to vote
(CORPORATION CODE, Sec. 71). 0. Pledgor, mortgagor, or administrator shall have
0. Treasury shares have no voting rights while they the right to attend and vote at meetings unless
remain in the treasury (CORPORATION CODE, pledgee/mortgagee is expressly given such right
Sec. 57). in writing, as recorded on the appropriate
corporate books (CORPORATION CODE, Sec.
Reason: Treasury shares are not part of the 55).
outstanding capital. When a corporation re-
acquires its own shares, it does not become a Executors, administrators, receivers, and other
subscriber thereof and the only right that a legal representatives may attend and vote in
corporation has over the treasury shares is to behalf of the stockholders or members without
reissue the same for valuable consideration need of any written proxy. The heirs are not
(AQUINO, supra at 455). prohibited from representing the deceased with
regard to shares of stock registered in the name
0. Fractional shares shall not be entitled to vote. of the latter, especially when no administrator has
0. Escrow shares shall not be entitled to vote before been appointed (Gochan v. Young, G.R. No.
the fulfillment of the condition imposed thereon. 131889, March 12, 2001).
0. Unpaid shares, if not delinquent, are entitled to all
the rights of a stockholder including the right to 0. Shares Jointly Owned - consent of all the co-
vote (CORPORATION CODE, Sec. 72). owners necessary, unless there is a written proxy,
signed by all the co-owners, authorizing one or
Note: Where the subscription contract is subject some of them or any other person to vote such
to a suspensive condition of full payment, a share or shares. If shares are owned in an
subscriber is not entitled to the rights of a regular “and/or” capacity by the holders thereof, any one
stockholder before the fulfillment of the condition of the joint owners can vote or appoint a proxy
(DE LEON & DE LEON Jr., supra at 606). thereof (CORPORATION CODE, Sec. 56).

Right to Appoint Proxy

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Proxy 1. As provided for in its by-laws (Id. at 493).
It is a written authorization given by one person to
another so that the second person can act for the first. Note: Sec. 58 imposes no limitation as to who
may be a proxy. A stockholder/member may
It also refers to the instrument which evidences the appoint any person he sees fit to represent him,
authority of the agent. and by-laws restricting his right in this respect are
likewise void (Id.).
It may be used to apply to the holder of the authority
or person authorized by an absent stockholder or In non-stock corporations, the right to vote by
member to vote for him at a stockholder’s or members’ proxy, or even the right to vote itself may be
meetings (DE LEON & DE LEON Jr., supra at 492). denied to members in the AOI or the by-laws as
long as the denial is not discriminatory
Requirements for Validity: (F5-SWV) (CORPORATION CODE, Sec. 89).
0. It shall be Filed before the scheduled meeting with
the corporate secretary;
0. No proxy shall be valid and effective for a period Rules on Proxy
longer than five (5) years at any one time; 0. Since a proxy acts for another, he may act as such
0. It shall be Signed by the stockholder or member although he himself is disqualified to vote his
concerned; shares.
0. Proxies shall be in Writing; and 0. The same person may act as proxy for one or
0. Unless otherwise provided in the proxy, it shall be several stockholders or members.
Valid only for the meeting which it was intended 0. Directors or trustees cannot attend or vote by
(CORPORATION CODE, Sec. 58). proxy at board meetings but they may act as
proxies in stockholders’ meetings.
Kinds of Proxy: 0. A proxy in favor of several persons is presumed
0. General Proxy – confers a general discretionary by the action of the majority to represent the
power to attend and vote at annual meeting as giver’s will and the dissenting minority of them
well as exercise all powers the cannot withdraw and break up the quorum as well
stockholder/member could do if personally as the meeting to effectuate their dissent.
present. 0. A proxy, however, may be revoked when it runs to
0. Limited Proxy – restricts the authority to vote to several proxies who cannot agree on a vote (DE
specified matters only and may direct the manner LEON & DE LEON Jr., supra at 494).
in which the vote shall be cast.
0. Specific Proxy – the authority granted is merely Revocation of Proxies
for a particular meeting on a specific date. Proxies, even those with irrevocable terms, have
0. Continuing Proxy – the authority given is to always been considered as revocable, unless coupled
represent the stockholders at any and all regular with an interest (SEC Memorandum No. 4, Series of
or special stockholder’s meetings unless the 2004).
stockholder revokes the same (DE LEON & DE
LEON Jr., supra at 497-501). Revocation may be made through:
0. Formal notice;
Purposes and Use of Proxies 0. Verbal communication; or
0. For convenience or favor to the distant and 0. Conduct (i.e. when the stockholder votes or
indifferent stockholders; attends the meeting personally notwithstanding
0. Assures the presence of a quorum; his appointment of a proxy. In such case, the
0. Enables those who do not wish to attend a proxy is deemed revoked) (SEC Opinion, October
stockholder or member’s meeting to protect their 28, 1991).
interest by exercising their right to vote through
representative; and Rules on Revocation:
0. Secure voting control or management control in 0. Last Proxy given revokes all previous proxies; and
corporation (DE LEON & DE LEON Jr., supra at 0. Where proxies are undated, the postmark dates
492-493). become important.

The right to vote by proxy may be exercised in any Right to Execute Voting Trust Agreements
of the following instances: Voting Trust Agreement
1. Election of the board of directors or trustees; It is an agreement whereby a stockholder of a stock
1. Voting in case of joint ownership of stock; corporation confers upon a trustee/s the right to vote
1. Voting by trustee under voting trust agreement; and other rights pertaining to the shares for a period
1. Voting by members in a non-stock corporation; not exceeding 5 years at any time.
1. Pledge or mortgage of shares; and

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212 2017 CENTRALIZED BAR OPERATIONS
It is not governed by the law on agency. Unlike
agency, a voting trust agreement is not revocable at Voting Trust Agreement v. Proxy
will (AQUINO, supra at 463). Voting Trust
Proxy
Agreement
Purposes of Voting Trust Agreement:
As to Nature
0. Unified control of the affairs of the corporation and
a consistent policy by binding stockholders to vote The trustee votes as The proxy holder votes
as a unit; owner. as agent.
0. Assure continuity of policy and management As to Notarization
especially of a new corporation desirous of The agreement must Proxy need not be
attracting investors; be notarized. notarized.
0. To enable the owners of the majority of the stock
of the corporation to control the corporation; As to Legal Title
0. To vest and retain the management of the Trustee acquires legal
corporation in the persons originally promoting it. title to the shares of the
0. To prevent a rival concern from acquiring control Proxy has no legal title
transferring
of the corporation; to the shares of the
stockholder; only
0. To carry out a proposed sale of the corporation’s principal.
beneficial title remains
assets and to facilitate its dissolution; with the stockholder.
0. To enable two holding companies to operate
jointly a corporation controlled by them; As to Manner of Voting
0. To effect a plan for reorganization of a corporation The trustee may vote in
in financial difficulty or in bankruptcy proceedings; person or by proxy The proxy must vote in
and unless the agreement person.
0. To aid a financially embarrassed corporation to provides otherwise.
obtain a loan and protect its creditors (AQUINO,
As to Actions Allowed
supra at 463).
Proxy can only act at a
Trustee is not limited to
Limitations: specified stockholder’s
act at any particular
0. The agreement cannot be entered into for a period meeting (if not
meeting.
exceeding 5 years at any one time except when it continuing).
is a condition in a loan agreement, in which case, As to Restrictions on Voting
said contract shall automatically expire upon full
A trustee can vote and
payment of the loan;
exercise all the rights of A proxy can only vote in
0. The agreement must not be used for purposes of
the stockholder even the absence of the
fraud;
when the latter is owners of the stock.
0. It must be in writing and notarized and specify the
present.
terms and conditions thereof;
0. A certified copy of the agreement must be filed As to Period
with the corporation and with the SEC; An agreement must not A proxy is usually of
0. The agreement shall be subject to examination by exceed five (5) years at shorter duration
any stockholder of the corporation; and any one time except although under Sec. 58
0. Unless expressly renewed, all rights granted in the when the same is made it cannot exceed five (5)
agreement shall automatically expire at the end of a condition of a loan. years at any one time.
the agreed period (CORPORATION CODE, Sec.
As to Separability of Ownership and Voting
59)
Right
Note: A voting trust agreement not filed with the The right to vote is
corporation and SEC is ineffective and The voting right is inherent in or
unenforceable (CORPORATION CODE, Sec. 59). divorced from the inseparable from the
ownership of stocks. right to ownership of
Status of the Voting Trustee stock.
Title to shares conveyed is transferred to the trustee As to Revocability
on the books of the corporation (DE LEON & DE
Revocable anytime
LEON Jr., supra at 505). The agreement is
except if coupled with
irrevocable.
interest.
Status of the Transferring Stockholder
The transferring stockholder parts with the voting
power but only retains the equitable or beneficial Note: A voting trust agreement is just one example of
ownership of the stock (Id.). devices employed by groups to gain or retain control

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over the management by combination of voting power. 1. The refusal to allow such right to inspect and to
Other examples are: demand such copy shall subject the erring officer
0. Voting agreements; or agent to civil and criminal liabilities and if such
0. Classification of common shares into voting and refusal is by virtue of a resolution or order of the
non-voting, with the voting power vested in a small board of directors or trustees, the liability shall be
class of management stock; imposed upon the directors or trustees who voted
0. Management contracts; and for the adoption of such resolution or order
0. Pyramiding (DE LEON & DE LEON Jr., supra at (CORPORATION CODE, Sec. 74).
502-503).

Powers or Rights of Voting Trustees: Contents of Stock and Transfer Book:


0. They shall possess the right to vote and other 0. All stocks in the name of the stockholders
rights pertaining to the shares so transferred and alphabetically arranged;
registered in his or their names subject to the 0. Amount paid and unpaid on all stocks and the date
terms and conditions of and for the period of payment of any installment;
specified in the agreement; 0. Alienation, sale, or transfer of stocks; and
0. May vote in person or by proxy unless the 0. Other entries as the by-laws may prescribe.
agreement provides otherwise;
0. The trustee may exercise the rights of inspection Note: Only the corporate secretary is duly authorized
of all corporate books and records; and to make entries on the STB. Hence, entries made by
0. The trustee is the legal title holder or owner of the the Chairman or President are invalid (Torres, Jr. v.
shares so transferred under the agreement. He is CA, G.R. No. 120138, September 5, 1997).
therefore qualified to be a director.
(CORPORATION CODE, Sec. 59). Contents of Book of Minutes:
0. Date and time of meeting;
Note: The trustor cannot be elected as director 0. Place of meeting;
during the life of the Voting Trust Agreement 0. How the meeting was authorized;
(AQUINO, supra at 464). 0. The fact that notice was given;
0. Whether the meeting was regular or special;
Reason: By its very nature, a voting trust 0. If the meeting was special, its objective/s must be
agreement results in the separation of the voting stated;
rights of a stockholder from his other rights (DE 0. Those present and absent; and
LEON & DE LEON Jr., supra at 505). 0. Every act done or ordered done at the meeting.

Right of Inspection Note: Upon demand of any director, trustee,


Books Required to be Kept by a Corporation stockholder (D/T/SH/M) or member, the following
0. Book of all business transactions; must be stated in the Book of Minutes:
0. Book of Minutes of all meetings of stockholders or
members; 0. Time when any D/T/SH/M entered or left the
0. Book of Minutes of all meetings of directors or meeting;
trustees; and 0. Record of yeas or nays on any motion or
0. Stock and transfer book (STB), in case of stock proposition; and
corporations (CORPORATION CODE, Sec. 74). 0. The protest of any D/T/SH/M on any motion or
proposition (CORPORATION CODE, Sec. 74).
Corporate Records Required by the SEC to be
Kept and/or Registered: Right to Inspect Corporate Books
0. Books of Account; Persons Given the Right to Inspect Corporate
0. List of Stockholders or Members; and Books:
0. Financial Records. 0. Any director, trustee, stockholder or member;
0. Voting trust certificate holder;
Requirements: 0. Stockholder of a sequestered company; and
1. Records must be kept at the principal office of the 0. Beneficial owner of shares.
corporation;
1. Any director, trustee, stockholder or member shall Rights of Stockholders to Corporate Books and
have the right to inspect the records of all Records
business transactions and the minutes of any 1. Right of inspection;
meetings; 1. Right to demand a list of stockholders;
1. The stockholder may demand a copy of the 1. Right to demand a detailed auditing of business
excerpts of the records or minutes; and expenditures;

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214 2017 CENTRALIZED BAR OPERATIONS
1. Right to examine books of the corporation’s 1. The right must be exercised during reasonable
subsidiary; hours on business days;
1. Right to Financial Statements (CORPORATION 1. The person demanding the right has NOT
CODE, Sec. 75). improperly used any information obtained through
any previous examination of the books and
Basis of the Right to Inspection records of the corporation; and
0. The right to inspect the books of the corporation 1. The demand is made in good faith or for a
rests on the fact of beneficial ownership of the legitimate purpose (CORPORATION CODE, Sec.
corporate property and assets through ownership 74).
of shares;
0. The stockholders are entitled to inspect the books Note: The right extends, in consonance with
and records of a corporation in order for them to equity, good faith, and fair dealing, to a foreign
investigate the conduct of the management, subsidiary wholly-owned by the corporation.
determine the financial condition of the
corporation, and generally take an account of the Nos. 2 and 3 are defenses available to a director,
stewardship of the officers and directors; trustee or officer held liable.
0. The evident purpose of the law in granting
stockholders the right is to protect small and Remedies if Inspection Denied:
minority stockholders from the power of the 0. Mandamus (RULES OF COURT, Rule 65);
majority and from mismanagement by its officers 0. Damages; and
as well as to ascertain, establish and maintain 0. Criminal Suit (CORPORATION CODE, Sec. 144).
their rights and intelligently perform their
corporate duties; and Pre-Emptive Right
0. The SEC’s power of supervision and control over The preferential right of shareholders to subscribe to
all corporations (SEC Opinion, September 14, all issues or disposition of shares of any class in
1998). proportion to their present shareholdings
(CORPORATION CODE, Sec. 39).
Extent of the Right of Inspection
The right to inspect the books and records of the It may be waived and may be denied in the AOI or an
corporation includes, as an incident of the right to amendment thereto. Such a denial is not against
make copies, abstracts and memoranda of their public policy.
contents.
Note: Whenever the capital stock of a corporation is
The right of inspection is personal but the inspection increased and new shares of stock are issued, the
and examination may be made by any proper new issue must be offered first to the stockholders
representative or attorney-in-fact either with or without who are such at the time the increase was made in
the attendance of the director. proportion to their existing shareholdings.

Trade secrets are those which the corporation may Purpose: To enable the shareholder to retain his
undoubtedly keep secret notwithstanding the right of proportionate control in the corporation and to retain
inspection given to stockholders. his equity in the surplus (SEC Opinion, August 11,
1997).
It covers all books of the corporation including journal,
ledger, financial statements, income tax returns, Instances when Pre-emptive Right is Available:
vouchers, receipts, contracts and all papers pertaining 0. All issues and disposition;
to the operation of the corporation which are of interest 0. Issuance of unsubscribed shares which are part
to its stockholders. of the original capital stock;
0. Increase if capital stock to the extent of the
The right to inspect extends to books and records of additional amount;
wholly owned subsidiary of the corporation 0. Issuance of unissued shares; and
(Gokongwei v. SEC, supra). 0. Treasury shares.

It is the RTC and NOT the Sandiganbayan which has Reason: When a corporation acquires treasury
jurisdiction over a stockholders’ suit to enforce its shares, they become retired and even cease to
rights of inspection under the Corporation Code where affect the outstanding capital stock. However,
the case does not involve a sequestration-related when reissued by the corporation, these shares
incident, but an intra-corporate controversy (Abad v. re-acquire their voting rights, hence will affect the
PHILCOMSAT, G.R. No. 200620, March 18, 2015). voting control of the stockholders over the
outstanding capital stock.
Limitations on the Right of Inspection:

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Denial of Pre-Emptive Right
This extends to shares issued in good faith in Answer: X shareholder does not have pre-emptive
exchange for property needed for corporate purposes right with the remaining 900,000 of the original 1M
or in payment of previously contracted debts ACS. But he can exercise pre-emptive right with the
(CORPORATION CODE, Sec. 39). new 200,000 shares since they are considered
Instances when Pre-emptive Right is NOT unissued shares.
Available: (PREP-DeWN)
0. Shares to be issued to comply with laws requiring Pre-Emptive Right v. Right of First Refusal
stock offering or minimum stock ownership by the Pre-Emptive Right Right of First Refusal
Public; Arises only by virtue of
0. It does not apply to shares that are being May be exercised even
contractual stipulations
Reoffered by the corporation after they were when there is no
but is also granted
initially offered together with all the shares.; express provision of
under the provisions on
0. Shares issued in good faith, with the approval of law.
Close Corporation.
the stockholders representing two-thirds (2/3) of Can only be exercised
the outstanding capital stock, in Exchange for May be exercised by by the owner and not
property needed for corporate purposes; mere trustee or mere trustee or
0. Shares issued, with the approval of the conservator (Republic conservator as it is an
stockholders representing two-thirds (2/3) of the v. Sandiganbayan, G.R. act of ownership
outstanding capital stock, in Payment of Nos. 107789 & 147214, (Republic v.
previously contracted debts; April 30, 2003). Sandiganbayan,
0. In case the right is Denied in the AOI or an supra).
amendment thereto Pertains to
0. Waiver of the right by the stockholder; unsubscribed portion of Exercisable against
0. In case of Non-stock corporations, where the the authorized capital another stockholder of
assignors have previously exercised their pre- stock. A right that may the corporation of his
emptive rights to subscribe to new shares. be claimed against the shares of stock.
Otherwise, the pre-emptive right attached to the corporation.
original stock would be exercised twice (SEC
Opinion, November 28, 1990). The mutual right of first refusal in favor of foreigner
stockholders over shares of a company that owned land
Note: If the shares of a corporation are offered and in the Philippines does not constitute violation of the
not subscribed or purchased by the stockholders and provisions of the Constitution limiting transfer of land to
the shares are being offered again, there is no pre- aliens. The right pertains to the shares of stock and NOT
emptive right with respect to the latter offer of shares the land itself (J.G. Summit Holdings, Inc. v. CA, G.R.
(Benito v. SEC, G.R. No. L-56655, July 25, 1983). No. 124293, January 31, 2005).

Additional Issues of Originally Authorized Shares Appraisal Right


General Rule: There is no pre-emptive right. It is the right to demand payment of the fair value of his
shares, after dissenting from a proposed corporate
Reason: This is on the theory that when a corporation action involving a fundamental change in the corporation
at its inception offers its first shares, it is presumed to in the cases provided by law (DE LEON & DE LEON Jr.,
have offered all of those which it is authorized to issue supra at 653).
(Dee v. CA, G.R. No. L-60502 July 16, 1991).
Activity Period
Exception: Within 30 days after the
When a corporation at its inception offers only a Stockholder’s written
date on which the vote
specified portion of its authorized capital stock for demand on the
on the proposed
subscription, there would be pre-emptive right as to corporation for the
corporate action was
the remaining portion thus offered for subscription. payment of his shares.
taken.
Appraisal of 3
Unless there is an express restriction in the AOI, the disinterested persons
pre-emptive right of the stockholder is transferable. Within 60 days from the
in case of
date the corporate
disagreement between
Illustration: A Corporation has 1M Authorized Capital action was approved by
the stockholder and
Stock. X shareholder subscribed to only 100,000 the stockholders.
corporation of the fair
shares. Suppose A Corporation increases its ACS by value of the shares.
amendment of its AOI by an additional 200,000 Payment by the Within 30 days after
shares.May X exercise his pre-emptive right? To what corporation of the such award was made.
extent can he exercise his right?

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216 2017 CENTRALIZED BAR OPERATIONS
award of the 1. Upon payment of the agreed or awarded price, the
appraisers. stockholder shall transfer his shares to the
Immediately after the corporation (CORPORATION CODE, Sec. 82).
Restoration of voting passage of 30 days
and dividend rights to after the award and the Conditions for Exercise of Appraisal Right (AIDS-
the dissenting dissenting stockholder FUT)
stockholder. is still not paid the value 0. Dissenting stockholder must have voted Against
of his shares. the proposed action (CORPORATION CODE,
Submission by Sec. 82);
stockholder of his 0. Any of the Instances set forth by law must be
Within 10 days after present (CORPORATION CODE, Sec. 81);
certificates of stock to
demanding payment 0. Demand for payment must be made within 30
the corporation for
for the stockholder’s days from the date vote is taken thereon
notation that such
shares. (CORPORATION CODE, Sec. 82); Commented [AM22]: Source
shares are dissenting
shares.
Note: Failure to make demand shall be deemed a
Instances when Appraisal Right may be waiver.
Exercised: (ASIMA)
0. An Amendment to the articles that has the effect 0. Submission by withdrawing stockholder of his
of: shares to the corporation for notation of being
. Changing or Restricting The Rights of dissenting stockholder within 10 days from written
Shareholders; or demand (CORPORATION CODE, Sec. 86);
. Of Authorizing Preferences over those of 0. Price must be based on Fair value as of the day
Outstanding Shares; or prior to date on which vote was taken
. Changing The Term of Corporate Existence (CORPORATION CODE, Sec. 82);
(CORPORATION CODE, Sec. 81); 0. Payment must be made only when the corporation
0. Sale, encumbrance or other dispositions of all or has Unrestricted retained earnings in its books
substantially all of the corporate property or assets (CORPORATION CODE, Sec. 82); and
(CORPORATION CODE, Sec. 81);
0. Investment of corporate funds in another Note: Although at the time of dissent, the
corporation or in a purpose other than the primary corporation has a deficit, subsequent existence of
purpose (CORPORATION CODE, Sec. 42); unrestricted retained earnings would entitle the
0. Merger or consolidations (CORPORATION dissenting stockholder of his appraisal right
(Turner v. Lorenzo Shipping Corporation, G.R.
CODE, Sec. 81);
No. 157479, November 24, 2010).
0. In a close corporation, a stockholder may, for Any
reason, compel the corporation to purchase his
shares when the corporation has sufficient assets 0. Stockholder must Transfer his shares to the
in its books to cover its debts and liabilities corporation upon payment by the corporation
exclusive of capital stock (CORPORATION (CORPORATION CODE, Sec. 82).
CODE, Sec. 105).
Note: If the corporation unjustifiably refuses to
Note: The appraisal right does not normally pay the dissenting stockholder despite the full
belong to a stockholder as a matter of absolute compliance with all the requirements for a valid
right; otherwise, a stockholder can withdraw from exercise of appraisal right and despite the fact that
a corporation anytime by returning his share and the corporation has sufficient unrestricted retained
getting back his capital, which is truly violative of earnings, the aggrieved stockholder may file the
the trust fund doctrine (SEC Opinion, January 11, appropriate action before the proper RTC to
1982). compel the corporation to allow him to exercise his
appraisal right (SEC Opinion, October 1, 2001).
How Right is Exercised
1. The dissenting stockholder shall make a written When Right to Payment Ceases
demand on the corporation within 30 days after General Rule:
the date on which the vote was taken for the A dissenting stockholder who demands payment of his
payment of the fair value of his shares; shares is no longer allowed to withdraw from his
1. If the proposed corporate action is implemented or decision.
effected, the corporation shall pay such
stockholder, upon surrender of the corresponding
certificate of stock within 10 days after demanding Exceptions: (C-DAN)
payment of his shares; and 1. The corporation Consents to the withdrawal;

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2017 CENTRALIZED BAR OPERATIONS
1. The proposed corporate action is Disapproved by Kinds:
the SEC where its approval is necessary; 0. Individual Suit – an action brought by a
1. The proposed corporate action is Abandoned or stockholder against the corporation for direct
rescinded by the corporation; or violation of his contractual rights.
1. The Commission determines that such 0. Representative Suit – one brought by a person
stockholder is Not entitled to appraisal right in his own behalf and on behalf of all similarly
(CORPORATION CODE, Sec. 84). situated.
0. Derivative Suit – one brought by one or more
Valuation Date stockholders or members in the name and on
The fair value of the shares of the dissenting behalf of the corporation to redress wrongs
stockholder is determined as of the day PRIOR to the committed against it or to protect or vindicate
date on which the vote was taken notwithstanding any corporate rights, whenever the officials of the
appreciation or depreciation in value of the shares in corporation refuse to sue or are the ones to be
anticipation of such corporate action sued or hold control of the corporation (Ching v.
(CORPORATION CODE, Sec. 82). Subic Bay Golf & Country Club, Inc., G.R. No.
174353, September 10, 2014).
Who Bears Costs of Appraisal
General Rule: The corporation shall bear cost of Requisites of Derivative Suit: (SICAN)
appraisal. 0. Party bringing the suit should be a Shareholder as
of the time of the act or transaction complained of;
Exception: The fair value ascertained by the 0. Exhaustion of Intra-Corporate Remedies;
appraisers is approximately the same as the price
which the corporation may have offered to pay the Note: The exhaustion of intra-corporate remedies
stockholder. In such case, the stockholder shall bear cannot be dispensed with even if the company is
the costs (CORPORATION CODE, Sec. 85). a family corporation. There is nothing in the
pertinent laws or rules supporting the distinction
Notation on Certificate(s); Rights of Transferee between, and the difference in the requirements
Effects of Transfer of Dissenting Shares: for, family corporations vis-à-vis other types of
0. The transferee shall become a regular corporations, in the institution by a stockholder of
stockholder with the right to receive all dividend a derivative suit (Yu v. Yukayguan, G.R. No.
distributions which would have accrued to such 177549, June 18, 2009).
shares;
0. The right of the transferor as a dissenting 0. Cause of action actually devolves on the
stockholder to be paid the fair value of the shares corporation;
shall cease (CORPORATION CODE, Sec. 86). 0. Appraisal Rights not available; and
0. Not a Nuisance or harassment suit.
Effect of Demand and Termination of Right (VILLANUEVA-CASTRO, supra at. 120-121).
0. All rights accruing to such shares shall be
suspended from the time of demand for payment Note: The complaint must specifically allege the
of the fair value of the shares until either the fraudulent act of the director, trustee or officer so
abandonment of the corporate action or the that the complaint will not be classified as a
purchase of the said shares by the corporation; harassment suit (Guy v. Guy, G.R. No. 189486,
0. The dissenting stockholder shall be entitled to September 5, 2012).
receive payment of the fair value of his shares as
agreed upon between him and the corporation or Stockholder a Nominal Party
as determined by the appraisers chosen by them; The suing stockholder is regarded as a nominal party,
0. If not paid within 30 days after the award, his with the corporation as the real party in interest
voting and dividend rights shall be immediately (VILLANUEVA, supra at 472).
restored;
0. Upon such payment, all his rights as stockholder The corporation should be made a party, in order to
are terminated, not merely suspended. But if make the Court's judgment binding upon it, and thus
before he is paid the proposed corporate action is bar future relitigation of the issues (Republic Bank v.
abandoned, his rights and status as a stockholder Cuaderno, G.R. No. L-22399, March 30, 1967).
shall thereupon be permanently restored; and
0. Payment may be made only if the corporation has The mere trustee of shares registered in his name
unrestricted retained earnings in its books to cover cannot file a derivative suit for he is not a stockholder
the same (CORPORATION CODE, Sec. 83). in his own right (Bitong v. CA, G.R. 123553, July 13,
1998).
Derivative Suit
Actions by Stockholders or Members

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218 2017 CENTRALIZED BAR OPERATIONS
Although, the corporation is not a complainant in the 1. Liability for watered stock;
criminal action, the subject of the falsification was the 1. Liability for dividends unlawfully paid; and
corporation’s project and the falsified documents were 1. Liability for failure to create corporation.
corporate documents. Therefore, the corporation is a
proper party in the petition for certiorari because the In addition, he may become personally liable for
proceedings in the criminal case directly and damages or otherwise for any wrongful disposition of
adversely affected the corporation (Chua v. CA, GR corporate assets, breaches of fiduciary duties, fraud,
No. 150793, November 19, 2004). gross negligence, unauthorized acts, violation of law
or improper use of corporate form (DE LEON & DE
Rights and Remedies of Stockholders LEON Jr., supra at 584).
Rights as to Control and Management:
(AVEMECA)
0. To Adopt/amend/repeal the by-laws or adopt new S UB SCRIPTION C ONTRA CT
by-laws (CORPORATION CODE, Secs. 46 & 48);
0. To have the corporation Voluntarily dissolved
Ways to Become a Stockholder of a Corporation:
(CORPORATION CODE, Secs. 118 & 119);
0. Subscription contract with the corporation;
0. To Elect & remove directors (CORPORATION
0. Purchase or acquisition of shares from existing
CODE, Secs. 24 & 28);
stockholders;
0. To attend and vote in person/ proxy at
0. Purchase of treasury shares from the corporation;
stockholder’s Meetings (CORPORATION CODE,
0. Foreclosure of Pledged or Mortgaged shares;
Secs. 50 & 58);
0. Execution Sale; and
0. To Enter into a voting trust agreement
0. Death of Stockholder (SUNDIANG & AQUINO,
(CORPORATION CODE, Sec. 59);
supra at 245).
0. To Compel the calling of meetings
(CORPORATION CODE, Sec. 50); and
Subscription Contract
0. To Approve certain corporate acts
It is any contract for the acquisition of unissued stock
(CORPORATION CODE, Sec. 52).
in an existing corporation or the shares of a
corporation still to be formed shall be deemed a
Proprietary Rights: (Pre-TRIP)
subscription (CORPORATION CODE, Sec. 60).
0. To Pre-emption in the issue of shares
(CORPORATION CODE, Sec. 39);
Nature of Subscriptions Contracts
0. To Transfer of stocks in the corporate book
The subscription contract is a consensual contract that
(CORPORATION CODE, Sec. 63);
is perfected upon the meeting of the minds of the
0. To Receive dividends when declared
parties. The name of the subscriber is recorded in the
(CORPORATION CODE, Sec. 43);
stock and transfer book, and from that time, such
0. To Issuance of certificate of stock/ other evidence
subscriber becomes a stockholder of record entitled to
of stock ownership (CORPORATION CODE, Sec.
all the rights of a stockholder. Until the stocks are fully
63); and
paid, it continues to be a subsisting liability that is
0. To Participate in distribution of corporate assets
legally enforceable.
upon dissolution (CORPORATION CODE, Secs.
118 & 119).
Even if subscribers have legal standing to sue for
rescission of subscription contract based on breach of
Remedial Rights: (ReBIRD)
contract, such action cannot prosper since rescission
0. To be furnished recent financial statements/
will violate the Trust Fund Doctrine and the
Reports of the corporation’s operations
procedures for the valid distribution of assets and
(CORPORATION CODE, Sec. 75);
property under the Corporation Code (Ong Yong v.
0. To Bring suits;
Tiu, G.R. No. 144476, April 8, 2003).
0. To Inspect corporate books (CORPORATION
CODE, Sec. 74);
Note: A subscription contract may cover one or more
0. To Recover stock unlawfully sold for delinquency
shares. But even if it covers two or more shares, the
(CORPORATION CODE, Sec. 69); and
contract is an indivisible contract.
0. To Demand payment in the exercise of appraisal
right (CORPORATION CODE, Secs. 41 & 81).
Trust Fund Doctrine (TFD)
The subscribed capital stock of the corporation is a
Liabilities of Stockholders
trust fund for the payment of debts of the corporation
1. Liability to the corporation for unpaid subscription;
which the creditors have the right to look up to satisfy
1. Liability to the corporation for interest on unpaid
their credits, and which the corporation may not
subscription;
dissipate. The creditors may sue the stockholders
1. Liability to creditors of the corporation on the
directly for the latter’s unpaid subscription.
unpaid subscription;

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2017 CENTRALIZED BAR OPERATIONS
Application of the TFD: There can be a subscription only with reference to
0. Where the corporation has distributed its capital stock, which has never been issued (i.e., to an original
among the stockholders without providing for the issue of stock) or to an increase of a capital stock. The
payment of creditors; subscription in case of the former may be made before
0. When there is payment of dividends without or after incorporation. But in case of the latter, it is
unrestricted retained earnings; always made after incorporation.
0. Where it had released the subscribers to the
capital stock from their subscriptions; Kinds of Subscription Contract
0. Where it has transferred the corporate property in 0. Pre-incorporation subscription – a subscription
fraud of its creditors; for shares of stock of a corporation still to be
0. Where the corporation is insolvent; formed.
0. Prohibition against the issuance of watered It is one entered into before incorporation. It
stocks; constitutes a binding contract among the
0. Purchase of a corporation of its own shares; and subscribers (DE LEON & DE LEON Jr., supra at
0. Decrease of authorized capital stock to the 513).
prejudice of the corporation’s creditors
(SUNDIANG & AQUINO, supra at 241). When pre-incorporation subscription is
irrevocable:
Additional Paid-in Capital (APIC) is considered a . For a period of at least six (6) months from the
contribution of a stockholder over and above the par date of subscription unless:
value of shares and falls under the concept of . All of the other subscribers consent to the
corporate Trust Fund upon its recording in the books revocation.
of the corporation (SEC Opinion dated June 11, 2004). . The incorporation fails to materialize.
. It shall likewise be irrevocable after the
Subscription v. Purchase submission of the AOI to the SEC.
Subscription Purchase
Note: A person who subscribes for a stock in
As to Period
a corporation to be formed and who does not
Can be made before or Can only be made after consent to any change in the subscription is
after incorporation. incorporation. not liable if the corporation afterwards formed,
As to Payment is a different corporation from that
The purchaser under a contemplated by the subscription (Salmon,
Generally, the Dexter & Co. v. Uson, G.R. No. L-23608,
deed of assignment or
subscriber need not March 17, 1925).
sale shall pay
pay unless there is a
according to
call. Underwriting Agreement v. Stock Subscription
agreement.
Agreement
As to Release from Obligation to Pay
Underwriting Stock Subscription
Agreement Agreement
Subscriber cannot be The stockholders who
released from his sells his shares can As to Obligation
obligation to pay the condone the obligation The signers obligate
The obligation of the
subscription price. to pay the purchase themselves to
signer to the
price. purchase the shares of
purchasers and to the
As to Statute of Frauds stock which cannot be
public is absolute.
sold.
The Statute of Frauds
The Statute of Frauds As to Commission
applies if the purchase
does not apply to There is no
price is not less than Underwriters are given
subscription contracts. commission.
P500. commission.

General Rule: Only persons whose ownership are As to Becoming a stockholder


registered in the stock and transfer book are The signer can refuse He becomes a
considered stockholders of record. to become a stockholder of the
stockholder/ member of company and is liable
Exception: In case of original subscribers, they the company. to pay the amount due.
become shareholders from the time of the issuance of
the Certificate of Incorporation (Castillo v.
0. Post-incorporation subscription – a
Balinghasay, G.R. No. 150976, October 18, 2004).
subscription entered into after the incorporation

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220 2017 CENTRALIZED BAR OPERATIONS
for the acquisition of unissued stock (DE LEON & In view of numbers (1) and (2), payment of shares
DE LEON Jr., supra at 513). of stocks must be actually received by the
corporation. Hence receivables cannot be treated
Note: The subscriber becomes a stockholder as cash actually received since actual payment
upon acceptance by the corporation of the has yet to take place in the future. They may
subscriber’s offer or by the subscriber of the however be considered as property payment
corporation’s offer even though he has not paid for subject to verification by the SEC of its existence
his shares unless the subscription agreement or and collectability and the condition that the same
charter otherwise provides (Id.). shall be held in escrow until actual payment of the
amount (SEC Opinion, December 17, 1993).
0. Conditional Subscription – one, which is subject
to a condition. The subscriber does not become a U.S. dollars representing payment on subscription
stockholder until the condition is fulfilled (Id. at of a proposed corporation should be duly
514). converted into Philippine peso; otherwise, they
shall be considered payment by way of property
0. Absolute Subscription – one where the (SEC Opinion, July 28, 1986).
subscriber becomes liable on the subscription and
acquires the rights of a stockholder from the time Financial instruments such as notes, shares of
it is accepted (Id.). stocks and bonds may be classified as personal
property; hence, they may be legally accepted as
0. Subscription with a special term – one where capital contribution (SEC Opinion, January 25,
the corporation agrees to do something, the 1995).
fulfillment of which not being a condition
precedent to the accrual of a liability of the 0. Amount transferred from unrestricted retained
subscriber or the acquisition of the rights of a earnings to stated capital;
stockholder (Id.).
Note: Declaration of stock dividends involves
Valid Considerations in Subscription Agreements: issuance of stocks directly paid from amounts
(CaPAL-PO) transferred from unrestricted retained earnings to
0. Cash actually received; stated capital (CORPORATION CODE, Sec. 62,
0. Property, tangible or intangible, actually received par. 5). Since the retained earnings have already
AND necessary or convenient for its use and been applied as payment to the issuance of
lawful purposes; shares covering the stock dividend declaration,
the same can no longer be reapplied as payment
Requisites: (FAVAN) to subsequent subscription rights (SEC Opinion,
. It must be subject to a Fair valuation equal to December 7, 1989).
the par or issued value of the stock issued;
. The property is Actually received by the 0. Labor or services actually rendered to the
corporation; corporation;
. The Valuation thereof shall initially be Note: The transaction must be in good faith and
determined by the incorporators or the board no fraud is perpetrated upon other stockholders
of directors; and creditors (SEC Opinion, January 7, 1982).
. The valuation is subject to the Approval by the
SEC; and Future services are not acceptable.
. The property is Necessary or convenient for
its use and lawful purposes; Compensation payable for services actually
rendered to the corporation is credit which is
Note: Intangible properties that may be used property and whose value is ascertainable. An
as consideration include patents or copyrights agreement to issue stock for services before the
and if intellectual property will serve as a same is rendered is void and the corporation is not
consideration, the corporation must submit to estopped to deny the services constituted
the SEC a copy of the Certificate of payment of the stock subscription even though it
Registration of the intellectual property right has received the benefit thereof (SEC Opinion,
together with an appraisal report and a Deed April 2, 1976).
of Assignment (AQUINO, supra at 484).
0. Previously incurred corporate indebtedness;
A mining claim is acceptable because it is an
intangible property that is capable of valuation Note: The indebtedness involved is one that is
(SEC Opinion, June 10, 1999). acknowledged by the board.

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The set-off is in effect a payment to the creditor stockholder and he is not entitled to dividends, voting
with shares of stock of the debtor-corporation in rights or other prerogatives and attributes of a
the form of property (CORPORATION CODE, stockholder.
Sec. 62[2]) in lieu of cash (CORPORATION An entity shall classify a contract to deliver its own
CODE, Sec. 62[1]) at the option of the corporation; equity instruments under equity as a separate account
and it is legally feasible to issue stock in favor of a (e.g., Deposit for Stock Subscription) from
subscriber who paid the obligations of the “Outstanding Capital Stock” if and only if, all of the
corporation to a third party (SEC Opinion, following elements are present as of end of the
February 15, 1974). reporting period:
0 The unissued authorized capital stock of the entity
0. Outstanding shares in exchange for stocks in the is insufficient to cover the amount of shares
event of reclassification or conversion indicated in the contract;
(CORPORATION CODE, Sec. 62). 0 There is Board of Directors’ approval on the
proposed increase in authorized capital stock (for
Note: A corporation may reclassify its shares by which a deposit was received by the corporation);
amending its AOI and exchange outstanding 0 There is stockholders’ approval of said proposed
shares of stockholders for stocks reclassified or increase; and
converted from one class to another. Thus, a 0 The application for the approval of the proposed
holder of preferred shares with conversion increase has been filed with the Commission.
privilege may give his convertible preferred
shares as a consideration for the issuance of a It is understood from the foregoing that there is a
certain number of common shares (DE LEON & subscription agreement which, among other things,
DE LEON Jr., supra at 532). states that the corporation is not contractually obliged
to return the consideration received and that the
Prohibited Consideration corporation is obliged to deliver a fixed number of its
Shares of stock shall not be issued in exchange for own shares of stock for a fixed amount of cash or
promissory notes or future services. However, there is property paid or to be paid by the contracting party
no prohibition on the use of checks, bills or notes in (SEC Financial Reporting Bulletin 006 dated January
payment of the “cash” consideration. 24, 2013).

A corporation cannot issue its stock as a gratuity but it Remedies to Enforce Payment of Subscription
is lawful for a corporation to issue watered stock as a 0. Delinquency Sale
bonus to officers or employees as incentives or for Put up the unpaid shares for sale and dispose it in
services actually rendered to the corporation for in a delinquency sale for the account of the
such case, the stock cannot be considered gratuitous delinquent stockholder.
(SEC Opinion, Dec. 1, 1988; Sabalvaro v. Erlanger &
Galinger, Inc., G.R. No. L-43045, August 17, 1937). The shares subscribed are first-hand shares and
their consideration shall form part of the capital
Amount of Consideration asset. Thus, if it is delinquent, the corporation must
Shares of stock shall not be issued for a consideration still pay for it to avoid diminution of its assets.
less than the par or issued price thereof
(CORPORATION CODE, Sec. 65) except treasury 0. Court action
shares so long as the price is reasonable Forfeiture of delinquent stock, without the
(CORPORATION CODE, Sec. 9). corporation paying for it under Sec. 68, is not
authorized under the Code. It cannot forfeit in its
Note: It is implied from Sec. 62 that a corporation may favor delinquent shares to be taken up in the
issue shares of stock at a price above the par or corporation’s books as treasury shares, in case no
issued value. Such value does not necessarily reflect bidder in a delinquent sale.
the true or actual value of stock since book or market
value normally fluctuates. The prescriptive period is 10 years from the time
the right of action accrues if based on a written
Deposit on Stock Subscription subscription contract (CIVIL CODE, Art. 1144(1))
It is an amount of money received by the corporation or within 6 years if based on a verbal subscription
as a deposit with the possibility of applying the same contract.
as payment for future issuance of capital stock (CIR v.
First Express Pawnshop Company, G.R. Nos.
172045-46, June 16, 2009).

Note: The person making a deposit on stock


subscription does not have the standing of a

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222 2017 CENTRALIZED BAR OPERATIONS
Delinquent Shares It must contain:
UNPAID SUBSCRIPTION . Amount due on each subscription;
ACCRUED . All accrued interest; and
INTEREST, if any . Date, time and place of the sale.
CALL
Note: The resolution under Sec. 68 is different
Subject to the provisions of the contract of
from the call under Sec. 67. The former orders the
subscription, the board of directors may at any sale of delinquent stock while the latter makes an
time declare due and payable unpaid unpaid price due and demandable.
subscriptions
ACCRUED 1. Notice. Notice of said sale, with a copy of the
INTEREST, if any resolution, shall be sent to every delinquent
DUE AND PAYABLE stockholder either personally or by registered
Payment of any unpaid subscription plus accrued mail;
interest shall be made on the date specified in 1. Publication. The notice shall furthermore be
the contract of subscription or on the date stated published once a week for two (2) weeks in a
newspaper of general circulation in the province
in the call. Failure to pay on such date shall
or city where the principal office of the corporation
render the entire balance due and payable and is located;
shall make the stockholder liable for interest at 1. Sale. The delinquent stock shall be sold at the
the legal rate on such balance public auction to be held not less than thirty (30)
30 DAYS, LEGAL INTEREST days nor more than sixty (60) days from the date
or as provided in the by-laws the stocks become delinquent;
DELINQUENT It may be cancelled by:
If within thirty (30) days from the said date no . Payment on or before date of the sale
payment is made, all stocks covered by said . Order of the board to that effect
1. Transfer. The stock so purchased shall be
subscription shall thereupon become delinquent
transferred to such purchaser in the books of the
and shall be subject to sale as hereinafter corporation and a certificate for such stock shall
provided, unless the board of directors orders be issued in his favor; and
otherwise. 1. Credit Remainder. The remaining shares, if any,
LEGAL INTEREST or as shall be credited in favor of the delinquent
provided in the by-laws stockholder who shall likewise be entitled to the
RESOLUTION ORDERING SALE OF issuance of a certificate of stock covering the
DELINQUENT STOCK same (AQUINO, supra at 511-512).
LEGAL INTEREST or as
provided in the by-laws Highest Bidder in a Delinquency Sale
NOTICE OF SALE 0. The person participating in the delinquency sale
Notice with a copy of the resolution shall be sent who offers to pay the full amount of the balance of
to every delinquent stockholder either personally the subscription together with the accrued
interest, costs of advertisement and expenses of
or registered mail. It shall also be published once
sale, for the smallest number of shares.
a week for 2 consecutive weeks in a newspaper 0. If there is no bidder as mentioned above, the
of general circulation. corporation may bid for the same, and the total
LEGAL INTEREST or as amount due shall be credited as paid in full in the
provided in the by-laws books of the corporation. Such shares shall be
SALE (PUBLIC AUCTION) considered as treasury shares (CORPORATION
Not be less than thirty (30) days nor more than CODE, Sec. 68).
sixty (60) days from the date the stocks become
delinquent. The delinquent stock shall be sold to Note: The board is not bound to accept the
such bidder who shall offer to pay the full amount highest bid unless the contrary appears (DE
LEON & DE LEON Jr., supra at 600).
of the balance on the subscription with accrued
interest, costs of advertisement and expenses of Reason: In a public sale, the bidder is the one
sale, for the smallest number of shares or making the offer to purchase which the
fraction of shares corporation is free to accept or reject it (Id.)

Procedure for Delinquency Sale: (ReNo-PuSa-TC) Illustration:


1. Resolution. The board shall issue resolution Suppose X subscribed to 5 shares with a par value of
ordering the sale of delinquent stock. P100 each, paying P300 as initial payment. X failed to

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2017 CENTRALIZED BAR OPERATIONS
pay the balance upon call hence his stock was Note: The prescriptive period in case of subscription
declared delinquent. The interest, expenses and cost of shares begins to run only from the time the board
of sale amount to P50. of directors declare that the balance is due and
payable (Garcia v. Suarez, G.R. No. 45493, April 21,
a. Bids: A, P250 for 2 shares; B, P250 for 3 shares; 1939).
and C, P250 for 4 shares. A is the highest bidder.
Retains 3 shares and A will own 2 shares. Effect of Failure to Pay Subscription:
0. If the subscription contract fixes the date for
b. Bids: A, P200 for 2 shares; B, P250 for 4 shares; payment, failure to pay on such date shall render
C, P240 for 3 shares. B is the highest bidder the entire balance due and payable with interest.
because he is the only one who offers the full Thirty (30) days therefrom, if still unpaid, the
amount due. X retains 1 share (Id.). shares become delinquent, as of the due date,
. and subject to sale, unless the board declares
When Sale may be Questioned otherwise; or
The action is filed on the ground of irregularity or 0. If no date is fixed in the subscription contract, the
defect in the notice of sale, or in the sale of the board of directors can make the call for payment,
delinquent stock; and specify the due date. The notice of call is
1. The party seeking to maintain such action first mandatory. A mere demand is insufficient. The
pays or tenders to the party holding the stock the failure to pay on such date shall render the entire
sum for which the same was sold with interest balance due and payable with interest. Thirty (30)
from the date of the sale at the legal rate; and days therefrom, if still unpaid, the shares become
1. The complaint was filed within six (6) months from delinquent, as of the date of call, and subject to
the date of the sale (CORPORATION CODE, Sec. sale, unless the board declares otherwise
69). (CORPORATION CODE, Sec. 67).

Interest on Unpaid Subscriptions Call


There is interest on unpaid subscription only when The resolution or formal declaration of the board that
required by the by-laws or subscription contract the unpaid subscriptions are due and payable. Commented [AM23]: Source
(CORPORATION CODE, Sec. 66).
Requisites for a Valid Call
Note: A mere resolution of the board of directors to 0. Must be made in the manner prescribed by law;
that effect would not make the subscribers liable 0. Must be made by the board of directors; and
unless the board is empowered by the by-laws to 0. Must operate uniformly upon all the shareholders.
charge interest on unpaid subscriptions. But even if
not so required, a delinquent stockholder shall be Where call is necessary, notice must be given to the
liable to pay interest from date of delinquency stockholder concerned. A call without notice to the
(CORPORATION CODE, Sec. 68). subscriber is practically no call at all (Pike v. Dangar
Co., Short Line R.R, 68 Me. 445). The right to notice
The corporation may waive the right to collect interest of call, however, may be waived by the subscriber (DE
on unpaid subscriptions, if it so desires, because it is LEON & DE LEON, Jr., supra at 596).
a right which could be waived (SEC Opinion, March
11, 1969) provided of course that no corporate General Rule: Call by the board is necessary to make
creditors are prejudiced by such waiver. But if the the unpaid subscription due and demandable. A
payment of interest is required by the by-laws, waiver corporation cannot file an action to recover the unpaid
may only be done by amending the by-laws (SEC price if the action is not preceded by call. There can
Opinion, March 20, 1980). be no set-off when there is no call.

Payment of Balance of Subscription Exceptions:


Collection of Unpaid Subscription 1. Date is specified in the subscription agreement;
0. Voluntary Payment and
. Upon the date specified in the subscription 1. When the corporation becomes insolvent. Commented [AM24]: Source
contract; or
. Upon call by the Board of Directors. Payment Without Call
0. Involuntary Payment A stockholder can pay his subscribed shares of stock
. Extra-judicial even if there is no call for their payment. The
. Delinquency sale; or corporation, as creditor, cannot refuse a valid tender
. Application of dividends of payment offered to it (SEC Opinion, September 12,
. Judicial action 1989).

Effects of Delinquency

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224 2017 CENTRALIZED BAR OPERATIONS
0. Upon the stockholder books, the latter controls (Lao v. Lao, G.R. No. L-
. Accelerates the entire amount of the unpaid 21017, February 25, 1924).
subscription;
. Subjects the shares to interest, expenses and Doctrine of Indivisibility of Subscription Contract
costs; A certificate of stock is one, entire and indivisible
. Disenfranchises the shares from any right that contract. It cannot be divided into portions, so that the
inheres to a shareholder, except the right to stockholder shall not be entitled to a certificate until he
dividends (but which shall be applied to any has remitted the full payment of his subscription
amount due on said shares or, in the case of together with any interest or expenses, if any is due
stock dividends, to be withheld by the (SEC Opinion, November 12, 1993).
corporation until full payment of the delinquent
shares (CORPORATION CODE, Sec. 43); Note: All partial payments on one subscription shall
and be deemed applied proportionately among the number
. Stockholder not included in the determination of shares (DE LEON & DE LEON Jr., supra at 565).
of quorum because he is not entitled to vote.
Quasi-Negotiable Certificate of Stock
0. Upon the director owning delinquent shares A certificate of stock is a quasi-negotiable instrument.
. If the delinquent stockholder is a director, the It may be transferred by indorsement, coupled with
director shall continue to be a director but he delivery but the holder thereof takes it without
cannot run for re-election. prejudice to such rights or defenses as the registered
. A delinquent stockholder seeking to be owner’s or transferor’s creditor may have under the
elected as director may not be a candidate for, law except insofar as such rights or defenses are
nor be duly elected to the board. subject to the limitations imposed by the principles
governing estoppel (De los Santos v. McGrath, G.R.
Note: No delinquent stock shall be voted for nor No. L-4818, February 28, 1955).
be entitled to vote or representation at any
stockholders meeting, nor shall the holder be Although it is sometimes regarded as quasi-
entitled to any of the rights of a stockholder except negotiable, it is well-settled that it is non-negotiable,
the right to dividends in accordance with the because the holder thereof takes it without prejudice
provisions of this Code until and unless he pays to such rights or defenses as the registered owner’s or
the amount due on his subscription with accrued transferor’s creditor may have under the law (De los
interest, the cost and expenses of advertisement, Santos v. McGrath, supra).
if any (CORPORATION CODE, Sec. 71). Street Certificate
When a stock certificate is endorsed in blank by the
Quo warranto proceedings may be instituted against owner thereof, it constitutes what is termed as “street
directors elected by delinquent stockholders (SEC certificate,” so that upon its face, the holder is entitled
Opinion, January 8,1976). to demand transfer into his name from the issuing
corporation. Such certificate is deemed quasi-
Certificate of Stock negotiable and as such, the transferee thereof is
It is the paper representation or tangible evidence of justified in believing that it belongs to the holder and
the stock itself and of the various interests therein. It transferor (Guy v. Guy, supra).
expresses the contract between the corporation and
the stockholder (Makati Sports Club, Inc. v. Cheng, Requisites for the Issuance of Certificate of Stock:
G.R. No. 178523, June 16, 2010). (SSD-FS)
0. The certificate must be Signed by the president or
It is not essential to the ownership and/or existence of vice-president, countersigned by the secretary or
the share of stock. It is prima facie evidence that the assistant secretary;
holder is a shareholder in a corporation (Makati Sports 0. The certificate must be Sealed with the seal of the
Club, Inc. v. Cheng, supra). corporation;
0. The certificate must be Delivered;
Note: In the absence of the certificate, the ownership 0. The par value, as to par value shares or full
of stocks may be shown by the record thereof in the subscription as to no par value shares must first
corporate books. But the mere inclusion of a person be Fully paid; and
as a shareholder in the General Information Sheet
filed with the Commission is insufficient proof that one Basis: Doctrine of indivisibility of subscription
is a shareholder in a corporation where there is no
certificate of stock in his name, nor any written 0. The original certificate must be Surrendered
document such as an assignment in his favor, duly where the person requesting the issuance of a
registered in the stock and transfer book of the certificate is a transferee from the stockholder
corporation. As between the GIS and the corporate (Bitong v. CA, supra).

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excess shares, the latter would constitute
Shares of Stock v. Certificate of Stock “watered” stocks; and
Shares of Stock Certificate of Stock 0. If there is no over issue and watering of stocks,
the corporation may be bound to honor the
As to Nature certificate (if duly signed and released by its
Evidence of the authorized officers) in the hands of a holder in
Unit of interest in a holder’s ownership of good faith, reserving a right of recourse that an
corporation. the stock and of his aggrieved party may pursue against the culpable
right as a shareholder. or unjustly enriched party.
As to Classification
Remedies where corporation refuses to issue
Concrete and tangible certificate (MS-DR)
Incorporeal or
property. 1. A Petition for Mandamus
intangible property.
Mandamus should not issue to compel the
As to Condition for Issuance secretary of the corporation to make a transfer of
the stock on the books of the corporation unless it
May be issued by the affirmatively appears that he has failed or refused
May be issued only if
corporation even if the to do so upon demand of the proper person
the subscription is fully
subscription is not fully (Ponce v. Alsons Cement, supra).
paid.
paid.
Note: Mandamus will not lie where the certificate
Notes: There must be a special power of attorney was not indorsed by the owner (Price v. Martin,
executed by the registered owner of the share G.R. No. 37281, November 10, 1933).
authorizing transferor to demand transfer in the stock
and transfer book (Ponce v. Alsons Cement, G.R. No. 1. A suit for Specific performance of an express or
139802, December 10, 2002). implied contract.
1. May sue for Damages where specific
The transferee must present the indorsed certificate to performance cannot be granted.
the corporate secretary who shall effect the transfer in 1. Rescind contract of subscription and recover the
the corporate books, issue a new stock certificate in consideration paid.
favor of the transferee and cancel the former
certificate. Note: Considering that the law does not prescribe a
If there is no indorsement in favor of the transferee, period within which the registration of the transfer of
the transferee may file an action to compel the shares should be effected, the action to enforce the
transferor to make such indorsement. However, the right does not accrue until there has been a demand
same cannot be considered as an intra-corporate and a refusal concerning the transfer (Ponce vs.
controversy because the transferee is not yet a Alsons Cement, supra).
shareholder (Rivera, et al. v. Florendo, et al., G.R. No.
L-57586, October 8, 1986). Modes of Stock Transfer
0. Indorsement and delivery of stock certificate
Only absolute transfers need to be registered. The and to issue a new certificate unless the original
pledge or mortgage itself need not be recorded in the certificate is surrendered for cancellation or is
stock and transfer book, but a chattel mortgage must clearly shown to have been lost, stolen or
comply with the Chattel Mortgage Law, and a pledge destroyed.
would require the shares to be placed in the 0. Transfer made in a separate instrument – while
possession of the creditor/pledgee. The agreement an assignment may be valid and binding between
must appear in a public instrument to take effect the parties despite non-compliance with the
against third persons (Chemphil v. CA, G.R. Nos. requisite endorsement and delivery, it does not
112438-39, December 12, 1995). necessarily make the transfer effective for the
assignee cannot enjoy the status of a stockholder
Where the certificate of stock reflects a greater until and unless the issue of ownership is resolved
volume of shares than the actual number of with finality.
shares issued or to be issued, the following rules 0. Judicial or extra judicial settlement of estate –
may be considered: upon the death of the stockholder, his
0. To the extent that there is an over issue, the administrator or executor becomes vested with
excess issuance (over the authorized capital the legal title of the stock until the settlement and
stock or the stated capital) shall be void as being division of the estate is made (DE LEON & DE
ultra vires; LEON Jr., supra at 551-553).
0. If there is no over issue, but no payment has been
made to cover the par or stated value of the Requirements for Validity of Stock Transfer: (DIR)

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226 2017 CENTRALIZED BAR OPERATIONS
In case of shares represented by a certificate, the 1. Publication. The corporation shall publish a
transfer must strictly comply with the following notice in a newspaper of general circulation
conditions: published in the place where the corporation has
0. There must be Delivery of the certificate; its principal office, once a week for three (3)
0. The share must be Indorsed by the owner or his consecutive weeks at the expense of the
agent; and registered owner of the certificate of stock which
0. To be valid to the corporation and third persons, has been lost, stolen or destroyed;
the transfer must be duly Recorded in the books 1. One (1) Year Waiting Period. There shall be a
of the corporation (Rural Bank of Lipa v. CA, G.R. waiting period of one (1) year from the date of the
No. 124535, September 28, 2001). last publication during which a contest can be
interposed;
Effects of Unregistered Transfer of Shares 1. Contest. If the contest has been presented to said
0. It is valid and binding as between the transferor corporation or if an action is pending in court
and the transferee; regarding the ownership of said certificate of stock
0. It is invalid as to the corporation except when which has been lost, stolen or destroyed, the
notice is given to the corporation for purposes of issuance of the new certificate of stock shall be
registration; suspended until the final decision of the court
0. It is invalid as against corporate creditors and the regarding the ownership of said certificate of
transferor is still liable to the corporation; and stock; and
0. It is invalid as to the attaching or executing 1. Replacement. If there is no contest within the one
creditors of the transferor, as well as subsequent (1) year period, the corporation shall then replace
purchasers in good faith without notice of the the certificate. The replacement of share can only
transfer (DE LEON & DE LEON Jr., supra at 562- be made before the expiration of the one (1) year
563). period if a bond is posted (AQUINO, supra at pp.
528-529)
Where no certificate has been issued or for some
reason it is not in the possession of the stockholder, it Note: The corporation may voluntarily issue new
may be transferred by means of a deed of assignment certificates in lieu of the originals provided that the
but the same must be duly recorded in the books of corporation is certain as to the real owner of the
the corporation (Id. at 545). shares. This is because of the fact that, unless proven
Note: No shares of stock against which the otherwise, the stock and transfer book of the
corporation holds any unpaid claim shall be corporation is the best evidence to establish stock
transferable in the books of the Corporation ownership (VILLANUEVA, supra at 544).
(CORPORATION CODE, Sec. 63, par. 2).
Lost Due to the Fault of the Corporation
Unpaid Claims The procedure prescribed in Sec. 73 is not applicable
Those claims arising from unpaid subscription and not in a proceeding to compel issuance of a certificate to
to any indebtedness which a subscriber may owe the one in whose favor none was never issued by the
corporation arising from any other transactions (China corporation or where upon the facts, the certificate
Banking Corp v. CA, supra). was lost by the corporation (DE LEON & DE LEON,
Jr., supra at p. 631).
Note: A third party buyer of shares that were sold in
an execution sale is entitled to the registration in the When there is clear proof that the original had been
books of the corporation. The pendency of the case destroyed or where the certificate was lost by the
between the judgment debtor and judgment creditor is corporation itself by carelessness, the corporation
not a bar to such registration. However, the sale is may be compelled to use a new certificate (SEC
without prejudice to the proceedings to determine the Opinions dated January 8, 1990 and June 11, 1990).
liability of the parties against each other (Lee vs.
Trocino, G.R. No. 164648, June 19, 2009). When the stock and transfer book has been lost or
destroyed, and the corporation decides to issue new
Lost and Destroyed Certificate of Stock certificates of stock in lieu of the old certificates held
Procedure for Issuance of New Certificate of Stock by existing stockholders, the procedure or formalities
In lieu of Lost, Stolen or Destroyed Certificates: prescribed under Section 73 are not applicable for the
(AVP-1-CR) stockholders should not be made to suffer the
1. Affidavit. The registered owner shall execute and consequences on account of the negligence of
file an affidavit regarding the share and the corporation (DE LEON & DE LEON, Jr., supra at 631).
circumstances regarding its loss;
1. Verification. The corporation shall verify the
affidavit and other information and evidence with N ON - S TOCK C ORPORATION
the books of the corporation;

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Non-Stock Corporation 9. Fraternal;
It is one where no part of its income is distributable as 10. Scientific; and
dividends to its members. (CORPORATION CODE, 11. Similar purpose like:
Sec. 87). a. Trade;
b. Industry;
Requisits of a Non-Stock Corporation c. Chambers; or
1. It does NOT have a capital stock divided into d. any combination thereof (CORPORATION
shares;; CODE, Sec. 88).
2. NO part of its incme is distributble as dividends to
its members; and They are governed by the same rules established for
3. Non-stock corporations may be formed or stock corporations, whenever pertinent, subject
organized for charitable religious, educational, however, to a number of special features.
professional, cultural, civic service, fraternal,
literary,or similar purposes like trade, industry, Note: Political purposes are not specifically included
agricultural and like chambers or any combination in the enumeration of the purposes. Hence, the SEC
thereof. (CORPORATION CODE, Ibid) may reject the AOI if the purpose of the corporation is
to engage in election campaign or partisan political
activity (SEC Opinion, April 10, 1985).
Notes:
1. The non-existence of capital stock is NOT Rules on Conversion
determinative under the codal definition on 1. Stock to non-stock corporation
whether the entity is a “non-stock” corporation; Conversion may be made by mere amendment of
and it is legally possible for a corporation having the AOI.
capital stock to still be considered a non-stock
corporation (e.g. proprietary membership in Effect: The stockholders will become the
leisure/golf clubs). members of the non-stock corporation and thus
2. The non-incurring of profit is NOT determinative will no longer have any pecuniary interest in the
for an entity to be classified as “non-profit” corporation. Neither are they entitled to any share
corporation. Non-stock and non-profit in the profit that may be obtained out of the
corporations may earn profits as an incident to operations or activities of the non-stock
their primary operations, and so long as the profits corporation.
are devoted for their eleemosynary purpose
(VILLANUEVA, Corporate Law, supra at pp. 883- 2. Non-stock to stock corporation
884). A non-stock corporation cannot be converted into
3. Any profit derived by it from any authorized activity a stock corporation by mere amendment of its AOI
cannot be distributed as dividends to its members because the conversion would change the
(DE LEON & DE LEON, Jr., Corporate Law, supra corporate nature from non-profit to profit.
at 663).
4. The granting of financial assistance to its Instead of conversion by amendment of the AOI,
members out of its profits cannot be considered in the corporation may dissolve itself and its
the advancement of its purpose (SEC Opinion No. members may organize a stock corporation.
11-31, July 31, 2011).
5. The provision in corporate charter allowing The conversion without dissolving it first would be
distribution of income does not make one a non- tantamount to distribution of its assets or income
stock corporation. (U.S. Employees Association to its members inasmuch as after its conversion,
vs. U.s. Employees Association, G.R. No. L- the asset of the non-stock corporation would now
36896, August 31, 1981) be treated as payment to the subscriptions of the
4. members who will now become stockholders of
Purposes: the corporation (VILLANUEVA, supra at 902).
Non-stock corporations may be formed or organized
for the following purposes: (ProCuRe-ChEd- Stock v. Non-Stock Corporations
SoLiCiFraS-Sim) Stock Non-Stock
1. Professional;
As to Nature
2. Cultural;
3. Religious; Has capital stock
4. Charitable; divided into shares and Does not have shares
5. Educational; with authority to and may not distribute
6. Social; distribute dividends to profits to its members.
7. Literary; its stockholders.
8. Civic service;

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Stock Non-Stock Stock Non-Stock
As to Meeting / voting of members/ stock corporations,
stockholders apply suppletorily to
Stockholders and non-stock corporations,
directors must act in a Members may be except as may be
meeting, except where allowed by the by-laws covered by specific
a mere written assent is to vote by mail or other provisions of the Code
sufficient or a formal similar means. pertaining to non-stock
meeting unnecessary. corporations.
As to Manner of voting
Rules Applicable ONLYnly to Non-stock
Cumulative voting not Corporations:
Cumulative voting is
available unless 1. Prohibition against distribution of dividends. No
always available in the
otherwise provided in pecuniary benefits shall inure in favor of the
election of directors.
the articles or by-laws. members although they may avail of, or derive
As to Proxy other forms of, assistance from the corporation.
Members may be 2. Non-profit character of non-stock corporations. It
Stockholders may vote deprived of the right to cannot engage in business with the object of
by proxy. vote by proxy in the making profits.
articles or by-laws. 3. The right to vote of members may be limited,
broadened, or even denied in the AOI or the by-
As to Non-transferability of Membership
laws. It is possible that none of the members have
Members cannot voting rights (CORPORATION CODE, Sec. 40
transfer their last par, in relation to Sec. 89).
Stockholders may
membership unless
transfer their shares.
allowed by the articles Note: Unless otherwise provided by the AOI or by-
or by-laws. laws, a member may vote by proxy in accordance
As to Directors/Trustees with the provisions of the law. Hence, proxy voting
Directors cannot Trustees may exceed may be denied in the case of non-stock
exceed 15 in number. 15 in number. corporations.
As to Term of Director/Trustee Each member is entitled only to one vote in the
The term of a trustee is election of trustees unless cumulative voting is
The term of a director is 3 years; 1/3 of the authorized in the AOI or the by-laws.
1 year. Board shall be elected
annually. He may cast as many votes as there are trustees
As to Election of officers to be elected but may not cast more than one vote
for one candidate, unless otherwise provided in
Officers may be directly
the articles or by-laws. (CORPORATION CODE,
elected by the
Officers are elected by Sec. 24).
members unless
the Board of Directors.
otherwise provided in
Voting by mail or other similar means may be
the articles or by-laws.
authorized.
As to Place of meeting of Stockholders
The by-laws may Exception: Merger or Consolidation
Stockholders’ meetings
provide that members The provisions on Sec. 89 should be treated as a
shall be held in the city
of a non-stock general provision for non-stock corporations
or municipality where
corporation may hold applicable only in the absence of a specific
principal office of
their meetings at any provision in the Corporation Code on a particular
corporation is located,
place within the subject matter. Therefore, in case of mergers and
and if practicable in the
Philippines. consolidations, Sec 77 should apply. Hence,
principal office.
corporate mergers must be approved by the
Trustees’ place of members at a meeting duly called for the purpose.
Board of Directors’
meetings may also be
meetings may be held
held in or outside the 4. Non-stock corporations may, through their AOI or
in or outside the
Philippines unless the by-laws, designate their governing boards by any
Philippines, unless the
by-laws otherwise name other than as board of trustees
by-laws otherwise
provides. Reason: the (CORPORATION CODE, Sec. 138).
provides.
provisions governing 5. The number of trustees who must be members of
the corporation may be more than fifteen (15). But,

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the number of incorporating trustees shall not be Termination of Membership in a Non-Stock
more than fifteen (15). Corporation
6. The terms of office of the trustees first elected are Membership shall be terminated in the manner and for
staggered with a one (1) year interval. While the the causes provided in the AOI or by-laws
terms are staggered, the members of the board (CORPORATION CODE, Sec. 91).
should always be elected in accordance with Sec.
24 and any vacancy thereof filled as provided Effect: Extinguishes all rights of a member in the
under Sec. 29. corporation or in its property unless otherwise
7. Trustees subsequently elected shall have a term provided in the AOI or by-laws (CORPORATION
of three (3) consecutive years. CODE, Sec. 91).
8. The rule on founder’s shares (CORPORATION
CODE, Sec. 7) also applies to non-stock Note: In those cases when the loss of membership in
corporations since the provisions governing stock a NSC also entails loss of property rights, the manner
corporations, when pertinent, shall be applicable of termination must be in accordance with substantial
to non-stock corporations (SEC Opinion, justice (Calatagan Golf Club v. Clemente, Jr., G.R. No.
September 23, 1991; SEC Opinion No. 04-06, 165443, April 16, 2009).
December 7, 2004).
9. Only members can be elected to sit in the board Requirements for Validity of Termination:
of trustees. 1. Reasonable notice to the member concerned; and
10. A corporation is not qualified to occupy the 2. Fair opportunity to be heard (SEC Opinion
position of a trustee (CORPORATION CODE, September 29, 1997Calatagan Golf Club v.
Sec. 25). Clemente, Jr., supra).
11. Officers other than members may be directly
elected by the members (not by the board) unless Rules on Distribution of Assets of Non-Stock
otherwise provided in the AOI (CORPORATION Corporations:
CODE, Sec. 92, last par.) 1. All of the corporation’s creditors shall be paid.
12. In case of dissolution, its assets shall be applied 2. Assets held that are subject to return on
and distributed in accordance with certain specific dissolution shall be delivered or returned back to
rules laid down by law (CORPORATION CODE, the conveyor.
Sec. 94) or as may be specified in a plan of 3. Assets held for charitable, religious, benevolent,
distribution adopted by the corporation provided it educational, or similar purposes, not held upon a
is not inconsistent with such rules. condition to return on dissolution shall be
conveyed to one or more corporations engaged in
Membership in a Non-Stock Corporation similar activities as the dissolved corporation
A non-stock corporation may admit members to the 4. All other assets shall be distributed to the
corporation (CORPORATION CODE, Sec 36(6)). members in accordance with the AOI or by-laws
(CORPORATION CODE, Sec. 94).
Transferability Of Membership In Non-Stock
Corporation Note: The plan of distribution of assets may be
adopted by a majority vote of the Board of trustees
General rule: Membership in a non-stock and approval of two-thirds (2/3) of the members
corporation and the rights arising therefrom are not having voting rights present or represented by
transferable. proxy at the meeting during which said plan is
adopted (CORPORATION CODE, Sec. 95).
Rationale: Membership in a non-stock corporation
has personal elements that require qualification by Distribution of assets to members upon
social and other ties. (SEC Opinion, December 11, dissolution is allowed if expressly provided for in
the AOI or By-laws. In the absence of any
1996)
provision, the assets may be distributed in
accordance with the plan of distribution adopted
Exception: When the articles of incorporation or by- by the corporation (AQUINO, supra at 589).
laws so provide (CORPORATION CODE, Sec. 90).

Note: Membership in a non-stock corporation cannot C LOSE C ORPORA TIONS


be acquired except in the particular manner or mode
of acquiring the same, as provided for in its valid by-
laws (DE LEON, & DE LEON Jr., Corporate Law, Close Corporation
supra at 672) A corporation cannot be considered a close
corporation within the meaning of the Corporation
Code if ANY of the following requisites is absent in the
Articles of IncorporationA special kind of stock

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230 2017 CENTRALIZED BAR OPERATIONS
corporation whose articles of incorporation should Non-compliance with any of the requirements shall not
provide that:: make the corporation a close corporation within the
1. Stockholders shall not be more than a specified meaning of the Corporation Code.
(in the AOI) number which shall not exceed 20;
2. Issued stocks are subject to transfer restrictions, The outstanding peculiarity of a close corporation is
with a right of preemption in favor of the the identity between stock ownership and active
stockholders or the corporation; andd management (SEC Opinion, February 7, 1994).
3. The corporation shall not be listed in the stock
exchange or its stocks should not be publicly Note: A narrow distribution of ownership does not, by
offered. (CORPORATION CODE, Sec. 96) itself, make a close corporation. Mere ownership by a
single stockholder of all or nearly all of the capital
stock of a corporation does not make one a close
corporation if the above-specified requirements are
Note: Even if all 3 required provisions are in the not stated in the AOI (San Juan Structural v. CA,
Articles, a corporation shall not be deemed a close supra).
corporation when at least 2/3 of its voting stocks or
voting rights is owned or controlled by another Going Public and Going Private Corporations
corporation which is not a close corporation A corporation is deemed to be going public when it
(CORPORATION CODE, Sec. 96).Note: Special decides to list its shares in the stock exchange. This
rules are provided for a close corporation because it is include coporations that will make initial public offering
essentially an incorporation partnership. (DE LEON, of shares.
Corporate Law, supra at 678)
Going private corporations are those which would
The following CANNOT be a close corporation: restrict the shareholders to a certain group. This
1. When atleast 2/3 of the voting stock or voting rights include close and closely held, Going privare
is owned or controlled by another corporation which is corporations, however, are not necessarrily close
not a close corporation ; corporations. (AQUINO, Corporate Law, supra at 107)

2, Mining or oil companies, stock exchanges, banks, Close v. Closed Corporation and Closely Held
Corporation
insurance companies, public utilities, educational
A close corporation is different from a “closed
institutions, and corporations to be declared vested corporation” and a “closely held corporation.”
with public interest. (Corporation Code, Sec. 96)The
following cannot be a close corporation: “Closed” emphasizes a determination on the part of
the participants in the enterprise to keep outsiders
(PIPE-BOMS) from acquiring any interest in the business and may
indicate that they have taken steps to accomplish that
1. Corporations declared to be vested with Public objective by shareholders’ agreement or provision in
interest; the Articles or by-laws.

2. Insurance companies; “Closely held” focuses more on the number of


shareholders in the corporation at that particular time,
3. Public utilities; indicating that they are few in numbers. The shares of
a “closely held corporation” are owned by a relatively
4. Educational institutions; limited number of stockholders (AQUINO, supra at
595).
5. Banks;
A close corporation can be a “family corporation.”
6. Oil companies; However, a family corporation need not be a close
corporation and it may also be organized as an
7. Mining companies; ordinary corporation (Id. at 593).

8. Stock exchanges (CORPORATION CODE, Sec. Characteristics of Close Corporations: (EL-QT-


96). DAPA)
1. Stockholders may act as directors without need of
Election and therefore are liable as directors;
2. Stockholders who are involved in the
management of the corporation are Liable in the
same manner as directors are;
3. Quorum may be greater than mere majority;

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2017 CENTRALIZED BAR OPERATIONS
4. Transfers of stocks to others, which would Ordinary Stock
increase the number of stockholders to more than Close Corporation
Corporation
the maximum are invalid;
Sec. 39 of the otherwise provided in
5. Corporate Acts may be binding even without a
Corporation Code. the Articles.
formal board meeting, if the stockholder had
knowledge or ratified the informal action of the As to Appraisal right
others;
The appraisal right may
6. Preemptive right extends to all stock issues; The appraisal right
be exercised and
7. Deadlocks in board may be settled by the SEC, on may be exercised by a
compelled against the
the written petition by any stockholder; and stockholder only in the
corporation by a
8. Stockholder may withdraw and avail of his right of cases provided in
stockholder for any
Appraisal (SUNDIANG & AQUINO, supra at 281). Secs. 81 and 42 of the
reason.
Code.
Ordinary Stock Corporation v. Close Corporation As to Purchase of its own shares
Ordinary Stock
Close Corporation In case of an arbitration
Corporation
Except as regards of an intra-corporate
As to Articles of incorporation redeemable shares,deadlock by the SEC,
the purchase by the the corporation may be
Articles must contain the corporation of its own ordered to purchase its
provisions required by stock must always be own shares from the
AOI need only contain made from thestockholders regardless
Sec. 97, aside from the
the general matters unrestricted retained of the availability of
general matters in Sec.
enumerated in Sec. 14 earnings. unrestricted retained
14. Failure to do so
of the Code. earnings.
precludes a de jure
close corporation As to Remedy of arbitration
status.
Arbitration of intra- Arbitration of intra-
As to Ownership of stocks corporate deadlock by corporate deadlock by
Two-thirds (2/3) of its the SEC is not a the SEC is an available
Its status as an remedy in case the remedy in case the
voting stock or voting
ordinary stock
rights must not be directors or directors or
corporation is not
owned or controlled by stockholders are so stockholders are so
affected by the divided respecting the divided respecting the
another corporation
ownership of its voting management of the management of the
which is not a close
stock or voting rights. corporation. corporation.
corporation.
As to Classification of directors
Agreements by Stockholders
Its Articles cannot Its Articles may classify
Effects Where Stockholders Are Managers: (LoD-
classify its directors. its directors.
LiFT)
As to Election/appointment of officers 1. No Longer necessary to elect directors
The corporate officers Its articles may provide (CORPORATION CODE, Sec. 97);
and employees are that any or all of the 2. Stockholders concerned shall be deemed the
elected by a majority corporate officers or Directors (CORPORATION CODE, Sec. 97);
vote of all the employees may be 3. The stockholders shall have the same Liabilities
members of the board elected or appointed by as directors (CORPORATION CODE, Sec. 97);
of directors. the stockholders. 4. To the extent that the stockholders are actively
As to Management engaged in the management or operation of the
business and affairs of a close corporation, the
Business of the stockholders shall be held to strict Fiduciary duties
corporation may be to each other and among themselves
Business of the
managed by the (CORPORATION CODE, Sec. 100); and
corporation is
stockholders if the 5. The stockholders shall be personally liable for
managed by the board
Articles so provide, but corporate Torts unless the corporation has
of directors.
they are liable as obtained reasonably adequate liability insurance
directors. (CORPORATION CODE, Sec. 100).
As to Pre- emptive right
The pre-emptive right The pre-emptive right is When Board Meeting is Unnecessary or
is subject to the subject to no Improperly Held
exceptions found in exceptions, unless General Rule: (KICK)

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232 2017 CENTRALIZED BAR OPERATIONS
Any action by the directors of a close corporation regardless of the availability of unrestricted
without a meeting shall still be valid if: retained earnings, or (b) by the other
1. All the stockholders have actual or implied stockholders;
Knowledge of the action and make no prompt 5. Appoint a Provisional director, who shall be an
objection thereto in writing; impartial person who is neither a stockholder nor
2. The directors are accustomed to take Informal a creditor of the corporation or its
action with the express or implied acquiescence subsidiary/affiliate;
of all the stockholders; 6. Grant such Other relief as the circumstances may
3. Before or after such action is taken, written warrant; or
Consent is signed by all the directors; and 7. Dissolve the corporation (CORPORATION
4. All the directors have express or implied CODE, Sec. 104).
Knowledge of the action in question and make no
prompt written objection thereto (CORPORATION The power given to the Commission by Sec. 104 may
CODE, Sec. 101). be exercised notwithstanding any provision in the AOI,
by-laws, or agreement of stockholders of a close
Exception: If the by-laws provide otherwise corporation to the contrary (CORPORATION CODE,
(CORPORATION CODE, Sec. 101). Sec. 104).

Pre-emptive Right in Close Corporations Remedies of Stockholders


General Rule: The right of pre-emption shall extend 1. Compel the corporation to purchase his
to all stocks to be issued (CORPORATION CODE, shares – any stockholder of a close corporation
Sec. 102). may, for any reason, compel the said corporation
to purchase his shares at their fair value, which
Exception: When limited or curtailed by the AOI shall not be less than their par or issued value,
(CORPORATION CODE, Sec. 102). when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of
Amendment of AOI capital stock.
General Rule: 2/3 of the outstanding capital stock is 2. Compel the dissolution of the corporation -
necessary to approve amendments to AOI deleting or any stockholder of a close corporation may, by
removing any required provision (on close written petition to the SEC, compel the dissolution
corporations) in the AOI or reducing the quorum of such corporation whenever:
(CORPORATION CODE, Sec. 103). a. Any of acts of the directors, officers or those
in control of the corporation is illegal,
Exception: Greater proportions are specifically fraudulent, dishonest, oppressive or unfairly
provided in AOI for the purpose (CORPORATION prejudicial to the corporation or any
CODE, Sec. 103). stockholder, or
b. Corporate assets are being misapplied or
Deadlock in a Close Corporation wasted (CORPORATION CODE, Sec. 105).
Occurs when the directors or stockholders are so b.
divided respecting the management of the business Permissive Provisions in the Articles of
and affairs of the corporation that the votes required Incorporation of a Close Corporation: (SDQM)
for any corporate action cannot be obtained and as a 1. Classifications of Shares or rights and the
result, business and affairs can no longer be qualifications for owning or holding the same and
conducted to the advantage of the stockholders restrictions on their transfers as may be stated
generally (CORPORATION CODE, Sec. 104). therein;
2. Classification of Directors into one or more
Remedy: The SEC, upon written petition by any classes, each of whom may be voted for and
stockholder, shall have the power to arbitrate the elected solely by a particular class of stock;
dispute (CORPORATION CODE, Sec. 104). 3. A greater Quorum or voting requirements in
meetings of stockholders or directors than those
Authority of the SEC to Arbitrate (DRAP-POD) provided in the Code; and
1. Direct or prohibit any act of the corporation or its 4. The business of the corporation to be Managed by
Board, stockholders, officers, or other persons the stockholders of the corporation rather than by
party to the action; a board of directors (CORPORATION CODE,
2. Cancel, alter or enjoin any Resolution or act of the Sec. 97).
corporation or its Board, stockholders, or officers;
3. Cancel or alter any provision in the Articles, by- Conditions for the Validity of Restrictions on the
laws or any stockholders’ agreement; Right to Transfer Shares:
4. Require the Purchase at their fair value of shares
of any stockholder, either (a) by the corporation

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2017 CENTRALIZED BAR OPERATIONS
1. They must appear in the (a) AOI, (b) by-laws, and AOI is amended (CORPORATION CODE, SEC.
(c) certificate of stock; otherwise, they shall not be 99(5)).
binding on any purchaser in good faith.
2. They shall not be more onerous than granting the Remedy of the transferee: To rescind the transfer or
existing stockholders or the corporation the option to recover under any applicable warranty, express or
to purchase the shares of the transferring implied (CORPORATION CODE, Sec. 99(7)).
stockholders with such reasonable terms,
conditions or period stated therein Good Faith Not a Defense
(CORPORATION CODE, Sec. 98) e.g. the AOI It is clear that good faith is not a defense because
provides that all transfers shall be subject to the there is a conclusive presumption of knowledge of the
approval of the Board of Directors. This is an restriction. ( CORPORATION CODE, Sec. 98) Commented [ASPC26]: Source?
invalid restriction (DE LEON, Corporate Law, & Formatted: Font: Italic
DE LEON Jr., supra at 684).
Formatted: Font: Italic
Note: An absolute prohibition to transfer shares, S PECIAL C ORPORATIONS Formatted: Font: Italic
even when contained in the AOI, would be void
since it would violate the provision of Sec. 63 of
A. Educational Corporations
the Corporation Code which treats of shares of
It is a stock or non-stock corporation organized to
stock as personal property of the stockholder who
provide facilities for teaching or instruction (DE
has the inherent right to dispose as an incident of
LEON & DE LEON Jr., supra at 697).
ownership (VILLANUEVA, Corporate Law, supra
at 423).
Composition of Board:
1. Non-stock corporations: Not less than 5 nor
The restriction on transfer is in the nature of a right of
more than 15 provided that the number of
first refusal in favor of the stockholders that can be
trustees shall be in multiples of 5 (i.e. either 5,
waived by the stockholder, if the latter fails to exercise
10 or 15).
the option to purchase within the period stated in the
2. Stock corporations: the number and term of
articles and by-laws.
directors shall be governed by the provisions
on stock corporations (CORPORATION
Any transfer made should not result in exceeding the
CODE, Sec. 108).
number of stockholders as allowed by the Code. Commented [ASPC25]: Source?
(AQUINO, Corporate Law, supra at 600)
General Rule: The Board of Trustees (BOT) of
educational institutions shall, as soon as
Effect of Issuance or Transfer of Stock in Breach
organized, so classify themselves that the term of
of Qualifying Conditions
office of 1/5 of their number shall expire every year
The transferee is conclusively presumed to have
(CORPORATION CODE, Sec. 108).
notice if:
1. Stock is issued or transferred to any person who
Exception: Otherwise provided in the AOI or by-
is not entitled under any provision of the AOI to be
laws (CORPORATION CODE, Sec. 108).
a holder of record of its stock and the certificate
for such stock conspicuously shows the
Recommendation
qualifications of the persons entitled to be holders
A favorable recommendation of the Department of
of record thereof.
Education is essential for the approval of its AOI
2. The issuance or transfer of stock to any person
and by-laws (CORPORATION CODE, Sec. 107).
would cause the stock to be held by more than
such number of persons and the AOI of a close
It is primarily governed by special laws and
corporation states the number of persons, not
suppletorily governed by the provisions of the
exceeding 20, who are entitled to be holders of
Code (DE LEON & DE LEON Jr., supra at 698).
record of its stock, and the certificate for such
Sec. 4(2), Article XIV of the 1987 Constitution
stock conspicuously states such number.
provides for rules governing the control,
3. The acquisition violates the restriction and the
administration and establishment of educational
stock certificate conspicuously shows a restriction
institutions.
on transfer of stock (DE LEON & DE LEON Jr.,
supra at 100).
Although the second paragraph of Sec. 108 sets
the term of the members of the Board of Trustees
Remedy of the corporation: It may refuse to register
at 5 years, it also contains a proviso expressly
the transfer of stock in the name of the transferee
subjecting the duration to what is otherwise
(CORPORATION CODE, Sec. 99(4)). However, the
provided in the AOI or by-laws of the educational
corporation may not refuse to register if the transfer
corporation. Therefore, the term of office of
has been consented to by all the stockholders or if the
trustees in educational corporation may be less

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234 2017 CENTRALIZED BAR OPERATIONS
than five years (Barayuga v. AUP, G.R. No. affairs, estate and properties of his religious
168008, August 17, 2011). denomination, sect or church within his
territorial jurisdiction, describing such
Note: For institutions organized as stock territorial jurisdiction;
corporations, the number and term of directors 4. Manner in which any Vacancy occurring in the
shall be governed by the provisions on stock office of chief archbishop, bishop, priest,
corporations (CORPORATION CODE, Sec. 108). minister, rabbi of presiding elder is required to
be filled;
B. Religious Corporations 5. The place where the Principal office; and
It is a corporation composed entirely of spiritual 6. Other provisions not contrary to law
persons and which is organized for the (CORPORATION CODE, SEC. 111).
furtherance of a religion or for perpetuating the
rights of the church or for the administration of Notes: Note: The one member is but a trustee of
church or religious work or property. It is different organization. The one member, with the concurrence
from an ordinary non-stock corporation organized of 2/3 of the membership of the organization for whom
for religious purposes (DE LEON & DE LEON Jr., he acts as trustee, can pass the amendment of its AOI.
supra at 705). He can, with membership concurrence, increase the
technical number of the members of the corporation
Note: The Corporation Code does not require any from "sole" or one to the greater number authorized by
religious group to be registered as a corporation but if its amended articles (Iglesia Evangelica Metodista v.
it wants to acquire legal personality, its members Bishop Lazaro, G.R. No. 184088, July 6, 2010).
should incorporate under the Corporation Code.
The Roman Catholic Church is not registered like By-laws Not Necessary
other religious societies or churches in the Philippines, Unlike an ordinary corporation, a corporation sole is
because it has been recognized as a juridical person not required to file by-laws. Further, the articles of
incorporation of a corporation sole as well as its
since time immemorial (Barlin vs Ramirez, 7 Phil 41).
articles of faith or rules of discipline already contain
the provsions normally embodied in the by-laws of an
Kinds: ordinary corporation. (AQUINO, Corporate Law, supra
1. Corporation Sole at 621)
It is a special form of corporation, usually
associated with the clergy, consisting of one Acquisition and Alienation of property
person only and his successors, who is Acquisition
incorporated by law to give some legal capacities Any corporation sole may purchase and hold real
and advantages (CORPORATION CODE, Sec. estate and personal property for its church,
110). charitable, benevolent or educational purposes,
and may receive bequests or gifts for such
Importance of Corporation Sole: purposes (CORPORATION CODE, Sec. 113).
a. Separate juridical personality from the
archbishop, priest, etc; and
b. Continuous existence (DE LEON & DE Alienation
LEON Jr.,N, Corporate Law, supra at 709- The corporation may sell or mortgage real
710). property held by it by obtaining an order from the
court.
Effectivity
The chief archbishop, priest, etc. shall become a Provided, that in cases where the rules,
corporation sole from and after the filing with the regulations and discipline of the religious
SEC of the AOI and other required documents denomination, sect or church, religious society or
(CORPORATION CODE, Sec. 112). order concerned represented regulate the
method of acquiring, holding, selling and
Contents of AOI (CRAP-VO) mortgaging real estate and personal property,
1. He is the Chief archbishop, bishop, priest, such rules, regulations and discipline shall
minister, rabbi or presiding elder of his control, and the intervention of the courts shall
religious denomination, sect or church and not be necessary (CORPORATION CODE, Sec.
that he desires to become a corporation sole; 113).
2. The Rules, regulations and discipline of his
religious denomination, sect or church are not Dissolution
inconsistent with his becoming a corporation A corporation sole may be dissolved and its
sole and do not forbid it; affairs settled voluntarily by submitting to the SEC
3. He is charged with the Administration of the
temporalities and the management of the

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2017 CENTRALIZED BAR OPERATIONS
a verified declaration of dissolution 3. Ordinary Non-Stock Religious Corporation
(CORPORATION CODE, Sec. 115). (CORPORATION CODE, Sec. 88).

Contents of the Declaration of Dissolution


1. Name of the corporation; C ORPORATE D ISSOLUTION
2. Reason for dissolution and winding up;
3. Authorization for the dissolution; and A ND L IQUIDATION
4. Names and addresses of the persons who
are to supervise the winding up of the affairs
of the corporation (CORPORATION CODE, Dissolution
Sec. 115). It is the extinguishment of the corporate franchise and
the termination of corporate existence (AQUINO,
Effectivity of Dissolution Corporate Law, supra at 627).
Upon the approval of the declaration of
dissolution by the SEC (CORPORATION CODE, Nature of Dissolution
Sec. 115). It signifies the extinguishment of a corporation’s
franchise and and termination of its corporate
Conversion existence for business purpose. As distinguised from
A corporation sole can convert into a corporation the actual business enterprise operations, dissolution
aggregate by mere amendment of its AOI. (. legally affects morethe nature and capacity of the Commented [AM27]: Source
AQUINO, Corporate Law, supra at 624) “juridical person” of the corporate being.
Formatted: Font: Italic

Reason: It is only a shift from one kind of non- The mere fact that the corporation has ceased to do Formatted: Font: (Default) Arial, 10 pt, Italic
stock corporation to another kind of non-stock business does not necessarily constitute a dissolution Formatted: Font: (Default) Arial, 10 pt, Italic
corporation (Iglesia Evangelica Metodista v. or dimunition of the legal power and capacity of the
Formatted: Font: (Default) Arial, 10 pt, Italic
Bishop Lazaro, supra). corporation. (VILLANUEVA, supra at 817)
Formatted: Font: Italic
2. Religious Societies/Corporate Aggregate
It is a non-stock corporation governed by a board
but with religious purposes. It is incorporated by De Jure Dissolution De Facto Dissolution
an aggregate of persons, e.g. religious order, A dissolution in law
diocese, synod, sect, etc. (DE LEON & DE LEON One which takes place
adjudged and
Jr., supra 708). in substance and in fact
determined by judicial
when the corporation
sentence, or brought
Contents of AOI (PATRIC) by reason of
about by an act of or
a. The religious society or religious order, or insolvency, cessation
with the consent of the
diocese, synod, or district organization is a of business or
sovereign power, or
religious organization of a religious otherwise, suspends all
which results from the
denomination, sect or church; its operations and goes
expiration of the
b. At least 2/3 of its membership have given into liquidation still
charter period of
their written consent or have voted to retaining its primary
corporate life (DE
incorporate, at a duly convened meeting of franchise to be a
LEON & DE LEON Jr.,
the body; corporation (Id.).
supra at 713).
c. The incorporation is not forbidden by
competent authority or by the constitution, De jure Dissolution
rules, regulations or discipline of the religious A dissolution in law adjudged and determined by
denomination, sect, or church of which it judicial sentence, or brought about by an act of or with
forms a part; the consent of the sovereign power, or which results
d. Desires to incorporate for the administration from the expiration of the charter period of corporate
of its affairs, properties and estate; life (DE LEON & DE LEON Jr., supra at 713).
e. Place where the principal office; and
f. Names, nationalities, and residences of the De facto Dissolution
trustees elected to serve for the first year or One which takes place in substance and in fact when
such other period as may be prescribed by the corporation by reason of insolvency, cessation of
the laws of the religious society or religious business or otherwise, suspends all its operations and
order, or of the diocese, synod, or district goes into liquidation still retaining its primary franchise
organization, the board of trustees to be not to be a corporation (Id.).
less than 5 nor more than 15
(CORPORATION CODE, Sec. 116). Two Legal Steps in Corporate Dissolution:

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236 2017 CENTRALIZED BAR OPERATIONS
1. Termination of the corporate existence (right to go 2.B. Voluntary Dissolution Where Creditors are
on doing ordinary business); and Affected (APOPO-HD)
2. Winding up of its affairs, payment of its debts and a. Approval of the stockholders representing at
distribution of its assets among shareholders or least 2/3 of the outstanding capital stock or
members and other persons interested (Id.). 2/3 of members in a meeting called for that
purpose;
Note: After formal dissolution of the corporation, b. Filing of a Petition with the SEC signed by
any of its stockholders may form another majority of directors or trustees or other
corporation, which will engage in the same line of officers having management of its affairs
business even if it is done during the liquidation verified by President or Secretary or Director;
period (CORPORATION CODE, Sec. 122). c. If the Petition is sufficient in form and
substance, the SEC shall issue an Order
Modes of Dissolution fixing a hearing date for objections;
1. Voluntary Dissolution d. A copy of the Order shall be Published at least
2. Involuntary Dissolution once a week for 3 consecutive weeks in a
3. Shorterning of Term newspaper of general circulation or there is no
4. Expiration of Term newspaper, posting for 3 consecutive weeks
5. Revocation of Certificate of Incorporation by SEC in 3 public places.
(2002 Bar) e. Objections must be filed no less than 30 days
nor more than 60 days after the entry of the
Voluntary Corporate Dissolution Order.
Methods: f. After the expiration of the time to file
1. Vote of the board of directors or trustees and the objections, a Hearing shall be conducted
stockholders or members where NO Creditors are upon prior 5-day notice to hear objections;
affected (CORPORATION CODE, Sec. 118); and
2. Judgment of the SEC after hearing of petition for g. Judgment shall be rendered Dissolving the
voluntary dissolution where creditors are affected corporation and directing the disposition of
(CORPORATION CODE, Sec. 119); assets, the judgment may include
3. Amending the AOI to shorten the corporate term appointment of a receiver (Id. at 629).
(CORPORATION CODE, Sec 120); or
4. In the case of a corporation sole, by submitting to 3. Dissolution by Shortening Corporate Term
the SEC a verified declaration of dissolution for Upon approval by the SEC of the amended AOI of
approval (CORPORATION CODE, Sec. 115). the expiration of the shortened term, as the case
may be, the corporation shall be deemed dissolved
1.A. Voluntary Dissolution Where No Creditors are without any further proceedings except its
Affected (CRAMS-PuNo)) liquidation (CORPORATION CODE, Sec. 120).
a. A Meeting must be held on the call of directors
or trustees; Reincorporation
b. Notice of meeting should be given to the A dissolved corporation cannot be revived. However,
stockholders by personal delivery or those interested may reincorporate by refiling new AOI
registered mail at least 30 days prior to the and by-laws complying with Section 10-15 of the
meeting; Corporation Code (Rebodillo v. CA, G.R. No. 81123,
c. The notice of meeting should also be February 28, 1989).
Published for 3 consecutive weeks in a
newspaper published in the place; Winding up is the sole activity of a dissolved
d. The resolution to dissolve must be Approved corporation and it does not intend to incorporate a
by the majority of directors/trustees and new. If it does, however, it is not unlawful for the old
approved by the stockholders representing at board of directors to negotiate and transfer the assets
least 2/3 of the outstanding capital stock or of the dissolved corporation, as expressly allowed by
2/3 of members; Sec. 40 to the new corporation intended to be created
e. A copy of the Resolution shall be certified by as long as the stockholders have given their consent
the majority of the board of directors or (Chung Ka Bio v. IAC, G.R. No. 71837, July 26, 1988).
trustees and countersigned by the secretary;
f. The Signed and countersigned copy will be
filed with the SEC; and Involuntary Dissolution
g. The SEC will issue the Certificate of Modes:
dissolution (AQUINO, Corporate Law, supra 1. Filing of verified complaint under Sec. 121;
at 628-629). 2. Revocation of Articles of Incorporation; and
3. Quo warranto proceedings.

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Grounds e. Fraud in procuring its certificate of
1. Failure to organize and commence within two years registration; or
from incorporation;
2. Continuous non-operation for five years; f. Serious Misrepresentation as to what
3. Failure to file by-laws within 30 days from issuance the corporation can do or is doing to the
of certificate of incorporation; and
prejudice of the general public (P.D. 902-A,
Management committee or rehabilitation receiver
Sec. 6).
found the continuation of business is no longer
feasible. (AQUINO, Corporate Law, supra at 630) 4.
Grounds: (FEM-LQS) Procedure:
1. Filing a verified complaint;
1. Failure to organize and commence business 2. Proper notice; and
within 2 years from the date of issuance of the 3. Hearing on the grounds provided for by existing
certificate of incorporation (CORPORATION laws, rules and regulations (CORPORATION
CODE, Sec. 22); CODE, Sec. 121).

Note: The methods of effecting dissolution as


prescribed by statute are exclusive and a corporation
Note: The effect of failure to organize and cannot be dissolved except in the manner prescribed
commence business is not automatic. The proper by law (DE LEON, Corporate Law, & DE LEON Jr.,
supra at 715 citing Vesagas v. CA, 371 SCRA 508
proceedings for revocation of the AOI must be
[2001]).
initiated (SEC Opinions dated 10 December 1985,
April 14, 1987, October 4, 1989). Dissolution by Shortening Corporate Term

Upon approval by the SEC of the amended AOI of


the expiration of the shortened term, as the case may
2. Expiration of the corporate term
be, the corporation shall be deemed dissolved
(CORPORATION CODE, Sec. 11);
without any further proceedings except its liquidation
3. Minority stockholders’ suit for dissolution on (CORPORATION CODE, Sec. 120).
justifiable grounds (DE LEON & DE LEON Jr.,
Requirements:
supra at 734); 1. Notice of the dissolution of the corporation by
shortening of the corporate term shall be published in
4. Legislative dissolution (Id. at 722); a newspaper of general circulation for three
consecutive weeks;
5. Quo warranto suit against a de facto 2. Filing of the list of the corporate creditors, with their
corporation (Id. at 730); or consent to the shortening of term; and
3. Submission of the following with the SEC:
6. SEC dissolution (CORPORATION CODE, a. Undertaking under oath by the majority
Sec. 121), upon complaint and after notice and stockholders or principal officers of the coporation
hearing, on the following grounds: (BRID-FM) that tey shall personally answer for any
outstanding obligations of the corporation;
a. Failure to file By-laws within the b. Latest audited inancial statements of the
required period; corporation; and
c. BIR clearance on tax liabilities of the
b. Failure to file Required reports in corporation. (SEC Opinion, 5 July 1979, XIII SEC
Quarterly Bulletin 3 (No. 4, Oct. 1979))
appropriate forms as determined by the
Commission within the prescribed period; Expiration of Corporate Term
No further action is needed for corporation to be
c. Continuous Inoperation for a period of deemed dissolved on the part of the corporation or the
at least 5 years; State. (PNB v. CFI Rizal, Pasig, Br. XXI, 209 SCRA
294 (1992))
d. Refusal to comply or Defiance of any
lawful order of the Commission; No extension of corporate life is allowed by
amendment of articles of incorporation to be effected
during the three-year statutory period for liquidation

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238 2017 CENTRALIZED BAR OPERATIONS
when its original term had already expired. (24 SCRA the liquidation by continuing as trustees by legal
269 (1968)) implication. (AQUINO, Corporate Law, supra at 650)

Revocation of Certificate of Incorporation by SEC Notes: The trustee of a corporation may continue to
There can be no automatic dissolution after prosecute a case commenced by the corporation
incorporation has been approved by the SEC. It shall within three years from its dissolution until rendition of
continue to exist as a juridical entity notwithstanding the final judgment, even if such judgment is rendered
uts non-operational status until its certificate of beyond the three-year period allowed by Section 122
registration is formally revoked by the SEC after due of the Corporation Code. But a defunct corporation
notuce and hearing. (SEC Opinion, 5 July 1979, XXXII cannot initiate a suit after the lapse of the said three-
SEC Quarterly Bulletin 12 (No. 1, June 1979)) year period. (Alabang Development Corporation
v. Alabang Hills Village Association, June 2, 2014)

Effects: (TCN-WAR) The dissolution of a corporation does not extinguish


1. Transfer of legal title to corporate properties in the the debts due or owing to it. Dissolution or even the
stockholders who become co-owners thereof; expiration of the 3-year liquidation period does not
2. The corporation Ceases as a body corporate to bar a corporation from enforcing its rights as a
continue the business for which it was corporation (DE LEON,Corporate Law, supra at 739).
established;
3. The stockholders are not prevented from Jurisdiction
conveying their respective shareholdings toward The SEC’s jurisdiction does not extend to the
the creation of a New corporation to continue the liquidation of a corporation. While the SEC has
business of the old; jurisdiction to order the dissolution of a corporation,
4. The corporation continues as a body corporate for jurisdiction over the liquidation of the corporation now
3 years for purposes of Winding up or liquidation; pertains to the appropriate RTCs. Liquidation of a
5. Upon the expiration of the 3-year winding up corporation requires the settlement of claims for and
period, the corporation ceases to exist for All against the corporation, which clearly falls under the
purposes; and jurisdiction of the regular courts. Thus, the decision of
6. Though a dissolved corporation cannot be the RTC that it did not have jurisdiction over the
revived, those interested may Reincorporate by petition for dissolution and liquidation is clearly
re-filing the new AOI and by-laws (SUNDIANG & erroneous (Consuelo Metal Corporation v. Planters
AQUINO, Corporate Law, supra at 273). Development Bank, G.R. No. 152580, June 26, 2008).

Corporate Liquidation The Court that has jurisdiction over the liquidation
It is the process by which all the assets of the proceedings shall, in proper cases, issue Liquidating
corporation are converted into liquid assets (cash) in
Order which includes, among others:
order to facilitate the payment of obligations to
creditors, and the remaining balance, if any, is to be
distributed to the stockholders or members (AQUINO, 1. Declaring that the debtor is insolvent;
supra at 648).
2. Ordering the liquidation of the debtor;
General Rule: Liquidation period is for 3 years only
and not extendable (Id. at 650). 3. In case of a juridical person, declaring it dissolved;

Exception: When a trustee is appointed, there is no 4. Prohibiting payments and/or transfer of property by
time limit within which liquidation should be completed the debtor; and
(Id.).
5. Directing all claims to be filed with the liquidator.
Note: The dissolution of a corporation does not (Section 112, FRIA) Formatted: Level 2, Keep with next
extinguish the debts due or owing to it. Dissolution or
even the expiration of the 3-year liquidation period Effects of Liquidating Order
does not bar a corporation from enforcing its rights as The assets of the insolvent debtor shall be divided
a corporation (DE LEON & DE LEON Jr., supra at among the creditors in accordance with the
739). Liquidation Plan submitted by the Liquidator and
approved by the Court. The rules on concurrence and
Period preference of credits under the New Civil Code and
Within three years. However, if full liquidation can only other relevant laws shall be observed in the
be effected after the three-year period and there is no Liquidation Plan. (Sec. 113, FRIA)
trustee, the directors may be permitted to complete
Methods of Liquidation or Winding Up

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1. By the corporation itself through its board of In appointing a receiver, the court should consider
directors/trustees (CORPORATION CODE, whether the company’s financial situation is
Sec. 122(1)); serious and whether there is a clear and imminent
danger that it will lose its corporate assets if a
The board of directors may also be permitted to receiver is not appointed. (Pryce Corporation v.
complete the corporate liquidation by continuing as CA, G.R. No. 17230, February 4, 2008)
“trustees” by legal implication (Clemente v. CA,
G.R. No. 82407, March 27, 1995); Effects of Creation of a Management Committee

2. By a trustee to whom the corporate assets Jurisdiction


have been conveyed (CORPORATION CODE, The RTC has original and exclusive jurisdiction to
Sec. 122(2)); and hear and decide intra-corporate controversies,
including incidents of such controversies. These
The word “trustee” as used in the corporation incidents include applications for the appointment
statute must be understood in its general concept of receivers or management committees (Villamor
which could include the counsel entrusted with the v. Umale, supra).
prosecution of the suit filed by the corporation
(Sps. Gelano v. CA, G.R. No. L-39050, February The receiver and members of the management
24, 1981). The Board of Directors of the dissolved committee are considered officers of the court and
corporation validly constitutes the term “trustees” shall be under its control and supervision (Villamor
to carry on the liquidation process beyond the v. Umale, supra).
three-year period mandated under Section 122.
(VILLANUEVA, Corporate Law, supra at 835) If the trustee may commence a suit which can
proceed to final judgment beyond the 3-year
Note: All interest which the corporation had in the period, there is no reason why a suit commenced
property terminates, the legal interest vests in the by the corporation itself during its existence should
trustees, and the beneficial interest in the not be afforded similar treatment and allowed to
stockholders, members, creditors or other proceed to final judgment and execution thereof
persons in interest (Sps. Gelano v. CA, supra). (Reburiano v. CA, G.R. No. 109840, January 21,
1999).
3. By a management committee or rehabilitation
receiver appointed by the SEC If corporate property has already been transferred
(CORPORATION CODE, Sec. 119(3)). to the stockholders, corporate creditors may sue
the stockholders even beyond the 3-year
Management committees and receivers are liquidation period.
appointed when the corporation is in imminent
danger of: If liquidation is through a receiver, the appointment
a. Dissipation, loss, wastage or destruction of of a receiver operates to suspend the authority of
assets or other properties; and the corporation and its directors and officers over
b. Paralyzation of its business operations that its properties and effects (Yam v. CA, G.R. No.
may be prejudicial to the interest of the 104726, 11 February 1999).
minority stockholders, parties-litigants, or the
general public (Villamor v. Umale, G.R. No. The question as to the right of priority of a claimant
172843, September 24, 2014). against the assets of a corporation that is being
dissolved and liquidated becomes of importance
Mere possibility without proof of abusing only when the assets of the corporation are not
corporate positions and dissipation of assets and sufficient to pay all claims (DE LEON & DE LEON
properties of the corporation is not a valid ground Jr., Corporate Law, supra at 748).
for appointment of a manegement
committee/receiver. (Sy Chim v. Sy Siy Ho, G.R. If the corporate creditors could not be found, the
No. 164958, January 27, 2006, property will be escheated to the government
(CORPORATION CODE, Sec. 122(3)).
Note: Misconduct of directors and officers
does not justify appointment of a receiver Reincorporation
(VILLANUEVA-CASTRO, Take Note, supra at A dissolved corporation cannot be revived. However,
141)In cases of appointment of a those interested may reincorporate by refiling new AOI
management committee or receiver in banks, and by-laws complying with Section 10-15 of the
BSP approval is required. Corporation Code (Rebodillo v. CA, G.R. No. 81123, Commented [ASPC28]: Source?
February 28, 1989).
Serious Situation Test

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240 2017 CENTRALIZED BAR OPERATIONS
Winding up is the sole activity of a dissolved
corporation and it does not intend to incorporate a 2. Involuntary Rehabilitation – one that is agreed
new. If it does, however, it is not unlawful for the old upon out of court.
board of directors to negotiate and transfer the assets Grounds:
of the dissolved corporation, as expressly allowed by a. There is no genuine issue of fact or law on the
Sec. 40 to the new corporation intended to be created claim/s of the petitioner/s and that the due and
as long as the stockholders have given their consent demandable payments thereon have not been
(Chung Ka Bio v. IAC, G.R. No. 71837, July 26, 1988). made for at least 60 days or that the debtor
has failed generally to meet its liabilities as
Difference between Extension of Corporate Life, they fall due; or
Revival and Reincorporation b. A creditor, other that the petitioner/s, has
initiated foreclosure proceedings against the
Extension of Corporate Life debtor that will prevent the debtor from paying
To increase the time for the existence of one which its debts as they become due or will render it
would otherwise reach its limit at an earlier period insolvent (FRIA, Sec. 13).

Revival Suspension of Claims


To give a new existence to one which has been Upon the appointment of a management committee or
forfeited, or which has lost its vitality by lapse of time. a rehabilitation receiver, all actions for claims against
the corporation pending before any court, tribunal or
Reincorporation board shall ipso jure be suspended (Lingkod
Consists in the taking out of a new charter by a Manggagawa sa Rubberworld v. Rubberworld [Phils.]
corporation in order to correct errors of defects in the Inc., G.R. No. 153882, January 29, 2007).
original incorporation, or to enlarge power or limit
liabilities of the corporation, or to lengthen, or revive Rationale: To enable the management committee or
the corporate life. (VILLANUEVA, Corporate Law, the rehabilitation receiver to effectively exercise its/his
supra at 844) powers free from any judicial or extrajudicial
interference that might unduly hinder or prevent the
rescue of the corporation (Lingkod Manggagawa sa
Liquidation v. Rehabilitation Rubberworld v. Rubberworld [Phils.] Inc., supra).
Liquidation Rehabilitation
Purpose: To prevent a creditor from obtaining an
As to Nature
advantage or preference over another and to protect
and preserve the rights of party litigants as well as the
Connotes a winding up Connotes a reopening interest of the investing public or creditors. Such
or settling with creditors or reorganization. suspension is intended to give enough breathing
and debtors. space for the management committee or rehabilitation
As to Continuity of Corporate Life receiver to make the business viable again, without
Contemplates a having to divert attention and resources to litigations
Winding up process so continuance of in various form (Sobrejuanite v. ASB, G.R. No.
that assets may be corporate life in an 165675, September 30, 2005).
distributed to those effort to restore the
entitled. corporation to its former Claims
successful operation. It refers to all claims or demands of whatever nature
or character against the debtor or its property, whether
for money or otherwise (R.A. No. 10142, Sec. 3)
Rehabilitation
It refers to the restoration of the debtor to a condition
The definition of claims is all-encompassing as it
of successful operation and solvency, if it is shown
refers to all actions whether for money or otherwise.
that its continuance of operation is economically
There are no distinctions or exemptions. Clearly, the
feasible and its creditors can recover by way of the
complaint for rescission with damages would fall
present value of payments projected in the plan, more
under the category of claim (Sobrejuanite v. ASB,
if the debtor continues as a going concern than if it is
supra).
immediately liquidated (FRIA, Sec. 4).
Formatted: Font: Bold
Expanded Concept of “Claim” Covered by Stay Formatted: Font: 10 pt, Bold
Kinds of Rehabilitation
Order
1. Voluntary Rehabilitation – one that is Formatted: Font: Bold
1. Money claim for missing luggage against a common
supervised by the court.
carrier. (PAL v. Spouses Kurangking, et al., G.R. No. Formatted: Font: 10 pt
Requisites:
a. Insolvency of debtor; and 146698, September 24, 2002) Formatted: Font: 10 pt, Italic
b. Viability of its rehabilitation (FRIA, Sec. 12). Formatted: Font: 10 pt

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2. Illegal dismissal cases with claims for backwages 2. Subject to the discretion of the court, to cases
and other unpaid benefits filed before the NLRC pending or filed at a specialized court or quasi-
(Rubberworld (Phils.), Inc. v. NLRC, G.R. No. 126773, judicial agency which, upon determination by the Formatted: Font: 10 pt, Italic
court is capable of resolving the claim more
April 14, 1999)
quickly, fairly and efficiently than the court;
3. To the enforcement of claims against sureties and
3. Case filed before HLURB to rescind a sale of a
other persons solidarily liable with the debtor, and
subdivision lit with corresponding refund of the price. third party or accommodation mortgagors as well
(Spouses Sobrejuanite v. ASB Dev’t. Corp., G.R. No. as issuers of letters of credit; Formatted: Font: 10 pt, Italic
165675, September 20, 2005)
Note: Claims that are enjoined do not cover
4. Ejectment cases (Tyson’s Super Conrete, Inc. V. claims against the solidary guarantors/sureties of
CA, G.R. No. 140081, June 23, 2005) the debtor under rehabilitation. Solidary claims
can be pursued separately from and independent
5. Complaint for recission of contract of assignment of of the rehabilitation case (MWSS v. Daway, G.R.
leasehold right with damages. (Unwide Holdings, Inc. No. 160732, June 21 2004).
v. Jandecs Transportation Co., Inc., G.R. No. 168522,
4. To any form of action of customers or clients of a
December 19, 2007 securities market participant to recover or
otherwise claim moneys and securities entrusted
6. Enforcment of repairman’s maritime lien (Negros to the latter in the ordinary course of the latter's
Navigation Co. Inc. v. CA, G.R. No. 166845, business;
December 10, 2008) 5. To the actions of a licensed broker or dealer to sell
pledged securities of a debtor pursuant to a
7. A claim for value of shares belonging to the plaintiff securities pledge or margin agreement for the
that was illegally sold by liquidators of a corporation. settlement of securities transactions;
(Cordova v. Reyes Daway Lim Bernardo Lindo 6. The clearing and settlement of financial Formatted: Font: 10 pt, Italic
Rosales Law Officers, G.R. No. 146555, July 3, 2007) transactions through the facilities of a clearing
agency or similar entities duly authorized,
Stage of Proceedings Suspended registered and/or recognized by the appropriate
The suspension of all actions for claims against the regulatory agency like the BSP and the SEC as
corporation embraces all phases of the suit, be it well as any form of actions of such agencies or
before the trial court or any tribunal or before the SC. entities to reimburse themselves for any
What are automatically stayed or suspended are the transactions settled for the debtor; and
proceedings of a suit and not just the payment of 7. Any criminal action against director or officer of a
claims during the execution stage after the case had debtor corporation (R.A. No. 10142, Sec. 18).
become final and executor (Garcia v. PAL, G.R. No.
164856, August 29, 2007). Note: The rehabilitation of a corporation and the
settlement of claims against it is not a legal ground
Execution is included in the stay order in rehabilitation for the extinction of criminal liabilities of officers.
proceedings (Molina v. Pacific Plans, G.R. No. The prosecution of the officers of the corporation
165476, August 15, 2011). for a criminal case has no bearing on the pending
rehabilitation of the corporation, especially since
Return of property by failure to prosecute a replevin they are charged in their individual capacities
case will not violate the stay order (Advent Capital v. (Panlilio v. RTC, G.R. No. 173846, February 2,
Young, G.R. No. 183018, August 3, 2011). 2011).

Note: However, a petition for rehabilitation does not Effects on Contracts of Suspension of Claims
always result in the appointment of a receiver or the Does not result in amendment of contracts However,
creation of a management committee. Suspension of a Rehabilitation Plan may impose dacion en pago
actions for claims commences only from the time a provided that no compulsion is involved. (AQUINO,
management committee or receiver is appointed by Corporate Law, supra at 642)
the SEC (RCBC v. IAC, G.R. No. 7851, December 9,
1999). Cram Down Rule
The Rehabilitation Plan confirmed by the Court shall
Exceptions to the Stay or Suspension Order be binding upon the debtor and all persons who may
The Stay or Suspension Order shall not apply: be affected by it, including creditors, whether or not
1. To cases already pending appeal in the Supreme such persons have participated in the proceedings, or
Court as of commencement date; opposed the Plan , or whether or not their claims have

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242 2017 CENTRALIZED BAR OPERATIONS
been scheduled. (AQUINO, Corporate Law, supra at
635)
Application to Existing Foreign Corporation
See further discussion on Interim Rules Or Procedure Every foreign corporation owning a license on the date
on Corporate Rehabilitation (A.M. 00-08-10-SC) of the effectivity of this Code shall continue to have
such authority under the terms and conditions of the
license, subject to the provisions of this Code and
FOREIGN CORPORATIONS other special laws (CORPORATION CODE, Sec.
124).
Foreign Corporation
It is one formed, organized or existing under any law
other than those of the Philippines and whose laws
allow Filipino citizens and corporations to do business
Application for a License
in its own country or state (CORPORATION CODE,
Requisites for Issuance of a License (CALFS)
Sec. 123).
1. A copy of its AOI and by-laws, certified in
accordance with law, and their translation to an
The rule that requires reciprocity before a foreign
official language of the Philippines, if necessary;
corporation can be recognized is a reflection of the
2. An application for License under oath;
basic rule that a foreign corporation is one which owes
3. Attached to the application for license shall be a
its existence to the laws of another State and
duly executed Certificate under oath by the
generally, it has no existence within a State in which it
is foreign (AQUINO, Corporate Law, supra at 658). authorized official, attesting to the fact that the
laws of the country allow Filipino citizens and
Requisites of a Foreign Corporation corporations to do business therein;
4. The application shall be accompanied by a
1. The corporation must be formed, organized, or
Statement under oath of the President of the
existing under any law other than those of the corporation, showing that applicant is solvent and
Philippines; and in sound financial condition, and stating its assets
and liabilities as of the date not exceeding 1 year
2. The laws of the country where the corporation was immediately prior to the filing of the application;
organized allow Filipino citizens and corporations to and
do business in its own country or state 5. Foreign banking, financial and insurance
(CORPORATION CODE, Sec. 123) corporations shall also comply with the provisions
of existing laws applicable to them. In the case of
Modes of Doing Business in the Philippines all other foreign corporations, no application for
1. Subsidiary - a corporation which will be organized license to transact business in the Philippines
in the Philippines through SEC (AQUINO, Corporate shall be accepted by the SEC without previous
authority from the appropriate government
Law, supra at 659)
agency, whenever required by law
(CORPORATION CODE, Sec. 125).
1. 2.;
Note: Foreign corporations have the right to transact
2. Branch Office - Carries out activities of a
business in the Philippines after it shall have obtained
foreign corporation and derives income from the host a license to transact business in this country in
country (Ibid).; accordance with this Code and a certificate of
authority from the appropriate government agency
3. 3.Representative or liaison office - deals (CORPORATION CODE, Sec. 123).
directly with the clients of the parent company but
does not derive income from the host country and is Purpose: To subject foreign corporations to the
fully subsidized by its head office (Ibid).; and jurisdiction of the local courts (AQUINO, Corporate
Law, supra at 662).
4. 4. Regional or area headquarters - may be
Upon issuance of the license, the foreign corporation
organized under Presidential Decree No. 218 (Ibid)
may commence to transact business in the
(Id.). Philippines. Within 60 days after the issuance, the
licensee, except foreign banking or insurance
corporation, shall deposit with the SEC for the benefit
of present and future creditors of the licensee in the
Philippines, securities satisfactory to the SEC
(CORPORATION CODE, Sec. 126).

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a. Substance Test – Whether the foreign
corporation is maintaining or continuing in the
Philippines the body or substance of the
business for which it was organized or
Resident Agent whether it has substantially retired from it and
1. An individual, who must be of good moral turned it over to another; and
character and of sound financial standing, b. Continuity Test – Whether there is continuity
residing in the Philippines, or of commercial dealings and arrangements,
2. A domestic corporation lawfully transacting contemplating to some extent the
business in the Philippines designated in a written performance of acts or works or the exercise
power of attorney by a foreign corporation of some functions normally incident to and in
authorized to do business in the Philippines progressive prosecution of, the purpose and
(CORPORATION CODE, Secs. 127-128). object of its organization (Agilent
Technologies Singapore, Ltd. v. Integrated
A condition precedent to the issuance of the license is Silicon Technology Philippines Corp., G.R.
the filing with the SEC a written power of attorney No. 154618, April 14, 2004).
designating some person who must be a resident of
the Philippines, on whom any summons and other 2. Contract Test
legal processes may be served in all actions or other Whether the contracts entered into by the foreign
legal proceedings against such corporation, and corporation, or by an agent acting under the
consenting that service upon such resident agent shall control and direction of the foreign corporation,
be admitted and held as valid as if served upon the are consummated in the Philippines. To be doing
duly authorized officers of the foreign corporation at its or “transacting business in the Philippines” for
home office (CORPORATION CODE, Sec. 128). purposes of Sec. 133 of the Corporation Code, the
foreign corporation must actually transact
business in the Philippines, that is, perform
A resident agent cannot sign the certificate of non- specific business transactions within Philippine
forum shopping that is a requirement for the filing of territory on a continuing basis in its own name and
an initiatory pleading in court because while a resident for its own account. Actual transaction of
agent may be aware of actions filed against the business within the Philippine territory is an
principal, he may not be aware of the actions initiated essential requisite for the Philippines to acquire
by the principal (Expertravel & Tours Inc. v. CA, jurisdiction over a foreign corporation and thus
supra). require the foreign corporation to secure a
Philippine business license (B. Van Zuiden Bros.,
“Doing Business” Ltd. v. GTVL Manufacturing Industries, Inc., G.R.
No general rule or governing principle can be laid No. 147905, May 28, 2007).
down as to what constitutes “doing” or “engaging” or
“transacting business”. Indeed, the accepted rule in Acts constituting “Doing Business”: (SAPO)
jurisprudence is that each as must be judge in the light 1. Soliciting orders, service contracts, opening
of its peculiar environmental circumstances, offices, whether called “liaison” offices or
considering the purposes and the language of the branches;
statute or statutes applicable (DE LEON & DE LEON 2. Appointing representatives or distributors
Jr.,, Corporate Law, supra at 780). domiciled in the Philippines or who in any calendar
year stay in the country for a period or periods
A single act or transaction made in the Philippines, totaling 180 days or more;
however, could qualify a foreign corporation to be 3. Participating in the management, supervision or
doing business in the Philippines, if such singular act control of any domestic business, firm or entity or
is not merely incidental or casual, but indicates the corporation in the Philippines; and
foreign corporation's intention to do business in the 4. Any Other act or acts that imply a continuity of
Philippines. (AVON Insurance v. CA; G.R. No. 97642; commercial dealings or arrangements, and
August 29, 1997) contemplate to that extent the performance of acts
or works, or the exercise of some of the functions
Jurisprudential Tests: normally incident to, and in progressive
1. Twin Characterization Test prosecution of, commercial gain or the purpose of
The true test seems to be whether the foreign the business organization (R.A. No. 7042, Sec.
corporation is continuing the body or substance of the 3(d)).
business or enterprise for which it was organized.
(Mentholatum Co., Inc. v, Mangaliman; G.R. No Note: Participating in the bidding process
47701; June 27, 1941) constitutes “doing business” because it shows the
1. foreign corporation’s intention to engage in

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244 2017 CENTRALIZED BAR OPERATIONS
business here. It is in the performance by a foreign Foreign corporations, even unlicensed ones, can sue
corporation of the acts for which it was created, or be sued on a transaction or series of transactions
regardless of volumes of business, that set apart from their common business in the sense
determines whether a foreign corporation needs a that there is no intention to engage in a progressive
license or not (Hutchison Ports Philippines Ltd. v. pursuit of the purpose and object of business
SBMA, G.R. No. 131367, August 31, 2000). transaction (Eriks PTE, Ltd. v. CA, G.R. No. 118843,
February 6, 1997).
Acts NOTnot constituting “Doing Business”:
(MAPS-CCP) What is determinative of “doing business” is not really
1. Mere investment as a shareholder in a domestic the number or the quantity of the transactions but
corporation and/or the exercise of rights as such more importantly, the intention of an entity to continue
investor; the body of its business in the country. The phrase
2. Appointing a representative or distributor “isolated transaction” has a definite and fixed
domiciled in the Philippines which transacts meaning, i.e., a transaction or series of transaction set
business in its own name and for its own account; apart from the common business of a foreign
3. Publication of a general advertisement through enterprise in the sense that there is no intention to
any print or broadcast media; engage in a progressive pursuit of the purpose and
4. Maintaining a Stock of goods in the Philippines object of the business (Eriks PTE, Ltd. v. CA, supra).
solely for the purpose of having the same
processed by another entity in the Philippines; In Pari Delicto Rule
5. Consignment by the foreign corporation of The very purpose of the law was circumvented and
equipment with a local company to be used in the evaded when the petitioner entered into the said
processing of products for export; agreements despite the prohibition contained in the
6. Collecting information in the Philippines; and questioned law. The parties were considered as being
7. Performing services auxiliary to an existing in pari delicto because they equally violated R.A. No.
isolated contract of sale which are not on a 5455 (Top-Weld Manufacturing v. ECED, S.A., G.R.
continuing basis (VILLANUEVA, Corporate Law, No. L-44944, August, 9, 1985).
supra at 970).
Estoppel Rule
The mere ownership by a foreign corporation of a A party is estopped from questioning the capacity of a
property in certain state, unaccompanied by its active foreign corporation to institute an action in our courts
use in furtherance of the business for which it was where it had obtained benefits from its dealings with
formed, is insufficient in itself to constitute “doing such foreign corporations and thereafter committed a
business” (MR Holdings Ltd. v. Bajar, G.R. No. breach or sought to renege on its obligations (Merrill
138104, April 11, 2002). Lynch v. CA, G.R. No. 97816, July 24, 1992).

There is no showing that petitioner performed within Effects of Lack of License on Suits
the Philippine territory the specific act of doing 1. Foreign corporation doing business in the
business in Sec. 3(d) of R.A. No. 7042. Petitioner did Philippines:
not also open an office here in the Philippines, appoint a. May not sue or intervene in any action in any
a representative, or distributor, or manage or court or administrative agency of the
supervise or control a local business. While petitioner Philippines; but
and respondent entered into a series of transactions b. May be sued on any valid cause of action
implying a continuity of commercial dealings, the recognized in the Philippines
perfection and consummation of the transactions were (CORPORATION CODE, Sec. 133).
done outside the Philippines (B. Van Zuiden v. GTVL 2. Foreign corporation not doing business in the
Manufacturing Industries, supra). Philippines:
a. May sue for isolated transactions, as well as
If a foreign corporation that is engaged in selling of for those which are casual or incidental
goods has local distributor, the foreign corporation can thereto (Agilent Technologies v. Integrated
still be considered as not doing business if the Silicon Technology Philippines Corp., supra);
distributor is transacting in its own name and
independently of the foreign corporation and in its own b. May be sued on any valid cause of action
account and not in the name or for the account of the recognized in the Philippines (VILLANUEVA,
foreign corporation. (La Chemise Lacoste v. Corporate Law, supra at 946).
Fernandez; G.R. Nos. 63796-97; May 21, 1984)
Effect of Subsequent Acquisition of License
The subsequent acquisition of the license will cure the
Doctrine of Isolated Transactions lack of capacity at the time of the execution of the
contract. Hence, the foreign corporation can re-file the

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2017 CENTRALIZED BAR OPERATIONS
case that was previously dismissed after acquiring a independent of any business transaction
license (Home Insurance v. Eastern Shipping Liner, (Eastboard Navigation Ltd. v. Juan Ysmael and
G.R. No. L-34382, July 20, 1983). Company, Inc., G.R. No. L-9090, September 10,
1957).
Res Judicata does not set in a case dismissed for lack
of capacity to sue, because there has been no 2. To Protect its corporate reputation, name, and
determination on the merits—and subsequent goodwill;
acquisition of the license will cure the lack of capacity 3. To enforce a Right not arising out of a business
at the time of the execution of the contract (Eriks PTE. transaction, e.g., tort that occurred in the
Ltd v. CA, supra). Philippines;
4. When the parties have Contractually stipulated
If a foreign corporation, not engaged in business in the that Philippines is the venue of actions;
Philippines, is not barred from seeking redress from 5. When the party sued is barred by the principle of
courts in the Philippines, a fortiori, that same Estoppel and/or principle of unjust enrichment
corporation cannot claim exemption from being sued from questioning the capacity of the foreign
in the Philippine courts for acts done against a person corporation; and
in the Philippines (Facilities Management Corp. v.
Dela Osa, G.R. No. L-38649, March 26, 1979). Note: When a foreign corporation does business
in the Philippines without a license, a Philippine
Doing Business Without License citizen or entity which has contracted with said
Summary of Rules corporation may be estopped from challenging the
The principles regarding the right of a foreign foreign corporation’s corporate personality in a
corporation to bring suit in Philippine courts may thus suit brought before the Philippine courts (Merrill
be condensed in four statements: Lynch Futures v. CA, supra).
1. If a foreign corporation does business in the
Philippines without a license, it cannot sue before 6. Recovery of Misdelivered property (DE LEON &
the Philippine courts; DE LEON Jr., , Corporate Law, supra at 798-801).
2. If a foreign corporation is not doing business in the
Philippines, it needs no license to sue before 6.
Philippine courts on an isolated transaction or on
a cause of action entirely independent of any Revocation of License
business transaction; Grounds:
3. If a foreign corporation does business in the 1. Failure to file its annual report or pay any fees as
Philippines without a license, a Philippine citizen required by the Code;
or entity which has contracted with said 2. Failure to appoint and maintain a resident agent in
corporation may be estopped from challenging the the Philippines as required by the Code;
foreign corporation’s corporate personality in a 3. Failure, after change of its resident agent or his
suit brought before Philippine courts; and address, to submit to the SEC a statement of such
4. If a foreign corporation does business in the change as required by the Code;
Philippines with the required license, it can sue 4. Failure to submit to the SEC an authenticated
before Philippine courts on any transaction copy of any amendment to its AOI or by-laws or of
(Agilent Technologies Singapore v. Integrated any articles of merger or consolidation within the
Silicon Technology Philippines Corp., supra). time prescribed by the Code;
5. A misrepresentation of any material matter in any
Note: The prohibition against doing business without application, report, affidavit or other document
first securing a license is now given penal sanctions submitted by such corporation pursuant to the
under Section 144 of the Code. (AQUINO, Corporate provisions of the Code;
Law, supra at 676) 6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies
Instances when a Foreign Corporation May Sue in or political subdivision;
the Philippines whether or not Licensed To Do 7. Transacting business in the Philippines outside of
Business (PRICE-M) the purpose or purposes for which such
1. To seek redress for an Isolated business corporation is authorized under its license;
transaction; 8. Transacting business in the Philippines as agent
of or acting for and in behalf of any foreign
Note: If a foreign corporation is not doing corporation or entity not duly licensed to do
business in the Philippines, it needs no license to business in the Philippines; or
sue before the Philippine courts on an isolated
transaction or on a cause of action entirely

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246 2017 CENTRALIZED BAR OPERATIONS
9. Any other ground as would render it unfit to while Sec. 5 was amended, there is no repeal of
transact business in the Philippines Sec. 6 thereof declaring that the fraudulent acts or
(CORPORATION CODE, Sec. 134). schemes, which the SEC shall exclusively
investigate and prosecute, are those in violation of
Procedure: any law or rules and regulations administered and
1. The SEC shall issue a corresponding certificate of enforced by the SEC alone. The filing of civil/intra-
revocation, furnishing a copy thereof to the corporate case before SEC does not preclude the
appropriate government agency in the proper simultaneous and concomitant filing of a criminal
case; and action before the regular courts; such that a
2. The SEC shall also mail to the corporation at its fraudulent act may give rise to liability for violation
registered office in the Philippines a notice of such of the rules and regulations of the SEC cognizable
revocation accompanied by a copy of the by the SEC itself, as well as criminal liability for
certificate of revocation (CORPORATION CODE, violation of the Revised Penal Code cognizable by
Sec. 135). the regular courts; both charges to be filed and
proceeded independently and simultaneously
Withdrawal (Fabia v. CA, G.R. No. 132684. September 11,
By filing a petition for withdrawal of license 2002).
(CORPORATION CODE, Sec. 136).
A corporate officer’s dismissal is always a
Requisites: corporate act and/or an intra-corporate
1. All claims which have accrued in the Philippines controversy. However, the corporate officers
have been paid, compromised, or settled; contemplated are those whose offices are created
2. All taxes, imposts, assessment, and penalties, if by the Corporation Code or the by-laws (Marc II
any, lawfully due to the Philippine Government or Marketing v. Joson, supra).
any of its agencies or political subdivisions have
been paid; and Intra-Corporate Dispute
3. The petition for withdrawal of license has been Elements:
published once a week for three consecutive 1. Status or relationship of the parties –
weeks in a newspaper of general circulation in the controversy must be between and among
Philippines (CORPORATION CODE, Sec. 136). corporators, between corporators and the
corporation. Commented [ASPC29]: Source?

S ECURITIES A ND An intra-corporate controversy is one which


"pertains to any of the following relationships: (1)
EXCHANGE C OMMISSION between the corporation, partnership or
association and the public; (2) between the
REORGANIZATION A CT corporation, partnership or association and the
State in so far as its franchise, permit or license to
( P . D . N O . 902- A ) operate is concerned; (3) between the corporation,
partnership or association and its stockholders,
RTC’s Original and Exclusive Jurisdiction partners, members or officers; and (4) among the
(FIDCARS) stockholders, partners or associates themselves"
1. Fraudulent devices and schemes employed by (Yujuico v. Quiambao, G. R. No. 168639, January
directors detrimental to the public interest and to 29, 2007).
other firms;
2. Intra-corporate disputes; 2. Nature of the question – intrinsic connection with
3. Disputes with the state in relation to their franchise the regulation or the internal affairs of the
and right to exist as such; corporation (Lozano v. De Los Santos, supra).
4. Controversies in election, appointment of Examples:
directors or trustees; a. Action by a corporate officer to recover
5. Petition to be declared in a State of suspension of compensation from the corporation;
payments; b. Action by a stockholder to compel issuance of
6. Petition for Rehabilitation; and certificate of stocks; and
7. Appointment of rehabilitation receiver or c. Action for recovery of corporate funds. Commented [ASPC30]: Source?
management committee (R.A. No. 8799, Sec.
5.2). Grounds for Suspension or Cancellation of
Certificate of Registration
Note: R.A. No. 8799 effectively amended Sec. 5 1. Fraud in procuring registration;
of P.D. No. 902-A, jurisdiction over intra-corporate 2. Serious misrepresentation as to objectives of
disputes is now vested in the RTC. However, corporation;

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2017 CENTRALIZED BAR OPERATIONS
3. Refusal to comply with lawful order of SEC; The jurisdiction of the regular courts over so-called
4. Continuous inoperation for at least 5 years; election contests or controversies under Section 5(c)
5. Failure to file by-laws within required period; of P.D. No. 902-A does not extend to every potential
6. Failure to file reports; and subject that may be voted on by the shareholders, but
7. Other similar grounds (P.D. No. 902-A, Sec. 6(i)). only to the election of directors or trustees in which
stockholders are authorized to participate under Sec.
24 of the Corporation Code (GSIS v. CA, G.R. No.
I NTERIM R ULES O F 183905, April 16, 2009).
P ROCEDURE F OR I NTRA - Question regarding the accounting of the association
dues and the manner of calculating the same is an
C ORPORATE C ONTROVERSIES intra-corporate dispute (Chateau de Baie v. Moreno,
G.R. No. 186271, February 23, 2011).
( A . M . N O . 01-2-04)
All actions covered by these Rules shall be
Intra-corporate Controversies commenced and tried in the Regional Trial Court
Intra-corporate controversies are ordinary civil which has jurisdiction over the principal office of the
actions. These cases either seek the recovery of corporation, partnership, or association concerned.
damages or property or specific performance of an act Where the principal office of the corporation,
against a party for the violation or protection of a right partnership or association is registered in the SEC as
(A. M. No. 00-8-10-SC). Metro Manila, the action must be filed in the city or
municipality where the head office is located (Rule 1,
Cases Covered (DREDI) Sec 5, A.M. No. 01-2-04-SC).
1. Devices or schemes employed by, or any act of,
the board of directors, business associates, Nuisance and Harassment Suits
officers or partners, amounting to fraud or Nuisance and harassment suits are prohibited. In
misrepresentation which may be detrimental to determining whether a suit is a nuisance or
the interest of the public and/or of the harassment suit, the court shall consider, among
stockholders, partners, or members of any others, the following:
corporation, partnership, or association; 1. The extent of the shareholding or interest of the
2. Controversies arising out of intra-corporate, initiating stockholder or member;
partnership, or association relations, between and 2. Subject matter of the suit;
among stockholders, members, or associates; 3. Legal and factual basis of the complaint;
and between, any or all of them and the 4. Availability of appraisal rights for the act or acts
corporation, partnership, or association of which complained of; and
they are stockholders, members, or associates, 5. Prejudice or damage to the corporation,
respectively; partnership, or association in relation to the relief
3. Controversies in the election or appointment of sought.
directors, trustees, officers, or managers of
corporations, partnerships, or associations; In these cases, the court may, motu proprio or upon
4. Derivative suits; and motion, forthwith dismiss the case (Rule 1, Sec. 1(b),
5. Inspection of corporate books (Rule 1, Sec. 1(a), A.M. No. 01-2-04-SC).
A.M. No. 01-2-04-SC).
All decisions and orders issued under these Rules
Note: The provisions of the rule shall also apply shall immediately be executory. No appeal or petition
to election contests in stock and non-stock taken therefrom shall stay the enforcement or
corporations (Rule 6, Sec. 1, A.M. No. 01-2-04- implementation of the decision or order, unless
SC). restrained by an appellate court. Interlocutory orders
shall not be subject to appeal (RULE 1, Sec. 4, A.M.
Election Contest No. 01-2-04-SC, March 13, 2001).
Any controversy or dispute involving title or claim to
any elective office in a stock or non-stock corporation,
the validation of proxies, the manner and validity of I NTERIM R ULES O F
elections, and the qualifications of candidates,
including the proclamation of winners, to the office of
P ROCEDURE ON C ORPORATE
director, trustee or other officer directly elected by the R EHABILITATION
stockholders in a close corporation or by members of
a non-stock corporation where the AOI or by-laws so ( A . M . N O . 00-8-10- SC )
provide (RULE 6, Sec. 2).

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248 2017 CENTRALIZED BAR OPERATIONS
Corporate Rehabilitation of business or has liabilities greater than its assets.
A process to conserve and administer the (VILLANUEVA-CASTRO, Take Note, supra at 134)
corporation’s assets in the hope that it may eventually
be able to recover from financial stress to solvency. Venue
Petitions for rehabilitation pursuant to these Rules
Rehabilitation is the restoration of the debtor to a shall be filed in the RTC having jurisdiction over the
position of successful operation and solvency, if it is territory where the debtor’s principal office is located
shown that its continuance of operation is as specified in the AOI (RULE 3, Sec. 2).
economically feasible and its creditors can recover by
way of the present value of payments projected in the Although FADI and UDI have interlocking directors,
plan more if the corporation continues as a going owners, and officers and intertwined loans, the two
concern than if it immediately liquidated (RU LE 2, corporations are separate, each with a personality
Sec. 1). distinct from the other. In determining the feasibility of
rehabilitation, the court evaluates the assets and
Construction on Rules on Rehabilitation liabilities of each of these corporations separately and
The rules shall be liberally construed to btain to the not jointly with other corporations. Considering that
parties a just, expedious, and inexpensive disposition UDI’s principal office is located in Pasig City, the
of cases. (VILLANUEVA-CASTRO, Take Note, supra petition should have been filed with the RTC
at 133) in Pasig City (Asia Trust v. FADI and UDI, G.R. No.
179558, June 1, 2011).
Nature
1. In rem; If the principal office is registered in the SEC as Metro
2. Summary; and Manila, the action must be filed in the RTC of the city
3. Non-adversarial (RULE 3, Sec. 1). or municipality where the head office is located (RULE
3, Sec. 2, A.M. No. 00-8-10-SC).
Special Proceeding
A petition for rehabilitation is a special proceeding. Joint petition by group of companies shall be filed in
The status or fact sought to be established is the the RTC which has jurisdiction over the principal office
inability of the corporate debtor to pay its debts when of the parent corporation (RULE 3, Sec. 2).
they fall due so that a rehabilitation plan, containing
the formula for the successful recovery of the The rehabilitation court has no power to resolve
corporation, may be approved in the end. ownership disputes. Rehabilitation proceedings are
summary and non-adversarial in nature, and do not
Applicability contemplate adjudication of claims that must be
These Rules apply to petitions for rehabilitation filed threshed out in ordinary court proceedings (Advent
by corporations, partnerships and associations Capital v. Alcantara, G.R. No. 183050, January 25,
pursuant to P.D. No. 902-A (RULE 1, Sec. 1). 2012).

Notes: A corporation with debts that have already Executory Nature of Orders
matured may still file a petition for rehabilitation under Any order issued by the court under these Rules is
the Interim Rules of Procedure on Corporation immediately executory (RULE 3, Sec. 5)
Rehabilitation. (Metropolitan Bank and Trust .
Company v. Liberty Corrugated Boxes Manufacturing Steps:
Corporation, G.R. No. 184317, January 25, 2017) 1. Filing a verified petition with the appropriate
RTC by:
a. Corporate debtor who foresees the
impossibility of meeting its debts when they
respectively fall due (RULE 4, Sec. 1);
Rehabilitation in case there is perceived insolvency of b. A group of companies, when one or more of
the company is not inappropriate because the basic its constituent corporations foresee the
issues in rehabilitation proceedings concern the impossibility of meeting debts when they
viability and desirability of continuing the business respectively fall due, and the financial distress
operations of the petitioning corporation. would likely adversely affect the financial
condition and/or operations of the other
Moreso, FRIA has defined a corporate debtor as companies of the group under the terms of the
corporation duly organized and existing under proposed rehabilitation plan (RULE 4, Sec. 1);
Philippine laws that has become insolvent. The term or
“insolvent” term insolvent is defined as the financial c. Creditor or creditors holding at least 20% of
condition of a debtor that is generally unable to pay its the debtor’s total liabilities when the debtor
or his liabilities as they fall due in the ordinary course

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2017 CENTRALIZED BAR OPERATIONS
cannot meet its debts as they respectively fall would bar them from any participation in the
due (RULE 5, Sec. 1). proceedings (RULE 3, Sec. 7).

2. The following shall be annexed to the petition: 4. Publication of the stay order in a newspaper of
a. Audited financial statements at end of its last general circulation once a week for 2
fiscal year; consecutive weeks (RULE 3, Sec. 7);
b. Interim financial statement; 4.
c. Schedule of debts and liabilities; 5. Referral of rehabilitation plan to rehabilitation
d. Inventory of assets; receiver
e. Rehabilitation plan;
f. Schedule of payments and disposition of Rehabilitation Plan shall include: (a) the desired
assets effected within 3 months preceding the business targets or goals and the duration and
filing of the petition; coverage of the rehabilitation; (b) the terms and
g. Schedule of cash flow for the last 3 months; conditions of such rehabilitation; (c) the material
h. Statement of possible claims; financial commitments; (d) the means for the
i. Affidavit of general financial condition; execution; (e) a liquidation analysis; and (f) such
j. At least 3 nominations for rehabilitation other relevant information (Rule 3, Sec. 18);
receiver; and
k. Certificate under oath that directors and Note: Material financial commitments is material in
stockholders have irrevocably rehabilitation plan. It becomes significant in gauging Formatted: Highlight
approved/consented to all actions/matters the reesolve determination, earnestness, and good
necessary under the rehabilitation plan faith of the distressed corporation in financing the
(RULE 4, Sec. 2). proposed. rehabilitation plan. (VILLANUEVA-
CASTRO, Take Note, supra at 133)
Note: A petition filed by the debtor must be
verified by an affidavit of a responsible officer 6. Initial and additional hearings (RULE 4, Secs.
of the debtor (RULE 4, Sec. 3). 5-6)
7. Meetings between corporate debtor and
3. The court shall issue the stay order not later creditors. Discussions on the rehabilitation
than 5 days from the filing of the petition, plan (RULE 4, Sec. 8);
which among others, shall: 8. Submission of final rehabilitation plan to the
a. Appoint a rehabilitation receiver and fix his RTC for approval (RULE 4, Sec. 10);
bond; 9. The petition shall be dismissed (which results
b. Stay all actions for claims against the debtor, into the automatic lifting of the stay order
which shall cover both secured and unless RTC ordered otherwise) if no
unsecured creditors. rehabilitation plan is approved after 180 days
from initial hearing; and
Provided, that the stay order shall not cover 10. Approval or disapproval of the rehabilitation
claims against letters of credit and similar plan by RTC. The court shall decide the
security arrangements issued by a third party petition within 1 year from the date of filing of
to secure the payment of the debtor's the petition (RULE 4, Secs. 11-12).
obligations;
Note: The rehabilitation plan is an indispensable
Provided, further, that the stay order shall not requirement in corporate rehabilitation
cover foreclosure by a creditor of property not proceedings (Siochi Fishery v. BPI, G.R. No.
belonging to a debtor under corporate 193872, October 19, 2011).
rehabilitation;
Stay Order/Automatic Stay
However, that where the owner of such Effect of appointment of a management committee or
property sought to be foreclosed is also a rehabilitation receiver (RULE 3, Sec. 7).
guarantor or one who is not solidarily liable,
said owner shall be entitled to the benefit of All actions for claims against the corporation shall be
excussion as such guarantor; suspended accordingly (RULE 3, Sec. 7).

c. Set an initial hearing for the petition (not Execution is included in the stay order in rehabilitation
earlier than 45 days but not later than 60 days proceedings (Molina v. Pacific Plans, G.R. No.
from filing of the petition); and 165476, August 15, 2011).
d. Direct the creditors to file their verified
comment or opposition not later than 15 days
before the initial hearing; their failure to do so

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250 2017 CENTRALIZED BAR OPERATIONS
Return of property by failure to prosecute a replevin creditors. Such suspension is intended to give
case will not violate the stay order (Advent Capital v. enough breathing space for the management
Young, supra). committee or rehabilitation receiver to make the
business viable again, without having to divert
Upon the appointment of a management committee or attention and resources to litigations in various
a rehabilitation receiver, all actions for claims against fora (Sobrejuanite v. ASB, supra).
the corporation pending before any court, tribunal or
board shall ipso jure be suspended. The justification All actions and claims against the corporation are
for the automatic stay of all pending actions for claims suspended upon the appointment by the Court of
is to enable the management committee or the a Management Committee or Rehabilitation
rehabilitation receiver to effectively exercise its/his Receiver. The stay order shall be effective from
powers free from any judicial or extrajudicial the time of its issuance up to the dismissal of the
interference that might unduly hinder or prevent the petition or termination of the rehabilitation
rescue of the corporation (Lingkod Manggagawa sa proceedings (PAL v. Spouses Kurongking, G.R.
Rubberworld v. Rubberworld [Phils.] Inc., supra). No. 146698, September 24, 2002).

The suspension of all actions for claims against the The suspension also covers employees’ claims
corporation embraces all phases of the suit, be it (Lingkod ng Manggagawa sa Rubberworld v.
before the trial court or any tribunal or before the Rubberworld, Phils. Inc., supra).
Supreme Court. What are automatically stayed or
suspended are the proceedings of a suit and not just The suspension embraces all phases of the suit,
the payment of claims during the execution stage after be it before the trial court or any tribunal or before
the case had become final and executor (Garcia v. the Supreme Court, not just payment of claims but
PAL, supra). also proceedings of a suit are automatically
suspended (Garcia v. PAL, supra).
The rehabilitation of a corporation and the settlement
of claims against it is not a legal ground for the 2. This suspension shall not prejudice or render
extinction of criminal liabilities. The prosecution of the ineffective the status of a secured creditor as
officers of the corporation has no bearing on the compared to a totally unsecured creditor. P.D.
pending rehabilitation of the corporation, especially No. 902-A does not state anything to this
since they are charged in their individual capacities effect. What it merely provides is that all actions
(Panlilio v. RTC, supra). for claims against the corporation, partnership or
association shall be suspended. This should give
Purpose: To enable the management committee or the receiver a chance to rehabilitate the
the rehabilitation receiver to effectively exercise its corporation if there should still be a possibility for
powers free from any judicial or extrajudicial doing so. However, in the event that rehabilitation
interference that might unduly hinder or prevent the is no longer feasible and claims against the
rescue of the debtor company (Rubberworld v. NLRC, distressed corporation would eventually have to
GR No. 126773, April 14, 1999). be settled, the secured creditors shall enjoy
preference over the unsecured creditors, subject
No definite duration; deemed to apply during the entire only to the provisions of the Civil Code on
period that the corporate debtor is under management Concurrence and Preferences of Credit (RCBC v.
committee or the rehabilitation receiver (BF Homes v. IAC, G.R. No. 74851, December 9, 1999).
CA, GR No. 30690, November 19, 1982).
The order prohibits the debtor from selling,
Procedure for a Valid Stay Order encumbering, transferring, or disposing in any
1. All claims against corporations, partnerships, or manner any of its properties except in the ordinary
associations that are pending before any court, course of business; and from making any payment
tribunal, or board, without distinction as to whether of its liabilities outstanding as at the date of filing of
or not a creditor is secured or unsecured, shall be the petition.
suspended effective upon the appointment of a
management committee, rehabilitation receiver, The order likewise prohibits the debtor’s suppliers
board, or body in accordance P.D. No. 902-A of goods or services from withholding supply of
(RULE 3, Sec. 7). goods and services in the ordinary course of
business for as long as the debtor makes
The purpose for the suspension of the payments for the services and goods supplied after
proceedings is to prevent a creditor from obtaining the issuance of the stay order (RULE 6, Sec. 2(k),
an advantage or preference over another and to A.M. No. 00-8-10-SC).
protect and preserve the rights of party litigants as
well as the interest of the investing public or

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Upon motion or motu proprio, the court may 1. To verify the accuracy of the petition, including its
declare void any transfer of property or any other annexes such as the Schedule of Debts and
conveyance, sale, payment, or agreement made in Liabilities and the Inventory of Assets;
violation of its stay order or in violation of these 2. To accept and incorporate, when justified,
rules (RULE 3, Sec. 6). amendments to the Schedule of Debts and
Liabilities;
Period of Stay Order 3. To recommend to the court the disallowance of
The stay order shall be effective from the date of its claims and rejection of amendments to the
issuance until the dismissal of the petition or the Schedule of Debts and Liabilities that lack
termination of the rehabilitation proceedings (RULE 3, sufficient proof and justification;
Sec. 9) 4. To submit to the court and make available for
review by the creditors, a revised Schedule of
The petition shall be dismissed if no rehabilitation plan Debts and Liabilities;
is approved by the court upon the lapse of 180 days 5. To investigate the acts, conduct, properties,
from the date of the initial hearing. The court may grant liabilities, and financial condition of the debtor, the
an extension beyond this point only if it appears by operation of its business and the desirability of the
convincing and compelling evidence that the debtor continuance thereof; and, any other matter
may successfully be rehabilitated. relevant to the proceeding or to the formulation of
a rehabilitation plan;
6. To examine under oath the directors and officers
Rehabilitation Receiver of the debtor and any other witnesses that he may
A person appointed by the RTC, in behalf of all the deem appropriate;
parties for the purpose of preserving and conserving 7. To make available to the creditors documents and
the property and preventing its possible destruction or notices necessary for them to follow and
dissipation, if it were left in the possession of any of participate in the proceedings;
the parties (RULE 3, Sec. 11). 8. To report to the court any fact ascertained by him
pertaining to the causes of the debtor's problems,
He acts in a fiduciary capacity and with impartiality fraud, preferences, dispositions, encumbrances,
towards all interested. (RULE 3, Sec. 11). misconduct, mismanagement and irregularities
committed by the stockholders, directors,
He does not take over the management and control management, or any other person against the
from the debtor, but shall closely oversee and monitor debtor;
the operations of the debtor during the pendency of 9. To employ such person or persons such as
the proceedings. lawyers, accountants, appraisers and staff as are
necessary in performing his functions and duties
He shall not be subject to any action, claim or demand as receiver;
in connection with any act done or omitted by him in 10. To monitor the operations of the debtor and to
good faith in the exercise of his functions and powers immediately report to the court any material
conferred in the rules (RULE 3, Sec. 15). adverse change in the debtor's business;
11. To evaluate the existing assets and liabilities,
He may be dismissed by the court, upon motion or earnings, and operations of the debtor;
motu proprio, (a) if he fails, without just cause, to 12. To determine and recommend to the court the
perform any of his powers and functions under these best way to salvage and protect the interests of
Rules; or (b) on any of the grounds for removing a the creditors, stockholders, and the general
trustee under the general principles of trusts (RULE 3, public;
Sec. 17). 13. To study the rehabilitation plan proposed by the
debtor or any rehabilitation plan submitted during
Advent Capital or its rehabilitation receiver cannot the proceedings, together with any comments
unilaterally decide to apply the entire amount of cash made thereon;
dividends retroactively to cover the accumulated trust 14. To prohibit and report to the court any
fees. Advent Capital merely managed in trust the encumbrance, transfer, or disposition of the
cash dividends for the benefit of the Alcantaras. The debtor's property outside of the ordinary course of
trust property is only fictitiously attributed by law to the business or what is allowed by the court;
trustee “to the extent that the rights and powers vested 15. To prohibit and report to the court any payments
in a nominal owner shall be used by him on behalf of outside of the ordinary course of business;
the real owner” (Advent Capital v. Alcantara, supra). 16. To have unlimited access to the debtor's
employees, premises, books, records, and
Powers and Functions of Management Committee financial documents during business hours;
or Rehabilitation Receiver

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17. To inspect, copy, photocopy, or photograph any 4.3. Contracts and other arrangements between the
document, paper, book, account or letter, whether debtor and its creditors shall be interpreted as
in the possession of the debtor or other persons; continuing to apply to the extent that they do not
18. To gain entry into any property for the purpose of conflict with the provisions of the plan; and
inspecting, measuring, surveying, or 4. Any compromises on amounts or rescheduling of
photographing it or any designated relevant object timing of payments by the debtor shall be binding
or operation thereon; on creditors regardless of whether or not the plan
19. To take possession, control, and custody of the is successfully implemented (RULE 3, Sec. 20).
debtor's assets;
20. To notify counterparties and the court as to Note: The rehabilitation plan, once approved, is
contracts that the debtor has decided to continue binding upon the debtor and all persons who may be
to perform the breach; affected by it, including the creditors, whether such
21. To be notified of and to attend all meetings of the persons have or have not participated in the
board of directors and stockholder of the debtor; proceedings or have opposed the plan or whether
22. To recommend any modification of an approved their claims have or have not been scheduled. Upon
rehabilitation plan as he may deem appropriate; approval of the court, there is nothing left to be done
23. To bring to the attention of the court any material but to enforce the terms and schedule of payment as
change affecting the debtor's ability to meet the provided in the said plan. (Veterans Philippine Scout
obligations under the rehabilitation plan; Security Agency, Inc. v. First Dominion Prime
24. To recommend the appointment of a management Holdings, Inc., G.R. No. 190907, August 23, 2012)
committee in the cases provided for under P.D.
No. 902-A, as amended;
25. To recommend the termination of the proceedings 5.
and the dissolution of the debtor if he determines
that the continuance in business of such entity is Mere disagreement among stockholders as to the
no longer feasible or profitable or no longer works affairs of the corporation would not in itself suffice as
to the best interest of the stockholders, parties- a ground for the appointment of a management
litigants, creditors, or the general public; committee. At least where there is no imminent danger
26. To apply to the court for any order or directive that of loss of corporate property or of any other injury to
he may deem necessary or desirable to aid him in stockholders, management of corporate business
the exercise of his powers and performance of his should not be wrested away from duly elected officers,
duties and functions; and who are prima facie entitled to administer the affairs of
27. To exercise such other powers as may from time the corporation, and placed in the hands of the
to time be conferred upon him by the court (RULE management committee. However, where the
3, Sec. 12). dissension among stockholders is such that the
corporation cannot successfully carry on its corporate
Can a corporate officer file a suit to recover an functions, the appointment of a management
unlawfully corporate detained property despite committee becomes imperative (Jacinto v. First
the corporations pending rehabilitation? Women’s Credit Corporation, G.R. No. 154049,
Yes. A receiver is tasked only to monitor the success August 28, 2003).
implementation of the rehabilitation plan. There is
nothing in the concept of corporate rehabilitation that Does approval of the Rehabilitation Plan violates
would ipso facto deprived a duly authorized creditor’s right against non-impairment of
corporatate officer its right recover its property from an contracts? No becuase Rehabilitation Plan merely
errant lessee. (VILLANUEVA-CASTRO, Take Note, suspend the actions for claims against a respondent
supra at 136) corporation. The enforcement of loan is merely
suspended which does not result in impairment of
contracts. (VILLANUEVA-CASTRO, Take Note, supra
Effects of the Rehabilitation Plan at 144)
1. The plan and its provisions shall be binding upon
the debtor and all persons who may be affected
by it, including the creditors, whether or not such
persons have participated in the proceedings or
opposed the plan or whether or not their claims
have been scheduled; GOCC G OVERNA NCE A CT
2.1. The debtor shall comply with the provisions of the
plan and shall take all actions necessary to carry
( R . A . N O . 10149)
out the plan;
3.2. Payments shall be made to the creditors in Government-Owned or -Controlled Corporation
accordance with the provisions of the plan; GOCC refers to any agency organized as a stock or

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2017 CENTRALIZED BAR OPERATIONS
non-stock corporation, vested with functions relating integrity, experience, education, training and
to public needs whether governmental or proprietary competence (Sec. 16(3)).
in nature, and owned by the Government of the
Republic of the Philippines directly or through its Note: The members of the board and officers must
instrumentalities either wholly or, where applicable as exercise extraordinary diligence in the conduct of
in the case of stock corporations, to the extent of at business and in dealing with the properties of the
least a majority of its outstanding capital stock (Sec. GOCC. Such a degree of diligence requires using the
3(o)). utmost diligence of every cautious person with due
regard for all circumstances (Sec. 21).
Chartered v. Non-Chartered GOCC
Chartered GOCC refers to a GOCC, including Term of Office
Government Financial Institutions, created and vested The term of office of each Appointive Director shall be
with functions by a special law. for 1 year, unless sooner removed for cause. The
Appointive Director shall continue to hold office until
Nonchartered GOCC refers to a GOCC organized and the successor is appointed (Sec. 17(1)).
operating under Batas Pambansa Bilang 68, or “The
Corporation Code of the Philippines” (Sec. 3). Note: An Appointive Director may be nominated by
the GCG for reappointment if one obtains a
Governance Commission for GOCCs (GCG) performance of above average or its equivalent or
Is a central advisory, monitoring, and oversight body higher in the immediately preceding year of tenure
with authority – to formulate, implement and based on the performance criteria for Appointive
coordinate policies (Sec. 5). Directors for the GOCC (Sec. 17(1)).

Board of Directors or Trustees Fiduciary Duties of the Board and Officers


Refers to the governing body that exercises the The members of the Board and Officers of the GOCCs
corporate powers of a GOCC (Sec. 3). The present shall:
number of Directors or Trustees provided in the 1. Act with utmost and undivided loyalty to the
charter of the GOCCs shall be maintained (Sec. 13). GOCC;
2. Act with due care, extraordinary diligence, skill,
Appointive Director and good faith in the conduct of the business of
An Appointive Director shall be appointed by the the GOCC;
President of the Philippines from a short-list prepared 3. Avoid conflicts of interest and declare an interest
by the Governance Commission for Government- they may have in any particular matter before the
Owned or –Controlled Corporations (GCG) (Sec. 15). Board;
4. Apply sound business principles to ensure the
Chief Executive Officer (CEO) financial soundness of the GOCC; and
The CEO or the highest-ranking officer provided in the 5. Elect and/or employ only Officers who are fit and
charters of the GOCCs, shall be elected annually by proper to hold such office with due regard to the
the members of the Board from among its ranks (Sec. qualifications, competence, experience and
18). integrity (Sec. 19(2)).

Note: The Board shall have the authority to discipline Special Audit
the CEO, or order the removal from office, upon a When required:
majority vote of the members of the Board who 1. The 30 GOCCs with the highest total assets shall
actually took part in the investigation and deliberation be subject to periodic special audit by the COA.
(Sec. 22). The periodic audit shall, at the minimum make a
determination whether:
Fit and Proper Rule a. Accounting records of the GOCCs are
To maintain the quality of management of the GOCCs, complete and in accordance with generally
the GCG, in coordination with the relevant government accepted accounting practices and
agencies shall, subject to the approval of the standards; and
President, prescribe, pass upon, and review the b. The statements prepared from the accounts
qualifications and disqualifications of individuals present fairly and comprehensively their
appointed as officers, directors or elected CEO of the GOCCs financial position and the results of its
GOCC and shall disqualify those found unfit (Sec. financial operations.
16(2)). 2. As may be necessary or convenient in the
performance by the GCG of its functions, the
In determining whether an individual is fit and proper Chairman of the GCG may direct at any time a
to hold the position, due regard shall be given to one’s special COA audit of any other GOCC for any

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254 2017 CENTRALIZED BAR OPERATIONS
specific purpose, or when authorized by law, 7. Revocation, refusal or suspension of registration
direct an audit by independent auditors (Sec. 26). of brokers, dealers and salesmen and associated
persons (SRC, Sec. 29);
Requisites for the Creation of a New GOCC or 8. Restrictions on “over-the-counter” markets (SRC,
Related Corporation Sec. 32);
A government agency seeking to establish a GOCC or 9. Self-regulation of associations of securities
Related Corporation under “The Corporation Code of brokers, dealers and other securities related
the Philippines” shall submit its proposal to the GCG organizations (SRC, Sec. 29);
for review and recommendation to the President for 10. Registration of clearing agencies (SRC, Sec. 42);
approval before registering the same with the SEC. 11. Limitations on margin trading or the amount of
The SEC shall not register the AOI and by-laws of a credit that may be extended on any security (SRC,
proposed GOCC or Related Corporation, unless the Sec. 49);
application for registration is accompanied by an 12. Civil liabilities arising from false statement in the
endorsement from the GCG stating that the President registration statement (SRC, Sec. 56);
has approved the same (Sec. 27). 13. Civil liabilities arising from false statements or
omissions in the prospectus, communications and
Requisites for the Acquisition of Controlling reports (SRC, Sec. 57);
Interest in Another Corporation 14. Protection against manipulation of security prices,
Any government agency seeking to purchase a manipulative and deceptive devices (SRC, Sec.
corporation or acquire controlling interest therein shall 59), fraud in pre-need plans and commodities
submit its proposal to the GCG for review and futures contracts (SRC, Sec. 60), fraudulent
approval of the President (Sec. 28). transactions (SRC, Sec. 58), and insider trading
(SRC, Sec. 61); and
15. Establishment of trust funds to compensate
S ECURITIES R EGULATION investors for extraordinary losses or damage they
may suffer due to business failure or fraud or
C ODE mismanagement of the persons with whom they
transact (SRC, Sec. 36.5(a)).
R . A . N O . 8799
Securities
State Policy (REEPP-EM) Shares, participation, or interest in a corporation or in
To establish a socially conscious and free market that: a commercial enterprise or profit-making ventures and
1. Regulates itself; evidenced by a certificate, contract, or instrument
2. Encourages the widest participation of ownership whether written or electronic in character (SRC, Sec.
in enterprises; 3.1).
3. Enhances the democratization of wealth;
4. Promotes the development of the capital market;
5. Protects investors; Kinds of Securities (SIF-DeCPO)
6. Ensures full and fair disclosure about securities; 1. Shares of stocks, bonds, debentures, notes,
and evidences of indebtedness, asset-backed
7. Minimizes, if not totally eliminate, insider trading securities.
and other fraudulent or manipulative devices and
practices which create distortions in the free a. Stocks – a type of security that signifies
market (SRC, Sec.2). ownership in a corporation and represents a
claim on the part of a corporation’s assets and
Features Intended to Protect Investing Public earnings.
1. All securities are required to be registered before
they can be sold to the public (SRC, Sec. 8); Note: When an instrument is labeled “stock”
2. Rejection and revocation of registration of and possesses all the traditional
securities (SRC, Sec. 13); characteristics of stock, one is not required to
3. Regulation of pre-need plans (SRC, Sec. 16); look to the economic substance of the
4. Protection of shareholder interests via rules on transaction to determine whether the stock is
tender offers & proxy solicitations (SRC, Secs. 19 a security (Landreth v. Landreth, 471 U.S.
& 20); 681, 1985).
5. Prohibition on fraud, manipulation and insider
trading (SRC, Secs. 24, 25, 26 and 27); b. Bonds – contract of debt.
6. Regulations of Securities Market Professionals c. Debentures – unsecured debt.
(SRC, Sec. 28); d. Notes – a writing representing a promise to
pay money.

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Family Resemblance Test: a note is proceeds to the investor (SEC v. Howey Co.,
presumed to be a security unless it bears a supra).
strong resemblance to one of a judicially
crafted list of categories of instrument that are 3. Fractional undivided interests in oil, gas, or other
not securities. mineral rights;

e. Evidence of indebtedness - some written 4. Derivatives like options and warrants;


document which on its face establishes an
obligation to pay a sum of money to the holder Derivative – a financial instrument whose value
without regard to the custom and usage changes in response to the change in a specified
surrounding its actual employment. interest rate, security price, commodity price,
foreign exchange rate, index of prices or rates, a
Note: Airline tickets, though they may be credit rating or credit index, or similar variable or
converted into cash, are not evidence of underlying factor; requires no initial or little net
indebtedness because they do not establish a investment relative to other types of contracts that
legal obligation to pay (US v. Jones, 450 F. 2d have similar responses to changes in market
523, 1971). conditions; and is settled at a future date
(Amended IRR of SRC, Rule 3(F)).
f. Asset-backed securities – financial security
backed by a loan, lease or receivables against Options v. Warrants
assets other than real estate and mortgage- Options Warrants
backed securities (DIZON, supra at 221-227). Contracts that give the Rights to subscribe or
buyer the right, but not purchase new shares
2. Investment contracts, certificates of interest or the obligation, to buy or existing shares in a
participation in a profit-sharing agreement, (call options) or sell company, on or before
certificates of deposit for a future subscription (put options) an a predetermined date,
underlying security at a called the expiry date,
Investment contract – a contract, transaction or predetermined price, which can only be
scheme whereby a person invests his money in a called the exercise or extended in
common enterprise, and is led to expect strike price, on or accordance with
profits PRIMARILY from the efforts of others before a Exchange rules
(Amended IRR of SRC, Rule 3(G)). predetermined date, (Amended IRR of
called the expiry date, SRC, Rule 3(F).4).
Howey Test (CICE2) which can only be
For an investment contract to exist, the following extended in
elements must concur: accordance with
a. A Contract, transaction, or scheme; Exchange rules
b. An Investment of money; (Amended IRR of
c. Investment is made in a Common enterprise; SRC, Rule 3(F).1).
d. Expectation of profits; and
e. Profits arising primarily from the Efforts of 5. Certificates of assignments and participation, trust
others (SEC v. Howey Co., 328 U.S. 293, certificates, voting trust certificates or similar
1946). instruments;

The contract is not an investment contract if the 6. Proprietary or non-proprietary membership


entrepreneurial efforts occurred BEFORE the certificates in corporations; or
purchase of said contracts (SEC v. LPI, 102 F. 3d.
587, 1996). 7. Other instruments as may in the future be
determined by the SEC (SRC, Sec. 3).
Considered as investment contracts:
a. A business scheme whereby an investor Flexible Principle
enrolls, and in turn, he is entitled to recruit The term “securities” embodies a flexible rather
other investors and the accumulated amount than static principle, one that is capable of
received by the investor comes from the adaptation to meet the countless and variable
efforts of his recruits (Powerhomes Unlimited schemes devised by those who seek to use the
Inc v. SEC, G.R. NO. 164182, February 26, money of others on the promise of profits
2008). (Gabionza v. CA, G.R. No. 161057, September 12,
b. Contract for units of a citrus grove 2008).
development coupled with a contract for
cultivating, marketing and remitting the net Considered as securities

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256 2017 CENTRALIZED BAR OPERATIONS
1. Checks which were rolled over to augment the 11. Impose Sanctions for violation of laws and rules,
creditor’s existing investment with another regulations and orders;
corporation; 12. Compel the officers of any registered corporation
2. Sale of leasehold rights (SEC Opinion, October or association to Call meetings of stockholders or
21, 1982); and members;
3. Time share contracts (SEC Opinion, April 16, 13. Issue Subpoena duces tecum and summon
1996). witnesses to appear in any proceedings of the
Commission; and
Issuer 14. Exercise such Other powers as may be provided
The originator, maker, obligor, or creator of the by law which are necessary or incidental to the
security (SRC, Sec. 3.2). carrying out its express powers (SRC, Sec. 5).

Broker Note: With the transfer of jurisdiction of the SEC


A person engaged in the business of buying and over intra-corporate controversies to the RTC
selling securities for the account of others (SRC, Sec. under R.A. No. 8799, the RTC has the power to
3.3). hear and decide the intra-corporate controversies
between the parties herein. Concomitant to said
Dealer power is the authority to issue orders necessary
Any person who buys and sells securities for his/her or incidental to the carrying out of the powers
own account in the ordinary course of business (SRC, expressly granted to it. Thus, the RTC may, in
Sec. 3.4). appropriate cases, order the holding of a special
meeting of stockholders or members of a
Associated Person of a Broker or Dealer corporation involving an intra-corporate dispute
An employee thereof who, directly exercises control of under its supervision (Yujuico v. Quiambao,
supervisory authority, but does not include a supra).
salesman, or an agent or a person whose functions
are solely clerical or ministerial (SRC, Sec. 3.5). SEC Jurisdiction over the Validity for Proxies in
relation to Election Controversies
Powers and Functions of the SEC (CoRe-FEAR- This power has been withdrawn from the SEC by the
RECCS-CaSO)) SRC and transferred to the regular courts. Questions
1. Supervision over Corporations, partnerships, and relating to the proper solicitation of proxies used in
grantees of primary franchise; election are now cognizable by the regular courts.
2. Approve, Reject Registration statements/licensing However, the power of the SEC to regulate proxies
applications; remains extant and could very well be exercised when
3. Suspend, revoke, after notice and hearing, stockholders vote on matters other than the election of
primary Franchise on grounds provided by law: directors (VILLANUEVA-CASTRO, supra at 158,
a. Fraud; citing GSIS v. CA, supra).
b. Serious misrepresentation;
c. Refusal to comply or defiance of any lawful Note: SEC has the power to regulate proxies remains
order of the SEC; in place in instances when stockholders vote on
d. Continuous inoperation for at least 5 years; matters other than the election of directors. However,
e. Failure to file by-laws; and when proxy validation is in connection with the
f. Failure to file required reports. determination of quorum for election of directors, the
4. Supervise monitor, suspend or take over, RTC has jurisdiction since the same is an intra-
Exchanges, clearing agencies and other SROs; corporate controversy (SEC v. CA and Omico Co.,
5. Regulate/ supervise Activities of persons to G.R. No. 187702, October 22, 2014).
ensure compliance;
6. Recommend policies, advise, propose legislation General, Administrative and Regulatory Powers
to Congress on securities market; 1. Power over Stock Exchanges
7. Prepare, approve, amend or repeal Rules, Notwithstanding the regulatory power of the SEC
regulations, issue opinions over the PSE, and the resultant authority to
8. Enlist the aid and support of and/or deputize any reverse decision of the PSE in matter of
and all enforcement agencies of the Government application for listing in the market, the SEC may
as well as any private institution, corporation, firm, exercise such power only if the PSE’s judgment is
association or person in the implementation of its attended by bad faith (PSE v. CA, G.R. No.
powers; 125469, October 27, 1997);
9. Issue Cease and desist orders to prevent fraud or
injury; 2. Power to conduct hearings and render
10. Punish for Contempt of the Commission; decision

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SEC has authority to take cognizance of complaint
praying that the mandatory tender offer rule be The effectivity of a registration statement does not
applied and in so doing, SEC has authority to cover prior sales. Thus, buyers of securities previous
require a party to make a tender offer (CEMCO to the date of issuance of statement may validly
Holdings v. National Life, G.R. No. 171815, rescind the contact of sale of securities (Timeshare
August 7, 2007); and Realty Corp. v. Lao, G.R. No. 158941, February 11,
2008).
3. Power to enjoin acts or practices
SEC has the power to enjoin the acts or practices Exceptions:
of securities-related organizations even without 1. Exempt securities (SRC, Sec. 9); and
first conducting a hearing if, upon proper 2. Exempt transactions (SRC, Sec. 10).
investigation or verification, SEC is of the opinion
that there exist possibility that the act or practice Policy of Full Material Disclosure
may cause grave or irreparable injury to the All companies, listed or applying for listing, are
investing public (PASTRAI v. CA, G.R. No. required to divulge truthfully and accurately, all
137321, October 15, 2007). material information about themselves and the
securities they sell for the protection of the investing
Cease and Desist Order (CDO) public and under pain of administrative, criminal and
Essential Requirements that must be complied by civil sanctions (PSE v. CA, supra).
the SEC:
1. It must conduct proper investigation or Material Information
verification; and Includes, but not limited to, the following: (RiS-PReP-
2. There must be a finding that the act or practice, LoS-C)
unless restrained, will operate as a fraud on 1. Any event or transaction which increases or
investors or is otherwise likely to cause grave or creates a Risk on the investments or on the
irreparable injury or prejudice to the investing securities covered by the registration;
public (SEC v. Performance Foreign Exchange 2. Increase/decrease in the volume of the Securities
Corporation, G.R. No. 154131, July 20, 2006). being offered at an issue price higher/lower than
the range set and disclosed in the registration
Note: The issuance of the CDO is an act of the statement and which results to a derogation of the
SEC itself done in the exercise of its original rights of existing security holders, as may be
jurisdiction to review actual cases or determined by the Commission;
controversies. It should be clear now that its 3. Major change in the Primary business of the
power to issue a CDO cannot, under the SRC, be registrant;
delegated to an individual commissioner. 4. Reorganization of the company;
(VILLANUEVA-CASTRO, supra at 154, citing 5. Change in the work Program or use of proceeds;
GSIS v. CA, supra). 6. Loss, deterioration or substitution of the property
underlying the securities;
Under Sec. 64 of the SRC, a cease and desist 7. Significant or 10% or more change in the financial
order may be issued by the SEC motu propio, it condition or results of operation of the registrant
being unnecessary that it results from a verified unless a report to that effect is filed with the
complaint from an aggrieved party and even Commission and furnished the prospective
without a prior hearing whenever the SEC finds it purchaser;
appropriate to issue a cease and desist order that 8. Classification, de-classification, or reclassification
aims to curtail fraud or grave or irreparable injury of securities which results to derogation of rights
to investors. A cease and desist order may only of existing security holders, as may be determined
be issued by the SEC after (1) proper investigation by the SEC (Amended IRR of SRC, Rule 14.1).
or verification, and (2) upon showing that the acts
sought to be restrained could result in injury or Exempt Securities (GoCo-CeBSS)
fraud to the investing public (Primanila Plans, Inc. 1. Any security issued or guaranteed by the
v. SEC, G.R. No. 193791, August 6, 2014). Government of the Philippines, or by any political
subdivision or agency thereof, or by any person
Registration of Securities controlled or supervised by, and acting as an
General Rule: Securities shall not be sold or offered instrumentality of said Government.
for sale or distribution within the Philippines, without a 2. Any security issued or guaranteed by the
registration statement duly filed with and approved by government of any Country with which the
the SEC. Prior to such sale, information on the Philippines maintains diplomatic relations, or by
securities, in such form and with such substance as any state, province or political subdivision thereof
the SEC may prescribe, shall be made available to on the basis of reciprocity.
each prospective purchaser (SRC, Sec 8.1).

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258 2017 CENTRALIZED BAR OPERATIONS
3. Certificates issued by a receiver or by a trustee in Note: The exemption covers only the issuance of
bankruptcy duly approved by the proper shares of stock as part of and in the course of
adjudicatory body. increasing the ACS of the corporation. It does not
4. Any security issued by a Bank except its own cover issuance of shares from already authorized
shares of stock. but still unissued capital (Nestle v. CA, G.R. No.
5. Any class of securities added by the SEC by rule 86738, November 13, 1991).
or regulation after public hearing, if it finds that the
enforcement of this Code with respect to such 10. The Issuance of bonds or notes secured by
securities is not necessary in the public interest mortgage upon real estate or tangible personal
and for the protection of investors. property, where the entire mortgage are sold to a
6. Any security or its derivatives the sale or transfer single purchaser at a single sale;
of which, by law, is under the Supervision and 11. Sale to less than 20 persons during any 12- month
regulation of the Office of the Insurance period (private placements); and
Commission, Housing and Land Use Regulatory 12. Sale of securities to banks, registered investment
Board, or the Bureau of Internal Revenue (SRC, house, insurance companies, pension fund or
Sec. 9). retirement plan maintained by the government or
other persons authorized by the BSP to engage in
Reason for Exemption of Securities: trust functions (SRC, Sec. 10).
The securities listed are exempt either because the
issuer is an entity that could be trusted not to deceive Reason for exemption of transactions: The security
the investor or the issuer is regulated, supervised or involved in an exempt transaction is not in itself
monitored by another government entity who could be exempt, but the circumstances under which the
expected to protect the interest of the investors in the security is sold make the requirement of registration
same manner as the SEC (CATINDIG, Commercial under the SRC unnecessary in the public interest or
Laws). for the protection of the investors (CATINDIG, supra). Commented [ASPC31]: Find page number
Commented [ASPC32]: Page number??
Note: A bank is still required to comply with full General Rule: No notice of exemption or fee shall be
disclosure rules despite exemption from securities required for exempt transactions (Amended IRR of
registration requirements. The exemption is confined SRC, Rule 10.1).
merely to initial requirement of registration of
securities for public offering and not to subsequent Exceptions: Transactions covered by Nos. 11-12
filing of various periodic reports which the SEC may (Amended IRR of SRC, Rule 10.1).
require (Union Bank v. SEC, G.R. No. 138949, June
6, 2001). Note: Issuance of shares of stock by a debtor
corporation to its creditor in settlement of a legitimate
Exempt Transactions obligation is an exempt transaction.
(JEBS- DISS-PISS)
1. Any Judicial sale, or sale by an executor, Cooperatives are not exempt from the provision of the
administrator, guardian or receiver or trustee in SRC (SEC Opinion No. 35-03, June 30, 2003).
insolvency or bankruptcy;
2. Exchange of securities by issuer with existing Procedure for Registration
security holders exclusively, where no 1. Filing of sworn registration statement which must:
commission is paid for soliciting such exchange; a. Contain all material information;
3. Broker’s transactions, executed upon customers’ b. Be accompanied by any prospectus;
orders, on any registered Exchange or other c. Be signed by the proper officer
trading market; d. Accompanied by a duly verified board
4. Sale of pledged or mortgaged security to liquidate resolution of the issuer corporation;
a bona fide debt; e. Accompanied by a written consent of the
5. Distribution of stock dividends or other distribution expert named as having certified any part of
out of surplus; the registration; and
6. Issuance of security in exchange for any other f. Where the registration statement includes
security of the same issuer pursuant to a right of shares to be sold by selling stockholder,
conversion; accompanied by a written certification of the
7. Sale of capital stock exclusively to stockholders stockholder.
where no commission is paid; 2. Payment of filing fee of not more than 1/10 of the
8. Sale on isolated transactions by owner; 1% of the maximum aggregate price at which such
9. Pre-incorporation subscription and subscription securities are proposed to be offered.
pursuant to an increase of the ACS; 3. Publication of the notice of filing of the registration
once a week for two consecutive weeks in two
newspapers of general circulation.

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4. Decision of SEC within 45 days unless the issuer the fiscal year (certified by an independent CPA),
has consented to a later date. and a management discussion and analysis of
results of operations; and
Grounds for Rejection or Revocation of 2. Other periodical reports for interim fiscal periods
Registration of Securities: and current reports on significant developments of
1. The issuer: the issuer (SRC, Sec 17.1).
a. Has been judicially declared insolvent;
b. Has violated any of the provisions of this Tender Offer
Code, the rules promulgated pursuant It is a publicly announced intention by a person acting
thereto, or any order of the Commission of alone or in concert with other persons to acquire
which the issuer has notice in connection with equity securities of a “public company.” It is an offer by
the offering for which a registration statement the acquiring person to stockholders of a public
has been filed; company for them to tender their shares therein on the
c. Has been or is engaged or is about to engage terms specified in the offer (CEMCO Holdings v.
in fraudulent transactions; National Life, supra).
d. Has made any false or misleading
representation of material facts in any Public Company
prospectus concerning the issuer or its It is not limited to a company whose shares of stock
securities; are publicly listed; even companies whose shares are
e. Has failed to comply with any requirement that offered only to a specific group of people, may be
the Commission may impose as a condition considered a public company (Philippine Veterans
for registration of the security for which the Bank v. Callangan, G.R. No. 191995, August 3, 2011).
registration statement has been filed; or
2. The registration statement is on its face
incomplete or inaccurate in any material respect
or includes any untrue statement of a material fact Requisites:
or omits to state a material fact required to be 1. Assets exceeding P50M; and
stated therein or necessary to make the 2. Two hundred (200) or more stockholders with at
statements therein not misleading; or least 100 shares each (VILLANUEVA-CASTRO,
3. The issuer, any officer, director or controlling supra at 162, citing Philippine Veterans Bank v.
person of the issuer, or person performing similar Callangan, supra).
functions, or any underwriter has been convicted,
by a competent judicial or administrative body, Mandatory Tender Offer Rule
upon plea of guilty, or otherwise, of an offense Tender offer is mandatory in the following
involving moral turpitude and/or fraud or is circumstances:
enjoined or restrained by the Commission or other 1. Any person or group of persons acting in concert,
competent judicial or administrative body for who intends to acquire 35% or more of equity
violations of securities, commodities, and other shares in a public company pursuant to an
related laws (SRC, Sec. 13.1). agreement made between or among the person
and one or more sellers;
A registration statement may be withdrawn by the 2. Any person or group of persons acting in concert,
issuer only with the consent of the Commission (SRC, who intends to acquire 35% or more of equity
Sec. 13.6). shares in a public company in one or more
transactions within a period 12 months; or
Reportorial Requirements 3. If any acquisition of even less than 35% would
They apply to: result in ownership of over 51% of the total
1. An issuer which has sold a class of its securities outstanding equity securities of a public company
pursuant to a registration under Sec. 12 of R.A. (Amended IRR of SRC, Rule 19.2).
No. 8799;
2. An issuer with a class of securities listed for Note: Tender offer covers both direct and indirect
trading on an Exchange; and acquisition. What is decisive is the determination of
3. An issuer with assets of at least fifty million pesos the power of control. The bottom line of the law is to
or such other amount as the SEC shall prescribe, give the shareholder of the public company the
and having 200 or more holders each holding at opportunity to decide whether or not to sell in
least 100 shares of a class of its equity securities connection with a transfer of control. Thus, the rules
(SRC, Sec 17.2). apply even if one will acquire the shares in the
corporation that owns the shares of a public
Required Periodic and Other Reports: company including subsidiary (CEMCO Holdings v.
1. Annual report – including balance sheet, profit & National Life, supra).
loss statement, and statement of cash flows for

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Exemptions from Mandatory Tender Offer The purpose of Sec. 20 is to prevent the corporation
Requirements: from having undue advantage in gaining proxies and
1. Any purchase of shares from the unissued capital eventually controlling the corporation and its
stock provided that the acquisition will not result to securities.
a 50% or more ownership of shares by the
purchaser; Rules on Proxies in Publicly Listed Corporations
2. Any purchase of shares from an increase in 1. Proxies must be in writing, signed by the
authorized capital stock; stockholder or his duly authorized representative
3. Purchase in connection with foreclosure and filed before the scheduled meeting with the
proceedings involving a duly constituted pledge or corporate secretary.
security arrangement where the acquisition is 2. Unless otherwise provided in the proxy, it shall be
made by the debtor or creditor; valid only for the meeting for which it is intended.
4. Purchases in connection with privatization No proxy shall be valid and effective for a period
undertaken by government of the Philippines; longer than 5 years at one time.
5. Purchases in connection with corporate 3. No broker or dealer shall give any proxy, consent
rehabilitation under court supervision; or authorization, in respect of any security carried
6. Purchases through an open market at the for the account of a customer, to a person other
prevailing market price; and than the customer, without the express written
7. Merger or Consolidation (Amended IRR of SRC, authorization of such customer.
Rule 19.3). 4. A broker or dealer who holds or acquires the proxy
for at least 10% or such percentage as the SEC
How Tender Offer is Made: may prescribe of the outstanding share of the
1. By filing with the SEC a declaration to make a issuer, shall submit a report identifying the
tender offer; beneficial owner within 10 days from such
2. By furnishing the issuer or the originator of the acquisition, for its own account or customer, to the
security a statement containing such information issuer of the security, to the Exchange where the
required under Sec. 17 of the SRC: security is traded, and to the SEC (SRC, Sec.20).
a. Annual Report (includes balance sheet, profit
and loss statement); and SEC’s Investigatory Power
b. Periodical reports for interim fiscal periods; Under Sec. 20.1, the solicitation of proxies must be in
and accordance with rules and regulations issued by the
3. By publishing all requests or invitations for tender, SEC, such as Amended IRR-SRC Rule 4. And by
or materials, making a tender offer or requesting virtue of Sec. 53.1, the SEC has the discretion "to
or inviting letters of such a security (SRC, Sec. make such investigations as it deems necessary to
19). determine whether any person has violated" any rule
issued by the commission, such as AIRR-SRC Rule 4.
The legislative intent of Sec. 19 of the Code is to The investigatory power of the SEC established by
regulate activities relating to acquisition of control of Sec. 53.1 is central to its regulatory authority, most
listed company and for the purpose of protecting the crucial to the public interest especially as it may
minority stockholders of a listed corporation. Whatever pertain to corporations with publicly traded shares
may be the method by which control of a public (GSIS v. SEC, supra).
company is obtained, either through the direct
purchase of its stocks or through an indirect means, The SEC is granted the power to regulate proxies
mandatory tender offer applies (CEMCO Holding, Inc. while the regular courts are given the jurisdiction over
v. National Life Insurance Co., supra). matter affecting the manner and conduct of the
election of directors. In this case, the validation of
Prohibited Transactions During Tender Offer proxies relates to the determination of the existence of
1. Buying or selling of securities sought or to be a quorum. Nonetheless, it is a quorum for the election
sought by the tender offer by a person who is in of the directors, and, as such, which requires the
possession of a material nonpublic information; presence – in person or by proxy – of the owners of
2. Communication of material nonpublic information the majority of the outstanding capital stock of Omico.
by an insider which would likely result to a violation Therefore, the power of the SEC to regulate proxies
of number 1 (SRC, Sec. 27.4). only remains in place in instances when stockholders
vote on matter other than the election (SEC v. CA and
Proxy Solicitation Omico, supra).
In proxy solicitations, the corporation itself asks its
stockholders to give their proxy to the corporation or Proxy Solicitation v. Proxy Validation
some other entity, unlike in Sec 58 of the Corporation Proxy solicitation involves the securing and
Code (SRC, Sec. 20). submission of proxies, while proxy validation concerns
the validation of such secured and submitted proxies.

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2017 CENTRALIZED BAR OPERATIONS
Proxy solicitation is a procedure that antecedes proxy 3. Engage in any act, transaction, practice or course
validation (GSIS v. SEC, supra). of business which operates or would operate as a
fraud or deceit upon any person (SRC, Sec. 26).
Manipulation of Security Prices
It shall be unlawful for any person acting for himself or Insider (IDA-GoL)
through a dealer or broker, directly or indirectly (FEC- 1. The Issuer;
ME): 2. A Director or officer (or any person performing
1. To create a False or misleading appearance of similar functions) of, or a person controlling the
active trading in any listed security traded in an issuer;
Exchange or any other trading market by: 3. A person whose relationship or former
a. Effecting any transaction in such security relationship to the issuer gives or gave him
which involves no change in the beneficial Access to material information about the issuer or
ownership thereof; the security that is not generally available to the
b. Entering an order or orders for the purchase public;
or sale of such security with the knowledge 4. A Government employee, director, or officer of an
that a simultaneous order or orders of exchange, clearing agency and/or self-regulatory
substantially the same size, time and price, for organization who has access to material
the sale or purchase of any such security, has information about an issuer or a security that is not
or will be entered by or for the same or generally available to the public; and
different parties; or 5. A person who Learns such information by a
c. Performing similar act where there is no communication from any foregoing insiders (SRC,
change in beneficial ownership. Sec.3.8).
2. To Effect a series of transactions in securities that:
a. Raises their price to induce the purchase of a Insider Trading
security; Trading of corporation’s stock or other securities by
b. Depresses their price to induce the sale of individuals with potential access to non-public
security; or information about the company. It refer to a practice in
c. Creates active trading to induce such a which an insider or a related part trades based on a
purchase or sale through manipulative material non-public information obtained during the
devices such as marking the close, painting performance of the insider’s duties at the corporation,
the tape, squeezing the float, hype and dump, or otherwise in breach of fiduciary or other relationship
boiler room operations and such other similar of trust and confidence or where the non-public
devices. information was misappropriated from the company
3. To Circulate or disseminate information that the (DIZON, supra at 175-176).
price of any security listed in an Exchange will or
is likely to rise or fall because of manipulative Purpose: To prevent insiders from using the material
market operations non-public information which they gained to their own
4. To Make false or misleading statement with pecuniary advantage.
respect to any material fact for the purpose of
inducing the purchase or sale of any security listed Allowed Transactions
or traded in an Exchange. The selling or buying of a security by an insider while
5. To Effect any series of transactions for the in possession of material non-public information is
purpose of pegging, fixing or stabilizing the price considered unlawful unless:
of such security; unless otherwise allowed by this 1. The insider proves that the information was not
Code or by rules of the Commission (SRC, Sec. gained from such relationship, or
24). 2. If the other party selling to or buying from the
insider (or his agent) is identified, the insider
Fraudulent Transactions proves:
It shall be unlawful for any person, directly or indirectly, a. That he disclosed the information to the other
in connection with the purchase or sale of any party, or
securities to: (DOE) b. That he had reason to believe that the other
1. Employ any Device, scheme, or artifice to defraud; party otherwise is also in possession of the
2. Obtain money or property by means of any untrue information (SRC, Sec. 27.1).
statement of a material fact of any omission to
state a material fact necessary in order to make A transaction of an insider or such insider’s spouse or
the statements made, in the light of the relatives by affinity or consanguinity within the second
circumstances under which they were made, not degree, legitimate or common-law, shall be presumed
misleading; or to have been effected while in possession of material
nonpublic information if transacted after such
information came into existence but prior to

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262 2017 CENTRALIZED BAR OPERATIONS
dissemination of such information to the public and the 8. “Over-the-Counter” Transaction – transactions
lapse of a reasonable time for market to absorb such which are not made at the stock exchange, but
information. directly between the broker and the customer.
9. “Over-The-Counter” Market – A market created
Concept of Materiality other than a registered stock exchange for both
Information is material if it would affect the market the purchase and sale of any security.
price of a security to a significant extent and/or a fact
which a reasonable person would consider in Short Sale
determining his cause of action with regard to the A contract for sale of shares of stock which the seller
shares of stock (SEC v. Interport, G.R. No. 135808, does not own, or certificates which are not within his
October 6, 2008). control, so as to be available for delivery at the time
when delivery must be made (Amended IRR of SRC,
Information is Material Non-Public if: Rule 24.2-2).
1. It has not been generally disclosed to the public
and would likely affect the market price of the Short sales are not completely prohibited. However,
security after being disseminated to the public and no short sale shall be executed in connection with the
the lapse of a reasonable time for the market to purchase or sale of any security except in accordance
absorb the information; or with such rules and regulations as the Commission
2. Would be considered by a reasonable person may prescribe as necessary or appropriate in the
important under the circumstances in determining public interest or for the protection of investors (SRC,
his course of action whether to buy, sell or hold a Sec. 24.2).
security (SRC, Sec.27.2).
Prohibited Transactions in Short Sales
Definition of Terms 1. No broker or dealer shall accept a long sale order
1. Stop-Loss Order – The direction by a customer from a customer unless he has made a
to his broker that if the commodity touches the determination that the customer owns the security
price named, the broker shall close the trade at and will deliver in good deliverable form within
the best available price. three (3) business days of the execution of the
2. Put – An option that, in consideration of a order.
premium paid, gives the purchaser the right to 2. No broker or dealer shall use any facility of a
make the seller take from him a given number of securities exchange to effect a short sale of any
shares of a named stock between a given time at security unless (1) at a price higher than the last
a stipulated price which is usually below the sale or (2) at the price of the sale if and only if that
prevailing market price of the stock at the time the price is above the next preceding different sale
“put” is purchased (Amended IRR of SRC, Rule price on such day (Amended IRR of SRC, Rule
3.1(f)). 24.2-2).
3. Call – An option that, in consideration of a 3. No person shall, directly or indirectly, by the use
premium paid, entitles the buyer the right to of any facility of a securities exchange, effect a
compel the seller to deliver to him a certain short sale in a security registered or listed on any
number of shares within a given time at a securities exchange, where the seller does not
stipulated price which is usually higher than the intend to make delivery of the securities within the
prevailing market price at the time the “call” is period specified in the contract (Amended IRR of
bought. “Call” is the reverse of “put” (Amended SRC, Rule 24.2-2).
IRR of SRC, Rule 3.1(f)) 4. No director, officer or principal stockholder of a
4. Straddle – The double privilege of a “put” and a corporation shall make a short sale in securities of
“call,” and secures to the holder the right to the corporation in which he is a director, officer or
demand of the seller at a certain price within a principal stockholder (Amended IRR of SRC, Rule
certain time a certain number of shares of 24.2-2).
specified stock, or to require him to take, at the
price within the same time, the same shares of Mandatory Close-Out Rule
stock (Amended IRR of SRC, Rule 25.1(2)) A contract involving a short sale which has not
5. Short Swing Transaction – One where a person resulted in a delivery by the Broker or Dealer within
buys securities and sells the same within a period the settlement period must be closed by the Broker or
of six months. Dealer by purchasing for cash or guaranteed delivery
6. Floor Trader – A professional trader in securities securities of like kind and quantity on the next
who acts for himself and not for the account of business day after settlement date, unless such
others, hence, receives no commission at all. purchase cannot be effected within said period for
7. Boiler Room Sales – The use of high-pressure justifiable reasons in which case, notification in writing
sales tactics to promote purchases and sales of shall be made with the Exchange and the Commission
securities. (Amended IRR of SRC, Rule 24.2-2).

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2017 CENTRALIZED BAR OPERATIONS
financial situations and needs (Amended IRR of SRC,
Illustration Rule 30.2-4).
Sherlock is a stockholder and director of Baskerville
Bank. In order to earn a quick buck, he asked his Transactions & Responsibility of Brokers &
friend John, a stockbroker, to lend him some stock, Dealers
which John agreed. John lent him his 50 shares in No broker or dealer shall deal in securities where any
Baskerville Bank, which John sold at P 100.00 per stockholder, director, associated person or salesman,
share to Mycroft. Thus, John gave the proceeds of the or authorized clerk of said broker or dealer and all the
sale to Sherlock. The price of the shares of Baskerville relatives of the foregoing within the fourth civil degree
decreased to Php 80.00 per share prompting Sherlock of consanguinity or affinity, is at the time holding office
to buy the 50 shares sold to Mycroft and thereby in the issuer corporation as a director, president, vice-
earning a profit of P 1,000.00. Is the sale valid? president, manager, treasurer, comptroller, secretary
or any office of trust and responsibility, or is a
ANSWER: NO. Sherlock is engaged in a short sale, controlling person of the issuer (SRC, Sec 30.1).
i.e., any sale of a security which the seller does not
own or any sale, consummated by the delivery of a Exception: Chinese Walls (Segregation of
security borrowed by, or for the account of the seller, Function)
which he is prohibited from engaging in such because Any Broker Dealer which assumes more than one
the shares he sold are the shares of the corporation function whether as a dealer, adviser or underwriter
where he is also a director. Directors, officers, or or which engages in market making transaction shall
principal stockholders of a corporation are prohibited maintain proper segregation of those functions within
from making short sales in the securities of their the firm to prevent: (i) the flow of information between
corporation (AQUINO, supra at 724). the different parts of its organization which perform
each function; and (ii) any conflict of interest which
Prohibited Conducts in Securities Transactions may result (DIZON, supra at 211-212).
1. Painting the tape – engaging in a series of
transactions in securities that are reported publicly Independent Director
to give the impression of activity or price A person other than an officer or employee of the
movement in a security. corporation, its parent or subsidiaries, or any other
2. Marking the close – buying and selling securities individual having a relationship with the corporation,
at the close of the market in an effort to alter the which would interfere with the exercise of independent
closing price of the security. judgment in carrying out the responsibilities of a
3. Improper matched orders – engaging in director (SRC, Sec. 38).
transaction where both the buy and the sell orders
are entered at the same time with the same price When Independent Director Required
and quantity by different but colluding parties. 1. A class of equity securities listed for trading on an
4. Hype and dump – engaging in buying activity at Exchange;
increasingly higher prices and then selling 2. Assets in excess of P50M and having 200 or more
securities in the market at higher securities. holders, at least of 200 of which are holding at
5. Wash sale – the operation of simultaneously least 100 shares of a class of its equity securities;
buying and selling the same stock. It is any or
transaction in any security which involves no 3. Which has sold a class of equity securities to the
change in the beneficial ownership thereof. It is public pursuant to an effective registration
the reverse of “MATCHED ORDERS” wherein statement in compliance with Sec. 12.
there is a change in the ownership of the
securities. Number of Independent Directors
6. Squeezing the float – taking advantage of a 1. At least 2 independent directors; or
shortage of securities in the market by controlling 2. Independent directors constituting at least 20% of
the demand side and exploiting market the members of the board, whichever is lesser.
congestion during such shortages in a way as to
create artificial prices (Amended IRR of SRC, Note: An independent director must not be a
Rule 24.1(b)) director or officer of the covered company or any
of its related company (holding or subsidiary
Suitability Rule company) or any of its substantial shareholders (a
The rule states that in recommending to a customer shareholder who is directly or indirectly the
the purchase, sale or exchange of any security, a beneficial owner of more than 10% of any equity
broker or dealer shall have reasonable grounds for security) (Amended IRR of SRC, Rule 38).
believing that the recommendation is suitable for such
customer based on the facts disclosed by the such Margin Trading
customer as to his other security holdings and his

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264 2017 CENTRALIZED BAR OPERATIONS
A kind of trading that allows a broker to advance for
the customer /investor part of the purchase price of a
security and to keep it as collateral for such advance.

The credit extended must be for an amount not greater


than whichever is higher of:
1. 65% of current market price of the security; or
2. 100% of the lowest market price of security during
the preceding 36 calendar months, but not greater
than 75% of the current market price (SRC, Sec.
48).
Margin
Sum of money, or its equivalent, placed in the hands
of a broker by principal or persons on whose account
the purchase is to be made, as a security to the former
against losses to which he may be exposed by a
subsequent depression in the market value of the
stock.

Note: Trading on credit (or “margin trading”) allows


investors to buy more securities than their cash
position would normally allow. Investors pay only a
portion of the purchase price of the securities; their
broker advances for them the balance of the purchase
price and keeps the securities as collateral for the
advance or loan. Brokers take these securities/stocks
to their bank and borrow the “balance” on it, since they
have to pay in full for the traded stock. Hence,
increasing margins i.e., decreasing the amounts which
brokers may lend for the speculative purchase and
carrying of stocks is the most direct and effective
method of discouraging an abnormal attraction of
funds into the stock market and achieving a more
balanced use of such resources (Abacus Securities v.
Ampil, G.R. No. 160016, February 27, 2006).

Civil Liability
Under the SRC, the following acts shall give rise to
civil liabilities:
1. On account of false registration statement (SRC,
Sec. 56).
2. In connection with prospectus, communication,
and reports:
a. Sale of security in violation of registration
requirements
b. Sale of security by mean of prospectus or
communication with untrue statement (SRC,
Sec. 57).
3. For fraud in connection with securities transaction
(SRC, Sec. 58).
4. For manipulation of security prices (SRC, Sec.
59).
5. With respect to commodity futures contracts and
pre-need plans (SRC, Sec. 60).
6. On account of insider trading (SRC, Sec. 61).

Note: To constitute violation of the securities law,


fraud or deceit, not mere negligence, on the part
of the offender must be established (SEC v. CA,
supra).

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2017 CENTRALIZED BAR OPERATIONS
COMPARATIVE CHART 1. That he is the
NON-STOCK CLOSE EDUCATIONAL CORPORATION 2 All the RELIGIOUSissued chief archbishop, 2. That at least 2/3
CORPORATION CORPORATION CORPORATION SOLE stock of all SOCIETIES
classes bishop, priest, of its membership
shall be subject to minister, rabbi or have given their
NATURE/ DEFINITION one or more presiding elder of written consent or
One where no part A special kind of It is a stock or non- It is a specialspecified
form It is a corporation his religious have voted to
of its income is stock corporation stock corporation of restrictions
corporation, composed on entirely denomination, sect incorporate, at a
distributable as which is limited to organized transfer; of
to usually associated andspiritual persons or church and that duly convened
dividends to its selected persons or provide facilities for with the clergy, and which is he desires to meeting of the
members, trustees, member of a family. teaching or consisting of3. one The organized
corporation for the become a body;
or officers. instruction. person only and shall hisnotfurtherance
list in any of corporation sole;
successors, who stockis exchange
religion oror for 3. That the
incorporated by make law any public
perpetuating the 2. That the rules, incorporation is not
to give someoffering
legal of any of
rights of the
its church regulations and forbidden by
capacities stock
andof orany class. the discipline of his competent authority
advantages. A administration of religious or by the
corporation sole church or religious denomination, sect constitution, rules,
may be formed by work or property. or church are not regulations or
the chief inconsistent with his discipline of the
archbishop, bishop, becoming a religious
priest, minister, corporation sole denomination, sect,
rabbi or other and do not forbid it; or church of which it
presiding elder of forms a part;
such religious 3. That he is
denomination, sect charged with the 4. The desire to
or church. administration of incorporate for the
the temporalities administration of its
GOVERNING RULES and the affairs, properties
The provisions The provisions on Shall be governed Shall be governed Shall be governed management of the and estate;
governing stock Close Corporations by special laws and by the provisions on by the provisions on affairs, estate and
corporation, when shall primarily by the general religious religious properties of his 5. The place where
pertinent, shall be govern; other provisions of the corporations and by corporations and by religious the principal office
applicable except provisions of the Corporation Code. the general the general denomination, sect of the corporation is
as may be covered Corporation Code provisions on non- provisions on non- or church within his to be established
by specific shall apply stock corporations stock corporations territorial and located, which
provisions. suppletorily. insofar as they may insofar as they may jurisdiction, place must be
be applicable. be applicable. describing such within the
territorial Philippines; and
ARTICLES OF INCORPORATION jurisdiction;
Its articles need Its articles must Its articles need The chief The AOI shall set 6. The names,
only contain the contain: only contain the archbishop, bishop, forth: 4. The manner in nationalities, and
general matters general matters priest, minister, which any vacancy residences of the
enumerated in Sec. 1. All the enumerated in Sec. rabbi or presiding 1. That the religious is required to be trustees elected to
14 of the Code. corporation's 14 of the Code. elder of any society or religious filled, according to serve for the first
issued stock of all religious order, or diocese, the rules, year or such other
classes, exclusive denomination, sect synod, or district regulations or period as may be
of treasury shares, or church must file organization is a discipline of the prescribed by the
shall be held of with the SEC AOI religious religious laws of the religious
record by not more setting forth the organization of a denomination, sect society or religious
than a specified following: religious or church to which order, or of the
number of persons, denomination, sect he belongs; and diocese, synod, or
not exceeding 20; or church; district

SAN BEDA COLLEGE OF LAW 265


2017 CENTRALIZED BAR OPERATIONS
religious,5. The place where purpose,organization,
benefit or the managing, as the management of
educational,
the principal end. office board of trustees to trustee, the affairs, the affairs,
professional,
of the corporation be not less than 5 property and properties and
cultural, sole fraternal,
is to be nor more than 15. temporalities of any estate of any
literary, established
scientific, and religious religious society or
social, civic
located,
service, which denomination, sect religious order, or
or similarplace
purposes, must be or church. any diocese, synod,
like trade,within
industry, the or district
agricultural
Philippines.
and like organization of any
chambers, or any religious
SUBMISSION OF ARTICLES OF combination
INCORPORATION denomination, sect
In accordance with In accordance with In accordancethereof. with The AOI must be The AOI must be or church.
Section 14 and 15 Section 14 and 15 Section 14 and 15 verified, before verified by RIGHT
the TO VOTE
of the Corporation of the Corporation of the Corporation Right filing, of bythe affidavit
Shareholders
or affidavitmayof Willthe depend on Right of the Right of the
Code. Code, with special Code. Mustmembers be affirmation
of any ofhave the such
presiding
rights, whether
elder, member of to vote members of any
requirements on accompanied class by a or chief
classesarchbishop,
to privileges secretary,oror educational
clerk may be limited, class or classes to
the contents of the favorable vote maybishop,
be limited, priest,
restrictions
or other
as may member
corporation
of is broadened or vote may be limited,
AOI as provided in recommendation broadened
of minister, orrabbi be stated
or suchin the AOIreligious
organized as a denied to the extent broadened or
Section 97. the Department deniedof topresiding
the extentelder,
Provided,
as society
That or noreligious
stock or non-stock specified in the AOI denied to the extent
Education, TESDA specifiedthe in thecase
AOImay share
be, order,
may orbediocese,corporation. or the by-laws. specified in the AOI
or CHED. or the by-laws.
and accompanied deprivedsynod,
of votingor district or the by-laws
by a copy of rights
the except
organization
those of the (Reason: General (Reason: General
commission, classifiedreligiousand provisions on non- provisions on non-
certificate issuedof denomination,as sect stock corporations stock corporations
election or letter"preferred"
of or church, or setting apply suppletorily). apply suppletorily).
appointment "redeemable"of forth the required
such shares,
chief provisions
unless in the
archbishop, bishop,
otherwise AOI provided
in accordance
priest, minister,
in the Code.
to Sec. 116.
rabbi or presiding MANNER OF VOTING
Cumulative elder,voting
duly certified
Cumulative voting Will depend on Not applicable Cumulative voting
not toavailable,
be correct by is any
always available whether (A corporation not available,
unless notary public. in the election of educational
otherwise consisting of only unless otherwise
COMMENCEMENT OF CORPORATE provided EXISTENCE
in the directors. corporation is one person or provided in the
From the date the From the date the From the date articles
the or Fromby-laws.
and after the From the date organized
the as a member, voting not articles or by-laws
SEC issues a SEC issues a SEC issues a filing with the SEC SEC issuesstocka or non-stock necessary).
certificate of certificate of certificate of of the said AOI, certificate corporation.
of (Reason: General
incorporation under incorporation under incorporation under verified by affidavit incorporation under provisions on non-
its official seal. its official seal. its official seal. or affirmation, and its official seal. stock corporations
accompanied by apply suppletorily).
the required PROXY
Membersdocuments, such
may vote Stockholders may Will depend on Not applicable Members may vote
be deprivedchief of archbishop,
the vote by proxy whether (A corporation be deprived of the
right tobishop,vote by priest, educational consisting of only right to vote by
proxy in minister,
the articlesrabbi or corporation is one person or proxy in the articles
or by-laws.presiding elder organized as a member, voting not or by-laws
shall become a stock or non-stock necessary).
corporation sole. corporation. (Reason: General
PURPOSE provisions on non-
May be formed or For the transaction To provide facilities Formed for the Formed for the stock corporations
organized for of business, private for teaching or purpose of administration of its apply suppletorily).
charitable, instruction administering and temporalities or for

SAN BEDA COLLEGE OF LAW


266 2017 CENTRALIZED BAR OPERATIONS
MEETING/ VOTING OF MEMBERS OR STOCKHOLDERS provided in denomination, sect
Members may be Stockholders and Will depend on Not applicable Members may multiples
be of 5. or church.
allowed by the by- directors must act in whether (A corporation allowed by the by-
laws to vote by mail a meeting, except educational consisting of only laws to vote byIf mail a stock
or other similar where a mere corporation is one person or or other similarcorporation,
means. assent is sufficient organized as a member, voting not means directors shall not
or a formal meeting stock or non-stock necessary) less than 5 nor
is unnecessary. corporation. (Reason: Generalmore than fifteen
provisions on(15). non-
stock TERM
corporations
OF DIRECTOR/ TRUSTEE
The term of a The term apply ofsuppletorily).
a General Rule: If As may be The trustees
TRANSFERABILITY OF MEMBERSHIP/ trustee is 3STOCKS
years; director is 1 year. organized as a non- prescribed by the elected shall serve
Members cannot Transfers of stocks If organized 1/3 as aof The
the successors
Board in Members stock corporation, rules, regulations or
cannot for the first year of
transfer their subject to non-stock shall be officeelected
of any chief transfer the term of a trustee discipline of the
their incorporation or
membership unless restrictions stated in corporation, annually.archbishop, bishop, membership unless is 5 years; 1/5 of the religious such other period
allowed by the the AOI and the members cannot priest, minister, allowed by Board the shall be denomination, sect as may be
articles or by-laws. Code. transfer their rabbi or presiding articles or by-laws elected annually or church prescribed by the
membership unless elder in a represented by the laws of the religious
allowed by the corporation sole (Reason: General Exception: corporation sole as society or religious
articles or by-laws. shall become the provisions onOtherwise non- provided the trusteeship is order, or of the
corporation sole on stock corporations in the AOI or by- attached to the diocese, synod, or
If a stock their accession to apply suppletorily). laws office of the chief district
corporation, office. If a stock archbishop, bishop, organization.
stockholders may Or as maycorporation, be the priest, minister,
transfer their During any vacancy prescribed byterm theof a director is rabbi or the
shares. 1 year.
in the office of chief laws of the religious presiding elder.
archbishop, bishop, society or religious
priest, minister, order, WHOorMAY of BE the A DIRECTOR/ TRUSTEE
No personrabbi or A the diocese,
shall be provisionalsynod, or
No person shall be Must be the chief No person shall be
elected presiding
as trustee elder, the district
director, who is elected as director/ archbishop, bishop, elected as trustee
unless person neither organization.
he is ora persons a trustee unless he is priest, minister, unless he is a
member authorized and
of the stockholder nor a a member of the rabbi or other member of the
empowered by
corporation. the
creditor of the corporation. presiding elder of corporation.
rules, regulations or
corporation or of such religious
discipline ofanythesubsidiary or denomination, sect
religious affiliate of the or church.
denomination,corporation,
sect may be
or church
appointed by the
represented by SEC the in case of
corporation deadlocks.
sole
shall exercise all ELECTION OF OFFICERS
Officers themaypowers
be The and AOI may If a non-stock Not applicable Officers may be
directly authority
elected by of providethe that all corporation, officers directly elected by
the corporation
members sole. officers or may be directly (The sole member the members
unless otherwise employees or that elected by the of the corporation unless otherwise
DIRECTORS/TRUSTEES provided in the specified officers or members unless serves as trustee of provided in the
At least 5 Trustees; At least 5 Directors; If organized articles
as a or The sole member
by-laws. of Theshallboard
employees be otherwiseof provided the affairs, property articles or by-laws
may exceed 15 in may not exceed 15 non-stock the corporation
elected trustees or to be not articles or by- and temporalities of
in the
number. in number. corporation, serves as trustee of lessby than
appointed the 5laws nor any religious (Reason: General
trustees shall not the affairs, property more than 15.
stockholders, denomination, sect provisions on non-
less than 5 nor and temporalities of of by the If
instead a stock or church). stock corporations
more than 15, any religious
board of directors. corporation, officers apply suppletorily).

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2017 CENTRALIZED BAR OPERATIONS
are elected by the
Board of Directors.
PLACE OF MEETINGS OF STOCKHOLDERS
The by-laws may Stockholder’s If a non-stock Not applicable The by-laws may
provide that the meeting shall be corporation, by- provide that the
members of a non- held in the city or laws may provide (A corporation members of a non-
stock corporation municipality where that the members of consisting of only stock corporation
may hold their principal office of a non-stock one person or may hold their
regular or special corporation is corporation may member, meeting regular or special
meetings at any located and if hold their regular or not necessary). meetings at any
place practicable in the special meetings at place
within the principal office. any place within the
Philippines. within the Philippines.
Philippines.
(Reason: General
If a stock provisions on non-
corporation, stock corporations
Stockholder’s apply suppletorily).
meeting shall be
held in the city or
municipality where
principal office of
corporation is
located and if
practicable in the
principal office.
PLACE OF MEETINGS OF DIRECTORS/TRUSTEES
Board of Trustees’ Board of Directors’ Whether a stock or Not applicable Board of Trustees’
meetings may also meetings may be non-stock meetings may also
be held in or outside held in or outside corporation, Board (A corporation be held in or outside
the Philippines, the Philippines, of Directors/ consisting of only the Philippines,
unless the by-laws unless the by-laws Trustees’ meetings one person or unless the by-laws
otherwise provide. otherwise provides. may be held in or member, one otherwise provide.
(Reason: the outside the trustee, meeting not
provisions Philippines, unless necessary)
governing stock the by-laws
corporations apply otherwise provide.
suppletorily to non-
stock corporations
except as may be
covered by specific
provisions of the
Code pertaining to
non-stock
corporations)

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268 2017 CENTRALIZED BAR OPERATIONS
CORPORATE ACTS WHICH REQUIRE MAJORITY Corporate Act Board Vote Required Stockholders/Members Salient Points
VOTE OF THE BOD ALONE (V-P2EN) Vote Required
Corporate Act Vote Needed/Required Salient Points 2. Appraisal right is
Vacancies in BOD if NOT due to available in certain
If the directors do not constitute a
removal, expiration of the term or Majority vote of remaining cases;
quorum, stockholders have the
increase in number of directors directors if quorum still exists. 3. Effective upon
right to elect.
(CORPORATION CODE, Sec. 29). approval by SEC, or
Power to acquire own shares 1. Provided that there are date of filing if not acted
(CORPORATION CODE, Sec. 41 Majority Vote. unrestricted retained earnings upon within 6 months;
in relation to Secs. 23 and 25). 2. Only for legitimate purposes and
Power to declare dividends 4. Must be for a legitimate
For stock dividends, approval of purpose.
(CORPORATION CODE, Sec 43 Majority Vote.
the 2/3 of
Voluntary Dissolution of the OCS is necessary.
in relation to Secs. 23 and 25).
Election of officers Majority vote of all theCorporation
members of Majority vote. 2/3 of OCS/ members.
Non-voting shares can
(CORPORATION CODE, Sec. 25). BOD. (CORPORATION CODE, vote.
Fixing the issued Price of No- Par Secs. 118 and 119).
Majority Vote, if authorized
Adoptionby AOI
of Majority
plan orof OCS, if BOD is not
value shares (CORPORATION
or by-laws. authorized
distribution of assets of by the AOI.
CODE, Sec. 62, last par.). 2/3 of members having
non-stock corporation Majority vote of trustees.
voting rights.
CORPORATE ACTS WHICH REQUIRE MAJORITY (CORPORATION CODE,
VOTE OF THE BOD AND VOTE OF Sec. 95, par. 2).
STOCKHOLDERS REPRESENTING MAJORITY OF 1. Non-voting shares
THE OCS (AM) can vote;
Corporate Act Board Vote Required Stockholders/Members Salient Points 2. Appraisal right is
Vote Required available, except
when the plan is
Amendment or repeal of Merger or ConsolidationAmendment may be
Majority of BOD of 2/3 of OCS/ members of abandoned; and
By-laws or Adoption of (CORPORATION CODE,made by the Board only
Majority constituent corporations. constituent corporations. 3. Any amendment to
new By-laws Majority vote. Sec. 77).of OCS or after due delegation by
majority of members. the stockholders. the plan may be made
(CORPORATION CODE, provided it is
Non-voting shares can
Sec. 48). approved by majority
vote.
2/3 of OCS or members is vote of the board and
required when: 2/3 of OCS/members.
a) a stockholder 1. Majority of the board
representing the same is sufficient if the
transaction does not
Sale, Lease, Exchange,interest of both the
cover all or
Mortgage, Pledge ormanaging and managed
substantially all of the
other Disposition of all orcorporations own or
Majority assets of the
Management Contract Majority vote of BOD of substantially all of ofcontrol more
Majority than 1/3 of
vote. 2/3 of OCS/ members.
OCS/members of both corporation;
(CORPORATION CODE, both managing and corporate assetstotal OCS entitled to vote
managing and managed 2. Non-voting shares
Sec. 44). managed corporation. (CORPORATION CODE,of the managing
corporation. corporation; can vote;
Sec.40).
b) majority of the 3. Appraisal right is
members of the BOD of available; and
the managing corporation 4. Notice is required.
also constitute a majority 1. Meeting is required;
of the members of the 2. Non-voting shares
BOD of the managed can vote;
Increase or decrease ofcorporation. 3. No appraisal right;
capital stock 4. Prior approval of the
Majority vote. 2/3 of OCS/ members.
CORPORATE ACTS WHICH REQUIRE MAJORITY (CORPORATION CODE, SEC is necessary;
VOTE OF THE BOD AND VOTE OF Sec. 38). and
STOCKHOLDERS REPRESENTING 2/3 OF THE 5. Treasurer’s sworn
OCS (ADAM-LI3ES) statement is
Corporate Act Board Vote Required Stockholders/Members Salient Points necessary.
Incur,
VoteCreate,
RequiredIncrease 1. Meeting is required;
Amendment of AOI Bonded Indebtedness1. Non-voting shares can and
Vote or written assent of Majority Vote. 2/3 of OCS/ members.
(CORPORATION CODE, Majority vote. (CORPORATION CODE, vote; 2. Non-voting shares
2/3Sec.
of OCS/
38). members. can vote.
Sec. 16).

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2017 CENTRALIZED BAR OPERATIONS
Corporate Act Board Vote Required Stockholders/Members
Corporate Act Salient Points
Vote Needed/Required Salient Points
Vote Required exchange for property needed for
Investment of Corporate 1. Non-voting shares corporate purposes or in
Funds in another can vote; payment of a previously
Corporation or Business 2. Appraisal right contracted debt.
or for any other purpose Delegation of the power to Amend,
available; and Delegation can be revoked by
Majority vote. 2/3 of OCS/ members.
other than primary Repeal or Adopt New By-laws
3. Investment
to in the majority OCS.
2/3 of OCS/ members.
purpose BOD (CORPORATION CODE, secondary purpose is
(CORPORATION CODE, Sec. 48). covered. Non-voting shares cannot vote.
Sec. 42). Notice and statement of
1. Non-voting shares purpose are necessary
can vote;
Extension or shortening Removal of Directors/ Trustees
2. Appraisal2/3 of
right
OCS /ismembers. Must be made in a meeting
of corporate term (CORPORATION CODE, Sec. 28).
Majority vote. 2/3 of OCS/ members. available; and called by the secretary on
(CORPORATION CODE,
3. Effected through an President’s order or on written
Sec. 37).
amendment of the demand of majority of OCS.
AOI.
Ratification of act of disloyal
Issuance of Stock director (CORPORATION CODE, 2/3 of OCS.
There must be
Dividends Sec. 34).
Majority vote. 2/3 of OCS/ members. unrestricted retained
(CORPORATION CODE,
earnings.
Sec. 43).
Incorporation of Religious
2/3 of members.
CORPORATE ACTS WHICH REQUIRE MAJORITY Societies.
VOTE OF THE STOCKHOLDERS REPRESENTING
MAJORITY OF THE OCS ALONE (FFAD)
The contract must be fair and
Corporate Act Vote Needed/Required Salient Points
reasonable under the
Reasonable per diems may be
Ratification of a contract of Self- circumstances.
given.
dealing directors (CORPORATION 2/3 of OCS/ members.
CODE, Sec. 32). Full disclosure of adverse
Fixing of compensation of directors By-laws may provide for
Majority of OCS. interest of directors/ trustees
(CORPORATION CODE, Sec.30). compensation.
involved is necessary.
Limit: not more than 10% of the
net income before income tax.
Stockholders/Members shall vote
Fixing the issued Price of No- Par
if the BOD/BOT are not
value shares (CORPORATION Majority of OCS.
authorized by the AOI and the by-
CODE, Sec. 62, par. 5).
laws to fix the price.
Adoption of By-laws
Majority of OCS/ members. Non-voting shares can vote.
(CORPORATION CODE, Sec. 46).
1. Candidates with the highest
number of votes get elected;

2. Cumulative voting: No. of


Election of Directors/ trustees shares x No. of directors to be
Majority of OCS / members.
(CORPORATION CODE, Sec. 24). elected; and

3. Non-voting shares cannot


vote.

CORPORATE ACTS WHICH REQUIRE MAJORITY


VOTE OF THE STOCKHOLDERS REPRESENTING
2/3 OF THE OCS ALONE (PAR2IS)
Corporate Act Vote Needed/Required Salient Points
Only if the AOI or amendment
thereto denies pre-emptive right.
Denial of Pre-emptive right
2/3 of OCS.
(CORPORATION CODE, Sec. 39).
Shares issued in good faith with
the approval of the OCS, in

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270 2017 CENTRALIZED BAR OPERATIONS

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