Corporation (2019) MIDTERM REVIEWER
GAVIOLA-CLIMACO
FEBRUARY 2, 2019
General Provisions-RECAP
CORPORATION, DEFINED
Section 2. Corporation defined
A corporation is an artificial being created by operation
of law, having the right of succession and the powers,
attributes and properties expressly authorized by law or
incident to its existence.
Attributes of a Corporation
1. An artificial being
2. Created by operation of law
3. Has the right of succession
4. Has the powers, attributes and properties expressly
authorized by law or incident to its existence.
1 | Artificial being
As an artificial being, it has a separate juridical personality.
It can enter into obligations and contracts, and when it has
liabilities, the corporation shall be liable but its members or
stockholders could not be held personally liable as they are
considered to be separate from the corporation itself.
Atty. GC: So how does this relate to the Doctrine of Piercing
the Veil?
(Based on Aquino book) Doctrine of Piercing the Veil of
Corporate Fiction:
Basic in corporate law is the principle that a
corporation has a separate personality distinct from its
stockholders and from other corporation to which it may
be connected. It is a fiction created by law with the intent
that it should be treated as true. However, under this
doctrine, the corporation’s separate juridical personality
may be disregarded when there is an abuse of the
corporate form. Whenever the doctrine applies, the
principal and the conduit will be treated as one; the
controlled corporation will be deemed to have, “ so to
speak, no separate mind, will or existence of its own, and
is but a conduit for its principal.” If applicable, “ the
corporation is merely an aggregation of persons whose
liabilities must be treated as one with the corporation.”
The conduit corporation will then be solidarily liable with
the principal.
S: It means that the veil or the artificial or separate
personality of the corporation is disregarded and that the
members or the stockholders thereof are made personally
liable because they are using the corporation as an alter ego
or an avatar(term used by Atty.) as a means to defeat public
convenience, justify a wrong, protect a fraud, defend a
crime, to commit injustice or as a vehicle for the evasion of
an existing obligation.
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ATTY.
2 | Created by operation of law
S: As we have discussed, a corporation is different from a
partnership for the latter can be formed by mere consent.
A corporation, however, is formed once it gains the
approval of the Securities and Exchange Commission.
Technically, a corporation needs to comply with the
necessary requirements set forth by law and from that, the
issuance of the Certificate of Incorporation follows which in
turn starts its corporate existence.
3 | Has the right of succession
(Based on Aquino book) Right of Succession or Perpetual
Succession:
Perpetual Succession is” that continuous existence which
enables a corporation to manage its affairs, and hold
property without the necessity of perpetual conveyances ,
for purposes of transmitting it. By reason of this quality, the
ideal and artificial person remains, in its legal entity and
personality, the same though frequent changes may be
made of its members.”
Blackstone on the concept of perpetual succession:
“All individual members that have existed from the
foundation to the present time, or that shall ever hereafter
exist, are but one person in law, a person that never dies; in
like manner as the River Thames is stiull the same river,
though parts which compose it are changing every instant.”
(char)
IOW, a corporation continues to exist even if there is a
change in those who compose it. Death of a shareholder or
a transfer of his shares will not dissolve it.
Atty. GC: When a stockholder transfers his share, does it
need the consent of the other stockholders just like in
partnership?
S: No. In the transfer or assignment of shares or rights in a
corporation, a stockholder does not need the consent of
the other stockholders because they own it in their own
right and as oppose to a partner in a partnership, it is
needed because of their highly fiduciary relationship.
Atty. GC: So as a general rule, a stockholder can transfer
his share in the corporation even without the consent of the
other stockholders.
Exception: If they expressly provide for a restriction on
transfers as reflected in their Articles of Incorporation.
4 | Has the powers, attributes and properties expressly
authorized by law or incident to its existence
S: It means that once a corporation is registered or has been
approved by the SEC, it can immediately perform the
Corporation (2019) MIDTERM REVIEWER
different obligations or exercise rights related to the
purpose for which it is formed.
KINDS OF POWERS
• Express powers: those authorized by law
• Implied powers: those incidental to its existence
Atty: But the implied powers must be only those that are
related to the expressed powers of the corporation. It
cannot be just anything implied, it has to be powers that are
directly related or incidental to the powers expressly
provided for by law. As a creature of law, its powers are
limited only to that, and anything done beyond that will be
considered “ultra vires” or an authorized.
CLASSIFICATION OF CORPORATION
Section 3. Classes of Corporation
Corporations formed or organized under this Code may
be stock or non-stock corporations. Corporations which
have capital stock divided into shares and are authorized
to distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the
shares held are “stock corporations”. All other
corporations are “non-stock corporations”
AS TO EXISTENCE OF STOCKS:
• Stock corporation - Corporations which have
capital stock divided into shares and are
authorized to distribute to the holders of such
shares dividends or allotments of the surplus
profits on the basis of the shares held.
• Non-stock corporation - It does not issue stocks
and does not declare or distribute dividends. They
are organized for non-profit purposes.
AS TO THE NUMBER OF COMPONENTS:
• Aggregate corporation - A corporation consisting
of more than one member defined as an artificial
body of men, composed of diverse individuals, the
ligaments of which body, the franchises and
liberties bestowed upon it, bind and unite all into
one, and consists the whole frame and essence of
the corporation. For corporation aggregate you
need to have at least 5 members or stockholders.
• Corporation sole - It consists of only one person or
member. As per Section 110 of the Corporation
Code, a corporation sole is one formed by the chief
archbishop, bishop, priest, rabbi, etc. For the
purpose of managing and ministering, as trustee,
the affairs, property and temporalities of any
religious denomination, sect, or church.
Atty. GC: Can you have a corporation with 3 corporators?
Ans: Technically, the corporation will not be dissolved if you
have 3 corporators but the law requires that you must have
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ATTY. GAVIOLA-CLIMACO
atleast 5 members in the board, and each member of the
board must have atleast 1 share. So, that non-compliant
corporation will be penalized by the SEC.
AS TO LAWS OF INCORPORATION:
• Domestic corporation - A corporation formed,
organized or existing under Philippine laws.
• Foreign corporation - A corporation formed,
organized, or existing under any laws other than
those of the Philippines and whose laws allow
Filipino citizens and corporations to do business in
its own country or state.
Atty. GC: So when we talk about domestic or foreign
corporations, what are we talking about specifically?
Ans: We are talking about the classification based on the
Law of Incorporation or the Place of Incorporation. It
answers the question as to where the corporation is
incorporated in order to call it as a “Domestic or a Foreign
corporation.” It does not speak about the citizenship of its
corporators.
Thus, it can be possible that you have a domestic
corporation but all of its stockholders are foreign. There is
no prohibition as to organizing a corporation that is 100%
foreign-owned except in cases of nationalized
activities/corporations.
AS TO NATIONALITY:
• Place of incorporation test: where the
corporation was created [Corporation Code]
o Domestic corporation: created in the
Philippines
o Foreign corporation: created abroad
• Citizenship of stockholders [Foreign Investment
Act]
o Philippine National: 100% owned by
Filipino citizens even if incorporated
abroad
o Foreign-owned corporation: majority of
stockholdings owned by foreigners, even
if incorporated in the Philippines
TESTS TO DETERMINE CITIZENSHIP OF STOCKHOLDINGS
APPLIES WHEN THE CORPORATION IS NOT 100% FILIPINO
OWNED
• Control test: at least 60% of the capital stock
outstanding and entitled to vote are owned by
Filipinos
• Grandfather rule: if the percentage of Filipino
citizenship is less than 60% then only the number
of shares corresponding to such percentage shall
be counted as Philippine nationality
Corporation (2019) MIDTERM REVIEWER
NARRA NICKEL V. REDMONT
The “Control Test” is still the prevailing mode of
determining whether or not a corporation is a Filipino
corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case,
in the 60-40 Filipino-equity ownership in the corporation,
then it may apply the “Grandfather Rule”
AS TO CITIZENSHIP OF THE STOCKHOLDERS:
• Philippine National
FOREIGN INVESTMENTS ACT OF 1991 (RA 7042), SECTION 3.
DEFINITION:
The term "Philippine national" shall mean a citizen of the
Philippines or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation
organized under the laws of the Philippines of which at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the
Philippines; or a trustee of funds for pension or other
employee retirement or separation benefits, where the
trustee is a Philippine national and at least sixty (60%) of
the fund will accrue to the benefit of the Philippine
nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and
Exchange Commission (SEC) registered enterprise, at least
sixty percent (60%) of the capital stocks outstanding and
entitled to vote of both corporations must be owned and
held by citizens of the Philippines and at least sixty percent
(60%) of the members of the Board of Directors of both
corporations must be citizens of the Philippines, in order
that the corporations shall be considered a Philippine
national;
• Foreign-owned corporation - those that don’t
qualify in the abovementioned definition
NATIONALIZED ACTIVITY
Determined by looking at the Foreign Investment Negative
List (FINL) which enumerates the activities which are
limited or reserved to Filipinos. It is a list of areas of
economic activity whose foreign ownership is limited to a
maximum of forty ownership is limited to a maximum of
forty percent (40%) of the equity capital of the enterprise
engaged therein. (pls. check Section 8 of RA 7042 or the
Foreign Investments Act of 1991)
If the activity is not listed, that activity can be performed by
a corporation which is 100% foreign owned even if
incorporated in the Philippines.
Nationalized Corporations are those that by Constitution
or by special laws are limited to Filipino citizens.
Eg. Natural resource exploration, development and use,
public utility corporations, land ownership, educational
institutions and advertising companies.
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ATTY. GAVIOLA-CLIMACO
[Atty. talks about foreigners and their attorneys’ erroneous
belief that they need Filipino stockholders to incorporate
in the Philippines.
Moral of the story: get rid of the notion that you need to
have citizenship in order to incorporate because to be an
incorporator all that is required is to be a resident. In fact,
only a majority needs to be residents.]
TAKE NOTE
A domestic corporation can be foreign owned. This
happens when a corporation is incorporated in the
Philippines but is composed of foreigners.
In the same way, a foreign corporation can be considered a
Philippine national when 100% of its capital stock or its
stockholders are Filipino citizens.
Atty: In order for a corporation to be considered as
Philippine National under the Control Test , what is the
requirement.
Student: Majority of its shareholder should have a hold of
shares with voting rights
Atty: What do you mean majority?
Student: In cases of like Nationalized Corporation there is
a particular percentage as to the requirement of the
Filipino
Atty: Let us talk Philippine Nationals in particular, when can
they be considered as a Philippine National if you have a
corporation which has a mixed of foreign and Filipino
Stockholders?
Student: They are considered a Philippine National ,when
the management and the control of business are held
majority of Filipino citizens
Atty: How do you insure that the managament and control
of the business will be controlled by Filipinos?
Student: Majority of its BOD are also Filipino citizens.
Atty: What do you mean by majority?
Student: All of its BOD are Filipino citizens because through
BOD it is the body in which a corporation can act.
Atty: So you apply control test, control test basically means
that in order to be considered as Philippine National the
corporation’s director must be Filipino citizens... that’s
what you read in the cases.
Student: As what I have read in the cases basing it there in
cases of like the nationalized businesses there was a
Corporation (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

requirement that 60 % of those holding shares with voting

rigts must be a Filipino citizens
Atty: And what do you call a corporation where 60% of its
shares outstanding and entitled to vote are held by Filipino
citizens?
Going back to the question , how do you determine a
Philippine National corporation using the Control Test?
Student: In determining the Philippine National using the
control test there should be at least 60% of the voting
shares that are held and own by Filipino citizens.
Atty: You have a coprporation which is organized in the
Philippines at least 60% of its capital stock outstanding and
entitled to vote should be own by Filipino Citizens in which
case that corporation become a Filipino national , so that
is control test if you have at least 60% ,so that is the control
tets but what happens when we have ( wala nipadayun si
atty nilahus na lang siya grandfather rule)
What about the grandfather rule ?
Student: It will apply supplementarily to the control test
because it is the prevailing test by the use of the
grandfather rule you disect or try to trace the corporate
structure or the equity structure in a particular corporation
so if ever there is one corporation which is to be created
and there is a possible corporation it is a it is required that
you should be able to assess how many or the percentage
the ownership of that particular investing corporation is
Filipino owned or foriegn owned to be able to determine
the nationality of the investee corporation
Atty: Give as an example of the application of the two tests
Student: In the case of Narra Nickel what happened here
was Redmont, a domestic corporation ,filed an action in
order to cancel or revoke the mineral production sharing
agreements between 3 corporations
Atty:What is that document? mineral production sharing
agreement or mpsa?
Atty:Redmont here try to apply for the same permits in
certain parts in Palawan but it new that these permits are
already distributed to the three corporations namely ,
Narra , McArthur and Tesoro and after that Redmont
claimed that these 3 corporations are disqualified from
having such mpsas because they are basically foreigned
owned thus contradicts the prohibitions provided for
under the constitution basically for the exploitation,
development and utilization of the natural resources
because it claims that these 3 corporations are controlled
by a 100% Canadian Corporation MBMI so with this regard
those mpsa should be revoked or cancelled. In this case the
major issues was the determination really of the nationality
of these three corporation.
Atty: So let us take one corporation of those three, the
Mcarthur Mining Corporation,what was the structure of
mcArthur Mining Corp.?
Student: Actually McArthur Mining had was qble to get its
mpsa from its predecessor SMMI.
Atty: What was the capital Structure of MMI?
Student: It has a capital structure of 10M and it is divided
into one , 10 thousand common shares at 1 thousand pesos
per share
Atty: and then what was the ownership structure
NARRA NICKEL V. REDMONT
The supreme court held that McArthur is a foreign
corporation because applying the grandfather rule it has to
account MBMI's shareholdings in MMC which in turn is a
shareholder of MMI. Applying the 60/40 foreign equity
requirement base on the Constitution, it is evident that
MBMI adding up his percentage of shares in MMC and MMI
it will exceed the 40 percent limitation.
Table 1. Share- Total Paid-up Total
McArthur holding Subscrib
s ed

Student:These are like permits which allow or authorizes MMC 1,997 5,997,00 825,000 59.97%
or allows a foreign corporation to exploit, explore or (Filipino) 0
extract minerals or do mining in certain portions of MBMI 3,998 3,998,00 1,878,17 39.98%
(Canadian) 0 4

Atty: conduct of mining activities, and conduct of mining

activities is what type of activity?
Student: A nationalized activity
Atty: A nationalized activity so under our constitution it can
only be done by corporations which are owned at least
60% by Filipino citizens so it is a nationalized activity.

Atty:So what happened?

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 Corporation (2019) MIDTERM REVIEWER
Table 2. MMC Share Total Subscribed
holdings
Olympic 6,663 shares @ 1K 6,663,000
MBMI 3,331 @ 1k 3,331,000
Equation:
1. Shares of MMC in McArthur x MBMI shares in MMC =
Indirect shares of MBMI in McArthur
2. Direct shares of MBMI with McArthur + Indirect shares
of MBMI in McArthur = Total shares to determine
compliance with foreign equity limitation
Applying in the case:
1. 60% x 33% = 19.8% or 20% is MBMI’s indirect shares in
McArthur
2. 40% + 20% = 60% which is a clear violation of the
foreign equity limitation.
CORPORATE LAYERING
• A type of arrangement whereby a corporation has
for its stockholder another corporation
• This is not a circumvention of the law. It is a valid
structure UNLESS it can be establish that it is used
to circumvent the law or the constitution
• Basis: Foreign Investment Act where it only
requires that the investee corporation and
investor corporation should be Filipino citizens at
least 60% of its outstanding stock entitled to vote
and its board of directors should compose at least
60% filipino citizens
Section 3. Definitions. - As used in this Act:
a) The term "Philippine national" shall mean a
citizen of the Philippines or a domestic
partnership or association wholly owned by
citizens of the Philippines; or a corporation
organized under the laws of the Philippines of
which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a
trustee of funds for pension or other employee
retirement or separation benefits, where the
trustee is a Philippine national and at least sixty
(60%) of the fund will accrue to the benefit of
the Philippine nationals: Provided, That where
a corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange
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ATTY. GAVIOLA-CLIMACO
Commission (SEC) registered enterprise, at
least sixty percent (60%) of the capital stocks
Paid-up Total
0 66.63
2.8M 33.31%
outstanding and entitled to vote of both
corporations must be owned and held by
citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of
Directors of both corporations must be citizens
of the Philippines, in order that the
corporations shall be considered a Philippine
national;
Summary of Narra Nickel Mining et. al v Redmont:
1. Apply Control Test
“at least sixty percent (60%) of the capital stock
outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of
the Philippines AND at least sixty percent (60%) of
the members of the Board of Directors of each of
both corporations must be citizens of the Philippines,
in order that the corporation shall be considered a
Philippine national; (as amended by R.A. 8179).”
If it FAILED: then it means it does not comply with 60-40
requirement and NO NEED TO APPLY THE GRANDFATHER
RULE because you already fell below the 60% requirement.
Automatically, it is disqualified and it is not a Philippine
National.
If it PASSED and there is NO DOUBT as to the BENEFICIAL
OWNERSHIP and CONTROL of the Corporation = stop here
If it PASSED however there is DOUBT as to the BENEFICIAL
OWNERSHIP and CONTROL of the Corporation = apply
GRANDFATHER RULE
What do you mean by “doubt”?
“Doubt” is any circumstance, which renders the beneficial
ownership and control of the corporation outside of Filipino
ownership. It is not when you fall below 60%.
In the Narra Nickel Case the following circumstances were
considered to establish doubt:
1. MBMI fully funded the joint ventures or ventures that
MMI will enter into. The fund of MMC actually came
from MBMI
Corporation (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

2. Foreign corporation practically provides all the the stockholdings of another foreign corporation to
technical support and supplies for that particular determine whether MMI is a Filipino corporation?
venture Atty Gavi: Yes, the law does not distinguish as to who the
3. Foreign corporation although has minor ownership in stockholder is. What the law looks into is the citizenship of
said corporation but it is the own who prepares its the stockholders. So as long as the stockholders of the
economic viability studies investor corporation (MMC) is still foreigner and if you are
4. During the pendency of the case the three petitioners going to apply the grandfather rule, then it is still
converted its MPSA application to an FTAA application. considered foreign ownership.
It confirmed that the petitioners did not have the Clarification: The SEC rulings were quoted by the SC but
capacity to be given the MPSA unless the SC really adopts those rulings, they are merely
guidelines, they are not black and white rules. I would like
WHERE DOES THE 60/40 RULE APPLY, Nationalized to maintain that you have to go the ultimate stockholders.
Activities: Unless the SC will rule on a specific case really saying to
1. Public Utilities apply only second layer or third layer but for me
2. Land Ownership grandfather rule means that you have to go to the ultimate
3. Mining Exploration stockholders.

Clarification: Where do we apply the 60% in order to determine the

For tax laws, there is different classification based on where nationality because there are different kinds of shares?
you earn the income, or based on your situs. I don’t think What shares are relevant in determining nationality of a
we based it on FIA or Corporation Law. There is different corporation?
classification under NIRC. The classification would depend
on the purpose. Gamboa vs. Teves, G.R. No. 176579, June 28, 2011
Examples: a. ) Whether or not this entity is qualified to
engage in a certain activity, then you are going to look at FACTS
the FIA classification. Another, b.) whether or not this entity
requires a permit with the SEC in order to engage business
in the Philippines, then you are going to look at the
Corporation Code classifications. Bottomline, depends on
the purpose.

The nationality classification based on place on

incorporation will be discussed later because around
section 60s pa sa Corpo code. It matters whether you are
domestic or foreign corporation as to whether or not you
are doing business in the Philippines because if you are
doing business in the Philippines and you re domestic 1) The Philippine Legislature granted PLDT the
corporation, you don’t need to get a permit anymore from franchise and right to engage in
the SEC, your certificate of incorporation is already telecommunications business.
sufficient but if you are a foreign corporation (you are not 2) The American company, General Telephone
registered in the SEC) if you want to do do business in the Electronics Corporation (GTE) which is a major
Philippines, you need to get permit from SEC to operate stockholder of PLDT,
either as a branch or a representative office. This 3) Sold 26% of its common shares to Philippine
classification is also important with regard to doing Telecommunications Investment Corporation
business in the Philippines. (will be further discussed later (PTIC).
on) 4) PTIC stockholders executed three deeds of
Place of incorporation whether domestic or foreign, assignment in favor of Prime Holdings, Inc. (PHI)
citizenship of the stockholding s as to what activities your which became the owner of 111,415 shares of
corporation can engage in, you look at the FIA. Philippine stock of PTIC.
national or foreign owned. In order to determine whether 5) Such 111,415 shares of PTIC held by PHI were
or not it’s a Philippine national or foreign owned, apply the sequestered by the PCGG which represent
control test. If there are no doubts, control test is sufficient. 46.125% of the outstanding capital stock of PTIC
If there are doubts on the ownership of the corporation that were later declared to be owned by the
based on facts and circumstances then you need to apply Republic of the Philippines.
the grandfather rule. 6) First Pacific which is a Bermuda-registered & HK-
Question: In the corporate structure of MMC it is not MBMI based firm acquired the remaining 54% of PTIC.
but another foreign corporation, would you still consider
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Corporation (2019) MIDTERM REVIEWER
7) Subsequently, Interagency Privatization Council
announced selling the 111,415 shares or 46.125%
of PTIC through a public bidding. Parallax won the
bid.
8) Thereafter, First Pacific as PTIC stockholder
announced to match the bid of Parallax to buy the
111,415 shares. However, it failed to do so.
9) Through its subsidiary MPAH, First Pacific entered
into a Conditional Sale & Purchase Agreement
with the government for the 111, 415 shares.
Since PTIC is a stockholder of PLDT, the sale by the
Philippine Government of 46.125% of PTIC shares is actually
an indirect sale of 12M shares or about 6.3% of the
outstanding common shares of PLDT. With the completed
sale, First Pacific common shareholdings in PLDT increased
from 30.7% to 37%, thereby increasing the shares of
foreigners to about 81.47% and thus violating the
constitutional limitation of foreign ownership of the capital
of a public utility.
Sec 11, Art 12 of the Constitution:
No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except
to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such
citizens of the Philippines.
The facts according to public respondents Finance
Secretary Teves, Undersecretary Sevilla, and PCGG
Commissioner Abcede: The HR Committee on Good
Government conducted a public hearing of the impending
sale and concluded that First Pacific’s intended acquisition
of the government’s 111,415 PTIC shares (see 9 in the
illustration above) resulting in First Pacific’s 100%
ownership of PTIC will not violate the constitutional limit
since PTIC holds only 13.847% of the total outstanding
common shares of PLDT.
Petitioner filed the instant petition for prohibition,
injunction, declaratory relief, and declaration of nullity of
sale of 111,415 shares and averred that the sale would
result in an increase in First Pacific’s common shareholdings
in PLDT from 30.7% to 37%, and this, combined with
Japanese NTT DoCoMo’s common shareholdings in PLDT
would result to 51.56% foreign shareholdings which is over
the 40% constitutional limit.
TN: First Pacific + Japanese NTT DoCoMo’s common
shareholdings = 51.56% foreign shareholdings
Is PLDT in compliance with the constitutional requirement
of the 60% capital which must be owned by Filipino
Citizens?
The contention of the petitioner
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ATTY. GAVIOLA-CLIMACO
It is not compliant because when you say capital, you have
to look at common shares only. If that is the basis,
foreigners already own 80% which is beyond the 60%
limitation.
The contention of respondent
If you look at all the outstanding shares, the 80% ownership
in common shares of the foreigners will only be around 17%
of the pie. Hence, PLDT is compliant since this is below 60%.
ISSUE:
Does the term "capital" in Section 11, Article XII of the
Constitution refer to common shares or to the total
outstanding capital stock (combined total of common and
non-voting preferred shares)?
RULING
We agree with petitioner and petitioners-in-intervention.
The term "capital" in Section 11, Article XII of the
Constitution refers only to shares of stock entitled to vote
in the election of directors, and thus in the present case
only to common shares, and not to the total outstanding
capital stock comprising both common and non-voting
preferred shares.
The Supreme Court looked into the definition of Capital
under the Law. Under FIA, which governs foreign
investments in the Philippines, Capital is considered 60% of
the capital stock outstanding and entitled to vote.
Capital was explained through differentiating common
from preferred shares of PLDT. SC said that the shares that
foreign nationals own was already in violation of the
Constitutional requirement.
First, the foreigners owned 64% of the common shares.
Common shares include the sole, exclusive right to vote in
the election of directors. Thus, when they are such
conferred with that right, they are already in control and in
management of the corporation.
However, Filipinos only owned 35% of the PLDT’s common
shares. As between the holdings of the Filipino citizens and
foreign nationals in terms of common shares, the latter
have the superiority. In preferred shares, the Supreme
Court described them as mere investors who do not have
the right to vote in the election of directors and officers.
The preferred shares of PLDT is owned by 99% Filipinos.
Thus, they do not have the voting rights—they cannot
control, manage or participate. However, the rest are
already owned by the foreigners.
Compliance with the required Filipino ownership of a
corporation shall be determined on the basis of outstanding
capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.
Corporation (2019) MIDTERM REVIEWER
For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full beneficial
ownership of the stocks, coupled with appropriate voting
rights is essential. Thus, stocks, the voting rights of which
have been assigned or transferred to aliens cannot be
considered held by Philippine citizens or Philippine
nationals. Individuals or juridical entities not meeting the
aforementioned qualifications are considered as non-
Philippine nationals.
Gamboa vs. Teves, G.R. No. 176579, October 9, 2012
FACTS:
The lawyers of PLDT felt that they were disadvantaged by
this decision, because now it is not based on total
outstanding stock, but on the common shares. They filed a
Motion for Reconsideration brought by the foreigners and
their lawyers who were insisting on the total outstanding
capital stock.
ISSUE
Whether or not the MR should be granted
RULING
No. SC denied the MR.
(...but according to Atty G: The SC now realized that their
ruling in the First Gamboa v. Teves case actually narrowed
down the definition of capital. Because of the MR, the SC
revised their ruling although they did not admit that they
revised it. They just maintained that this it was their ruling
all along. But it’s not true because they said “entitled to
vote in the election of directors.” According to them, what
they focused on is on the pronouncement “that mere legal
title is not sufficient, but full beneficial ownership.” )
Since a specific class of shares may have rights and
privileges or restrictions different from the rest of the
shares in a corporation, the 60-40 ownership requirement
in favor of Filipino citizens in Section 11, Article XII of the
Constitution must apply not only to shares with voting
rights but also to shares without voting rights. Preferred
shares, denied the right to vote in the election of directors,
are anyway still entitled to vote on the eight speci􀀾c
corporate matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a
mixture of common and preferred non-voting shares, at
least 60 percent of the common shares and at least 60
percent of the preferred non-voting shares must be owned
by Filipinos. Of course, if a corporation issues only a single
class of shares, at least 60 percent of such shares must
necessarily be owned by Filipinos. In short, the 60-40
ownership requirement in favor of Filipino citizens must
apply separately to each class of shares, whether common,
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ATTY. GAVIOLA-CLIMACO
preferred non-voting, preferred voting or any other class of
shares.
Moreover, such uniform application to each class of shares
insures that the "controlling interest" in public utilities
always lies in the hands of Filipino citizens.
Philippine Nationality of Corporations
Sec 3(a) of the Foreign Investments Act provides, “The term
"Philippine national" shall mean a citizen of the
Philippines;or a domestic partnership or association wholly
owned by citizens of thePhilippines; or a corporation
organized under the laws of the Philippines of which at least
sixty percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the
Philippines;...”
The second ruling expanded the first ruling. They said that
it must apply to all types of shares—voting or non-voting.
Common shares must have 60-40 shares, preferred shares
60-40 limitation applies as well. You apply it separately. You
don’t apply it on total outstanding shares, like what PLDT
wanted in their MR. The SC wanted it more strict. SC said
that it must apply not just those entitled to shares but to
each type of shares—whether voting or non-voting, class A,
class B…
(sa IBL ni) Atty Gaviola: That interpretation for me is the
correct interpretation because when the law says
outstanding capital stock entitled to vote, this is very
general. You cannot say that preferred stocks are not
entitled to vote. General rule is that if the articles are silent,
preferred stocks are entitled to vote in the election of
directors. Only when they are deemed to be non-voting
expressly can they be deprived of their right to vote but
only in the election of directors. For all the 8 other items
enumerated in the corporation code, they are required to
vote.
So where do you apply the 60%?
60% voting shares or 60%total outstanding shares?
The lawyers of PLDT were insisting that you should apply
based on total outstanding shares because these are the
lawyers representing the foreign stockholders of PLDT. If
you apply it based on total outstanding shares, PLDT’s total
outstanding shares, more than 70% of its outstanding
shares were preferred non-voting shares and majority of
that almost 99% were owned by Filipino citizens. On the
other hand, the common stockholdings, the voting shares
were only around 20+% but majority of that were owned by
foreigners.
Do we apply it to common or do we apply it to the total?
If in common, it would mean PLDT should not own a utility
franchise because more than 60% of its voting shares are
Corporation (2019)
owned by foreigners. But if we apply it on total outstanding,
then that’s okay because more than 60% of its total
outstanding are owned by Filipinos.
GAMBOA CASE-decision
MEANING: TOTAL CAPITAL STOCK OUTSTANDING &
ENTITLED TO VOTE : ON THE ELECTION OF DIRECTORS
1:18:00-1:33:00
Control Test:
You need to have 60 % in your outstanding capital stock
entitled to vote should be owned by Filipino Citizens
Now the question is , what is meaning of “60 %
outstanding capital stock & entitled to vote?”
Summary :
Gamboa Case: 60 % should be based on the total shares
entitled to vote in the election of directors
Gamboa Resolution: Based on each class of shares
regardless if voting or non-voting :apply it to each class.
SEC: total voting shares entitled to vote on the election of
directors & total outstanding shares whether voting or
not.
Ans: Base on the Gamboa case, when you say total capital
stock outstanding & entitled to vote, it means the Total
capital stock outstanding and vote (Election of directors).
IOW: apply the 60 & on the capital stock entitled to vote in
the election of directors:
Ans: So basically, what you classify as voting shares are
those shares entitled to vote in the election of directors.
GAMBOA CASE- resolution
MEANING: TOTAL CAPITAL STOCK OUTSTANDING &
ENTITLED TO VOTE : VOTING OR NON VOTING SHARES
Atty: While on the MR , what happened?
Ans: In the MR, the Supreme Court appeared to have said
that no, you DON’T just apply it JUST TO THE CAPITAL
STOCK ENTITLED TO VOTE IN THE ELECTION OF THE
DIRECTORS, BUT YOU APPLY IT TO EACH CLASS OF SHARES
WHETHER VOTING OR NON-VOTING.
Atty: What was the basis of this rule by the Supreme
Court? Why did it say that Total Capital Stock Outstanding
and entitled to vote means voting / non voting shares?
Ans: Because according to the Supreme court, there is no
such thing as Non-voting shares because there are still
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instances that even non-voting shares are entitled to vote.
( See list enumerated in Sec. 6 of Corporation Code)
Atty:All the items listed there are the circumstances where
even the non-voting shares are required to vote. SO
basically, in the MR it tells us that under the Corporation
code, there is no true non-voting shares although we say
voting and non-voting shares , even non- voting shares are
required to vote in certain instances.
So the SC said, that being the case then we apply the
60- 40 rule in each class of shares whether non-voting or
not. In the case of PLDT, 60 % of the Common and on top
of that 60 % of the preferred non-voting must also be
owned by , Filipino Citizen.
So now, that cause a lot of confusion, since basically it
contradicted the first SC Gamboa Decision, so what
happened next?
Ans: SEC clarified how to apply the 60-40. There are 2
classes, first the total outstanding which is entitled to vote
( Election of the BOD) second, total outstanding shares
regardless if it’s voting or not voting.
Atty: So here comes the SEC coming out on its own rules ,
which was not based on the First Gamboa Case neither
was it base on the Gamboa Resolution. SEC: total voting
shares entitled to vote on the election of directors & total
outstanding shares whether voting or not. So nagpalahi
sad ang SEC. So what happened next?
Ans: In the case of Roy, the petitioners files a case
questioning the validity of the Memorandum circular and
the basis is that the Memorandum circular is not
consistent with the final Gamboa ruling which said that it
should be applied to each class of shares. Lain-lain naman
ug interpretation Class.
Example. 200 shares outstanding,
100- voting shares
100- non-voting
Gamboa Decision:
60 % of the shares entitled to vote in the election of
directors must be owned by Filipino Citizens ( refers to 100
voting shares lang) non-voting and shares outstanding
(NOT IMPORTANT)
200 SHARES OUTSTANDING
100 -VOTING
100-NON VOTING
Corporation (2019)
Gamboa Reso:
Its not just the shares entitled to vote in the election of
directors , because the law says TOTAL OUTSTANDING
AND ENTITLED TO VOTE, and under the corporation code
there are really no non-shares cause even the non-voting
shares are required to vote in certain circumstances.
Meaning it should be applied to each class of shares.
200 SHARES OUTSTANDING
100 - VOTING
100 - NON VOTING
SEC: 60 % of the voting: entitled to vote in the election of
directors & 60 % of the total outstanding capital stock ,
meaning if you have 60 of the voting but 0 % of the non-
voting under the SEC test you will not pass because you
only have 60 of the total outstanding shares.
Atty: Which will prevail?
Ans: The prevailing rule is the SEC. The SC said that in the
Roy case, basically everything of the discussion in the
Gamboa Reso is a mere Obiter. And the prevailing rule is
still the Gamboa Decision That the 60 % should be based
on the Total Capital stock entitled to vote on the election
of directors. But since the SEC requirement is more
stringent because it does not look at the total voting but
also takes a look at the total outstanding capital , then it
SEC memorandum Circular is VAlid. So as long as the
memorandum circular exist that is the prevailing rule. The
SC upheld is because it’s in accordance with our Gamboa
Deicsion ruling in fact it is more stringent than the
Gamboa Deicion. Second GAmboa ruling, does not matter
because it’s just all Obiter. All the hours that you spend
analyzing the Gamboa Reso is a mere obiter.
AS no nationality , you can have the place of the
corporation , citizenship of stockholders. Which
classification you apply, it depends on what’s the purpose.
If it’s a matter on “can the corporation do business?” and
to secure a permit, then you take a look at the place of
incorporation . If it a question on what activity can that
corporation engage in?” Look at the Citizenship of the
stock holders and you apply the foreign investment act.
How do you determine nationality base on the FIA?
Apply the Control test: 60 % of the Capital stock
outstanding and entitled to vote must be owned by
Filipino Citizen.
If there is corporate layering
60 % of both the investor and investee if outstanding
capital stock and entitled to vote must be owned by
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MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
Filipino Citizens & 60 % of the directors both corporation
must be Filipino citizen. In which case, your corporation is
Philippine national .
Can you have a Philippine national that is domestic?
Ans: Yes,
Can you have a Philippine national that is foreign?
Ans: Yes, because Philippine national at least 60 %. Foreign
here in the Philipines since incorporated. But it could still
be considered as Filipino if composed of 100 & Filipino.
Can you have a foreign corporation that is domestic?
Ans: Yes, because, incorporated here but less than 60 %
Filipino owned.
What are the other classifications?
As to legal status:
De jure corporation- one that is organized in accordance
with the requirements of law, a validly existing corporation;
De facto corporation- a corporation where there exists a
flaw in its incorporation. These three elements must exist
In order for a corporation to be considered as de facto:
a. There must be a valid law under which the
corporation may be incorporated;
b. There must be an attempt in good faith to
incorporate;
c. There must be an exercise or use of corporate
powers
There is also a corporation by estoppel where there is a
group of persons holding itself out in the public as a
corporation and it enters into a contract with third persons,
thus they cannot deny their existence to those persons. The
persons making the corporation by estoppel is solidarily
liable. They are liable as an association because they are
not considered as a corporation. They are estopped from
claiming that they are not a corporation but their liability is
individual.
Corporation by prescription- it is not formally organized as
a corporation as such but has been duly recognized by
immemorial usage as a corporation, with rights and duties
enforceable under the law.
As to function:
Public Corporation: a corporation organized for the
government of a state for the purpose of serving general
good and welfare.
Private Corporation: a corporation formed for some private
purpose, benefit aim or end.
As to manner of creation:
Corporation created by Special law - a corporation directly
created by Congress through a special law.
Corporation (2019) MIDTERM REVIEWER
Corporation created under a General law- a corporation
created under the Corporation Code of the Philippines or
the old Corporation Law.
As to whether they are for religious purposes or not:
Ecclesiastical corporation or one organized for religious
purposes. Under the Code, religious corporations are
classified into corporations sole and religious societies.
Lay corporation or one organized for a purpose other than
for religion. Lay corporations, in turn, may be either
eleemosynary or civil.
As to whether they are for charitable purposes or not:
Eleemosynary corporation or one established for or
devoted to charitable purposes or those supported by
charity; or
Civil corporation or one established for business or profit,
i.e., with a view toward realizing gains to be distributed
among its members.
As to their relation to another corporation:
Parent or holding corporation or one which is so related to
another corporation that it has the power, either directly or
indirectly, to elect the majority of the directors of such
other corporation;
- So basically a parent corporation controls the
other corporation.
Subsidiary corporation or one which is so related to
another corporation that the majority of its directors can be
elected either directly or indirectly by such other
corporation. it is one in which another corporation owns at
least a majority of the shares and thus has control; or
Affiliated corporation or one related to another by owning
or being owned by common management or by a long term
lease of its properties or other control device.
What are the components of a corporation?
1. Incorporators- The persons who first formed the
corporation.
- Under the Corporation Code, there must be
atleast 5 persons and they must not exceed 15,
they must be of legal age, majority of them must
be a resident of the Philippines, each of them must
atleast own 1 shares of stock.
2. Corporators- they are the stockholders of the
corporation
What is the relationship between an incorporator as against
a corporator?
- Incorporators are always corporators, but
corporators are not always incorporators because
incorporators refer only to those persons who first
formed the corporation and signed the Articles of
Incorporation. Some incorporators stop being
corporators after they sell their share but they
never stop being incorporator because their name
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ATTY. GAVIOLA-CLIMACO
will remain in the Articles of Incorporation of the
corporation.
A: Going back to my question, who makes up the
corporation?
S: First is the corporator and second is the incorporator
A: So again the corporators are different from the
incorporators. Corporators may be incorporators.
Corporators make up the corporation. These are basically
persons who are holding the capital stocks or the members
of the corporation if it is a non-stock corporation.
Corporators are the stockholders or members of the
corporation. This comprises the general population.
Corporators may be incorporators. These incorporators are
a special brand of people because they first formed the
corporation by signing the articles of incorporation. Not
necessarily that they first formed the corporation because
a person or an entity may be one of the first stockholders.
Are we clear? So who else are corporators? What’s the
difference between a corporator and a shareholder?
S: Under the law, in order to be an incorporator, you have
to be a stockholder but not all stockholders are
incorporators.
A: Then we also have members for non-stock corporations.
So who else make up the corporation?
S: Promoters who bring about the formation of the
corporation.
A: Yes, they bring about the formation but they are not
necessarily part of the corporation. Who else make up the
corporation?
S: The Board of Directors or Trustees.
A: Trustees in case of non-stock corporation. Who else?
S: Underwriters?
A: What is their role? If the corporation intends to list its
shares or to issue its shares to the public, then you will need
to have an underwriter. So the role of the underwriter is to
guarantee the sale of the securities to be issued by the
offeror corporation such that if the sales are not sold the
underwriter undertakes to purchase the remainder. So an
underwriter is not necessarily part of the corporation. They
can become part of the corporation if they become
stockholders by purchasing the shares but their
undertaking as an underwriting is separate from the
components of the corporation. So who else makes up the
corporation?
S: I think subscribers.
A: Subscribers are also the stockholders of the corporation,
the only way that the subscriber cannot be a subscriber of
the corporation is if the authorized capital stock of the
corporation is not sufficient to cover the subscription in
which case you will be a subscriber but you will not be a
stockholder because the corporation does not have enough
shares. So when do you become a stockholder is when the
corporation gets a permit from the SPC (not sure) to
increase their authorized capital stocks. So in general,
subscribers are stockholders because you don’t need to
fully pay your subscription to become a stockholder. The
Corporation (2019)
moment you subscribe you start to enjoy the rights of a
stockholder. So who else make up the corporation?
S: president, vice-president
A: So third component are your officers. Who are your
required officers?
S: President, Corporate Secretary and Treasurer
A: So you have the President, Corporate Secretary and
Treasurer. Those are the officers required under the law.
The corporation may add more positions under its by-laws.
So these are the components of the corporation. As we said
a corporation is just an entity created by legal fiction. It has
no body. It is not something that’s tangible but the people
making up the corporation are the corporators. They can be
an incorporator if they sign the articles of incorporation or
they can be the shareholders or members, meaning owning
the shares of stock of the corporation. Then you have the
governing body of the corporation which is your Board of
Directors. By the way what is the basic requirement to be
elected as a director? The director must own at least one
share and the third component is your officers.
Understood? Questions?
Atty then calls another student.
A: So corporations under the Corporation Code are of two
kinds. What are these again?
S: A stock and a non-stock corporation
A: And how do you distinguish both?
S: The stock corporation is one where the capital is divided
into shares and it is incorporated for the purpose of profit
and distributing such profit to its stockholders. Non-stock
corporations are all other corporations which are not
classified as a stock corporation. It is one where no part of
its income is distributable as dividends to its members,
trustees, and officers.
A: So what do you mean by stock? Not a stock corporation
but stock.
S: wrong answer si student
A: It is a unit of division of the capital stock of the
corporation. So you have the total capital stock. It is divided
into shares so each unit is what we call a stock or a share
and what does this represent?
S: It is a share of the obligation on the part of the
shareholder.
A: What if the share of stock is fully paid?
S: If it is fully paid, then it forms part of the capital of the
corporation.
Atty. Gavi: So you mean if the share is not paid, it’s not
capital?
S: it actually is capital even if it’s not fully paid it still forms
part of the capital of the Corporation, only that it is a
liability on the part of the shareholder if it’s not yet paid.
Atty: Gavi: So what if it’s fully paid?
S: it forms part of the subscribed capital stock.
Atty. Gavi: So if it’s not fully paid it does not form part of
the subscribed capital stock?
S: the subscribed capital stock actually comprises both the
fully paid and not fully paid so not the entire subscribed
capital has to be fully paid.
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Atty Gavi: What does the shares of stock represent? Does
the definition of share of stock matter whether if it is paid
or unpaid?
1. It represents the interest or right of the
stockholder in the management of the corporation
through the exercise of the voting right;
2. It represents the interest of right of the
stockholder in the earnings of the corporation in
the form of the dividends to be distributed; and
3. It represents the interest or right of the
stockholder in the residual assets of the
corporation upon dissolution.
NB: Stockholders as a general rule do not have a right to the
earnings of the corporation. It’s not a matter of right, the
earnings only become a matter of right once it is declared
by the board of directors as dividends. So the share of
stock represents your share in the corporation in the form
of dividends.
Going back, what is a share of stock?
• It is unit in which the capital of the corporation is
divided.
Example: you have 1M capital divided into 1M shares, that
means that your capital is divided into 1M parts and each
share represents 1 part.
What does this part give to the shareholders? (The 3
enumerated above.)
Shares of stocks are therefore an asset on the part of the
shareholder. It is an intangible asset representing its right
and interest in the corporation.
So shares of stock represents a division of a unit of the
capital of the corporation, so what are the types of capital
that a corporation can have?
S: 1.) Authorized Capital Stock (ACS): the amount of stock
indicated in the articles of incorporation and the
corporation is authorized to issue;
Atty. Gavi: So this is your basic capital, a corporation cannot
issue more that its authorized capital. If you want to issue
more, you have to amend your articles of incorporation to
increase your authorized capital stock. After your
authorized capital stock you have your?
S: 2.) Subscribed/Issued Capital Stock (SCS): (inaudible)
3.) Paid up capital: represents the amount of the subscribed
capital which are actually paid by the subscribers or the
stockholders.
4.) Unsubscribed/Unissued Capital Stock: the difference
between the ACS and the SCS
5.) Outstanding Capital Stock
Outstanding capital stock is the portion of the capital stock
which is issued and held by persons other than the
corporation itself.
Treasury stock – which have been issued by the
corporation, but are no longer outstanding because they
have been acquired by the corporation
subscription - buying shares from the unissued capital stock
of the corporation
Corporation (2019)
subscription agreement - document issued in subscription
deed of assignment= document from buying from issued
stock of the corporation (deed of assignment is for
intangible asset)
subscription agreement - a primary offering to purchase
from the unissued capital stock
secondary offering, you purchase from the existing
subscribed capital stock is a deed of assignment
Illustration:
A newly established corporation with authorized capital
stock of 10 million divided into 1 million shares at 10P per
share.
Out of the 10 million, 5 million is subscribed, the remaining
5 million is the unissued, meaning, there are no buyers yet
. If it is subscribed there must be an existing subscription
agreement over these shares. Meaning, these shares have
been purchased
Out of the 5 million subscribed, 4 million is paid, this is the
paid up capital stock
so, therefore, the corporation has an unissued stock of 5
million. Supposing the corporation repurchased/reacquired
1 million shares from the shareholders, the 1 million are the
treasury shares. These treasury shares remain subscribed
and issued because somebody already paid for it. Even the
corporation that reacquired it, paid for it. But they are no
longer outstanding capital stock.
Therefore, the outstanding capital stock is 4 million.
There’s no difference in the right of stockholders who have
paid or have not yet paid their subscription. They’re all
entitled to the same right, even the right to the dividends.
Only when your shares are declared as delinquent will be
the time that you stop enjoying stockholder rights. So as
long as you’re not declared as delinquent, even unpaid, you
are considered as a stockholder.
What about legal capital? This is how it goes. We’re talking
here about the capital contribution. But financially, capital
is not just the financial contribution. It includes the earnings
in the corporation in the form of retained earnings. So
assets-liabilites, that composes your legal capital. But this
term is not really used here in the Philippine practice.
What is the status of treasury shares? Treasury shares are
not retired shares. They do notrevert to the unissued shares
of the corporation but are regarded as property acquired
by the corporation which may
be reissued or resold by the corporation at a price to be
fixed by the board of directors.
are treasury shares the same as unissued shares? No.
When do you consider shares as retired? These are the
shares which the corporation reacquires with no intetntion
of reissuing. And when that happens, you decrease your
authorized capital stock. You go the SEC, and apply for a
reduction of your authorized capital stock. And it is not easy
because you have to have the consent of all your creditors.
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MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
Why? because of the trust fund doctrine. Meaning, the
capital of the corporation is the trust fund for its creditors.
When you retire your shares, you decrease your authorized
capital stock. When you acquire treasury stock, does that
mean, that you decrease your authorized capital stock? No.
Going back to the illustration, when there was a treasury
stock acquisition of 1million, does that mean that your
authorized capital stock is now only 9million? No. your
authorized capital stock remains at 10 million pesos
because treasury shares are not retired shares. They are
still part of the issued capital of the corporation, but no
longer outstanding. The corporation now has the option of
reissuing that share or retiring them. But to retire them
you need to go to the SEC and get an amendment of your
articles of incorporation.
These treasury shares also do no revert to unissued capital
stock. So just because you acquired 1 million treasury stock,
it does not mean that your unissued is now 6 million.
Instead, it remains 5 million. This is part of issued, but no
longer outstanding.
Question from class: for treasury stocks, does that entitle
the corporation to dividends? No. the corporation cannot
declare dividends on its own treasury shares, nor can the
corporation have the right to vote by virtue of these
treasury shares. Although the treasury stock forms part of
the assets of the corporation, the corporation does not
become a stockholder of itself by purchasing treasury
shares.
You cannot reissue retired shares but you can reissue
treasury shares.
Requirements before a corporation can purchase its own
shares
1. The corporation must have surplus profit
T: What do you mean surplus profit?
S: Surplus profit is unrestricted retained earnings.
T: And what is unrestricted retained earnings again?
S: Retained earnings that can be used by the corporation to
repurchase the shares of stocks.
T: What does retained earning represent?
S: Retained earning represent the cumulative net earnings
and profits of the corporation.
T: Okay, so this represents, your retained earnings
represents the earnings of the corporations which have not
been declared as dividends. So, the rule under the
corporation code which provision is it that provides for
retained earnings? Rule on when you can purchase treasury
shares?
S: Section 9, Atty.
Corporation (2019) MIDTERM REVIEWER
T: Section 9 defines treasury shares. But the section which
provide on the rule that defines how you can purchase
treasury shares is section?
S: Section 41, Atty.
T: What does section 41 say?
S: Section 41. Power to acquire own shares. - A stock
corporation shall have the power to purchase or acquire its
own shares for a legitimate corporate purpose or purposes,
including but not limited to the following cases: Provided,
That the corporation has unrestricted retained earnings in
its books to cover the shares to be purchased or acquired:
T: So what is the requirement before may acquire their own
shares?
S: That the corporation has unrestricted retained earnings
in their books to cover the shares to be purchased.
T: Corporations can only have treasury shares as long as
they have unrestricted retained earnings. So it’s not a
simple matter to acquire treasury shares. The requirement
for treasury shares is that it can only be acquired as long as
the corporations has unrestricted retained earnings.
Questions? So do you understand this class? The concept
from authorized capital to treasury shares to retired
capital? Are we okay here? Yes?
S: Atty, is redeemable shares treasury shares in the sense
that (inaudible) kay diba its buying back or purchasing
back?
T: Not so. Any other questions? Yes.
S: Regarding treasury shares, earlier we said that example
the 1M and 500K.
S: We said that the entire 1M would be considered as the
treasury shares if the company buys it back. BUt what does
it mean in section 9 which says Treasury shares are shares
of stock which have been issued and fully paid for, does that
mean “fully paid for by the company and redeeming such
share” or “fully paid for by the subscribers”?
T: Okay, as I mentioned on the delinquency shares, it’s not
a simple matter of buying it back the treasury shares
because there is a process. So when you don’t fully pay,
okay the meaning in section 9 is that it doesn’t have to be
fully paid by the subscriber, although as a general rule, that
is what you need, it has to be fully paid. But if the shares
are delinquent, you have to go through the process of doing
a public bidding. So the first time, this is already advance,
we will be discussing this later on, but the procedure is, if
the directors already make a call for payment, and the
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ATTY. GAVIOLA-CLIMACO
subscribers still does not pay, the shares are declared as
delinquent. So what happens if there will be public bidding.
Now if based on the public bidding, no one will bid on the
shares, then the corporation is allowed to acquire the
shares. But in acquiring the shares, the corporation is
deemed to have paid for the shares. Do you understand?
So, in a sense, the treasury shares are fully paid. So, this is,
later on pa man ta ni siya noh, pero you asked me this is
how it works. When you subscribe shares, let’s say 1M, (…..)
1M imung subscription, one rule that you have to learn
about subscription is that subscription is indivisible.
Indivisible xa. So that when it becomes delinquent, you
cannot say that I will just get the part that I paid and then
bahala na ang corporation for the part that I did not pay. It
does not work that way. In fact, the corporation code says,
that if your shares are not fully paid, you cannot sell them.
Do you understand? You cannot sell your shares which are
unpaid. If you want to do that, there is a way but it is not an
outright sale of the unpaid shares. You are not selling the
shares. You are going to sell your right to the subscription.
But d nimu xa pwede (inaudible). It’s all or nothing. Do you
understand? So, 1M, let’s say you paid is 70%, 700K, so
300K remains unpaid. But you are considered as a
stockholder for the whole 1M. Do you get that? So now,
based on your subscription, if the directors make a call for
payment, and you did not pay, the directors will render
your entire subscription delinquent. They will not say nga
delinquent na ka for 300. Get it? So you are delinquent for
the entire 1M even if nakabayad na ka ug 700. Now, again,
we go to public bidding, there’s publication, etc. etc. If no
one will buy, I think up to third publication or public bidding,
if no one will buy, then the corporation has that option to
buy the delinquent shares. But the full 1M. Now, when the
corporation buys back the subscription, that means it now
owns the 1M.
Regardless of the nomenclature, as to how the shares are
called in the AOI, if the difference in the characteristics are
not expressly provided in the Articles, all shares are
considered equal. You remember there was one question
that I asked in my IBL class, there was a question if you
remember on FIA, common shares owned by Filipinos,
preferred shares owned by foreigner, something like that,
and the question was “Can this corporation apply for a
public utility franchise?”, but the question was silent as to
whether the preferred share was voting or non-voting. So
the presumption is voting. Presumption is since there was
no express provision as to what kind of preferred share it
was, the presumption is voting. That’s the Doctrine of
Equality of Shares. So when it comes to the exam, and you
are faced with common or preferred but there is no
distinction, then you have to cite the Doctrine of Equality of
Shares.
Who has the power to classify the shares of the
corporation? Incorporators and the corporators.
Corporation (2019)
How? The incorporators have the power to classify while
making/drafting the AOI while the corporators can amend
the AOI.
Only the corporators can amend? Also the BOD.
How does the amendment work? By the BOD voting and
corporators. (Stockholders nalang para simple).
When the corporation is established, then the
incorporators will set the characteristics of the shares of
stock of the corporation. So they are the ones who initially
establish the rights and obligations of the shares. Now,
after the establishment of the corporation, can you still
reclassify the shares? Yes. Who has the power to do so? It’s
the BOD and the stockholders. So the BOD has to make the
proposal, approved by the majority of the Board, and then
it has to be ratified by the stockholders. Both of them
working together. Can amend the classification or
characteristics of shares.
What are the classes of shares? The classes of shares are
the common shares which are the basic shares issued by
the corporation. Preferred shares are those shares which
are specified in the AOI that the preferred shares have
preference over the distribution of assets in case of
liquidation and preference in the distribution of dividends.
So the two basic classifications of shares are common
shares and preferred shares. Common shares are the basic
shares issued by the corporation. You cannot have a
corporation that has no common shares.
If the stockholders or the incorporators want to give
preferred shares, they can do so. If specified, the
preference can be as to distribution of dividends and
distribution of assets in case of liquidation.
What are the type of preferred shares based on preference
as to dividends? Cumulative or Non -Cumulative preferred
share. Participating or Non-Participating Preferred Share.
So, what’s cumulative or non cumulative? Cumulative –
right to dividends in arrears.
What do you mean by dividends in arrears? It means that
for every year that the company did not declare dividends,
each cumulative preferred shareholder will have an interest
in those undeclared dividends.
Meaning if I am the holder of cumulative preferred share, I
am entitled to the dividends which are declared this year.
And next year, when there is another declaration, I am
entitled to next year as well as this year? For every year that
the company did not declare dividends, you are entitled for
the..
Can you just illustrate (nalang)? So that it will be easier.
How does it work?
Give us (nalang) concrete examples. For example, for the
year 2017, the corporation did not declare dividends. You
are not entitled because the corporation did not declare for
that year. For 2018, still the corporation did not declare
dividends, but in 2019, the corporation declared dividends.
So you are entitled not just for this year but also for those
years which the corporation did not declare dividends.
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Preference as to dividends, normally in your Articles or by
the BOD if they are authorized, the issuance of the shares,
it will always say there that these are preferred shares
entitled to cumulative dividends at Php5/share per year.
That’s how it works. I have 1000 shares, so 2017 and 2018,
no dividends declared. 2019 – dividends declared. How
much am I entitled to? Php5000/year. I am not only entitled
to the dividends this year but also for the years where I did
not receive dividends. Why? Because my shares are
cumulative preferred. Meaning, I am supposedly entitled to
dividends every year, such that if the corporation’s BOD did
not declare dividends in that particular year, the next year
that they declare dividends, I am entitled to that current
year’s dividends as well as to the dividends in arrears.
Meaning, the dividends that I should have gotten but only I
did not get because did not declare. That is cumulative
preferred share.
If the shares are non-cumulative, how much would I get?
Php5000 only, only for that current year.
So, if the shares are preferred cumulative, that means I am
entitled to dividends in arrears. That means the dividends
for those years that the corporation did not declare. If non-
cumulative, I am only entitled to this year’s dividends.
What about participating and non-participating?
Participating - those which after they get their share of the
dividends, they still participate in the sharing of dividends
of the common stockholders. For example, the corporation
declared dividends and the preferred shares already got
their share.
How do you determine it? In the AOI. It has to be indicated
in the Articles, either fixed amount or a percentage of the
par.
So, for example, the AOI says that the preferred
stockholders are entitled to Php50/share. So when the
corporation declared for Php500, each of the preferred
stockholder get. What’s the Php500? Dividends, atty. Total?
Dividend declaration of Php500. Ay, Php500,000 nalang.
Total declared dividends – Php500,000. And then, what
happens? In the AOI, they said.
Corporation (2019)
GAMBOA CASE-decision
MEANING: TOTAL CAPITAL STOCK OUTSTANDING &
ENTITLED TO VOTE : ON THE ELECTION OF DIRECTORS
Control Test:
You need to have 60 % in your outstanding capital stock
entitled to vote should be owned by Filipino Citizens
Now the question is , what is meaning of “60 %
outstanding capital stock & entitled to vote?”
Summary :
Gamboa Case: 60 % should be based on the total shares
entitled to vote in the election of directors
Gamboa Resolution: Based on each class of shares
regardless if voting or non-voting :apply it to each class.
SEC: total voting shares entitled to vote on the election of
directors & total outstanding shares whether voting or
not.
Ans: Base on the Gamboa case, when you say total capital
stock outstanding & entitled to vote, it means the Total
capital stock outstanding and vote (Election of directors).
IOW: apply the 60 & on the capital stock entitled to vote in
the election of directors:
Ans: So basically, what you classify as voting shares are
those shares entitled to vote in the election of directors.
GAMBOA CASE- resolution
MEANING: TOTAL CAPITAL STOCK OUTSTANDING &
ENTITLED TO VOTE : VOTING OR NON VOTING SHARES
Atty: While on the MR , what happened?
Ans: In the MR, the Supreme Court appeared to have said
that no, you DON’T just apply it JUST TO THE CAPITAL
STOCK ENTITLED TO VOTE IN THE ELECTION OF THE
DIRECTORS, BUT YOU APPLY IT TO EACH CLASS OF SHARES
WHETHER VOTING OR NON-VOTING.
Atty: What was the basis of this rule by the Supreme
Court? Why did it say that Total Capital Stock Outstanding
and entitled to vote means voting / non voting shares?
Ans: Because according to the Supreme court, there is no
such thing as Non-voting shares because there are still
instances that even non-voting shares are entitled to vote.
( See list enumerated in Sec. 6 of Corporation Code)
Atty:All the items listed there are the circumstances where
even the non-voting shares are required to vote. SO
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MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO
basically, in the MR it tells us that under the Corporation
code, there is no true non-voting shares although we say
voting and non-voting shares , even non- voting shares are
required to vote in certain instances.
So the SC said, that being the case then we apply the
60- 40 rule in each class of shares whether non-voting or
not. In the case of PLDT, 60 % of the Common and on top
of that 60 % of the preferred non-voting must also be
owned by , Filipino Citizen.
So now, that cause a lot of confusion, since basically it
contradicted the first SC Gamboa Decision, so what
happened next?
Ans: SEC clarified how to apply the 60-40. There are 2
classes, first the total outstanding which is entitled to vote
( Election of the BOD) second, total outstanding shares
regardless if it’s voting or not voting.
Atty: So here comes the SEC coming out on its own rules ,
which was not based on the First Gamboa Case neither
was it base on the Gamboa Resolution. SEC: total voting
shares entitled to vote on the election of directors & total
outstanding shares whether voting or not. So nagpalahi
sad ang SEC. So what happened next?
Ans: In the case of Roy, the petitioners files a case
questioning the validity of the Memorandum circular and
the basis is that the Memorandum circular is not
consistent with the final Gamboa ruling which said that it
should be applied to each class of shares. Lain-lain naman
ug interpretation Class.
Example. 200 shares outstanding,
100- voting shares
100- non-voting
Gamboa Decision:
60 % of the shares entitled to vote in the election of
directors must be owned by Filipino Citizens ( refers to 100
voting shares lang) non-voting and shares outstanding
(NOT IMPORTANT)
200 SHARES OUTSTANDING
100 -VOTING
100-NON VOTING
Gamboa Reso:
Corporation (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

Its not just the shares entitled to vote in the election of
directors , because the law says TOTAL OUTSTANDING
AND ENTITLED TO VOTE, and under the corporation code
there are really no non-shares cause even the non-voting
shares are required to vote in certain circumstances.
Meaning it should be applied to each class of shares.
200 SHARES OUTSTANDING
Philippine national .
Can you have a Philippine national that is domestic?
Ans: Yes,
Can you have a Philippine national that is foreign?
Ans: Yes, because Philippine national at least 60 %. Foreign
here in the Philipines since incorporated. But it could still
be considered as Filipino if composed of 100 & Filipino.

100 - VOTING Can you have a foreign corporation that is domestic?

Ans: Yes, because, incorporated here but less than 60 %
100 - NON VOTING Filipino owned.

SEC: 60 % of the voting: entitled to vote in the election of

directors & 60 % of the total outstanding capital stock ,
meaning if you have 60 of the voting but 0 % of the non-
voting under the SEC test you will not pass because you
only have 60 of the total outstanding shares.

Atty: Which will prevail?

Ans: The prevailing rule is the SEC. The SC said that in the
Roy case, basically everything of the discussion in the
Gamboa Reso is a mere Obiter. And the prevailing rule is
still the Gamboa Decision That the 60 % should be based
on the Total Capital stock entitled to vote on the election
of directors. But since the SEC requirement is more
stringent because it does not look at the total voting but
also takes a look at the total outstanding capital , then it
SEC memorandum Circular is VAlid. So as long as the
memorandum circular exist that is the prevailing rule. The
SC upheld is because it’s in accordance with our Gamboa
Deicsion ruling in fact it is more stringent than the
Gamboa Deicion. Second GAmboa ruling, does not matter
because it’s just all Obiter. All the hours that you spend
analyzing the Gamboa Reso is a mere obiter.

AS no nationality , you can have the place of the

corporation , citizenship of stockholders. Which
classification you apply, it depends on what’s the purpose.
If it’s a matter on “can the corporation do business?” and
to secure a permit, then you take a look at the place of
incorporation . If it a question on what activity can that
corporation engage in?” Look at the Citizenship of the
stock holders and you apply the foreign investment act.

How do you determine nationality base on the FIA?

Apply the Control test: 60 % of the Capital stock
outstanding and entitled to vote must be owned by
Filipino Citizen.

If there is corporate layering

60 % of both the investor and investee if outstanding
capital stock and entitled to vote must be owned by
Filipino Citizens & 60 % of the directors both corporation
must be Filipino citizen. In which case, your corporation is
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