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+CORPORATION CODE
(BP 68, effective May 1, 1980)
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CORPORATION CODE OF THE PHILIPPINES
motor vehicle claiming that as a stockholder
Q: What are the requisites of the control test? with a substantial equity share, he owns that
portion of the corporate assets now in his
A: possession. Is the contention of S valid?
1. Control, not mere majority or complete Explain.
stock control, but complete domination,
not only of finances but of policy and A: No. The contention of S is not valid. The Ford
business practice in respect to the Expedition is owned by the corporation. The
transaction attacked such that the corporation has a legal personality separate and
corporate entity as to this had at that time, distinct from that of its stockholder. What the
will or existence of its own; corporation owns is its own property and not the
2. Such control must have been used by the property of any stockholder even how substantial
defendant to commit fraud or wrong, to the equity share that stockholder owns. (2000 Bar
perpetuate the violation of a statutory or Question)
other positive legal duty, or dishonest or
unjust act in contravention of plaintiffs Q: What are the cases when the doctrine of
legal right; and piercing the veil of corporate fiction may be
3. The control and breach of duty must used to disregard the personality of the
proximately cause the injury or unjust loss corporation?
complained of. (Concept Builders, Inc. v.
National Labor Relations Commission, A:
G.R. No. 108734, May 29, 1996) a. Where the corporation is a mere alter ego
or business conduit of a person; or
Q: What are the effects of piercing the veil? b. `Where the corporation is so organized
and controlled and its affairs are so
A: Courts will look at the corporation as an conducted as to make it merely an
aggregation of persons undertaking the business instrumentality, agency, conduit or adjunct
as a group. of another person.
Note: When the veil of corporate fiction is pierced in Note: Fraud is not an element in these cases.
proper cases, the corporate character is not necessarily
abrogated. It continues for legitimate objectives. The Q: Plaintiffs filed a collection action against "X"
decision applies only for that particular case. (Reynoso Corporation. Upon execution of the court's
IV v. CA, G.R. Nos. 116124-25, November 22, 2000) decision, "X" Corporation was found to be
without assets. Thereafter plaintiffs filed an
Q: Is the alleged control of a proprietor over a action against its present and past stockholder
corporation enough in order that the separate "Y" Corporation which owned substantially all
juridical personality of a corporation to be of the stocks of "X" corporation. The two
disregarded? corporations have the same board of directors
and "Y" Corporation financed the operations of
A: No. The alleged control of a corporation was not "X" corporation. May "Y" Corporation be held
evident in any particular corporate acts of the liable for the debts of "X" Corporation? Why?
corporation wherein the proprietor using the
corporation executed acts and powers directly A: Yes, "Y" Corporation may be held liable for the
involving the corporation. For the separate juridical debts of "X" Corporation. The doctrine of piercing
personality of a corporation to be disregarded, the the veil of corporation fiction applies to this case.
wrongdoing must be clearly and convincingly The two corporations have the same board of
established. (Matuguina Integrated Wood directors and "Y" Corporation owned substantially
Products, Inc. v. CA, G.R. No. 98310, October 24, all of the stocks of "X" Corporation, which facts
1996) justify the conclusion that the latter is merely an
extension of the personality of the former, and that
Q: Nine individuals formed a private the former controls the policies of the latter. Added
corporation pursuant to the provisions of the to this is the fact that "Y" Corporation controls the
Corporation Code of the Philippines (Batas finances of "X" Corporation which is merely an
Pambansa Blg. 68). Incorporator S was elected adjunct, business conduit or alter ego of "Y"
director and president-general manager. Part of Corporation. (Commissioner of Internal Revenue v.
his emolument is a Ford Expedition, which the Norton & Harrison Company, L-17618, August 31,
corporation owns. After a few years, S lost his 1964) (2001 Bar Question)
corporate positions but he refused to return the
UNIVERSITY OF SANTO TOMAS 3
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Q: What are the requisites in Alter Ego or mismanages BOT who mismanages
Instrumentality Rule? must be in the name of
the corporation
A: CUP Extent of liability to Third persons
1. Control, not mere majority or complete Partners are liable Stockholders are liable
stock control, but complete domination, personally and subsidiarily only to the extent of the
not only of finances but of policy and (sometimes solidarily) for shares subscribed by
business practice; partnership debts to third them whether paid or
persons not.
2. Such control must have been used by the
defendant to commit fraud or wrong, to XPN: Limited partner
Right of Succession
perpetrate the violation of a statutory or
No right of succession Has right of succession
other positive duty, or dishonest and unjust
Transferability of SH’s interest
act in contravention of plaintiff’s legal
Partner cannot transfer his Stockholder has the
rights;
interest in the partnership right to transfer his
without the consent of all shares without prior
3. Such control and breach of duty must the other existing consent of the other
proximately cause the injury or unjust loss partners. stockholders unless the
complained of. (Velarde v Lopez, Inc. G.R. right of first refusal is
No. 153886, January 14, 2004) embodied in the articles
of incorporation.
Q: What are the distinctions between Term of existence
partnership and corporation? May be established for May not be formed for a
any period of time term in excess of 50
PARTNERSHIP CORPORATION stipulated by the partners years. May be
As to creation extendible to not more
Created by mere Created by law or by than 50 years in any
agreement of the parties operation of law one instance
Commencement of juridical personality Firm Name
from the moment of from the date of In a limited partnership it May adopt any name
meeting of minds of the issuance of the is required by law to add provided:
partners certificate of the word “Ltd.” to its name 1. it is not identical or
incorporation by the deceptively similar to
SEC any registered firm
Number of Incorporators name;
May be organized by at Requires at least 5 2. not contrary to
least two persons incorporators but not existing law.
more than 15 Dissolution
XPN: corporation sole May be dissolved at any Can only be dissolved
Powers time by the will of any or with the consent of the
GR: May exercise any May exercise only such all of the partners. State
power authorized by the powers as may be
partners. granted by law and its Death, civil interdiction Death or insolvency of
articles of incorporation, and insolvency of a shareholders can’t
XPN: Acts which are implied therefrom or partner dissolves the dissolve the corporation.
contrary to: - law, incidental thereto. partnership.
morals, good customs, Governing Law
public order, public policy Governed by the Civil Governed by the
Management Code Corporation Code
When management is not Power to do business
agreed upon, every and manage its affairs is Q: What are the advantages and disadvantages
partner is an agent of the vested in the BOD/BOT of a business corporation?
partnership
A: Advantages
1. Limited liability;
Effect of Mismanagement 2. Shareholders are not general agents of
A partner as such can sue The suit against a the business;
a co-partner who member of the BOD or 3. Easy transferability of shares;
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CORPORATION CODE OF THE PHILIPPINES
4. Continuity of existence; GR: Corporations have no power to enter
5. Its credit is strengthened by such into partnership. Reason: Public policy.
continuity of existence; In a partnership, the corporation would be
6. Standardized methods for the creation, bound by the acts of the persons who are
organization, management and dissolution not its duly appointed and authorized agents
under corporation code; and officers, which would be entirely
7. Centralized management in the BOD/BOT; inconsistent with the policy of the law that
8. Feasibility of great undertakings; the corporation shall manage its own affairs
9. The corporation has legal capacity to act separately and exclusively.
as a legal unit.
XPN: The SEC allowed corporations to enter
Disadvantages into partnerships with other corporations and
1. Relatively complicated in formation and individuals provided:
management; a. The authority to enter into partnership
2. Entails high cost of formation and relation is expressly conferred by the
operation; Charter or the AOI and the nature of the
3. Limited liability of shareholder serves as a business venture to be undertaken by the
limitation to corporate creditor because partnership is in line with the business
shareholders are not personally liable; authorized by the charter or the AOI. (SEC
4. There is ordinarily lack of personal Opinions, Feb. 29, 1980, Dec. 1, 1993,
element in view of the transferability of and Feb. 23, 1994.);
shares; b. The partnership must be a limited
5. There is greater degree of governmental partnership and the corporation must be a
control and supervision that in any limited partner;
other forms of business organizations; c. If it is a foreign corporation, it must obtain
6. In large corporations, holding rights have a license to transact business in the
become largely theoretical because of the country.
use of proxies and widespread ownership;
7. Stockholders have little voice in the Q: Does a defective incorporation result into a
conduct of the business; partnership?
8. In large group, management and control
has been separated from ownership; A: The answer depends on whether or not there is
9. Double taxation on corporate system. a clear intent to participate in the management of
the business affairs on the part of the investor.
Q: Give the similarities between a partnership Parties who intends to participate or has actually
and a corporation. participated in the business affairs of the
proposed corporation would be considered as
A: partners under a de facto partnership. On the
1. Has juridical personality separate and other hand, parties who took no part
distinct from that of the individuals notwithstanding their subscriptions do not become
composing it; partners with other subscribers. (Pioneer
2. Can act only through agents; Insurance v. CA, G.R. No. 84197, July 28, 1989)
3. Organization composed of an aggregate
of individuals; Q: May a corporation enter into a joint venture?
XPN: corporation sole;
4. Distributes its profits to those who A: Yes. It may enter into a joint venture with
contribute capital; another where the nature of that venture is in line
XPN: The case of an industrial partner with the business authorized by its charter.
who also shares in partnership profits; (Aurbach v. Sanitary Wares Manufacturing
5. Can only be organized where there is a Corporation, G.R. No. 75875, December 15, 1989)
law authorizing its organization;
6. Both are taxable as corporation, subject to
income taxation.
A:
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CORPORATION CODE OF THE PHILIPPINES
a. Ecclesiastical Corporation – Constitution which prohibits the formation of a
composing entirely of spiritual persons private corporation by special legislative act, since
like bishops, deacons and the like and the new corporation was neither owned nor
are established for the furtherance of controlled by the government, and that the National
religion and for perpetuating the rights Development Corporation was merely required to
of a church. extend a loan to the new corporation, and the new
b. Lay corporation – All corporations stocks of the corporation were to be issued to the
other than ecclesiastical. old investors and stockholders of the insolvent
c. Eleemosynary or charitable Agrix upon proof of their claims against the
corporation – Created not for private abolished corporation. (NPC v. Philippine Veterans
gain or profit but for charitable Bank, 1990)
purposes for the administration of
charitable trust Q. What are the components of a corporation?
d. Civil corporation – Not for the purpose
of charity but for benefit, pecuniary or A:
otherwise, of its members. 1. Corporators – Those who compose a
corporation, whether as stockholders or
9. Special Types of Corporation members
See discussion on educational and religious
corporations. 2. Incorporators - They are those mentioned
in the Articles of Incorporation as originally
Q: What are the tests in determining the forming and composing the corporation
nationality of corporations? and who are signatories thereof.
A: No. Promoters are not agents of the corporation Q: What is stated capital?
before it comes into existence. Upon incorporation,
the practice is for the BOD to pass a resolution A: The capital stock divided into no par value
ratifying the contracts entered into by the shares.
incorporators with the promoter. Then, they
become agents of the corporation. Q: What is paid-up capital?
6. Subscriber – persons who have agreed to A: The portion of the authorized capital stock which
take and pay for original, unissued shares has been subscribed and actually paid.
of a corporation formed or to be formed.
Q: What is legal capital?
7. Underwriter – a person who guarantees
on a firm commitment and/ or declared A: Is the portion of the paid in capital arising from
best effort basis the distribution and sale the issuance of capital stock which cannot be
of securities of any king by another returned to the stockholders in any form during the
company. (Sec. 3 R.A. 8799) lifetime of the corporation.
A: It is an integral unit of a capital stock which A: Represent the cumulative balance of periodic
represents proportionate interest to the earnings, dividends distributions, fundamental
corporation’s assets, profits, dividends and errors and other capital adjustments.
management.
Q: What is market value?
Q: What is capital stock?
A: The price at which shares of capital stock are
A: The amount fixed in the articles of incorporation bought and sold by investors in the market.
to be subscribed and paid in or secured to be paid
Q: What is book value?
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CORPORATION CODE OF THE PHILIPPINES
6. Once issued, they are deemed fully paid
A: The amount per share that each shareholder and non-assessable. (Sec. 6)
would receive if the corporation were liquidated
without incurring any further expenses and if Q: What are common shares?
assets were sold and liabilities liquidated at their
recorded amounts. A: These are ordinarily and usually issued stocks
without extraordinary rights and privileges, and
Q: What are the kinds or classifications of entitle the shareholder to a pro rata division of
share? profits.
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be entitled to vote on the following fundamental Q: What are the requisites of a de facto
matters (Sec. 6 par. 6) corporation?
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CORPORATION CODE OF THE PHILIPPINES
owned by a corporation (Sec. 5 of RA 9. Names, nationalities, number of shares,
4726). and the amounts subscribed and paid by
each of the original subscribers which
D. Up to Thirty Percent (30%) Foreign Equity shall not be less than 25% of authorized
1. Advertising (Art. XVI, Sec. 11 of the capital stock;
Constitution). 10. If non-stock, the amount of capital, the
names, residences, and amount paid by
E. Up to Twenty-Five Percent (25%) Foreign each contributor, which shall not be less
Equity than 25% of total subscription; name of
1. Private recruitment, whether for local treasurer elected by subscribers; and
or overseas employment (Art. 27 of 11. Other matters as are not inconsistent with
PD 442); law and which the incorporators may
2. Contracts for the construction and deem necessary and convenient. (Sec.
repair of locally-funded public works 14)
(Sec. 1 of CA 541, LOI 630) except:
a. infrastructure/development Q: What are the limitations in adopting
projects covered in RA 7718; corporate name?
and
b. projects which are foreign A:
funded or assisted and 1. The proposed name is identical or
required to undergo deceptively or confusingly similar to that of
international competitive any existing corporation;
bidding (Sec. 2a of RA 7718); 2. Any other name protected by law; or
3. Contracts for the construction of 3. Patently deceptive, confusing or contrary
defense-related structures (Sec. 1 of to existing laws. (Sec. 18).
CA 541). 4. The corporate name shall contain the
word “Corporation” or its abbreviation
F. Up to Twenty Percent (20%) Foreign Equity “Corp.” or “Incorporated”, or “Inc.”
1. Private radio communications network 5. The partnership name shall contain the
(RA 3846). word “Company” or “Co.”.
6. For limited partnership, the word “Limited”
Q: Define Articles of Incorporation. or “Ltd.” Shall be included.
7. If the name or surname of a person is
A: Articles of Incorporation (AOI) is one that used as part of a corporate or partnership
defines the charter of the corporation and the name, the consent of said person or his
contractual relationships between the State and heirs must be submitted except if that
the corporation, the stockholders and the State, person is a stockholder, member, partner
and between the corporation and its stockholders. or a declared national hero.
8. The name of a dissolved firm shall not be
Q: What are the contents of AOI? allowed to be used by other firms within 3
years after the approval of the dissolution
A: NaPuP- TIDUA-ONO of the corporation by SEC, unless allowed
1. Name of corporation; by the last stockholders representing at
2. Purpose/s, indicating the primary and least majority of the outstanding capital
secondary purposes; stock of the dissolved firm. (SC
3. Place of principal office; Memorandum Circular 14)
4. Term of existence;
5. Names, nationalities and residences of Q: If a corporation changes its corporate name,
incorporators; is it considered a new corporation?
6. Number of directors or trustees, which
shall not be less than 5 nor more than 15; A: No, it is the same corporation with a different
7. Names, nationalities, and residences of name, and its character is in no respect changed.
the persons who shall act as directors or (Republic Planter’s Bank v CA, G.R. No. 93073,
trustees until the first regular ones are December 21, 1992)
elected and qualified;
8. If a stock corporation, the amount of its Q: What are the basic requirements for a stock
authorized capital stock, number of shares corporation?
and in case the shares are par value
shares, the par value of each share;
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A: h. Other corporations governed by
1. Name verification slip; special laws [Sec. 17 (2)]
2. AOI and By-laws;
3. Treasurer’s affidavit; Q: When does corporate existence commence?
4. Registration data sheet;
5. Proof of payment of subscription like Bank A: From the date the SEC issues a certificate of
Certificate of Deposit if the paid-up capital incorporation under its official seal. (Sec. 19)
is in cash;
6. Favorable endorsement from proper Q: When does amendment of AOI take effect?
government agency in case of special
corporations. A: Upon approval by the SEC. That is upon
issuance of amended certificate of incorporation.
Q: What is the content of a treasurer’s
affidavit? Q: Is it necessary that the approval of SEC be
express?
A: That at least 25% of the authorized capital stock
of the corporation has been subscribed, and at A: No, implied approval of SEC is also allowed.
least 25% of the total subscription has been fully Thus amendment may also take effect from the
paid in actual cash and/or property. Such paid-up date of filing with SEC if not acted upon within 6
capital being not less than P 5,000. months from the date of filing for a cause not
attributable to the corporation.
Q: What are the requirements for the
amendment of AOI? Q: What are the provisions of AOI that cannot
be amended?
A:
1. The amendment must be for legitimate A: Those matters referring to accomplished facts,
purposes and must not be contrary to except to correct mistakes.
other provisions of the Corporation Code Examples:
and Special laws; 1. Names of incorporators;
2. Approved by majority of BOD/BOT; 2. Names of original subscribers to the
3. Vote or written assent of stockholders capital stock of the corporation and their
representing 2/3 of the outstanding capital subscribed and paid up capital;
stock or 2/3 of members; 3. Names of the original directors;
4. The original and amended articles 4. Treasurer elected by the original
together shall contain all provisions subscribers;
required by law to be set out in the articles 5. Members who contributed to the initial
of incorporation. Such articles, as capital of the non-stock corporation; and
amended, shall be indicated by 6. Witnesses to and acknowledgement with
underscoring the change/s made; AOI.
5. Certification under oath by corporate
secretary and a majority of the BOD/BOT Q: What are the grounds for the rejection or
stating the fact that said amendment/s disapproval of AOI or amendment thereto by
have been duly approved by the required the SEC?
vote of the stockholders or members, shall
be submitted to the SEC; A:
6. Must be approved by SEC. (Sec. 16); 1. If such is not substantially in accordance
7. Must be accompanied by a favorable with the form prescribed;
recommendation of the appropriate 2. The purpose/s of the corporation are
government agency in cases of: patently unconstitutional, illegal, immoral,
a. Banks; or contrary to government rules and
b. Banking and quasi-banking regulations;
institutions; 3. The Treasurer’s Affidavit concerning the
c. Building and loan associations; amount of capital stock subscribed and/or
d. Trust companies and other financial paid is false
intermediaries; 4. The required percentage of ownership of
e. Insurance companies; the capital stock to be owned by Filipino
f. Public utilities; citizens has not been complied with. (Sec.
g. Educational institutions; and 17)
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CORPORATION CODE OF THE PHILIPPINES
Note: A person who does not own a stock at the time of
his election or appointment does not disqualify him as
Q: Is there an automatic rejection of the AOI or director if he becomes a shareholder before assuming
any amendment thereto? the duties of his office. (SEC Opinions, Nov. 9, 1987 &
April 5, 1990)
A: No; the SEC shall give the incorporators a
reasonable time within which to correct or modify Q: What are the common requirements of a
the objectionable portions of the AOI or director and trustee?
amendment. [Sec. 17 (1)]
A:
Q: What is the effect of non-use of corporate 1. Majority of the directors/trustees must be
charter and continuous inoperation of a residents of the Philippines (Sec. 23);
corporation? 2. He must not have been convicted by final
judgment of an offense punishable by
A: imprisonment for period exceeding 6 years
1. Failure to organize and commence or a violation of the Corporation Code,
business within 2 years from incorporation committed within 5 years prior to the date
– its corporate powers ceases and the of his election (Sec. 27);
corporation shall be deemed dissolve. 3. He must be of legal age;
4. Other qualifications as may be prescribed
2. Continuous inoperation for at least 5 years in Special laws or regulations or in the by-
– ground for the suspension or revocation laws of the corporation.
of corporate franchise or certificate of
incorporation. (Sec. 22) Q: What are the disqualifications?
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CORPORATION CODE OF THE PHILIPPINES
Q: What are the different methods of voting? XPN: If AOI or the by-laws provide for a greater
number.
A:
1. Straight Voting – every stockholder may Note: Every decision of at least a majority of the
vote such number of shares for as many directors or trustees present at a meeting at which there
persons as there are directors to be is quorum shall be valid as a corporate act.
elected.
XPN: The election of officers which shall require
2. Cumulative voting for one candidate – a the vote of a majority of all the members of the
stockholder is allowed to concentrate his board. [Sec. 25 (2)]
votes and give one candidate, as many
votes as the number of directors to be Q: Who are corporate officers?
elected multiplied by the number of his
shares shall equal. A:
President – Must be a director at the time the
3. Cumulative voting by distribution - a assumes office not at the time of appointment;
stockholder may cumulate his shares by
multiplying the number of his shares by Treasurer – May or may not be a director; as a
the number of directors to be elected and matter of sound corporate practice, must be a
distribute the same among as many resident
candidates as he shall see fit.
Secretary – Need not be a director unless
Q: When is cumulative voting allowed? required by the by-laws; must be a resident
and citizen of the Philippines; (Sec. 25); and
A: Cumulative voting is allowed in the election of
directors of stock corporations. Cumulative voting Such other officers as may be provided in the
is allowed in non-stock corporations only if the by-laws.
same is provided in the AOI.
Q: Can the president of a corporation sign the
Q: What are the limitations on the stockholder’s verification and certification of non-forum
right to vote? shopping without the approval of the Board of
Directors?
A:
1. Where the articles of incorporation provides A:
for classification of shares pursuant to Sec. GR: Only individuals vested with authority by a
6, non-voting shares are not entitled to vote valid board resolution may sign the certificate
except as provided for in the last paragraph of non-forum shopping on behalf of a
of Sec.6. corporation.
2. Preferred or redeemable shares may be
deprived of the right to vote unless XPN: The following officials or employees of
otherwise provided in the Code. the company can sign the verification and
3. Fractional shares of stock cannot be voted. certification without need of a board resolution:
4. Treasury shares have no voting rights as 1. The Chairperson of the Board of
long as they remain in the treasury. Directors;
5. Holders of stock declared delinquent by the 2. The President of a corporation;
board of directors for unpaid subscription are 3. The General Manager or Acting
not entitled to vote or to a representation at General Manager;
any stockholder’s meeting. 4. Personnel Officer; and
6. A transferee of stock cannot vote if his 5. An Employment Specialist in a labor
transfer is not registered in the stock and case.
transfer book of the corporation.
Reason: They are in a position to verify the
Q: What is the required number of BOD/BOT to truthfulness and correctness of the allegations in
constitute quorum? the petition. (Cagayan Valley Drug Corporation v
CIR, G.R. No. 151413, February 13, 2008)
A:
GR: Majority of the number of directors or Q: May a suit be dismissed by virtue of lack of
trustees. authority of the general manager/treasurer to
sign the certificate of non-forum shopping from
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the BOD at the time of filing the complaint but 1. It must take place either at a regular
subsequently designated by the board as the meeting or special meeting of the
corporation’s attorney-in-fact? stockholders or members called for the
purpose;
A: No. Although the general manager/treasurer 2. Previous notice to the stockholders or
initially failed to show that he had the capacity to members of the intention to remove a
sign the verification and institute the case on behalf director;
of the corporation, when confronted with such 3. A vote of the stockholders representing 2/3
question, he immediately presented the Secretary’s of outstanding capital stock or 2/3 of
Certificate confirming her authority to represent the members;
company. (Pasricha v Don Luis Dison Realty Inc., 4. If the director was elected by the minority,
G.R. No. 136409, March 14, 2008) there must be cause for removal; (Sec.
28)
Note: A board resolution appointing an attorney-in-fact to
represent the corporation in the pre-trial is not necessary Q: In 1999, Corporation "A" passed a board
where the by-laws authorizes an officer of the corporation resolution removing "X" from his position as
to make such appointment. (Citibank, N.A. v. Chua, G.R. manager of said corporation. The by-laws of
No. 102300 March 17, 1993)
"A" corporation provides that the officers are
the president, vice-president, treasurer and
Q: What are the distinctions between a
secretary. Upon complaint filed with the SEC, it
corporate officer and a corporate employee?
held that a manager could be removed by mere
resolution of the board of directors. On motion
A: for reconsideration, "X" alleged that he could
CORPORATE OFFICER CORPORATE only be removed by the affirmative vote of the
EMPLOYEE stockholders representing 2/3 of the
Position is provided for in Employed by the action outstanding capital stock. Is "X's" contention
the by-laws or under the of the managing officer legally tenable. Why?
Corporation Code. of the corporation.
RTC acting as a special LA has jurisdiction in
A: No. Stockholders' approval is necessary only for
commercial court has case of labor disputes.
the removal of the members of the Board. For the
jurisdiction over intra-
corporate controversies.
removal of a corporate officer or employee, the
vote of the Board of Directors is sufficient for the
purpose. (2001 Bar Question)
Q: In case where there are 2 lists of BOD
submitted to SEC, which one is controlling?
Q: What are the ways in filling up of vacancies
in the board?
A: In determining whether the filing of an action
was authorized by the BOD, it is the list of directors A:
in the latest general information sheet as filed with 1. Vacancies filled up by stockholders or
the SEC which is controlling. By express mandate members, if it is due to (a) removal; (b)
of the Corporation Code, all corporations duly expiration of term; (c) grounds other than
organized pursuant thereto are required to file with removal or expiration of term (e.g. death,
the SEC the names, nationalities and residences of resignation) where the remaining directors
the directors and officers elected. (Premium do not constitute a quorum; or (d) increase
Marble Resources, Inc. v CA, G.R. No. 96551, in the number of directors;
November 4, 1996) 2. Vacancies filled up by the remaining
directors constituting a quorum, if it is due
Q: May 2 or more corporate positions be held to causes other than those specified
concurrently by the same person? above. (Sec. 29)
A: Yes, except that no one shall act as president Note: A director elected to fill vacancy shall serve the
and secretary or president and treasurer at the unexpired term. (Sec. 29)
same time.
Q: How are directors compensated?
Q: What are the requisites for removal of
directors or trustees? A:
GR: They shall be entitled as such directors to
A: reasonable per diems only.
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CORPORATION CODE OF THE PHILIPPINES
b. The vote of such director/trustee in the
XPN: board meeting approving the contract
1. When their compensation is fixed in the by- was not necessary for the approval of
laws; the contract;
2. When granted by the vote of stockholders c. The contract is fair and reasonable
representing at least a majority of the under the circumstances;
outstanding capital stock at a regular or d. In the case of an officer, there was
special meeting; previous authorization by the board of
3. When they are also officers of the directors.
corporation.
2. Contracts entered into between corporations
XPN to XPN: with interlocking directors (interest of said
In no case shall the total yearly compensation of directors is “substantial”, meaning,
directors, as such directors exceed 10% of the exceeding 20% of the outstanding capital
net income before income tax of the corporation stock). (Sec. 33)
during the preceding year. (Sec. 30)
Valid, provided that:
Q: What are the instances when directors are a. The contract is not fraudulent; and
personally liable? b. The contract is fair and reasonable
under the circumstances.
A:
GR: Directors and officers are not solidarily Note: If the interlocking director’s interest in one
liable with the corporation. corporation or corporations is “nominal” (not exceeding
20% of the outstanding capital stock) and in the other
XPN: AGIWAL substantial, then all the first 3 conditions prescribed in
Sec. 32 must be present with respect to the corporation
1. Willfully and knowingly voting for and in which he has nominal interest.
assenting to patently unlawful acts of the
corporation; (Sec. 31) Where any of the first two conditions is absent, said
2. Gross negligence or bad faith in directing contract must be ratified by the vote of the stockholders
the affairs of the corporation; (Sec. 31) representing at least 2/3 of the outstanding capital stock
3. Acquiring any personal or pecuniary or 2/3 of the members in a meeting called for the
interest in conflict of duty; (Sec. 31) purpose, provided:
4. Consenting to the issuance of watered 1. That full disclosure of the adverse interest of the
director/ trustee involved is made at such
stocks, or, having knowledge thereof,
meeting;
failing to file objections with the secretary; 2. The contract is fair and reasonable under the
(Sec. 65) circumstances.
5. Agreeing or stipulating in a contract to
hold himself liable with the corporation; or Q: What is doctrine of corporate opportunity?
6. By virtue of a specific provision of law.
A: Unless his act is ratified by stockholders
Q: What is the doctrine of limited liability? representing 2/3 of the outstanding capital stock, a
director shall refund to the corporation all the
A: Shields the corporators from corporate liability profits he realizes on a business opportunity (Sec.
beyond their agreed contribution to the capital or 34) which:
shareholding in the corporation. a. The corporation is financially able to
undertake;
Q: Give the rules on contracts entered into by b. From its nature, is in line with corporations
directors/trustees of or officers. business and is of practical advantage to
it; and
A: c. The corporation has an interest or a
1. Contracts which are entered into by the reasonable expectancy. (2005 Bar
corporation with one or more of its own Question)
directors/trustees, or officers. (Sec. 32);
Note: The rule shall be applied notwithstanding the fact
Voidable, unless: that the director risked his own funds in the venture.
a. The presence of such director/trustee
in the board meeting approving the Q: Malyn, Schiera and Jaz are the directors
contract was not necessary to of Patio Investments, a close corporation
constitute a quorum;
UNIVERSITY OF SANTO TOMAS 19
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formed to run the Patio Cafe, an al fresco A: No. It is in violation of Sec. 32 of the
coffee shop in Makati City. In 2000, Patio Corporation Code.
Cafe began experiencing financial reverses,
consequently, some of the checks it issued What happens if director "A" is able to
to its beverage distributors and employees consummate his mining claims over and above
bounced. that of the corporation's claims? (2001 Bar
Question)
In October 2003, Schiera informed Malyn that
A: "A" should account to the corporation for the
she found a location for a second cafe in
profits which he realized from the transaction. He
Taguig City. Malyn objected because of the grabbed the business opportunity from the
dire financial condition of the corporation. corporation. (Sec. 34)
Sometime in April 2004, Malyn learned about Q: What is an executive committee?
Fort Patio Cafe located in Taguig City and
that its development was undertaken by a A: A body created by the by-laws and composed
new corporation known as Fort Patio, Inc., of some members of the board which, subject to
where both Schiera and Jaz are directors. the statutory limitations, has all the authority of the
Malyn also found that Schiera and Jaz, on board to the extent provided in the board resolution
behalf of Patio Investments, had obtained a or by-laws.
loan of P500, 000.00, from PBCom Bank, for
the purpose of opening Fort Patio Cafe. This Must be provided for in the by laws and composed
loan was secured by the assets of Patio of not less than 3 members of the board appointed
Investments and personally guaranteed by by the board.
Schiera and Jaz.
May act by a majority vote of all of its members.
Malyn then filed a corporate derivative action
Note: An executive committee can only be created by
before the Regional Trial Court of Makati City virtue of a provision in the by-laws and that in the
against Schiera and Jaz, alleging that the two absence of such by-law provision, the board of directors
directors had breached their fiduciary duties cannot simply create or appoint an executive committee
by misappropriating money and assets of to perform some of its functions. (SEC Opinion, Sept 27,
Patio Investments in the operation of Fort 1993)
Patio Cafe.
Q: What are the limitations on the powers of the
executive committee?
Did Schiera and Jaz violate the principle of
corporate opportunity? Explain.
A: It cannot act on the following:
1. Matters needing stockholder approval;
A: Sciera and Jaz violated the principle of 2. Filling up of board vacancies;
corporate opportunity, because they used Patio 3. Amendment, repeal or adoption of by-
Investments to obtain a loan, mortgaged its laws;
assets and used the proceeds of the loan to 4. Amendment or repeal of any resolution of
acquire a coffee shop through a corporation they the Board which by its express terms is
formed. (Sec. 34) (2005 Bar Question) not amendable or repealable; and
5. Cash dividend declaration. (Sec. 35)
Q: Suppose that the by-laws of "X"
Corporation, a mining firm, provides that "The POWERS OF CORPORATION
directors shall be relieved from all liability for
any contract entered into by the corporation Q: What are the kinds of powers of
with any firm in which the directors may be corporation?
interested." Thus, director "A" acquired claims
which overlapped with "X's" claims and were A:
necessary for the development and operation 1. Express Powers - Granted by law,
of "X's" mining properties. Corporation Code, and its Articles of
Incorporation or Charter, and
Is the by-law provision valid? Why? administrative regulations
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CORPORATION CODE OF THE PHILIPPINES
2. Inherent/Incidental Powers – Not expressly
stated but are deemed to be within the Q: Can a corporation with foreign
capacity of corporate entities. shareholdings acquire real property?
3. Implied/Necessary Powers – Exists as a A: Yes, provided that the capital stock of the
necessary consequence of the exercise of corporation is 60% owned by the Filipinos.
the express powers of the corporation or
the pursuit of its purposes as provided for Q: Is the right of first refusal over the shares of
in the Charter a public utility whose capitalization must be
60% Filipino owned granted to a foreign
Q: What are the general powers of corporation? corporation under a joint venture agreement
violative of the Anti-Dummy Law?
A: SUSUCO-ABSP-MEDPO
1. To sue and be sued; A: No. No law disqualifies a person from
2. Of succession; purchasing shares in a landholding corporation
3. To adopt and use of corporate seal; even if the latter will exceed the allowed foreign
4. To amend its Articles of Incorporation; equity, what the law disqualifies is the corporation
5. To adopt its by-laws; from owning land.
6. For stock corporations: issue and sell
stocks to subscribers and treasury stocks; Q: What are the limitations as to acquisition of
for non-stock corporations: admit real property?
members
7. To purchase, receive, take or grant, hold, A:
convey, sell, lease, pledge, mortgage and 1. Constitutional Limitations – cannot acquire
deal with real and personal property, public lands except by lease.
securities and bonds;
8. To enter into merger or consolidation; With regard to private land, 60% of the
9. To make reasonable donations for public corporation must be owned by the
welfare, hospital, charitable, cultural, Filipinos, same with the acquisition of a
scientific, civic or similar purposes, condo unit
provided that no donation is given to any
(i) political party, (ii) candidate and (iii) 2. Special Law – Banking laws, bank cannot
partisan political activity. acquire real property except for business
10. To establish pension, retirement, and other purposes or when they acquired the land
plans for the benefit of its directors, in the course of business.
trustees, officers and employees – basis of
which is the labor code Q: Can a corporation act as surety or
11. To exercise other powers essential or guarantor?
necessary to carry out its purposes.
A:
Q: When does the power to sue and be sued GR: No.
commence?
XPN: Such guaranty may be given in the
A: Upon issuance by SEC of Certificate of accomplishment of any object for which the
Incorporation. corporation was created, or when the particular
transaction is reasonably necessary or proper in
Q: What are the requisites for a valid donation? the conduct of its business.
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CORPORATION CODE OF THE PHILIPPINES
Q: What is meant by substantially all of
A: It shall be based on the additional amount by corporate assets?
which the capital stock increased and not on the
total capital stock as increased. A: If the corporation would be rendered incapable
of continuing the business or accomplishing the
Note: No treasurer’s affidavit in case of decrease in purpose for which it was incorporated.
capital stock. Corporation need not exhaust its original
capital before increasing capital stock. Q: When may the corporation forgo the
ratification by SH / members?
Q: What are the ways of increasing/ decreasing
the capital stock? A:
a. If sale is necessary in the usual and regular
A: course of business;
a. By increasing/decreasing the number of b. If the proceeds of the sale or other
shares and retaining the par value; disposition of such property and assets
b. By increasing/decreasing the par value of are to be appropriated for the conduct of
existing shares without the remaining business;
increasing/decreasing the number of shares; c. If the transaction does not cover all or
c. By increasing/decreasing the number of substantially all of the assets.
shares and increasing/decreasing the par
value. Q: What is the effect of transfer of all or
substantially all of assets of one corporation to
Incur, create or increase bonded indebtedness another corporation?
Q: What is bonded indebtedness? A:
GR: The transferee corporation of all or
A: it is a long term Indebtedness secured by real or substantially all of the assets of the transferor
personal property. corporation shall not be liable for the debts of the
transferor corporation.
Note: Nature of indebtedness determines if it needs
stockholder’s approval. The requirements are basically
the same as the requirements for increase and decrease
XPNs:
of capital stock as it likewise requires the same approvals 1. Express or implied assumption of liabilities;
by the directors and the stockholders. 2. Merger or consolidation;
3. If the purchase was in fraud of creditors;
Sell, lease, exchange, mortgage, pledge or 4.If the purchaser becomes a continuation of
other disposition (SLEMPO) of all or the seller;
substantially all of corporate assets; 5. If there is violation of the Bulk Sales Law.
XPN: SEC Opinion, October 12, 1992, XPN: When the mortage or pledge is recorded
imposed the following conditions on its in the books of the corporation, in such a case
exercise: then the mortgagee or pledgee is entitled to
1. The capital of the corporation must not receive the dividends.
be impaired;
2. Legitimate and proper corporate Q: What are the forms of dividends?
objective is advanced;
3. Condition of the corporate affairs A:
warrants it; 1. Cash
4. Transaction is designed and carried 2. Stock/Property
out in good faith
5. Interest of creditors not impaired, that Note: Stock dividends are withheld from the delinquent
is, not violative of the trust fund stockholder until his unpaid subscription is fully paid.
doctrine.
Cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus
Invest corporate funds in another corporation cost and expenses.
or business for other purpose other than
primary purpose The right to dividends is based on duly recorded
stockholdings.
Q: What are the requirements?
Stockholders are entitled to dividends PRO-RATA based
A: on the total number of shares and not on the amount
1. Majority vote of the BOD or BOT; paid on shares.
2. Stockholders representing at least 2/3 of
the outstanding capital stock or by at least Q: When may corporation declare dividends?
2/3 of the members in case of non-stock
corporation A:
3. Written notice. GR: Even if there are existing profits, BOD has
discretion to determine WON dividends are
Note: Investment of a corporation in a business which is declared.
in line with its primary purpose requires only the approval
of the board. XPN: Stock corporations are prohibited from
retaining surplus profits in excess of 100% of
Power to declare dividends out of unrestricted their paid-in capital stock.
retained earnings (URE)
XPN to the XPN:
Q: What are the requirements? a. Definite corporate expansion projects
approved by the board of directors
A: b. Corporation is prohibited under any
1. Unrestricted retained earnings; loan agreement with any financial
2. Resolution of the board; institution or creditor from declaring
3. In case of stock dividend, resolution of the dividends without its/his consent and
board with the concurrence of 2/3 of such consent has not yet been
outstanding capital. secured
c. The retention is necessary under
Q: Who are entitled to receive dividends? special circumstances obtaining in the
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CORPORATION CODE OF THE PHILIPPINES
corporation, such as when there is a A:
need for special reserve for probable CASH DIVIDENDS STOCK DIVIDENDS
contingencies. Part of general fund Part of capital
Results in cash outlay No cash outlay
Not subject to levy Once issued, can be
levied by corporate
Q: What if there is a wrongful or illegal creditors because they’re
declaration of dividends? part of corporate capital
Declared only by the Declared by the board
A: The Board of Directors is liable. The board of directors at its with the concurrence of
stockholders should return the dividends to the discretion the stockholders
corporation (solutio indebiti). (majority of the quorum representing at least 2/3 of
only, not majority of all the outstanding capital
the board) stock at a regular/special
Q: What are the sources of dividends?
meeting
Does not increase the Corporate capital is
A:
corporate capital increased
GR: Dividends can only be declared and aid
Its declaration creates No debt is created by its
out of actual and bona fide unrestricted retained a debt from the declaration
earnings. corporation to each of
its stockholders
Q: What are the rules regarding other sources If received by Not subject to tax either
of dividends? individual: subject to received by individual or a
tax; corporation
A: If received by
a. Gain from sale of real property - Where a corporation: not
corporation sold its real property, which is subject to tax
not being used for business, at a gain, the Cannot be revoked Can be revoked despite
income derived therefrom may be availed after announcement announcement but before
of for dividend distribution. issuance
Applied to the unpaid Can be withheld until
b. Revaluation surplus - Increase in the value balance of delinquent payment of unpaid
of a fixed asset as a result of its shares balance of delinquent
revaluation. It cannot be declared as shares
dividend unless the asset is sold.
Q: May stock dividends be issued to a person
c. Paid-in surplus - Dividends can be who is not a stockholder in payment of
declared out of the amount received in services rendered?
excess of the par value of shares when
(SEC Opinion): A: No. Only stockholders are entitled to payment of
1. That they be declared only as stock stock dividends. (Nielson & Co., Inc. v. Lepanto
dividends and not cash; Consolidated Mining Co., G.R. No. 21763,
2. No creditors are prejudiced; and December 17, 1966).
3. There is no impairment of capital.
Q: What is provided for by the trust fund
d. Reduction surplus - can be a source of doctrine?
dividends. Rule on paid-in surplus
is applicable. A: The subscribed capital stock of the corporation
is a trust fund for the payment of debts of the
e. No dividends can be declared out of corporation which the creditors have the right to
capital except only in two instances: look up to satisfy their credits, and which the
1. Liquidating dividends; and corporation may not dissipate. The creditors may
2. Dividends from investments in sue the stockholders directly for the latter’s unpaid
Wasting Asset Corporation. subscription.
A:
UNIVERSITY OF SANTO TOMAS 27
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c. The required quorum in meeting of stock, or 2/3 of the
stockholders or members and the manner members in case of
of voting therein; non-stock corporations
d. The form for proxies of stockholders and Power to amend/repeal Power to amend or repeal
members and the manner of voting them; articles cannot be by-laws or adopt new by-
e. The qualification, duties and compensation delegated by the laws may be delegated by
of directors or trustees, officers and stockholders/ members the 2/3 of the outstanding
employees; to the board of capital stock or 2/3 of the
f. Time for holding the annual election of directors/ trustees members in the case of non-
directors or trustees and the mode or stock corporation
manner of giving notice thereof;
g. Manner of election or appointment and the Q: What are the ways of amending, repealing or
term of office of all officers other than adopting new by-laws?
directors or trustees;
h. Penalties for violation of the by-laws A:
i. In case of stock corporations, the manner 1. Amendment may be made by stockholders
of issuing certificates; together with the Board – by majority vote
j. Such other matters as may be necessary of directors and owners of at least a
for the proper or convenient transaction of majority of the outstanding capital
its corporate business and affairs. (Sec. stock/members; or
47) 2. By the board only after due delegation by
the stockholders owning 2/3 of the
Q: Is a corporation automatically dissolved, if outstanding capital stock/members.
within 1 month after receipt of the official Provided, that such power delegated to
notice of the issuance of the certificate of the board shall be considered as revoked
incorporation by the SEC, it failed to adopt a whenever stockholders owning at least
code of by-laws? majority of the outstanding capital stock or
members, shall vote at a regular or special
A: No. The incorporators must be given chance to meeting. (Sec. 48)
explain their neglect or omission and remedy the
same. MEETINGS
Q: What are the distinctions between AOI and Q: What are the requirements for a valid
By-laws? meeting whether stockholders/members or the
board?
A: A:
AOI BY-LAWS 1. Required notice (Sec. 50 for
Essentially a contract For the internal government stockholders/members) and (Sec.
between the of the corporation but has
53 for BOD/BOT)
corporation and the the force of a contract
stockholders/ members; between the corporation and
between the the stockholders/ members, No meeting can be validly held unless there is
stockholders/ member and between the notice. However it may be waived.
inter se, and between stockholders and members;
the corporation and the 2. Call by authorized person;
State; 3. Presided by the president unless
otherwise provided in the by-laws (Sec.
Executed before May be executed after 54);
incorporation incorporation. Sec. 46 allows 4. Required quorum (Secs. 52 & 53)
the filing of the by-laws
simultaneously with the Q: When will stockholders/members meeting
Articles of Incorporation be held?
Amended by a majority May be amended by a
of the directors/ majority vote of the BOD and A:
trustees and majority vote of outstanding DATE OF MEETING REQUIRED
stockholders capital stock or a majority of WRITTEN NOTICE
representing 2/3 of the the member in non-stock 1. Annually on date fixed in 1. Within the period
outstanding capital corporation the by-laws; or provided in the by-
28
CORPORATION CODE OF THE PHILIPPINES
2. If there is no date in the by- laws
laws – any date in April as 2. In the absence of A:
determined by the board. provision in the by- A. Quorum in meetings of Stockholders
laws – 2 weeks prior GR: Shall consist of the stockholders
to the meeting. representing majority of the outstanding
1. Any time deemed 1. Within the period capital stock or a majority of the members
necessary; or provided in the by- in the case of non-stock corporation.
2. As provided in the by-laws laws
2. If no provision in XPN:
the by-laws – 1 1. A different quorum may be provided
week prior to the
for in the by-laws
meeting
2. The corporation code provides for
Note: Whenever for any cause, there is no person certain resolutions that must be
authorized to call the meeting, the SEC, upon petition of approved by at least 2/3 of the
any stockholder or member on showing of good cause, outstanding capital stock, in which
may issue an order to the petitioning stockholder or case, majority of the outstanding
member directing him to call a meeting of the corporation capital stock is insufficient to
by giving proper notice constitute a quorum, presence of
the stockholders representing 2/3
Q: Where will stockholders/members meeting of the outstanding capital stock is
be held? necessary for such purpose.
2. Shares are owned in an “and/or” capacity Q: Is the power to appoint a proxy a personal
by the holders – any one of the joint right?
owners can vote thereof or appoint a
proxy. (Sec. 56) A: Yes. The right to vote is inseparable from the
right of ownership of stock. Therefore, to be valid,
Q: Do treasury shares have voting rights? a proxy must have been given by the person who
is the legal owner of the stock and is entitled to
A: Treasury shares shall have no voting right as vote. (SEC Opinion, Sept. 9, 1991)
long as such shares remain in the treasury. (Sec.
57) Q: What is the duration of proxy?
GR: One who has given a proxy the right to Note: Unless expressly renewed, all rights granted in a
vote may revoke the same at anytime. voting trust agreement shall automatically expire at the
end of the agreed period, and the voting trust certificates
XPN: Said proxy is coupled with interest even as well as the certificates of stock in the name of the
trustee or trustees shall thereby be deemed canceled
if though it may appear by its terms to be and new certificates of stock shall be reissued in the
irrevocable. name of the transferors.
Q: What is a voting trust? The voting trustee or trustees may vote by proxy unless
the agreement provides otherwise. (Sec. 59)
A: It is an agreement whereby one or more
stockholders transfer their shares of stocks to a Q: What are the distinctions between a voting
trustee, who thereby acquires for a period of time trust agreement and proxy?
the voting rights (and/or any other rights) over such
shares; and in return, trust certificates are given to A:
the stockholder/s, which are transferable like stock VOTING TRUST PROXY
certificates, subject, to the trust agreement. The agreement is Revocable anytime except
irrevocable one with interest
Q: What are the specific limitations on VTA? Trustee acquires Proxy has no legal title to
legal title to the the shares of the principal
A: shares of the
transferring
UNIVERSITY OF SANTO TOMAS 31
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stockholder 3. Acquires shares from existing
The trustee votes as The proxy holder votes as shareholders by sale or any other
owner rather than as agent contract.
mere agent
Qualifies as a Not qualified to be a Q: What is a subscription contract?
director director
A: It is a contract for the acquisition of unissued
Not only right to vote Only right to vote is given stock in an existing corporation or a corporation still
is given, other rights to be formed. It is considered as such
as well notwithstanding the fact that the parties refer to it
The trust may vote in The proxy must vote in as purchase or some other contract. (Sec. 60)
person or by proxy person
unless the
Q: What are the kinds of subscription
agreement provides
contracts?
otherwise
The agreement must Proxy need not be
be notarized notarized A:
Trustee is not limited Proxy can only act at a 1. Pre-incorporation subscription – entered
to act at any specified stockholder’s into before the incorporation and
particular meeting meeting (if not continuing) irrevocable for a period of six (6) months
The share certificate No cancellation of the from the date of subscription unless all
shall be cancelled certificate shall be made other subscribers consent or if the
and transferred to corporation failed to materialize. It cannot
the trustee also be revoked after filing the Articles of
A trustee can vote A proxy can only vote in Incorporation with the SEC (Sec. 61)
and exercise all the the absence of the owners
rights of the of the stock 2. Post-incorporation subscription – entered
stockholder even into after incorporation.
when the latter is
present Q: What are valid considerations in a
May not be revoked May be revoked anytime subscription agreement?
for the duration unless coupled with
interest A:
The voting right is The right to vote is 1. Cash;
divorced from the inherent in or inseparable 2. Property;
ownership of stocks from the right to ownership 3. Labor or services actually rendered to the
of stock corporation;
An agreement must A proxy is usually of 4. Prior corporate obligations;
not exceed 5 years shorter duration although
5. Amounts transferred from unrestricted
at any one time under Sec. 58 it cannot
retained earnings to stated capital (in case
except when the exceed 5 years at any one
same is made a time of declaration of stock dividends);
condition of a loan. 6. Outstanding shares in exchange for stocks
in the event of reclassification or
STOCKS conversion.
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CORPORATION CODE OF THE PHILIPPINES
pre-incorporation subscription may be
Q: What are the distinctions between revoked after the submission of the articles
subscription and purchase? of incorporation to the SEC. (Sec. 61)
Q: What is the Doctrine of Individuality of A: Yes. As long as the shares are not considered
Subscription? delinquent, they are entitled to all rights granted to
it whether or not the subscribed capital stocks are
A: A subscription is one entire and indivisible whole fully paid.
contract. It cannot be divided into portions. (Sec.
64) Q: What are the distinctions between capital
stock from shares of stock?
Q: What is the rule on pre-incorporation
subscription agreements? A:
CAPITAL STOCK SHARES OF STOCK
A: The amount paid in or It is an interest or right
GR: Subscription of shares of stock of a secured to be paid in which an owner has in the
corporation still to be formed shall be irrevocable by the stockholders management of the
for a period of at least 6 months from date of upon which the corporation, and its surplus
subscription. corporation is to profits, and, on dissolution,
conduct its operation. in all of its assets remaining
XPN: It is the property of the after payment of its debt.
1. All of the other subscribers consent to the corporation itself The stockholder may own
revocation; and (monetary value). the shares even if he is not
2. Incorporation of said corporation fails to holding a certificate of stock.
materialize within said period or within a
longer period as may be stipulated in the
contract of subscription; provided that no Q: How are shares of stock transferred?
UNIVERSITY OF SANTO TOMAS 33
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Can "A" claim the shares of stocks from "X"?
A: Explain.
1. If represented by a certificate, the
following must be strictly complied with: A: No. Since the shares were already transferred
a. Delivery of the certificate; to "B", "A" cannot claim the shares of stock from
b. Indorsement by the owner and his "X". The certificate of stock covering said shares
agent; have been duly endorsed by "A" and entrusted by
c. To be valid to third parties, the transfer him to "B". By his said acts, "A" is now estopped
must be recorded in the books of the from claiming said shares from "X", a bona fide
corporation (Rural Bank of Lipa v. purchaser who relied on the endorsement by “A” of
Court of Appeals, G.R. No. 124535, the certificate of stock.
September 28, 2001).
Would your answer be the same if "A" lost the
2. If not represented by the certificate (such stock certificate in question or if it was stolen
as when the certificate has not yet been from him?
issued or where for some reason is not in
the possession of the stockholder). A: Yes. In the case where the certificate of stock
a. By means of deed of assignment: and was lost or stolen from "A", "A" has a right to claim
b. Such is duly recorded in the books of the certificate of stock from the thief who has no
the corporation. right or title to the same. "One who has lost any
movable or has been unlawfully deprived thereof,
Note: registration in the stock and transfer book is not may recover it from the person in possession of the
necessary if the conveyance is by way of chattel same." (Art. 559, NCC) (2001 Bar Question)
mortgage. However, there must be due registration with
the Register of Deeeds (Chua Guan v. Samahan, L- Q: What if there is no certificate of stock, how
42091, November 2, 1935) can shares be transferred?
Q: What if the transfer is not recorded, is it A: It can be transferred by deed of
valid? sale/assignment.
A: Only insofar as the parties to the transfer are Q: When may a certificate of stock be issued?
concerned.
A: It shall be issued until the full amount of his
Note: Hence, the corporation has the right to refuse to subscription together with interest and expenses
recognize any transfer of shares which has not been duly
registered in the stock and transfer book. (Sec. 63)
has been paid. (Sec. 64)
Q: When may the corporation validly refuse to Q: When should the balance of the subscription
register the transfer of shares? be paid?
3. Collection from cash dividends and Delinquent stockholder shall not be entitled to any
withholding of stock dividends. (Sec. 43) of the rights of a stockholder but he shall still be
entitled to receive dividends.
Q: What is the procedure for collection and
delinquency sale? Note: If the delinquent stockholder is a director, he shall
continue be a director but he cannot run for re-election.
A:
1. Call whenever required must be made by Q: Are delinquent shares entitled to dividends?
the Board.
2. Notices of call – The stockholders are
36
CORPORATION CODE OF THE PHILIPPINES
c. Increasing / Decreasing capital stock / not entitled to vote except as provided for
bonded indebtedness; in the last paragraph of Sec.6.
d. Sale or disposition of all, substantially b. Preferred or redeemable shares may be
all of corporate assets; deprived of the right to vote unless
e. Investment of corporate funds in otherwise provided in the Code. (Sec. 6)
another corporation or for a purpose c. Fractional shares of stock cannot be voted
other than main purpose; unless they constitute at least one full
f. Issuance of stock dividends; share. (Sec. 41)
g. Corporate mergers or consolidation; d. Treasury shares have no voting rights as
h. Voluntary dissolution of the long as they remain in the treasury (Sec.
corporation whether or not creditors 57)
are prejudiced. e. Holders of stock declared delinquent by
the board of directors for unpaid
2. 2/3 of outstanding stocks subscription are not entitled to vote or a
a. Removal of directors; representation at any stockholder’s
b. Ratification of contract with director or meeting. (Sec. 67)
officer where first two requisites of f. A transferee of stock cannot vote if his
Sec. 32 are lacking; transfer is not registered in the stock and
c. Where stockholders of managed transfer book of the corporation. (Sec. 63)
corporation own more than 1/3 of g. Stock held in escrow cannot be voted until
outstanding capital stock entitled to the performances of a certain condition or
vote of the managing corporation are the happening of a certain event as
also the majority of the board of contained in the agreement. (SEC
managed corporation, such 2/3 vote is Opinion)
required to approve management
contract; Q: What is a pooling agreement?
d. Delegation to the board to amend,
repeal by-laws or adopt new by-laws. A: This is an agreement, also known as voting
agreement, entered into by and between 2 or
3. Majority of Outstanding stocks with more stockholders to make their shares vote in
majority of the board the same manner. This usually relates to
a. Approval of management contract; election of directors where parties often
b. Amendment to by-laws, repeal of by- provide for arbitration in case of disagreement.
laws, adoption of new by-laws. This does not involve a transfer of stocks but is
merely a private agreement. (Sec. 100)
4. Majority of outstanding stock
a. For quorum in electing members of Note: Parties thereto remain the legal owners of their
the board by cumulative voting; stocks with the right to vote them, although contractually
b. Grant of compensation to members of they each have bound themselves to vote in accordance
the board; with the decision of the majority in the pool.
c. Adoption of original by-laws;
d. Revocation of delegated authority to Q: When are pooling agreements valid?
the board of directors to amend or
repeal or adopt new by-laws. A: As long as they do not limit the discretion of the
BOD in the management of corporate affairs or
5. The right to vote of non-voting work any fraud against stockholders not party to
stockholders may be limited or broadened the contract.
to the extent specified in the AI or by-laws,
however, they may still vote in instances Q: What is a pre-emptive right?
specified in the code.
A: It is the right of SH to subscribe to the issuance
Q: What are the limitations on the or disposition of shares in proportion to their
stockholder’s right to vote? respective shareholding so that their interest in the
corporation will be maintained, before said shares
A: are offered to a non-stockholder.
a. Where the articles of incorporation
provides for classification of shares Q: When is the pre-emptive right not available?
pursuant to Sec.6, non-voting shares are
A:
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a. To shares to be issued in compliance with Q: ABC Corporation has an authorized capital
laws requiring stock offerings or minimum stock of One Million (P1,000,000.00) Pesos
stock ownership by the public; divided into 50,000 common shares and 50,000
b. Not extend to shares to be issued in good preferred shares. At its inception, the
faith with the approval of the stockholders Corporation offered for subscription all the
representing 2/3 of the outstanding capital common shares. However, only 40,000 shares
stock, in exchange for property needed for were subscribed. Recently, the directors
corporate purposes or in payment of a thought of raising additional capital and
previously contracted debt; decided to offer to the public all the authorized
c. Shall not take effect if denied in the shares of the Corporation at their market value.
Articles of Incorporation or an amendment
thereto. Would Mr. X, a stockholder holding 4,000
d. It does not apply to shares that are being shares, have pre-emptive rights to the
reoffered by the corporation after they remaining 10,000 shares?
were initially offered together with all the
shares. (Benito v. SEC, L-56655, July 25, A: Yes. Mr. X, a stockholder holding 4,000 shares,
1983) has pre-emptive right to the remaining 10,000
shares. All stockholders of a stock corporation shall
Note: Includes not only new shares in pursuance of an enjoy pre-emptive right to subscribe to all issues or
increase of capital stock but would cover the issue of disposition of shares of any class, in proportion to
previously unissued shares which form part of the their respective shareholdings. The ruling in Benito
existing capital stock as well as treasury shares. (SEC v. Datu and Tan v. SEC to the effect that pre-
2000 Opinion).
emptive right applies only to issuance of shares in
connection with an increase in capital is no longer
Q: Suppose that "X" Corporation has already
a valid rule under the Corporation Code. The facts
issued the 1000 originally authorized shares of
in those cases happened during the regime of the
the corporation so that its Board of Directors
old Corporation Law.
and stockholders wish to increase "X's"
authorized capital stock. After complying with
Alternative answer:
the requirements of the law on increase of
No, Mr. X does not have pre-emptive right over the
capital stock, "X" issued an additional 1000
remaining 10,000 shares because these shares
shares of the same value.
have already been offered at incorporation and he
chose not to subscribe to them. He, therefore, has
Assume that stockholder "A" presently holds
waived his right thereto and the corporation may
200 out of the 1000 original shares. Would "A"
offer them to anyone.
have a pre-emptive right to 200 of the new
issue of 1000 shares? Why?
Would Mr. X have pre-emptive rights to the
50,000 preferred shares?
A: Yes, "A" would have a pre-emptive right to 200
of the new issue of 1000 shares. "A" is a
A: Yes. Mr. X would have pre-emptive rights to the
stockholder of record holding 200 shares in "X"
50,000 preferred shares. All stockholders of a
Corporation. According to the Corporation Code,
stock corporation shall enjoy pre-emptive right to
each stockholder has the pre-emptive right to all
subscribe to all issues or disposition of shares of
issues of shares made by the corporation in
any class, in proportion to their respective
proportion to the number of shares he holds on
shareholdings.
record in the corporation.
Alternative answer:
When should stockholder "A" exercise the pre-
Yes, Mr. X has preemptive right over the 50,000
emptive right?
preferred shares because they were not offered
before by the corporation for subscription.
A: Pre-emptive right must be exercised in
accordance with the Articles of Incorporation or the
Assuming that the existing stockholders are
By-Laws. When the Articles of Incorporation and
entitled to pre-emptive rights, at what price will
the By-Laws are silent, the Board may fix a
the shares be offered?
reasonable time within which the stockholders may
exercise the right.
A: The shares will be offered to existing stock-
holders, who are entitled to pre-emptive right, at a
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CORPORATION CODE OF THE PHILIPPINES
price fixed by the Board of Directors, which shall In right of first refusal, it is the SH who shall offer
not be less than the par value of such shares. his shares to the other SH before the same are
offered to the public or non-stockholders. It is a
Assuming a stockholder disagrees with the right available to SH to be offered the shares of
issuance of new shares and the pricing for the another SH before it is offered to other party. The
shares, may the stockholder invoke his right to be exercised must be indicated in the AOI
appraisal rights and demand payment for his and printed in the stock certificate.
shareholdings?
Q: Is there pre-emptive right on the re-issuance
A: No, the stockholder may not exercise appraisal of treasury shares?
right because the matter that he dissented from is
not one of those where right of appraisal is A: Yes. When a corporation reacquires its own
available under the Corporation Code. (1999 Bar shares which thereby become treasury shares, all
Question) shareholders are entitled to pre-emptive right when
the corporation reissues or sells these treasury
Q: The Board of Directors of ABC, Inc., a shares. The re-issuance of treasury shares is not
domestic corporation, passed a resolution among the exception provided by Sec. 39 when
authorizing additional issuance of shares of pre-emptive right does not exist.
stocks without notice nor approval of the
stockholders. DX, a stockholder, objected to Q: May pre-emptive right be waived by the
the issuance, contending that it violated his stockholder?
right of pre-emption to the unissued shares. Is
his contention tenable? Explain briefly. A: Yes when the stockholder fails to exercise his
pre-emptive right after being notified and given an
A: Yes. DX’s contention is tenable. Under Sec.39 opportunity to avail of such right.
of the Corporation Code, all stockholders of ABC,
Inc. enjoy pre-emptive right to subscribe to all Note: The shareholder must either exercise the right and
issues of shares of any class, including the increase the investment, or dispose of the right by sale or
reissuance of treasury shares in proportion to their it will lapse and the shareholder’s proportionate interest
respective shareholdings. (2004 Bar Question) will be diluted.
Q: What are the contents of a stock and A: The right to withdraw from the corporation and
transfer book? demand payment of the fair value of his shares
after dissenting from certain corporate acts
A: involving fundamental changes in corporate
1. All stocks in the name of the stockholders structure. (Sec. 81)
alphabetically arranged;
2. Amount paid and unpaid on all stocks and Q: In what instances may the right of appraisal
the date of payment of any installment; be exercised?
3. Alienation, sale or transfer of stocks;
4. Other entries as the by-laws may A: In case any amendment to the articles of
prescribe. incorporation which has the effect of:
a. Changing or restricting the rights of any
Q: What are the limitations on the right of stockholder or class of shares; or
inspection of a stockholder? b. Authorizing preferences in any respect
superior to those of outstanding shares of
A: any class; or
1. The inspection should only be for a c. Extending or shortening the term of
purpose germane to his interest as a SH. corporate existence;
2. It must be exercised in good faith. d. In case of sale, lease, exchange, transfer,
3. It should be done during reasonable office mortgage, pledge or other disposition of all
hours on business days. or substantially all of the corporate
4. It should follow the formalities that may be property and assets as provided in the
required in the by-laws. Code; and
5. The right does not extend to trade secrets. e. In case of merger or consolidation
6. It is subject to limitations under special f. Extension or shortening of the term of the
laws. corporation; (Sec. 37)
ex. Secrecy of Bank Deposits. g. In case of investment of corporate funds in
another corporation or business or for any
Q: Who is authorized to make entries in the other purpose; (Sec. 42)
stock and transfer book? h. In cases of close corporations.
A: The corporate secretary. Hence, entries made Q: What are the requirements for the
by the Chairman or President are invalid. (Torres, successful exercise of appraisal right?
Jr. v. Court of Appeals, G.R. No. 120138,
September 5, 1997) A:
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CORPORATION CODE OF THE PHILIPPINES
1. Must have dissented from the proposed three (3) disinterested persons one of whom shall
corporate act so such dissenting be named by the stockholder, another by the
stockholder must be present in the SH corporation, and the third by the two thus chosen.
meeting where the corporate act was The findings of the majority of the appraisers shall
proposed. be final.
2. Make a written demand on the corporation
within 30 days after the date on which the The award shall be paid by the corporation within
vote was taken for payment of the fair thirty (30) days after such award is made No
value of his shares. Failure to make the payment shall be made to any dissenting
demand within such period shall be stockholder unless the corporation has unrestricted
deemed a waiver of the appraisal right. retained earnings in its books to cover such
3. Existence of unrestricted retained payment
earnings or surplus profits.
XPN: In case of a close corporation which Upon payment by the corporation of the agreed or
only requires that it has assets and the awarded price, the stockholder shall forthwith
payment of the fair value of the shares to transfer his shares to the corporation.
the dissenting SH will not result to its
insolvency. Q: What is the effect of the demand and
4. Within ten (10) days after demanding termination of right?
payment for his shares, a dissenting
stockholder shall submit the certificates of A: From the time of demand for payment of the fair
stock representing his shares to the value of a stockholder's shares until either the
corporation for notation thereon that such abandonment of the corporate action involved or
shares are dissenting shares. (Sec. 86) the purchase of the said shares by the corporation,
His failure to do so shall, at the option of all rights accruing to such shares, including voting
the corporation, terminate his rights. and dividend rights, shall be suspended, except
5. After payment, certificate of stock of said the right of such stockholder to receive payment of
shares shall be cancelled and acquired as the fair value thereof, provided, if the dissenting
treasury shares. stockholder is not paid the value of his shares
within 30 days after the award, his voting and
Q: When will the dissenting stockholder lose dividend rights shall immediately be restored.
his right of appraisal? (Sec.83)
A: If within a period of sixty (60) days from the date Q: Who bears the cost of appraisal?
the corporate action was approved by the
stockholders, the withdrawing stockholder and the A:
corporation cannot agree on the fair value of the GR: Costs of appraisal shall be borne by the
shares, it shall be determined and appraised by corporation
UNIVERSITY OF SANTO TOMAS 41
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2. He has exhausted intra-corporate
XPN: The costs shall be borne by the remedies; and
stockholder, when the fair value ascertained by 3. The cause of action actually devolves on
the appraisers is approximately the same as the corporation, the wrongdoing or harm
the price which the corporation may have having been caused to the corporation
offered to pay the stockholder. (Sec. 85) and not to the particular stockholder
bringing the suit.
Note: In the case of an action to recover such fair value,
all costs and expenses shall be assessed against the Note: A person who is merely holding in trust the shares
corporation, unless the refusal of the stockholder to of stock in her name cannot file a derivative suit, since
receive payment was unjustified. she is not a stockholder in her own right. (Bitong v. Court
of Appeals, G.R. No. 123553, July 13, 1998)
Q: What is the effect of the transfer from the
dissenting stockholder? Personal injury suffered by the stockholders cannot
disqualify them from filing a derivative suit on
A: behalf of the corporation. It merely gives rise to an
1. The rights of the transferor as a dissenting additional cause of action for damages against the
erring directors. (Gochan v. Young, G.R. No.
stockholder shall cease;
131889, March 12, 2001)
2. The transferee shall have all the rights of a
regular stockholder; and
3. All dividend distributions which would have Q: What are individual actions?
accrued on such shares shall be paid to
the transferee. A: Those brought by the shareholder in his own
name against the corporation when a wrong is
Q: A dissenting stockholder transfers his directly inflicted against him.
shares of stock and his certificate of stock
bearing the notation that such shares are Q: What are representative actions?
dissenting shares, are consequently cancelled.
Will the transferee acquire the right of the A: These brought by the stockholder in behalf of
transferor to demand from the corporation the himself and all other stockholders similarly situated
payment of the fair value of the shares? when a wrong is committed against a group of
stockholders.
A: No, because upon transfer of the shares of the
dissenting stockholder, his right as a dissenting Q: AA, a minority stockholder, filed a suit
stockholder shall cease and the transferee shall against BB, CC, DD, and EE, the holders of
have all the rights of a regular stockholder and all majority shares of MOP Corporation, for
dividend distributions which would have accrued on alleged misappropriation of corporate funds.
such shares shall be paid to the transferee. The The complaint averred, inter alia, that MOP
transfer of shares is an abandonment by the Corporation is the corporation in whose behalf
dissenting stockholder of his appraisal right. and for whose benefit the derivative suit is
brought. In their capacity as members of the
Q: What are derivative actions? Board of Directors, the majority stockholders
adopted a resolution authorizing MOP
A: Those brought by one or more Corporation to withdraw the suit. Pursuant to
stockholders/members in the name and on behalf said resolution, the corporate counsel filed a
of the corporation to redress wrongs committed Motion to Dismiss in the name of the MOP
against it, or protect/vindicate corporate rights Corporation. Should the motion be granted or
whenever the officials of the corporation refuse to denied? Reason briefly.
sue, or the ones to be sued, or has control of the
corporation. A: No. The requisites for a valid derivative suit
exist in this case. First, AA was exempt from
Q: What are the requisites of a derivative exhausting his remedies within the corporation and
action? did not have a demand on the Board of Directors
for the latter to sue. Here, such a demand would
A: be futile, since the directors who comprise the
1. The party bringing suit should be a majority (namely BB, CC, DD and EE are the ones
shareholder as of the time of the act or guilty of the wrong complained of. Second, AA
transaction complained of; appears to be a stockholder at the time of the
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CORPORATION CODE OF THE PHILIPPINES
alleged misappropriation of corporate funds. Third, regardless of the domicile corporation is
the suit is brought on behalf and for the benefit of of the owner or where the domiciled elsewhere.
MOP Corporation. In this connection, it was held in corporation was
Conmart (Phils.) Inc. vs SEC, 198 SCRA 73 that to organized. (see also sec.
grant to the corporation concerned the right of 104 of R.A. No. 8424)
withdrawing or dismissing the suit, at the instance b. To register the chattel
of the majority stockholders and directors who mortgages over the
themselves are the persons alleged to have shares of stock the situs is
committed the breach of trust against the interests the duty/promise in which
the corporation has its
of the corporation would be to emasculate the right
principal place of
of the minority stockholders to seek redress for the
business.
corporation. Filing such action as a derivative suit c. For purposes of
even by a lone stockholder is one of the execution, it is the
protections extended by law to minority domicile of the
stockholders against abuses of the majority. corporation.
A: Yes, it is the corporate secretary’s duty and A: Yes. The corporation may be compelled by
obligation to register transfers of stocks. mandamus to register in the shares of stock in the
name of the assignee. The only legal limitation
Note: An attachment or mortgage of shares of stock imposed by Sec. 63 of the Corporation Code is
need not be registered in the corporations stock and when the Corporation holds any unpaid claim
transfer book inasmuch as a chattel mortgage over against the shares intended to be transferred. The
shares of stock does a “transfer of shares” and that only alleged claim of another heir of PX is not sufficient
absolute transfers of shares of stock are required to be to deny the issuance of new certificates of stock to
recorded in the corporation’s stock and transfer book in his wife and children. It would be otherwise if the
order to have “force and effect as against third persons”.
transferee’s title to the shares has no prima facie
(Chemphil Export and Import Corporation v. Court validity or is uncertain.
of Appeals, G.R. Nos. 112438-39, December 12,
1995) Q: What is the rule with regard to lost or
destroyed Certificates?
Q: What is the rule on right to issuance?
A: While Sec. 73 of the Corporation Code appears
A: A corporation may now, in the absence of to be mandatory, the same admits of exceptions,
provisions in their by-laws to the contrary, apply such that a corporation may voluntarily issue a new
payments made by subscribers-stockholders, certificate in lieu of the original certificate of stock
either as: which has been lost without complying with the
a. Full payment for the corresponding requirements under Sec. 73 of the Corporation
number of shares of stock, the par value Code, provided that the corporation is certain as to
of each of which is covered by such the real owner of the shares to whom the new
payment; or certificate shall be issued. It would be an internal
b. Payment pro-rata to each and all the matter for the corporation to find measures in
entire number of shares subscribed for. ascertaining who are the real owners of stock for
(Baltazar v. Lingayen Gulf Electric Power purposes of liquidation. It is well-settled that
Co., Inc, L-16236-38, June 30, 1965) unless proven otherwise, the STB of the
44
CORPORATION CODE OF THE PHILIPPINES
corporation is the best evidence to establish stock b. The endorsee of the replacement
ownership. (SEC Opinion, January 28, 1999) certificate has a better right to the shares.
After expiration of 1 year form he date of
Q: What is the procedure for the issuance of the last publication, and no contest has
new certificate of stock for certificate that was been presented to said corporation
lost, destroyed or stolen? regarding said certificate, the right to make
such contest has been barred and said
A: corporation already cancelled in its books
1. The registered owner must make an the certificate which have been lost,
affidavit in triplicate stating the stolen, or destroyed and issued in lieu
circumstances as to how it was lost, stolen thereof new certificate.
or destroyed, number of shares
represented by the certificate, serial Q: What if there are oppositions on the
number of the certificate, and name of the issuance of new certificates, what may the
corporation that issued it. corporation do?
2. The corporate secretary shall verify the
same. A notice shall also be published A: The corporation may file an interpleader
once a week for 3 consecutive weeks in a proceeding to compel the parties to litigate among
newspaper of general circulation. themselves.
3. If after 1 year from the last publication, no
contest has been presented or made Q: May the corporation be sued for the
against the issuance of new certificate, the issuance of new certificates of stock?
old certificates shall be cancelled and new
ones be issued. Exception to the 1 year A: No action shall prosper against the corporation
period: if the registered owner files a bond for the issuance of new certificates unless there is
or other security effective for period of 1 bad faith, fraud or negligence present.
year, in which case, new certificate may
be issued even before expiration of 1 year Q: When will the issuance of new certificate of
but still upon the discretion of the stock in lieu of the one lost be suspended?
corporation.
A:
Q: A stockholder claimed that his stock a. if a contest has been presented to the
certificate was lost. After going through with corporation; or
the procedure for the issuance of lost b. if an action is pending in court regarding
certificate, and no contest was presented the ownership of the lost certificate. (Sec.
within 1 year from the last publication, the 73 par. 2)
corporation issued a new certificate of stock in
lieu of the supposed lost certificate. The Q: What are the obligations of stockholders?
stockholder immediately sold his shares and
endorsed the replacement certificate to a buyer. A:
It turned out that the original certificate was not 1. Liability to the corporation for unpaid
lost, but sold and endorsed to another person. subscription; (Secs. 67-70)
(a) May the corporation be made liable by the 2. Liability to the corporation for interest on
aggrieved party? (b) Who will have a better unpaid subscription if so required by the
right over the shares, the endorsee of the by-laws; (Sec. 66)
original certificate or the endorsee of the 3. Liability to the creditors of the corporation
replacement certificate? for unpaid subscription; (Sec. 60)
4. Liability for watered stock; (Sec. 65)
A: 5. Liability for dividends unlawfully paid;
a. No, the corporation cannot be made liable. (Sec. 43)
Except in cases of fraud, bad faith, or 6. Liability for failure to create corporation.
negligence on the part of the corporation (Sec. 10)
and its officers, no action may be brought
against any corporation which have issued MERGER AND CONSOLIDATION
certificates of stock in lieu of those lost,
stolen, or destroyed pursuant to the Q: What is merger?
procedure prescribed by law.
Q: What are the limitations on corporate Q: What happens to the employees of the
combinations? absorbed corporation? Is the surviving
UNIVERSITY OF SANTO TOMAS 47
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corporation duty-bound to absorb the former’s
employees? Q: What are the modes of dissolution of a
corporation?
A: Yes, because employment agreements or
contracts are liabilities. All liabilities of the absorbed A:
corporation are acquired by the surviving 1. Voluntary
corporation. However, this is without being subject a. Where no creditors are affected
to giving them the same positions. Procedure:
1. Majority vote of the board of
Q: What are the types of acquisitions and directors or trustees; and
transfers? 2. Resolution duly adopted by the
affirmative vote of the
A: stockholders owning at least 2/3
1. Assets-Only Transfers - The purchaser is of the outstanding capital stock or
only interested in the raw assets and at least 2/3 of the members at a
properties of the business. The meeting duly called for that
transferee is not liable for the debts and purpose.
liabilities of his transferor, except where 3. A copy of the resolution
the transferee expressly or impliedly authorizing the dissolution shall
agrees to assume such debts. be certified by a majority of the
board of directors or trustees and
2. Business-Enterprise Transfers - The countersigned by the secretary of
purchaser’s interest goes beyond the the corporation.
assets of the business enterprise. The 4. Such copy shall be filed with
primary interest is essentially to obtain the SEC. (Sec. 118)
earning capability of the venture. The
transferee is liable for the debts and b. Where creditors are affected
liabilities of his transferor. Procedure:
1. Filing a petition for dissolution
3. Equity Transfers - The transferee is not with the SEC
liable for the debts and liabilities of the 2. Such petition must be signed by
transferor, except where the transferee majority of the board of directors
expressly or impliedly agreed otherwise. or trustees
What the purchaser has actually 3. Must also be verified by the
purchased is the ability to elect the president or secretary or one of
members of the board of the corporation its directors
who run the business. 4. The dissolution was resolved
upon by the affirmative vote of the
Q: What is a spin-off? stockholders representing at least
2/3 of the outstanding capital
A: It has the opposite effect of merger or stock or at least 2/3 of the
consolidation, whereby a department, division or members at a meeting duly called
portions of the corporate business enterprise is for that purpose.
sold-off or assigned into a new corporation that will 5. If there is no sufficient objection,
arise by the process which may constitute it into a and the material allegations of the
subsidiary of the original corporation. The validity petition are true, a judgment shall
of spin-offs depends upon valid business cause be rendered dissolving the
and good faith. (San Miguel Corp. Employees corporation and directing such
Union-PTGWO v. Confesor, G. R. No. 111262, disposition of its assets as justice
September 19, 1996) requires, and may appoint a
receiver to collect such assets
LIQUIDATION and DISSOLUTION and pay the debts of the
corporation. (Sec. 119)
Q: What is meant by dissolution?
c. By shortening the corporate term - A
A: It is the extinguishment of the franchise of a voluntary dissolution may be effected by
corporation and the termination of its corporate amending the AOI to shorten its corporate
existence. term pursuant to the provisions of the
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CORPORATION CODE OF THE PHILIPPINES
Code. A copy of the amended AOI shall Q: Name three (3) methods by which a stock
be submitted to the SEC. Upon approval corporation may be voluntarily dissolved.
of the amended AOI of the expiration of Explain each method.
the shortened term, the corporation shall
be deemed dissolved without any further A:
proceedings, subject to the provisions of 1. Voluntary Dissolution where no creditors are
the Code on liquidation. affected. This Is done by a majority vote of
the directors, and resolution of at least 2/3
As an additional requirement, the SEC vote of stockholders, submitted to the
requires to submit the final audited Securities and Exchange Commission.
financial statement not older than 60 days 2. Voluntary dissolution where creditors are
before the application for shortening the affected. This Is done by a petition for
corporate term. dissolution which must be filed with the
Securities and Exchange Commission,
d. In case of a corporation sole, by signed by a majority of the members of the
submitting to the SEC for approval, a board of directors, verified by the president
verified declaration of dissolution or secretary, and upon affirmative vote of
(Sec.115). This merely needs the affidavit stockholders representing at least 2/3 of the
of the presiding elder. No need for a outstanding capital stock.
board resolution. 3. Dissolution by shortening of the corporate
term. This is done by amendment of the
e. By merger or consolidation, whereby the articles of incorporation. (2002 Bar
constituent corporations automatically Question)
cease upon issuance by the SEC of the
certificate of merger or consolidation, Q: What are the effects of dissolution of a
except the surviving or consolidated corporation?
corporation which shall continue to exist.
(Secs. 79 and 80) A:
1. It shall be continued as a corporate body
f. Expiration of the corporate term (Sec. 11). for 3 years after dissolution, for the
purpose of liquidation but not for
2. Involuntary continuing the business for which it was
a. Failure to organize and commence established.
transaction of its business within 2 years 2. At any time during said 3 years, the
from date of incorporation. (Sec. 22) corporation is authorized and empowered
to convey all of its properties to trustees
b. Continuous inoperation for a period of at for the benefit of stockholders, members,
least 5 years. creditors, and other interested persons.
3. After conveyance of corporate property, all
c. Failure to file by-laws within the required interests the corporation had in the said
period but, according to a SEC Opinion, property terminates, and legal title shall
SEC will give it the opportunity to explain vest in the transferee.
such failure an not automatically dissolve 4. Upon winding up of the corporate affairs,
the corporation. any asset distributable to any creditor or
stockholder or member who is unknown or
d. By order of the SEC upon a verified cannot be found shall be escheated to the
petition and after proper notice and city or municipality where such assets are
hearing on the ground of serious located.
misrepresentation as to what the 5. Distribution of its assets or property shall
corporation can do or is doing to the great be done only after payment of all its debts
prejudice of or damage to the general and liabilities. (Sec. 122)
public.
Q: XYZ Corporation entered into a contract of
e. Revocation or forfeiture of the franchise or lease with ABC, Inc., over a piece of real estate
certificate of incorporation due to its for a term of 20 years, renewable for another 20
misuse or non-use pursuant to quo years, provided that XYZ's corporate term is
warranto proceedings filed by the Solicitor extended in accordance with law. Four years
General. after the term of XYZ Corporation expired, but
still within the period allowed by the lease
UNIVERSITY OF SANTO TOMAS 49
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contract for the extension of the lease period, expected to be completed or resolved within
XYZ Corp. notified ABC, Inc., that it is five years from May 30, 1997. If the creditors
exercising the option to extend the lease. ABC, had sought your professional help at that time
Inc., objected to the proposed extension, about whether or not their cases could be
arguing that since the corporate life of XYZ pursued beyond May 30, 1997, what would have
Corp. had expired, it could no longer opt to been your advice?
renew the lease. XYZ Corp. countered that
withstanding the lapse of its corporate term it A: The cases can be pursued even beyond May
still has the right to renew the lease because no 30. 1997, the last day of the corporate existence of
quo warranto proceedings for involuntary GHQ Corporation. The Corporation is not actually
dissolution of XYZ Corp. has been instituted by dissolved upon the expiration of its corporate term.
the Office of the Solicitor General. Is the There is still the period for liquidation or winding
contention of XYZ Corp. meritorious? Explain up. (2000 Bar Question)
briefly.
Q: "X" Corporation shortened its corporate life
A: XYZ Corporation’s contention is not meritorious by amending its articles of incorporation. It has
based on the ruling of the Supreme Court in PNB v. no debts but owns a prime property located in
CFI of Rizal, 209 SCRA. XYZ Corp. was dissolved Quezon City. How would the said property be
ipso facto upon the expiration of its original term. It liquidated among the five stockholders of said
ceased to be a body corporate for the purpose of corporation? Discuss two methods of
continuing the business for which it was organized, liquidation.
except only for purposes connected with its
winding up or liquidation. Extending the lease is A: The prime property of "X" Corporation can be
not an act to wind up or litigate XYZ’s affairs. It is liquidated among the five stockholders after the
contrary to the idea of winding up the affairs of the property has been conveyed by the corporation to
corporation. (2004 Bar Buestion) the five stockholders, by dividing or partitioning it
among themselves in any two of the following
Q: What is liquidation? ways:
1. By physical division or partition based on
A: It is the process by which all the assets of the the proportion of the values of their
corporation are converted into liquid assets (cash) stockholdings; or
in order to facilitate the payment of obligations to 2. By selling the property to a third person
creditors, and the remaining balance if any is to be and dividing the proceeds among the five
distributed to the stockholders. stockholders in proportion to their
stockholdings; or
Q: What are the modes of liquidation? 3. after the determination of the value of the
property, by assigning or transferring the
A: property to one stockholder with the
1. Liquidation by a duly appointed receiver; obligation on the part of said stockholder
(Sec. 119) to pay the other four stockholders the
2. Liquidation by the corporation itself or its amount/s in proportion to the value of the
board of directors; (Sec. 122) stockholding of each. (2001 Bar
3. Liquidation by trustees to whom the assets Question)
of the corporation had been conveyed.
(Sec. 122); (Board of Liquidators v. Kalaw, Q: What are the consequences if the liquidation
L-18805, August 14, 1967) is not terminated within the 3-year period?
A:
Q: What is a foreign corporation?
1. The foreign corporation should file a
A: It is a corporation formed, organized or existing
verified application containing and
under any law other than those of the Philippines,
together with the following:
and whose laws allow Filipino citizens and
2. Designated resident agent (who will
corporation to do business in its own country or
receive summons and notices for the
state. (Sec. 123)
corporation; a special power of attorney
Q: May a foreign corporation sue in the should also be submitted for such
Philippines? purpose;
3. An agreement that if it ceases to transact
A: No. The foreign corporation transacting business or if there is no more resident
business in the Philippines without a license to do agent, summons shall then be served
business shall not be permitted to maintain or through SEC;
intervene in any action, suit or proceeding in any 4. Oath of Reciprocity. Certificate under Oath
court or administrative agency. of the authorized official of the foreign
corporation’s country that allows Filipino
Q: May a foreign corporation be sued in the citizens and corporations to do business in
Philippines? said country.
5. Within 60 days from issuance of license,
A: Yes. Any foreign corporation transacting the corporation should deposit at least
business in the Philippines whether or not with a P100, 000.00 (cash, property or bond) for
license, may be sued against/before Philippine
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the benefit of creditors subject to further functions of directors without need of
deposit every six months. election
a. When they manage, stockholders are
Q: What are the requirements for close liable as directors;
corporations? b. There is no need to call a meeting to
elect directors;
A: c. The stockholders are liable for tort.
1. The Articles of Incorporation must state 2. Despite the presence of the requisites, the
that the number of stockholders shall not corporation shall not be deemed a close
exceed 20; corporation if at least 2/3 of the voting
2. The Articles of Incorporation must contain stocks or voting rights belong to a
restriction on the transfer of issued stocks corporation which is not a close
(which must appear in the Articles of corporation.
Incorporation, By-laws and Certificate of
Stock). 3. NON-STOCK CORPORATION
Restrictions on the transfer must not be
more than onerous than granting the Q: What is a non-stock corporation?
existing SH or corporation the option to
/purchase the shares; A: It is a corporation organized primarily for
3. The stocks cannot be listed in the stock charitable, religious, educational, fraternal, literary,
exchange nor publicly offered. trade, industry and agriculture chambers or any
combination thereof.
Note: The corporation is not a close even if the shares
belong to less than twenty if not all the requisites are It cannot be organized for political purposes.
present. (San Juan Structural and Steel Fabricators, Inc.
v. Court of Appeals, G.R. No. 129459, September 29, The income of which cannot be distributed as
1998)
dividends to its members, trustees or officers.
CLOSE CORPORATION
Q: What are the distinctions between a stock
Q: What cannot be a close corporation? corporation and a non-stock corporation?
A: A:
1. Mining companies; STOCK NON-STOCK
2. Oil companies; Organized for profit Not organized for profit
3. Stock exchanges; Governed by BOD Governed by BOT
4. Banks; Membership is Membership is non-
5. Insurance companies transferable transferable. It Is
6. Public utility personal.
7. Educational institutions Right to resort to It must be provided in the
8. Other corporation declared to be vested cumulative voting by-laws
with public interest. BOD: not more than 15 BOT: more than 15 but
divisible by 3
Q: What is the remedy in case of deadlocks in a Place of meeting: within Any place outside the
close corporation? the city or municipality place of business but
where the place of must be within the
A: The SEC may be asked to intervene and the business is located Philippines
SEC may perform such actions that may be Term of BOD: 1 year Term of BOT: 3 years but
on a staggered basis
necessary under the circumstances including the
Right to vote can be Right to vote may be
appointment of a provisional director who, as an
denied except in cases denied as provided in the
impartial person will have all the powers of a duly
stated in Sec. 60 by-laws
elected director (not a receiver).
Assets are distributed Assets are distributed as
according to interest provided by law
Q: What are the characteristics of a close
Capital stock is divided No capital stock divided
corporation? into shares into shares
Officers are elected Officers are elected by
A:
directly by BOD the members
1. The stockholders themselves can directly
Stockholders may vote Members may vote by
manage the corporation and perform the
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CORPORATION CODE OF THE PHILIPPINES
personally or by proxy email dividends to members. Giving the
Assets are distributed to Assets are distributed to members shares is tantamount to
the stockholders after members provided: distribution of its assets or income. (SEC
payment of corporate a. Obligations and Opinion, March 20, 1995)
obligations duties were paid. 2. A non-stock corporation can be converted
b. Properties into a stock corporation only if the
received but members dissolve it first and then
burdened with organize a stock corporation. However,
limitation that it there is a resulting new corporation. (SEC
can’t be Opinion, May 13, 1992)
dispensed unless
3. A stock corporation may be converted into
these limitations
a non-stock corporation by mere
were complied
with amendment provided all the requirements
c. Plan of are complied with. Its rights and liabilities
dissolution must will remain.
be approved by
the majority vote Q: What is the order of distribution of assets on
of BOT and 2/3 dissolution of non-stock corporations?
members
Members are called Members are called A:
“corporators” “members” 1. All its creditors shall be paid;
Termination: according to Termination: governed by 2. Assets held subject to return on
stockholders the AOI dissolution, shall be delivered back to their
givers;
3. Assets held for charitable, religious
purposes, etc., without condition for their
return on dissolution, shall be conveyed to
one or more organizations engaged in
similar activities as dissolved corporation;
Q: What the rights of members? and
4. All other assets shall be distributed to
A: members, as provided for in the Articles or
By-laws. (Sec. 94)
a. Right to vote - A member is entitled to one
(1) vote. However, such right may be Q: Can a non-stock corporation offset unused
broadened, limited or denies in the Articles contributions of members against the balance
of Incorporation or BY-Laws. (Sec.89) of receivables from the same members?
thus, the BY-laws of a non-stock
corporation may provide for the desired A: No. The unused contributions of members
voting rights of members, including the cannot be offset against the balance of receivables
number of votes. (SEC Opinion, October because this would amount to distribution of the
10, 1989) capital of the corporation. Members of Non-stock
Corporation are not entitled to distribution of
b. Right to transfer membership - As a capital. They are only entitled to distribution of
general rule, a member cannot transfer his capital upon dissolution when it is provided for in
membership (and the rights arising the Articles of Incorporation or by-laws. (SEC
therefrom) in a non stock corporation. Opinion, November 27, 1985)
However, by way of exception, the Articles
on Incorporation or BY-laws may provide Q: What is the nationality of a corporation
for their transferability. (Sec. 90) sole?
Q: What are the rules regarding conversion? A: A corporation sole does not have any nationality
but for purposes of applying nationalization laws,
A: nationality is determined not by the nationality of its
1. A non-stock corporation cannot be but by the nationality of its members, constituting
converted into a stock corporation through the sect in the Philippines. Thus, the Roman
mere amendment of its Article of Catholic Church can acquire lands in the
Incorporation. This would violate Sec.87 Philippines even if it is headed by the Pope.
which prohibits distribution of income as (Roman Catholic Apostolic Church v. Land
UNIVERSITY OF SANTO TOMAS 53
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Registration Commission, L-8451, December 20,
1957)
54