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CORPORATION LAW
INTRODUCTION
A corporation, being a creature of law, "owes its life to the state, its birth being purely
dependent on its will," it is "a creature without any existence until it has received the imprimatur of
the state acting according to law." A corporation will have no rights and privileges of a higher priority
than that of its creator and cannot legitimately refuse to yield obedience to acts of its state organs.
(Tanyag v. Benguet Corporation)
Stock v. Non-Stock
Corporations
Stock Non-Stock
Purpose Primarily to make profits for its May be formed or organized for
shareholders charitable, religious, educational,
professional, cultural, fraternal,
literary, scientific, social, civic
service, or similar purposes like
trade, industry, agricultural and
like chambers, or any combination
thereof. (§88)
Scope of right to vote Each stockholder votes Each member, regardless of class,
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 2
Voting by proxy May be denied by the AOI or the Cannot be denied. (Sec. 58)
by-laws. (Sec. 89)
Term of directors or Directors / trustees shall hold Board classified in such a way that
trustees office for 1 year and until their the term of office of 1/3 of their
successors are elected and number shall expire every year.
qualified (Sec. 23). Subsequent elections of trustees
comprising 1/3 of the board shall
be held annually, and trustees so
elected shall have a term of 3
years. (Sec. 92)
Election of officers Officers are elected by the Officers may directly elected by the
Board of Directors (Sec. 25), members UNLESS the AOI or by-
except in close corporations laws provide otherwise. (Sec. 92)
where the stockholders
themselves may elect the
officers. (Sec. 97)
Place of meetings Any place within the Generally, the meetings must be
Philippines, if provided for by held at the principal office of the
the by-laws (Sec. 93) corporation, if practicable. If not,
then anyplace in the city or
municipality where the principal
office of the corporation is located.
(Sec. 51)
FACTS: Club Filipino owns and operates a club house, a sports complex, and a bar
restaurant, which is incident to the operation of the club and its gold course. The club is
operated mainly with funds derived from membership fees and dues. The BIR seeks to tax
the said restaurant as a business.
HELD: The Club was organized to develop and cultivate sports of all class and
denomination for the healthful recreation and entertainment of its stockholders and
members. There was in fact, no cash dividend distribution to its stockholders and whatever
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 3
was derived on retail from its bar and restaurants used were to defray its overhead expenses
and to improve its golf course.
In the case at bar, nowhere in the AOI or by-laws of Club Filipino could be found an
authority for the distribution of its dividends or surplus profits.
Number • not less than 5; not more than • may be more than 15 for non-
15 stock corp. except educational
corp.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 4
3- Contribute capital/resources
4- Mode of use of capital/resource and control/management of capital/resource
5- distribution/disposition of capital/resource (embodied in constitutive documents)
STEPS COMMENTS
c. Filing of articles; payment • AOI & the treasurer’s affidavit duly signed & acknowledged
of fees. • must be filed w/ the SEC & the corresponding fees paid
• failure to file the AOI will prevent due incorporation of the
proposed corporation & will not give rise to its juridical
personality. It will not even be a de facto corp.
• Under present SEC rules, the AOI once filed , will be
published in the SEC Weekly Bulletin at the expense of the
corp. (SEC Circular # 4, 1982).
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 5
Corporate Name • Essential to its existence since it is through it that the corporation
can sue and be sued and perform all legal acts
Purpose Clause • A corporation can only have one (1) primary purpose. However, it
can have several secondary purposes.
Term of Existence • cannot specify term which is longer than 50 years at a time
• may be renewed for another 50 years, but not earlier than 5 years
prior to the original or subsequent expiry date UNLESS there are
justifiable reasons for an earlier extension.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 6
Capital Stock • amount of its authorized capital stock in lawful money of the
Philippines
• number of shares into which it is divided
• in case the shares are par value shares, the par value of each,
• names, nationalities and residences of the original subscribers,
and the amount subscribed and paid by each on his subscription,
and if some or all of the shares are without par value, such fact
must be stated
• for a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount
contributed by each
• 25% of 25% rule to be certified by Treasurer
• paid up capital should not be less than P5,000
Other matters Classes of shares into w/c the shares of stock have been
divided; preferences of & restrictions on any such class;
and any denial or restriction of the pre-emptive right of
stockholders should also be expressly stated in said articles.
De Facto Corporations:
Requisites
User of Corporate Powers
What is a ‘de facto’ corporation?
A ‘de facto’ corporation is a defectively organized corporation, which has all the
powers and liabilities of a ‘de jure’ corporation and, except as to the State, has a
juridical personality distinct and separate from its shareholders, provided that the
following requisites are concurrently present:
(1) That there is an apparently valid statute under which the corporation with its
purposes may be formed;
(2) That there has been colorable compliance with the legal requirements in good
faith; and,
(3) That there has been use of corporate powers, i.e., the transaction of business in
some way as if it were a corporation.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 7
No. In the case of Hall v. Piccio (86 Phil. 603; 1950), where the supposed
corporation transacted business as a corporation pending action by the SEC on its
articles of incorporation, the Court held that there was no ‘de facto’ corporation on
the ground that the corporation cannot claim to be in ‘good faith’ to be a corporation
when it has not yet obtained its certificate of incorporation.
The constitutive documents of the proposed corporation were deposited with the
Register of Deeds but not on file in said office. One of the requirements for valid
incorporation is the filing of constitutive documents in the Register of Deeds.
Was there ‘colorable’ compliance enough to give the supposed corporation at least
the status of a ‘de facto’ corporation?
No. The filing of the constitutive documents in the Register of Deeds is a condition
precedent to the right to act as a corporate body. As long as an act, required as a condition
precedent, remains undone, no immunity from individual liability is secured.
The constitutive documents were filed with the clerk of the Court of Appeals but not
with the clerk of court in the judicial district where the business was located. Arkansas law
requires filing in both offices.
Was there ‘colorable’ compliance enough to give the supposed corporation at least
the status of a ‘de facto’ corporation?
No. Neither the hope, the belief, nor the statement by parties that they are
incorporated, nor the signing of the articles of incorporation which are not filed, where filing
is requisite to create the corporation, nor the use of the pretended franchise of the nonexistent
corporation, will constitute such a corporation de facto as will exempt those who actively
and knowingly use s name to incur legal obligations from their individual liability to pay
them. There could be no incorporation or color of it under the law until the articles were filed
(requisites for valid incorporation).
In the case of Hall v. Piccio, where the supposed corporation transacted business as a
corporation pending action by the SEC on its articles of incorporation, the Court held that
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 8
there was no ‘de facto’ corporation on the ground that the corporation cannot claim to be in
‘good faith’ to be a corporation when it has not yet obtained its certificate of incorporation.
The ‘de facto’ doctrine differs from the estoppel doctrine in that where all the
requisites of a ‘de facto’ corporation are present, then the defectively organized
corporation will have the status of a ‘de jure’ corporation in all cases brought by and
against it, except only as to the State in a direct proceeding. On the other hand, if
any of the requisites are absent, then the estoppel doctrine can apply only if under
the circumstances of the particular case then before the court, either the defendant
association is estopped from defending on the ground of lack of capacity to be sued,
or the defendant third party had dealt with the plaintiff as a corporation and is
deemed to have admitted its existence.
(De facto – has status of ‘de jure’ corpo, except separate personality against State, provided all
requisites are present)
(2) against third party? Third party cannot deny existence of corporation if it
dealt with it as such.
Company was sued on a promissory note. Its defense was that at the time of its
issuance, it was defectively organized and therefore could not be sued as such.
The Corporation cannot repudiate the transaction or evade responsibility when sued
thereon by setting up its own mistake affecting the original organization.
One who enters into a contract with a party described therein as a corporation is
precluded, in an action brought thereon by such party under the same designation, from
denying its corporate existence.
The corporation sued another corporation a promissory note. The defense was that
the plaintiff was not able to prove the corporate existence of both parties.
The defendant is estopped from denying its own corporate existence. It is also
estopped from denying the other’s corporate existence. The general rule is that in the
absence of fraud, a person who has contracted or otherwise dealt with an association is such
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 9
a way as to recognize and in effect admit its legal existence as a corporate body is thereby
estopped from denying its corporate existence.
IBM sued Cranson in his personal capacity regarding a typewriter bought by him as
President of a defectively organized company whose Articles were not yet filed when the
obligation was contracted.
IBM, having dealt with the defectively organized company as if it were properly
organized and having relied on its credit instead of Cranson’s, is estopped from asserting that
it was not incorporated. It cannot sue Cranson personally.
Salvatierra leased his land to the corporation. He filed a suit for accounting,
rescission and damages against the corporation and its president for his share of the produce.
Judgment against both was obtained. President complains for being held personally liable.
He is liable. An agent who acts for a non-existent principal is himself the principal.
In acting on behalf of a corporation which he knew to be unregistered, he assumed the risk
arising from the transaction.
Mariano Albert entered into a contract with University Publishing Co., Inc. through
Jose M. Aruego, its President, whereby University would pay plaintiff for the exclusive right
to publish his revised Commentaries on the Revised Penal Code. The contract stipulated that
failure to pay one installment would render the rest of the payments due. When University
failed to pay the second installment, Albert sued for collection and won. However, upon
execution, it was found that University was not registered with the SEC. Albert petitioned for
a writ of execution against Jose M. Aruego as the real defendant. University opposed, on the
ground that Aruego was not a party to the case.
The Supreme Court found that Aruego represented a non-existent entity and induced
not only Albert but the court to believe in such representation. Aruego, acting as
representative of such non-existent principal, was the real party to the contract sued upon,
and thus assumed such privileges and obligations and became personally liable for the
contract entered into or for other acts performed as such agent.
The Supreme Court likewise held that the doctrine of corporation by estoppel cannot
be set up against Albert since it was Aruego who had induced him to act upon his (Aruego's)
willful representation that University had been duly organized and was existing under the
law.
(a) No later than one (1) month after receipt from SEC of official
notice of issuance of Cert. of incorporation.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 10
When effective: Only upon the SEC’s issuance of a certification that the by-laws
are not inconsistent with the Corporation Code.
Contents of By-laws - Subject to the provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a private corporation
may provide in its by-laws for:
1) the time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2) the time and manner of calling and conducting regular and special meetings
of the stockholders or members;
4) the form for proxies of stockholders and members and the manner of voting
them;
6) the time for holding the annual election of directors or trustees and the
mode or manner of giving notice thereof;
7) the manner of election or appointment and the term of office of all officers
other than directors or trustees;
10) such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs.
As a general rule, the by-laws of a corporation are valid if they are reasonable and
calculated to carry into effect the objective of the corporation and are not contradictory to the
general policy of the laws of the land. Under a statute authorizing by-laws for the transfer of
stock, a corp. can do no more than prescribe a general mode of transfer on the corp. books
and cannot justify an restriction upon the right of sale.
Is a provision in the by-laws allowing the BOD, by vote of absolute majority, to cancel
shares valid?
No. It is a patent nullity, being in direct conflict with Sec. 187 of the Corp. Law
which prohibits forced surrender of unmatured stocks except in case of dissolution.
Yes. Since the Corporation Law does not prescribe the rate of compensation, the
power to fix compensation lies with the corporation.
Is a provision requiring persons elected to the Board of Directors to own at least P 5,000
shares valid?
Yes. The Corporation Law gives the corporation the power to provide qualifications
of its directors.
CITIBANK, N.A. v. CHUA (220 SCRA 75)
ISSUE: Whether the failure of a corporation to file its by-laws within one (1) month from
the date
of its incorporation, as mandated by Art. 46 of the Corporation Code, results in the
corporation's automatic dissolution.
RULING: No. Failure to file by-laws does not result in the automatic dissolution of the
corporation. It only constitutes a ground for such dissolution. (Cf. Chung Ka Bio v.
IAC, 163 SCRA 534) Incorporators must be given the chance to explain their neglect
or omission and remedy the same.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 12
In this case, the sale of a piece of land belonging to Motorich Corporation by the
corporation treasurer (Gruenberg) was held to be invalid in the absence of evidence that said
corporate treasurer was authorized to enter into the contract of sale, or that the said contract
was ratified by Motorich. Even though Gruenberg and her husband owned 99.866% of
Motorich, her act could not bind the corporation since she was not the sole controlling
stockholder.
The act of liquidation made by the stockholders of the corp of the latter’s assets is not
and cannot be considered a partition of community property, but rather a transfer or
conveyance of the title of its assets to the individual stockholders. Since the purpose of the
liquidation, as well as the distribution of the assets, is to transfer their title from the
corporation to the stockholders in proportion to their shareholdings, that transfer cannot be
effected without the corresponding deed of conveyance from the corporation to the
stockholders. It is, therefore, fair and logical to consider the certificate of liquidation as one
in the nature of a transfer or conveyance.
The case of the unpaid compensation for the preparation of the project study.
The petitioners were not involved in the initial stages of the organization of the
airline. They were merely among the financiers whose interest was to be invited and who
were in fact persuaded, on the strength of the project study, to invest in the proposed airline.
There was no showing that the Airline was a fictitious corp and did not have a
separate juridical personality to justify making the petitioners, as principal stockholders
thereof, responsible for its obligations. As a bona fide corp, the Airline should alone be
liable for its corporate acts as duly authorized by its officers and directors. Granting that the
petitioners benefited from the services rendered, such is no justification to hold them
personally liable therefor. Otherwise, all the other stockholders of the corporation, including
those who came in late, and regardless of the amount of their shareholdings, would be
equally and personally liable also with the petitioner for the claims of the private respondent.
The case of the reliance on a default provision of the contract granting automatic extra-
judicial rescission.
The court found no badges of fraud on the part of the president of the corporation.
The BOD had literally and mistakenly relied on the default provision of the contract. As
president and controlling stockholder of the corp, no sufficient proof exists on record that he
used the corp to defraud private respondent. He cannot, therefore, be made personally liable
because he appears to be the controlling stockholder. Mere ownership by a single
stockholder or by another corporation of all or nearly all of the capital stock of a corporation
is not of itself sufficient ground for disregarding the separate corporate personality.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 13
The case of the assignment by Senator Magsaysay of a certain portion of his shareholdings in
SUBIC granting his sisters the right to intervene in a case filed by the widow against SUBIC.
The words "an interest in the subject," to allow petitioners to intervene, mean a direct
interest in the cause of action as pleaded, and which would put the intervenor in a legal
position to litigate a fact alleged in the complaint, without the establishment of which
plaintiff could not recover.
A: That a corporation has a personality distinct from its stockholders, and is not
affected by the personal rights, obligations and transactions of the latter.
(1) Stockholders would be personally liable for the acts and contracts of the
corporation whose existence at least for the purpose of the particular situation
involved is ignored.
(2) Court is not denying corporate existence for all purposes but merely refuses to
allow the corporation to use the corporate privilege for the particular purpose
involved.
STATE V. STANDARD OIL (49 Ohio, St., 137, N.E. 279, 15; 1892)
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 14
Where the corporation was formed by and consisted of the members of a partnership
whose business and property was conveyed to the corporation for the purpose of continuing
its business, such corporation is presumed to have assumed partnership debts.
shows that other shareholders may be considered dummies of Castro. Hence, corporate veil
may be pierced.
Tan BBC (T) supplies paper to Graphics Publishing Inc (G) but the latter fails to pay.
G's printing machine levied upon to satisfy claim but PADCO, another corpo intercedes,
saying it is the owner of the machine, having leased such to G.
Printing machine was allowed by the Court to satisfy G's liability. Both G and
PADCO's corporate entities pierced because they have: the same board of directors, PADCO
owns 50% of G, PADCO never engaged in the business of printing. Obviously, the board is
using PADCO to shield G from fulfilling liability to T.
Associated Financing Corp. (AFC), through its pres. F. Sycip (who together with
wife, own 76% of AFC) contracts with NAMARCO for an exchange of sugar (raw v.
refined). N delivers, AFC doesn't since it did not have sugar to supply in the first place. N
sues to recover sum of money plus damages.
Sycip held jointly and severally liable with AFC. AFC's corporate veil was pierced
because it was used as Sycip's alter ego, corpo used merely as an instrumentality, agency or
conduit of another to evade liability.
Jacinto, president/GM and owner of 52% of corpo, owes MetroBank sum of money,
signs trust receipts therefor. Jacinto absconds. Jacinto ordered to jointly and severally pay
MetroBank. Corpo veil pierced because it was used as a shield to perpetuate fraud and/or
confuse legitimate issues. There was no clear cut delimitation between the personality of
Jacinto and the corporation.
Both predecessor and successor were owned and controlled by petitioner and there
was no break in the succession and continuity of the same business. All the assets of the
dissolved Plant were turned over to the emerging corporation. The veil of corporate fiction
must be pierced as it was deliberately and maliciously designed to evade its financial
obligation to its employees.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 15
Rule: The doctrine of piercing the veil of corporate entity applies when corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime, or
when it is made as a shield to confuse the legitimate issues or where a corporation is the
mere alter ego or business conduit of a person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.
Case at bar: Union sought to pierce corporate veil alleging that the creation of Acrylic is a
devise to evade the application of the CBA Indophil had with them (or it sought to include
the other union in its bargaining leverage).
SC: Legal corporate entity is disregarded only if it is sought to hold the officers and
stockholders directly liable for a corporate debt or obligation. Union does not seek to impose
such claim against Acrylic. Mere fact that businesses were related, that some of the
employees of Indophil are the same persons manning and providing for auxiliary services to
the other company, and that physical plants, officers and facilities are situated in the same
compound - not sufficient to apply doctrine.
NAFLU V. OPLE (143 SCRA 125; 1986)
Libra/Dolphin Garments was but an alter ego of Lawman Industrial, therefore, the
former must bear the consequences of the latter's unfair acts. It cannot deny reinstatement of
petitioners simply because of cessation of Lawman's operations, since it was in fact an illegal
lock-out, the company having maintained a run-away shop and transferred its machines and
assets there.
Here, the veil of corporate fiction was pierced in order to safeguard the right to self-
organization and certain vested rights which had accrued in favor of the union. Second
corporation sought the protective shield of corporate fiction to achieve an illegal purpose.
A corporation is invested by law with a personality separate and distinct from those
of the persons composing it as well as from that of any other legal entity to which it may be
related. Mere ownership by a single stockholder or by another corporation of all or nearly all
of the capital stock of a corporation is not of itself sufficient ground for disregarding the
separate corporate personality.
Where there is nothing on record to indicate the President and majority stockholder
of a corporation had acted in bad faith or with malice in carrying out the retrenchment
program of the company, he cannot be held solidarily and personally liable with the
corporation.
Jose M. Villarama, operator of a bus company, Villa Rey Transit, which was
authorized to operate 32 units from Pangasinan to Manila and vice-versa, sold 2 CPCs to
Pantranco. One of the conditions included in the contract of sale was that the seller
(Villarama) "shall not, for a period of 10 years from the date of the sale, apply for any TPU
service identical or competing with the buyer (Pantranco)."
Barely 3 months after the sale, a corporation called Villa Rey Transit, Inc. was
organized, with the wife of Jose M. Villarama as one of the incorporators and who was
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 16
subsequently elected as treasurer of the Corporation. Barely a month after its registration
with the SEC, the corporation bought 5 CPCs and 49 buses from one Valentin Fernando, and
applied with the Public Service Commission (PSC) for approval of the sale. Before the PSC
could take final action on the said application, however, 2 of the 5 CPCs were levied upon
pursuant to a writ of execution issued by the CFI in favor of Eusebio Ferrer, judgment
creditor, against Valentin Fernando, judgment debtor. During the public sale conducted,
Ferrer was the highest bidder, and a certificate of sale was issued in his name. Shortly
thereafter, he sold the said CPCs to Pantranco, and they jointly submitted their contract of
sale to the PSC for approval.
The PSC issued an order that pending resolution of the applications, Pantranco shall
have the authority to provisionally operate the service under the 2 CPCS that were the subject
of the contract between Ferrer and Pantranco. Villa Rey Transit took issue with this, and
filed a complaint for annulment of the sheriff's sale of the CPCs and prayed that all the
orders of the PSC relative to the dispute over the CPCs in question be annulled. Pantranco
filed a third-party complaint against Jose M. Villarama, alleging that Villarama and Villa
Rey Transit are one and the same, and that Villarama and/or the Corporation is qualified
from operating the CPCs by virtue of the agreement entered into between Villarama and
Pantranco.
Given the evidence, the Court found that the finances of Villa-Rey, Inc. were
managed as if they were the private funds of Villarama and in such a way and extent that
Villarama appeared to be the actual owner of the business without regard to the rights of the
stockholders. Villarama even admitted that he mingled the corporate funds with his own
money. These circumstances negate Villarama's claim that he was only a part-time General
Manager, and show beyond doubt that the corporation is his alter ego. Thus, the restrictive
clause with Pantranco applies. A seller may not make use of a corporate entity as a
means of evading the obligation of his covenant. Where the Corporation is
substantially the alter ego of one of the parties to the covenant or the restrictive
agreement, it can be enjoined from competing with the covenantee.
Close Corporations
The Cease plantation was solely composed of the assets and properties of the defunct
Tiaong plantation whose license to operate already expired. The legal fiction of separate
corporate personality was attempted to be used to delay and deprive the respondents of their
succession rights to the estate of their deceased father.
While originally, there were other incorporators of Tiaong, it has developed into a
closed family corporation (Cease). The head of the corporation, Cease, used the Tiaong
plantation as his instrumentality. It was his business conduit and an extension of his
personality. There is not even a showing that his children were subscribers or purchasers of
the stocks they own.
The Delpher Trades Corp. is a business conduit of the Pachecos. What they really did
was to invest their properties and change the nature of their ownership from unincorporated
to incorporated form by organizing Delpher and placing the control of their properties under
the corporation. This saved them inheritance taxes.
This is the reverse of Cease; however, it does not modify the other cases. It stands on
its own because of the facts.
Parent-Subsidiary
Relationship
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 17
A: The mere fact that a corporation owns all or substantially all of the stocks of
another corporation is not alone sufficient to justify their being treated as one entity.
(1) if the subsidiary was formed for the payment of evading the payment
of higher taxes
(2) where it was controlled by the parent that its separate identity was
hardly discernible
Q: What are the criteria by which the subsidiary can be considered a mere
instrumentality of the parent company?
1. the parent corp. owns all or most of the capital stock of the
subsidiary.
2. the parent and subsidiary have common directors and officers
3. the parent finances the subsidiary
4. the parent subscribes to all the capital stock of the subsidiary or
otherwise causes its incorporation
5. the subsidiary has grossly inadequate capital
6. the parent pays the salaries and other expenses or losses of the
subsidiary
7. the subsidiary has substantially no business except with the parent
corp. or no assets except those conveyed to or by the parent corp.
8. in the papers of the parent corp. or in the statements of its officers,
the subsidiary is described as a department or division of the parent corp. or
its business or financial responsibility is referred as the parent’s own
9. the parent uses the property of the subsidiary as its own
10. the directors or the executives of the subsidiary do not act
independently in the interest of the subsidiary but take their orders from the
parent corp. in the latter’s interest
11. the formal legal requirements of the subsidiary are not observed
(Garrett vs. Southern Railway)
(Note: Sir Jack said that we must not stop after we’ve gone through the 11 points in
order to determine whether or not there is a subsidiary or instrumentality. We must
go further and consider other circumstances which may help determine clearly the
true nature of the relationship. --- Em)
GARRETT VS. SOUTHERN RAILWAY (173 F. Supp. 915, E.D. Tenn. 1959)
The general rule is that stock ownership alone by one corporation of the stock of
another does not thereby render the dominant corporation liable for the torts of the
subsidiary, unless the separate corporate existence of the subsidiary is a mere sham, or unless
the control of the subsidiary is such that it is but an instrumentality or adjunct of the
dominant corporation.
In the case, it was found that there were two distinct operations. There was no
evidence that Southern dictated the management of Lenoir. In fact, evidence shows that
Marius, the manager of the subsidiary, was in full control of the operation. He established
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 18
prices, handled negotiations in CBAs, etc. Lenoir paid local taxes, had local counsel and
maintain a Workmen’s Compensation Fund. There was also no evidence that Lenoir was run
solely for the benefit of Southern. In fact, a substantial part of its requirements in the field of
operation of Lenoir was bought elsewhere. Lenoir sold substantial quantities to other
companies. Policy decisions remained in the hands of Marius. Hence, the complaint against
Southern Railway was dismissed.
KOPPEL VS. YATCO (77 Phil. 496; 1946)
This case involved a complaint for the recovery of merchant sales tax paid by Koppel
(Philippines), Inc. under protest to the Collector of Internal Revenue. Although the Court of
First Instance did not deny legal personality to Koppel (Philippines), Inc. for any and all
purposes, it dismissed the complaint saying that in the transactions involved in the case, the
public interest and convenience would be defeated and would amount to a perpetration of tax
evasion unless resort was had to the doctrine of "disregard of the corporate fiction."
The facts show that 99.5% of the shares of stocks of K-Phil were owned by K-USA.
K-Phil. acted as a representative of K-USA and not as an agent. K-Phil. also bore alone its
own incidental expenses (e.g. Cable expenses) and also those of its “principal”. Moreover,
K-Phil’s share in the profits was left in the hands of K-USA. Clearly, K-Phil was a mere
branch or dummy of K-USA, and was therefore liable for merchant sales tax. To allow
otherwise would be to sanction a circumvention of our tax laws and permit a tax evasion of
no mean proportion and the consequent commission of a grave injustice to the Government.
Moreover, it would allow the taxpayer to do by indirection what the tax laws prohibit to be
done directly.
Liddel Motors Inc. was an alter ego of Liddel & Co. At the time of its incorporation,
98% of the Liddel Inc.’s stock belonged to Frank Liddel. As to Liddel Motors, Frank
supplied the original capital funds. The bulk of the business of Liddel Inc. was channeled
through Liddel Motors. Also, Liddel Motors pursued no other activities except to secure
cars, trucks and spare parts from Liddel Inc. and then sell them to the general public.
To allow the taxpayer to deny tax liability on the ground that the sales were made
through another and distinct corporation when it is proved that the latter is virtually owned
by the former or that they were practically one and the same is to sanction the circumvention
of tax laws.
Southern Motors was actually owned and controlled by Yutivo as to make it a mere
subsidiary or branch of the latter created for the purpose of selling vehicles at retail. Yutivo
financed principally, if not wholly, the business of Southern Motors and actually exceeded
the credit of the latter . At all times, Yutivo, through the officers and directors common to it
and the Southern Motors exercised full control over the cash funds, policies, expenditures
and obligations of the latter. Hence, Southern Motors, being a mere instrumentality or
adjunct of Yutivo, the CTA correctly disregarded the technical defense of separate corporate
identity in order to arrive at the true tax liability of Yutivo.
The La Campana Gaugau Packing and La Campana Coffee Factory were operating
under one single business although with 2 trade names. It is a settled doctrine that the fiction
of law of having the corporate identity separate and distinct from the identity of the persons
running it cannot be invoked to further the end subversive of the purpose for which it was
created. In the case at bar, the attempt to make the two businesses appear as one is but a
device to defeat the ends of the law governing capital and labor relations and should not be
permitted to prevail.
It must be noted, however, that the contract must be adopted in its entirety;
the corporation cannot adopt only the part that is beneficial to it and discard
that which is burdensome. Moreover, the contract must be one which is
within the powers of the corporation to enter, and one which the usual
agents of the company have express or implied authority to enter.
McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892)
Whatever may be the proper legal theory by which a corporation may be bound by
the contract (ratification, adoption, novation, a continuing offer to be accepted or rejected by
the corporation), it is necessary in all cases that the corporation should have full knowledge
of the facts, or at least should be put upon such notice as would lead, upon reasonable
inquiry, to the knowledge of the facts.
A promoter could not have acted as agent for a corporation that had no legal
existence. A corporation, until organized, has no life therefore no faculties. The corporation
had no juridical personality to enter into a contract.
The fact of bringing an action on the contract has been held to constitute
sufficient adoption or ratification to give the corporation a cause of action.
BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 20
When the corporation was formed, the incorporators took upon themselves the whole
thing, and ratified all that had been done on its behalf. Though there was no formal
assignment of the contract to the corporation, the acts of the incorporators were an adoption
of the contract. Therefore the corporation has the right to sue for damages for the breach of
contract.
The incorporation of (Morong) and its acceptance of the franchise as shown by this
action in prosecuting the application filed with the Commission for approval of said
franchise, not only perfected a contract between the municipality and Morong but also cured
the deficiency pointed out by the petition. The fact that Morong did not have a corporate
existence on the day the franchise was granted does not render the franchise invalid, as
Morong later obtained its certificate of incorporation and accepted the franchise.
WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915)
Individual promoters cannot escape liability where they buy machinery, receive them
in their possession and authorize one member to issue a note, in contemplation of organizing
a corporation which was not formed. (see Campos' notes p. 258-259). The agent is personally
liable for contracts if there is no principal. The making of partial payments by the
corporation, when later formed, does not release the promoters here from liability because
the corporation acted as a mere stranger paying the debt of another, the acceptance of which
by the creditor does not release the debtors from liability over the balance. Hence, there is no
adoption or ratification.
HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963)
The rule is that if the contract is partly to be performed before incorporation, the
promoters solely are liable. Even if the promoter signed "on behalf of corporation to be
formed, who will be obligor," there was here an intention of the parties to have a present
obligor, because three-fourths of the payment are to be made at the time the drawings or
plans in the architectural contract are completed, with or without incorporation. A purported
adoption by the corporation of the contract must be expressed in a novation or agreement to
that effect. The promoter is liable unless the contract is to be construed to mean: 1) that the
creditor agreed to look solely to the new corporation for payment; or 2) that the promoter did
not have any duty toward the creditor to form the corporation and give the corporation the
opportunity to assume and pay the liability.
QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961)
The promoters here are not liable because the contract imposed no obligation on
them to form a corporation and they were not named there as obligors/promissors. The
creditor-plaintiff was aware of the inexistence of the corporation but insisted on naming it as
obligor because the planting season was fast approaching and he needed to dispose of the
seedlings. There was no intent here by plaintiff-creditor to look to the promoters for the
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 21
performance of the obligation. This is an exception to the general rule that promoters are
personally liable on their contracts, though made on behalf of a corporation to be formed.
A promoter, notwithstanding his fiduciary duties to the corporation, may still sell
properties to it, but he must pursue one of four courses to make the contract binding. These
are: 1) provide an independent board of officers in no respect directly or indirectly under his
control, and make full disclosure to the corporation through them; 2) make full disclosure of
all material facts to each original subscriber of shares in the corporation; 3) procure a
ratification of the contract after disclosing its circumstances by vote of the stockholders of
the completely established corporation; or 4) be himself the real subscriber of all the shares
of the capital stock contemplated as a part of the promotion scheme. The promoter is liable,
even if owning all the stock of the corporation at the time of the transaction, if further
original subscription to capital stock contemplated as an essential part of the scheme of
promotion came in after such transaction.
CORPORATE POWERS
• Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
• To adopt by-laws not contrary to law, morals, or public policy, and to amend
or repeal the same in accordance with this Code;
(NOTE: There are two (2) general restrictions on the power of the corp. to
acquire and hold properties:
• To make reasonable donations, including those for the public welfare of for
hospital, charitable, cultural, scientific, civic, or similar purposes:
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 22
• To establish pension, retirement and other plans for the benefit of its
directors, trustees, officers and employees; and
Specific Powers of
Corporation
• Extension or shortening of the corporate term (Sec. 37)
Implied
Under Sec. 36, a corporation is given such powers as are essential or
Powers necessary to carry out its purpose or purposes as stated in the articles of
incorporation. This phrase gives rise to such a wide range of implied powers, that it would not be at
all difficult to defend a corporate act versus an allegation that it is ultra vires.
A corporation is presumed to act within its powers and when a contract is not its face
necessarily beyond its authority; it will, in the absence of proof to the contrary, be presumed valid.
Ultra vires acts are those acts beyond the scope of the powers of the corporation, as defined
by its charter or laws of state of incorporation. The term has a broad application and includes not
only acts prohibited by the charter, but acts which are in excess of powers granted and not
prohibited, and generally applied either when a corporation has no power whatever to do an act, or
when the corporation has the power but exercises it irregularly.
• Parties to the ultra vires contract will be left as they are, if the contract has
been fully executed on both sides. Neither party can ask for specific
performance, if the contract is executory on both sides. The contract, provided
that it is not illegal, will be enforced, where one party has performed his part,
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 23
and the other has not with the latter having benefited from the former’s
performance.
• Ultra vires acts may become binding by the ratification of all the
stockholders, unless third parties are prejudiced thereby, or unless the acts are
illegal.
Resolution adopted by the company to open a post office branch at the mining camp
and to assume sole and direct responsibility for any dishonest, careless or negligent act of its
appointed postmaster is NOT ULTRA VIRES because the act covers a subject which
concerns the benefit, convenience, and welfare of the company’s employees and their
families.
While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond the
powers conferred upon it by law, there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation.
The BOD of the Phil Trust Co. adopted a resolution which authorized its president to
purchase at par and in the name of the corp. bonds of MSC. These bonds were later resold
and guaranteed by PTC to third persons. PTC paid plaintiff the corresponding interest
payments until July 1, 1928 when it alleged that it is not bound to pay such interest or to
redeem the obligation because the guarantee given for the bonds was illegal and void.
Held: The act of guaranty by PTC was well within its corporate powers. Furthermore, having
received money or property by virtue of the contract which is not illegal, it is estopped from
denying liability. Even if the then prevailing law (Corp. Law) prohibited PTC from
guaranteeing bonds with a total value in excess of its capital, with all the MSC properties
transferred to PTC based on the deed of trust, sufficient assets were made available to secure
the payment of the corresponding liabilities brought about by the bonds.
(This case is an example of how the implied powers concept may be used to justify certain
acts of a corporation.)
A quo warranto proceeding instituted by the Gov't against El Hogar, a building and loan
ass'n to deprive it of its corp. franchise.
1. El Hogar held title to real property for a period in excess of 5 years in good faith, hence
this cause will not prosper.
2. El Hogar owned a lot and bldg. at a business district in Manila allegedly in excess of its
reasonable requirements, held valid bec, it was found to be necessary and legally acquired
and developed.
3. El Hogar leased some office space in its bldg.; it administered and managed properties
belonging to delinquent SHs; and managed properties of its SHs even if such were not
mortgaged to them.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 24
Held: first two valid, but the third is ultra vires bec. the administration of property in that
manner is more befitting of the business of a real estate agent or trust company and not of
a building and loan ass'n.
Held: Court cannot dwell on the issue since the promoter is not a party in the proceeding
and it is the corp. or its SHs who may bring a complaint on such.
5. Issuance of special shares did not affect El Hogar's character as a building and loan ass'n
nor make its loans usurious.
6. Corporate policy of using a depreciation rate of 10 % per annum is not excessive, bec.
accdg. to the SC, the by-laws expressly authorizes the BOD to determine each year the
amount to be written down upon the expenses of installation and the property of the corp.
7. The Corp. Law does not expressly grant the power of maintaining reserve funds but such
power is implied. All business enterprises encounter periods of gains and losses, and its
officers would usually provide for the creation of a reserve to act as a buffer for such
circumstances.
8. That loans issued to member borrowers are being used for purposes other than the bldg. of
homes not invalid bec. there is no statute which expressly declares that loans may be made
by these ass'ns solely for the purpose of bldg. homes.
9. Sec. 173 of the Corp. Law provides that "any person" may become a SH on a bldg. and
loan ass'n. The word "person" is used on a broad sense including not only natural persons
but also artificial persons.
Two railroad corporations contend that they transcended their own powers and
violated their own organic laws. Hence, they should not be held liable for the injury of the
plaintiff who was a passenger in one of their trains.
Held: The contract between the two corporations was an ultra vires act. However, it is not
one tainted with illegality, therefore, the accompanying rights and obligations based on the
contract of carriage between them and the plaintiff cannot be avoided by raising such a
defense.
This case involved the issue of whether or not the defendant corporation performed
an ultra vires act by donating the life insurance proceeds to the minor children of Pirovano,
the deceased president of the defendant company under whose management the company
grew and progressed to become a multi-million peso corporation.
Held: NO.
“(1) to invest and deal with moneys of the company not immediately required,
in such manner as from time to time may be determined; and
(2) to aid in any other manner any person, association or corporation of which
any obligation or in which any interest is held by this corporation or in the
affairs of prosperity of which this corporation has a lawful interest.”
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 25
From this, it is obvious that the corporation properly exercised within its chartered
powers the act of availing of insurance proceeds to the heirs of the insured and deceased
officer.
A contract between Benguet and Balatoc provided that Benguet will bring in capital,
eqpt. and technical expertise in exchange for capital shares in Balatoc. Harden was a SH of
Balatoc and he contends that this contract violated the Corp.Law which restricts the
acquisition of interest by a
mining corp. in another mining corp.
Held: Harden has no standing bec. if any violation has been committed, the same can be
enforced only in a criminal prosecution by an action of quo warranto which may be
maintained only by the Attorney-General.
Board of directors or trustees- responsible for corporate policies and the general
management of the business and affairs of the corporation.
The BOD is responsible for corporate policies and the general management of the
business affairs of the corporation. (See Citibank v Chua)
(b) Requirements
(iii) Nationality
The formula for determining the number of shares needed to elect a given number of directors is
as follows:
X = Y x N1 +1
N+1
By a vote of the SHs holding or representing at least 2/3 of the outstanding capital stock,
or by a vote of at least 2/3 of the members entitled to vote, provided that such removal takes
place at either a regular meeting of the corporation or at a special meeting called for the
purpose. In both cases, there must be previous notice to the SHs / members of the intention
to propose such removal at the meeting.
Removal may be with or without cause. However, removal without cause may not be
used to deprive minority SHs or members of the right of representation to which they may be
entitled under Sec. 24 of the Code.
All other vacancies: May be filled by the vote of at least a majority of the
remaining directors or trustees, if still constituting a
quorum.
Note: Directors or trustees so elected to fill vacancies shall be elected only for the
unexpired
term of their predecessors in office.
If not provided in by-laws: Directors shall not receive any compensation other than
reasonable per diems, as directors. However,
compensation other than per diems may be granted to
directors by a majority vote of the SHs at a regular or
special stockholders' meeting.
Note: In no case shall the total yearly compensation of directors, as such directors, exceed
10%
of the net income before income tax of the corporation during the preceding year.
(h) Liability (See subsequent discussion under Duties of Directors and Controlling
Stockholders.)
In this case, the board of directors, before the financial inability of the corporation to
proceed with the project was revealed, had already recognized the contracts as being in
existence and had proceed with the necessary steps to utilize the films. The subsequent action
by the stockholders in not ratifying the contract must be ignored. The functions of the
stockholders are limited of nature. The theory of a corporation is that the stockholders may
have all the profits but shall return over the complete management of the enterprise to their
representatives and agents, called directors. Accordingly, there is little for the stockholders to
do beyond electing directors, making by-laws, and exercising certain other special powers
defined by law. In conformity with this idea, it is settled that contracts between a corporation
and a third person must be made by directors and not stockholders.
In this case, the Board of Regents of the University of the Philippines terminated the
ad interim appointment of Dr. Blanco as Dean of the College of Education by not acting on
the matter. In the transcript of the meeting which was latter agreed to be deleted, it was found
out that the BOR, consisting of 12 members, voted 5 in favor of Dr. Blanco's appointment 3
voted against, and 4 abstained.
The core of the issue is WON the 4 abstentions will be counted in favor of Dr.
Blanco's appointment or against it. The SC held that such abstentions be counted as negative
vote considering that those who abstained, 3 of which members of the Screening Committee,
intended to reject Dr. Blanco's appointment.
The issue in this case is regarding the validity of the director's meeting at the
company's laboratory on December 8, 1937 wherein Zachary was removed as president of
the company. Zachary that he was not notified of the meeting thus, the action was void. On
the other hand, the defendants contend that the notice requirement was waived by Zachary's
presence at the meeting.
The SC held that the validity of the meeting was not affected by the failure to give
notice as required by the by-laws, provided that the parties were personally present. Since all
the parties were present at the meeting of December 8, and understood that the meeting was
to be a directors' meeting, then the action taken is final and may not be voided by any
informality in connection with its being called.
The action was brought by the mortgagor (Tapnio) against PNB for damages in
connection with the failure of the latter's board of directors to act expeditiously on the
proposed lease of the former's sugar quota to one Tuazon.
The Supreme Court held that while the PNB has the ultimate authority to approve or
disapprove the proposed lease since the quota was mortgaged to PNB, the latter certainly
cannot escape liability for observing, for the protection of the interest of the private
respondents, that degree of care, precaution and vigilance which the circumstances justly
demand in approving or disapproving the lease of the said sugar quota.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 28
Any 2 or more positions may be held concurrently by the same person, except that
no one shall act as (a) president and secretary, or (b) president and treasurer at the
same time.
- Violation of Corporation Code committed within 6 yrs. prior to the date of election
or
appointment
The authority of a corporate officer in dealing with third persons may be actual or
apparent. The doctrine of "apparent authority," with special reference to banks, was laid out
in Prudential Bank v. CA (223 SCRA 350) where it was held that:
A bank is liable for the wrongful acts of its officers done in the
interest of the bank or in the course of dealings of the officers
in their representative capacity but not for acts outside the
scope of their authority. A bank holding out its officers and
agents as worthy of confidence will not be permitted to profit
by the frauds they may thus be enabled to perpetrate in the
apparent scope of their employment; nor will it be permitted to
shrink from its responsibility for such frauds, even though no
benefit may accrue to the bank therefrom.
Accordingly, a bank is liable to innocent third persons where the representation is
made in the course of its business by its agent acting within the general scope of his authority
even though, in the particular case, the agent is secretly abusing his authority and attempting
to perpetrate a fraud upon his principal or some other person for his own ultimate benefit.
Application of these principles is especially necessary because banks have a fiduciary
relationship with the public and their stability depends on the confidence of the people in
their honesty and efficiency. Such faith will be eroded where banks do not exercise strict
care in the selection and supervision of its employees, resulting in prejudice to their
depositors.
The power to bind a corporation by contract lies with its board of directors or
trustees. Such power may be expressly or impliedly be delegated to other officers and agents
of the corporation. It is also well settled that except where the authority of employing
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 29
servants or agents is expressly vested in the board, officers or agents who have general
control and management of the corporation's business, or at least a specific part thereof, may
bind the corporation by the employment of such agents and employees as are usual and
necessary in the conduct of such business. Those contracts of employment should be
reasonable. Case at bar: contract of employment in the printing business was too long and
onerous to the business (3-year employment; shall receive salary even if corp. is insolvent).
Kalaw was a corporate officer entrusted with general management and control of
NACOCO. He had implied authority to make any contract or do any act which is necessary
for the conduct of the business. He may, without authority from the board, perform acts of
ordinary nature for as long as these redound to the interest of the corporation. Particularly,
he contracted forward sales with business entities. Long before some of these contracts were
disputed, he contracted by himself alone, without board approval. All of the members of the
board knew about this practice and have entrusted fully such decisions with Kalaw. He was
never questioned nor reprimanded nor prevented from this practice. In fact, the board itself,
through its acts and by acquiescence, have laid aside the by-law requirement of prior board
approval. Thus, it cannot now declare that these contracts (failures) are not binding on
NACOCO.
1. Erquiaga is one of the largest stockholder, and was the all-in-one officer (he was the
President, GM, Attorney, Auditor, etc.)
2. Two other directors approved his actions and expressed satisfaction with the advantages
obtained by him in securing the chattel mortgage.
3. The corporation took advantage of the benefits of the chattel mortgage. There were even
partial payments made with the knowledge of the three directors.
Acuna entered into an agreement with Verano, manager of PROCOMA, in which the
former would be constituted as the latter's agent in Manila. Acuna diligently went about his
business and even used personal funds for the benefit of the corporation. During the face-to-
face meeting with the board, Acuna was assured that there need not be any board approval
for his constitution as agent for it would only be a mere formality. Later on, the board
disapproved the agency and did not pay him. The SC ruled that the agreement was valid due
to the ratification of the corp. proven by these acts:
Board Committees
The By-laws of the corporation may create an executive committee,
composed of not less than 3 members of the Board, to be appointed by the Board.
The executive committee may act, by majority vote of all its members, on such
specific matters within the competence of the board, as may be delegated to it in
either (1) the By-laws, or (2) on a majority vote of the board.
(1) approval of any action for which shareholders' approval is also required;
(2) the filling of vacancies in the board (refer to Sec. 29);
(3) the amendment or repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of the board which by its
express terms is not so amendable or repealable; and
(5) a distribution of cash dividends to the shareholders.
HAYES V. CANADA, ATLANTIC AND PLANT S.S CO., LTD. (181 F. 289; 1910)
No, because the Executive Commmittee usurped the powers vested in the board and
the stockholders. If their actions was valid, it would put the corp. in a situation wherein only
two men, acting in their own pecuniary interests, would have absorbed the powers of the
entire corporation. "Full powers" should be interpreted only in the ordinary conduct of
business and not total abdication of board and stockholders' powers to the ExeCom. "FULL
POWERS" does not mean unlimited or absolute power.
Stockholders or Members
In the following basic changes in the corporation, although action is usually initiated by the
board of directors or trustees, their decision is not final, and approval of the stockholders or
members would be necessary:
In all of these cases, even non-voting stocks, or non-voting members, as the case may be,
will be entitled to vote. (Sec. 6)
Meeting was invalid for lack of notice. By-laws provide for a 5-day notice before
meeting. March 26 posting not enough for March 28 election.
However, the proceedings can be nullified if the walkout was for a reasonable and
justifiable cause. In this case, F. Logan Johnston, who owned and/or represented more than
50% of the corporation's outstanding shares, was prohibited from voting the shares of the
Silos family (which he had validly purchased) and of the minor children of Albert S.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 31
Johnston (of whom he was guardian) on the ground that such shares must first be registered
in the names of the wards, thereby prompting the walkout. The Court of Appeals held that
the walkout was neither unreasonable nor unjustifiable. It noted however that there was no
formal declaration of a quorum before the withdrawal from the meeting by F. Logan
Johnston.
Upon good cause, such as a Chairman of the Board failing to call a meeting, either by
his absence or neglect, the Court may grant a stockholder the authority to call such a
meeting.
DETECTIVE AND PROTECTIVE BUREAU VS. CLORIBEL (26 SCRA 225; 1968)
The Corporation Law says that every director must own at least one (1) share of the
capital stock of the corporation.
• Amended by-laws are valid for the corporation has its inherent right to protect
itself.
Under the Law, directors can only be removed from office by a vote of the
stockholders representing 2/3 of subscribed capital stock, while vacancies can be filled by a
mere majority.
Court may appoint a receiver when corporate remedy is unavailable when board of
directors perform acts harmful to the corporation.
The stockholders have an implied power to remove a director for cause. Even when
there is cumulative voting, stockholders can still remove directors for cause.
DELA RAMA V. MA-AO SUGAR CENTRAL CO, INC. (27 SCRA 247; 1969)
A corporation may use its funds to invest in another corporation without the approval
of the stockholders if done in pursuance of a corporate purpose. However, if it is purely for
investment, the vote of the stockholders is necessary.
VOTIN
G
Pledgors, mortgagors, executors, receivers, and administrators (Sec.
55)
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 32
- Treasury shares have no voting right for as long as such shares remain in the
Treasury.
- Unless otherwise provided in the proxy, it shall be valid only for the meeting for
which it is intended. No proxy shall be valid and effective for a period longer than
five (5) years at any one time.
- Note that in Sec. 89, non-stock corporations are permitted to waive the right to
use proxies via their AOI or by-laws.
- Voting trusts must be in writing, notarized, specifying the terms and conditions
thereof, certified copy filed with SEC. Failure to comply with this requirement
renders the agreement ineffective and unenforceable.
- As a general rule, voting trusts are valid for a period not exceeding 5 years at
any one time, and automatically expire at the end of the agreed period unless
expressly renewed.
However, in the case of a voting trust specifically required as a condition in
a loan agreement, said voting trust may exceed 5 years but shall
automatically expire upon payment of the loan.
Pooling agreement
- Sec. 100, par. 2 of the Corporation Code provides for pooling and voting
agreements in close corporations. Although there is no equivalent provision for
widely-held corporations, Justice and Prof. Campos are of the opinion that SHs
of widely-held corporations should not be precluded from entering into voting
agreements if these are otherwise valid and are not intended to commit any
wrong or fraud on the other SHs that are not parties to the agreement.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 33
ITF shares
- Any one of the joint owners can vote said shares or appoint a proxy thereof.
Devices Affecting
Control
Proxy Device
Sec 58. Proxies. – Stockholders and members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall be in writing, signed by the stockholder
or member and filed before the scheduled meeting with the corporate secretary. Unless
otherwise provided in the proxy, it shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than five (5) years at any
one time.
Character: agency relationship; revocable at will (by express revocation, by attending the
meeting) and by death, except when coupled with interest or is a security.
Even if stocks are sold, the stockholder of record remains the owner of the stocks and
has the voting right until the by-law requiring recording of transfer in the transfer book is
complied with. Thus, a proxy given by the stockholder of record even if he has already sold
the share/s of stock remains effective.
STATE EX REL EVERETT TRUST V PACIFIC WAXED PAPER, (159 A.L.R. 297;
1945)
The general rule is that a proxy is revocable even though by its express terms it is
irrevocable. The exceptions are: (a) when authority is coupled with interest; (b) where
authority is given as part of a security and is necessary to effectuate such a security. It is
coupled with interest when there is interest in the share themselves (such as a right of first
refusal in case of sale) and the rights inherent in the shares (such as voting rights; capacity to
obtain majority).
Where a stockholder’s meeting was validly convened, the proxies must be deemed
present even if the proxies were not presented, provided: (a) their existence is established; (b)
the agents were so designated to attend and act in SH’s behalf; (c) the agents were present in
the meeting.
Q: Is it valid for the corporation to pay the expenses for proxy solicitation?
A: In the case of Rosenfeld v. Fairchild Engine and Airplane Corp. (128 N.E. 2d 291;
1955), it was held that in a contest over policy (as opposed to a purely personal
power contest), corporate directors have the right to make reasonable and proper
expenditures, subject to the scrutiny of the courts when duly challenged, from the
corporate treasury for the purpose of persuading the SHs of the correctness of their
position and soliciting their support for policies which the directors believe, in all
good faith, are in the best interests of the corporation. The SHs, moreover, have the
right to reimburse successful contestants for the reasonable and bona fide expenses
incurred by them in any such policy contest, subject to like court scrutiny.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 34
However, where it is established that such monies have been spent for personal
power, individual gain or private advantage, and not in the belief that such
expenditures are in the best interest of the stockholders and the corporation, or
where the fairness and reasonableness of the amounts allegedly expended are duly
and successfully challenged, the courts will not hesitate to disallow them.
Voting Trust
A Voting Trust Agreement (VTA) is an agreement whereby the real ownership of the shares
is separated from the voting rights, the usual aim being to insure the retention of incumbent directors
and remove from the stockholders the power to change the management for the duration of the trust.
Advantages
Disadvantages
Rights given up by the shareholder in a VTA in exchange for the fiduciary obligation
of the trustee:
• Voting rights
• Proprietary rights/naked title/legal ownership
• Incidental rights such as to attend meetings, to be elected, to receive dividends)
(1) A VTA is prepared in writing, notarized, and filed with the corporation and SEC.
(2) The certificates of stock covered by the VTA are cancelled and new ones (voting trust
certificates) are issued in the name of the trustee/s stating that they are issued pursuant
to the VTA.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 35
(4) The trustee/s execute and deliver to transferors the voting trust certificates. (Note that
these certificates shall be transferable in the same manner and with the same effect as
certificates of stock.)
(5) At the end of the period of the VTA (or the full payment of the loan to which the VTA is
made a condition, as the case may be), in the absence of any express renewal, the
voting trust certificates as well as the certificates of stock in the name of the trustee/s
shall be deemed cancelled and new certificates of stock shall be reissued in the name of
the transferors.
This case illustrates how VTA can give rise to effective control and how it can be
abused. Original stockholders can set aside the VTA when their rights are trampled upon by
the trustee.
• Want of consideration
• Voting power not coupled with interest
• Fraud
• Illegal or improper purpose
A VTA transfers only voting or other rights pertaining to the shares subject of the
agreement, or control over the stock. Stockholders of a corp. that lost all its assets through
foreclosures cannot go after those properties. PNB-NIDC acquired those properties not as
trustees but as creditors.
Advantages:
Disadvantages:
What rights does a shareholder give up/ retain with a pooling agreement?
Shareholders retain their right to vote because the parties are not constituted as
agents. However, the will of the parties may not be carried out due to non-
compliance with the pooling agreement.
Generally, agreements and combinations to vote stock or control corporate fiction &
policy are valid if they seek without fraud to accomplish only what parties might do as
stockholders and do not attempt it by illegal proxies, trusts or other means in contravention
of statutes or law.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 36
Stockholders’ control agreements are valid where it is for the benefit of corporation
where it works no fraud upon creditors or other stockholders and where it violates no statute
or recognized public policy.
If the enforcement of a particular contract damages nobody-not even the public, there
is no reason for holding it illegal. Test is WON it causes damage to the corporation and
stockholders.
Methods of Voting
1. Straight voting: If A has 100 shares and there are 5 directors to be elected,
he shall
multiply 100 by five (equals 500) and distribute equally among the
five candidates without preference
2. Cumulative voting: If A has 100 shares and there are 5 directors to be elected,
he shall
(one candidate) multiply 100 by five (equals 500) and he can vote the 500 for only
one
candidate.
3. Cumulative voting: If A has 100 shares, there are 5 directors to be elected, and
he only
(multiple candidates) wants to vote for two nominees, he can divide 500 votes between
the
two, giving each one 250 votes.
X= # of shares required
Y= # of outstanding votes
Z= # of directors to be elected
X = _ Y__ + 1
Z+1
2. Baker & Cary’s formula (minimum no. of votes needed to elect multiple directors)
X= # of shares required
Y= # of shares represented at meeting
D= # of directors the minority wants to elect
D’= total # of directors to be elected
X= Y x D + 1
D' + 1
NOTES
• Levels playing field or at least ensures that the minority can elect at least one
representative to the board of directors (BOD)
• Cannot of itself give the minority control of corporate affairs, but may affect and limit
the extent of the majority’s control
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 37
• By-laws cannot provide against cumulative voting since this right is mandated by
law in Section 24.
Type of shares
2. Preferred: share has preference over dividends and distribution of assets upon
liquidation;
right to vote may be restricted (Sec. 6)
NOTES
• Even though the right to vote of preferred and redeemable shares may be restricted,
owners of these shares can still vote on certain matter provided for in Sec. 6.
• SEC requires that where no dividends are declared for three consecutive years, in
spite of available profits, preferred stocks will be given the right to vote until dividends
are declared.
• Provision granting right to vote to preferred stock previously prohibited from voting,
constitutes diminution of the voting power of common stock.
• Provision in the articles of incorporation granting holders of preferred stock right to vote
in case of default in payment of dividends after July 1, 1951 was construed as denial by
necessary implication of the right to vote even prior to July 1, 1951.
• Most common restriction: granting first option to the other stockholders and/or the
corporation to acquire the shares of a stockholder who wishes to sell them.
• This gives to the corporation and/or to its current management the power to prevent
the transfer of shares to persons who they may see as having interests adverse to
theirs.
• As long as the qualifications imposed are reasonable and not meant to unjustly or
unfairly deprive the minority of their rightful representation in the BOD, such provisions are
within the power of the majority to provide in the by-laws.
• According to Gokongwei vs. SEC, aside from prescribing qualifications, by-laws can
also provide for the disqualification of anyone in direct competition with the corporation.
Founder’s shares
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 38
• Exception to the rule in sec. 6 that non-voting shares shall be limited to preferred
and redeemable shares
• If founder’s shares enjoy the right to vote, this privilege is limited to 5 years upon
SEC’s approval, so as to prevent the perpetual disqualification of other stockholders.
• BOD can and usually delegate many of its functions but it can’t abdicate its
responsibility to act as a governing body by giving absolute power to officers or others, by
way of a management contract or otherwise. It must retain its control over such officers so
that it may recall the delegation of power whenever the interests of the corporation are
seriously prejudiced thereby.
SHERMAN & ELLIS VS. INDIANA MUTUAL CASUALTY (41 F. 2d 588; 1930)
Although corporations may, for a limited period, delegate to a stranger certain duties
usually performed by the officers, there are duties, the performance of which may not be
indefinitely delegated to outsiders.
• In exchange for the numerical majority in the BOD, minority can ask for a stronger
veto power in major corporate decisions.
• A requirement that there shall be no election of directors at all unless every single vote be
cast for the same nominees, is in direct opposition to the statutory rule that the receipt of
plurality of the votes entitles a nominee to election. (See Sec. 24)
• Requiring unanimity before the BOD can take action on any corporate matter makes it
impossible for the directors to act on any matter at all. In all acts done by the corporation,
the major number must bind the lesser, or else differences could never be determined nor
settled.
• The State has decreed that every stock corporation must have a representative
government, with voting conducted conformably to the statutes, and the power of
decision lodged in certain fractions, always more than half, of the stock. This whole
concept is destroyed when the stockholders, by agreement, by-law or certificates of
corporation provides for unanimous action, giving the minority an absolute, permanent
and all-inclusive power of veto.
• The requirement of unanimous vote to amend by-laws is valid. Once proper by-laws
have been adopted, the matter of amending them is no concern of the State.
Unusual voting and MINORITY: gives them stronger Subject to the limitations
quorum requirements veto power in certain corp. affairs in Sec. 103.
MEETINGS
NOTICE: Must be sent at least 1 day prior to the scheduled meeting, unless
otherwise provided by the by-laws.
Exceptions:
WHO PRESIDES: The president, unless the by-laws provide otherwise. (Sec. 54)
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 40
WHO PRESIDES: The president, unless the by-laws provide otherwise. (Sec. 54)
(1) Diligence
(2) Loyalty
(3) Obedience
Obedience - directors must act only within corporate powers and are liable for
damages if they acted beyond their powers unless in good faith. Assuming that
they acted within their powers, liability may still arise if they have not observed
due diligence or have been disloyal to the corporation.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 41
In such cases, the directors or trustees shall be liable jointly and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons.
In addition to this general liability, the Corporation Code provides for specific
rules to govern the following situations:
However, if due to the fault or negligence of the directors the assets of the
corporation are wasted or lost, each of them may be held responsible for any
amount of loss which may have been proximately caused by his wrongful acts or
omissions. Where there exists gross negligence or fraud in the management of the
corporation, the directors, besides being liable for damages, may be removed by the
stockholders in accordance with Sec. 28 of the Code. (Campos & Campos)
GENERAL RULE: Contracts intra vires entered into by BoD are binding upon
the corporation and courts will not interfere.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 42
If in the course of management, the directors arrive at a decision for which there is a
reasonable basis and they acted in good faith, as a result of their independent judgment, and
uninfluenced by any consideration other than what they honestly believe to be for the best
interest of the railroad, it is not the function of the court to say that it would have acted
differently and to charge the directors for any loss or expenditures incurred.
In the present case, the bond issue was adequately deliberated and planned, properly
negotiated and executed; there was no lack of good faith; no motivation of personal gain or
profit; there was no lack of diligence, skill or care in selling the issue at the price approved
by the Commission and which resulted in a saving of approximately $9M to the corporation.
The Bacolod-Murcia Milling Co. adopted a resolution which granted to its sugar
planters an increase in their share in the net profits in the event that the sugar centrals of
Negros Occidental should have a total annual production exceeding one-third of the
production of all sugar central mills in the province. Later, the company amended its
existing milling contract with its sugar planters, incorporating such resolution. The
company, upon demand, refused to comply with the contract, stating that the stipulations in
the resolution were made without consideration and that such resolution was, therefore, null
and void ab initio, being in effect a donation that was ultra vires and beyond the powers of
the corporate directors to adopt. This is an action by the sugar planters to enforce the
contract.
The terms embodied in the resolution were supported by the same cause and
consideration underlying the main amended milling contract; i.e., the premises and
obligations undertaken thereunder by the planters, and particularly, the extension of its
operative period for an additional 15 years over and beyond the thirty years stipulated in the
contract.
As the resolution in question was passed in good faith by the board of directors, it is
valid and binding, and whether or not it will cause losses or decrease the profits of the
central, the court has no authority to review them. They hold such office charged with the
duty to act for the corporation according to their best judgment, and in so doing, they cannot
be controlled in the reasonable exercise and performance of such duty. It is a well-known
rule of law that questions of policy or of management are left solely to the honest decision of
officers and directors of a corporation, and the court is without authority to substitute its
judgment of the board of directors; the board is the business manager of the corporation, and
so long as it acts in good faith, its orders are not reviewable by the courts.
FACTS: Alleghany Corp. bought terminals in Kansas City and St. Joseph. It needed to
raise money to pay the balance of the purchase price but could not directly borrow money
due to a borrowing limitation in its charter. Thus, it sold Missouri Pacific bonds to J.P.
Morgan and Co. worth $IOM. J.P. Morgan, in turn, sold $3M worth of the bonds to
Guaranty Trust Company. Under the contract, the seller was given an option to repurchase
at same price within six months.
HELD: Option given to seller is invalid. It is against public policy for a bank to sell
securities and buy them back at the same price; similarly, it is against public policy for the
bank to buy securities and give the seller the option to buy them back at the same price
because the bank incurs the entire risk of loss with no possibility of gain other than the
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 43
interest derived from the securities during the period that the bank holds them. Here, if the
market price of the securities rise, the holder of the repurchase option would exercise it to
recover the securities at a lower price at which he sold them. If the market price falls, the
seller holding the option would not exercise it and the bank would sustain the loss.
Directors are not in a position of trustees of an express trust who, regardless of good
faith, are personally liable. In this case, the directors are liable for the transaction because
the entire arrangement was improvident, risky, unusual and unnecessary so as to be contrary
to fundamental conceptions of prudent banking practice. Yet, the advice of counsel was not
sought. Absent a showing of exercise of good faith, the directors are thus liable.
FACTS: Frederick Southack and Alwyn Ball loaned Avram $20T evidenced by a
promissory note executed by Avram and endorsed by Lacey. The loan was not authorized by
any meeting of the board of directors and was not for the benefit of the corporation. The
note was dishonored but defendant-directors did not protest the note for non-payment; thus,
Lacey, the indorser who was financially capable of meeting the obligation, was subsequently
discharged.
HELD: Directors are charged not with misfeasance, but with non-feasance, not only
with doing wrongful acts and committing waste, but with acquiescing and confirming the
wrong doing of others, and with doing nothing to retrieve the waste. Directors have the duty
to attempt to prevent wrongdoing by their co-directors, and if wrong is committed, to rectify
it. If the defendant knew that an unauthorized loan was made and did not take steps to
salvage the loan, he is chargeable with negligence and is accountable for his conduct.
FACTS: The board of directors of Sibuguey Trading Company authorized the purchase
of 330 shares of stock of the corporation and declared payment of P3T as dividends to
stockholders. The directors from whom 300 of the stocks were bought resigned before the
board approved the purchase and declared the dividends. At the time of purchase of stocks
and declaration of dividends, the corporation had accounts payable amounting to P9,241 and
accounts receivable amounting to P12,512, but the receiver who made diligent efforts to
collect the amounts receivable was unable to do so.
It has been alleged that the payment of cash dividends to the stockholders was
wrongfully done and in bad faith, and to the injury and fraud of the creditors of the
corporation. The directors are sought to be made personally liable in their capacity as
directors.
HELD: Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the BOD will not use the assets of the corporation to buy its
own stock, and will not declare dividends to stockholders when the corporation is insolvent.
In this case, it was found that the corporation did not have an actual bona fide surplus
from which dividends could be paid. Moreover, the Court noted that the Board of Directors
purchased the stock from the corporation and declared the dividends on the stock at the same
Board meeting, and that the directors were permitted to resign so that they could sell their
stock to the corporation. Given all of this, it was apparent that the directors did not act in
good faith or were grossly ignorant of their duties. Either way, they are liable for their
actions which affected the financial condition of the corporation and prejudiced creditors.
A complaint was filed against a corporate director for failing to give adequate
attention (he relied solely on the President’s updates on the status of the corp) to the affairs
of a corporation which suffered depletion of funds.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 44
The director was not liable. The court said that despite being guilty of misprision in
his office, still the plaintiff must clearly show that the performance of the director’s duties
would have avoided the losses. When a business fails from general mismanagement, business
incapacity, or bad judgment, it is difficult to conjecture that a single director could turn the
company around, or how much dollars he could have saved had he acted properly.
Cushing, a director and in charge of leasing a roller skating rink of the corp, leased
the same to himself. Minority stockholders filed suit against Bowen, the corporation's
President, to recover for company losses arising out of an alleged breach of fiduciary duty.
Bowen was held to be not liable because: (1) Cushing's acts were not actually
dishonest or fraudulent; (2) Cushing performed personal work such as keeping the facility in
repair which redounded to the benefit of the company and even increased its income; (3)
Bowen did not profit personally through Cushing's lease; and (4) the issue of the possible
illegality of the lease was put before the Board of Directors, but the Board did not act on it
but instead moved on to the next item on the agenda. Absent any bad faith on Bowen's part,
and a showing that it was a reasonable exercise of judgment to take no action on the lease
agreement at the time it was entered into, Bowen was not liable.
Lowell Hoit filed action against directors of a cooperative grain company for an
alleged willful conversion by the manager of grain stored in the company facility. The court
said that the directors were not personally liable. There was no evidence that the directors
had knowledge of the transaction between the manager and Lowell Hoit.
The court will treat directors with leniency with respect to a single act of fraud on the
part of a subordinate officer/agent. But directors could be held liable if the act of fraud was
habitual and openly committed as to have been easily detected upon proper supervision. To
hold directors liable, he must have participated in the fraudulent act; or have been guilty of
lack of ordinary and reasonable supervision; or guilty of lack of ordinary care in the selection
of the officer/agent.
Coleman, an employee of the bank, was able to divert bank finances for his benefit,
resulting in huge losses to the bank. The receiver sued the president and the other directors
for the loss.
The court said that the directors were not answerable as they relied in good faith on
the cashier’s statement of assets and liabilities found correct by the government examiner,
and were also encouraged by the attitude of the president that all was well (the president had
a sizable deposit in the bank). But the president is liable. He was at the bank daily; had direct
control of records; and had knowledge of incidents that ordinarily would have induced
scrutiny.
A self-dealing director is one who enters into a contract with the corporation
of which he is a director.
However, such contract may be upheld by the corporation if all of the following
conditions are present:
(2) The vote of such self-dealing director or trustee was not necessary for
the
approval of the contract;
(4) In the case of an officer, the contract has been previously authorized by
the
4 Board of Directors.
In the event that either of or both conditions (1) and (2) are absent (i.e., the
presence of the director/trustee was necessary for a quorum and/or his vote was
necessary for the approval of the contract), the contract may be ratified by a 2/3 vote
of the OCS or all of the members, in a meeting called for the purpose. Full
disclosure of the adverse interest of the directors or trustees involved must be made
at such meeting.
The articles of inc. of respondent included a provision that relieves any director of all
responsibility for which he may otherwise be liable by reason of any contract entered into
with the corp., whether it be for his benefit or for the benefit of any other person, firm,
association or partnership in which he may be interested, except in case of fraud.
SC: This is in direct contravention of the Corp Law, of the traditional fiduciary relationship
between directors and the SH. The implication is that they can do anything short of fraud,
even to their benefit, and with immunity.
Note: This case was decided in 1966 under the Corporation Law, which had no
provisions on self-dealing directors.
Issue: validity of sale of corp. property and assets to the directors who approved the same.
Gen Rule: When purely private corporations remain solvent, its directors are agents or
trustees for the SH.
Exception: when the corp. becomes insolvent, its directors are trustees of all the creditors,
whether they are members of the corp. or not, and must manage its property and assets with
strict regard to their interest; and if they are themselves creditors while the insolvent corp is
under their management, they will not be permitted to secure to themselves by purchasing
the corp property or otherwise any personal advantage over the other creditors.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 46
In the case at bar, the sale was held to be valid and binding. Company was losing. 4
directors present during meeting all voted for the sale. They likewise constitute majority of
SH. Contract was found to be fair and reasonable.
Prime White Cement Corp. (through the President and Chairman of the Board) and
Alejandro Te, a director and auditor of the corporation, entered into a dealership agreement
whereby Te was obligated to act as the corporation's exclusive dealer and/or distributor of its
cement products in the entire Mindanao area for 5 years. Among the conditions in the
dealership agreement were that the corporation would sell to and supply Te with 20,000 bags
of white cement per month, and that Te would purchase the cement from the corporation at a
price of P 9.70 per bag.
On appeal, the Supreme Court held that the dealership agreement is not valid and
enforceable, for not having been fair and reasonable: the agreement protected Te from any
market increases in the price of cement, to the prejudice of the corporation. The dealership
agreement was an attempt on the part of Te to enrich himself at the expense of the
corporation. Absent any showing that the stockholders had ratified the dealership agreement
or that they were fully aware of its provisions, the contract was not valid and Te could not be
allowed to reap the fruits of his disloyalty.
In the case of Gokongwei v. SEC (89 SCRA 336; 1979), the Supreme
Court, quoting from the US case of Pepper v. Litton (308 U.S. 295-313; 1939)
stated that a director cannot, "by the intervention of a corporate entity violate the
ancient precept against serving two masters … He cannot utilize his inside
information and his strategic position for his own preferment. He cannot violate
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 47
rules of fair play by doing indirectly through the corporation what he could not
do directly. He cannot use his power for his personal advantage and to the
detriment of the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical
requirements. For that power is at all times subject to the equitable limitation
that it may not be exercised for the aggrandizement, preference, or advantage of
the fiduciary to the exclusion or detriment of the cestuis."
In this case, it was held that the general allegations in the complaint of conspiracy of
the directors to obtain corporate opportunity were deficient. The complaint should state
specific transactions.
Fiduciary duty applies even if the corporation is unable to enter into transactions
itself.
In this case, it was held that the common stock purchased by the defendants wasn’t a
business opportunity for the corporation. Having fulfilled their duty to the corporation in
accordance with their best judgment, the defendant directors were not precluded from a
transaction for their own account and risk.
Interlocking directors
WHAT IS AN INTERLOCKING DIRECTOR?
Except in cases of fraud, and provided the contract is fair and reasonable
under the circumstances, a contract between 2 or more corporations having
interlocking directors shall not be invalidated on that ground alone. This practice is
tolerated by the Courts because such an arrangement oftentimes presents definite
advantages to the corporations involved.
However, if the interest of the interlocking director in one corporation is
substantial (i.e., stockholdings exceed20% of the OCS) and his interest in the other
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 48
In the event that either of or both conditions (1) and (2) are absent (i.e., the
presence of the director/trustee was necessary for a quorum and/or his vote was
necessary for the approval of the contract), the contract may be ratified by a 2/3 vote
of the OCS or all of the members, in a meeting called for the purpose. Full
disclosure of the adverse interest of the directors or trustees involved must be made
at such meeting.
GLOBE WOOLEN CO. V. UTICA GAS & ELECTRIC (121 N.E. 378; 1918)
Maynard, president and chief stockholder of Globe but nominal SH in Utica Gas,
obtained a cheap, 10-year contract for Utica to supply power. Maynard did not vote during
the meeting for the approval of the contract.
Can Globe seek to enforce contract? The Supreme Court held that Globe could not
enforce the contract and that said contract was voidable at the election of Utica. It was found
that based on the facts of the case, the contract was clearly one-sided. Maynard, although he
did not vote, exerted a dominating influence to obtain the contract from beginning to end.
The director-trustee has a constant duty not to seek harsh advantage in violation of
his trust.
shall be solidarily liable with the stockholders concerned to the corporation and its
creditors for the difference between the fair value received at the time of the
issuance of the stock and the par or issued value of the same.
GOV'T OF THE PHILIPPINES VS. EL HOGAR FILIPINO (50 Phil. 399; 1927)
This action was brought by the directors of defendant corporation to recover 1% from
each of the plaintiffs of the profits of the corporation for 1929 pursuant to a by-law provision
which grants the directors the right to receive a life gratuity or pension in such amount for
the corporation.
The SC held that the by-law provision is not valid. Such provision is ultra vires for a
mutual loan and building association to make. It is not merely a provision for the
compensation of directors. The authority conferred upon corporations refers only to
providing compensation for the future services of directors, officers, and employees after the
adoption of the by-law in relation thereto. The by-law can't be held to authorize the giving of
continuous compensation to particular directors after their employment has terminated for
past services rendered gratuitously by them to the corporation.
CENTRAL COOPERATIVE EXCHANGE INC VS. TIBE (33 SCRA 596; 1970)
The questioned resolutions which appropriated the funds of the corporation for
different expenses of the directors are contrary to the by-laws of the corporation; thus they
are not within the board's power to enact. Sec. 8 of the by-laws explicitly reserved to the
stockholders the power to determine the compensation of members of the board and they did
restrict such compensation to actual transportation expenses plus an additional P30 per
diems and actual expenses while waiting. Hence, all other expenses are excluded. Even
without the express reservation, directors presumptively serve without pay and in the
absence of any agreement in relation thereto, no claim can be asserted therefore.
A retirement plan which provides a very large pension to an officer who has served to
within one year of the retirement age without any expectation of receiving a pension would
seem analogous to a gift or bonus. The size of such bonus may raise a justifiable inquiry as to
whether it amounts to wasting of the corporate property. The disparity also between the
president's pension plan and that of even the nearest of the other officers and employees may
also be inquired upon by the courts.
This is an appeal filed to enjoin the California Eastern Airways from putting into
effect a stock option plan and a profit-sharing plan. The SC held that the stock option plan
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 50
was deficient as it was not reasonably created to insure that the corporation would receive
contemplated benefits. A validity of a stock option plan depends upon the existence of
consideration and the inclusion of circumstances which may insure that the consideration
would pass to the corporation. The options provided may be exercised in toto immediately
upon their issuance within a 6 month period after the termination of employment. In short,
such plan did not insure that any optionee would remain with the corporation.
With regard to the profit-sharing plan, it was held valid because it was reasonable
and was ratified by the stockholders pending the action.
Close Corporations
Sec. 97 provides that the AOI of a close corp. may specify that it shall be managed by the
stockholders rather than the BoD. So long as this provision continues in effect:
• Generally, stockholders deemed to be directors for purposes of this Code, unless the
context clearly requires otherwise;
• Stockholders shall be subject to all liabilities of directors. The AOI may likewise provide
that all officers or employees or that specified officers or employees shall be elected or
appointed by the stockholders instead of by the BoD.
Further, Sec. 100 provides that for stockholders managing corp. affairs:
• They shall be personally liable for corporate torts (unlike ordinary directors liable only
upon finding of negligence)
• If however there is reasonable adequate liability insurance, injured party has no right of
action v. stockholders-managers
A SH/director is still entitled to vote in a stockholder’s meeting even if his interest is adverse
to a corporation. But a stockholder able to control a corp. is still subject to the duty of good faith to
the corp. and the minority.
Persons with management control of corporation hold it in behalf of SHs and can not regard
such as their own personal property to dispose at their whim.
• Disposal by controlling SH of his stock at any time & at such price he chooses
• Selling corp. office or management control by itself, that is NOT accompanied by stocks
or stocks are insufficient to carry voting control;
• Transferring office to persons who are known or should be known as intending to raid
the corporate treasury or otherwise improperly benefit themselves at the expense of the
corp. (Insuranshares Corp. V. Northern Fiscal);
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 51
The corp. is suing its former directors to recover damages as a result of the sale of its
control to a group (corporate raiders) who proceeded to rob it of most of its assets mainly
marketable securities.
Are previous directors who sold corp. control liable? Yes, they are under duty not to
sell to raiders.
Owners of corp. control are liable if under the circumstances, the proposed transfer
are such as to awaken a suspicion or put a prudent man on his guard. As in this case, control
was bought for so much aside from being warned of selling to parties they knew little about,
and also from fair notice that such outsiders indeed intended to raid the corp.
Duty to Creditors
General rule: Corporate creditors can run after the corp. itself only, and not the directors for
mismanagement of a solvent corp.
If corp. becomes insolvent, directors are deemed trustees of the creditors and should
therefore manage its assets with due consideration to the creditor’s interest.
If directors are also creditors themselves, they are prohibited from gaining undue advantage
over other creditors.
Personal Liability of
Directors
In what instances does personal liability of a corporate director, trustee or
officer validly attach together with corporate liability?
III. Agrees to hold himself personally and solidarily liable with the corporation;
In labor cases, particularly, corporate directors and officers are solidarily liable with
the corporation for the termination of employment of corporate employees done with malice
or in bad faith.
In the instant case, there was a showing of bad faith: the Board Resolution
retrenching the respondents on the feigned ground of serious business losses had no basis
apart from an unsigned and unaudited Profit and Loss Statement which had no evidentiary
value whatsoever.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 52
A stock and transfer book is a record of all stocks in the names of the
stockholders alphabetically arranged. It likewise contains the following information:
The stock and transfer book shall be kept in the principal office of the corporation or
in the office of its stock transfer agent, and shall be open for inspection by any
director or stockholder of the corporation at reasonable hours on business days.
Ordinary stockholders, the beneficial owners of the corporation, usually have no say on
how business affairs of the corp. are run by the directors. The law therefore gives them the right to
know not only the financial health of the corp. but also how its affairs are managed so that if they find
it unsatisfactory, they can seek the proper remedy to protect their investment.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 53
This includes book of inventories and balances, journal, ledger, book for copies of
letters and telegrams, financial statements, income tax returns, vouchers, receipts,
contracts, papers pertaining to such contracts, voting trust agreements (sec. 59)
2. By-laws
This is to inform stockholders of Board policies. Such right arises only upon
approval of the minutes, however.
These are records of all stocks in the names of the stockholders alphabetically
arranged. contain all names of the stockholders of record. Useful for proxy
solicitation for elections. SEC has however ruled that a SH cannot demand that he
be furnished such a list but he is free to examine corp. books.
Sec. 75 of the Code provides that within 10 days from the corporation's receipt of
a written request from any stockholder or member, the corporation must furnish the
requesting party with a copy of its most recent financial statement, which shall
include a balance sheet as of the end of the last taxable year and a profit or loss
statement for said taxable year.
Note: Under the Secrecy of Bank Deposits Act, records of bank deposits of the
corporation are NOT open to inspection, EXCEPT under the following
circumstances:
2. Such limitations to be valid must be reasonable and not inconsistent with law ( Sec.
36[5] and 46).
3. A corp. may regulate time and manner of inspection but provisions in its by-law
which gives directors absolute discretion to allow or disallow inspection are prohibited.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 54
• Such business days should be THROUGHOUT THE YEAR. BoD cannot limit
such to merely a few days within the year. (Pardo v. Hercules Lumber)
6. Place of inspection: Principal office of the corp. SH cannot demand that such
records be taken out of the principal office.
7. As to purpose:
• BURDEN OF PROOF: lies with corp. which should show that purpose was
illegal.
• Belief in good faith that a corp. is being mismanaged may be given due
course even if later, this is proven unfounded.
Every director, trustee, stockholder, member may exercise right personally or through an
agent who can better understand and interpret records (impartial source, expert accountant, lawyer).
NOTE: Writ shall not issue where it is shown that the petitioner’s
purpose is improper and inimical to the interests of the
corporation.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 55
(2) Injunction
(3) Action for damages against the officer or agent refusing inspection. Also,
penal
sanctions such as fines and / or imprisonment (Sec. 74; Sec. 144)
(1) The person demanding has improperly used any information secured through
any prior examination; or
(2) Was not acting in good faith; or
(3) The demand was not for a legitimate purpose.
BOD/Officers may deny inspection when sought at unusual hours or under improper
conditions. But they cannot deprive the stockholders of the right altogether. In CAB, by-law
provided that the inspection be made available only for a few days in a year, chosen by the
directors. This is void.
There was nothing improper in the secretary’s refusal since the minutes of these prior
meetings have to be verified, confirmed and signed by the directors then present. Hence,
Veraguth has to wait until after the next meeting.
The law takes from the SH the burden of showing impropriety of purpose and places
upon the corporation the burden of showing impropriety of purpose and motive.
Considering that the foreign subsidiary is wholly owned by SMC and therefore under
its control, it would be more in accord with equity, good faith and fair dealing to construe the
statutory right of Gokongwei as petitioner as SH to inspect the books and records of such
wholly subsidiary which are in SMC’s possession and control.
DERIVATIVE SUITS
• But since the directors who are charged with mismanagement are
also the ones who will decide WON the corp. will sue, the corp. may be
left without redress; thus, the stockholder is given the right to sue on
behalf of the corporation.
• A SH can only bring suit for an act that took place when he was a
stockholder; not before. (Bitong v. CA, 292 SCRA 503)
1) Stockholder/ member must have exhausted all remedies within the corp.
3) Any benefit recovered by the stockholder as a result of bringing derivative suit must be
accounted for to the corp. who is the real party in interest.
The injury complained of is against the corporation and thus the action properly
belongs to the corporation rather than the stockholders. It is a derivative suit brought by the
stockholder as a nominal party plaintiff for the benefit of the corporation, which is the real
party in interest. In this case, plaintiffs brought the suit not for the benefit of the
corporation's interest, but for their own. Plaintiffs here asked that the defendant make good
the losses occasioned by his mismanagement and to pay them the value of their respective
participation in the corporate assets on the basis of their respective holdings. Petition
dismissed for venue improperly laid.
In a derivative suit, the corporation is the real party in interest, and the stockholder
merely a nominal party. Normally, it is the corp. through the board of directors which should
bring the suit. But as in this case, the members of the board of directors of the bank were the
nominees and creatures of respondent Roman and thus, any demand for an intra-corporate
remedy would be futile, the stockholder is permitted to bring a derivative suit.
Should the corporation be made a party? The English practice is to make the corp. a
party plaintiff while the US practice is to make it a party defendant. What is important
though is that the corporation should be made a party in order to make the court's ruling
binding upon it and thus bar any future re-litigation of the issues. Misjoinder of parties is not
a ground to dismiss the action.
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 57
The importation of textiles instead of raw materials, as well as the failure of the
board of directors to take actions against those directly responsible for the misuse of the
dollar allocations constitute fraud, or consent thereto on the part of the directors. Therefore,
a breach of trust was committed which justified the suit by a minority stockholder of the
corporation.
The claim that plaintiff Justiniani did not take steps to remedy the illegal importation
for a period of two years is also without merit. During that period of time plaintiff had the
right to assume and expect that the directors would remedy the anomalous situation of the
corporation brought about by their wrong-doing. Only after such period of time had elapsed
could plaintiff conclude that the directors were remiss in their duty to protect the corporation
property and business.
It was JAKA's Board of Directors, not Senator Enrile, which had the
power to grant Bitong authority to institute a derivative suit for and in its
behalf.
Sources of Financing
WHERE CAN CAPITAL TO FINANCE THE CORPORATION BE SOURCED?
Capital Structure
WHAT IS MEANT BY CAPITAL STRUCTURE?
DEFINITION the amount fixed, usually by the actual property of the corporation,
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 58
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the
lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 59
DEFINITION Stock which entitles the Stock which entitles Shares that have Shares issued by the Special shares whose
owner of such stocks to an the holder to some been issued and corporation that may exclusive rights and
equal pro rata division of preference either in the fully paid but be taken up by the privileges are
profits dividends or subsequently corporation upon determined by the
distribution of assets reacquired by the expiration of a fixed AOI.
upon liquidation, or in issuing period.
both corporation by regardless of the
lawful means. existence of
unrestricted retained
earnings
VALUE Depends if it’s par or no Stated par value Fixed in the AOI, and Value not fixed in the
par indicated in the stock AOI, and therefore not
certificate. May be indicated in the stock
sold at a value certificate. Price may be
higher, but not lower, set by BOD, SH’s or fixed
than that fixed in the in the AOI eventually.
AOI.
VOTING RIGHTS Usually vested with the Can vote only under Depends if it’s Depends if it’s common No voting rights Usually denied voting
exclusive right to vote certain circumstances common or preferred. or preferred. for as long as rights.
such stock
remains in the
treasury (Sec. 57)
NOTE: Only preferred and redeemable shares may be deprived of the right to vote. (Sec. 6, Corporation Code)
EXCEPTION: As otherwise provided in the Corporation Code.
* No-par value shares may not be issued by the following entities: banks, trust companies, insurance companies, public utilities, building & loan association (Sec. 6)
Based on the outline, comments, notes and selected cases of Prof. Jose Campos, Jr. and Maria Clara L. Campos, and the lectures and additional cases of Prof. Virgilio Jacinto.
WILMAR K. REQUINA, BAR 2011 60
• Subscriptions constitute a fund to which the creditors have a right to look for satisfaction
of their claims.
• The assignee in insolvency can maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debts.
• A subscription contract subsists as a liability from the time that the subscription is made
until such time that the subscription is fully paid.
A share of stock or the certificate thereof is not an indebtedness to the owner nor
evidence of indebtedness and therefore, it is not a credit. Stockholders as such are not
creditors of the corporation.
The capital stock of a corporation is a trust fund to be used more particularly for the
security of the creditors of the corporation who presumably deal with it on the credit of its
capital.
Pre-incorporation subscription
RULE: When a group of persons sign a subscription contract, they are deemed not only to make a
continuing offer to the corporation, but also to have contracted with each other as well. Thus, no
one may revoke the contract even prior to incorporation without the consent of all the others.
2) After the AOI have been submitted to the SEC (Sec. 61)
UTAH HOTEL CO V. MADSEN (43 Utah 285, 134 Pac. 557; 1913)
Sec 332 in express terms confers powers upon the stockholders “to regulate the mode
of making subscriptions to its capital stock and calling in the same by-laws or by express
contract.”
WILMAR K. REQUINA, BAR 2011 61
Since it may be done by express contract, this shows that it was intended that a contract to
that effect may be entered into even before the corporation is organized, and the contract
agreement is enforced if the corporation is in fact organized.
One who has paid his subscription to the capital stock of the corporation may compel
the issuance of proper certificates therefor.
Post-incorporation subscription
NOTE: Under the Corporation Code, there is no longer any distinction between a
subscription and a purchase. Thus, a subscriber is liable to pay for the shares even
if the corporation has become insolvent.
This common law principle which was generally understood to be applicable in this
jurisdiction has now to give way to the express provisions of the Corporation Code on the matter.
LIMITATIONS: The pre-emptive right does not extend to: (Sec. 39)
Note: In Nos. (2) and (3), such acts require approval of 2/3 of the OCS
or
2/3 of total members.
In Close Corporations
In close corporations, the preemptive rights extends to ALL stock to be issued, including re-
issuance of treasury shares, EXCEPT if provided otherwise by the AOI. (Sec. 102). Note that the
limitations in Sec. 39 do not apply.
If it appears merely in a waiver agreement and NOT in the AOI, and was unanimously
agreed to by all existing stockholders:
*0 The existing stockholders cannot later complain since they are all bound to their
private agreement.
Any stockholder who has not exercised his preemptive right within a reasonable time will be
deemed to have waived it.
(1) Injunction;
(2) Mandamus;
(3) Cancellation of the shares (NOTE: but only if no innocent 3rd parties
are prejudiced)
(4) In certain cases, a derivative suit
STOKES V. CONTINENTAL TRUST CO. (78 N.E. 1090; 1906)
The directors were under the legal obligation to give the SH-plaintiff an opportunity
to purchase at the price fixed before they could sell his property to a third party. By selling
to strangers without first offering to sell to him, the defendant wrongfully deprived him of his
property and is liable for such damages as he actually sustained.
But even if preemptive right does not exist, the issue of shares may still be
objectionable if the directors have acted in breach of trust and their primary purpose is to
perpetuate or shift control of the corporation, or to ‘freeze out’ minority interest.
The doctrine of preemptive right is not affected by the identity of the purchasers.
What it is concerned with is who did not get it. But when officers and directors sell to
themselves and thereby gain an advantage, both in value and in voting power, another
situation arises. In the case at bar, the directors were not able to prove good faith in the
purchase and equity of transaction, since the corp. was a financial success. There was
constructive fraud upon the other SHs.
Debt Securities
Borrowings
NOTE: Under the SEC rules, stock option must first be approved by the
SEC.
Also, if the stock option is granted to non-stockholders, or to
directors, officers, or managing groups, there must first be SH
approval of 2/3 of the OCS before the matter is submitted to the SEC
for approval.
MERRITT-CHAPMAN & SCOTT CORP. VS. NEW YORK TRUST CO. (184 F. 2d
954; 1950)
If the corporation is allowed to declare stock dividends without taking account of the
warrant holders (who have not yet exercised their warrant), the percentage of interest in the
common stock capital of the corporation which the warrant holders would acquire, should
they choose to do so, could be substantially reduced/diluted. Thus, the corporation is wrong
in contending that a warrant holder must first exercise his warrant before they may be issued
stock dividend.
Hybrid securities
Because preferred shares and bonds are created by contract, it is possible to create stock
which approximates the characteristics of debt securities. Hybrid securities, as the name implies,
therefore combine the features of preferred shares and bonds.
Determining the true nature of the security is crucial for tax purposes. The American courts
use the following criteria:
(1) Is the corporation liable to pay back the investor at a fixed maturity date?
(2) Is interest payable unconditionally at definite intervals, or is it dependent on earnings?
(3) Does the security rank at least equally with the claims of other creditors, or is it
subordinate to them?
BONDS STOCK
JOHN KELLY VS. CIR TALBOT MILLS VS. CIR (326 U.S. 521; 1946)
In the Kelly case, the annual payments made were interest on indebtedness (therefore,
a bond is held) because there were sales of the debentures as well as exchanges of preferred
stock for debentures, a promise to pay a certain annual amount if earned, a priority for the
debentures over common stock and a definite maturity date in the reasonable future.
In the Talbot Mills case, the annual payments made were dividends and not interest
(therefore, shares are held), because of the presence of fluctuating annual payments with a
2% minimum, and the limitation of the issue of notes to stockholders in exchange only for
stock. Besides, it is the Tax Court which has final determination of all tax issues which are
not clearly delineated by law.
The payments made, regardless of what they are called, are in fact dividends (on
stocks) because of the absence of a maturity date and the right to enforce payment of the
principal sum by legal action, among other factors.
It must be noted that these criteria are not of equal importance and cannot be relied upon
individually. E.g. treatment accorded the issuance by the parties cannot be sufficient as this
would allow taxpayers to avoid taxes by merely naming payments as interest.
(1) debtor-corporation
(2) creditor-bondholder
(3) trustee: representative of all the bondholders
The rights of bondholders are to be determined by their contract and courts will not
make or remake a contract merely because one of the parties may become dissatisfied with
its provisions. If the contract is legal, the courts will interpret and enforce it.
In the deed of trust and bonds in this case, there are provisions empowering
bondholders of 2/3 of the principal amount or more, by agreement with the company, to
modify and extend the date of payment of the bonds provided such extension affected all
bonds alike. When this was done, the bondholders only followed such provisions in good
faith. The company benefited because of such move, and the bondholders were not
necessarily prejudiced, as defendants Joneses in this case were themselves owners of 72% of
the bond issue.
WILMAR K. REQUINA, BAR 2011 66
Form of Consideration
• cash;
• property actually received by the corporation: must be
necessary or convenient for its use and lawful purposes;
• labor performed for or services actually rendered to the
corporation
(NOTE: Future services are NOT acceptable!);
• previously incurred indebtedness by the corporation;
• amounts transferred from unrestricted retained earnings to
stated capital;
• outstanding shares exchange for stocks in the event of
reclassification or conversion
• future services
• promissory notes
• value less than the stated par value
(2) By the BOD pursuant to authority conferred upon it by the AOI or the by-laws; or
(3) In the absence of the foregoing, by the SHs representing at least a majority of
the outstanding capital stock at a meeting duly called for the purpose (Sec. 62)
Watered Stocks
NOTE: No-par shares CAN be watered stock: when they are issued for less
than their issued value as fixed by the corp. in accordance with law.
(1) Gratuitously, under an agreement that nothing shall be paid to the corporation;
(2) Upon payment of less than its par value in money or for cost at a discount;
(3) Upon payment with property, labor or services, whose value is less than the par
value of the shares; and
WILMAR K. REQUINA, BAR 2011 67
(4) In the guise of stock dividends representing surplus profits or an increase in the
value of property, when there are no sufficient profits or sufficient increases in
value to justify it.
Directors and officers who consented to the issuance of watered stocks are
solidarily liable with the holder of such stocks to the corp. and its creditors for
the difference between the fair value received at the time of the issuance and the
par or issued value of the share.
The liability will be to all creditors, whether they became such prior or
subsequent to the issuance of the watered stock. Reliance by the creditors on
the alleged valuation of corporate capital is immaterial and fraud is not made an
element of liability.
In this case, the stocks issued to the Dillman faction were no par value shares, the
consideration for which were never fixed as required by law. Hence, their issuance was void.
Moreover, the stocks were issued to the Dillmans for services rendered and to be rendered.
Future services are not lawful consideration for the issuance of stock.
McCarty agreed to purchase shares of a corp. with a downpayment of only $20, with the
balance due to be evidenced by a note. McCarty failed to pay a big portion of the balance. The
Court affirmed the judgement against McCarty for the balance due on the contract.
McCarty contends that the contract is void. But the law only prohibits the issuance of
stock. If it is understood that the stock will not be issued to the subscriber until the note is paid,
the contract is valid and not illegal.
If a security such as a note, which is not a valid consideration, is accepted, the law does
not say that such note, or the stock issued for it, shall be void. What is void by express provision
of law is the fictitious increase of stock or indebtedness. The law was designed for the protection
of the corporation and its creditors. It emphasizes the stockholder’s obligations to make full and
lawful payment in accord with its mandate, rather than furnish him with a defense when he has
failed in that obligation. Its purpose is to give integrity to the corporation’s capital. None of
these objects would be promoted by declaring a note given by a subscriber for stock
uncollectible in the hands of a bona fide stockholder.
This case involves an action to collect unpaid balances on par value of shares. It was
held that innocent transferees of watered stock cannot be held to answer for the deficiency of the
stocks even at the suit of the creditor of the company. The creditor’s remedy is against the
original owner of the watered stock.
A subscriber to shares who pays only part of what he agreed to pay is liable to creditors
for the balance.
WILMAR K. REQUINA, BAR 2011 68
Holders of watered stock are generally held liable to the corporation’s creditors for the
difference between the par value of the stock and the amount paid in.
Under the misrepresentation theory, the creditors who rely on the misrepresentation of
the corporation’s capital stock are entitled to recover the “water” from holders of the watered
stock. Reliance of creditors on the misrepresentation is material. However, under the
statutory obligation theory, reliance of creditors on the capital stock of the corporation is
irrelevant. (It must be noted that here in the Philippines, it is the statutory obligation theory which is
prevailing.)
Issuance of Certificate
Certificate of stock
CONDITION FOR ISSUANCE: payment of full amount of subscription price plus
interest, if any is due (Sec. 64)
(3) Par value of par value shares / Full subscription of no par value shares must be
fully paid.
WILMAR K. REQUINA, BAR 2011 69
(4) Surrender of the original certificate if the person requesting the issuance of a
certificate is a transferee from a SH.
Stock issued without authority and in violation of law is void and confers no rights on
the person to whom it is issued and subjects him to no liabilities. Where there is an inherent
lack of power in the corporation to issue the stock, neither the corporation nor the person to
whom the stock is issued is estopped to question its validity since an estoppel cannot operate
to create stock which under the law cannot have existence.
Unpaid Subscriptions
• Unpaid subscriptions are not due and payable until a call is made by the
corporation for payment. (Sec. 67)
(1) Call for payment as necessary, i.e. the BOD declares the unpaid subscriptions
due and payable (Sec. 67);
Poizat subscribed to 20 shares but only paid for 5. Board made a call for payment
through a resolution. Poizat refused to pay. Corporation became insolvent. Assignee in
insolvency sued Poizat whose defense was that the call was invalid for lack of publication.
It was held that the Board call became immaterial in insolvency which automatically
causes all unpaid subscriptions to become due and demandable.
Company’s president subscribed to shares and paid partially. The Board made a call
for payment through a resolution. However, the president refused to pay, prompting the
corporation to sue. The defense was that the call was invalid for lack of publication.
It was held that the call was void for lack of publication required by law. Such
publication is a condition precedent for the filing of the action. The ruling in Poizat does not
apply since the company here is solvent.
WILMAR K. REQUINA, BAR 2011 70
Da Silva subscribed to 650 shares and paid for 200. The company notified him that
his shares will be declared delinquent and sold in a public auction if he does not pay the
balance. Da Silva did not pay. The company advertised a notice of delinquency sale. Da
Silva sought an injunction because the by-laws allegedly provide that unpaid subscriptions
will be paid from the dividends allotted to stockholders.
The Court held that by-laws provide that unpaid subscriptions may be paid from such
dividends. Company has other remedies provided for by law such as a delinquency sale or
specific performance.
Dexter subscribed to 300 shares. The subscription contract provided that the shares
will be paid solely from the dividends. Company became insolvent. Assignee in insolvency
sued Dexter for the balance. Dexter's defense was that under the contract, payment would
come from the dividends. Without dividends, he cannot be obligated to pay.
The Court held that the subscription contract was void since it works a fraud on
creditors who rely on the theoretical capital of the company (subscribed shares). Under the
contract, this theoretical value will never be realized since if there are no dividends,
stockholders will not be compelled to pay the balance of their subscriptions.
Lumanlan had unpaid subscriptions. Company’s receiver sued him for the balance
and won. While the case was on appeal, the company and Lumanlan entered into a
compromise whereby Lumanlan would directly pay a creditor of the company. In exchange,
the company would forego whatever balance remained on the unpaid subscription.
Lumanlan agreed since he would be paying less than his unpaid subscription. Afterwards,
the corporation still sued him for the balance because the company still had unpaid creditors.
Lumanlan’s defense was the compromise agreement.
The Court held that the agreement cannot prejudice creditors. The subscriptions
constitute a fund to which they have a right to look to for satisfaction of their claims.
Therefore, the corporation has a right to collect all unpaid stock subscriptions and any other
amounts which may be due it, notwithstanding the compromise agreement.
Holders of subscribed shares not fully paid which are not delinquent
shall have all the rights of a stockholder. (Sec. 72)
Chua Soco bought 500 shares of China Banking Corp. at par value of P100.00,
paying the sum of P25,000.00, 50% of the subscription price. Chua mortgaged the said shares
in favor of plaintiff Fua Cun to secure a promissory note for the sum of P25,000.00. In the
meantime, Chua Soco's interest in the 500 shares were attached and levied upon to satisfy his
debt with China Banking Corp. Fua Cun brought an action to have himself declared to hold
priority over the claim of China Bank, to have the receipt for the shares delivered to him, and
to be awarded damages for wrongful attachment, on the ground that he was owner of 250
shares by virtue of Chua Soco's payment of half of the subscription price.
WILMAR K. REQUINA, BAR 2011 71
The Court held that payment of half the subscription price does not make the holder
of stock the owner of half the subscribed shares. Plaintiff's rights consist in an equity in 500
shares and upon payment of the unpaid portion of the subscription price he becomes entitled
to the issuance of certificate for the said 500 shares in his favor.
The Court held that shares of stock covered by fully paid capital stock shares
certificates are entitled to vote. Corporation may choose to apply payments to subscription
either as: (a) full payment for corresponding number of stock the par value of which is
covered by such payment; or (b) as payment pro-rata to each subscribed share. The
corporation chose the first option, and, having done so, it cannot unilaterally nullify the
certificates issued.
Note: The Camposes are of the opinion that § 64 of Corporation Code makes
the Lingayen Gulf inapplicable at present.
NAVA V. PEERS MARKETING (74 SCRA 65; 1976)
It was held that the transfer is effective only between Co and Nava and does not
affect the corporation. The Fua Cun ruling applies. Lingayen Gulf does not apply because,
unlike in Lingayen Gulf, no certificate of stock was issued to Co.
Effect of delinquency
Stock that remains unpaid 30 days after the date specified in the
subscription contract or the date stated in the call made by the Board.
1. The holder thereof loses all his rights as a stockholder except only the rights to
dividends;
2. Dividends will not be paid to the stockholder but will be applied to the unpaid
balance of his subscription plus costs and expenses. Also, stock dividends will be
withheld until full payment is made.
3. Such stockholder cannot vote at the election of directors or at any meeting on any
matter proper for stockholder action.
WHAT IS THE PROCEDURE FOR THE CONDUCT OF A DELINQUENCY SALE? (Sec. 68)
Note: The sale shall not be less than 30 days nor more than 60 days
from the date the stocks become delinquent.
If there is no bidder at the public auction who offers to pay the full amount of
the balance on the subscription and its attendant costs, the corporation may
bid for the shares, and the total amount due shall be credited as paid in full
in the books of the corporation. Title to all the shares of stock covered by
the subscription shall be vested in the corporation as treasury shares and
may be disposed of by said corporation in accordance with the Code.
Yes. This is done by filing a complaint within 6 months from the date of
sale, and paying or tendering to the party holding the stock the sum for which said
stock was sold, with interest at the legal rate from the date of sale. No action to
recover delinquent stock sold can be sustained upon the ground of irregularity or
defect in the notice of sale, or in the sale itself of the delinquent stock unless these
requirements are complied with.
(1) File an affidavit in triplicate with the corporation. The affidavit must state the
following:
(a) Circumstances as to how the certificates were SLD;
(b) Number of shares represented; and
(c) Serial number of the certificate
(d) Name of issuing corporation
(2) The corporation will publish notice after the affidavit and other information and
evidence have been verified with the books of the corporation, (Note however that this is not
mandatory. The corporation has the discretion to decide whether to publish or not.)
(3) SLD certificate is removed from the books if after one year from date of last
publication, no contest is presented.
NOTE: One-year period will not be required if the applicant files a bond
good for
1 year.
NOTE: Even if the above procedure was followed, if there was fraud, bad
faith, or negligence on the part of the corporation and its officers, the
corporation may be held liable.
TRANSFER OF SHARES
(1) Delivery;
(3) Recording of the transfer in the books of the corporation (so as to make
the transfer valid as against third parties)
A corporation, either by its board, its by-laws or the act of its officers, cannot create
restrictions in stock transfers.
A by-law which prohibits a transfer of stock without the consent or approval of all the
SHs or of the President or Board of Directors is illegal as constituting undue limitation on
the right of ownership and in restraint of trade (citing Fleisher v. Botica Nolasco Co., Inc., 47
Phil. 583)
While Sec. 47 (9) of the Corporation Code grants to stock corporations the authority
to determine in the by-laws the "manner of issuing certificates" of shares of stock, however,
the power to regulate is not the power to prohibit, or to impose unreasonable restrictions of
the right of SHs to transfer their shares. To uphold the cancellation of a stock certification as
null and void for lack of delivery of the cancelled "mother" certificate whose endorsement
was deliberately withheld by petitioner, is to prescribe certain restrictions on the transfer of
stock in violation of the Corporation Code as the only law governing transfer of stocks.
USON V. DIOSOMITO (61 Phil. 535; 1935)
Toribia Uson filed a civil action for debt against Vicente Dioisomito. Upon
institution of said action, an attachment was duly issued and D's property was levied upon,
including 75 shares of the North Electric Co., which stood in his name on the books of the
company when the attachment was levied on 18 January 1932. The sheriff sold said shares at
a public auction with Uson being the highest bidder. Jollye claims to be the owner of said
certificate of sock issued to him by the co. on 13 February 1933.
There is no dispute that Diosomito was the original owner of said shares, which he
sold to Barcelon. However, Barcelon did not present these certificates to the corporation for
registration until 19 months after the delivery thereof by Barcelon, and 9 months after the
attachment and levy on said shares. The transfer to Jollye was made 5 months after the
issuance of a certificate of stock in Barcelon's name.
Is a bona fide transfer of the shares of corp., not registered or noted on the books of the
corp., valid as against a subsequent lawful attachment of said shares, regardless of whether
the attaching creditor had actual notice of said transfer or not.
NO, it is not valid. The transfer of the 75 shares in the North Electric Co., Inc made
by the defendant Diosomito as to the defendant Barcelon was not valid as to the plaintiff.
Toribia Uson, on 18 Jan. 1932, the date on which she obtained her attachment lien on said
shares of stock which still stood in the name of Diosomito on the books of the corp. Sec. 35
says that No transfer, however, is valid, except as between the parties, until the transfer is
entered and noted upon the books of the corporation so as to show the names of the parties to
the transaction, the date of the transfer, the number of the certificate, and the number of
shares transferred.
All transfers of shares not so entered are invalid as to attaching or execution creditors
of the assignors, as well as to the corporation and to subsequent purchasers in good faith, and
indeed, as to all persons interested, except the parties to such transfers.
No shares of stock against which the corporation holds any unpaid claim shall be
transferable in the books of the corporation. (Sec. 63)
It is the corporate secretary's duty and obligation to register valid transfers of stocks
and if said corporate officer refuses to comply, the transferor SH may rightfully bring suit to
compel performance.
Note: In this case, Judge Torres had no right to enter the assignments (conveyances)
of
his shares himself in the corporation's stock and transfer book since he was
not corporate secretary.
Isamu Akasako, a Japanese national who was allegedly the real owner of the shares
of stock in the name of one Aquilino Rivera, a registered SH of Fujuyama Hotel and
Restaurant, Inc., sold 2550 shares of the same to Milagros Tsuchiya along with the assurance
that Tsuchiya would be made President of the corporation after the purchase. Rivera assured
her that he would sign the stock certificates because Akasako was the real owner. However,
after the sale was consummated and the consideration paid, Rivera refused to make the
indorsement unless he is also paid.
Tsuchiya, et al. attempted several times to have the shares registered but were refused
compliance by the corp. They filed a special action for mandamus and damages.
The Supreme Court held that mandamus was improper in this case since the shares of
stock were not even indorsed by the registered owner who was specifically resisting the
registration thereof in the books of the corporation. The rights of the parties would have to
be threshed out in an ordinary action.
The corporation may, at its option, refuse to register the transfer of stock in
the name of the transferee. (Sec. 99.4) However, this shall not be applicable if the
WILMAR K. REQUINA, BAR 2011 76
transfer, though otherwise contrary to subsections (1), (2) and (3) of Sec. 99, has
been consented to by all the stockholders of the close corporation, or if the close
corporation has amended its AOI in accordance with Title XII of the Code.
For his part, the transferee may rescind the transfer or recover from the
transferor under any applicable warranty, whether express or implied.
UNAUTHORIZED TRANSFERS
This proceeds from the theory of quasi-negotiability which provides that in endorsing
a certificate in blank, the real owner clothes the possessor with apparent authority,
thus, estopping him later from asserting his rights over the shares of stock against a
bona fide purchaser.
Forged Transfers
A corporation does not incur any misrepresentation in the issuance of a
certificate made pursuant to a forged transfer. It can always recall from the person
the certificate issued, for cancellation.
In case where the certificate so issued comes into the hands of a bona fide
purchaser for value from the original purchaser, the corporation is estopped from
denying its liability. It must recognize both the original and the new certificate. But if
recognition results to an over-issuance of shares, only the original certificate may be
recognized, without prejudice to the right of the bona fide purchaser to sue the
corporation for damages.
Santamaria secured her order for a number of shares with Campos Co. with her stock
certificate representing her shares with Batangas Minerals. The said certificate was originally
issued in the name of her broker and endorsed in blank by the latter. As Campos failed to
make good on the order, Santamaria demanded the return of the certificate. However, she
was informed that Hongkong Bank had acquired possession of it inasmuch as it was covered
by the pledge made by Campos with the bank. Thereafter, she instituted an action against
Hongkong Bank for the recovery of the certificate. Trial court decided in her favor. The bank
appealed.
Issues: 1) WON Santamaria was chargeable with negligence which gave rise to the case
2) WON the Bank was obligated to inquire into the ownership of the certificate
WILMAR K. REQUINA, BAR 2011 77
(1) The facts of the case justify the conclusion that she was negligent. She delivered
the certificate, which was endorsed in blank, to Campos without having taken any
precaution. She did not ask the Batangas Minerals to cancel it and instead, issue another in
her name. In failing to do so, she clothed Campos with apparent title to the shares
represented by the certificate. By her misplaced confidence in Campos, she made possible
the wrong done. She was therefore estopped from asserting title thereto for it is well-settled
that “where one of the innocent parties must suffer by reason of a wrongful or unauthorized
act, the loss must fall on the one who first trusted the wrongdoer.”
(2) The subject certificate is what is known as a street certificate. Upon its face, the
holder is entitled to demand its transfer into his name from the issuing corporation. The bank
is not obligated to look beyond the certificate to ascertain the ownership of the stock. A
certificate of stock, endorsed in blank, is deemed quasi-negotiable, and as such, the
transferee thereof is justified in believing that it belongs to the transferor.
De los Santos filed a claim with the Alien Property Custodian for a number of shares
of the Lepanto corporation. He contended that said shares were bought from one Campos
and Hess, both of them dead. The Philippine Alien Property Administrator rejected the
claim. He instituted the present action to establish title to the aforementioned shares of stock.
De los Santos’ sole evidence that he purchased the said shares was his own unverified
testimony. The alleged vendors of the stocks who could have verified the allegation, were
already dead. Further, the receipt that might have proven the sale, was said to have been lost
in a fire. On the other hand, it was shown that the shares of stock were registered in the
records of Lepanto in the name of Madrigal, the trustee of Matsui; that Matsui was
subsequently given possession of the corresponding stock certificates, though endorsed in
blank; and, that Matsui had neither sold, conveyed nor alienated these to anybody.
It is the rule that if the owner of the certificate has endorsed it in blank, and is stolen,
no title is acquired by an innocent purchaser of value. This is so because even though a stock
certificate is regarded as quasi-negotiable, in the sense that it may be transferred by
endorsement, coupled with delivery, the holder thereof takes it without prejudice to such
rights or defenses as the registered owner or credit may have under the law, except in so far
as such rights or defenses are subject to the limitations imposed by the principles governing
estoppel.
Collateral Transfers
Shares of stock are personal property. Thus, they can either be pledged or mortgaged.
However, such pledge or mortgage cannot have any legal effect if it is registered only in the
corporate books.
If the certificate of stock is not delivered to the creditor, it must be registered in the registry of
deeds of the province where the principal office of the corporation is located, and in case where the
domicile of the stockholder is in a different province, then registration must also be made there.
In a situation where, the chattel mortgage having been registered, the stock certificate was
not delivered to the creditor but transferred to a bona fide purchaser for value, it is the rule that the
WILMAR K. REQUINA, BAR 2011 78
bona fide purchaser for value is bound by the registration in the chattel mortgage registry. It is said
that such a rule tends to impair the commercial value of stock certificates.
Did the chattel mortgage in the registry of deeds of Manila gave constructive notice to the
attaching creditors?
The Chattel Mortgage Law provides two ways of executing a valid chattel mortgage:
1) the possession of mortgaged property is delivered and retained by the mortgagee; and, 2)
without delivery, the mortgage is recorded in the register of deeds. But if chattel mortgage of
shares may be made validly, the next question then becomes: where should such mortgage be
properly registered?
It is the general rule that the situs of shares is the domicile of the owner. It is also
generally held that for the purpose of execution, attachment, and garnishment, it is the
domicile of the corporation that is decisive. Going by these principles, it is deemed
reasonable that chattel mortgage of shares be registered both at the owner’s domicile and in
the province where the corporation has its principal office. It should be understood that the
property mortgaged is not the certificate but the participation and share of the owner in the
assets of the corporation.
Note: The provision of the Chattel Mortgage Law (Act No. 1508)
providing for delivery of mortgaged property to the mortgagee as a
mode of constituting a chattel mortgage is no longer valid in view of
the Civil Code provision defining such as a pledge.
NON-TRANSFERABILITY
IN NON-STOCK CORPORATIONS
Form of Dividends
IN WHAT FORMS CAN DIVIDENDS BE ISSUED?
1. Cash
2. Property
WILMAR K. REQUINA, BAR 2011 79
3. Stock dividends
Can this be issued by No. (Sec. 35) No, since this requires SH
Executive Committee? approval. (Sec. 35)
Stock dividends are issued only to SHs This is so because only stockholders are
entitled to dividends. A stock dividend really adds nothing to the interest of each
stockholder; the proportional interest of each stockholder remains the same. If a stockholder
is deprived of his stock dividends - and this happens if the shares of stock forming part of the
stock dividends are issued to a non-stockholder - then the proportion of the stockholder's
interest changes radically. Stock dividends are civil fruits of the original investment, and to
the owners of the shares belong the civil fruits.
If subscribed shares have not been fully paid, the unpaid portion of subscribed
capital stock is an asset, and as long as the net capital asset (after payment of
liabilities) including this unpaid portion is at least equal to the total par value of the
subscribed shares, any excess would be surplus or earnings from which dividends
may be declared. However, if a deficit exists, subsequent profits must first be applied
to cover the deficit.
Dividends can only be declared only from the surplus, i.e. the excess in the value of
the assets over the liabilities and the issued capital stock. To do otherwise would be illegal
The object of the prohibition is to protect the creditors in view of the limited liability of the
SHs and also to protect the SHs by preserving the capital so that the purposes of the corp.
may be performed.
Surplus must be bona fide i.e. founded upon actual earnings or profits and not to be
dependent for its existence upon a theoretical estimate of an appreciation in the value of the
company’s assets.
The prohibition does not apply, however, to stock dividends because creditors and
SHs will not be affected by their declaration since they do not decrease the company’s assets.
Dividends on non-cumulative preferred stock are payable only out of net profits and
for the years in which said net profits are actually earned.
The right to dividends is conditional upon: (1) accrual of net profits, and (2) retention
in the business.
If the annual net earnings of a corp. are justifiably applied to legitimate corp.
purposes, such as payment of debts, reduction of deficits and restoration of impaired capital,
the right of non-cumulative preferred stockholders to the payments of dividends is lost. If
they are applied against prior losses and thereby completely absorbed, there are no net
profits from which dividends may be lawfully paid.
SOME RULES ON DIVIDEND DECLARATION:
1. BOD has discretion whether or not to declare dividends and in what form.
However, such discretion cannot be abused and the BOD cannot accumulate
surplus profits unreasonably on the excuse that it is needed for expansion or
reserves.
Exceptions:
5. The dividends received are based on stock held whether or not paid.
However, if the stocks are delinquent, the amount will first be applied to the
payment of the delinquency plus costs and expenses; stock dividends will not be
given to a delinquent SH.
KEOGH v ST. PAUL MILK (285 N.W. 809; 1939)
The mere fact that a large corporate surplus exists is not enough to warrant equitable
intervention; the test is good faith and reasonableness of the policy of retaining the profits.
However, where dividends are withheld for an unlawful purpose – to deprive a SH of his
right to a just proportion of the corporation's profit, the court may compel the corporation to
declare dividends.
This case involves an action against the Ford Motor Company to compel declaration
of dividends. At the time this complaint was made, Ford had concluded its most prosperous
year of business, and the demand for its cars at the price of the previous year continued.
While it had been the practice, under similar circumstances, to declare larger dividends, the
corporation refused to declare any special dividends. The Board justified its refusal to
declare larger dividends on the expansion plans of the company by erecting a smelting plant,
but maintaining the selling price of its cars (instead of reducing it as had been the practice in
previous years). The plaintiffs contend that such a proposal would be tantamount to the
business being conducted as a semi-eleemosynary (or charitable) institution instead of a
business institution.
The court pointed out that a business corporation is organized and carried on
primarily for the profit of SHs. The discretion of the directors is to be exercised in the choice
of means to attain that end and does not extend to a change in the end itself – reduction of
profits or to devote profits to another purpose. While the Court noted the capable
management of the affairs of the corporation and therefore was not convinced that the
motives of the directors were prejudicial to the company's interests, it likewise noted that the
annual dividends paid were very small in relation to the profits that the company had been
making. It therefore affirmed the amount fixed by the lower court to be distributed to the
stockholders.
Note: Prof. Jacinto is of the opinion that what happened in this case is
possible under the present Code, even without changing the AOI.
WILMAR K. REQUINA, BAR 2011 82
Preference as to Dividends
In the AOI and the certificate of stock of Stock A, it was stated that the holders of
said stocks are entitled to receive to receive preferential dividends of 5% per fiscal year, non-
cumulative, before dividends are paid to other stocks. From 1915 to 1926, no dividends were
declared. The net earnings were instead used for the improvements and additions to property
and equipment. Due to this, the corporation became prosperous and proposed to pay
dividends to A & B common stock. Plaintiffs filed this case in order to collect the dividends
for fiscal years 1915-1926 before the other classes of stock are paid.
No, they were not. By the plain meaning of the words in the AOI and the certificates
of stock, the holders are not entitled to dividends unless directors declare so. It is likewise
generally understood that in cases where the company's net earnings are applied for
improvements and no dividend is declared, the claim for such year is gone in case of non-
cumulative stock, and cannot be later asserted.
BURK V. OTTAWA GAS & ELECTRIC CO. (123 Pac. 875; 1912)
An action was brought by the preferred SHs of Ottawa against the directors of Ottawa
to (1) require the directors to account for all the property and assets of the corporation, (2)
declare such dividends from the net profits of the business of such co. as should have been
declared since 1 Jan. 1906, and (3) restrain the officers and directors during the pendency of
the action from paying out any of the money or disposing of the assets of the company except
such amounts as should be necessary to pay the actual necessary current expenses of
conducting the business of the corporation.
The BOD maintained that the corporation's funds were exhausted by expenditures for
the extension of the co’s plant, hence it was unable to declare dividends. Expenditures were
said to be necessary and for the betterment of the plant.
Were the corp funds were wrongfully diverted, and were preferred SHs entitled to dividends?
The case was remanded to the trial court, with instructions to make further findings to
protect the preferred SHs in their rights.
The fair interpretation of the contract between Ottawa and its SHS is that if in any
year net profits are earned, a dividend is to be declared. To hold otherwise, meaning if the
BOD had absolute discretion when to declare dividends and when not to, when the
corporation has funds for such dividends, would result in temptation to unfair dealing, giving
one party the option to pay the other or not. In the case at bar, the accumulated profits would
be lost forever since the dividends were non-cumulative.
Preferred SHs, however, are not generally creditors until dividends are declared. In
the case at bar, if dividends should have been declared to such SHs, they are considered
creditors from that time.
As soon as the BoD has declared dividends. From this time, it becomes a
debt owed by the corporation, and therefore can no longer be revoked (McLaran
v. Crescent Planning).
WILMAR K. REQUINA, BAR 2011 83
NOTE: The extent of the SH’s share in the dividends will depend on the
capital contribution; NOT the number of shares he has.
Dividends are defined as portions of profits/surplus funds of the corp. which have
been actually set apart by a valid board resolution or by the SH at a corp. mtg. for
distribution among SH according to their respective interests. The mere declaration of the
dividend, without more, by competent authority under proper circumstances, creates a debt
against the corporation in favor of the stockholders the same as any other general creditor of
the corporation. By the mere declaration, the dividend becomes immediately fixed and
absolute in the stockholder and from henceforth the right of each individual stockholder is
changed by the act of declaration from that of partner and part owner of the corporate
property to a status absolutely, adverse to every other stockholder and to the corporation
itself, insofar as his pro rata proportion of the dividend is concerned.
(1) If the directors acted wilfully, or with negligence or in bad faith, they will be liable to
the corporation. If the corporation has become insolvent, they are liable to the
corporation's creditors for the amount of dividends based out of capital. (Based on
Sec. 31)
(2) If the directors cannot be held liable because they acted with due diligence and in
good faith, in the absence of an express provision of law, an innocent stockholder
is not liable to return the dividends received by him out of capital, unless the
corporation was insolvent at the time of payment. (Majority view; Campos)
The appraisal right refers to the right of a stockholder who dissented and voted
against a proposed fundamental corporate action to get out of the corporation by
demanding payment of the fair value of his shares.
(1) In case any amendment to the AOI has the effect of changing or restricting the
rights of any SH or class of shares, or of authorizing preferences in any respect
superior to those of outstanding shares of any class, or of extending or
shortening the term of corporate existence (Sec. 81);
(2) In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition
of all or substantially all of the corporate property and assets as provided in this
Code (Sec. 81; Sec. 40);
(4) In case the corporation invests its funds in any other corporation or business or
for any purpose other than the primary purpose for which it was organized (Sec.
42)
All rights accruing to the shares, including voting and dividend rights, are
suspended in accordance with the Corporation Code, except for the right of the SH
to receive payment of the fair value thereof.
WILMAR K. REQUINA, BAR 2011 85
However, if said dissenting SH is not paid the value of his shares within 30 days
after the award, his voting and dividend rights shall immediately be restored.
AMENDMENTS OF CHARTER
Amendment by Legislature
Amendment by Stockholders
One of the powers expressly granted by law to all corporations is the power
to amend its articles of incorporation. This, in effect, is a grant of power to owners of
2/3 of the outstanding stocks to change the basic agreement between the
corporation and its stockholders, making such change binding on all the
stockholders, subject only to the right of appraisal, if proper.
(1) The appraisal right must be recognized in case the amendment has
the effect of changing rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding
shares of any class, or extending or shortening the term of corporate
existence.
(3) A copy of the amended articles should be filed with the SEC, and
with the proper governmental agencies, as appropriate (e.g., in the case
of banks, public utilities, etc.)
WILMAR K. REQUINA, BAR 2011 86
(4) Original and amended articles should contain all matters required
by law to be set out in said articles.
The same grounds as for the disapproval of the original articles (Sec. 17):
The Board of Directors gave notice to SH that among the matters to be acted upon in
its annual meeting would be a proposal to amend certificate of incorporation to add to the
rights of preferred stockholders, voting rights equal to those of common stockholders.
Marcus, objected and demanded payment for the common stock owned by her.
The Court held that Marcus may invoke her appraisal right. The aggregate number of
shares having voting rights equal to those of common shares was substantially increased and
thereby the voting power of each common share outstanding prior to the meeting was altered
or limited by the resulting pro rata diminution of its potential worth as a factor in the
management of the corporate affairs. Considering that she held diminished voting power;
that she notified the corpo of her objection; that her shares were voted against the
amendment—these were sufficient to qualify her to invoke her statutory appraisal right.
Effectivity of amendment
Amendments take effect only from the approval by the SEC. However, such
approval or rejection must be made within six months of filing of amendment;
otherwise it shall take effect even w/o such approval (as of the date of filing),
unless cause of delay is attributable to the corporation. (Sec. 16)
Special amendments
WILMAR K. REQUINA, BAR 2011 87
After the authorized capital stock has been fully subscribed and the
corporation needs to increase its capital, it will have to amend its articles to
increase its capital stock. A corporation does not have the implied power to
increase capital stock; such a power can only be granted by law.
The power to increase or decrease capital stock must be exercised
in accordance with the provisions of Sec. 38 of the Code.
A corporation has no power to release an original subscriber to its capital stock from
the obligation of paying for his shares, without valuable consideration for such release; and
as against creditors a reduction of the capital stock can take place only in the manner and
under the conditions prescribed by the statute or charter or the articles of incorporation.
(1) All issued stock of all classes should be held by not more than 20;
(2) All issued stock shall be subject to one or more specified restrictions on transfer
permitted by law;
(3) Corporation should not be listed in the stock exchange or make any public offering
of its stock.
If any of these are deleted, then the corporation will cease to be a close
corporation and will lose the special privileges of such corporations. Thereafter, it
will be governed by the general provisions of the Code. Since such amendment
involves a change in the nature of the corporation, even non-voting stocks are
given a voice in the decision. A stockholders’ meeting is required and a 2/3 vote
must approve the amendment, unless otherwise provided by the articles of
incorporation.
DISSOLUTION
Modes of Dissolution
WILMAR K. REQUINA, BAR 2011 88
This is effected by majority vote of the BOD and a 2/3 vote of the
OCS or members. (Note the special notice requirements.) The copy
of the resolution authorizing the dissolution shall be certified by a
majority of the BOD and countersigned by the secretary of the
corporation. THE SEC shall thereupon issue the certificate of
dissolution.
Date: not less than 30 days nor more than 60 days after
the
entry of the order
Before the date fixed by the SEC, the SEC order shall be
published and posted accordingly.
(b) Quo Warranto proceedings (See Sec. 5b, PD 902-A and Rule 66,
Rules of
Court. Previously, the SEC had exclusive jurisdiction over quo
warranto proceedings involving corporation. Under the Securities
Regulation Code or RA 8799, however, the jurisdiction of the SEC
over all cases enumerated under Sec. 5 of PD 902-A have been
transferred to the Regional Trial Courts.
• Illegal;
• Fraudulent;
• Dishonest;
• Oppressive or unfairly prejudicial to the corporation
or any other SH;
Effects of Dissolution
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NOTE that the subsequent dissolution of a corporation may not remove or impair
any right or remedy in favor of or against, nor any liability incurred by, any
corporation, its stockholders, members, directors, trustees or officers. (Sec. 145)
Plaintiff National Abaca Corporation filed a complaint against Pore for the recovery
of a sum of money advanced to her for the purchase of hemp. She moved to dismiss the
complaint by citing the fact that National Abaca had been abolished by EO 372 dated Nov.
24, 1950. Plaintiff objected to such by saying that it shall nevertheless be continued as a
corporate body for a period of 3 years from the effective date of said order for the purpose of
prosecuting and defending suits by or against it and to enable the Board of Liquidators to
close its affairs.
Can an action commenced within 3 years after the abolition of plaintiff corporation be
continued by the same after the expiration of said period?
The Corp. Law allows a corporation to continue as a body for 3 years after the time
when it would have been dissolved for the purposes of prosecuting and defending suits by or
against it. But at any time during the 3 years, the corporation should convey all its property
to trustees so that the latter may be the ones to continue on with such prosecution, with no
time limit on its hands. Since the case against Pore was strong, the corp.'s amended
complaint was admitted and the case was remanded to the lower court.
The termination of the life of a juridical entity does not by itself cause the extinction
or diminution of the right and liabilities of such entity nor those of its owners and creditors.
If the 3-year extended life has expired without a trustee or receiver having been expressly
designated by the corporation itself within that period, the board of directors or trustees itself
may be permitted to so continue as "trustees" by legal implication to complete the corporate
liquidation. In the absence of a board of directors or trustees, those having any pecuniary
interest in the assets, including not only the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make proper representations with the SEC,
which has primary and sufficiently broad jurisdiction in matters of this nature, for working
out a final settlement of the corporate concerns.
Executory contracts
The prevailing view is that executory contracts are not extinguished by
dissolution. Sec. 145 of the Code states that "No right or remedy in favor of or
WILMAR K. REQUINA, BAR 2011 91
Liquidation
If this method is used, the 3-year limitation will not apply provided
the designation of the trustees is made within said period. There is no
time limit within which the trustee must finish liquidation, and he may
sue and be sued as such even beyond the 3-year period unless the
trusteeship is limited in its duration by the deed of trust. (See Nat'l
Abaca Corp. v. Pore, supra)
As with the previous method, the three-year rule shall not apply.
However, the mere appointment of a receiver, without anything more,
does not result in the dissolution of the corporation nor bar it from the
exercise of its corporation rights.
(2) Conveyance of all corporate property to trustees for the benefit of SHs, members,
creditors, and other persons in interest;
The appointment of a receiver by the court to wind up the affairs of the corporation
upon petition of voluntary dissolution does not empower the court to hear and pass on the
claims of the creditors of the corporation at first hand. In such cases, the receiver does not
act as a receiver of an insolvent corporation. Since "liquidation" as applied to the settlement
of the affairs of a corporation consists of adjusting the debts and claims, that is, of collecting
all that is due the corporation, the settlement and adjustment of claims against it and the
payment of its just debts, all claims must be presented for allowance to the receiver or
trustees or other proper persons during the winding-up proceedings within the 3 years
provided by the Corporation Law as the term for the corporate existence of the corporation,
and if a claim is disputed so that the receiver cannot safely allow the same, it should be
transferred to the proper court for trial and allowance, and the amount so allowed then
presented to the receiver or trustee for payment. The rulings of the receiver on the validity of
claims submitted are subject to review by the court appointing such receiver though no
appeal is taken to the latter ruling, and during the winding-up proceedings after dissolution,
no creditor will be permitted by legal process or otherwise to acquire priority, or to enforce
his claim against the property held for distribution as against the rights of other creditors.
Defendant corp. was a timber license holder with concessions in Camarines Norte.
Investigations led to the discovery that certain taxes were due on it. BIR assessed Marsman 3
times for unpaid taxes. Atty. Moya, in behalf of the corp., received the first 2 assessments.
He requested for reinvestigations. As a result, corp. failed to pay within the prescribed
period. Numerous BIR warnings were given. After 3 years of futile notifications, BIR sued
the corp.
Although Marsman was extrajudicially dissolved, with the 3-year rule, nothing
however bars an action for recovery of corporate debts against the liquidators. In fact, the 1st
assessment was given before dissolution, while the 2nd and 3rd assessments were given just 6
months after dissolution (within the 3-year rule). Such facts definitely established that the
Government was a creditor of the corp. for whom the liquidator was supposed to hold assets
of the corp.
TAN TIONG BIO V. CIR (G.R. No. L-15778; April 23, 1962)
The creditor of a dissolved corp. may follow its assets, as in the nature of a trust fund,
once they pass into the hands of the stockholders. The dissolution of a corp. does not
extinguish the debts due or owing to it.
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An indebtedness of a corp. to the government for income and excess profit taxes is
not extinguished by the dissolution of the corp. The hands of government cannot, of course,
collect taxes from a defunct corporation, it loses thereby none of its rights to assess taxes
which had been due from the corporation, and to collect them from persons, who by reason
of transactions with the corporation hold property against which the tax can be enforced and
that the legal death of the corporation no more prevents such action than would the physical
death of an individual prevent the government from assessing taxes against him and
collecting them from his administrator, who holds the property which the decedent had
formerly possessed. Thus, petitioners can be held personally liable for the corporation's
taxes, being successors-in-interest of the defunct corporation.
(1) All liabilities and obligations of the corporation shall be paid, satisfied,
and discharged, or adequate provision shall be made therefor.
CORPORATE COMBINATIONS
(1) Merger (A + B = A)
(2) Consolidation (A + B = C)
Merger or Consolidation
(5) All property (real or personal) and all receivables due on whatever
account (including subscriptions to shares and other choses in action), and all and every
other interest of, or belong to, or due to each constituent corporation, shall be deemed
transferred and vested in such surviving or consolidated corporation without further act or
deed.
Consolidation becomes effective not upon mere agreement of the members but only
upon issuance of the certificate of consolidation by the SEC. There can be no intra-corporate
nor partnership relation between 2 jeepney drivers' and operators' associations whose plans
to consolidate into a single common association is still a proposal.
Note, however, that after such approval by the SHs, the BOD may nevertheless,
in its discretion, abandon such sale or other disposition without further action or
approval by the SHs. This, of course, is subject to the rights of third parties under
any contract relating thereto.
Yes. However, it must be stressed that this right is generally available only
to dissenting stockholders of the selling corporation, not the purchasing
corporation. (It can be argued, though, that in instances wherein the purchase
constitutes an investment in a purpose other than its primary purpose, stockholders'
approval of such investment is necessary, and anyone who objects thereto will have
the appraisal right under Sec. 42.)
Exchange of stocks
acquiring (parent) corporation, there is hardly any difference between owing the
acquired corporation's business directly and operating it through a controlled
subsidiary. In fact, the parent corporation would have the power to buy all the
subsidiary's assets and dissolve it, achieving the same result as in the other
methods of combination. (Campos & Campos)
FOREIGN CORPORATIONS
A corporation formed and organized under laws other than those of the
Philippines, regardless of the citizenship of the incorporators and stockholders.
Such corporation must have been organized and must operate in a country
which allows Filipino citizens and corporations to do business there.
The BOI certificate is issued upon a finding of the Board of Investments that the
business operations of the foreign corp. will contribute to the sound and
balanced development of the national economy on a self-sustaining basis.
(See Omnibus Investments Code, Sec. 48-49)
Once the licensee ceases to do business in the Philippines, these deposited securities shall be
returned, upon the licensee's application and proof to the satisfaction of the SEC that the licensee
has no liability to Philippine residents or the Philippine government.
Note: Foreign banking and insurance corporations are the exceptions to this requirement.
Isolated transactions
Marshall Wells, a corporation organized under the State of Oregon, sued a domestic
corp. for the unpaid balance on a bill of goods. Defendant demurred to the complaint on the
ground that it did not show that plaintiff had complied with the law regarding corp. desiring
to do business in the Phil., nor that the plaintiff was authorized to do business in the Phil.
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The Supreme Court, in ruling for Marshall Wells, stated that the object of the statute
was to subject the foreign corp. doing business in the Phil. to the jurisdiction of its courts.
The object of the statute was not to prevent it from performing single acts but to prevent it
from acquiring a domicile for the purpose without taking the steps necessary to render it
amenable to suit in the local courts. The implication of the law is that it was never the
purpose of the Legislature to exclude a foreign corp. which happens to obtain an isolated
order for business from the Phil., from securing redress in Phil. Courts, and thus, in effect to
permit persons to avoid their contract made with such foreign corporation.
ATLANTIC MUTUAL V. CEBU STEVEDORING (G.R. No. 18961; Aug. 31, 1966)
A foreign corp. engaged in business in the Phil. can maintain suit in this jurisdiction if
it is duly licensed. If a foreign corp. is not engaged in business in the Phil., it can maintain
such suit if the transaction sued upon is singular and isolated, in which no license is required.
In either case, the fact of compliance with the requirement of license, or the fact that the
suing corp. is exempt therefrom, as the case may be, cannot be inferred from the mere fact
that the party suing is a foreign corp. The qualifying circumstance, being an essential part of
the element of the plaintiff’s capacity to sue, must be affirmatively pleaded. In short, facts
showing foreign corporation’s capacity to sue should be pleaded.
Curing of defect
A contract entered into by a foreign insurance corp. not licensed to do business in the
Phil. is not necessarily void and the lack of capacity to sue at the time of execution of the
contract is cured by its subsequent registration.
Domestic corporation General Garments registered “Puritan” trademark for its men’s
wear. US corporation Puritan Sportswear petitioned the Phil. Patent Office for cancellation
of said trademark, alleging its ownership and prior use in the Phil.
The Supreme Court held that a foreign corp. which does not do business in the Phil.
and is unlicensed but is widely known in the Phil. through the use of its products here has
legal right to maintain an action to protect its reputation, corporate name and goodwill. The
right to use the corporate name is a property right which the corp. may assert and protect in
any of the courts of the world.
A foreign corporation not doing business in the Phil. needs no license to sue in the
Phil. for trademark violations.
Where a violation of our unfair trade laws which provide a penal sanction is alleged,
lack of capacity to sue of injured foreign corp. becomes immaterial (because a criminal
offence is essentially an act against the State).
NOTE: Sec. 160 of R.A. 8293 (Intellectual Property Code) provides that
any foreign national or juridical person who meets the
requirements of Sec. 3 of the Act (i.e., is a national or is domiciled in
a country party to any convention, treaty or agreement relating to
intellectual property rights or the repression of unfair competition, to
WILMAR K. REQUINA, BAR 2011 100
The true test as to whether a foreign corporation is doing business in the Philippines
seems to be whether the foreign corp. is continuing the body or substance of the business for
which it was organized or whether it has substantially retired from it and turned it over to
another. The term implies a continuity of dealings and arrangements and contemplates
performance of acts/works or the exercise of the functions normally incident to and in
progressive prosecution of the purpose and object of its organization.
judgment against persons domiciled outside and not doing business in the Phil. and over
whom it did not acquire jurisdiction.
The Supreme Court held that the petitioner may be considered as doing business in
the Philippines within the scope of Sec. 14, Rule 14 of the Rules of Court:
Sec. 14. Service upon private foreign corp. - If the defendant is a foreign
corp., or a non-resident joint stock corporation or association, doing business
in the Phil., service may be made on its resident agent, on the government
official designated by law to the effect, or to an y of its officers or agents
within the Philippines.
FMC had appointed Jaime Catuira as its agent with authority to execute Employment
Contracts and receive, on behalf of the corp., legal services from, and be bound by processes
of the Phil. Courts, for as long as he remains an employee of FMS. If a foreign corp. not
engaged in business in the Phil., through an Agent, is not barred from seeking redress from
courts in the Phil., that same corp. cannot claim exemption done against a person or persons
in the Phil..
NOTE: Under Sec. 12, Rule 14 of the 1997 Rules of Civil Procedure, the
term "doing business" has been replaced with the phrase "has
transacted business," thereby allowing suits based on isolated
transactions.
Merrill Lynch Futures, Inc. (MLF) filed a complaint against the spouses Lara for the
recovery of a debt. MLF is a non-resident foreign corp. not doing business in the Phil.,
organized under the laws of Delaware, USA. It is a futures commission merchant duly
licensed to act as such in the futures markets and exchanges in the US, essentially
functioning as a broker executing orders to buy and sell futures contract received from its
customers on US futures exchanges. (Futures contract is a contractual commitment to buy
and sell a standardized quantity of a particular item at a specified future settlement date and
at a price agreed upon with the purchase or sale being executed on a regulated futures
exchange.)
The spouses refused to pay and moved to dismiss the case alleging that plaintiff had
no legal capacity to sue because (1) MLF is doing business in the country without a license;
and (2) the transactions were made with Merrill Lynch Pierce, Fenner and Smith and not
with plaintiff MLF.
Issue: Can MLF sue in Philippine courts to establish and enforce its rights against spouses
in light of the undeniable fact that it had transacted business without a license?
Legal capacity to sue may be understood in two senses: (1) That the plaintiff is
prohibited or otherwise incapacitated by law to institute suit in the Phil. Courts, or (2)
although not otherwise incapacitated in the sense just stated, that it is not a real party in
interest.
The Court finds that the Laras were transacting with MLF fully aware of its lack of
license to do business in the Phils., and in relation to those transactions had made payments
and the spouses are estopped to impugn MLF's capacity to sue them. The rule is that a party
is estopped to challenge the personality of a corp after having acknowledged the same by
entering into a contract with it. The principle is applied to prevent a person contracting with
a foreign corporation from later taking advantage of its noncompliance with the statutes,
chiefly in cases where such person has received the benefits of the contract.
PACIFIC VEGETABLE OIL V. SINGSON (G.R. No. 7917; April 29, 1955)
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Contrary to the findings of the trial court, the copra in question was actually sold by
the defendant to the plaintiff in the US, the agreed price to be covered by an irrevocable letter
of credit to be opened at the Bank of California, and delivery to be made at the port of
destination. It follows that the appellant corporation has not transacted business in the Phil
in contemplation of Sec. 68 and 69 which require any foreign corporation to obtain a license
before it could transact business, or before it could have personality to file a suit in the Phil..
It was never the purpose of the Legislature to exclude a foreign corporation which happens to
obtain an isolated order of business from the Phil., from securing redress in the Phil. Courts,
and thus, in effect, to permit persons to avoid their contracts made with such foreign corp..
The lower court erred in holding that the appellant corporation has no personality to
maintain the present action.
AETNA CASUALTY & SURETY CO. VS. PACIFIC STAR LINE (80 SCRA 635;
1977)
Aetna as subrogee of I. Shalom sued Pacific Star Line (PSL), the common carrier for
the loss of Linen & Cotton piece goods due to pilferage and damage amounting to
US$2,300.00. PSL contends that Aetna has no license to transact insurance business in the
Philippines as gathered from the Insurance Commission and SEC . It also argues that since
said company has filed 13 other civil suits, they should be considered as doing business here
and not merely having entered into an isolated transaction.
Based on rulings in Mentholatum and Eastboard Navigation, the Supreme Court held
that Aetna is not transacting business in the Philippines for which it needs to have a license.
The contract was entered into in New York and payment was made to the consignee in the
New York branch. Moreover, Aetna was not engaged in the business of insurance in the
Philippines but was merely collecting a claim assigned to it by consignee. Because it was not
doing business in the Philippines, it was not subject to Sec. 68-69 of the Corporation Law and
therefore was not barred from filing the instant case although it had not secured a license to
transact insurance business in the Philippines.
Topweld entered into 2 separate contracts with foreign entities: a license and
technical assistance agreement with IRTI, and a distributor agreement with ECED, SA.
When Topweld found out that the foreign corporations were looking into replacing Topweld
as licensee and distributor, the latter went to court to ask for a writ of preliminary injunction
to restrain the foreign corporations from negotiating with 3 rd parties as violative of RA 5445
(4).
Although IRTI and ECED were doing business in the Philippines, since they had not
secured a license from BOI, the foreign corporations were not bound by the requirement on
termination and Topweld could not invoke the same against the former. Moreover, it was
incumbent upon Topweld to know whether or not IRTI and ECED were properly authorized
to engage in such agreements. The Supreme Court held that both parties were guilty of
violating RA 5445. Being in pari delicto, Topweld was not entitled to the relief prayed for.
Stokely Van Camp Inc. filed a complaint against Banahaw, Antam, Tambunting and
Unicorn for the collection of a sum of money for failure to deliver 500 tons of crude coconut
oil. Antam et al asked for dismissal of case on ground that Stokely was a foreign corporation
not licensed to do business in the Philippines and therefore had no personality to maintain
the suit.
The SC held that the transactions entered into by Stokely with Antam et al (3
transactions, either as buyer or seller) were not a series of commercial dealings which signify
an intent on the part of the respondent to do business in Philippines but constitute an isolated
transaction. The records show that the 2nd and 3rd transactions were entered into because
Antam wanted to recover the loss it sustained from the failure of the petitioners to deliver the
crude oil under the first transaction and in order to give the latter a chance to make good on
their obligation. There was only one agreement between the parties, and that was the
delivery of the 500 tons of crude coconut oil.
If there is no assigned resident agent, the government official designated by law can receive the
summons on their behalf and transmit the same to them by registered mail within 10 days. This will
complete the service of the summons. Summons can also be served on any of the corporation's
officers or agents within the Philippines. (See Sec. 128; Rule 14, Sec. 12, Rules of Court. Note that
while Sec. 128 presupposes that the foreign corporation has a license, Rule 14 does not make such
an assumption.)
Note that if there is a designated agent, summons served upon the government official is not
deemed a valid process.
Johnlo Trading case holds that the service on the attorney of an FC who was
also charged with the duty of settling claims against it is valid since no other agent was duly
appointed.
General Corporation and Mayon investment sued Union Insurance and Firemen’s
Fund Insurance (FFI) for the payment of 12 marine insurance policies. The summons was
served on Union which was then acting as FFI’s settling agent in the country. At that time, it
was not yet registered and authorized to transact business in the Philippines.
Issue: Did the trial court acquire valid jurisdiction over FFI?
Yes. The service of summons for FFI on its settling agent was legal and gave the
court jurisdiction upon FFI. Section 14, Rule 7 of ROC embraces Union in the phrase, “or
agents within the Philippines”. The law does not make distinctions as to corporations with or
without authority to do business in the Philippines. The test is whether a foreign corporation
was actually doing business here. Otherwise, a foreign corporation doing business illegally
because of its refusal or neglect to obtain the corresponding authority to do business may
successfully though unfairly plead such neglect or illegal act so as to avoid service and
thereby impugn the jurisdiction of the courts.
(1) All claims which have accrued in the Philippines have been paid,
compromised and settled;
(2) All taxes, imposts, assessments, and penalties, if any, lawfully due to
the Philippine Government or any of its agencies or political subdivisions have been
paid; and
(3) The petition for withdrawal of license has been published once a week
for 3 consecutive weeks in a newspaper of general circulation in the Philippines.
(1) Failure to file its annual report or pay any fees as required by the
Corporation Code;
(6) Failure to pay any and all taxes, imposts, assessments or penalties, if
any, lawfully due to the Philippine government or any of its agencies or political
subdivisions;
(9) Any other ground as would render it unfit to transact business in the
Philippines.
In determining whether the constitutional provision requiring 60% Filipino capital for
corporation ownership of private agricultural lands, the Supreme Court has held that it is the
nationality of the constituents of the diocese, and not the nationality of the actual incumbent
of the office, which must be taken into consideration. Thus, where at least 60% of the
constituents are Filipinos, land may be registered in the name of the corporation sole,
although the holder of the office is an alien. This ruling is based on the fact that the
corporation sole is not the owner but merely the administrator of the property, and that he
holds it in trust for the faithful of the diocese concerned. (See Gana v. Roman Catholic
Archbishop of Manila, 43 O.G. No. 8, 3225; 1947)
In contrast to a corporation sole, religious societies are composed of more than one
person. The requirements for incorporation of such societies are set forth in Sec. 116 of the
Code.
(2) All the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by Title XII of the Code; and
Notes:
YES, provided that said corporation owns less than 2/3 of voting
stock or voting rights.
• Mining
• Oil
• Stock Exchange
• Bank
• Insurance
• Public Utilities
• Educational Institutions
• Corporations declared vested with public interest
Pre-emptive right Extends to all stock, including Does not extend to treasury
treasury shares (Sec. 102) shares.
Buy-back of shares Must be > par value (Sec. 105) May be < par value
When availed of For any reason (Sec. 105) Only the grounds
enumerated in Sec. 81 and
Sec. 42
Fair value of shares Must be > par or issued value May be < par or issued
(Sec. 105) value
• Whenever the SEC conducts any examination of the operations, books and
records of any corporation, the results thereof must be kept strictly confidential,
unless the law requires them to be made public or where they are necessary
evidence before any court. (Sec. 142)
• No right or remedy in favor of or against, nor any liability incurred by, any
corporation, its stockholders, members, directors, trustees or officers, may be
removed or impaired by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of the Code. (Sec. 145)