Corporation Law (2019) MIDTERM REVIEWER
GAVIOLA-CLIMACO
Introduction
SOLE PROPRIETORSHIP, PARTNERSHIP AND CORPORATION
DISTINGUISHED
TYPES OF BUSINESS ORGANIZATIONS:
1. Sole Proprietorship
A form of business organization with only one
proprietary owner. It is when a person personally or a single
individual conducts business under his own name or under a
business name.
Atty G: What distinguishes a sole proprietorship is that the
individual is the business. You cannot separate the individual
from the business. It is the most basic form of business
organization.
2. Partnership
Articl 1767 NCC: By the contract of partnership, two or
more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Two or more persons may also form a partnership for
the exercise of a profession.
Atty G: The essence of partnership is that it is “contractual in
nature”. It is created by mere consent. The moment the partners
agree as to what they will contribute and how to conduct
business, there will now be a contract of partnership between
them. You don’t need to register the partnership with the SEC in
order to create it.
Aside from being a contract, a partnership is a separate
and distinct entity from that of the partners. It is basically a
bridge between sole proprietorship and a corporation.
Partnership is a contract and at the same time an entity, a
business organization thus, reflecting its peculiarity.
3. Corporation
Section 2, Corporation Code of the Philippines: An
artificial being created by operation of law, having the right of
succession and the the powers, attributes and properties
expressly authorized by law or incident to its existence.
CORPORATION VS. PARTNERSHIP
AS TO CAPITALIZATION (added by the transcriber)
 Corporation: The corporation can acquire more
investments since there are unlimited opportunities for the
increase in capitalization. Consequently, this makes it
feasible for the corporation to engage in bigger business.
 Partnership: Because of the principle of trust and
confidence, only those chosen may invest and be a partner.
Capitalization is limited to the contribution of the partners
and loans from creditors.
AS TO THE NUMBER OF PERSONS COMPOSING IT
 Corporation: needs at least 5 incorporators but not more
than 15
 Partnership: atleast 2 partners would be enough
AS TO MANNER OF CREATION
 Corporation: created through a legal process and requires SEC
approval via Certificate of Incorporation
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 Partnership: contractual, created by mere agreement
AS TO LIABILITIES
 Corporation: limited liability
o liability of the corporation is distinct from the liabilities of
the persons composing it and the liabilities of the persons
composing the corporation, as a general rule, are only
limited to their contribution to the corporation
o in other words, stockholders are liable only to the extent
of their contributions in the corporation
 Partnership
o General partnership: liability can extend to personal
assets
 partnership properties are exhausted prior to
partners’ personal properties
o Limited partnership: limited partner’s liability is limited to
contribution
AS TO MANAGEMENT
 Corporation: managed by Board of Directors acting together
(not even individually) who can bind the corporation
o Ex. to open a bank account, an individual director cannot
perform such in the name of the corporation as the bank
will require a board resolution
 Partnership: generally every partner is an agent of the
partnership and can bind the partnership
AS TO TRANSFERABILITY OF INTEREST
 Corporation: shares of stock can be transferred without
seeking the consent of the other stockholders
o corporation’s existence is independent of the
composition of its Board or stockholders
 Partnership: transfer of partner’s interest requires the consent
of all partners
o change in composition of partners automatically dissolves
partnership
AS TO SUCCESSION
 Corporation: right of succession exists
o heirs of stockholder will succeed in the rights
 Partnership: no right of succession
General Provisions
CORPORATION DEFINED
Section 2. Corporation defined. A corporation is an artificial
being created by operation of law, having the right of
succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
Attributes of a Corporation
1. An artificial being
2. Created by operation of law
3. Has the right of succession
4. Has the powers, attributes and properties expressly
authorized by law or incident to its existence
1 | Artificial being
As an artificial being, it has a separate juridical personality. It can
enter into obligations and contracts, and when it has liabilities,
the corporation shall be liable but its members or stockholders
Corporation Law (2019) MIDTERM REVIEWER
could not be held personally liable as they are considered to be
separate from the corporation itself.
Atty. GC: So how does this relate to the Doctrine of Piercing the
Veil?
(Based on Aquino book) Doctrine of Piercing the Veil of
Corporate Fiction:
Basic in corporate law is the principle that a
corporation has a separate personality distinct from its
stockholders and from other corporation to which it may be
connected. It is a fiction created by law with the intent that it
should be treated as true. However, under this doctrine, the
corporation’s separate juridical personality may be disregarded
when there is an abuse of the corporate form. Whenever the
doctrine applies, the principal and the conduit will be treated as
one; the controlled corporation will be deemed to have, “ so to
speak, no separate mind, will or existence of its own, and is but
a conduit for its principal.” If applicable, “ the corporation is
merely an aggregation of persons whose liabilities must be
treated as one with the corporation.” The conduit corporation
will then be solidarily liable with the principal.
S: It means that the veil or the artificial or separate personality
of the corporation is disregarded and that the members or the
stockholders thereof are made personally liable because they are
using the corporation as an alter ego or an avatar(term used by
Atty.) as a means to defeat public convenience, justify a wrong,
protect a fraud, defend a crime, to commit injustice or as a
vehicle for the evasion of an existing obligation.
2 | Created by operation of law
S: As we have discussed, a corporation is different from a
partnership for the latter can be formed by mere consent. A
corporation, however, is formed once it gains the approval of the
Securities and Exchange Commission. Technically, a corporation
needs to comply with the necessary requirements set forth by
law and from that, the issuance of the Certificate of
Incorporation follows which in turn starts its corporate existence.
3 | Has the right of succession
(Based on Aquino book) Right of Succession or Perpetual
Succession:
Perpetual Succession is” that continuous existence which enables
a corporation to manage its affairs, and hold property without
the necessity of perpetual conveyances , for purposes of
transmitting it. By reason of this quality, the ideal and artificial
person remains, in its legal entity and personality, the same
though frequent changes may be made of its members.”
Blackstone on the concept of perpetual succession:
“All individual members that have existed from the foundation to
the present time, or that shall ever hereafter exist, are but one
person in law, a person that never dies; in like manner as the
River Thames is stiull the same river, though parts which
compose it are changing every instant.” (char)
IOW, a corporation continues to exist even if there is a change in
those who compose it. Death of a shareholder or a transfer of his
shares will not dissolve it.
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ATTY. GAVIOLA-CLIMACO
Atty. GC: When a stockholder transfers his share, does it need
the consent of the other stockholders just like in partnership?
S: No. In the transfer or assignment of shares or rights in a
corporation, a stockholder does not need the consent of the
other stockholders because they own it in their own right and as
oppose to a partner in a partnership, it is needed because of
their highly fiduciary relationship.
Atty. GC: So as a general rule, a stockholder can transfer his
share in the corporation even without the consent of the other
stockholders.
Exception: If they expressly provide for a restriction on transfers
as reflected in their Articles of Incorporation.
4 | Has the powers, attributes and properties expressly
authorized by law or incident to its existence
S: It means that once a corporation is registered or has been
approved by the SEC, it can immediately perform the different
obligations or exercise rights related to the purpose for which it
is formed.
The corporation also has powers and attributes given by law and
incidental to its existence. It means that a corporation can:
1. Sue in its own name
2. Acquire properties
3. Enter into contract
This fourth attribute is a direct result of a corporation being an
artificial being.
This means that because a corporation is created by operation of
law as a separate and distinct entity, the powers is limited to
only that prescribed by law and any power incidental to the
express powers provided by law. Anything beyond that, the
corporation is not authorized anymore.
KINDS OF POWERS
 Express powers: those authorized by law
 Implied powers: those incidental to its existence
Atty: But the implied powers must be only those that are related
to the expressed powers of the corporation. It cannot be just
anything implied, it has to be powers that are directly related or
incidental to the powers expressly provided for by law. As a
creature of law, its powers are limited only to that, and anything
done beyond that will be considered “ultra vires” or an
authorized.
HEIRS OF FE TAN UY V. INTERNATIONAL EXCHANGE BANK, G.R.
NO. 166282-166283, FEBRUARY 13, 2013
FACTS: Respondent International Exchange Bank (iBank), granted
loans to Hammer Garments Corporation (Hammer), covered by
promissory notes and deeds of assignment.
These were made pursuant to the Letter-Agreement between
iBank and Hammer, represented by its Pres and Gen Manager,
Manuel Chua (Chua) a.k.a. Manuel Chua Uy Po Tiong, granting
Hammer a P 25 Million-Peso Omnibus Line. The loans were
secured by a Real Estate Mortgage executed by Goldkey
Development Corporation (Goldkey) over several of its properties
Corporation Law (2019) MIDTERM REVIEWER
and a Peso Surety Agreement signed by Chua and his wife, Fe
Tan Uy (Uy).
Hammer defaulted in the payment of its loans, prompting iBank
to foreclose on Goldkey’s third-party Real Estate Mortgage.
The mortgaged properties were sold for P 12 million during the
foreclosure sale, leaving an unpaid balance of P 13,420,177.62.
For failure of Hammer to pay the deficiency, iBank filed a
Complaint for sum of money against Hammer, Chua, Uy, and
Goldkey.
Despite service of summons, Chua and Hammer did not file their
respective answers and were declared in default. In her separate
answer, Uy claimed that she was not liable to iBank because she
never executed a surety agreement in favor of iBank. Goldkey, on
the other hand, also denies liability, averring that it acted only as
a third-party mortgagor and that it was a corporation separate
and distinct from Hammer.
RTC DECISION: ruled in favor of iBank. While it made the
pronouncement that the signature of Uy on the Surety
Agreement was a forgery, it nevertheless held her liable for the
outstanding obligation of Hammer because she was an officer
and stockholder of the said corporation. The RTC agreed with
Goldkey that as a third-party mortgagor, its liability was limited
to the properties mortgaged. It came to the conclusion, however,
that Goldkey and Hammer were one and the same entity for the
following reasons: (1) both were family corporations of Chua and
Uy, with Chua as the Pres. and Chief Operating Officer; (2) both
corporations shared the same office and transacted business
from the same place, (3) the assets of Hammer and Goldkey
were co-mingled; and (4) when Chua absconded, both Hammer
and Goldkey ceased to operate. As such, the piercing of the veil
of corporate fiction was warranted. Uy, as an officer and
stockholder of Hammer and Goldkey, was found liable to iBank
together with Chua, Hammer and Goldkey for the deficiency of
P13,420,177.62.
CA DECISION: affirmed the findings of the RTC. It found that
iBank was not negligent in evaluating the financial stability of
Hammer. According to the appellate court, iBank was induced to
grant the loan because petitioners, with intent to defraud the
bank, submitted a falsified Financial Report for 1996 which
incorrectly declared the assets and cashflow of Hammer.
Because petitioners acted maliciously and in bad faith and used
the corporate fiction to defraud iBank, they should be treated as
one and the same as Hammer.
ISSUES:
1. Whether Uy can be held liable to iBank for the loan obligation
of Hammer as an officer and stockholder of the said corporation?
Uy is not liable.
2. Whether Goldkey can be held liable for the obligation of
Hammer for being a mere alter ego of the latter? Goldkey is a
mere alter ego of Hammer.
HELD:
Uy is not liable.
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ATTY. GAVIOLA-CLIMACO
Basic is the rule in corporation law that a corporation is a
juridical entity which is vested with a legal personality separate
and distinct from those acting for and in its behalf and, in
general, from the people comprising it. Following this principle,
obligations incurred by the corporation, acting through its
directors, officers and employees, are its sole liabilities. A
director, officer or employee of a corporation is generally not
held personally liable for obligations incurred by the
corporation. Nevertheless, this legal fiction may be disregarded
if it is used as a means to perpetrate fraud or an illegal act, or as
a vehicle for the evasion of an existing obligation, the
circumvention of statutes, or to confuse legitimate issues.
Goldkey is a mere alter ego of Hammer
Goldkey’s argument, that iBank is barred from pursuing Goldkey
for the satisfaction of the unpaid obligation of Hammer because
it had already limited its liability to the real estate mortgage, is
completely absurd. Goldkey needs to be reminded that it is being
sued not as a consequence of the real estate mortgage, but
rather, because it acted as an alter ego of Hammer. Accordingly,
they must be treated as one and the same entity, making
Goldkey accountable for the debts of Hammer.
Under a variation of the doctrine of piercing the veil of corporate
fiction, when two business enterprises are owned, conducted
and controlled by the same parties, both law and equity will,
when necessary to protect the rights of third parties, disregard
the legal fiction that two corporations are distinct entities and
treat them as identical or one and the same.
While the conditions for the disregard of the juridical entity may
vary, the following are some probative factors of identity that
will justify the application of the doctrine of piercing the
corporate veil:
a. Both corporations are family corporations of defendants
Manuel Chua and his wife Fe Tan Uy.
b. Hammer Garments and Goldkey share the same office and
practically transact their business from the same place.
c. Defendant Manuel Chua is the President and Chief Operating
Officer of both corporations. All business transactions of Goldkey
and Hammer are done at the instance of defendant Manuel Chua
who is authorized to do so by the corporations.
d. The assets of Goldkey and Hammer are co-mingled. The real
properties of Goldkey are mortgaged to secure Hammer's
obligation with creditor hanks.
e. When defendant Manuel Chua "disappeared", the defendant
Goldkey ceased to operate.
The bank filed a collection case against Chua and Goldkey. There
are two issues in this case :
first issue. Whether or not UY the wife of Chua can be personally
liable being the officer of hammer garment.
second issue. Whether or not Goldkey can be peirce by the veil
being the surety where its property has been used as the
mortgage on the loan by the hammer garment ?
Corporation Law (2019) MIDTERM REVIEWER
With repspect to the first issue on the w/n Uy the wife of Chua
can be personally liable , the Supreme Court said no because the
corporation has its distinct and separate personality distinct from
its officer.
So the ground was not that because she signed the surety
agreement the ground was due to the fact that she was an
officer because it was found that its not here real signature so
the only basis that the court has in making here liable on the
obligation of hammer is the mere fact that she is an officer and a
director of Hammer . So what happened there? What did the
Supreme Court say?Is that a sufficient ground to make her liable?
The SC said it is not a sufficient ground that UY will be held liable
in this case because of the separate and distinct personality of
the corporation.
Atty: So is she liable by the mere fact that she is an officer?
So the Supreme Court said , go back to general rule because of
the separate personality of a corporation and its officer and
stockholders the officer and the stockholders does not become
liable of the obligation of the corporation by the mere fact of
their being an officer.
DOCTRINE OF PIERCING THE CORPORATE VEIL
It is a recognition that while a corporation is granted by law a
personality distinct and separate from its stockholder - meaning
its a separate person, its an artificial being which is recognized as
a person under the law separate from its stockholder and its
members. That artificial being is only created by law, a mere
legal fiction, because in reality there is no real person there. That
recognition as a person is a mere legal fiction created by law so
that when that artificial being is used as a means to commit
fraud or injustice then the law allows that this legal fiction will be
taken down. The law allows that it will pierce the veil of this
separate entity and consider it as one with the persons opposing
it. That is the reason behind the Doctrine of Piercing the Veil.
SOLIDBANK CORPORATION VS
MINDANAO FERROALLOY CORPORATION
Facts:
Philippine corporation Maria Cristina Chemical Industries (MCCI)
and three Korean corporations: Ssangyong Corporation, Pohang
Iron and Steel Company and Dongil Industries Company, Ltd.,
entered into a joint venture under the name of Mindanao
Ferroalloy Corporation. The officers of these corporation
comprised the Board members of Mindanao Ferroalloy
Corporation: Guevara as the President and Chairman, Hong the
Vice President, Teresita Cu as a member. Subsequently, the
Board of Directors authorized Guevara to secure a loan of
30Million pesos from Solidbank.
The Mindanao Ferroalloy started their operation in April 1991.
However, the indebtedness acquired from Solidbank ballooned
to 200.4Million pesos while its asset is only 65.4Million pesos.
The Corporation executed Promissory Note signed by Teresita Cu
and Jong-Won Hong. They also executed a Deed of Assignment in
favor of the Bank covering its rights, title and interests: entire
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ATTY. GAVIOLA-CLIMACO
proceeds of drafts drawn under Irrevocable Letter of Credit a
Quedan. Hong and Cu also affixed their signatures for the
Corporation. The Corporation, also, through Hong and Teresita
Cu, executed a Trust Receipt Agreement, by way of additional
security for said loan, the Corporation undertaking to hold in
trust, for the Bank, some of its property.
Shortly after the execution of the said deeds, the Corporation
stopped its operations. The Corporation failed to pay its loan.
Hence, a collection of sum of money was filed against the
Corporation imploding Guevarra, Hong, and Cu as joint and
solidary debtors.
Question: What was the basis of Solidbank for impleading the
officers of Ferro Alloy as solidary debtors of the loan?
Hong and Cu signed the promissory note. Now the bank is saying
that they signed as a co-maker and not just a representative of
the said corporation.
However the Supreme Court said that they actually signed in one
set of signature, as a mere representative of the corporation. It
could have been different if they affixed their signature twice.
Question: Why does it matter if they are signing as
representative of the corporation or signing under their own
name?
It is different because a corporation has a separate and distinct
personality as opposed to its officers. So because of that the
officers should not be held liable with the liabilities of the
corporation if they did not act in bad faith or there has no fraud
or illegality of the transaction, and that they are authorized to do
such transaction. In this case, it was shown that they were
authorized proven by the Board Resolution.
There is a principle in the Negotiable Instruments Law that was
discussed in the case, if you are only signing as a representative
of a particular corporation and that you are actually authorized
to represent the corporation you should not be held liable.
This is because your personality is distinct from the corporation
and you are merely acting on behalf of the corporation.
Question: So, when they sign the loan documents as
representatives of the corporation. Whose obligation was
created?
The obligation created is that of the corporation and of the Bank,
not of their personal capacity. They only acted as a
representative of the corporation.
ATTY. GAVI: That is correct, because they signed as officers of
the corporation and representing the corporation then that loan
obligation that was created is not their personal obligation. It is
the obligation of the corporation. They were only acting as
representatives of the corporation. The act and obligation was
entered into by the corporation and not the officers even if they
are the ones representing the corporation. Why is that?
Student: This is because of the artificial being created by law to a
corporation. Since there is an artificial created to a corporation
Corporation Law (2019) MIDTERM REVIEWER
by law then the officers, members, and representatives of such
should not be held liable since their personality is different.
ATTY. GAVI: If the corporation has an obligation just because it
was contracted through a particular officer, does it now mean
that it becomes the liability of the officer? Why?
Section 2. A corporation is an artificial being. Being an artificial
being its obligations are separate and distinct of its officers,
directors, and stockholders.
Question: Why would it have been different if the officers signed
the second time around?
If they sign the second time around the Supreme Court was
saying that they are already signing in their own capacity and not
mere representative of the corporation. By signing, it means that
they are really liable to the loan.
Question: If they sign the second time, what happens now to
that obligation of solid bank?
They are now solidary liable because they already bind
themselves not as officers of corporation but in their personal
capacity. The first time they signed, they are representing the
corporation, if they sign the second time (done na ang
corporation na part), SC said they are now signing on their own
behalf, they are now obliged in their personal capacity but in the
case at hand, THEY DID NOT, they only signed once. Hence, they
signed on behalf of the corporation.
The officers were not made joint and solidary liable with the
corporation. It is only the corporation that is liable to the loan
contracted by its officers.
Being an artificial entity, a corporation can only act through its
board of directors ( no physical hands to sign contract). It acts
through its officers or board of directors. When they act on
behalf of the corporation, it doesn’t mean that the obligations
created are the obligations of the board or its officers because a
corporation is an artificial being having a separate and distinct
personality from its stockholders and officers.
But if the representatives would voluntarily take on themselves
the obligation, that’s allowed. In which case they are now
solidarily liable with the corporation because they bound
themselves as such.
CLARIFICATION: REMEDY LEFT FOR CREDITORS WHEN THE
DOCTRINE OF PIERCING THE CORPORATE VEIL IS DISREGARDED.
WHEN THE OFFICERS AND STOCKHOLDERS ARE NOT PERSONALLY
LIABLE.
Atty G: Remedy is against the corporation, when it is proved that
the grounds of piercing the corporate veil are not present or
when they did not bind themselves voluntarily, the creditors
have no other remedy but to go after the corporation. When the
assets of the corporation are not enough, they will have to go
through insolvency proceeding and follow the rule in preference
of credits.
Just because a corporation is liable it does not mean that its
people are liable also, as long as they did not voluntarily bind
themselves and as long as there are no grounds to pierce the
veil.
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ATTY. GAVIOLA-CLIMACO
WHAT ABOUT SIGNING AS CO-MAKER OR CO-DEBTOR?
That is not piercing the veil, they are liable because of contract.
There is no need to pierce the veil, no need to prove that they
were in bad faith. Piercing the veil is based on different grounds.
Review:
The first attribute of a corporation is based on Section 2 of
Corporation Code is that a Corporation is an artificial being
which means it has a personality which is separate and distinct
from its stockholders, board of directors and officers which
means that the corporation can own properties and it can incur
obligations in its own name and that whichever properties that
are owned by the corporation or whatever obligations that are
incurred by the corporation are its own properties and
obligations and not that of its stockholders, directors or officers.
Meaning, by fiction of law the person of the corporation is
separate from the person of stockholders that the latter may
compose the corporation but they are not the corporation.
However, in certain instances the fiction or the veil of the
corporation and its stockholders may be lifted in which case the
corporation is considered as one with its board of directors and
stockholders. There are only very specific instances where this is
allowed because the law considers that corporation as separate
entity for the convenience of the parties involved and to
facilitate economic transactions. If this artificial being is being
used to commit injustice or to defraud the public, the law will lift
the veil because this is only a legal fiction, it’s not reality. The law
will pierce the veil of legal fiction and consider the corporation as
one with its stockholders.
Zambrano Case
CONCEPT OF ARTIFICIAL BEING
&
PIERCING OF THE VEIL
Facts:
Zambrano et al were employees of PhilCarp and then they were
dismissed because PhilCarp ceased operation on the grounds of
serious business reversals. So upon termination, they filled a case
against PhilCarp and Pacific contending that they were illegally
dismissed since Phil carp did not incur serious business losses
because as a matter of fact they are earning. They also want to
implead Pacific because they are mere Alter Ego given the fact
that the assets of Phil Carp was transferred to Pacific and some
of the employees of Phil CArp were absorbed by Pacific
The Court resolved that there was no illegal dismissal
Atty: So Zambrano was employed by which company?
B:by Phil Carp
Atty: What did Zambrano want done? And Why?
B:Wants Phil carp to be liable for illegal dismissal and at the
same time to make Pacific Carpet also solidarily liable.
Because they contend that there was no serious business losses
incurred by Phil Carp , there was unfair labor practice.
Atty: And what happened to the operations of PhilCarp
according to Zambrano?
Corporation Law (2019) MIDTERM REVIEWER
Their operations of Phil Carp was merely transferred to Pacific
Atty: So according to Zambrano the closure of Phil Carp was
merely a pretense just to get them out of their employment, to
terminate their employment when in fact the operations of Phil
Carp was merely transfered to Pacific which they own
Subsidiarily . So now they are claiming from both Phil Carp
(initial employer) and according them ( Zambrano ) ALTER EGO
Pacific Carpet.
Atty: Now what happened in the case?
B:First there was no finding of Unfair labor practice , since the
petitioner failed to prove and they were not able to cite a
specific ground for unfair labor practice
Second , there was no illegal dismissal. Since in as much as no
one is compelled to open a business, no one is also compelled to
sustain a business.
CORPORATION AS AN ARTIFICIAL BEING
Atty: Before going to the issue of Piercing of veil, this case also
discusses on the effects about the Corporation being an artificial
being.
We mentioned earlier that as an Artificial being , it has a
separate personality form its directors, stockholders and officers.
Besides those people who else has a Corporation distinct and
separate personality?
B: From any other legal entities to which it may be related
Atty: Not just stockholders, directors or officers being the natural
person but also any other legal entity to which they were
related.
Doctrine: The Concept of corporation being an Artificial being
does not only apply to the directors, officers or stockholders
(natural persons) it also applies to ANY OTHER ENTITY to whom
the corporation may be related, even if that entity is a (Juridical
entity)
For example:
You have A-B-C-D-E(natural person-stockholder) of Corporation B
and C.
Under the Concept of Artificial entity , Corporation B is separate
and distinct from ABCDE (stockholders-BOD-officers) IN the same
way Corporation C is separate and distinct from ABCDE. But at
the same time Corporation C is separate and distinct form
Corporation C.
PIERCING OF VEIL ISSUE
The court said that , the mere fact that Pacific as a Subsidiary of
Phil Carp it will not permit the piercing of veil .
Under the concept of artificial entity, corporation B is separate
and distinct from A, C, D and E, the stockholders, board of
directors and officers. In this way, corporation C is separate and
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ATTY. GAVIOLA-CLIMACO
distinct from corporation A, B, D and E, the stockholders, board
of directors and officers and at the same time corporation C is
separate and distinct from corporation D. The separate entity
applies not only to your stockholders, board of directors and
officers but also to any other legal entity in which the
corporation is created. In this case, we have the Philippine
carpet being the stockholder of the pacific carpet so now the
employee’s contention are that Philippine carpet merely
transferred its operations to pacific carpet and now they are
trying to say that Philippine Carpet committed unfair labor
practice by transferring its operations and now pacific carpet
should also be liable to them so they’re not claiming against
stockholders, board of directors and officers of Philippine carpet,
they’re claiming against the subsidiary of Philippine carpet. Thus
the rule on artificial being apply in this case. The Supreme Court
said that a corporation has a personality separate and distinct
from the persons composing it as well as from any other legal
entity which it may be related. The artificial entity is applicable
not just to the persons composing the corporation but also to
any other legal entity which it may be related. In regards to
piercing, it is allowed only in three instances; first is when there
is evasion of obligation, second is when there is protection of
commission of a wrong and third is in alter ego cases which is
one given in this case. In alter ego cases, it must passed the three
test, first is the instrumentality test, second is fraud test and
third is the harm test. In instrumentality test, the mere fact that
one corporation is controlled by a person, a single person does
not permit the piercing because it must also be prove that such
control extends to policy making, financial activities and etc. with
regards to the fraud, there must be a clear and proof of fraud
that the corporation was used to commit a fraud. And in the
harm test, there must be a causal relationship between the use
of the identity of the corporation and the harm committed. In
this case, the mere fact that Pacific is a subsidiary will not allow
piercing. With regards to the transfer of assets, it was found out
that the transfer of asset was actually a sale from Philippine
carpet to Pacific Carpet which explains the claim of the
petitioners why there are income generated by the Philippine
carpet.
Atty G: what do you mean by evasion of obligation?
Student: since a corporation has a separate entity of its own, the
owners may protect themselves by creating an entity that would
absorbed the obligations that they may incur and therefore
shield them on the doctrine of limited liability. What happens
then is the whole obligation of the supposed obligors may not be
enforced against them because of the shield of the corporate
fiction so the creditors will be prejudiced on the use of the
corporation. In which case, the legal fiction will not be allowed to
prevail.
Atty. G: so one, if the corporate vehicle is used to evade
obligations, the corporate then will be pierced and the
stockholders will still be made liable for the obligation of the
corporation.
Student: second is the protection of commission of a wrong,
since the corporation is a separate entity, it can only act through
its agents, so a corporation cannot be held, for example,
criminally liable. So if there are perpetrators, they might say for
example commit estafa through the corporation then the
corporate fiction will be used for them.
Corporation Law (2019) MIDTERM REVIEWER
Atty. G: so when the corporate fiction is used to defraud or
commit a crime then a corporate fiction will be pierced and the
stockholders will be held liable. The third instance is alter ego
cases.
Student: The alter ego principle is that, a corporation is created
by another person or juridical person through which the
transactions of that person is directly done through the
corporation, the essence of alter ego principle is that the person
who is using the corporation in shielding himself from any
possible liabilities that may arise from its transactions. The
difference between that and the first one is that the first one,
there might be a pre-existing intent to defraud whereas the third
one there might be none, that he is just shielding himself from
any possible liability.
Atty. G:The essence of the alter ego principle is CONTROL. If
somebody is controlling the corporation such that the
corporation basically does not have its own mind because a
person is controlling not just majority but complete dominion
not only of its finances but also its policies and business practice
so whatever the decision of this controlling person is considered
the decision of the corporation, so control, not just financial but
also with respect to business decisions and operations and you
use this control in order to commit a fraud or wrong, and that
the control causes harm or injury to other persons. In this case,
the corporation is merely your alter ego such that whatever
obligations incurred by the corporation because of your control
can be attributed to you and that person controlling the
corporation becomes liable.
So when do you apply the alter ego principle? There are three
test
Student: the instrumentality, the fraud and the harm. The
instrumentality test means the person has control including the
financial activities and policies. Second is fraud test, the entity is
used to commit fraud. Lastly, the harm test, there is a causal
connection between the injury to the person and the use of the
corporate fiction. The ruling of the SC in this case is that, there
was no alter ego or control because while there is control in the
subsidiary it does not amount to alter ego. There is absence of
harm and fraud.
A: Why not?
S: because the move of Philippine carpet to cease its operation is
lawful and there is no unfair labor practice committed.
A: so in order for there to be piercing of the veil based on alter
ego the three elements must occur together. It is not because
you own all the stocks in a certain corporation and another
corporation owns the stocks in another corporation, it does not
mean automatically that you will apply the alter ego rule. All
three elements must occur. There was complete control, there
was an intention to defraud, using that control and you cause
harm to another person because of that control. In this case it is
true there was control by Phil Carpet of pacific carpet. It owned
100% of the shares. However it was also found that there was no
fraud and there was no harm because Phil carpet’s reason for
foreclosure was legitimate. It was shown by the audited financial
statements of the corporation that it was really losing money and
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ATTY. GAVIOLA-CLIMACO
based on the labor code that is a sufficient ground to terminate
the employment of your employees. There was no fraud and
technically there was no harm. So the SC said that the alter ego
principle is not applicable in this case to justify piercing the veil.
A: So you have here CLL which is a foreign corporation engaged
in buy and sell of molasses. One of its suppliers was MarTiera,
which is based in the Philippines and was owned partially by RJL
Martinez fishing corporation. RJL on the other hand was owned
by Ruben Martinez. Okay? so that was the relationship of the
parties.
MARTINEZ VS. CA
Facts:
In this case, CLL which is a foreign corporation engaged in the
importation of molasses from the Phil which are obtained from a
company called Mar Tierra which is a domestic company and the
president of Mar Tierra was Wilfred Martinez.
Who was Wilfredo to CLL?
CLL has nominee shareholders and one of them was a firm also
owned by Wilfredo which was Baker Mckenzie (their firm here in
the Phil is Quisumbing Torres). Baker was a nominee stockholder
but the beneficial ownership was vested in Wilfredo Martinez,
Lacson et.al
RJL owned some of the shares of Mar Tierra which was 42%
owned by petitioner Ruben Maritnez. Ruben had nothing to with
CLL he was neither a beneficial owner nor a stockholder of CLL.
He was a stockholder of RJL.
CLL purchases molasses from Mar Tierra through letters of
credit.
This is how CLL and Mar Tierra did their business and their bank
was BPI. The bank transferred funds to Mar Tierra upon
instructions of CLL, so what happened next was that there was a
non-payment of $340k.
CLL had Money market placements with BPI so the arrangement
was that the bank will deduct the deposit from the amount that
was paid to Mar Tierra. The bank did not do this because at the
time the money market placements were not matured and so
instead of deducting it from the deposit, it recorded as a
receivable from CLL meaning CLL owes the bank.
When the placements matured, the bank did not collect but they
allowed withdrawal from amount. So at the end of the day there
was no more money in the account of CLL but CLL still had an
obligation to the bank.
The bank filed a case against CLL, Wilfredo and Ruben, He was
included because he was one of the signatories of the account.
Ruben questions why he was impleaded because he had nothing
to do with CLL.
The bank filed a case for the payment of the 340k against CLL,
Wilfredo et.al and Ruben.
Atty G: Why was Wilfredo and Lacson liable in the RTC and CA?
Corporation Law (2019) MIDTERM REVIEWER
Because they signed and agreed that they bound themselves
solidarily with CLL while Ruben Martinez was made liable by the
RTC because he owned shares in RJL.
RJL owns share with Mar Tierra and Mar Tierra and CLL had
common stockholders and that he was a co-signor in the bank
account, so they ruled that Ruben was liable because of such
connection they pierced the veil.
Atty G: Is this valid?
No. The SC said that the mere fact the majority stockholder of
Mar Tierra is RJL and that Ruben along with Jose and Luis
Martinez owned 42% of the corporate stock does not mean that
they had complete domination over Mar Tierra.
There was no showing that Ruben even benefitted of the
transaction. Just because he was a signatory, does not mean that
he can be made liable. Control alone does not warrant piercing
the veil.
The SC said that the mere fact, therefore, that the businesses of
two or more corporations are interrelated is not a justification
for disregarding their separate personalities, absent sufficient
showing that the corporate entity was purposely used as a shield
to defraud creditors and third persons of their rights
So Ruben was held not liable, Wilfredo and Lacson were liable.
How does the case of Tan Uy differ from Martinez or Zambrano,
because we said that mere ownership of stock does not pierce
the corporate veil?
In this case, the corporation was used to evade the liability from
the other corporation. It would cause harm, thus the corporate
veil may be pierced.
An important fact in this case was that Hammer and Goldkey
commingled their assets. Meaning one corporation benefited
from the other’s loan. Even without an express finding of fraud
on the part of Goldkey, by the mere fact that it benefited, then it
should be held liable.
Ordinarily, control alone is not sufficient, unless there is a finding
of fraud and harm. But an exception is this case of Uy, where the
commingling of assets is considered sufficient ground to consider
them as one entity.
Side Discussion about letter of credit:
What’s the letter of credit for? How does it work?
Atty. Gavi: It is a financial instrument it’s used basically as a
bridge between buyer and seller especially if they are located in
different countries.
 Illustration: if I were a buyer, I am not going to pay you
until I get the goods because if I pay you what if I don’t
get the goods? On the other hand if I was the seller, I’m
not also going to pay you if I don’t get paid, because
what happens if I ship the goods, its already with you
and you don’t pay me? Okay ra if we’re in the same
City, what if you’re in HK and I’m in Cebu. So how do
you reconcile? You do a letter of credit transaction. So
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ATTY. GAVIOLA-CLIMACO
as the buyer, you’re going to go to a bank, open a letter
of credit and then the bank will contact its
correspondent bank where the seller is, and then you
will say “hey, seller, I have here a letter of credit in your
favor, you ship the goods to the buyer then give me the
shipping documents, the moment you give the
complete shipping docs, me and the bank will pay you”
so the seller knowing that he will get paid by the bank
will ship the goods, the bank now will turn around and
tells the buyer “hey mr. buyer the good are on their
way, these are the docs you will need to claim the
goods, now pay me what I paid the seller”)
So that is what was used in this case, we have here CLL buying
molasses from Mar Tierra, so as part of that transaction, CLL
opened a letter of credit in favor of Mar Tierra. So Mar Tierra,
shipped goods to CLL knowing that its going to get paid under
the letter of credit. But ultimately, the letter of credit is a
liability of the buyer because iya man I reimburse ang bank, so
the letter of credit is the liability of CLL.
Atty. Gavi: (reiterations) So when everything was said and done,
that $340k transferred to Mar Tierra was supposed to be
deducted from their deposit with the bank, but the bank did not
deduct, so it just recorded a receivable, and then worse is it
allowed CLL and its representatives to deduct the full amount of
the deposit without taking into consideration that they still had
an obligation in the amount of $340k. So now, the bank was left
with no money in its hand but with a receivable with CLL. So
what happened?
S: So the bank tried to collect from CLL and Ruben and Gonzales,
but they refused.
....the bank tried to collect from CLL, Ruben and Gozales but
they refused. Eventually, they discovered that they really have a
payable to BPI after auditing their account. BPI filed a collection
case. Since they refused to pay BPI asked the court to pierce the
corporate veil, claiming that since the majority of the
stockholders are the same.
The respondents to the complaint filed by the bank are CLL,
Ruben, Lacson, Gonzales, and Wilfredo Martinez. Wilfredo is a
stockholder of CLL. Ruben is not a stockholder of CLL. He is the
stockholder of RJL corp which is a stockholder of Martiera.
Martiera is the supplier of CLL and they also have common
stockholders. The SC ruled that the mere identity of the officers
is not sufficient to pierce the corporate veil.
The persons, as ruled by the court, who were not held liable are
Ruben and Gonzales. Wilfredo Martinez and Lacson were held
liable because they signed a surety agreement and not because
of piercing the veil. This is because they voluntarily bound
themselves. Ruben was one of the signatories of the account but
he did not sign the surety agreement.
The RTC found the claim of the bank to be valid. That yes, CLL,
the two Martinez and Lacson are liable under the piercing of the
veil. That they were being used to defraud the bank. The CA
agreed that they are liable except for Gonzales, considering that
he was merely an employee and not a stockholder. Ruben went
Corporation Law (2019) MIDTERM REVIEWER
to the SC on the ground that there was no basis on the judgment
against him. Why? Because the rest of the stockholders signed a
surety agreement. Having signed such will make one liable jointly
and solidary liable with CLL. You do not even need to pierce the
veil because they bound themselves voluntarily by contract.
What about Ruben? The ground for including him as one of the
solidary debtor merely on the basis of piercing the veil/ the alter
ego doctrine. According to the SC, it pierced the veil to CLL to
Martiera to RJL and to Ruben who was the majority stockholder
of RJL, saying that all of these persons are one and the same.
That CLL was merely a paper corporation and sham used to
defraud the bank. The only proof that they had is the common
stockholding between Martiera and CLL. THAT IS NOT A
SUFFICIENT GROUND TO APPLY THE ALTER EGO PRINCIPLE. As
we go back to the case of Zambrano, we apply the alter ego
when there is a concurrence of 3 elements: (control, fraud,
injury)
THREE TESTS:
1. CONTROL TEST – not just financial, but COMPLETE
business and operating control control.
2. INSTRUMENTALITY TEST – that control must be used
to defraud.
3. HARM TEST – that fraud cause harm to the other party.
In this case, the bank was able to establish only the common
shareholdings between CLL and Martiera. But they have no proof
to show that Martiera was using CLL to conduct fraud. In fact, the
SC found that there was a valid business transaction between CLL
and Martiera. Martiera also has other clients other than CLL. The
SC found that there was no fraud. And since there was no fraud,
there was not harm. And since these two elements are missing
then you cannot apply the alter ego doctrine. So, there can be no
piercing the veil as far as Ruben is concerned.
HEIRS OF FE TAN UY VS. INTERNATIONAL EXCHANGE BANK
The bank granted a loan to Hammer which is secured by the
property of Goldkey under a surety agreement signed by Chua
and his wife. Hammer defaulted with the payment. The property
of Goldkey was foreclosed. But there is still an outstanding
balance of the loan. Bank filed a collection case against Hammer,
Goldkey and Chua. The issues are: whether or not UY can be held
personally liable, being an officer of Hammer; and whether or
not the alter ego doctrine is applicable in this case.
There was a finding by the trial court that Uy did not sign the
loan agreement. But she was made liable solely because she is an
officer and director of the corporation. That is the only basis that
the court had. The SC said that it is not a sufficient ground to
hold her liable because a corporation has a personality distinct
from its officers and stockholders. The officer does not become
liable with the obligations of the corporation by that mere fact.
As to the issue whether Goldkey can be held liable for the
obligation of Hammer for being a mere alter ego of the latter?
It was ruled that the corporate veil must be pierced on the
ground that Goldkey is a mere alter ego of Hammer because of
certain circumstances such as they have common stockholders,
both are family corporations by Chua who is the president of
both corporations, they share the same office, when Chua
disappeared, Goldkey and Hammer ceased operations. But the
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reason which cannot found in any other case is the commingling
of assets of the corporations. This means that when Hammer
contracted the loan, Goldkey was also benefited by it. Whatever
benefits that Hammer received from the loan was also enjoyed
by Goldkey. SC said that you are under the same control, you
have the same person running the corps, and that you
commingled you assets, even without mentioning fraud, or harm
which is a requirement under the alter ego doctrine, Goldkey is
still liable.
Atty G: Whatever benefits that Hammer receives from the
proceeds of the loan, it is assumed that Goldkey also enjoyed it
because they co-mingled their assets. So now that Hammer
cannot pay, Goldkey should be held liable.
Student: For purposes of the exam, if given the situation that the
companies co-mingled their assets, is it safe to answer that we
can provide the case?
T: Yes, you cite the case.
CIR VS NORTON & HARRISON.
It is about a case where Norton and Harrison company came
into an agreement with Jackbilt where it manufacture concrete
blocks. They came into an agreement where Jackbilt will
manufacture these concrete blocks and Norton will sell it to the
public, and it was found out that, when Norton and Harrison sells
it to the public, sells it, it will receive a lesser amount and the
rest of the (inaudible) of the amount goes to Jackbilt and.
Atty G: So how many transactions were there in the sale of the
goods? How did they structure their transactions?
S: It was like a buy and sell structure, buy and sell …
Norton and Harrison buys the concrete blocks from Jackbilt, and
then upon buying them, Norton and Harrison will sell it to the
public. And the proceeds of the sale will go to, will go to both of
them. The bigger amount goes to Jackbilt and the lesser amount
serves as profit or the compensation in selling the concrete
blocks to Norton and Harrison.
Atty G: Okay, take note class that this case happened 1964 pa or
1940’s ang facts occured. So lahi pa, the corporate income tax
then was different. So you have here two companies, one is the
manufacturing, the other is the distributor. Okay? What did they
have in common?
S: Three years after their agreement or their arrangement rather,
here comes Norton and Harrison eventually buying the shares of
Jackbilt.
Atty G: They purchased the shares. What’s the difference
between purchasing assets and purchasing shares? For example
you have A company and B company. What is the difference if
“A company will buy all the assets of B company” or “A
company buying the outstanding shares of B company”? Is it
the same or are they different transactions? They are different.
So don’t interchange them. What’s the difference?
Corporation Law (2019) MIDTERM REVIEWER
When you buy assets, you acquire the business. You acquire the
business because now you have all the assets of that other
entity but you don’t acquire another entity. Do you get it? You
acquire the assets of B so you acquire its business but you don’t
acquire B. Get it?
But if you buy shares, you are not only buying the business, you
are buying the entity. Do you get it? So rather than buying the
business, you buy the entity, you buy shares. So you acquire a
subsidiary. So be careful with that. That’s not the same. So in
practice, you can do an asset purchase or a share purchase. Two
very different transactions.
Okay? So what was the transaction here?
S: The sale of the concrete blocks, or the purchase of the assets
of the, or the outstanding shares of stocks
Atty G: The shares of Jackbilt were purchased by Norton. In
effect, Norton now acquired control.
Atty G: So Norton and Harrison became the sole stockholder of
Jackbilt. They now have control over Jackbilt. What happened
next?
S: The CIR (inaudible) collecting sales tax said that the sale, it
should disregard the entity of Jackbilt since its shares were
acquired by Norton. The sales tax should be imposed upon the
sales made by Norton to the public, and not the sale by Jackbilt
to Norton. Because after the, after Norton purchased the
outstanding shares of Jackbilt, the CIR said that (inaudible)
Jackbilt is now the corporation of Norton since it exercises
control over Jackbilt.
Atty G: What was the effect of the two transactions, the scheme
done by Norton and Jackbilt? What was the effect of that of their
tax liability? Why is the CIR saying that there should only be one
sale? How many sales were there? Two diba? Jackbilt to Norton
then Norton to the public. But now the CIR is saying that no,
there should only be one sale because is the same as Norton.
Why would the CIR do that? Of course, they want to get more
taxes. How is that scheme, nga iduha ka transaction, depriving
the CIR of taxes? Why? Because lain-lain man nga sales price.
Lain ang price from Jackbilt to Norton, and they declared that as
different revenue. Okay? At that time, the lower the revenue,
the lower your tax rate. Mura xag individual the taxation style
bah. Have you have your tax already? Then from Jackbilt to
Norton, another sale. So daku man ang cost, so again lower na
sad ang tax. Diba? Because they broke the transactions into two,
ni-qualify sila for a lower bracket sa tax rates. You understand?
Whereas if ila lang tu giusa nga sale, daku ang revenue, that
means that they go to the higher bracket. So the CIR is saying
that no, there should be only one sale, direct from Norton to
the public. We disregard from Jackbilt to Norton because that
first sale was only used to create a buffer to lower their tax. So
you understand? So what happened?
FOLLOW UP DISCUSSION
xx---direct from Norton to the public. We disregard the sale from
Jackbilt to Norton because that first sale was only used to create
a buffer to lower their tax.
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ATTY. GAVIOLA-CLIMACO
General Rule, just because one corporation owns
another, it doesn’t mean that they are one and the same
corporation; they are still separate and distinct. However, there
are circumstances to show that the separate personality is used
to evade an obligation then that separate personality will be
disregarded and both corporations will be considered as one.
So in this case, the Supreme Court found that Norton and
Harrison and Jackbilt were structed in such a way as to evade
paying the larger amount of tax; and it was shown that basically
the two corporations were under the same control. It was
Norton and Harrison who financed the operations of Jackbilt.
Since there was a finding that the structure was made that the
two-pronged sale was made just to avail of a lower tax, then the
Supreme Court said that Yes, we disregard the separate entity
and consider that there should only be one sale—the sale from
Norton and Harrison to the public. So that sale is assessed with a
higher tax rate, and Norton and Harrison were held liable for
deficiency tax.
(End of Norton Case Discussion)
There are instances where piercing the veil will not
apply. For example, in the case of Francisco Motors, what
happened there was the reverse.
FRANCISCO MOTORS CORPORATION VS. CA
GR NO. 100812, JUNE 25, 1999
The stockholders had a payable to lawyer. What the
lawyer did was that he sued the stockholders and the
Corporation. Nagreverse siya, diba ang piercing the veil is when
you sue the stockholders for the liabilities of the Corporation? In
this case, you’re suing the Corporation for the liability of the
stockholders. The Supreme Court said na well, there’s no definite
rule on how to apply here piercing the veil, but definitely, it is for
the protection of the public, diba. For the protection of the
public, when you are using that legal fiction of that corporation
to defraud the public, that’s the essence of piercing the veil.
You’re using that legal fiction to defraud the public and in order
to escape liability. Is that applicable in this case? It’s not, because
in this case, the legal entity of the Corporation was not being
used to defraud the public. In fact, the obligation that was being
claimed was the personal obligation of the stockholders, so the
Supreme Court refused to apply the piercing the veil principle
here.
It’s not black and white, but generally, piercing the veil
will only apply if you want to make the stockholders liable for the
liabilities of the Corporation, not the other was around. Why?
You go back to the essence of piercing the veil—if you are using
the legal entity to defraud, so if naa na siya then you pierce the
veil. In this case, there was no such allegation that the Corp was
being used to defraud the lawyer. So, the Supreme Court, it will
not apply.
KUKAN INTERNATIONAL CORPORATION VS. HON. AMOR REYES
GR NO. 182729, SEPTEMBER 29 2010
Corporation Law (2019) MIDTERM REVIEWER
Here, you have a supplier not being paid. Supplier sued
Kukan Inc., and then Kukan Inc. stopped appearing in court, so
that judgment was made and then Kukan Inc. was held liable.
However, when they served the writ of execution, they found
that there was another Corporation occupying the premises,
Kukan International Corporation—same stockholder but
different corporation. So now you have the supplier trying to
enforce the judgment of Kukan Inc. against Kukan International
Corporation and the justification is piercing the veil. Can he do
that? No. The Supreme Court said that while piercing the veil can
be used as a basis to impute liability, it cannot be used as a basis
to acquire jurisdiction. That’s a different matter—acquisition of
jurisdiction is something that’s technical. You cannot just enforce
a judgment against Corporation A when the judgment was
against Corporation B under the guise of piercing the veil. The
Supreme Court said that it is not how piercing the veil works. It is
used to establish a liability but it is not used to acquire
jurisdiction.
CLASSIFICATION OF CORPORATION
Section 3. Classes of Corporations. – Corporations formed or
organized under this Code may be stock or nonstock
corporations. Stock corporations are those which have capital
stock divided into shares and are authorized to distribute to
the holders of such shares, dividends, or allotments of the
surplus profits on the basis of the shares held. All other
corporations are nonstock corporations.
AS TO EXISTENCE OF STOCKS:
 Stock corporation - Corporations which have capital
stock divided into shares and are authorized to
distribute to the holders of such shares dividends or
allotments of the surplus profits on the basis of the
shares held.
 Non-stock corporation - It does not issue stocks and
does not declare or distribute dividends. They are
organized for non-profit purposes.
AS TO THE NUMBER OF COMPONENTS:
 Aggregate corporation - A corporation consisting of
more than one member defined as an artificial body of
men, composed of diverse individuals, the ligaments of
which body, the franchises and liberties bestowed
upon it, bind and unite all into one, and consists the
whole frame and essence of the corporation. For
corporation aggregate you need to have at least 5
members or stockholders.
 Corporation sole - It consists of only one person or
member. As per Section 110 of the Corporation Code, a
corporation sole is one formed by the chief archbishop,
bishop, priest, rabbi, etc. For the purpose of managing
and ministering, as trustee, the affairs, property and
temporalities of any religious denomination, sect, or
church.
Atty. GC: Can you have a corporation with 3 corporators?
Ans: Technically, the corporation will not be dissolved if you have
3 corporators but the law requires that you must have atleast 5
members in the board, and each member of the board must
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ATTY. GAVIOLA-CLIMACO
have atleast 1 share. So, that non-compliant corporation will be
penalized by the SEC.
AS TO LAWS OF INCORPORATION:
 Domestic corporation - A corporation formed,
organized or existing under Philippine laws.
 Foreign corporation - A corporation formed, organized,
or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and
corporations to do business in its own country or state.
Atty. GC: So when we talk about domestic or foreign
corporations, what are we talking about specifically?
Ans: We are talking about the classification based on the Law of
Incorporation or the Place of Incorporation. It answers the
question as to where the corporation is incorporated in order to
call it as a “Domestic or a Foreign corporation.” It does not speak
about the citizenship of its corporators.
Thus, it can be possible that you have a domestic corporation but
all of its stockholders are foreign. There is no prohibition as to
organizing a corporation that is 100% foreign-owned except in
cases of nationalized activities/corporations.
AS TO NATIONALITY:
 Place of incorporation test: where the corporation was
created [Corporation Code]
o Domestic corporation: created in the
Philippines
o Foreign corporation: created abroad
 Citizenship of stockholders [Foreign Investment Act]
o Philippine National: 100% owned by Filipino
citizens even if incorporated abroad
o Foreign-owned corporation: majority of
stockholdings owned by foreigners, even if
incorporated in the Philippines
TESTS TO DETERMINE CITIZENSHIP OF STOCKHOLDINGS
APPLIES WHEN THE CORPORATION IS NOT 100% FILIPINO
OWNED
 Control test: at least 60% of the capital stock
outstanding and entitled to vote are owned by Filipinos
 Grandfather rule: if the percentage of Filipino
citizenship is less than 60% then only the number of
shares corresponding to such percentage shall be
counted as Philippine nationality
NARRA NICKEL V. REDMONT
The “Control Test” is still the prevailing mode of determining
whether or not a corporation is a Filipino corporation, within the
ambit of Sec. 2, Art. II of the 1987 Constitution. When in the
mind of the Court there is doubt, based on the attendant facts
and circumstances of the case, in the 60-40 Filipino-equity
ownership in the corporation, then it may apply the
“Grandfather Rule”
AS TO CITIZENSHIP OF THE STOCKHOLDERS:
 Philippine National
Corporation Law (2019) MIDTERM REVIEWER
FOREIGN INVESTMENTS ACT OF 1991 (RA 7042), SECTION 3.
DEFINITION:
The term "Philippine national" shall mean a citizen of the
Philippines or a domestic partnership or association wholly
owned by citizens of the Philippines; or a corporation organized
under the laws of the Philippines of which at least sixty percent
(60%) of the capital stock outstanding and entitled to vote is
owned and held by citizens of the Philippines; or a trustee of
funds for pension or other employee retirement or separation
benefits, where the trustee is a Philippine national and at least
sixty (60%) of the fund will accrue to the benefit of the Philippine
nationals: Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at least sixty percent
(60%) of the capital stocks outstanding and entitled to vote of
both corporations must be owned and held by citizens of the
Philippines and at least sixty percent (60%) of the members of
the Board of Directors of both corporations must be citizens of
the Philippines, in order that the corporations shall be
considered a Philippine national;
 Foreign-owned corporation - those that don’t qualify
in the abovementioned definition
NATIONALIZED ACTIVITY
Determined by looking at the Foreign Investment Negative List
(FINL) which enumerates the activities which are limited or
reserved to Filipinos. It is a list of areas of economic activity
whose foreign ownership is limited to a maximum of forty
ownership is limited to a maximum of forty percent (40%) of the
equity capital of the enterprise engaged therein. (pls. check
Section 8 of RA 7042 or the Foreign Investments Act of 1991)
If the activity is not listed, that activity can be performed by a
corporation which is 100% foreign owned even if incorporated in
the Philippines.
Nationalized Corporations are those that by Constitution or by
special laws are limited to Filipino citizens.
Eg. Natural resource exploration, development and use, public
utility corporations, land ownership, educational institutions and
advertising companies.
[Atty. talks about foreigners and their attorneys’ erroneous belief
that they need Filipino stockholders to incorporate in the
Philippines.
Moral of the story: get rid of the notion that you need to have
citizenship in order to incorporate because to be an incorporator
all that is required is to be a resident. In fact, only a majority
needs to be residents.]
TAKE NOTE
A domestic corporation can be foreign owned. This happens
when a corporation is incorporated in the Philippines but is
composed of foreigners.
In the same way, a foreign corporation can be considered a
Philippine national when 100% of its capital stock or its
stockholders are Filipino citizens.
Atty: In order for a corporation to be considered as Philippine
National under the Control Test , what is the requirement.
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ATTY. GAVIOLA-CLIMACO
Student: Majority of its shareholder should have a hold of shares
with voting rights
Atty: What do you mean majority?
Student: In cases of like Nationalized Corporation there is a
particular percentage as to the requirement of the Filipino
Atty: So you apply control test, control test basically means that
in order to be considered as Philippine National the corporation’s
director must be Filipino citizens... that’s what you read in the
cases.
Student: As what I have read in the cases basing it there in cases
of like the nationalized businesses there was a requirement that
60 % of those holding shares with voting rights must be a Filipino
citizens
Atty: And what do you call a corporation where 60% of its shares
outstanding and entitled to vote are held by Filipino citizens?
Going back to the question , how do you determine a Philippine
National corporation using the Control Test?
Student: In determining the Philippine National using the control
test there should be at least 60% of the voting shares that are
held and own by Filipino citizens.
Atty: You have a coprporation which is organized in the
Philippines at least 60% of its capital stock outstanding and
entitled to vote should be own by Filipino Citizens in which case
that corporation become a Filipino national , so that is control
test if you have at least 60% ,so that is the control tets but what
happens when we have ( wala nipadayun si atty nilahus na lang
siya grandfather rule)
What about the grandfather rule ?
Student: It will apply supplementarily to the control test because
it is the prevailing test by the use of the grandfather rule you
dissect or try to trace the corporate structure or the equity
structure in a particular corporation so if ever there is one
corporation which is to be created and there is a possible
corporation it is a it is required that you should be able to assess
how many or the percentage the ownership of that particular
investing corporation is Filipino owned or foreign owned to be
able to determine the nationality of the investee corporation
NARRA NICKEL V. REDMONT
In the case of Narra Nickel what happened here was Redmont, a
domestic corporation ,filed an action in order to cancel or
revoke the mineral production sharing agreements between 3
corporations
Atty: What is that document? mineral production sharing
agreement or mpsa?
Student:These are like permits which allow or authorizes or
allows a foreign corporation to exploit, explore or extract
minerals or do mining. This is a nationalized activity.
 Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

Atty: A nationalized activity so under our constitution it can only
be done by corporations which are owned at least 60% by
Filipino citizens so it is a nationalized activity.
Atty: Redmont here try to apply for the same permits in certain
parts in Palawan but it new that these permits are already
distributed to the three corporations namely , Narra , McArthur
and Tesoro and after that Redmont claimed that these 3
corporations are disqualified from having such mpsas because
they are basically foreigned owned thus contradicts the
prohibitions provided for under the constitution basically for the
exploitation, development and utilization of the natural
resources because it claims that these 3 corporations are
controlled by a 100% Canadian Corporation MBMI so with this
regard those mpsa should be revoked or cancelled. In this case
the major issues was the determination really of the nationality
of these three corporation.
Atty: So let us take one corporation of those three, the Mcarthur
Mining Corporation, what was the structure of mcArthur Mining
Corp.?
Applying in the case:
1. 60% x 33% = 19.8% or 20% is MBMI’s indirect shares in
McArthur
2. 40% + 20% = 60% which is a clear violation of the foreign
equity limitation.
CORPORATE LAYERING
 A type of arrangement whereby a corporation has for
its stockholder another corporation
 This is not a circumvention of the law. It is a valid
structure UNLESS it can be establish that it is used to
circumvent the law or the constitution
 Basis: Foreign Investment Act where it only requires
that the investee corporation and investor corporation
should be Filipino citizens at least 60% of its
outstanding stock entitled to vote and its board of
directors should compose at least 60% filipino citizens
Section 3. Definitions. - As used in this Act:

Student: Actually McArthur Mining had was qble to get its mpsa
from its predecessor SMMI. a) The term "Philippine national" shall mean a citizen
Atty: What was the capital Structure of MMI? of the Philippines or a domestic partnership or
association wholly owned by citizens of the
Student: It has a capital structure of 10M and it is divided into Philippines; or a corporation organized under the
one , 10 thousand common shares at 1 thousand pesos per share laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and
entitled to vote is owned and held by citizens of the
The Supreme Court held that McArthur is a foreign corporation Philippines; or a trustee of funds for pension or
because applying the grandfather rule it has to account MBMI's other employee retirement or separation benefits,
shareholdings in MMC which in turn is a shareholder of MMI. where the trustee is a Philippine national and at
Applying the 60/40 foreign equity requirement based on the least sixty (60%) of the fund will accrue to the
Constitution, it is evident that MBMI adding up his percentage of benefit of the Philippine nationals: Provided, That
shares in MMC and MMI it will exceed the 40 percent limitation. where a corporation and its non-Filipino
stockholders own stocks in a Securities and
McArthu Shareholding Total Paid-up Total Exchange Commission (SEC) registered enterprise,
r Mining s Subscribe outstanding at least sixty percent (60%) of the capital stocks
capital stock outstanding and entitled to vote of both
MMC 5,997 shares 5,997,000 825,000 59.97% corporations must be owned and held by citizens
(Filipino) @ 1k of the Philippines and at least sixty percent (60%)
MBMI 3,998 shares 3,998,000 1,878,174 39.98% of the members of the Board of Directors of both
(Canadia @ 1k corporations must be citizens of the Philippines, in
n) order that the corporations shall be considered a
Philippine national;
MMC Shareholding Total Paid-up Total
s Subscribe Outsanding Summary of Narra Nickel Mining et. al v Redmont:
capital stock
Olympic 6,663 shares 6,663,00 No paid up 66.63%
Mines @1K
MBMI 3,331 @ 1K 3,331,000 2,803,900 33.31% 1. Apply Control Test

Equation:
“at least sixty percent (60%) of the capital stock
1. Shares of MMC in McArthur x MBMI shares in MMC = outstanding and entitled to vote of each of both
Indirect shares of MBMI in McArthur corporations must be owned and held by citizens of the
2. Direct shares of MBMI with McArthur + Indirect shares of Philippines AND at least sixty percent (60%) of the
MBMI in McArthur = Total shares to determine compliance members of the Board of Directors of each of both
with foreign equity limitation corporations must be citizens of the Philippines, in order
that the corporation shall be considered a Philippine
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Corporation Law (2019) MIDTERM REVIEWER
national; (as amended by R.A. 8179).”
If it FAILED: then it means it does not comply with 60-40
requirement and NO NEED TO APPLY THE GRANDFATHER RULE
because you already fell below the 60% requirement.
Automatically, it is disqualified and it is not a Philippine National.
If it PASSED and there is NO DOUBT as to the BENEFICIAL
OWNERSHIP and CONTROL of the Corporation = stop here
If it PASSED however there is DOUBT as to the BENEFICIAL
OWNERSHIP and CONTROL of the Corporation = apply
GRANDFATHER RULE
What do you mean by “doubt”?
“Doubt” is any circumstance, which renders the beneficial
ownership and control of the corporation outside of Filipino
ownership. It is not when you fall below 60%.
In the Narra Nickel Case the following circumstances were
considered to establish doubt:
1. MBMI fully funded the joint ventures or ventures that MMI
will enter into. The fund of MMC actually came from MBMI
2. Foreign corporation practically provides all the technical
support and supplies for that particular venture
3. Foreign corporation although has minor ownership in said
corporation but it is the own who prepares its economic
viability studies
4. During the pendency of the case the three petitioners
converted its MPSA application to an FTAA application. It
confirmed that the petitioners did not have the capacity to
be given the MPSA
WHERE DOES THE 60/40 RULE APPLY, Nationalized Activities:
1. Public Utilities
2. Land Ownership
3. Mining Exploration
Clarification:
For tax laws, there is different classification based on where you
earn the income, or based on your situs. I don’t think we based it
on FIA or Corporation Law. There is different classification under
NIRC. The classification would depend on the purpose.
Examples: a. ) Whether or not this entity is qualified to engage in
a certain activity, then you are going to look at the FIA
classification. Another, b.) whether or not this entity requires a
permit with the SEC in order to engage business in the
Philippines, then you are going to look at the Corporation Code
classifications. Bottomline, depends on the purpose.
The nationality classification based on place on incorporation will
be discussed later because around section 60s pa sa Corpo code.
It matters whether you are domestic or foreign corporation as to
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ATTY. GAVIOLA-CLIMACO
whether or not you are doing business in the Philippines because
if you are doing business in the Philippines and you re domestic
corporation, you don’t need to get a permit anymore from the
SEC, your certificate of incorporation is already sufficient but if
you are a foreign corporation (you are not registered in the SEC)
if you want to do do business in the Philippines, you need to get
permit from SEC to operate either as a branch or a
representative office. This classification is also important with
regard to doing business in the Philippines. (will be further
discussed later on)
Place of incorporation whether domestic or foreign, citizenship
of the stockholding s as to what activities your corporation can
engage in, you look at the FIA. Philippine national or foreign
owned. In order to determine whether or not it’s a Philippine
national or foreign owned, apply the control test. If there are no
doubts, control test is sufficient. If there are doubts on the
ownership of the corporation based on facts and circumstances
then you need to apply the grandfather rule.
Question: In the corporate structure of MMC it is not MBMI but
another foreign corporation, would you still consider the
stockholdings of another foreign corporation to determine
whether MMI is a Filipino corporation?
Atty Gavi: Yes, the law does not distinguish as to who the
stockholder is. What the law looks into is the citizenship of the
stockholders. So as long as the stockholders of the investor
corporation (MMC) is still foreigner and if you are going to apply
the grandfather rule, then it is still considered foreign ownership.
Clarification: The SEC rulings were quoted by the SC but unless
the SC really adopts those rulings, they are merely guidelines,
they are not black and white rules. I would like to maintain that
you have to go the ultimate stockholders. Unless the SC will rule
on a specific case really saying to apply only second layer or third
layer but for me grandfather rule means that you have to go to
the ultimate stockholders.
Where do we apply the 60% in order to determine the
nationality because there are different kinds of shares? What
shares are relevant in determining nationality of a corporation?
GAMBOA VS. TEVES, G.R. NO. 176579, JUNE 28, 2011
FACTS
1) The Philippine Legislature granted PLDT the franchise
and right to engage in telecommunications business.
2) The American company, General Telephone Electronics
Corporation (GTE) which is a major stockholder of
PLDT,
3) Sold 26% of its common shares to Philippine
Telecommunications Investment Corporation (PTIC).
Corporation Law (2019) MIDTERM REVIEWER
4) PTIC stockholders executed three deeds of assignment
in favor of Prime Holdings, Inc. (PHI) which became the
owner of 111,415 shares of stock of PTIC.
5) Such 111,415 shares of PTIC held by PHI were
sequestered by the PCGG which represent 46.125% of
the outstanding capital stock of PTIC that were later
declared to be owned by the Republic of the
Philippines.
6) First Pacific which is a Bermuda-registered & HK-based
firm acquired the remaining 54% of PTIC.
7) Subsequently, Interagency Privatization Council
announced selling the 111,415 shares or 46.125% of
PTIC through a public bidding. Parallax won the bid.
8) Thereafter, First Pacific as PTIC stockholder announced
to match the bid of Parallax to buy the 111,415 shares.
However, it failed to do so.
9) Through its subsidiary MPAH, First Pacific entered into
a Conditional Sale & Purchase Agreement with the
government for the 111, 415 shares.
Since PTIC is a stockholder of PLDT, the sale by the Philippine
Government of 46.125% of PTIC shares is actually an indirect sale
of 12M shares or about 6.3% of the outstanding common shares
of PLDT. With the completed sale, First Pacific common
shareholdings in PLDT increased from 30.7% to 37%, thereby
increasing the shares of foreigners to about 81.47% and thus
violating the constitutional limitation of foreign ownership of the
capital of a public utility.
Sec 11, Art 12 of the Constitution:
No franchise, certificate, or any other form of authorization for
the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations
organized under the laws of the Philippines, at least sixty per
centum of whose capital is owned by such citizens of the
Philippines.
The facts according to public respondents Finance Secretary
Teves, Undersecretary Sevilla, and PCGG Commissioner Abcede:
The HR Committee on Good Government conducted a public
hearing of the impending sale and concluded that First Pacific’s
intended acquisition of the government’s 111,415 PTIC shares
(see 9 in the illustration above) resulting in First Pacific’s 100%
ownership of PTIC will not violate the constitutional limit since
PTIC holds only 13.847% of the total outstanding common shares
of PLDT.
Petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of 111,415
shares and averred that the sale would result in an increase in
First Pacific’s common shareholdings in PLDT from 30.7% to 37%,
and this, combined with Japanese NTT DoCoMo’s common
shareholdings in PLDT would result to 51.56% foreign
shareholdings which is over the 40% constitutional limit.
TN: First Pacific + Japanese NTT DoCoMo’s common
shareholdings = 51.56% foreign shareholdings
Is PLDT in compliance with the constitutional requirement of the
60% capital which must be owned by Filipino Citizens?
The contention of the petitioner
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ATTY. GAVIOLA-CLIMACO
It is not compliant because when you say capital, you have to
look at common shares only. If that is the basis, foreigners
already own 80% which is beyond the 60% limitation.
The contention of respondent
If you look at all the outstanding shares, the 80% ownership in
common shares of the foreigners will only be around 17% of the
pie. Hence, PLDT is compliant since this is below 60%.
ISSUE:
Does the term "capital" in Section 11, Article XII of the
Constitution refer to common shares or to the total outstanding
capital stock (combined total of common and non-voting
preferred shares)?
RULING
We agree with petitioner and petitioners-in-intervention. The
term "capital" in Section 11, Article XII of the Constitution refers
only to shares of stock entitled to vote in the election of
directors, and thus in the present case only to common shares,
and not to the total outstanding capital stock comprising both
common and non-voting preferred shares.
The Supreme Court looked into the definition of Capital under
the Law. Under FIA, which governs foreign investments in the
Philippines, Capital is considered 60% of the capital stock
outstanding and entitled to vote.
Capital was explained through differentiating common from
preferred shares of PLDT. SC said that the shares that foreign
nationals own was already in violation of the Constitutional
requirement.
First, the foreigners owned 64% of the common shares. Common
shares include the sole, exclusive right to vote in the election of
directors. Thus, when they are such conferred with that right,
they are already in control and in management of the
corporation.
However, Filipinos only owned 35% of the PLDT’s common
shares. As between the holdings of the Filipino citizens and
foreign nationals in terms of common shares, the latter have the
superiority. In preferred shares, the Supreme Court described
them as mere investors who do not have the right to vote in the
election of directors and officers.
The preferred shares of PLDT is owned by 99% Filipinos. Thus,
they do not have the voting rights—they cannot control, manage
or participate. However, the rest are already owned by the
foreigners.
Compliance with the required Filipino ownership of a corporation
shall be determined on the basis of outstanding capital stock
whether fully paid or not, but only such stocks which are
generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or transferred to
aliens cannot be considered held by Philippine citizens or
Philippine nationals. Individuals or juridical entities not meeting
Corporation Law (2019) MIDTERM REVIEWER
the aforementioned qualifications are considered as non-
Philippine nationals.
GAMBOA VS. TEVES, G.R. NO. 176579, OCTOBER 9, 2012
FACTS:
The lawyers of PLDT felt that they were disadvantaged by this
decision, because now it is not based on total outstanding stock,
but on the common shares. They filed a Motion for
Reconsideration brought by the foreigners and their lawyers who
were insisting on the total outstanding capital stock.
ISSUE
Whether or not the MR should be granted
RULING
No. SC denied the MR.
(...but according to Atty G: The SC now realized that their ruling
in the First Gamboa v. Teves case actually narrowed down the
definition of capital. Because of the MR, the SC revised their
ruling although they did not admit that they revised it. They just
maintained that this it was their ruling all along. But it’s not true
because they said “entitled to vote in the election of directors.”
According to them, what they focused on is on the
pronouncement “that mere legal title is not sufficient, but full
beneficial ownership.” )
Since a specific class of shares may have rights and privileges or
restrictions different from the rest of the shares in a corporation,
the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution must apply not only to
shares with voting rights but also to shares without voting rights.
Preferred shares, denied the right to vote in the election of
directors, are anyway still entitled to vote on the eight speci􀀾c
corporate matters mentioned above. Thus, if a corporation,
engaged in a partially nationalized industry, issues a mixture of
common and preferred non-voting shares, at least 60 percent of
the common shares and at least 60 percent of the preferred non-
voting shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos. In
short, the 60-40 ownership requirement in favor of Filipino
citizens must apply separately to each class of shares, whether
common, preferred non-voting, preferred voting or any other
class of shares.
Moreover, such uniform application to each class of shares
insures that the "controlling interest" in public utilities always
lies in the hands of Filipino citizens.
Philippine Nationality of Corporations
Sec 3(a) of the Foreign Investments Act provides, “The term
"Philippine national" shall mean a citizen of the Philippines;or a
domestic partnership or association wholly owned by citizens of
thePhilippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines;...”
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ATTY. GAVIOLA-CLIMACO
The second ruling expanded the first ruling. They said that it
must apply to all types of shares—voting or non-voting. Common
shares must have 60-40 shares, preferred shares 60-40 limitation
applies as well. You apply it separately. You don’t apply it on
total outstanding shares, like what PLDT wanted in their MR. The
SC wanted it more strict. SC said that it must apply not just those
entitled to shares but to each type of shares—whether voting or
non-voting, class A, class B…
(sa IBL ni) Atty Gaviola: That interpretation for me is the correct
interpretation because when the law says outstanding capital
stock entitled to vote, this is very general. You cannot say that
preferred stocks are not entitled to vote. General rule is that if
the articles are silent, preferred stocks are entitled to vote in the
election of directors. Only when they are deemed to be non-
voting expressly can they be deprived of their right to vote but
only in the election of directors. For all the 8 other items
enumerated in the corporation code, they are required to vote.
So where do you apply the 60%?
60% voting shares or 60%total outstanding shares?
The lawyers of PLDT were insisting that you should apply based
on total outstanding shares because these are the lawyers
representing the foreign stockholders of PLDT. If you apply it
based on total outstanding shares, PLDT’s total outstanding
shares, more than 70% of its outstanding shares were preferred
non-voting shares and majority of that almost 99% were owned
by Filipino citizens. On the other hand, the common
stockholdings, the voting shares were only around 20+% but
majority of that were owned by foreigners.
Do we apply it to common or do we apply it to the total?
If in common, it would mean PLDT should not own a utility
franchise because more than 60% of its voting shares are owned
by foreigners. But if we apply it on total outstanding, then that’s
okay because more than 60% of its total outstanding are owned
by Filipinos.
GAMBOA CASE-decision
MEANING: TOTAL CAPITAL STOCK OUTSTANDING & ENTITLED TO
VOTE : ON THE ELECTION OF DIRECTORS
Control Test:
You need to have 60 % in your outstanding capital stock
entitled to vote should be owned by Filipino Citizens
Now the question is , what is meaning of “60 % outstanding
capital stock & entitled to vote?”
Summary :
Gamboa Case: 60 % should be based on the total shares entitled
to vote in the election of directors
Gamboa Resolution: Based on each class of shares regardless if
voting or non-voting :apply it to each class.
SEC: total voting shares entitled to vote on the election of
directors & total outstanding shares whether voting or not.
Ans: Base on the Gamboa case, when you say total capital stock
Corporation Law (2019) MIDTERM REVIEWER
outstanding & entitled to vote, it means the Total capital stock
outstanding and vote (Election of directors).
IOW: apply the 60 & on the capital stock entitled to vote in the
election of directors:
Ans: So basically, what you classify as voting shares are those
shares entitled to vote in the election of directors.
GAMBOA CASE- resolution
MEANING: TOTAL CAPITAL STOCK OUTSTANDING & ENTITLED TO
VOTE : VOTING OR NON VOTING SHARES
Atty: While on the MR , what happened?
Ans: In the MR, the Supreme Court appeared to have said that
no, you DON’T just apply it JUST TO THE CAPITAL STOCK
ENTITLED TO VOTE IN THE ELECTION OF THE DIRECTORS, BUT
YOU APPLY IT TO EACH CLASS OF SHARES WHETHER VOTING OR
NON-VOTING.
Atty: What was the basis of this rule by the Supreme Court?
Why did it say that Total Capital Stock Outstanding and entitled
to vote means voting / non voting shares?
Ans: Because according to the Supreme court, there is no such
thing as Non-voting shares because there are still instances that
even non-voting shares are entitled to vote. ( See list
enumerated in Sec. 6 of Corporation Code)
Atty:All the items listed there are the circumstances where even
the non-voting shares are required to vote. SO basically, in the
MR it tells us that under the Corporation code, there is no true
non-voting shares although we say voting and non-voting shares
, even non- voting shares are required to vote in certain
instances.
So the SC said, that being the case then we apply the
60- 40 rule in each class of shares whether non-voting or not. In
the case of PLDT, 60 % of the Common and on top of that 60 %
of the preferred non-voting must also be owned by , Filipino
Citizen.
So now, that cause a lot of confusion, since basically it
contradicted the first SC Gamboa Decision, so what happened
next?
Ans: SEC clarified how to apply the 60-40. There are 2 classes,
first the total outstanding which is entitled to vote ( Election of
the BOD) second, total outstanding shares regardless if it’s voting
or not voting.
Atty: So here comes the SEC coming out on its own rules , which
was not based on the First Gamboa Case neither was it base on
the Gamboa Resolution. SEC: total voting shares entitled to vote
on the election of directors & total outstanding shares whether
voting or not. So nagpalahi sad ang SEC. So what happened
next?
Ans: In the case of Roy, the petitioners files a case questioning
the validity of the Memorandum circular and the basis is that the
Memorandum circular is not consistent with the final Gamboa
ruling which said that it should be applied to each class of shares.
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ATTY. GAVIOLA-CLIMACO
Lain-lain naman ug interpretation Class.
Example. 200 shares outstanding,
100- voting shares
100- non-voting
Gamboa Decision:
60 % of the shares entitled to vote in the election of directors
must be owned by Filipino Citizens ( refers to 100 voting shares
lang) non-voting and shares outstanding (NOT IMPORTANT)
200 SHARES OUTSTANDING
100 -VOTING
100-NON VOTING
Gamboa Reso:
Its not just the shares entitled to vote in the election of directors
, because the law says TOTAL OUTSTANDING AND ENTITLED TO
VOTE, and under the corporation code there are really no non-
shares cause even the non-voting shares are required to vote in
certain circumstances. Meaning it should be applied to each class
of shares.
200 SHARES OUTSTANDING
100 - VOTING
100 - NON VOTING
SEC: 60 % of the voting: entitled to vote in the election of
directors & 60 % of the total outstanding capital stock , meaning
if you have 60 of the voting but 0 % of the non-voting under the
SEC test you will not pass because you only have 60 of the total
outstanding shares.
Atty: Which will prevail?
Ans: The prevailing rule is the SEC. The SC said that in the Roy
case, basically everything of the discussion in the Gamboa Reso is
a mere Obiter. And the prevailing rule is still the Gamboa
Decision That the 60 % should be based on the Total Capital
stock entitled to vote on the election of directors. But since the
SEC requirement is more stringent because it does not look at
the total voting but also takes a look at the total outstanding
capital , then it SEC memorandum Circular is VAlid. So as long as
the memorandum circular exist that is the prevailing rule. The
SC upheld is because it’s in accordance with our Gamboa
Deicsion ruling in fact it is more stringent than the Gamboa
Deicion. Second GAmboa ruling, does not matter because it’s
just all Obiter. All the hours that you spend analyzing the
Gamboa Reso is a mere obiter.
As to nationality , you can have the place of the corporation ,
citizenship of stockholders. Which classification you apply, it
depends on what’s the purpose. If it’s a matter on “can the
corporation do business?” and to secure a permit, then you take
Corporation Law (2019) MIDTERM REVIEWER
a look at the place of incorporation . If it a question on what
activity can that corporation engage in?” Look at the Citizenship
of the stock holders and you apply the foreign investment act.
How do you determine nationality base on the FIA?
Apply the Control test: 60 % of the Capital stock outstanding and
entitled to vote must be owned by Filipino Citizen.
If there is corporate layering
60 % of both the investor and investee if outstanding capital
stock and entitled to vote must be owned by Filipino Citizens &
60 % of the directors both corporation must be Filipino citizen.
In which case, your corporation is Philippine national .
Can you have a Philippine national that is domestic?
Ans: Yes,
Can you have a Philippine national that is foreign?
Ans: Yes, because Philippine national at least 60 %. Foreign here
in the Philippines since incorporated. But it could still be
considered as Filipino if composed of 100 & Filipino.
Can you have a foreign corporation that is domestic?
Ans: Yes, because, incorporated here but less than 60 % Filipino
owned.
What are the other classifications?
As to legal status:
De jure corporation- one that is organized in accordance with the
requirements of law, a validly existing corporation;
De facto corporation- a corporation where there exists a flaw in
its incorporation. These three elements must exist In order for a
corporation to be considered as de facto:
a. There must be a valid law under which the
corporation may be incorporated;
b. There must be an attempt in good faith to
incorporate;
c. There must be an exercise or use of corporate
powers
There is also a corporation by estoppel where there is a group of
persons holding itself out in the public as a corporation and it
enters into a contract with third persons, thus they cannot deny
their existence to those persons. The persons making the
corporation by estoppel is solidarily liable. They are liable as an
association because they are not considered as a corporation.
They are estopped from claiming that they are not a corporation
but their liability is individual.
Corporation by prescription- it is not formally organized as a
corporation as such but has been duly recognized by immemorial
usage as a corporation, with rights and duties enforceable under
the law.
As to function:
Public Corporation: a corporation organized for the government
of a state for the purpose of serving general good and welfare.
Private Corporation: a corporation formed for some private
purpose, benefit aim or end.
As to manner of creation:
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ATTY. GAVIOLA-CLIMACO
Corporation created by Special law - a corporation directly
created by Congress through a special law.
Corporation created under a General law- a corporation created
under the Corporation Code of the Philippines or the old
Corporation Law.
As to whether they are for religious purposes or not:
Ecclesiastical corporation or one organized for religious
purposes. Under the Code, religious corporations are classified
into corporations sole and religious societies.
Lay corporation or one organized for a purpose other than for
religion. Lay corporations, in turn, may be either eleemosynary
or civil.
As to whether they are for charitable purposes or not:
Eleemosynary corporation or one established for or devoted to
charitable purposes or those supported by charity; or
Civil corporation or one established for business or profit, i.e.,
with a view toward realizing gains to be distributed among its
members.
As to their relation to another corporation:
Parent or holding corporation or one which is so related to
another corporation that it has the power, either directly or
indirectly, to elect the majority of the directors of such other
corporation;
- So basically a parent corporation controls the other
corporation.
Subsidiary corporation or one which is so related to another
corporation that the majority of its directors can be elected
either directly or indirectly by such other corporation. it is one in
which another corporation owns at least a majority of the shares
and thus has control; or
Affiliated corporation or one related to another by owning or
being owned by common management or by a long term lease of
its properties or other control device.
SEC. 4. Corporations Created by Special Laws or Charters. –
Corporations created by special laws or charters shall be
governed primarily by the provisions of the special law or
charter creating them or applicable to them, supplemented
by the provisions of this Code, insofar as they are applicable.
SEC. 5. Corporators and Incorporators, Stockholders and
Members. – Corporators are those who compose a
corporation, whether as stockholders or shareholders in a
stock corporation or as members in a nonstock corporation.
Incorporators are those stockholders or members mentioned
in the articles of incorporation as originally forming and
composing the corporation and who are signatories thereof.
COMPONENTS OF A CORPORATION:
1. Incorporators - those originally forming and composing the
corporation as mentioned in the articles, and who are
signatories thereof.
Under the RCC, any person, partnership, association or
Corporation Law (2019) MIDTERM REVIEWER
corporation, singly or jointly with others but not more than
fifteen (15) in number, may organize a corporation for any lawful
purpose or purposes. Incorporators who are natural persons
must be of legal age. Each of the incorporators of a stock
corporation must own or be a subscriber to at least one (1) share
of the capital stock of the corporation.
2. Corporators - they are the stockholders or members of the
corporation.
They comprise the general population.
3. Officers - required officers under the law are the
President, Corporate Secretary and Treasurer.
The corporation may add more positions under its by-laws.
THREE OTHER CLASSES
 Promoters - Persons who bring about or cause to bring
about the formation and organization of a corporation by
bringing together the incorporators or the persons
interested in the enterprise, procuring subscriptions or
capital for the corporation and setting in motion the
machinery which leads to the incorporation of the
corporation itself.
 Subscriber - Person who have agreed to take and pay for
original, unissued shares of a corporation formed or to be
formed. All incorporators are subscribers but a subscriber
need not be an incorporator.
 Underwriter - A person, usually an investment banker,
who:
a. Has agreed, alone or with others, to buy at stated terms an
entire issue of securities or a substantial part thereof; or
b. Has guaranteed the sale of an issue by agreement to buy from
the issuing party any unsold portion at a stated price; or
c. Has agreed to sue his “best efforts” to market all or part of an
issue; or
d. Has offered for sale stock he has purchased from a controlling
stockholder.
RELATIONSHIP BETWEEN AN INCORPORATOR AS AGAINST A
CORPORATOR
 Incorporators are always corporators, but corporators are
not always incorporators.
- incorporators refer only to those persons who first
formed the corporation and signed the Articles of
Incorporation. Some incorporators stop being
corporators after they sell their share but they never
stop being incorporator because their name will
remain in the Articles of Incorporation of the
corporation.
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ATTY. GAVIOLA-CLIMACO
Section 6. Classification of shares. –The classification of
shares, their corresponding rights, privileges, or restrictions,
and their stated par value, if any, must be indicated in the
articles of incorporation. Each share shall be equal in all
respects to every other share, except as otherwise provided
in the articles of incorporation and in the certificate of stock.
The shares in stock corporations may be divided into classes
or series of shares, or both. No share may be deprived of
voting rights except those classified and issued as “preferred”
or “redeemable” shares, unless otherwise provided in this
Code: Provided, That there shall always be a class or series of
shares with complete voting rights.
Holders of nonvoting shares shall nevertheless be entitled to
vote on the following matters:
Amendment of the articles of incorporation;
Adoption and amendment of bylaws;
Sale, lease, exchange, mortgage, pledge, or other disposition
of all or substantially all of the corporate property;
Incurring, creating, or increasing bonded indebtedness;
Increase or decrease of authorized capital stock;
Merger or consolidation of the corporation with another
corporation or other corporations;
Investment of corporate funds in another corporation or
business in accordance with this Code; and
Dissolution of the corporation.
Except as provided in the immediately preceding paragraph,
the vote required under this Code to approve a particular
corporate act shall be deemed to refer only to stocks with
voting rights.
The shares or series of shares may or may not have a par
value: Provided, That banks, trust, insurance, and preneed
companies, public utilities, building and loan associations,
and other corporations authorized to obtain or access funds
from the public, whether publicly listed or not, shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by a corporation may be
given preference in the distribution of dividends and in the
distribution of corporate assets in case of liquidation, or such
other preferences: Provided, That preferred shares of stock
may be issued only with a stated par value. The board of
directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock
or any series thereof: Provided, further, That such terms and
conditions shall be effective upon filing of a certificate
thereof with the Securities and Exchange Commission,
hereinafter referred to as the “Commission”.
Shares of capital stock issued without par value shall be
deemed fully paid and nonassessable and the holder of such
shares shall not be liable to the corporation or to its creditors
in respect thereto: Provided, That no-par value shares must
be issued for a consideration of at least Five pesos (P5.00) per
share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall
be treated as capital and shall not be available for
distribution as dividends.
Corporation Law (2019) MIDTERM REVIEWER
A corporation may further classify its shares for the purpose
of ensuring compliance with constitutional or legal
requirements.
Stock - It is a unit of division of the capital stock of the
corporation.
The stock represents:
1. It represents the interest or right of the stockholder in
the management of the corporation through the
exercise of the voting right;
2. It represents the interest of right of the stockholder in
the earnings of the corporation in the form of the
dividends to be distributed; and
3. It represents the interest or right of the stockholder in
the residual assets of the corporation upon
dissolution.
So the share of stock represents your share in the corporation in
the form of dividends. Shares of stocks are therefore an asset on
the part of the shareholder. It is an intangible asset representing
its right and interest in the corporation.
Example: you have 1M capital divided into 1M shares, that
means that your capital is divided into 1M parts and each share
represents 1 part.
TYPES OF CAPITAL STOCK
 AUTHORIZED CAPITAL STOCK - It refers to the amount of
capital stock as specified in the articles of incorporation.
Additional shares may not be issued unless the articles of
incorporation are amended by vote of the stockholders.
But unissued authorized shares may be issued at a later
date without amendment of the articles of incorporation or
approval of the stockholders.
 SUBSCRIBED CAPITAL STOCK - It is the amount of the
capital stock subscribed, whether fully paid or not. It
connotes an original subscription contract for the
acquisition by a subscriber of unissued shares in a
corporation and would, therefore, preclude the acquisition
of shares by reason of subsequent transfer from a
stockholder or resale of treasury shares.
 OUTSTANDING CAPITAL STOCK - The Code defines the
terms as “the total shares of stock issued to subscribers or
stockholders, whether or not fully or partially paid (as long
as there is a binding subscription agreement), except
treasury shares.” the portion of the capital stock which is
issued and held by persons other than the corporation
itself.
 PAID-UP CAPITAL STOCK - It is that portion of the
subscribed or outstanding capital stock that is actually paid.
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ATTY. GAVIOLA-CLIMACO
 UNISSUED CAPITAL STOCK - That portion of the capital
stock that is not issued or subscribed. It does not vote and
draws no dividends.
 LEGAL CAPITAL - It is the amount equal to the aggregate
par value and/or issued value of the outstanding capital
stock. When par value shares are issued above par, the
premium or excess is not to be considered as part of the
legal capital. In the case of no par value shares, the entire
consideration received forms part of legal capital and shall
not be available for distribution as dividends. We’re talking
here about the capital contribution. But financially, capital
is not just the financial contribution. It includes the
earnings in the corporation in the form of retained
earnings. So assets-liabilites, that composes your legal
capital. But this term is not really used here in the
Philippine practice.
What are treasury shares?
Shares which have been issued by the corporation, but are no
longer outstanding because they have been acquired by the
corporation.
Status of treasury shares: not retired shares and they do not
revert to the unissued shares of the corporation but are
regarded as property acquired by the corporation which may be
reissued or resold by the corporation at a price to be fixed by the
board of directors. Hence, when you acquire treasury shares, you
don’t decrease your authorized capital stock. The corporation
cannot declare dividends on its own treasury shares, nor can the
corporation have the right to vote by virtue of these treasury
shares.
When are shares considered retired?
When the shares are reacquired by the corporation with no
intention of reissuing. When you retire your shares, you decrease
your authorized capital stock, which needs the consent of all the
creditors pursuant of the trust fund doctrine.
Illustration:
A newly established corporation with authorized capital stock
of 10 million divided into 1 million shares at P10 per share. Out
of the 10 million ACS, 5 million is subscribed.
The remaining 5 million is the unissued shares. Meaning, there
are no buyers yet. If it is subscribed, there must be an existing
subscription agreement over these shares. Meaning, these
shares have been purchased.
Out of the 5 million subscribed, 4 million is paid, this is the paid
up capital stock.
Supposing the corporation repurchased/reacquired 1 million
shares from the shareholders, the 1 million are the treasury
shares. These treasury shares remain subscribed and issued
because somebody already paid for it. Even the corporation that
reacquired it, paid for it. But they are no longer outstanding
capital stock. Therefore, the outstanding capital stock is 4
million. ACS remains at 10M. Unissued shares remain at 5M.
Corporation Law (2019) MIDTERM REVIEWER
There’s no difference in the right of stockholders who have paid
or have not yet paid their subscription. They’re all entitled to the
same right, even the right to the dividends. Only when your
shares are declared as delinquent will be the time that you stop
enjoying stockholder rights. So as long as you’re not declared as
delinquent, even unpaid, you are considered as a stockholder.
REQUIREMENTS BEFORE A CORPORATION CAN PURCHASE ITS
OWN SHARES (SEC 40 RCC)
1. The corporation has unrestricted retained earnings in its
books to cover the shares to be purchased or acquired
2. For a legitimate corporate purpose or purposes, including
the 3 instances mentioned.
POWER TO CLASSIFY SHARES
Unless restricted by law or the provision of its articles of
incorporation, a corporation has unrestricted freedom to issue
such classes or series of shares as the prospects and needs of its
business may require to attract investors.
WHEN CLASSIFICATION OF SHARES MAY BE MADE
1. By the Incorporator
The classes and numbers of shares which a corporation shall
issue are first determined by the incorporators as stated in the
articles of incorporation fled with the SEC. The incorporators
have the power to classify while making/drafting the AOI.
2. By the BOD and the stockholders
After the corporation comes into existence, they may be altered
by the BOD and the stockholders by amending the AOI. So the
BOD has to make the proposal, approved by the majority of the
Board, and then it has to be ratified by the stockholders. Both of
them working together. Can amend the classification or
characteristics of shares.
CLASSES OF SHARES
1. PAR VALUE SHARE
Par value share is one with a specific money value fixed in the
articles of incorporation and appearing in the certificate of stock.
The primary purpose thereof is to fix the minimum issue price
of the shares thus, assuring creditors that the corporation would
receive a minimum amount for its stock.
Requirement as to its issuance:
A par value share cannot be issued below par but can be issued
more than par and the excess thereof shall form part of the paid-
in capital but it is accounted for as a premium or as an additional
paid-in capital.
2. NO PAR VALUE SHARE
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ATTY. GAVIOLA-CLIMACO
It is one without any stated value appearing on the face of the
certificate of stock. IOW, it is a stock which does not state show
much money it represents.
Requirement as to its issuance:
1) Shares of stock issued without par value shall be deemed fully
paid and non-assessable and the holder of such shares shall not
be liable to the corporation or to its creditors in respect thereto.
- The consideration given shall be considered as the full amount
of the issue price, there can be no subscription receivable.
2) The shares without par value may not be issued for a
consideration less than the value of Five pesos (P5.00) per share.
- This is the minimum consideration for a non par value share
3) The entire consideration received by the corporation for its
non-par value shares shall be treated as capital and shall not be
available for distribution as dividends.
(2nd to the last paragraph, RCC)
THE FF INSTITUTIONS ARE NOT ALLOWED TO ISSUE SHARES
WITH NO-PAR VALUE:
That banks, trust, insurance, and preneed companies, public
utilities, building and loan associations, and other corporations
authorized to obtain or access funds from the public.
3. VOTING SHARE
Voting share is share with right to vote.
4. NON-VOTING STOCK
Non-voting share is share without right to vote.
Requirement as to its issuance:
1) Only preferred or redeemable shares may be made non-voting
shares.
2) There must remain other shares with full voting rights.
- There can be no valid agreement where a corporation has all
non-voting shares. Any agreeement that will take away the right
to vote of all the shares in a corporation is not valid.
3) Holders of non-voting shares shall nevertheless be entitled to
vote on the ff matters:
a. Amendment of the articles of incorporation
b. Adoption and amendment of by-laws
c. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property
d. Incurring, creating or increasing bonded indebtedness
e. Increase or decrease of capital stock
f. Merger or consolidation of the corporation with another
corporation or other corporations
g. Investment of corporate funds in another corporation or
business in accordance with this Code, and
h. Dissolution of the corporation.
What are the conditions to the issuance of non-voting shares?
Corporation Law (2019) MIDTERM REVIEWER
1. If the stock is originally issued as voting stock, it may not
thereafter be deprived of the right to vote without the consent
of the holder.
2. Under the Code, no share may be deprived of voting rights
except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in the Code.
3.Where non-voting shares are provided for , the Code requires
that there shall always be a class or series of shares which have
complete voting rights.
4. Under Section 6 (par. 1), only preferred or redeemable shares
may be denied the right to vote. The issuance of common stock
with a feature that voting rights thereof shall be exercised by a
trustee violates the rule that common shares cannot be deprived
of voting rights. The automatic assignment of voting rights in an
indirect violation of Section 6.
5. In case any amendment of the articles of incorporation has the
effect of changing or restricting the rights of any stockholder, the
latter shall have the right to dissent and demand payment of the
fair value of his shares
Atty: The rule is that a corporation must always have voting
shares there can be no valid agreement where a corporation has
all non-voting share. Any agreement that will take away the right
to vote of all the shares of a corporation is not valid.
5. COMMON STOCK
It is one which entitles the holder thereof to a pro rata division of
the profits, if there are any, and in its assets upon dissolution,
without any preference or advantage in that respect over other
stockholders but equally with all other stockholders except
preferred stockholders. Basic shares issued by the corporation.
You cannot have a corporation that has no common shares.
6. PREFERRED STOCK
It is one with a stated par value which entitles the holder thereof
to certain preferences over the holder of common stock. Shares
which are specified in the AOI that the preferred shares have
preference over the distribution of assets in case of liquidation
and preference in the distribution of dividends.
NOTE: Common and preferred shares are the 2 main classes or
forms of stock.
KINDS OF PREFERRED SHARES
a. Preferred share as to assets
Share which the holder thereof preference in the distribution of
the assets of the corporation in case of liquidation. It has been
held that preferred stock, standing alone, creates a preference
only to dividends and not to assets in case of liquidation.
b. Preferred share as to dividends
Share the holder of which is entitled to receive dividends on said
share to the extent agreed upon before any dividends at all are
paid to the holders of common stock. The preference simply
means that holders of common stock may receive dividends only
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ATTY. GAVIOLA-CLIMACO
after the satisfaction of the prior claims on dividends of
preferred stockholders. There is no guaranty that it will receive
any dividends. The corporation is not bound to pay dividends
unless the BOD declare them.
i. Cumulative preferred share - Share which entitles
the holders thereof not only to the payment of current dividends
but also to dividends in arrears. Dividends in arrears means that
for every year that the company did not declare dividends, each
cumulative preferred shareholder will have an interest in those
undeclared dividends.
ii. Non-cumulative - Share which entitles the holder
thereof to the payment of current dividends only in preference
to commons stockholders.
Example: 1000 shares; Stated in the AOI that these are preferred
shares entitled to cumulative dividends at Php5/share per year.
2017 and 2018, no dividends declared. 2019 – corporation
declares dividends.
Entitled to how much dividends?
Cumulative: 2017, 2018 and 2019, entitled to 5000/yr
Non-cumulative: 5000 only for the current year
iii. Participating preferred share - Share which gives
the holder thereof not only the right to receive the stipulated
dividends at the preferred rate but also to participate with the
holders of common shares in the remaining profits pro rata (or in
the proportion stated in the articles of incorporation) after the
common shares have been paid the amount of the stipulated
dividend at the same preferred rate. Those which after they get
their share of the dividends, they still participate in the sharing
of dividends of the common stockholders.
iv. Non-participating - Share which entitles the holder
thereof to receive the stipulated preferred dividends and no
more. The balance, if any, is given entirely to the common stocks.
v. Cumulative-participating - Share which is a
combination of the cumulative share and participating
share. This means that the holder is entitled not only to
dividends in arrears but also, after receiving his
preferred share of dividends, to participation with the
holders of common stock in the remaining profits.
NOTE: In the absence of an agreement, express or implied,
dividends should be deemed noncumulative and non-
participating in accordance with the presumption established in
Section 6 par.5 that shares are equal in all respects unless
otherwise stated in the articles of incorporation and in the
certificate of stocks.
FOUNDER’S SHARES
Section 7. Founders' shares.
Founders' shares classified as such in the articles of
incorporation may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided that where
the exclusive right to vote and be voted for in the election of
directors is granted, it must be for a limited period not to
exceed five (5) years subject to the approval of the Securities
and Exchange Commission. The five-year period shall
Corporation Law (2019) MIDTERM REVIEWER
commence from the date of the aforesaid approval by the
Securities and Exchange Commission.
“exclusive right to vote and be voted for in the election of
directors is granted”
GR: Common shares cannot be deprived the right to vote.
XPN: In the case of Founder’s Shares – for a limited period of 5
years, owners of founders’ shares shall have an exclusive right to
vote and be voted. (Sec. 7)
 Founders’ Shares – shares issued to the organizers and
promoters of a corporation in consideration of some
supposed right or property having special rights and
privileges not enjoyed by the owners of other classes
of shares.
 Effect: After the lapse of 5 years the founder’s shares
will be treated and given the same rights as other
common shareholders.
COMMON SHARES VS. PREFERRED SHARES
Common Shares
 refers to the residual ownership of the corporation
Preferred Shares
 preference as to the distribution of the assets of the
corporation
 preference as to the dividends of the corporation:
kinds of Preferred shares as to dividends
 cumulative preferred shares
- the stockholder is entitled to the dividends in the
years where the corporation was not able to
declare dividend plus the current year.
- example: In 2017 and 2018 the corporation did not
declare dividend. In 2019 it declared dividend. In
this case, the stockholder shall be entitled to the
dividends in 2017, 2018, and 2019.
 non-cumulative preferred share
- the stockholder does not have any right for the
years that the corporation did not declare
dividends but only entitled to the dividends
declared in the current year.
 participating preferred shares
- the stockholder is not only entitled to his preferred
shares but also entitled in the distribution with the
common shareholders.
 non-participating preferred shares
- the stockholder is entitled only to his preferred
shares.
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ATTY. GAVIOLA-CLIMACO
- it is a common practice that a preferred
shareholder enters into a stipulation with a
percentage of interest, such stipulated interest will
be followed in the distribution of his share in the
dividends.
Doctrine of Equality of Shares
 Absent any stipulation to the contrary in the Articles of
Incorporation, all shares are treated equal with the
same rights and privileges.
 Therefore, if the articles of incorporation provide only
of common and preferred shares but does not provide
for anything else the two shares are treated equally.
DOCTRINE OF EQUALITY OF SHARES
“IN THE ABSENCE OF ANY PROVISION IN THE AOI AND IN THE CERTIFICATE OF
STOCK TO THE CONTRARY, ALL STOCKS, REGARDLESS OF THEIR CLASS
NOMENCLATURE, ENJOY THE SAME RIGHTS AND PRIVILEGES AND SUBJECT TO THE
SAME LIABILITIES.”
-IF THE ARTICLES OF INCORPORATION ARE SILENT, PREFERRED SHARES ARE
PRESUMED TO BE NON-CUMULATIVE AND NON-PARTICIPATING.
- AOI CAN SPECIFY THAT SHARES ARE BOTH CUMULATIVE AND PARTICIPATING
.
a. CUMULATIVE - MEANS YOU HAVE THE RIGHT TO DIVIDENDS IN
ARREARS.
b. PARTICIPATING- MEANS YOU HAVE THE RIGHT TO PARTICIPATE WITH
THE COMMON SHARES.
TN: PREFERRED SHARES CAN BE BOTH CUMULATIVE AND PARTICIPATING
REDEEMABLE SHARES
REDEEMABLE SHARES ARE SHARES USUALLY PREFERRED, WHICH BY THEIR TERMS
ARE REDEEMABLE AT A FIXED DATE OR AT THE OPTION OF EITHER THE ISSUING
CORPORATION OR THE STOCKHOLDER OR BOTH AT A CERTAIN REDEMPTION PRICE.
TREASURY SHARES
TREASURY SHARES ARE SHARES WHICH HAVE BEEN LAWFULLY ISSUED BY THE
CORPORATION AND FULLY PAID FOR AND LATER REACQUIRED BY IT EITHER BY
PURCHASE, REDEMPTION, DONATION, FORFEITURE OR OTHER LAWFUL MEANS.
RULE IN CASE OF ACQUISITION BY THE CORPORATION IN ITS OWN SHARES
IN RELATION TO SEC. 41…..
SEC. 41. POWER TO ACQUIRE OWN SHARES. – A STOCK CORPORATION SHALL
HAVE THE POWER TO PURCHASE OR ACQUIRE ITS OWN SHARES FOR A
LEGITIMATE CORPORATE PURPOSE OR PURPOSES, INCLUDING BUT NOT LIMITED
TO THE FOLLOWING CASES: PROVIDED, THAT THE CORPORATION HAS
UNRESTRICTED RETAINED EARNINGS IN ITS BOOKS TO COVER THE SHARES TO BE
PURCHASED OR ACQUIRED:
1. TO ELIMINATE FRACTIONAL SHARES ARISING OUT OF STOCK
DIVIDENDS;
Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

2. TO COLLECT OR COMPROMISE AN INDEBTEDNESS TO THE but SUBJECT TO: SEC RULES

CORPORATION, ARISING OUT OF UNPAID SUBSCRIPTION, IN A
DELINQUENCY SALE, AND TO PURCHASE DELINQUENT SHARES SOLD
DURING SAID SALE; AND
3. TO PAY DISSENTING OR WITHDRAWING STOCKHOLDERS ENTITLED TO
PAYMENT FOR THEIR SHARES UNDER THE PROVISIONS OF THIS
CODE.
CORPORATION HAS THE POWER TO ACQUIRE ITS OWN SHARES WHETHER OR
NOT THESE SHARES ARE DEEMED AS REDEEMABLE.
1. Redeemable shares are redeemable even without
UNRESTRICTED RETAINED EARNINGS.
2. BUT SEC RULES REQUIRES:
- after redemption , there should still be sufficient assets to pay
of all liability plus the capital stock.
IOW: You cannot redeem without Retained Earnings.

The retained earnings may not be Unrestricted but if you have a

EVEN IF THERE ARE NO REDEEMABLE SHARES IN THE ARTICLES OF
deficit (negative Retained earnings)= CANT REDEEM.
INCORPORATION, CORPORATION IS STILL ALLOWED TO REACQUIRE ITS OWN
SHARES UNDER SECTION 41. BUT THIS SECTION ALLOWS SUCH PURCHASE ONLY IF
WHO CAN REDEEM: Corporation/ shareholder
THE CORPORATION HAS UNRESTRICTED RETAINED EARNINGS.
If you have shares that are redeemable , it means that the
parties have already agreed beforehand whether it is
GR: CORPORATION HAS THE POWER TO ACQUIRE ITS OWN SHARES WHETHER THE
redeemable at the option of the corporation or whether
SHARES ARE REDEEMABLE OR NOT PROVIDED THAT:
redeemable at the option of the stockholder.
1. IF NOT REDEEMABLE THE CORPORATION HAS UNRESTRICTED
WHEN TO REDEEM: it depends (Redemption Rights &
RETAINED EARNINGS.
Agreement)
2. BUT IF THE SHARES ARE TERMED OR CLASSIFIED AS REDEEMABLE ON
AOI, EVEN WITHOUT UNRESTRICTED RETAINED EARNINGS, IT IS
1. As a matter of right - when the redemption date
AUTHORIZED TO PURCHASE OR REACQUIRE THE SHARES.
comes, the stockholder can compel redemption as a
matter of right
WHAT HAPPENS IF THE CORPORATION ACQUIRES THE REDEEMABLE SHARES?
2. As a matter of agreement - redemption date comes
1. IF RETIRED. YOU NEED TO AMEND THE AOI IN ORDER TO
and the corporation does not redeem and the
DECREASE THE AUTHORIZED CAPITAL STOCK.
stockholders do not compel redemption, it is now a
matter of agreement between the two.
2. IF NOT RETIRED. THE CORPORATION CAN SELL THE SHARES OR
THEY CAN BE ISSUED AS PROPERTY DIVIDENDS BECAUSE THESE SHARES
If the stockholder dili ganahan magpa redeem sa
ONCE REACQUIRED BY CORPORATION BECOME PROPERTY BY THE
iyahang shares , then the corporation and the
CORPORATION.
stockholder can just agree that we’ll just amend our
AOI to put in there that it’s no longer redeemable.
Clarification: IF IT IS REDEEMABLE SHARES AT THE OPTION OF THE
CORPORATION, WHETHER THE STOCKHOLDERS LIKE IT OR NOT, THE CORPORATION
But if the redemption date arrives and the stockholders
CAN COMPEL THE ACQUISITION. THAT’S ONE OF THE DIFFERENCE BETWEEN
and corporation does not say anything and after a few
ORDINARY SHARES AND REDEEMABLE SHARES.
years the stockholders now say “ui redeem or shares”,
it’s now a matter on how the redemption date was
HOW ABOUT IF THE STOCKHOLDERS COMPEL THE CORPORATION TO REDEEM THE
worded.
SHARES?

Ex:
YOU CAN HAVE REDEEMABLE SHARES AT THE OPTION OF THE STOCKHOLDERS.
1. “Redemption can take place anytime after March
30”
THERE IS ALSO AN INSTANCE WHERE THE STOCKHOLDERS CAN COMPEL THE
Effect: Redemption can still be done.
CORPORATION TO PURCHASE AS AN EXERCISE OF THEIR APPRAISAL RIGHT.
2. “Redemption shall only be until March 30”
Effect: They can no longer redeem.
SO IT COULD BE REDEEMABLE AT THE OPTION OF THE CORPORATION OR
REDEEMABLE AT THE OPTION OF THE STOCKHOLDERS.
TN: IT DEPENDS ON HOW REDEMTION RIGHTS ARE
WORDED IN THE ARTICLES OF INCORPORATION AND
REDEEMABLE SHARES
AGREEMENT BETWEEN THE PARTIES.
Sec. 8. Redeemable shares. — Redeemable shares may be
issued by the corporation when expressly so provided in the
AMEND ROI (reduce ACS) IF REDEEMED SHARES ARE
articles of incorporation. They may be purchased or taken up by
RETIRED
the corporation upon the expiration of a fixed period,
There’s a need to amend the Articles of Incorporation
regardless of the existence of unrestricted retained earnings in
to decrease the AUTHORIZED CAPITAL STOCK (ACS) .
the books of the corporation, and upon such other terms and
The retirement or cancellation of the redeemed shares
conditions stated in the articles of incorporation, which terms
will not automatically reduce the ACS , there has to be
and conditions must also be stated in the certificate of stock
approval by the SEC.
representing said shares, (n)
CONVERTIBLE SHARE
REDEEMABLE SHARES ARE REDEEMABLE EVEN W/O URE
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Corporation Law (2019) MIDTERM REVIEWER ATTY. GAVIOLA-CLIMACO

CONCEPT
Are shares which are convertible or changeable by the
stockholder from one class to another class (such as from
preferred to common) at a certain price and within a certain
period.
retire the shares but regardless the shares do not revert to the
unissued it will always be issued but no longer outstanding.
Retirement – a decrease in the authorized capital stock. It has
nothing to do with the unissued shares.

Conversion of shares is a 2-step process:

1ST AMENDMENT: PROVIDE CONVERTIBILITY FEATURE IN AOI
Provide the Right to Convert in the AOI. If your articles do not
provide for Convertibility, you need to amend the articles first to
allow for the conversion.

2ND AMENDMENT: ACTUAL CONVERSION: WIPE OUT OR

DELETE THE CONVERTIBLE SHARE
when you do convert , you need to amend the AOI to provide for
the issuance or addition (for example) of new common shares
and delete the convertible preferred shares as you no longer
have those class of shares once conversion takes place.

EXAMPLE
If you allow Preferred shares to be converted to Common.
1. Amend your articles to provide for the Convertibility Feature.
( Preferred to Common)
2. Do a 2nd Amendment to wipe out the Convertible preferred
and they are now all Common Shares

The two amendments can be filled simultaneously with the SEC

because they will not allow you to change without going though
conversion. So what you will do is to apply for the convertibility
feature and at the same time you need to apply for the ACTUAL
CONVERSION.

NOTE: Generally it needs 2 amendments unless the Convertibility

feature is already there. You only need to amend for the actual
conversion.

TREASURY SHARES
Sec. 9. Treasury shares. - Treasury shares are shares of stock
which have been issued and fully paid for, but subsequently
reacquired by the issuing corporation by purchase, redemption,
donation or through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the board
of directors.

Treasury shares- it refers to the shares wherein it is fully issued

and paid but is subsequently reacquired by the corporation who
issued such shares through redemption, donation or any other
means.

What happens to the treasury? What is the status of the treasury

shares?

The treasury shares will become a property of the corporation

meaning that the corporation can resell it in an amount which is
fixed by the board of directors and it cannot be considered as a
retired share because it does revert into unissued shares.

Retirement is different from an unissued share.

We said that when we have treasury shares, it becomes the

property of the corporation, it can reissue the shares, or it can
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