1

CORPORATION LAW - In cases of slander, libel and other forms of

defamation (should not qualify because the code does
 Corporation is one of the types of business not qualify whether natural or juridical) Art. 2219 of
organizations. It is also the most important in the civil code:
economic development.
Art. 2219. Moral damages may be
INTRODUCTION recovered in the following and analogous cases:

 Sole proprietorship
(1) A criminal offense resulting in physical injuries;

- One man form of business entity, personally answers

all liabilities, but enjoys all the profits with the (2) Quasi-delicts causing physical injuries;
exclusion of others
- Limited shareholders responsibility (3) Seduction, abduction, rape, or other lascivious
- Paid subscription in full, you are no longer liable acts;

 Partnership
(4) Adultery or concubinage;

- Based on mutual trust and confidence

(5) Illegal or arbitrary detention or arrest;
 Joint venture
(6) Illegal search;
- one time grouping of persons whether they be natural
or juridical (7) Libel, slander or any other form of defamation;
- does not entail continuity because after the
undertaking is completed it is already the end
- particular partnership and joint venture would be (8) Malicious prosecution;
similar, but there is already a decision of the
Supreme Court declaring them as different (9) Acts mentioned in Article 309;
- when they do not register, it does not exist
- Foreign corporations enters into an agreement with a
domestic corporation, it must be registered. Generally (10) Acts and actions referred to in Articles 21, 26,
they do not need to be registered. 27, 28, 29, 30, 32, 34, and 35.

 Corporations The parents of the female seduced, abducted, raped,

or abused, referred to in No. 3 of this article, may also
recover moral damages.
- They may enter into joint venture, but generally they
cannot enter into a partnership, but there are
exceptions allowed by the SEC: the 3 exceptions must The spouse, descendants, ascendants, and brothers
go hand in hand and sisters may bring the action mentioned in No. 9
1. The articles of incorporation expressly of this article, in the order named.
authorized the corporation to enter into
contracts of partnership;  Advantages (SEE LADIA BOOK)
2. The agreement or articles of partnership must
provide that all the partners will manage the
- No. 2 may also be a disadvantage
partnership; and - No. 5 may also be a disadvantage
3. The articles of partnership must stipulate that
all the partners are and shall be jointly and
 A corporation is a person, therefore protected by the
severally liable for all obligations of the
due process clause and equal protection clause of the
partnership.
DEFINITION AND ATTRIBUTES Constitution

 4 attributes of a corporation CLASSIFICATION OF CORPORATIONS

1. Artificial being  Section 3 Stock and non-stock

2. Created by operation of law
3. Right of succession - Importance of knowing, determining what provisions
4. Powers, attributes and properties expressly of the code or the law may be applicable
authorized by law or incident to its existence.

Section 3. Classes of corporations. -

 Doctrine of limited capacity
- Only such powers as are expressly granted to it by
law and by its articles of incorporation including
others which are incidental to such conferred powers,
those reasonably necessary to accomplish its purpose
and those which may be incidental to its existence
Corporations formed or organized under this Code
may be stock or non-stock corporations. Corporations
which have capital stock divided into shares and are
authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the
basis of the shares held are stock corporations. All
other corporations are non-stock corporations. (3a)

- Can do things as the law asks or allows it to do  Non-stock- title 10

- If it does anything beyond, it shall be considered as
ULTRA VIRES  Stock- section 51

 General rule: Moral damages cannot be granted to  Stockholders must generally cast their votes in the
corporations meeting; section 4 governed primarily by the law
creating them
 Exception: Filipinas Broadcasting Network Inc. vs. Ago
Med

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Section 4. Corporations created by special - Parent or Holding/ subsidiaries and affiliates

laws or charters. - Corporations created by special - Affiliates- no majority vote
laws or charters shall be governed primarily by the SMC 12%
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. HERSHEY CBPl 12%
(n)
12% CBP
 Section 3 Affiliate is subject to common control by the 12 % owners
 De jure
- The two requisites must always concur
1. That they have a capital stock divided into shares; - cannot be attached by the state even in a quo
and, warranto proceeding
2. That they are authorized to distribute dividends or
allotments as surplus profits to its stockholders on  De facto
the basis of the shares held by each of them.
- exists by virtue of colorable compliance
 Section 4 - Attached directly only by the state in a quo warranto
proceeding
- Created by a special law, they have their own
character  Corporation by estoppel
- They are not immune from suit unless provided by
the law of their creation
-So defectively formed, but still considered
- Primarily governed by the law creating them
corporation, but only in relation to those who cannot
- Their subsidiaries are entirely different or
deny their existence section 20 and 21
independent from that of the other
FORMATION AND ORGANIZATION
 3 stages
 Close corporation 1. Creation
2. Re-organization or quasi-reorganization
- There is no exemption it is absolute 3. Dissolution/winding-up
 Purpose clause
- Defining the scope of authority of the corporate
 Public corporation
enterprise pr undertaking. Both confirmed and
limited
- Political or governmental purposes
 4 limitations of purpose clause
- Those formed or organized for the government or a
1. Lawful
portion of the State or any of its political subdivision 2. Specific or stated concisely
and which have for their purpose the general good 3. More than one, the primary and secondary must
and welfare be specified
4. Lawfully combined
 Private Corporation - Provision that states, cannot be issued less than par,
exception is treasury shares because it can be issued
- Immediate benefit, aim or advantage of private less than par
individuals
- Those formed for some private purpose, benefit, aim  A corporation commences only upon issuance of the
or end certificate, prior thereto it has no being and cannot
- Distinction: public for governmental purpose transact business. Promoters cannot act for a
projected corporation
 Corporation Sole
 Metro Manila- paid up capital requirement is 10 M
- Exemption to the rule because it is composed only of
one person  Non- stock- mere mention of the operating capital
- An incorporator may also be a juridical person
 Mention the authorized capital
 Close corporation
 Restrictions
- There is exclusivity of shares of stock
- Section 96-105 - Mandatory in close
- Restrictions to transfer shares - Not mandatory in ordinary
- Only those indicated can own shares
- Article must provide that there will be no public
 Non-stock
offering

- If value is not more than 100,000

 Open corporation

 A corporation cannot use any other name unless it

- openly admit investors
has been amended
- example: stock exchange

 Section 19
 Domestic/ Foreign

- If confusingly similar it will not be allowed to be

 Test
registered
- Verification slip from the records officer
- Incorporation test
- If incorporated under the laws of the Philippines it is
a domestic corporation Section 19. Commencement of corporate
existence. - A private corporation formed or organized
under this Code commences to have corporate
ME Gray vs. CA existence and juridical personality and is deemed
incorporated from the date the Securities and

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Exchange Commission issues a certificate of
incorporation under its official seal; and thereupon
the incorporators, stockholders/members and their
successors shall constitute a body politic and
corporate under the name stated in the articles of
incorporation for the period of time mentioned
therein, unless said period is extended or the
corporation is sooner dissolved in accordance with
law. (n)
- determining what point in time the juridical
personality will cease to exist
- enter into contract only when it has juridical
personality
- once it ceases to exist, it no longer has personality
- exist for another 3 years only for purposes of
liquidation
- Dissolution- it is automatic

 When should extension be made?

- Words corporation or inc. either in full or abbreviated
form must be included
- General rule: Not earlier than 5 years
- Exception: unless there are justifiable reasons
Section 18. Corporate name. - No
corporate name may be allowed by the Securities and  May it be extended after expiration?
Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that
- Alhambra cigar vs. SEC once it ceases to exist it has
of any existing corporation or to any other name
already protected by law or is patently deceptive, no vested politic, exist only for a period of 3 years
confusing or contrary to existing laws. When a change only for liquidation and for that purpose only
in the corporate name is approved, the Commission
shall issue an amended certificate of incorporation  Article 5 How many incorporators should there be?
under the amended name. (n)
- 5-15
 Doctrine of secondary meaning
 May a corporation be an incorporator?
- A word or phrase originally incapable of exclusive
appropriation [usually generic] with reference to an
- General rule: only natural persons
article in the market, because of geographically or - Exception: cooperatives and corporation primarily
otherwise descriptive, might nevertheless have been organized to hold equities in rural banks
used so long and so exclusively by one producer with
reference to his article that, in that trade and to that  How about minors?
branch of the purchasing public, the word or phrase
has become to mean that the article was his product.
- NO, because they must be of legal age

 Section 18
 May a corporation organized by incorporators
consisting solely of foreigners
- Lyceum of the Philippines case, the additional
geographical name does not make it confusingly
- Yes, there is no nationality requirement only
similar
residence, as long as majority are residents of the Phil
- actual confusion is not necessary- Philips case “it is
enough that there is probable confusion”
 Define incorporators <sec.5>
 2 requisites must be proven
- Those person mentioned in the articles as originally
forming the corporation and who are signatories of
- that the complainant corporation acquired a prior
the articles of incorporation.
right over the use of such corporate name
- Must be signatories to be incorporators
- identical, deceptively or confusingly, patently
deceptive
Section 5. Corporators and incorporators,
 principal office stockholders and members. - Corporators are those
who compose a corporation, whether as stockholders
or as members. Incorporators are those stockholders
- statement of principal office is required
or members mentioned in the articles of incorporation
- city and municipality not only province must be as originally forming and composing the corporation
specified and who are signatories thereof.
- principal office NOT operations office
- necessary because it will establish the residence of
corporations Corporators in a stock corporation are
- venue of actions for or against the corporations called stockholders or shareholders. Corporators in a
- venue of meetings non-stock corporation are called members. (4a)
- section 51 meetings may only be within the
boundaries of the city where the principal office  Define corporators <sec.5>
- non-stock may be held anywhere in the Philippines, if
provided in its by-laws - All persons who compose the corporation at any given
- where summons may be served
time and need not be among those who execute the
- registration of chattel mortgage must be registered in
articles of incorporation at the start of its formation
the register of deeds where the principal office is
and organization.
located
- Originally or subsequently
- Section 5 provides:
Clavecilla Radio System vs. Antillon Corporators in a stock corporation are
called stockholders or shareholders. Corporators in a
- action not upon a written contract non-stock corporation are called members. (4a)
- city where the defendant resides
 May a corporation be a corporator?
 term of existence
- YES. There is nothing to prevent a corporation from
- corporate term required being a stockholder

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 Incorporator must subscribe to 1 share
 There are those that are exclusively reserved to
Filipinos
 An incorporator maybe a corporator as long as he is a
stockholder
 section 6
Section 6. Classification of shares. - The
shares of stock of stock corporations may be divided
into classes or series of shares, or both, any of which
classes or series of shares may have such rights,
privileges or restrictions as may be stated in the
articles of incorporation: Provided, That 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,
further, That there shall always be a class or series of
shares which have complete voting rights. Any or all
of the shares or series of shares may have a par value
or have no par value as may be provided for in the
articles of incorporation: Provided, however, That
banks, trust companies, insurance companies, public
utilities, and building and loan associations shall not
be permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any
corporation may be given preference in the
distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or
such other preferences as may be stated in the
articles of incorporation which are not violative of the
provisions of this Code: 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, That such terms and conditions
shall be effective upon the filing of a certificate thereof
with the Securities and Exchange Commission.
Shares of capital 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:
Provided; That shares without par value may not be
issued for a consideration less than the value of five
(P5.00) pesos 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.
A corporation may, furthermore, classify its
shares for the purpose of insuring compliance with
constitutional or legal requirements.
Except as otherwise provided in the articles
of incorporation and stated in the certificate of stock,
each share shall be equal in all respects to every
other share.
Where the articles of incorporation provide
for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless
be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the corporate
property;
4. Incurring, creating or increasing bonded
indebtedness;
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5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with
another corporation or other corporations;
7. Investment of corporate funds in another
corporation or business in accordance with this Code;
and
8. Dissolution of the corporation.
Except as provided in the immediately
preceding paragraph, the vote necessary to approve a
particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.
(5a)
 How many directors should there be?
- General rule: Not less than 5 not more than 15
- Exceptions:
1. Educational corporations registered as non stock
corporation whose number of trustees, though not
less than five and not more than [15] should be
divisible by five [5], meaning they must have either
five, ten, or fifteen trustees and no other;
2. In close corporations where all the stockholders are
considered as members of the board of directors
thereby effectively allowing twenty members in the
board.
3. The by-laws of a corporation may provide for
additional qualifications and disqualifications of its
members of the board of directors or trustees.
However it may not do away with the minimum
disqualifications lay down by the Code.
 Qualifications of the governing board
- Requires mere residency <sec. 23>
Section 23. The board of directors or
trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under
this Code shall be exercised, all business conducted
and all property of such corporations controlled and
held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is
no stock, from among the members of the
corporation, who shall hold office for one (1) year until
their successors are elected and qualified. (28a)
Every director must own at least one (1)
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name
on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a
director shall thereby cease to be a director. Trustees
of non-stock corporations must be members thereof.
A majority of the directors or trustees of all
corporations organized under this Code must be
residents of the Philippines.
 May a domestic corporation have a governing board
consisting solely of foreigners?
- YES, section 23 majority of them must be residents of
the Philippines, no nationality requirement
 Anti-dummy act <sec.2-A>
- If the business undertaking or activity is only partially
nationalized, aliens can be elected as such directors,
[unless the law provides otherwise] but their number
shall only be in proportion to their equity or
participation in the capital stock of the corporation.

 Disqualifications <sec.27>
- The disqualifications provided for is absolute and may
not be done away with. Corporate by-laws may,
however, provide for additional qualifications and
disqualifications.
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation. (n)
 Section 27 and 23 minimum disqualifications and
qualifications
Lee vs. CA
- By laws may provide for additional
 Gov’t vs. El hogar Filipino, Gokongwei vs. SMC
Capital structure
Foundation- minimum paid-up capital 3M
Authorized capital 1 M No. of shares 1M
shares par value 1.00
Amount of shares subscribed
50 K A affected through the issuance of redeemable shares or
50 K B preference as to dividends and/or distribution of
C 250K
D be issued or sold from time to time at different price
E they do not purport to represent an actual of fixed
PAID UP =62,500
Corporation cannot exceed more than 1 M it is the maximum
amount it cannot issue more unless amended
Maximum shares it can issue is 1M shares unless amended
 How much shares should be subscribed?
- Must be at least 25% of the authorized capital stock
 Paid- up must be at least 25%-minimum
 Section 30
- Total subscription compliance with minimum 25%
total
- Any combination would comply with the minimum
required by section 30
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing
their compensation, the directors shall not receive
any compensation, as such directors, except for
reasonable per diems: Provided, however, That any
such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax
of the corporation during the preceding year. (n)
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 Minimum for a domestic corporation?
- In no case shall the paid- up capital be less than 5k
 Is there a minimum authorized capital imposed by
the code?
- If there is minimum paid-up logically there should
also be a minimum capital =5000
 Minimum paid-up capital for a financing company
metro manila 10 M if located in MM
 Shares of stock
 Purpose of classification
- To specify and define the rights and privileges of the
stockholders;
- For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers
and stockholders.
- As a management control device.
- To comply with statutory requirements particularly
those which provide for certain limitations on foreign
ownership and shares like overseas employment
agencies requiring to own at least 75% of the shares
of stock thereof.
- To better insure return on investment which can be
preferred shares, i.e., granting the holders thereof,
assets in case of liquidation; and,
- For flexibility in price, particularly, no par shares may
depending on the net worth of the company since
value.
 Section 6
- Each shall be equal in all respects to every other
share
 Preferred shares
- Specific preference
- Dividends or during liquidation
 No par
- Can sell it with the network of the corporation
 Distinction between the subscribed and outstanding
stocks?
- Section 137
Section 137. Outstanding capital stock
defined. - The term "outstanding capital stock", as
used in this Code, means the total shares of stock
issued under binding subscription agreements to
subscribers or stockholders, whether or not fully or
partially paid, except treasury shares. (n)
- Voting and dividend rights, it refers to the
outstanding capital stocks
- Only outstanding stocks are allowed to vote and
receive dividends
- Actually the same

 Treasury shares
- are also subscribed shares
- while they remain in the treasury, no voting and
dividend rights
- may be reissued by the corporation
- once reissued they become outstanding stocks again
 common shares
- carry the right to vote
 preferred shares
- grants the holder preference
- preference as to dividends
- preference as to distribution of the remaining assets
upon dissolution or
- both
- YOU MUST STATE THE PREFERENCE BECAUSE IF
NOT THEY ARE PRESUMED TO BE EQUAL
- It may include such other preferences not
inconsistent with the Code. This is so because Section
6 of the said law allows a stock corporation to issue
preferred shares subject only to the limitations
imposed therein which are:
a. They can be issued only with sated par value; and,
b. The preferences must be stated in the articles of
incorporation and in the certificate of stock,
otherwise, each share shall be, in all respect, equal to
every other share.
 Participating
- Must be stated because the presumption is that it is
participating
 Cumulative
- Irrespective of whether or not they where earned
 Preferred
- May be denied
- Unless denied they are still entitled
 What if hindi i-declare kahit na may dividends rights
for the previous years? May they be denied dividend
rights because they are non holders of non-
cumulative? NOTE: YOU CANNOT COMPEL THE
CORPORATION TO DECLARE DIVIDENDS UNLESS
IT EXCEEDS 100 % PAID UP CAPITAL SEC. 43
Section 43. Power to declare dividends. -
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property,
or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any
cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further,
That no stock dividend shall be issued without the
approval of stockholders representing not less than
two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose.
(16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
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consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary
under special circumstances obtaining in the
corporation, such as when there is need for special
reserve for probable contingencies. (n)
- It depends because there are three types of non-
cumulative preferred shares
- Discretionary dividend type
- Mandatory if earned
- Earned cumulative or dividend credit type
 Compare cumulative share from non-cumulative,
earned cumulative or dividend credit type
- Cumulative share –whether or not earned
- Non-cumulative earned cumulative or dividend credit
type- only if earned
 Par
- stated par value; shall not be issued less than par
 No par
- without stated par value
- once fully paid no longer liable
 Corporations cannot use its capitals in declaring
dividends; not all can issue no par value section 6
 Voting
- entitled to vote at any motion brought up in writing
 Non-voting
- not entitled to vote
 What types of shares may be denied of the right to
vote?
- Preferred and redeemable shares
 Is it correct to state that common shares can never be
denied the right to vote?
- Only preferred and redeemable shares are denied
unless provided in this code
- PWEDENG MA-DENY YUNG COMMON SHARES,
KASI YUNG FOUNDER’S SHARES MERON SILANG
EXCLUSIVE RIGHTS NA SILA LANG ANG MERON,
SO PWEDE SILANG BUMOTO WITH REGARDS TO
SOMETHING NA HINDI NA SAKOP NG COMMON
SHARE RIGHTS
- Example: founders shares- may be given certain
rights and privileges
- Even common shares may be denied the right to vote
of founders’ shares issued <sec.7>
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
commence from the date of the aforesaid approval by
the Securities and Exchange Commission. (n)

 Do you include non-voting shares in passing a valid
corporate act?
- Even non-voting shares are entitled to vote under
section 6
 Redeemable shares
- Discretionary/optional
- Obligatory or mandatory
 Generally a corporation can reacquire its own shares
if it has unrestricted retained earnings
 Exception: redeemable shares may be reacquired
irrespective of retained earnings
 Treasury shares
- They are treasury while in the treasury account of the
corporation
 May they be reissued by the corporation?
- YES
 If they are reissued will they be denied the right to
vote?
- Once reissued they shall become outstanding stocks
again and purchasers shall be entitled to all the
rights and privileges as the other holders have
 Section 57 treasury shares have no voting and
dividend rights. Why not?
Section 57. Voting right for treasury
shares. - Treasury shares shall have no voting right
as long as such shares remain in the Treasury. (n)
- Answer: commissioner vs. manning page 62 first par.
“Although authorities may differ on the
exact legal and accounting status of so-called
treasury shares, they are more or less in agreement
that treasury shares are stocks issued and fully paid
for and reacquired by the corporation either by
purchase, donation, forfeiture or other means.
Treasury shares are therefore issued shares but being
in the treasury they do not have the status of
outstanding shares. Consequently, although a
treasury share, not having been retired by the
corporation re-acquiring it, may be re-issued or sold
again, such shares, as long as it is held by the
corporation as a treasury share, participates neither
in dividends, because dividends cannot be declared
by the corporation to itself, nor in meetings of the
corporation as voting stock, for otherwise equal
distribution of voting powers among stockholders will
be effectively lost and the directors will be able to
perpetrate their control of the corporation, though it
still represents a paid for interest in the property of
the corporation. The foregoing essential features of a
treasury stocks are lacking in the questioned shares.
In this case, and under the terms of the
trust agreement, the shares of stock of Reese
participated in dividends which the trustee received
and the said shares were voted upon by the trustee in
all corporation meetings. They were not, therefore,
treasury shares.”
 When the law speaks of outstanding rights it does not
include treasury shares
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 Treasury shares may be reissued
- They are actually assets of the corporation
- Once re-issued they become outstanding stocks again
- The corporation may cancel them; in effect there will
be a reduction in the outstanding capital stocks
- The code does not require ordinary corporations to
provide for restrictions, but it does not likewise
prohibit restrictions
- Example: right of first refusal
- The restriction must be contained in the articles of
incorporation
- If provided in by-laws but not in the articles of
incorporation then it will not be binding
- Restrictions and preferences are mandatorily required
in close corporations
- If it does not provide restrictions it is not a close
corporation
- Specified persons- close corporations
- If not one of those specified you are not included
because there is exclusivity in close corporations
- Should also be in the by-laws not only in the articles
of incorporation
 No transfer clause
 Execution clause
 Acknowledgment
 Treasurer affidavit part of the articles of incorporation
 Section 23-27 minimum qualifications, but there may
be additional
 Grounds for disapproval
- Only substantial and not strict is required
 May the SEC refuse or reject registration?
- <Section 17>
Section 17. Grounds when articles of
incorporation or amendment may be rejected or
disapproved. - The Securities and Exchange
Commission may reject the articles of incorporation
or disapprove any amendment thereto if the same is
not in compliance with the requirements of this Code:
Provided, That the Commission shall give the
incorporators a reasonable time within which to
correct or modify the objectionable portions of the
articles or amendment. The following are grounds for
such rejection or disapproval:
1. That the articles of incorporation or any
amendment thereto is not substantially in accordance
with the form prescribed herein;
2. That the purpose or purposes of the corporation
are patently unconstitutional, illegal, immoral, or
contrary to government rules and regulations;
 8

3. That the Treasurer's Affidavit concerning the  General rule section 19

amount of capital stock subscribed and/or paid is
false; - Vested with judicial capacity upon issuance of the
certificate by the SEC
4. That the percentage of ownership of the capital
stock to be owned by citizens of the Philippines has o However it is not accurate according to
not been complied with as required by existing laws atty. Ladia because there are those that
or the Constitution.
can issue for example cooperatives-
BUREAU OF COOPERATIVES which
No articles of incorporation or amendment register, home insurance guaranty
to articles of incorporation of banks, banking and corporation- HOME OWNERS
quasi-banking institutions, building and loan
associations, trust companies and other financial
intermediaries, insurance companies, public utilities, Cagayan Fishing vs. Sandika
educational institutions, and other corporations
governed by special laws shall be accepted or - Corporations are created by law
approved by the Commission unless accompanied by
a favorable recommendation of the appropriate
government agency to the effect that such articles or - Commence to exist upon issuance by the
amendment is in accordance with law. (n) CONCERNED government corporation or agency

- Prior there to it has no being

- But the grounds in section 17 are not exclusive

 When will the corporation commence to exist? - The transfer of the property was not valid, it likewise
did not have the right to transfer
- Section 19
 De jure

Section 19. Commencement of corporate - Strict or substantial compliance

existence. - A private corporation formed or organized
under this Code commences to have corporate
existence and juridical personality and is deemed  De facto
incorporated from the date the Securities and
Exchange Commission issues a certificate of - 4 requisites must go hand in hand take out anyone of
incorporation under its official seal; and thereupon them there can be no de facto corporation
the incorporators, stockholders/members and their
successors shall constitute a body politic and
1. There is a valid statute under which the corporation
corporate under the name stated in the articles of
incorporation for the period of time mentioned could have been created as a de jure corporation.
therein, unless said period is extended or the
corporation is sooner dissolved in accordance with 2. An attempt, in good faith, to form a corporation
law. (n) according to the requirements of law, which goes far
enough to amount to a “colorable compliance” with
 A corporation de jure can come into existence only the law;
upon the issuance of the certificate of registration by
the SEC? TRUE OR FALSE? 3. A user of corporate powers, the transaction of
business in some way as if it were a corporation; and,
- TRUE
4. Good faith in claiming to be and doing business as a
- EXCEPTION: CORPORATION SOLE <sec. 112> corporation.

 Are the rights and obligations between officers and

Section 112. Submission of the articles of directors of a de jure and de facto the same?
incorporation. - The articles of incorporation must be
verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or - YES. Governed by the same law, rules and
presiding elder, as the case may be, and accompanied regulations
by a copy of the commission, certificate of election or
letter of appointment of such chief archbishop,  Only important in determining, is for the purpose of
bishop, priest, minister, rabbi or presiding elder, duly
applying the rules with regards to the direct and
certified to be correct by any notary public.
collateral attack

From and after the filing with the Securities  The existence of a de jure cannot be questioned even
and Exchange Commission of the said articles of by the State, either directly or indirectly
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop,  Existence of a de facto can be questioned only by the
priest, minister, rabbi or presiding elder shall become State directly in a quo warranto proceeding only
a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or
Municipality of Malabang vs. Benito
church theretofore administered or managed by him
as such chief archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held in trust by him - What is the missing link so as to consider it a de
as a corporation sole, for the use, purpose, behalf and facto? A law, because the executive order is
sole benefit of his religious denomination, sect or unconditional
church, including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof. (n)
- An unconditional act affords no rights, creates no
office
- CORPORATION SOLE- upon filing of the verified
articles of incorporation, once filed it is vested with a - Legal contemplation it was never passed at all
judicial capacity

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- It can therefore be questioned by any person
 If the certificate of registration has not been issued,
may a corporation de facto exist?
- NO!
- Number 4 requirement, good faith in claiming to be
and doing business as a corporation
Hall vs. Piccio
- Missing link is good faith
- The certificate was not yet issued by the SEC, the
members knew and therefore they were not acting in
good faith, therefore anybody can question its
existence
 Corporation by estoppel
- So defectively formed so that they are not to be
considered a de jure or de facto
- General partners- liable even beyond his promise
even his personal properties are prone to attachment
Lozano vs. Delos Santos
- Founded on principle of equity
- Exercise corporate powers
- Enters with business with 3rd parties
- When there is no 3 rd persons involved and the
problem arises between there members, therefore
they themselves know that there is no corporation by
estoppel
Albert vs. University
- 1965 case, no section 21 yet
- Applied where the rules governing agency
- A person purporting in behalf of a non existing
corporation
- Section 21, you arrive at the same decision
Chiang Kai Siek vs. CA
- SC based its decision from the provision of the
education act
- It cannot immune itself by virtue of its
compliance with the law
 Assuming there was no law?
- YES, it may still be sued as a school for the past 32
years the school represented itself as possessed of
juridical personality
 General rule: a 3 rd party transacting with a non
existent corporation shall be estopped to deny
Asia banking vs. standard products
- General rule: absence of fraud a person who has dealt
with a non incorporated corporation shall be stopped
to deny from actions in which it had benefited
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- Exemptions: when there is fraud the general rule
shall not apply
Salvatierra vs. Garlitos
- As a general rule a person who has contracted it a
corporation lacking personality
- Doctrine is not applicable where fraud takes part in
the transaction
 Another exemption
International express travel and tours vs. CA
- No fraud in this case
- How come Kahn was made liable?
- Doctrine of incorporation
- Applies only if that person is trying to escape from a
contract where he is benefited
- In this case petitioner is not trying to escape liability,
but rather the one claiming from the contract
 Would this apply to foreign corporation?
- YES, it may apply
- Georg Grotjahn vs. Isnami
 A foreign corporation cannot gain access to our courts
unless they attain a license to engage in business in
the Philippines but applying corporation by estoppels,
the court allowed
 Municipality of Malabang case
- No law, hence may be questioned by any person
- An unconstitutional act is not a law, t confers no
rights, it imposes no duties, it affords no protections,
it crates o office, it is in legal contemplation, as
inoperative as though it had never been passes
 Hall vs. Piccio
- No good faith
 Corporation by estoppel
- Admission, conduct or agreement
- Will not apply among members themselves there
must be a 3rd party
non
- Cannot escape when benefited
- General rule: you deal with a corporation, as to estop
it
- Exceptions: 1. fraudulently misrepresents the third
person may file an action directly to those members,
2. 3rd party will not be estopped if he is not trying to
escape liability
 2 possible remedies
- Chiang kai siek case
- Albert case
 10

 What would be the effect if the corporation failed to - They where signed for and in behalf of the corporation
commence transaction?
Palay inc. vs. Clave
- Automatic
- Liabilities incurred by the corporation cannot be
 Operated but becomes subsequently inoperative for 5 enforced against stockholders, etc., even if
years only a ground for suspension, proper notice and stockholders, etc. happens to own a substantial
hearing interest in the corporation, mere ownership does not
disregard the corporate entity theory
 Commencement
 Corporate entity for legal or legitimate purposes only
- Example realty company
 Two or more corporations, one of them will be treated
CORPORATE CHARTER AND ITS AMENDMENTS as a mere alter-ego

 What do you understand by the word charter? Is it  You cannot pierce the veil of corporate fiction when
the same as articles of incorporation? there are no facts attendant in the case

- Corporate charter is broader  Corporate Entity Theory

 Franchise - The corporation is possessed with a personality

separate and distinct from the individual stockholders
- Primary power granted by the state to be and act as a or members and is not affected by the personal rights,
corporation obligations or transactions of the latter

- Secondary franchise is the right or privilege that the  Instrumentality rule

corporation may exercise
- Where one corporation is so organized and controlled
 You cannot issue investment contracts without a and its affairs are conducted so that it is, in fact, a
secondary franchise, kailangan primary muna hindi mere instrumentality or adjunct of the other, the
pwede mauna secondary kasi sa section 19 it does fiction of the corporate entity of the “instrumentality”
not exist until issued with a certificate of registration may be disregarded
or incorporation
- Courts are concerned with reality and not form
 Corporate entity
- Mere ownership of all or substantially all of the
- Corporation exist separately and independently from shares of stock of a corporation is not, in itself,
the stockholders insufficient ground for disregarding the separate
corporate personality. And for the separate
- Stockholders cannot bring an action, to bring back personality of the corporation to be disregarded, the
the properties of a corporation wrong doing must be clearly and convincingly
established
- Corporation has no interest in the individual
properties of its members - Fraud must be proven by clear and convincingly
evidence amounting to more than preponderance. It
Sulo ng Bayan vs. Araneta cannot be justified by speculation and can never be
presumed. And only if it sought to hold the
stockholders liable directly for corporate debt
- Corporation cannot bring an action for the recovery of
the properties of its members
Palacio vs. Fely
Caram vs. CA
- Piercing the veil of corporate fiction
- Stockholders cannot be held liable for the legitimate
obligations of the corporation, they exist separately - Fely trans and the other corporation is one and the
and independently from one another same

Cruz vs. Dalisay Marvel bldg. vs. David

- Final judgment against a corporation cannot be - There must be facts before the court will be justified
enforced against stockholders in piercing the veil of corporate fiction

- Corporation was a mere extension of the personality

Rustan Pulp vs. CA
of the person

- Corporation exist separately and independently

Yutivo and sons vs. Court of Tax Appeals
- Corporation are juridical entities, they exist only in
legal contemplation, can act only through its - What where the facts or circumstances arrived by the
authorized representatives court here?

- Subscribed capital where all advanced by Yutivo, the

Soriano vs. CA
board where the same as Yutivo

- They are not personally liable

Commissioner of Internal Revenue vs. Norton and
Harrison

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 11

- Court applied the general rule
- Mere substantial ownership does not mean that
it has a same corporate entity
La Campana Coffee Factory, Inc. vs. KKM
- Two corporations managed by the same family,
workers were made interchangeably
it is shown, as in the case before us, that the
operations of the corporation were so merged with the
stockholders as to be practically indistinguishable
from them. To hold the latter liable for the
corporation’s obligations is not to ignore the
corporation’s separate entity, but merely to apple the
established principle that such entity cannot be
invoked or used for purposes that could not have
been intended by the law that created that separate
personality.”

Emilio Cano vs. CIR

Tan boon bee vs. Jarencio

- Sued in there official capacity

- Why would a drug company need a printing machine

- Reverse of Soriano vs. CA (signed in their official

- The property must be in pursuance of a company
capacity)
business

Tesco vs. WCC

Cease vs. CA

- The two corporations where located in the same office

- Alter-ego or the extension of the person of forest ware
does the court pierced the veil of corporate fiction
Claparols vs. CIR
- As to not deprive the holders of their successional
- Same as NAFLU and A.C. Ransom rights

Concept builders vs. NLRC
- Instrumentality rule. What is the instrumentality
rule? “where one corporation is so organized and
controlled and its affairs are conducted so that it is,
in fact, a mere instrumentality or adjunct of the
other, the fiction of the corporate entity of the
“instrumentality” may be disregarded.”
- Has no separate mind of its own. What is the degree
of control?
- Mere ownership of all or substantially all is not a
justification of piercing the veil of corporate fiction
 Fraud must be proven by clear and convincing
evidence cannot presume or speculate, there must be
facts and circumstances
 Fraud must be clear and convincing evidence more
than preponderance
Remo Jr. vs. IAC

1. Control, not mere majority or complete stock control, - The resolution was not entered to defraud anyone
but complete domination, not only of finances but of
policy and business practice in respect to the
Del Rosario vs. National Labor Commission
transaction attacked so that the corporate entity as to
this transaction had at the time no separate mind,
- The wrongdoing must be clearly established
will or existence of its own.

- There must be facts to support

2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the violation
of a statutory or other positive legal duty or dishonest - Payment of claims cannot thus be presumed
and unjust act in contravention of plaintiff’s legal
rights; and, Indophil Textile Mill vs. CALICA

3. The aforesaid control and breach of duty must - How do you distinguish this ruling to La Campana,
proximately cause the injury or unjust loss having the same issues:
complained of.
- La campana, one payroll, employees were made
- The absence of one of the elements prevents “piercing interchangeable. Acrylic had its own standards
the corporate veil.” In applying the “instrumentality”
or “alter ego” doctrine, the courts are concerned with
PNB vs. Ritratto Group
reality and not form, with how the corporation
operated and the individual defendant’s relationship
- Control test
to that operation.

- Not mere majority but rather complete

 There must facts and circumstances before warrant
piercing the veil of corporate fiction
- Twin ace was only a subsequent interested party
 The control necessary does not mean stock ownership
- Assets and machineries

MCConnel vs. CA
 Amendment of the articles of incorporation

- were located in the same floor

- Express power granted to a corporation

- “while the mere ownership of all or nearly all of the

 Section 16
capital stock of a corporation does not necessary
mean that it is a mere business conduit of the
- Appraisal right
stockholder, that conclusion is amply justified where
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- Section 81 to object on certain acts and transactions
Section 81. Instances of appraisal right. -
Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of
his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the
Code; and
3. In case of merger or consolidation. (n)
- Right granted only in specified instances
Are non-voting shares included in amending the articles of
incorporation
1 100/s
XYZ-----ABC
2 100/s
To
10 100/s
=1M/S what would
be the 2/3?
Section 6 last paragraph
Voting shares are excluded except the foregoing instances
1 1
2 2
3 3
4 4
5 5
6 6
1 & 2=absent
1&2=absent but gave their written assent
3 & 4= objected
3&4=objected
5 & 6= approved the amendment
5&6=approved
Would there be a valid amendment
 Special amendments 37 & 38 shortening that would
result to dissolution require prior approval by the
SEC
Section 37. Power to extend or shorten
corporate term. - A private corporation may extend or
shorten its term as stated in the articles of
incorporation when approved by a majority vote of the
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board of directors or trustees and ratified at a meeting
by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least
two-thirds (2/3) of the members in case of non-stock
corporations. Written notice of the proposed action
and of the time and place of the meeting shall be
addressed to each stockholder or member at his place
of residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That
in case of extension of corporate term, any dissenting
stockholder may exercise his appraisal right under
the conditions provided in this code. (n)
Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or increase
any bonded indebtedness unless approved by a
majority vote of the board of directors and, at a
stockholder's meeting duly called for the purpose,
two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock,
or the incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed increase
or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness
and of the time and place of the stockholder's meeting
at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any
bonded indebtedness is to be considered, must be
addressed to each stockholder at his place of
residence as shown on the books of the corporation
and deposited to the addressee in the post office with
postage prepaid, or served personally.
A certificate in duplicate must be signed by
a majority of the directors of the corporation and
countersigned by the chairman and the secretary of
the stockholders' meeting, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;
(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the
amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of
capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be incurred, created
or increased;
(5) The actual indebtedness of the corporation on the
day of the meeting;
(6) The amount of stock represented at the meeting;
and
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
Any increase or decrease in the capital
stock or the incurring, creating or increasing of any
bonded indebtedness shall require prior approval of
the Securities and Exchange Commission.
One of the duplicate certificates shall be
kept on file in the office of the corporation and the
other shall be filed with the Securities and Exchange

Commission and attached to the original articles of
incorporation. From and after approval by the
Securities and Exchange Commission and the
issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased
and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of
filing may declare: Provided, That the Securities and
Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless
accompanied by the sworn statement of the treasurer
of the corporation lawfully holding office at the time of
the filing of the certificate, showing that at least
twenty-five (25%) percent of such increased capital
stock has been subscribed and that at least twenty-
five (25%) percent of the amount subscribed has been
paid either in actual cash to the corporation or that
there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no
decrease of the capital stock shall be approved by the
Commission if its effect shall prejudice the rights of
corporate creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the same, with the
approval by a majority vote of the board of trustees
and of at least two-thirds (2/3) of the members in a
meeting duly called for the purpose.
Bonds issued by a corporation shall be
registered with the Securities and Exchange
Commission, which shall have the authority to
determine the sufficiency of the terms thereof. (17a)
 The vote must be cast at the meeting called for that
purpose
 Written assent would not suffice
 When do amendments become valid and effective?
- Only upon the approval of the SEC TRUE OR FALSE?
- FALSE because it can be valid upon the date of filing
if not acted upon within 6 months without fault
attributable to the corporation
 Why is it retroactive?
 What provision may be amended, altered or repealed
 Can you change name, address for example she
married or changed address?
- NO. you cannot change that
 Fait accompli, are beyond the powers or authority of
the corporation to change, alter or modify. These
would include the following:
- Names of the incorporators and
- The incorporating directors or trustees,
- The name of the treasurer originally or first elected by
the subscribers or members to act as such until his
successor has been duly elected and qualified,
- The number of shares and amount originally
subscribed and paid out of the original authorized
capital stock of the corporation,
- The date and place of execution of the articles of
incorporation,
- The signatories and acknowledgment thereof.
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- All other provisions or matters stated or contained in
the articles are subject to amendment.
 Founder’s or signatories hindi pwede palitan
 Names, nationalities- you cannot
 Capital- right granted by law to all corporation
 Paid up capital- NO
 Restriction and transfer of shares in ordinary stock
corporations
- You can, but close corporation cannot
- Section 96, otherwise it will not be a close corporation
Section 96. Definition and applicability of
Title. - A close corporation, within the meaning of this
Code, is one whose articles of incorporation provide
that: (1) All the corporation's issued stock of all
classes, exclusive of treasury shares, shall be held of
record by not more than a specified number of
persons, not exceeding twenty (20); (2) all the issued
stock of all classes shall be subject to one or more
specified restrictions on transfer permitted by this
Title; and (3) The corporation shall not list in any
stock exchange or make any public offering of any of
its stock of any class. Notwithstanding the foregoing,
a corporation shall not be deemed a close corporation
when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another
corporation which is not a close corporation within
the meaning of this Code.
Any corporation may be incorporated as a
close corporation, except mining or oil companies,
stock exchanges, banks, insurance companies, public
utilities, educational institutions and corporations
declared to be vested with public interest in
accordance with the provisions of this Code.
The provisions of this Title shall primarily
govern close corporations: Provided, That the
provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise
provides.
 Transfer clause, executor clause, acknowledgment,
treasury affidavit-NO
Philippine First Insurance case
- Mere change in the name of a corporation or by
merely complying with the law is general amendment
- It does not change its personality. It is the same
person in a different name. the charter is the same
 Amendment of a corporate term
- Extending the same can never be made 7 years prior?
TRUE or FALSE
- FALSE. It can be if there are justifiable reasons for
earlier extension as may be determined by the SEC
 Can you extend the corporate term if it has already
expired?
- Once the term expires without an amendment having
happen it ceases to exist as a body politic. It is
dissolved automatically on the day it expires.
 Alhambra cigar and PNB case

 Instances when the SEC allowed extension whose
term has already expired
- All of them involved are institutions of learning, it was
the case in order to avoid confusion that would arise
later on.
BOARD OF DIRECTORS/TRUSTEES
 Section 23
Section 23. The board of directors or
trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under
this Code shall be exercised, all business conducted
and all property of such corporations controlled and
held by the board of directors or trustees to be elected
from among the holders of stocks, or where there is
no stock, from among the members of the
corporation, who shall hold office for one (1) year until
their successors are elected and qualified. (28a)
Every director must own at least one (1)
share of the capital stock of the corporation of which
he is a director, which share shall stand in his name
on the books of the corporation. Any director who
ceases to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a
director shall thereby cease to be a director. Trustees
of non-stock corporations must be members thereof.
A majority of the directors or trustees of all
corporations organized under this Code must be
residents of the Philippines.
- Controlled by the board of directors
- Authority are however restricted to the day to day
- Stockholders may have all the profit but will turn over
the management to the governing board
- But unless the law provides the power may be
delegated
 General rule
- Corporations must sit and act as a body
- Will be bound by corporate officers if they acted
within the 5 classification page 150
Ramirez vs. Orientalist co.
- What was the position of Fernandez in this case?
TREASURER
- Why did the court rule that actions of Fernandez
bound the corporation when he is not even a board of
director?
“if a man is found acting for a corporation
with the external indicia of authority, any person not
having notice of want of authority, may usually rely
upon those appearances; and if it be found that the
directors had permitted the agent to exercise that
authority and thereby held him out as a person
competent to bind the corporation, or had acquiesced
in a contract and retained the benefit supposed to
have been conferred by it, the corporation will be
bound, notwithstanding the actual authority may
never have been granted.”
- Contracts must be made by the director and not the
stockholders
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- Actions of the stockholders in such matters is only
advisory and not in any way binding in the
corporation
Barreto vs. La previsora Filipina
- Everything emanates from the board of directors
- Stockholders action is merely advisory except their
approval or vote is necessary to prove a valid
corporate act
 Qualifications:
- No citizenship requirement, at least majority must be
residents
- Can have a governing board consisting solely of
foreigners
- But we have to take into consideration partly
nationalized industries and other laws which
prohibits or limits foreign ownership
- Anti-dummy act
- Utilization development of natural resources 60%
must be owned by Filipino citizens, therefore they
only own 40%---10 members they can only have 4
seats, but not entirely correct because the law may
provide otherwise; educational institutions restricted
to Filipinos, but there are exceptions when created by
religious and charitable institutions.
- By-laws may provide additional qualifications and
disqualifications
- To qualify as a director he must own at least 1 share
 Should the stockholder be the equitable or beneficial
owner in order to qualify as a director?
- NO, it is not necessary, as long as you are listed in
the books as owner of one share
Lee vs. CA
- As long as you are listed in the books as owner of one
share
- Under the old law he must be the beneficial owner
and legal owner thereof but in the new law it is not
required as long as it stands in his name he is
qualifies
1 A-100t/S B (own in the trust of X) is B qualified to be
a director?
2
3-10
2– transferring there voting rights in favor of VT
Other rights will accrue in favor of them, but not the voting
rights
voting rights must be recorder in the books of the corporation
that it is transferred
PNB-IFL- wholly owned subsidiary of PNB
PNB will assign to PNB-IFL nominal shares and PNB-IFL now
will be able to be nominated
 15

 Gen. Rule:  What is cumulative voting?

- Term of one year who will serve as such until there - Process of multiplying the number of shares to the
successors are elected and qualified number of director to be elected

 Exception: - Matter of right granted to stockholders in a stock

- Non-stock corporation can serve for a term of 3 years
- Educational non-stock- term of the governing board
can be 5 years
 May this term exceed one year?
- Yes, they may serve in a hold over capacity until their
successors have been duly elected and qualified
Detective and protective bureau vs. Cloribel
- In the by-laws, managing director must be elected
from among themselves
- Must be duly elected and qualified
How are the directors elected?
1-100T/S
2-100T/S
corporation
1 to 5 has 200k/s and members of the same family- majority
800k they have 4M votes they are guaranteed 4 seats
6 to 10 are not related- 1 seat 1M votes
 Cumulative to allow the minority to have a rightful
representation in the board
 Is it allowed in a non-stock corporation?
- Not generally available
- Section 89 unless the articles or by-laws allow
cumulative voting
Section 89. Right to vote. - The right of the
members of any class or classes to vote may be
limited, broadened or denied to the extent specified in
the articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member,
regardless of class, shall be entitled to one vote.

Unless otherwise provided in the articles of

3-100T/S
incorporation or the by-laws, a member may vote by
proxy in accordance with the provisions of this Code.
to 10=1M/S (n)

 Do you include the vote of 1 & 2 to have a quorum to

Voting by mail or other similar means by
have a valid meeting? members of non-stock corporations may be
authorized by the by-laws of non-stock corporations
- NO, quorum requirements is 401,000 with the approval of, and under such conditions
which may be prescribed by, the Securities and
Exchange Commission.
Quorum requirement is 501k

Holders of non-voting shares are only entitled to vote in last par.

Of section 6
 Other corporate officers other than the governing
1-200k board section 25

2-200k Section 25. Corporate officers, quorum. -

Immediately after their election, the directors of a
3-200k corporation must formally organize by the election of
a president, who shall be a director, a treasurer who
4-100k may or may not be a director, a secretary who shall
be a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws.
5-100k Any two (2) or more positions may be held
concurrently by the same person, except that no one
6-100k shall act as president and secretary or as president
and treasurer at the same time.
7-50k
The directors or trustees and officers to be
8-40k elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a
9-5k
greater majority, a majority of the number of directors
or trustees as fixed in the articles of incorporation
10-5k shall constitute a quorum for the transaction of
corporate business, and every decision of at least a
=1MS majority of the directors or trustees present at a
meeting at which there is a quorum shall be valid as a
corporate act, except for the election of officers which
1&2 is absent, 3&4 ayaw tumakbo and hindi nagvote 6-10,
shall require the vote of a majority of all the members
tumakbo and ninominate nila yung sarili nila and cast all their of the board.
shares on themselves

Directors or trustees cannot attend or vote

 Who wins? Or who gets elected?
by proxy at board meetings. (33a)

- No vote requirement, the one who gets the most

number of votes gets elected, section24.  Is the president required to be a stockholder. YES

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 The chairman may be another person
 The president may also be another person
 Prohibited is president to be secretary or treasurer at
the same time
 Board of director must sit and act as a body to arrive
at a corporate act
 What would constitute a quorum if 5 then 3 must be
present
 May the vote of 2 members past a 5 man governing
board pass a valid corporate act?
- YES. Voting requirement is majority of directors
present at which there where a quorum
1 1 and 2 present=valid voting
requirement
2 1 and 2 voted yes
3 3 voted no
4 acceptance of the other subsequent remittances is
5
 Is it absolute?
- NO, except in the election because it requires the
majority of all the members of the board
- If by-laws or articles provide a higher voting
requirement
 Artificial beings must act through its members and
act as a body to have a valid corporate act
 Exception:
- Delegation
- Expressly conferred
- Where the officer or agent is clothed with actual or
apparent authority
- Otherwise it will not bind the corporation
 Yao ka sin trading case “already asked in the bar”
- Only bind the corporation to the extent of authority
confined to him or virtue of customs, usage and
policy
- Must pass first the controller and counsel
 What if the notice requirement is not complied with?
Lopez realty vs. Fotencha
- Notice requirement must be complied with hence it
should have been with force and effect, but according
to the SC, it may be ratified expressly if there is a
subsequent meeting called for that purpose
- Impliedly through acts
- Asuncion was aware of the corporations obligation
- There was implied ratification or she was estopped
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16
Pua casim vs. Neumark and Co.
- Considered 3 circumstanced
- Check which was the proceed of the loan which was
endorsed and deposit in the corporate account
- Neumark as president and also stockholder
Yu chuck vs. Kong Li Po
- General manager usually has the power to hire but
the SC said the contract must be reasonable
- The contract here is so onerous that it would throw
the corporation into insolvency
Francisco vs. GSIS
- GSIS cannot evade the binding effect of the telegram
- Only 15 months later that the corporation said there
was a mistake
- The silence coupled with the unconditional
binding to the corporation
Board of liquidators vs. Kalaw
“Settled jurisprudence has it that where
similar acts have been approved by the directors as a
matter of general practice, custom and policy, the
general manager may bind the company without
formal authorization of the board of directors. In
varying language, existence of such authority is
established, by proof of the course of business, the
usages and practices of the company and by the
knowledge which the board of directors has, or must
be presumed to have, of acts and doings of its
subordinates in and about the affairs of the
corporation. So also, “xx authority to act for and bind
a corporation may be presumed from acts of
recognition in other instances where the power was in
fact exercised.” “xx Thus, when, in the usual course
of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs,
his authority to represent the corporation may be
implied from the manner in which he has been
permitted by the directors to manage its business.”
In the case at bar, the practice of the
corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading
activities for and in NACOCO’s behalf without prior
board approval. If the by-laws were to be literally
followed, the board should give its stamp of prior
approval on all corporate contracts. But that Board
itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior
approval.
- Kalaw signed alone and said contracts were
submitted to the board of directors after its
consummation and not before
Buenaseda vs. Bowen
- Express ratification is made through a formal board
action
- Implied ratification is through: silence or
acquiescence, acceptance benefits and lastly
recognition or adoption
 17

 An unauthorized act may nevertheless be binding Any directorship or trusteeship to be filled

either by express or implied by estoppels by reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular
or at a special meeting of stockholders or members
 By virtue of silence the board had impliedly accepted
duly called for the purpose, or in the same meeting
the act authorizing the increase of directors or trustees if so
stated in the notice of the meeting. (n)
 By recognition or adoption
 Other than by removal or expiration of term they do
 By virtue of payment of obligations arising therefore-
not have the power
Lopez realty
 When will the vacancies be filled up?
 May directors or trustees be disqualified to act as
such?
 Is notice required, to fill up vacancies due to removal?

- YES, crime, etc. disqualifications in book

 What if the vacancy is due to an increase, can it be
filled up in the same meeting where in the number is
- Possess or dispossess any of the qualifications or increased?
disqualifications , cease to hold at least one share
 Election due to removal-in the same meeting notice is
 May directors be ousted from office? not required

- At least 2/3 of members representing outstanding  Election due to increase in number- it must be so
capital stock. Again notice requirement must be stated in the meeting
complied with
 Section 30
1-200 1-5 same
family
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing
2-200
their compensation, the directors shall not receive
any compensation, as such directors, except for
3-200 reasonable per diems: Provided, however, That any
such compensation other than per diems may be
4-100 granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock at a regular or special stockholders'
5-100 electing meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
6-100 6 to 10 not ten (10%) percent of the net income before income tax
related of the corporation during the preceding year. (n)

7-50 - Generally not entitled to receive compensation

because they render it gratuitously
8-40
- Unless the by-laws allows
9-5
- Stockholders may also grant pursuant to a majority
10-5 outstanding vote
director
- Must not exceed net income of 10% tax of the
 Meetings called by the president or the secretary preceding year
ordered by the president
- Acting in special capacity
 It depends if the removal is without cause they cannot
do so because removal without cause shall not
- In, sum directors may receive compensation when
deprive the minority stockholders or members of the
right of representative
1. there is a provision in the by-laws to that effect

 If with cause they can even if it will prejudice the

2. When the stockholders, by a majority vote of the
rights of the minority, provided of course additional
outstanding capital stock grant the same; and,
requirements by-laws and articles of incorporation

3. If the director renders extra-ordinary or unsual

 Who will fill up the vacancy created due to the ouster
service
of a member of the board of directors <section 29>

Central cooperative exchange vs. Tibe

Section 29. Vacancies in the office of
director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal - By-laws may allow, stockholders may also allow such
by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of  What do you understand by the phrase “as such
the remaining directors or trustees, if still directors”
constituting a quorum; otherwise, said vacancies
must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or Western institute vs. Salas
trustee so elected to fill a vacancy shall be elected
only or the unexpired term of his predecessor in - Compensation was granted without by-laws authority
office.
- Prohibition is not a sweeping rule

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- Members of the board may receive when they receive
in a special capacity
- Mere act of the board will suffice
 Is the 10% ceiling applicable to other officers?
- NO. the phrase “as such director” was used twice
<Section 30>
- The SC ruled that the 10% ceiling will not likewise
apply if they acted in a capacity other than “as such
directors”
Government vs. El Hogar
- Judicial intervention is not proper
- The appropriates remedy is to those who can make or
unmake the by-laws
 Liability of corporate officers
- Obligations incurred by those acting for and in behalf
of the corporations are not there’s BUT there are
exceptions even if they are acting for and in behalf of
the corporation
Tramat vs. CA
- General rule was applied in the case
- Ong acted as officers and acted within the scope of
his authority
- Court laid down 4 instances when even if acting
within the scope of his authority he is held solidarily
liable
1. He assents (a) to a patently unlawful act of the
corporation, or (b) for bad faith, or gross negligence in
directing its affairs, or (c) for conflict of interest,
resulting in damages to the corporation, its
stockholders or other persons;
2. He consents to the issuance of watered stocks or who,
having knowledge thereof, does not forthwith file with
the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily
liable with the corporation;
4. He is made, by a specific provision of law, to
personally answer for his corporate action.
- Watered stocks- issued, fully paid up when in fact
they have not been fully paid or promised as such
Llamado vs. CA
- The corporate entity theory cannot be used as a
defense to escape liability in violation of B.P. 22
- Where the check is drawn by a corporation the
persons who signed the check shall be liable.
Uichico vs. NLRC
- Labor case corporate directors and officers are
solidarily liable with the corporation for the
termination of employment of corporate employee
done with malice and bad faith
 3 fold duty of directors
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18
- obedient
- diligent
- loyal
 Business judgment rule
- Questions of policy and management are left solely to
the honest decision of the board of directors and the
courts are without authority to substitute its
judgment as against the former. The directors are the
business managers of the corporation and as long as
they act in good faith, its actuations are not subject to
judicial review. Montelibano vs. Bacolod Murcia Milling
- questions of policy and management are left solely to
the board of directors
- BOD, business manager of the corporation and as
long as they act in good faith, its actuations are not
subject to judicial review
- They are not insurer of the property of the company,
they were guarantors that the enterprise undertaken
by the corporation shall be successful
Montelibano vs. Bacolod Murcia Milling Co.
- Directors are not liable due to imprudence or honest
error of judgment
- Duty of loyalty of corporate directors
- 31,32,33,34
- 31,32,33- specific instances when corporate officers
may violate loyalty
- 32,33 self-dealing and interlocking director
 Corporate opportunity doctrine
- It places a director of a corporation in the position of
a fiduciary and prohibits him form seizing a business
opportunity and/or developing it at the expense and
with the facilities of the corporation. He cannot
appropriate to himself a business opportunity which
in fairness should belong to the corporation.
 Last paragraph of section 31 and the provision of
section 34 make reference to recovery of “forbidden
profits”
 Distinction between section 31 and 34 relative to the
ratification by the stockholders
- The second paragraph of section 31 which makes a
director liable to account for profits if he attempts to
acquire or acquires any interest adverse to the
corporation in respect to any matter reposed in him in
confidence as to which equity imposes a disability
upon him to deal in his own behalf is not subject to
ratification by the stockholders. Whereas, in section
34 if a director acquires for himself a business
opportunity which should belong to the corporation,
he is bound to account for such profits unless his act
is ratified by the stockholders owning ore
representing at least 2/3 of the outstanding capital
stock.
- If reposed in him in confidence, not subject to
ratification

- If the acquisition is merely that of a business
opportunity which has not been reposed in him in
confidence, the same may be subject to ratification by
the stockholders.
Director x co.
A-REALTY
B voidable, but subject to ratification by 2/3 of the
C Z owns property and is going
abroad never to Return, he
wants to sell for 25M the fair
market value is 30M
D
E
E goes to Z and offers to pay the property for 26 M and later he
sells it for 30M making 4M profit, one of the stockholders
learned and complains that he should submit the profits. E said
that he will move for ratification of his actuation. Can it be
ratified?
- It can be ratified he merely acquired a business
owning to the corporation
- It would be different if it was entrusted in his
confidence
Another scenario:
Had A not attended the meeting he would not have known of
the sale it is then a matter reposed in him in confidence
 A corporation cannot reaquire its share if it has no
restricted unretained earnings
Strong vs. Rapide
- What duty did he violate?
- He violated his duty of loyalty
- The law would be impotent if the sale were not
invalidated
 Self-dealing director and interlocking director
 What is a self-dealing director?
- Director of a corporation dealing or transacting
business with his corporation
 Are the contracts and dealing of a self0dealing
director valid?
 General rule: voidable
 May the contracts of a self-dealing director be valid
per se.
- YES. If all the 4 conditions are present they will be
valid per se
1. That the presence of such director or trustee in the
board meeting in which the contract was approved
was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
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19
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
 When do they become voidable?
- When any of the two requisites are absent it is
outstanding capital stock or 2/3 of the member
 Requisites for ratification (subject to ratification by
the stockholders holding or representing at least 2/3
of the outstanding capital stock or 2/3 of the
members.)
- it must be at a meeting called for the purpose
- full disclosure of the adverse interest of the director
concerned must be made
- the contract is fair and reasonable under the
circumstances
 Problem if self-dealing director involved owns all or
substantially all of the shares of stock of the
corporation thereby making it easily possible to have
the contract ratified
- last sentence of section 32 should be made to apply
by determining the reasonableness and fairness of the
contract
Section 32. Dealings of directors, trustees
or officers with the corporation. - A contract of the
corporation with one or more of its directors or
trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are
present:
1. That the presence of such director or trustee in the
board meeting in which the contract was approved
was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set
forth in the preceding paragraph is absent, in the
case of a contract with a director or trustee, such
contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or of at least two-thirds
(2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made
at such meeting: Provided, however, That the contract
is fair and reasonable under the circumstances. (n)
Prime white cement vs. IAC
- a director of a corporation owes a position in trust
- in case of conflict between himself and that of the
corporation, he cannot sacrifice the interest of the
corporation to his own advantage

- as a director he should have acted in a manner as not
to unduly prejudice the corporation
- he cannot be allowed to enrich himself
 May corporate directors purchase the corporate
property?
Mead vs. Mccullogh
- interlocking director- a director of one corporation
who deals and transacts business with another
corporation who is himself a director
A- director of X company also a director of Y corporation
B-
C-
D-
E-
 Both companies enter into a contract and A sits, is
the contract valid?
- Yes on the ground of fraud or if it is unfair
- May be subject to the provision of section 32
- Section 32 contract may become voidable, hence it
may also be ratified
X Co.
Y Co.
A owe 20%
A owe 20%
Is it generally valid or voidable? VALID
25%
25% VALID
15%
25% VOIDABLE SUBJECT TO section 32
More than 20 substantial
 BOD mismanages corporate officers. Who may file a
suit?
- General rule: BOD which can institute a case because
it has all the powers. To allow stockholders to file
would violate the doctrine of corporate entity and may
result to multiplicity of suits
- Stockholders cannot therefore generally file a case
EXCEPT of course in a DERIVATIVE SUIT
 Derivative suit
- An action based on injury to the corporation-to
enforce a corporate right- wherein the corporation
itself is joined as a necessary party, and recovery is in
favor of and for the corporation.
- Remedy granted by law to stockholders to institute a
case to remedy a wrong done directly to the
corporation and indirectly to the stockholders, if the
board refuses to do so. Otherwise if not they would be
left without any recourse
 Available suits
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20
 individual or personal
- Wrong done against his person as a stockholder
 Class suit
- Filed by a stockholder in representation of other
stockholders
- A wrong or redress done, a derivative suit in nature
 Intra-corporate remedies
- Demand to the BOD to institute such action
- Negated by the BOD
- The one who instituted must be a stockholder at the
date when the act was done, must have been a
stockholder by that time
 Demand will not be required if the majority of the
BOD are the one’s guilty of the wrong charged
 The corporation must be made a party in the case
whatever side will not matter because under
Philippine law misjoinder is not a ground for
dismissal
 Non-joinder is a ground for dismissal
 Any benefit should inure to the corporation
 Stockholder bringing the action is entitled to
reimbursement such as attorney’s fee ONLY IF the
case is SUCCESSFUL to avoid harassment suit to
their management
Pascual vs. Orozco
- By virtue of the fact that he is a stockholder, may
maintain a derivative suit
- Depend on how, when and what reason
- Seeking for the years 1898 all the way 1907
- Only became a stockholder in 1903
- He can sue only in 1903 forward because he must be
a stockholder
- The right of action is personal in nature. He became a
stockholder only in 1902
 Derivative suit
- By a stockholder to address a wrong done against the
corporation and the stockholder indirectly
- Essential requisite must have been a stockholder
from the time the act complained of took place
- Cannot institute an action from the years he was still
not a stockholder
Everett vs. Asia Banking
- Stockholders cannot ordinarily commence suit in
equity and such is in the hands of its BOD however
there are exceptions when the BOD will not sue since
they are themselves principals to the fraud.
Republic vs. Cuaderno

- The facts constitute sufficient cause of action
- It is not the corporate interest to shield one from
criminal prosecution which is personal interest
- Perez is not suing in his behalf, but in behalf of the
corporation
Western institute vs. Salas
- Assuming it was filed in the proper forum would there
argument that it is a derivative suit prosper? NO. it is
people of the Philippines vs. individual director, it
must be stated in the complaint that it is being
instituted as a derivative suit and for and in behalf of
the corporation
- Granting arguendo, that this is a derivative suit, the
same is still outrightly dismissible for having been
wrongfully filed in the regular court devoid of any
jurisdiction to entertain the complaint. The case
should have been filed with the SEC which exercises
original and exclusive jurisdiction over derivative
suits, they being intra-corporate disputes, per Section
5 (b) of P.D. 902-A
San Miguel vs. Khan
- Was a demand made? NO
- It is not necessary because he objected in the board
meeting, but still it was adopted therefore it was
useless
Chase vs. Buencamino
- Argument that he should be in estoppels since he
filed in the U.S.
- Assuming the case prospered in the U.S. would not
estoppels apply as against him? NO for estoppels to
step in it must be a case by the corporation
Reyes vs. tan
- Corporate director are guilty of breach of trust
- A stockholder may institute an action to remedy a
wrong done
- Fraud in the conduct of corporate affairs
Gamboa vs. Victoriano
- Is derivative suit appropriate in this case
- They are not vindicatory damage done to the
corporation, but rather they where vindicating
damage against him
- Violation of their rights as individuals, hence
derivative suit is not the remedy
Evangelista vs. Santos
- Derivative suit is not proper
- Claim is not for the benefit of the corporation, but
rather his individual benefit
 From the cases above cited, these are the
requirements and the procedures that must be
followed in order that a derivative suit may prosper
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21
1. That the party bringing the suit should be a
stockholder as of the time the act or transaction
complained of took place, or whose shares have
evolved upon him since by operation of law. This rule,
however, does not apply if such act or transaction
continues and is injurious to the stockholder or affect
him specifically in some other way.
The number of his hares is immaterial since he is not
suing in his own behalf or for the protection or
vindication of his own right, or the redress of a wrong
done against him, individually, but in behalf and for
the benefit of the corporation.
2. He has tried to exhaust intra-corporate remedies, he
has made a demand on the board of directors for the
appropriate relief but the latter had failed or refused
to heed his plea. Demand, however, is not required if
the company is under the complete control of the
directors who are the very ones to be sued (or where it
becomes obvious that a demand upon them would
have been futile and useless) since the law does not
require a litigant to perform useless acts;
3. The stockholder bringing the suit must allege in his
complaint that he is suing on a derivative cause of
action on behalf of the corporation and all other
stockholders similarly situated, otherwise, the case is
dismissible. This is because the cause of action
actually devolves on the corporation and not to a
particular stockholder.
4. The corporation should be made a party, either as
party-plaintiff or defendant, in order to make the
court’s judgment binding upon it, and thus, bar
future litigation of the same issues. On what side the
corporation appears loses importance when it is
considered that it lay within the power of the court to
direct the making of amendment of the pleading, by
adding or dropping parties, as may be required in the
interest of justice. Misjoinder of parties is not a
ground to dismiss action; and,
5. Any benefit or damages recovered shall pertain to the
corporation. This is so because in all instances,
derivative suit is instituted for and in behalf of the
corporation and not for the protection or vindication
of a right or rights of a particular stockholder,
otherwise, the aggrieved stockholder should institute,
instead, an individual or personal suit to vindicate his
personal or individual right. Or, for that matter,
representative or class suit for all other stockholders
whose rights are similarly situated, injured or
violated, personally or individually.
 Executive committee
- Not allowed under the OLD law
 How may executive committee created and
constituted?
- Section 35
Section 35. Executive committee. - The by-
laws of a corporation may create an executive
committee, composed of not less than three members
of the board, to be appointed by the board. Said
committee may act, by majority vote of all its
members, on such specific matters within the
competence of the board, as may be delegated to it in
the by-laws or on a majority vote of the board, except
with respect to: (1) approval of any action for which
shareholders' approval is also required; (2) the filing
of vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new by-laws; (4)
the amendment or repeal of any resolution of the

board which by its express terms is not so amendable
or repealable; and (5) a distribution of cash dividends
to the shareholders.
- Said committee may act and bind the corporation by
the majority vote of all its members except with
respect to those matters provided for in sec. 35 these
are:
1. Approval of any action for which shareholders’
approval is also required
2. The filing of vacancies in the board;
3. Amendment or repeal of by-laws or the adoption of
new by-laws;
4. Amendment or repeal of any resolution of the board
which by its express terms is not so amenable or
repealable; and,
5. Distribution of cash dividends to the shareholders.
 May the board alone create an executive committee
without any authority provided for the by-laws?
- NO board of directors must sit and act as a body to
have a valid transaction
 May a non-member of the board of directors be a
member of the executive committee?
- NO, all of them must be members of the board of
directors
- BOD cannot act by proxy it would be abdication of
powers
 Purpose clauses necessary because it confers and
also limits the actual authority of the corporation
CORPORATE POWERS AND AUTHORITY
 Corporate authority may be classified into three
classes namely:
1. Those expressly granted or authorized by law
inclusive of the corporate charter or articles of
incorporation;
2. Those impliedly granted as are essential or reasonably
necessary to the carrying out of the express powers;
3. Those that are incidental to its existence.
 Section 36 to 45- POWER GRANTED BY LAW
Section 36. Corporate powers and capacity. - Every
corporation incorporated under this Code has the power and
capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period
of time stated in the articles of incorporation and the
certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in
accordance with the provisions of this Code;
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5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell stocks
to subscribers and to sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions
of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities
and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations
in aid of any political party or candidate or for
purposes of partisan political activity;
10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as
stated in the articles of incorporation. (13a)
Section 37. Power to extend or shorten corporate
term. - A private corporation may extend or shorten its term as
stated in the articles of incorporation when approved by a
majority vote of the board of directors or trustees and ratified at
a meeting by the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or by at least two-thirds
(2/3) of the members in case of non-stock corporations. Written
notice of the proposed action and of the time and place of the
meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation
and deposited to the addressee in the post office with postage
prepaid, or served personally: Provided, That in case of
extension of corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions provided in this
code. (n)
Section 38. Power to increase or decrease capital
stock; incur, create or increase bonded indebtedness. - No
corporation shall increase or decrease its capital stock or incur,
create or increase any bonded indebtedness unless approved by
a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution
of the capital stock, or the incurring, creating or increasing of
any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring,
creating, or increasing of any bonded indebtedness and of the
time and place of the stockholder's meeting at which the
proposed increase or diminution of the capital stock or the
incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage
prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the chairman
and the secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been
complied with;
(2) The amount of the increase or diminution of the
capital stock;

(3) If an increase of the capital stock, the amount of
capital stock or number of shares of no-par stock
thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the
amount of capital stock or number of no-par stock
subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of
capital stock or number of shares of no-par stock
allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend
therefor authorized;
(4) Any bonded indebtedness to be incurred, created
or increased;
(5) The actual indebtedness of the corporation on the
day of the meeting;
(6) The amount of stock represented at the meeting;
and
(7) The vote authorizing the increase or diminution of
the capital stock, or the incurring, creating or
increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require
prior approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office
of the corporation and the other shall be filed with the Securities
and Exchange Commission and attached to the original articles
of incorporation. From and after approval by the Securities and
Exchange Commission and the issuance by the Commission of
its certificate of filing, the capital stock shall stand increased or
decreased and the incurring, creating or increasing of any
bonded indebtedness authorized, as the certificate of filing may
declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase
of capital stock unless accompanied by the sworn statement of
the treasurer of the corporation lawfully holding office at the
time of the filing of the certificate, showing that at least twenty-
five (25%) percent of such increased capital stock has been
subscribed and that at least twenty-five (25%) percent of the
amount subscribed has been paid either in actual cash to the
corporation or that there has been transferred to the corporation
property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That no decrease
of the capital stock shall be approved by the Commission if its
effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded
indebtedness, or increase the same, with the approval by a
majority vote of the board of trustees and of at least two-thirds
(2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the
authority to determine the sufficiency of the terms thereof. (17a)
Section 39. Power to deny pre-emptive right. - All
stockholders of a stock corporation shall enjoy pre-emptive right
to subscribe to all issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right
is denied by the articles of incorporation or an amendment
thereto: Provided, That such pre-emptive right shall not extend
to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to
shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
Section 40. Sale or other disposition of assets. -
Subject to the provisions of existing laws on illegal combinations
and monopolies, a corporation may, by a majority vote of its
board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its
property and assets, including its goodwill, upon such terms
and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of
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money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by
the vote of the stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in case of non-stock
corporation, by the vote of at least to two-thirds (2/3) of the
members, in a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his
appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover
substantially all the corporate property and assets if thereby the
corporation would be rendered incapable of continuing the
business or accomplishing the purpose for which it was
incorporated.
After such authorization or approval by the stockholders or
members, the board of directors or trustees may, nevertheless,
in its discretion, abandon such sale, lease, exchange, mortgage,
pledge or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto,
without further action or approval by the stockholders or
members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or
members, to sell, lease, exchange, mortgage, pledge or otherwise
dispose of any of its property and assets if the same is necessary
in the usual and regular course of business of said corporation
or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its
remaining business.
In non-stock corporations where there are no members with
voting rights, the vote of at least a majority of the trustees in
office will be sufficient authorization for the corporation to enter
into any transaction authorized by this section.
Section 41. Power to acquire own shares. - A stock
corporation shall have the power to purchase or acquire its own
shares for a legitimate corporate purpose or purposes, including
but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to
cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the 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. (a)
Section 42. Power to invest corporate funds in
another corporation or business or for any other purpose. -
Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was
organized when approved by a majority of the board of directors
or trustees and ratified by the stockholders representing at least
two-thirds (2/3) of the outstanding capital stock, or by at least
two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called
for the purpose. Written notice of the proposed investment and
the time and place of the meeting shall be addressed to each
stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder shall have appraisal
right as provided in this Code: Provided, however, That where
the investment by the corporation is reasonably necessary to
accomplish its primary purpose as stated in the articles of
incorporation, the approval of the stockholders or members
shall not be necessary. (17 1/2a)

Section 43. Power to declare dividends. - The board
of directors of a stock corporation may declare dividends out of
the unrestricted retained earnings which shall be payable in
cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be applied to the
unpaid balance on the subscription plus costs and expenses,
while stock dividends shall be withheld from the delinquent
stockholder until his unpaid subscription is fully paid: Provided,
further, That no stock dividend shall be issued without the
approval of stockholders representing not less than two-thirds
(2/3) of the outstanding capital stock at a regular or special
meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits
in excess of one hundred (100%) percent of their paid-in capital
stock, except: (1) when justified by definite corporate expansion
projects or programs approved by the board of directors; or (2)
when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or
foreign, from declaring dividends without its/his consent, and
such consent has not yet been secured; or (3) when it can be
clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there
is need for special reserve for probable contingencies. (n)
Section 44. Power to enter into management contract.
- No corporation shall conclude a management contract with
another corporation unless such contract shall have been
approved by the board of directors and by stockholders owning
at least the majority of the outstanding capital stock, or by at
least a majority of the members in the case of a non-stock
corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided,
That (1) where a stockholder or stockholders representing the
same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the
total outstanding capital stock entitled to vote of the managing
corporation; or (2) where a majority of the members of the board
of directors of the managing corporation also constitute a
majority of the members of the board of directors of the
managed corporation, then the management contract must be
approved by the stockholders of the managed corporation
owning at least two-thirds (2/3) of the total outstanding capital
stock entitled to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock corporation. No
management contract shall be entered into for a period longer
than five years for any one term.
The provisions of the next preceding paragraph shall apply to
any contract whereby a corporation undertakes to manage or
operate all or substantially all of the business of another
corporation, whether such contracts are called service contracts,
operating agreements or otherwise: Provided, however, That
such service contracts or operating agreements which relate to
the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may
be provided by the pertinent laws or regulations. (n)
Section 45. Ultra vires acts of corporations. - No
corporation under this Code shall possess or exercise any
corporate powers except those conferred by this Code or by its
articles of incorporation and except such as are necessary or
incidental to the exercise of the powers so conferred. (n)
Section 36
 Where should the corporation be sued?
- principal office is important because it establishes the
residence of the corporation and determining service
of summons, venue of action
- it can be sued in the city or municipality where its
principal office is found
 Principal office is also important for venue of meetings
 Non-stock corporation may provide in its by-laws that
the venue of meeting be anywhere in the Philippines
 Upon whom service of summons be made?
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- Section 11. Service upon domestic private juridical
entity- when the defendant is a corporation,
partnership or association organized under the laws
of the Philippines with a juridical personality, service
may be made upon the president, managing partner,
general manager, corporate secretary, treasurer, or in
house counsel.
Delta motor vs. Mangosing
- strict compliance is necessary
- should be served to those named in the statute
- secretary of a dep’t are not those included in the
statute
E.B. Villarosa vs. Benito
- decision En Banc repeals all other pronouncement
- section 13 Rule 14 was repealed
- the old rules was ambiguous and broad and at all
time illogical
 the particular revision under Section 11 of Rule 14
was explained by retired Supreme Court Justice
Florenz Regalado, thus:
“xxx the then section 13 of this Rule
allowed service upon a defendant
corporation to “be made on the president,
manager, secretary, cashier, agent or any
of its directors.” The aforesaid terms were
obviously ambiguous and susceptible of
broad and sometimes illogical
interpretations, especially the word “agent”
of the corporation. The Filoil case, involving
the litigation lawyer of the corporation who
precisely appeared to challenge the validity
of service of summons but whose very
appearance for that purpose was seized
upon to validate the defective service, is an
illustration of the need for this revised
section with limited scope and specific
terminology. Thus the absurd result in the
Filoil case necessitated the amendment
permitting service only on the in-house
counsel of the corporation who is in effect
an employee of the corporation, as
distinguished from an independent
practitioner.”
o notes: additional knowledge
- special appearance enter for that particular
appearance you are not the counsel in the case
- would apply only if it does not involve an intra-
corporate controversy (controversy between and
among the stockholders)
- upon any of the statutory officers or officers fixed in
the by-laws any secretary, any of the directors; any
managers in the by-laws
 Seal
- merely ministerial or permissive
 Power to amend
- section 16
 25

- special 37,38,120 - While as a rule an ultra-vires act is one committed

outside the object for which a corporation is created
 Power to adopt by-laws as defined by law, there are however certain
corporate acts that may be performed outside of the
- section 46-48 scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the
 Power to issue or sell stocks and to admit members corporation. Thus, it has been held that “although
not expressly authorized to do so a corporation may
- stock of stockholders and provision governing non- become a surety where the particular transaction is
stock reasonably necessary or proper to the conduct of its
business,” and here it is undisputed that the
establishment local post office is a reasonable and
 Power to acquire or alienate real or personal property
proper adjunct to the conduct of the business of
appellant company. Indeed, such post office is a vital
- is there any limitation? YES
improvement in the living condition of its employees
and laborers who came to settle in its mining camp
- Two specific limitation
which is far removed from the postal facilities or
means of communication accorded to people living in
1. Section 36, as lawful transactions of business of the a city or municipality.
corporation may reasonably and necessarily require
 Power to exercise such other powers essential or
2. Constitution and law necessary to carry out its purpose (implied power)

Luneta vs. A.D. Santos 1. Acts in the usual course of business;

- Importance of the purpose clause 2. Acts to protect debts owing to the corporation;

- Cannot have the power to acquire 3. Embarking in a different business;

- Cannot engage in land transportation 4. Acts in part or wholly to protect or aid employees;
and,
- Doctrine of limited capacity
5. Acts to increase business
Gov’t vs. El Hogar
Teresa Electric and Power Co. vs. P.S.C.
- As the lawful transaction of its business may
reasonably represent - Examined the articles of incorporation to arrive at its
decision
Director of Lands vs. CA
National Power vs. Vera
- Exception to the rule in the constitution
- For purpose of prohibiting the NAPOCOR
- Alienable public land
- The court must decide whether or not a logical and
- Converts the property to a private land automatically necessary relation exists between the act questioned
once converted it can now be registered and the corporate purpose expressed in the NPC
charter
 Power to make donation
 Importance of PLACE of registration
- Limitation section 36 par.9
- Residence
- These are circumstances, however, under which a
donation by a corporation may be to its benefit as a - Venue
means of increasing its business or promoting
patronage. Thus, paragraph 9 of section 36 expressly - Place of meetings
authorizes a corporation to make donations. The only
limitations imposed are the following: - Place or registration of chattel mortgage

1. The donation must be “reasonable”;  Power to extend its terms

2. It must be for public welfare, or for hospital, - Once its term expires, already dissolved
charitable, scientific, cultural or similar purpose; and, automatically, thus can no longer ask for extension

3. It shall not be in aid of political party or candidate, or - After dissolution, it has 3 years to windup
for purposes of partisan political activity.
 What are the modes of increasing capital stock?
 Power to establish pension
1. Increasing the par value of the existing number of
- Include any act to promote and improve the shares without increasing the number of shares;
convenience, welfare and benefit of the employees or
offices 2. Increasing the number of existing shares without
increasing the par value thereof; and,
Republic vs. Acoje
3. Increasing the number of existing shares and at the
same time increasing the par value of the shares.
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 Why a corporation increases it capital stock?
- Generate funds, business expansion, or payment of
liabilities, purposes of acquiring other business.
(example: to buy cars for the officers, purpose of
acquiring other business, expansion, other valid
reasons)
 How do you decrease capital stock and why a
corporation decreases?
- Reduce or wipeout existing deficit where no creditors
would thereby be effected
- When capital is more than necessary to procreate the
business or reduction of capital surplus
- To write down the value of its fixed assets to reflect
those present and actual
o NOTE: any increase or decrease of capital stock
requires approval of government agency like SEC it
can never take place unless SEC approves the same
 Relevance of decrease of capital?
1. To reduce or wipe out existing deficit where no
creditors would thereby be affected;
2. When the capital is more than what is necessary to
procreate the business or reduction of capital
surplus; or,
3. To write down the value of its fixed assets to reflect
there present actual value in case where there is a
decline in the value of the fixed assets of the
corporation.
- Examples: Php 10M capital for grocery business,
mayor didn’t want to issue license/permit because
mayor has 3 other grocery stores, only allowed sari-
sari store permit, reduce capital for sari-sari so that
the money will not sleep in bank
- Example: car rental agencies-Php 10M capital for 20
taxi’s, after some time each taxi is only 250K,
nagmura ang taxi, to reduce capital is to show actual
assets
 Limitation imposed by law
- Decrease shall not in any way affect the rights of the
creditors
 Philippine Trust Company vs. Rivera
- Without the appraisal of SEC, a decrease in capital
stocks has no effect
 TRUST FUND DOCTRINE:
- Subscription to capital stock of a corporation
constitute a fund to which the creditors have a right
to look upon for satisfaction of their claims and that
the assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to
realize assets for the payment of its debts.
Madrigal vs. Zamora
- Decrease in capital has a subterfuge to evade
payment
- Thus not valid and effective
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- Must not prejudice creditors which includes the
employees
 Bond
- Commonly understood as an obligation of a state, its
subdivision or a private corporation, represented by a
certificate or an instrument for the principal and by
detachable coupons for the payment of interests. In
its simplest term, it is one where an obligor obliges
himself to pay a certain sum of money to another at a
day named.
- There are different kinds of bond but before they may
be issued or floated by the corporation, the same
must be registered and approved by the SEC subject
to the rules and regulations that may be adopted by
that agency. The procedure and requirements set
forth in section 38 is the same as in increasing or
decreasing the capital stock except that the certificate
does not have to state the matters required in sub-
section 2 & 3 thereof.
 Pre-emptive rights
- A right granted by law to all existing stockholders of a
stock corporation to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective stockholdings, subject only to the
limitations imposed under section 39 of the Code.
- Internationally granted
 Pre-emptive rights, why it is granted?
- In order that the existing stockholders may maintain
their proportionate right as not to dilute their right
 Power to deny pre-emptive rights
Section 39. Power to deny pre-emptive
right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is
denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive
right shall not extend to shares to be issued in
compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares
to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
 May it be denied? How?
- Yes, if provided by articles of incorporation or by an
amendment
- However, pre-emptive rights is unavailable to shares
in trading in stock exchange otherwise stockholders
must waive first their right before they may sell such.
 Exceptions
1. When the shares to be issued is in compliance
with laws requiring stock offerings or minimum
stock ownership by the public
2. Shares to be issued in good faith with the
approval of the stockholders representing 2/3 of
the outstanding capital stock either
a. In exchange for property needed for
corporate purpose or,

b. In payment of a previously contracted debt
- The exceptions, however will not apply to
stockholders of a close corporation by virtue of a
subsequent and specific provision of the Code which
provides that the “pre-emptive right of a stockholder
in a close corporation shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services or in
payment of a corporate debt, unless the articles of
incorporation provide otherwise, if not entirely
absolute, in that it extends to all issuance and
disposition of shares
- Such right of pre-emption may be lost by waiver of
the stockholder, expressly or impliedly by his inability
or failure to exercise it after having been notified of
the proposed issuance or disposition of shares
 When is it unavailable?
- In shares traded openly in stock exchange/market
 Is it applicable to close corporations?
- See section 96, close corporations must provide it
first on its articles of incorporation, that its articles
does not really deny such pre-emptive rights.
 Section 102, will not apply to close corporations
 The right of pre-emptive rights is absolute in close
corporations
“All issues or depositing shares of any class” form part of ACS
 Certain instances when a stockholder
nevertheless be unable to exercise this right:
- Issued for public ownership
- Issued in good faith, with approval of 2/3 of
outstanding capital stock either a) in exchange for
property needed or b) for payment of a previously
contracted debt
 Pre- emptive rights of stockholders in ordinary stock
corporations may be denied
- if the shares are to be issued in compliance with laws
requiring stock offering or minimum stock ownership
by the pubic
- In exchange for property needed for corporate
purposes
- In payment of previously contracted debts
 This rule, however, does not apply in a close
corporation as the pre-emptive rights of the
stockholders thereof is broadened to include all
issues without exceptions unless, of course, denied or
limited by the articles of incorporations. Section 102
provides:
Section 102. Pre-emptive right in close
corporations. - The pre-emptive right of stockholders
in close corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services, or
in payment of corporate debts, unless the articles of
incorporation provide otherwise.
 Denial will not apply to a close corporation,
ABSOLUTE
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27
- section 96
 May a stock holder in a close corporation insist in the
exercise of his pre-emptive rights?
- Yes, section 102
 What type or shares are covered by pre-emptive
rights?
 Does it include those originally unsubscribed?
- NO. Benito vs. SEC
 Will the stockholders be able to exercise their pre-
emptive right with respect to the old unissued
shares?
- Pre-emptive rights is applicable only to new issued
shares and not to the old unissued shares because it
is presumed that the original subscribers is deemed
to have taken his shares knowing that they form a
definite proportionate part of the whole number of
authorized shares
- When the shares, left unsubscribed are re-offered, he
cannot therefore claim. DILUTION OF INTEREST
 Will the acquiring purchaser be liable for debts of the
former corporation?
- Generally no, corporate entity theory because there
may be instances when purchasing corporation may
be held liable
 May a corporation acquire its own shares?
may
- Yes
 Is there any restriction provided for by law in
reacquiring its own shares?
- Yes, it must have been unrestricted retained earnings
appearing in the books of corporation
 A corporation can never acquire its own shares if it
has no unrestricted retained earnings
- False, exception close corporation and redeemable
shares
EXAMPLE:
ACS 2M
SUBSCRIBED 1M
PAID UP 1M
1 100K
2 100K
TO
10 100K
 If 1-5 became 200K each, may 6-10 demand the
exercise their pre-emptive right?
- YES
 May 1-5 subscribe to the unsubscribed capital stock
to the exclusion of 6-10?
 28

- If a corporation makes 2M unrestricted retained  THE ONLY PROPERTY

earnings, it is the shares and not the number of OF THE
persons that matters CORPORATION

 May 6-10 complain for a dilution of their interest?  BOARD OF

DIRECTORS
- YES, it’s an internationally recognized right because it DECIDED TO SELL IT
includes “all issues and disposition of shares of any
class” and all kinds of shares new or old Will it need the approval of the stockholders?

- If the remaining unsubscribed shares are issued, it’s
an issuance of any class
 May a corporation sell/dispose all or substantially all
of its corporate assets and liabilities?
- NO, if the same is necessary in the usual and regular
course of business of said corporation or if the
proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct
of its remaining business

- YES  If X is a manufacturing company, then it can sell its

only property upon approval of the stockholders
- 1) RESOLUTION 2) AUTHORIZATION 3) because it will render itself capable of continuing its
RATIFICATION 4) PRIOR WRITTEN NOTICE 5) SALE business, BUT if the proceeds will be used to
SUBJECT TO PROVISIONS OF EXITING LAWS 6) purchase a better one for the continuance of its
DISSENTING STOCKHOLDERS HAVE THE RIGHT TO business, then it does not need the approval of the
EXERCISE THEIR APPRAISAL RIGHT stockholders

 If a corporation sells substantially all of it assets and  Conditions for the valid exercise of this power are the
properties, will the buyer assume liability? following

- NO, EXCEPT 1. Resolution by the majority vote of the board of

directors/trustees
1) Express or implied agreement to the purchase
2. Authorization from the stockholders representing at
2) Where the transaction amounts to consolidation or least 2/3 of the outstanding capital stock or 2/3 of
merger of the corporations the members;

3) When purchasing corporation is merely a 3. The ratification of the stockholders or members must
continuation of the selling corporation be made at a meeting duly called for that purpose

4) Where the transaction is entered into fraudulently in 4. Prior written notice of the proposed action and of the
order to escape liability for such debt time and place of meeting must be made addressed to
all stockholders of record, either by mail or personal
 Legitimate purpose: for a corporation to reacquire its service;
own shares
5. The sale of the assets shall be subject to the
provisions of existing laws on illegal combinations
- Limitation: it must have surplus/unrestricted
and monopolies
retained earnings

6. Any dissenting stockholder shall have the option to

- Exception: may redeem irrespective of unrestricted
exercise his appraisal right
retained earnings

1) Exercise of stockholders’ right to compel “close IDP vs. CA

corporation” to purchase his shares
- Consent of the members was not secured
2) Where corporation has sufficient assets in its books
to cover its debts and liabilities exclusive of capital Edward Nell Co. vs. Pacific Farms
stock
- Generally where one corporation sells or otherwise
ACS 1M transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the
SUBSRIBED 1M transferor, except:

PAID-UP 1M 1. Where the purchaser expressly or impliedly

agrees to assume such debts;
ASSETS 500K
2. Where the transaction amounts to a
1M PROFITS consolidation or merger of the corporations;

- 500K LIABILITIES 3. Where the purchasing corporation is merely a

continuation of the selling corporation;
____________________
4. Where the transaction is entered into
500K RESERVES IN A CLOSE fraudulently in order to escape liability for such
CORPORATION IT CAN USE THIS TO REACQUIRE ISSUED debts.
STOCKS
 Power to acquire own shares
X – REALTY CORPORATION
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Section 41. Power to acquire own shares. -
A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
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. (a)
 The corporation must at all times have “unrestricted
retained earnings” to exercise this corporate power
Steinberg vs. Velasco
- For as long as there are debts and liabilities, a
corporation may not reacquire its shares (subject to
exceptions)
- Creditors of a corporation have the right to assume
that so long as there are outstanding debts and
liabilities, the board of directors will not use the
assets of the corporation to purchase its own stock,
and that it will not declare dividends to stockholders
when the corporation is insolvent.
 Power to invest funds <sec.42>
Section 42. Power to invest corporate
funds in another corporation or business or for any
other purpose. - Subject to the provisions of this Code,
a private corporation may invest its funds in any
other corporation or business or for any purpose
other than the primary purpose for which it was
organized when approved by a majority of the board
of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of
the outstanding capital stock, or by at least two
thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting
duly called for the purpose. Written notice of the
proposed investment and the time and place of the
meeting shall be addressed to each stockholder or
member at his place of residence as shown on the
books of the corporation and deposited to the
addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting
stockholder shall have appraisal right as provided in
this Code: Provided, however, That where the
investment by the corporation is reasonably
necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of
the stockholders or members shall not be necessary.
(17 1/2a)
- For any other purpose other than the primary
purpose, stockholder’s consent or approval is
necessary
- Thus, if it’s for the secondary purpose, it is necessary
- If it’s in connection with the primary purpose, only
board resolution is necessary
 Requirements and steps to be followed for a valid
investment of corporate funds are:
1. Resolution by the majority of the board of directors or
trustees;
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2. Ratification by the stockholders representing at least
2/3 of the outstanding capital stock or 2/3 of the
members in case of non-stock corporations;
3. The ratification must be made at a meeting duly
called for that purpose;
4. Prior written notice of the proposed investment and
the time and place of the meeting shall be made,
addressed to each stockholder or member by mail or
by personal service, and;
5. Any dissenting stockholder shall have the option to
exercise his appraisal right
Dela rama vs. Ma-ao Sugar
- There is a substantial and not remote connection
between the sugar bags and the sugar manufacture,
thus stockholder’s approval is not necessary for
validity
- A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and
imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge, or dispose of shares
bonds, securities and other evidences of indebtedness
of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not
need the approval of the stockholders; but when the
purchase of shares of another corporation is done
solely for investment and not to accomplish the
purpose of its incorporation, the vote of approval of
the stockholders is necessary.
Gokongwei vs. SEC
- Investments made by SMC is necessarily connected
with its primary purpose and this was ratified in a
meeting
- Submission of previous action is a sound corporate
practice
 Redeemable shares
 Closed corporation (see section 105)
- For any reason, compel the value of shares
“withdrawal shares” provided corporation has
sufficient funds to cover its debts and liabilities
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and without
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a
close corporation may, for any reason, compel the
said corporation to purchase his shares at their fair
value, which shall not be less than their par or issued
value, when the corporation has sufficient assets in
its books to cover its debts and liabilities exclusive of
capital stock: Provided, That any stockholder of a
close corporation may, by written petition to the
Securities and Exchange Commission, compel the
dissolution of such corporation whenever any of acts
of the directors, officers or those in control of the
corporation is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the corporation or
any stockholder, or whenever corporate assets are
being misapplied or wasted.
 If shares are reacquired, what happens?
- It becomes treasury shares

 Stockholder’s consent/ approval is not necessary and
mere board action is sufficient if in accordance with
primary purpose
 The logical relation of act done and primary purpose
of corporation and between the board of directors to
undertake submission of acts is a sound corporate
practice
 Dividends
Section 43. Power to declare dividends. -
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property,
or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any
cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further,
That no stock dividend shall be issued without the
approval of stockholders representing not less than
two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose.
(16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary
under special circumstances obtaining in the
corporation, such as when there is need for special
reserve for probable contingencies. (n)
 What are dividends?
- Corporate profits set aside, declared and ordered by
the Board of Directors to be paid to the stockholders.
 What are property dividends?
- Those paid in property surplus
 Like tables and chairs? Can tables and chairs make
surplus profits?
- No, they do not make surplus, bonds, etc.
 Where should dividends come from?
- Stock dividends are declared as stocks coming from
corporation
 Who declares dividends to be declared? Do
stockholders have any say?
- Board of Directors, if stock approval of 2/3
outstanding capital stock
ACS-1M SUB-1M P.U.-1M 1M-U.R.E. (surplus
profits of the corporation)
1-100k
2-100k
To
10-100k
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1M
 Board decides to declare 1M, how much will each
receive? May the board declare stock dividend
- NO. that would be over issuance of shares, violation
of securities regulation code
- It must have a free portion
- The corporation may increase its capital
 Z co. 1M to X Co. is 2/3 of Xco. Stockholders
reacquired?
- No, because in property 2/3 is not required
 What is the effect of declaration of dividends with
regards to the assets of a company?
- As compared to stock dividends, the declaration of
cash or property dividends have the effect of reducing
corporate assets to the extent of dividends declared.
- Neither would stock dividends increase the
proportionate interest of the stockholders of the
corporation although it will have the effect of
increasing the subscribed and paid-up capital of the
corporation. It gives the stockholders nothing in the
way of distribution of assets but merely divides his
existing shares into smaller units.
 Earnings belong to the corporation until declared or
given
 Revocation
- No revocation of dividend may be has unless it has
not been officially communicated to the stockholders
or is in the form of stock dividends which is revocable
at any time prior to distribution.
 Stock dividends- no reduction, you capitalize your
restricted retained earnings, what is issued is a piece
of paper. The restricted earnings remain in the
corporation
 Cash and property- reduces corporate assets
 Stock dividends increase corporate assets? No, it will
only have the effect of increasing the subscribed and
paid-up capital of the corporation
 Will there be a corresponding increase in their
proportionate interest?
- REMAINS THE SAME
- Exception: when stock dividends will result in a
fractional share
ACS-2M 1-100K 200 (10%) *VOTING
AND DIVIDEND RIGHTS STILL THE SAME
SUB-1M TO
10%
PU-1M 10-100K
ACS 2M
SUB 1M
PU 1M
 31

1M RE SUB 1M JULY 24 DECLARATION

JULY 31
1 100K
PU 1M
2 100K
1 100K 100T JULY 26-Y(NEW
TO ONE WAS DECLARED TO Y) JULY 30- 100K

10 100K 2

1M TO TO HAVE THE TRANSFER

RECORDED
 May they be compelled?
10 100K
- NO. You cannot declare if it does not come from
unrestricted retained earnings. 1M

1. 1M-U.R.E. (is it true there is no way to compel?)  Insofar as 1 and Y who has a better right? Already
declared, but not yet paid?
2. 2M-U.R.E.
- Right to receive vest upon declaration. Who ever owns
 May they be compelled to declare dividends at the time of declaration owns the dividends

- Mandatory if earned, the board may be compelled to - Unless there is a stipulation to the contrary
declare dividends
 TRUST FUND DOCTRINE
- if exceeds 100% of the paid-up capital the boards may
be compelled - The power to declare it if paid-up capital is not
maintained or is impaired
ACS 2M 1M U.R.E.
- Trust fund must be kept intact for the protection of
SUB 1M creditors who have the right to rely on such
subscription and the paid-up capital for the
PU 800K satisfaction of their claims

1-100K 50K PU  Cannot accumulate surplus unreasonably

2-100K 50K  Basis is the paid-up capital

TO  Entitled to dividends

10-100K  Irrespective of whether the subscription is full

1M  Illegally declared

 Will 1 and 2 receive full amount of dividends?
- YES. They are entitled however if they are declared
delinquent, the amount due them shall first be
applied to his delinquency plus expenses.
 Delinquency occurs, you are called to pay, but you
failed to pay. In case of stock dividend, the delinquent
stock holder will not be entitled thereto until he has
paid his subscription in full.
 Are non-stockholders entitled to receive dividends?
- No, tock dividends are civil fruits of the original
investment, and to the owners of the shares belong
the civil fruits.
 How did the court decide dividends in the case of
Neilsen
- Stock dividends cannot be issued to a person who is
not a stockholder in payment of services rendered.
- Whether cash, property or stock, only stockholders
may receive dividends. Dividends are fruits of
investments. They come from the U.R.E. or surplus
profits of the corporation.
ACS 2M 1M U.R.E.
- Declare dividend with the belief that it formed part of
the U.R.E., but yun pala sa capital
 Directors are not liable, unless sec31 acted in bad
faith or gross negligence in the conduct of corporate
affairs
 Directors even if acting in behalf of the corporation,
may still be held solidarily liable
 Power to enter into management contract
- New provision
Section 44. Power to enter into
management contract. - No corporation shall conclude
a management contract with another corporation
unless such contract shall have been approved by the
board of directors and by stockholders owning at least
the majority of the outstanding capital stock, or by at
least a majority of the members in the case of a non-
stock corporation, of both the managing and the
managed corporation, at a meeting duly called for the
purpose: Provided, That (1) where a stockholder or
stockholders representing the same interest of both
the managing and the managed corporations own or
control more than one-third (1/3) of the total
outstanding capital stock entitled to vote of the
managing corporation; or (2) where a majority of the
members of the board of directors of the managing
corporation also constitute a majority of the members
of the board of directors of the managed corporation,

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then the management contract must be approved by
the stockholders of the managed corporation owning
at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a non-stock
corporation. No management contract shall be
entered into for a period longer than five years for any
one term.
The provisions of the next preceding
paragraph shall apply to any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called service
contracts, operating agreements or otherwise:
Provided, however, That such service contracts or
operating agreements which relate to the exploration,
development, exploitation or utilization of natural
resources may be entered into for such periods as
may be provided by the pertinent laws or regulations.
(n)
 The requirement for a valid management contract are
as follows:
1. Resolution of the board of directors
2. Approval by the stockholders holding or representing
a majority of the outstanding capital stock or majority
of the members in case of non-stock corporation of
both the managing and the managed corporation
3. The approval of the stockholders or members must be
made at the meeting called for that purpose
4. The contract shall not be for a period longer than 5
years for any one term, except those which relate to
exploration, development or utilization of natural
resources which may be entered into for such periods
as may be provided by pertinent laws and regulations
 Every corporate act emanates from the BOARD
 Is the voting requirements of a majority stockholder
ABSOLUTE?
- Not only a majority but 2/3 of the outstanding capital
stock or 2/3 of the members in a non-stock
corporation would be required for the approval of a
management contract in the following instances:
1. Where the stockholders representing the same
interest of both the managing and managed
corporation own or control more than 1/3 of the total
outstanding capital stock of the managing
corporation; and
2. Where a majority of the members of the board of
directors of the managing corporation also constitute
a majority of the directors of the managed corporation
3. Where the contract would constitute the management
or operation of all or substantially all of the business
of another corporation, whether such contracts are
called service contracts. If it will not constitute the
management of all or substantially all of the business
of another corporation the first paragraph of section
44 will apply and not that of the second, that is, only
the vote of the stockholders holding or representing at
least a majority of the outstanding capital stock or
majority of the members in the case of non-stock
corporation will be required.
 How long?
- Not longer than 5 years for any one term
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- Exception: exploration, development or utilization of
natural resources
 What is an ultra-vires act or contract?
- Doctrine of limited capacity. Corporation can do such
acts and things as it is allowed to do
- Acts beyond it will be ultra vires, allowing a collateral
attack
- If not illegal per se merely voidable. Can be ratified
expressly or impliedly or even stopped as equitable
grounds
- Ultra-vires acts which are not illegal per se may
become binding and enforceable either by
satisfaction, estoppels or equitable grounds
 Consequences of ultra-vires acts?
1. On the corporation itself
- The proper forum, in accordance with the provisions
of PD 902-A, as amended and R.A. No. 8799 may
suspend or revoke, after proper notice and hearing,
the franchise or certificate of registration of the
corporation for serious misrepresentation as to what
the corporation can do or is doing to the great damage
or prejudice of the general public
2. On the rights of the stockholders
- A stockholder may bring either an individual or
derivative suit to enjoin a threatened ultra-vires act or
contract. If the act or contract has already been
performed, a derivative suit for damages against the
directors may be filed, but their liability will depend
on whether they acted in good faith and with
reasonable diligence in entering into the contract.
3. On the immediate parties
- The courts have not agreed as to the legal effect of a
corporate contract outside of its authorized business
but Ballatine gives the following summary of the
doctrines evolved:
a. If the contract is fully executed on both sides,
the contract is effective and the courts will no
interfere to deprive either party of what has been
acquired under it
b. If the contract is executory on both sides, as a
rule, neither party can maintain an action for its
non-performance
c. Where the contract is executor on one side only,
and has been fully performed on the other, the
courts differ as to whether an action will lie on
the contract against the party who has received
benefits of performance under it. Majority of the
courts, however, hold that the party who has
received benefits from the performance is
estopped to set up that the contract is ultra-
vires to defeat an action on the contract. This is
more in conformity with the doctrine that no
person shall be allowed to enrich himself at the
expense of another
Privano vs. Dela Rama
- Court looked into the purpose clause
- The purpose clause empowers and limits

- Articles likewise provide that it may deal with any of
its money
- “deal” broad enough to cover the donation it is not
then ultra-vires
- Not illegal per se hence (law of agency) excess powers
are subject to ratification
- Ratified by passing the resolution in question
Carlos vs. Mindoro sugar Co.
- PTC- trust company as such, it also has implied
powers as to make them more attractable
- Not ultra-vires in pursuance of its legitimate business
Japanese war notes vs. SEC
- Non-stock corporations cannot make profits and
distribute profits to its shareholders
- Ultra-vires because Japanese war notes is a non-
stock corporation
Crisologo-Jose vs. CA (ALWAYS ASKED BY DEAN
SUNDIANG)
- The negotiable instruments law which holds an
accommodation party liable on the instrument to a
holder for value, although such holder at the time of
taking the instrument knew him to be only an
accommodation party, does not include nor apply to
corporations which are accommodation parties. This
is because the issue or indorsement of negotiable
paper by a corporation without consideration and for
the accommodation of another is ultra-vires
- Corporate officers may guarantee or endorse an
accommodation only if specifically authorized
Section 36 paragraph 11
Section 10
Section 14 and 15
 Corporate powers depend on the agreement of the
stockholders rather than any director
- It may sell and it may guarantee, contract not
necessarily illegal, it will in the absence of proof to the
contrary presumed within its power. Corporations are
presumed to contract with in its powers- CARLOS
CASE
- Purpose clause may be stretched to cover PLDT
internet. It may be within its business.
- May it sell computers? NO! other line of business. Its
trading!
BY-LAWS
 By-Laws
- Rule adopted by the corporation for its internal
governance
 Is the adoption of by-laws mandatory?
 When should the by-laws be adopted or filed? Can it
not be adopted earlier?
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- After incorporation- within 1 month (emanates from
the BOARD)
- Prior-more convenient (signed by the incorporators)
 Who will sign the adoption clause?
- Majority of the stockholders or members attested to
by the corporate secretary
 What happens if the corporation fails to adopt the by-
laws from the tie provided by the law? Would there be
an automatic revocation or suspension?
- Proper notice and hearing, must first be complied
with
Loyola grand villas vs. CA
- Not the SEC, but the HIGC
- Must – not always imperative
- Filing of by-laws mandatory
- Empowered by SEC
- Merely a ground, there must be proper notice and
hearing
- Not affect the status of the corporation as a juridical
person
- Subject the corporation to a fine, as may be issued by
the SEC
 When do by-laws become effective?
- Until and unless the SEC gives it stamped of approval
- Suspension of any government agency. The
permission must first be secured- section 46
 Elements of a valid by-law
1. It must not be contrary to law, public policy or
morals;
2. It must not be inconsistent with the articles of
incorporation;
3. It must be general and uniform in its effect or
applicable to all alike or those similarly situated;
4. It must not impair obligations and contracts or vested
rights; and’
5. It must be reasonable.
- Must not be inconsistent with existing laws. Not be
inconsistent with articles of incorporation
 By-laws
- None filing would not affect the status of the
corporation, Loyola grand villas case
- The word “must” is not always imperative
- Stockholders are conlusively presumed to know the
provisions of the by-laws
 How about 3rd persons?

- NO. unless there is actual knowledge of the same they
are not presumed to know of the provisions of the by-
laws
Fleischer vs. Botika Nolasco
- Shares of stock are personal properties
- Shares of stock may transfer to whom ever he wishes
- The by-laws is contrary to law
 Articles of incorporation
- May provide reasonable restriction
- By-laws merely internal laws
- Articles is the contract between and among the
parties and corporation
Gov’t vs. El Hogar
- Did the court categorically ruled here that the
provision in the 5th cause of action is valid?
- Rules governing equity, considering the fact that there
was always lack of quorum
- Section 29 BOD if still constituting a quorum may fill
up a vacancy other than by removal, etc.
Gokongwei vs. SEC
- Section 48 allows a corporation to amend it by-laws
- Section 47 of the code, the by-laws may provide for
the qualification and disqualification
- It cannot be said Gokongwei has a vested rights
- Prevent directors from taking advantage of position to
promote his individual interest to the damage of
others
- The validity or reasonableness of a by-laws is a
question of law
- Subject to the limitations that reasonableness of a by-
law is a mere matter of judgment
- Rule of the majority and not the tyranny of the
minority
 May the by-laws be amended altered or appealed?
- YES. HOW? Two modes
1. By a majority vote of the directors or trustees and the
majority vote of the outstanding capital stock or
members in a non-stock corporation, at a regular or
special meeting called for that purpose;
MEETINGS
2. By the board of directors alone when delegated by 2/3
of the outstanding capital stock or 2/3 of the
members in a non-stock corporation.
- This delegated power, however, is considered revoked
whenever a majority of the outstanding capital stock
or members shall so vote at a regular or special
meeting.
 If it is to be amended what is the proceeding?
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- Section 48 2nd paragraph provides:
Section 48. Amendments to by-laws. - The
board of directors or trustees, by a majority vote
thereof, and the owners of at least a majority of the
outstanding capital stock, or at least a majority of the
members of a non-stock corporation, at a regular or
special meeting duly called for the purpose, may
amend or repeal any by-laws or adopt new by-laws.
The owners of two-thirds (2/3) of the outstanding
capital stock or two-thirds (2/3) of the members in a
non-stock corporation may delegate to the board of
directors or trustees the power to amend or repeal
any by-laws or adopt new by-laws: Provided, That any
power delegated to the board of directors or trustees
to amend or repeal any by-laws or adopt new by-laws
shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding
capital stock or a majority of the members in non-
stock corporations, shall so vote at a regular or
special meeting.
Whenever any amendment or new by-laws
are adopted, such amendment or new by-laws shall
be attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under
oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities
and Exchange Commission the same to be attached
to the original articles of incorporation and original
by-laws.
The amended or new by-laws shall only be
effective upon the issuance by the Securities and
Exchange Commission of a certification that the same
are not inconsistent with this Code. (22a and 23a)
Baretto vs. La Previsora
- Any corporate act emanates from the board
- Directors themselves cannot amend the by-laws if
they were not granted the same
 Section 48
 The power granted is not subject to revocation T or F?
- FALSE
 If the by-laws are amended when will they become
valid?
- Upon issuance of the SEC that they are not
inconsistent
 What if the SEC failed to act within 10 months
without fault attributable to the corporation?
 T or F any amendment of the by-laws will never
become valid until it gives its stamp of approval even
after 1 year
- TRUE. Articles of incorporation and by-laws are
different
 Meetings
- Meetings of stockholders 1. Date
fixed in the by-laws or by-law
- Meetings of director or trustees
 Meetings are regular and special

 Meetings of stockholders
 What is regular and what is special?
 When are regular meetings of the stockholders held?
- Fixed date provided by the by-laws
 What if there is no date?
- April
 Why april?
- Point in time the audited financial statement have
been prepared
 What if in the date specified in the by-laws or by the
law itself the meeting was not convened, for instance
lack of quorum or force majeure?
- It may be postponed on a reasonable date
 Notice requirement?
- Regular- 2 weeks prior notice
- Special- 1 week
 May the notice requirement be lessened?
- By-laws may provide a longer or a shorter duration
 What if the notice requirement is not complied with?
 What happened to any act passed in a meeting when
notice requirement was not required with?
- Voidable, subject to ratification
Board of directors vs. Tan
- Notice requirement is the by-laws is a mandatory
requirement
- Improperly served, any action will be invalidated at
the objection of any stockholder or member
 Must be held in the proper place
 Where should it be held?
- Apparent from the foregoing provision is that
meetings of stockholders must, at all times, be held in
the city or municipality where the principal office of
the corporation is located and, as far as practicable,
in the principal office of the corporation.
 May the by-laws of a corporation provide that
meetings be held anywhere in the Philippines?
- While there is no provision authorizing a stock
corporation to hold stockholders’ meetings outside of
the City of Municipality where the principal office is
located, the law allows a non-stock corporation to
provide in its by-laws any place of members’ meeting
provided that proper notice is sent to all members
indicating the date, time and place of the meeting
which shall be within the Philippines.
 T or F the by-laws of a stock corporation may validly
provide that meetings shall be held anywhere in the
Philippines?
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- FALSE. Non-stock corporations lang pwede provided
nakalagay sa by-laws and provided proper notice is
given
 Corporation can do only such things as the law allows
it to do, DOCTRINE OF LIMITED CAPACITY
 San Miguel office located in Ortigas Center. May
stockholders meeting be held in PICC center?
- YES. Metro Manila, one single city
 Must be called by the proper party
 Who calls?
- President until and unless there is a provision ,
secretary on order of the president
 What if there is nobody who can call?
- The petitioner, stockholder may petition the court
 What if there is a person who can call, but he fails or
neglects to call the meeting? May a stockholder
petition to authorize a meeting?
- Ponce case only applies when there is NO person
authorized to call the meeting. If there is a person,
but neglects his duty. Ponce will not apply.
 Writ of injunction may never be issued ex parte
 Is there any exception?
- Section 28 only instance
Section 28. Removal of directors or
trustees. - Any director or trustee of a corporation
may be removed from office by a vote of the
stockholders holding or representing at least two-
thirds (2/3) of the outstanding capital stock, or if the
corporation be a non-stock corporation, by a vote of
at least two-thirds (2/3) of the members entitled to
vote: Provided, That such removal shall take place
either at a regular meeting of the corporation or at a
special meeting called for the purpose, and in either
case, after previous notice to stockholders or
members of the corporation of the intention to
propose such removal at the meeting. A special
meeting of the stockholders or members of a
corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the
secretary on order of the president or on the written
demand of the stockholders representing or holding at
least a majority of the outstanding capital stock, or, if
it be a non-stock corporation, on the written demand
of a majority of the members entitled to vote. Should
the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice,
or if there is no secretary, the call for the meeting may
be addressed directly to the stockholders or members
by any stockholder or member of the corporation
signing the demand. Notice of the time and place of
such meeting, as well as of the intention to propose
such removal, must be given by publication or by
written notice prescribed in this Code. Removal may
be with or without cause: Provided, That removal
without cause may not be used to deprive minority
stockholders or members of the right of
representation to which they may be entitled under
Section 24 of this Code. (n)
 Cases of removal or ouster of a director
 Mandamus would be appropriate remedy if there is a
person authorized but refuses
 Quorum and voting requirement

- Majority stockholders or members constitute a may bind the corporation even without a meeting
quorum
 Is the presence of the majority owners of the
outstanding capital stock ABSOLUTE to have a
quorum?
- NO. when the code requires a higher quorum it must
also be equivalent to the vote required
 Do you include non-voting shares in arriving at the
voting requirement to have a valid corporate act?
- It depends.
- Section 6 last par. If it falls within the penultimate
par. Of section 6
 Five requisites of a valid meeting
1. It must be held on the date fixed in the by-laws or in
accordance with law
2. Prior notice must be given
3. It must be held at he proper place
4. It must be called by the proper party
5. Quorum and voting requirements must be met
 Date not complied with, notice, place, not complied
with and the person who called not authorized, what
happens to any resolution called?
- Section 51, any meeting shall be valid provided all the
stockholders are present or duly represented and
provided it is within the power of the corporation. 3 RD
paragraph of 324
- If the voting requirement is met, any resolution
passed in the meeting, even if improperly held or
called will be valid if all the stockholders or members
are present or duly represented thereat. The last
paragraph of section 51 is clear on the matter when it
provides:
“all proceedings had and any business
transacted at any meeting of the
stockholders or members, if within the
powers or authority of the corporation,
shall be valid even if the meeting be
improperly held or called, provided all the
stockholders or members of the corporation
are present or duly represented at the
meeting.”
 Directors/trustees meeting
 Regular (monthly) and special (anytime)
 May that be restricted (within or outside the Phil)
- YES. unless the by-laws provide otherwise.
 Is there any notice requirement?
- YES. 1 day unless otherwise provided by the by-laws
 What happens if notice is not complied with?
- If the notice requirement is not complied with the
meeting is illegal and will not bind the corporation
except when subsequently ratified or in the case of a
close corporation where the act of any one director
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under the special provision of Section 101 of the
Code.
 Can notice be waived? <sec.53>
Section 53. Regular and special meetings
of directors or trustees. - Regular meetings of the
board of directors or trustees of every corporation
shall be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors
or trustees may be held at any time upon the call of
the president or as provided in the by-laws.
Meetings of directors or trustees of
corporations may be held anywhere in or outside of
the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date,
time and place of the meeting must be sent to every
director or trustee at least one (1) day prior to the
scheduled meeting, unless otherwise provided by the
by-laws. A director or trustee may waive this
requirement, either expressly or impliedly. (n)
- YES. Expressly and impliedly
- SEC ruling
A special meeting is valid without notice
where the directors are all present or where
they consent to the meeting. Presence at
the meeting waives the want of notice.
Moreover, it has been ruled that the
meeting of the directors without a formal
call first being had, and notice thereof
given to the members, did not operate to
invalidate it or to render the proceedings
which were taken at it void, for every
member of the board were present, and
their joint action had completely bound the
corporation as if the meeting has been
called with due formality, and everyone of
the directors had received proper notice.
 What is the quorum and voting requirement in the
directors meeting?
- Majority of the members of the board of directors
(entire membership)
 Vote required to pass a valid corporate act?
- Majority of those present at which there is a quorum
(3 present, vote of 2 sufficient)
- Exception, majority of all the members of the board in
case of election of corporate officers, unless the
articles provide for a greater quorum or voting
requirement
 Should the director or trustees be physically present?
- General rule, must sit and act as a body to have a
valid corporate act
 Five man member board, a meeting was called today,
should the physical presence or warm bodies requires
to constitute a quorum?
- NO. it is not required. Teleconference or video
conference is allowed, E- commerce law
 Membership subject to laws

 Stockholder not yet
 May director vote by proxy?
- NO
 If A is a director and a meeting is called for the
purpose of electing a new set of BOD can A vote by
proxy?
- YES. Because it is a stockholders meeting
 If directors meeting, cannot vote by proxy
 Stockholder’s right to vote
- Inherent in stock ownership
- However this right is not always inherent, because it
may be denied:
1. Redeemable and preferred shares, however if
founders shares are issued others may be
denied the right to vote.
2. May be denied by the articles of incorporation or
contracts
- When not denied they may do so in person or by
proxy
 May the right to vote by proxy be denied?
 May the articles of incorporation deny?
 May the by-laws validly provide that proxy voting is
not allowed?
- NO
 Only non-stock may be denied proxy voting (may be
broaden, limited or denied)
 Proxy voting is a matter of right granted by law
 Requirements of a valid proxy?
- Section 58
Section 58. Proxies. - Stockholders and
members may vote in person or by proxy in all
meetings of stockholders or members. Proxies shall in
writing, signed by the stockholder or member and
filed before the scheduled meeting with the corporate
secretary. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a
period longer than five (5) years at any one time. (n)
 How long may a proxy exist?
- Maximum of 5 years
- Valid for the meeting in which it is intended
 Is proxy revocable?
- Generally revocable, unless coupled with interest
 Revocation
- A proxy, like agency in general is revocable unless
coupled with an interest and revocation need not be
made by formal notice in writing. Revocation may be
expressed to the proxy holder, to the election
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committee, by a subsequent proxy to another or by
sale of the shares. Thus it may be revoke orally by
conduct such that appearing and asserting the right
to vote at a meeting by the registered owner of the
shares revokes a proxy previously given.
 Must be submitted to a validation committee
 By-laws of non-stock corporations may deny proxy
voting
 What is voting trust agreement?
- One created by an agreement between a group of
stockholders of a corporation and a trustee, or a
group of identical agreements between individual
stockholders and a common trustee, whereby it is
provided that for a term o years or for a period
contingent upon a certain event, or until the
agreement is terminated, control over the stock
owned by such stockholders, shall be lodged in the
trustee, either with or without reservation to the
owners or persons designated by them the power to
direct how such control shall be issued.
- It is a devise of binding stockholders to vote as a unit
and thus assuring a desirable stability and continuity
in management in situations where it is needed.
 What is the effect of a voting trust agreement relative
to the rights?
- Lee vs. CA must pass these criteria
1. That the voting rights of the stock are separated from
the other attributes of ownership;
2. That the voting rights granted are intended to be
irrevocable for a definite period of time; and,
3. That the principal purpose of the grant of voting
rights is to acquire voting control of the corporation.
 During the duration of the trust they are irrevocable
unless there is a violation either by fraud
 Requisites
- Section 59
Section 59. Voting trusts. - One or more
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding
five (5) years at any time: Provided, That in the case of
a voting trust specifically required as a condition in a
loan agreement, said voting trust may be for a period
exceeding five (5) years but shall automatically expire
upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and
shall specify the terms and conditions thereof. A
certified copy of such agreement shall be filed with
the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective
and unenforceable. The certificate or certificates of
stock covered by the voting trust agreement shall be
cancelled and new ones shall be issued in the name
of the trustee or trustees stating that they are issued
pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the
name of the trustee or trustees is made pursuant to
said voting trust agreement.
The trustee or trustees shall execute and
deliver to the transferors voting trust certificates,
which shall be transferable in the same manner and
with the same effect as certificates of stock.
 38

The voting trust agreement filed with the  Is the stockholder executing in a voting trust
corporation shall be subject to examination by any agreement, is he qualified to act as a director?
stockholder of the corporation in the same manner as
any other corporate book or record: Provided, That
- NO. ceases to be stockholder of record, no longer the
both the transferor and the trustee or trustees may
exercise the right of inspection of all corporate books legal owner of shares
and records in accordance with the provisions of this
Code.  May the corporation enforce the voting trust
agreements executed by its stockholders?
Any other stockholder may transfer his
shares to the same trustee or trustees upon the terms - NO. NIDC vs. AQUINO
and conditions stated in the voting trust agreement,
and thereupon shall be bound by all the provisions of - Not a privy to the contract
said agreement.

- Rights liabilities of a stockholder are there in their

No voting trust agreement shall be entered individual capacity- corporate entity theory
into for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of
 Voting trust agreements
trade or used for purposes of fraud.

- Normally executed in favor of banking and financial

Unless expressly renewed, all rights institutions
granted in a voting trust agreement shall
automatically expire at the end of the agreed period,
and the voting trust certificates as well as the - So that they can vote a certain set of directors
certificates of stock in the name of the trustee or
trustees shall thereby be deemed cancelled and new - They will be more secured
certificates of stock shall be reissued in the name of
the transferors.
 Voting pull agreement

The voting trustee or trustees may vote by - Enters into an agreement

proxy unless the agreement provides otherwise. (36a)
- Pull all their shares to cast one vote
 Does it need to be notarized?
- Covered by rules governing contracts
- Yes, otherwise it is ineffective and unenforceable
- By pulling their votes they can decline the resolution
 Only legal ownership is transferred passed by the board

 Being still the beneficial owner they may transfer

 END OF MIDTERMS
these rights

 Is the right granted to a voting trust agreement

absolute? (to inspect)
STOCKS AND STOCKHOLDERS
- NO.
 3 modes
- The voting trust agreement filed with the corporation
1. By a contract of subscription with the corporation;
shall be subject to examination by any stockholder of
the corporation in the same manner as any other
corporate book or record. Provided, that both the 2. By purchase of treasury shares from the corporation;
transfer and the trustee or trustees may exercise the and,
right of inspection of all corporate books and records
in accordance with the provisions of this Code. 3. By purchase or acquisition of shares from existing
stockholders.
 Legal title is transferred to the voting trustee
 Section 60 subscription
 May the voting trustee vote by proxy?
- Any contract
- Yes, legal owner may vote by proxy
- Whether existing or still to be formed
 May the proxy holder vote by proxy?
Section 60. Subscription contract. - Any contract for
- NO, (AGENT) an agent can have no other agent unless the acquisition of unissued stock in an existing corporation
specifically allowed by the principal or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
 Stockholder executing as a proxy, is he qualified to be
purchase or some other contract. (n)
voted as a director?

 Why is he qualified to act as a director if the  Under the old law the 4th mode is PURCHASE
stockholder executes as a director?
 Purchase
- The beneficial owner of the shares in a voting trust is
disqualified to be a director in a voting trust whereas - Reciprocal in nature
in a proxy, the owner of the shares may be elected as
such since legal title thereof remains with him - Purchaser can neither require the issuance

- YES he remains to be the owner Xco. Inc.

P
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Authorized capital 1M
500 SUBSCRIBED
500 UNISSUED STOCKS (AS LONG AS GALING DITO)
Z wants to acquire 100K
Entered in June 50% shall be down payment remainder
December 08
o he will not be considered a stockholder unless he has
paid in full
August 08 property is ravaged by fire all are turned into shares
 Is Z liable to pay the balance of his acquisitions?
- YES, no matter how the party refer to it, it is
considered subscription
- Once you subscribe, you become a stockholder which
is entitled to all the liabilities of a stockholder
Z- subscribed to 100T/S of XCo.
Amount he paid 50k
Z did not pay on the date called and was declared a delinquent
share
 Corporation paid 100T/S therefore the corporation
reacquired the shares again, what are they called?
- Treasury shares
Y- 80T/S DECEMBER 08
40 % (AUGUST) WAS DESTROYED BY FIRE, IS HE STILL
LIABLE TO PAY THE UNPAID PORTION?
 IT WAS AGREED THAT IT WAS A PURCHASE AND
WILL BE A STOCKHOLDER ONLY IF PAID IN FULL IS
HE LIABLE?
- NO, because that was a purchase
- First example galing sa unissued stock
- 2nd example galling sa treasury shares hindi sa
unissued share
 NO such thing as purchase of unissued stocks
 A subscription contract can be conditional provided
there is nothing in the charter or statute prohibiting it
and not against public order, law, etc.
 Must it be in writing?
- NO, it may be oral
 5M should it be in writing to be valid and binding as a
subscription?
- NO, statutes of frauds only applies to SALES
Trillana vs. Quezon College
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- Counter proposal, therefore there was a need for an
acceptance
- Facultative because it is in his own free will, it is void
 What may be used as a consideration and how much
should be the consideration?
- Section 62 provides:
Section 62. Consideration for stocks. -
Stocks shall not be issued for a consideration less
than the par or issued price thereof. Consideration for
the issuance of stock may be any or a combination of
any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received
by the corporation and necessary or convenient for its
use and lawful purposes at a fair valuation equal to
the par or issued value of the stock issued;
3. Labor performed for or services actually rendered
to the corporation;
4. Previously incurred indebtedness of the
corporation;
5. Amounts transferred from unrestricted retained
earnings to stated capital; and
6. Outstanding shares exchanged for stocks in the
event of reclassification or conversion.
Where the consideration is other than
actual cash, or consists of intangible property such as
patents of copyrights, the valuation thereof shall
initially be determined by the incorporators or the
board of directors, subject to approval by the
Securities and Exchange Commission.
Shares of stock shall not be issued in
exchange for promissory notes or future service.
The same considerations provided for in
this section, insofar as they may be applicable, may
be used for the issuance of bonds by the corporation.
The issued price of no-par value shares
may be fixed in the articles of incorporation or by the
board of directors pursuant to authority conferred
upon it by the articles of incorporation or the by-laws,
or in the absence thereof, by the stockholders
representing at least a majority of the outstanding
capital stock at a meeting duly called for the purpose.
(5 and 16)
 “Amounts transferred from unrestricted retained
earnings to stated capital” what does it mean?
- Stock dividends will in effect capitalize the
unrestricted retained earnings
 After 5 years the founders shares may be converted
into common shares or other kinds of shares
 May shares of stocks be issued without
consideration? Why?
- NO, two reasons by the SC, discriminatory against
other stockholders and second unlawful, it prejudices
the right of the creditors “Trust Fund Doctrine”
 If issued without a consideration

- Section 65, they will be considered as watered stocks
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a
consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge
thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary,
shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the
difference between the fair value received at the time
of issuance of the stock and the par or issued value of
the same. (n)
- Subscribers may be compelled to pay the value
 Issuance of a certificate of stock is another thing
 What are the requisites for the issuance of a valid
certificate of stock?
1. It must be signed by the president or vice-president
and countersigned by the secretary or assistant
secretary;
2. It must be sealed with the corporate seal; and the
entire value thereof (together with interest or
expenses, if any) should have been paid.
While it appears, that a subscriber to shares of stock
cannot be entitled to the issuance of a certificate of
stock until the full amount of his subscription
together with interest and expenses (in case of
delinquent shares) if any is due, has been paid, a
subscriber to shares of stock, even if not yet fully
paid, is entitled to exercise all the rights of a
stockholder and the corresponding liability that
attach thereunder. Thus, the Code provides:
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder. (n)
 Is the issuance of a certificate of stock necessary to
consider the subscriber a stockholder?
- NO, shall be considered a stockholder even without a
certificate of stock
 Instances when he may not be able to exercise his
rights as such stockholder
- Declared delinquent
- When he exercises his appraisal right
 Are certificate of stocks transferrable?
- YES
 Are certificate of stocks considered negotiable?
- Quasi-negotiable
 Why are they considered quasi-negotiable when it
may be transferred through endorsement and
delivery?
100t/s 001 10/s
Abc co.
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B stole and forged the signature
C is purchaser in good faith and for value will C acquire title
Endorsement from
When issued by owner
Endorsed by owner- strict compliance
ANSWER: a certificate of stock is not regarded as negotiable in
the same sense that a bill or note is negotiable, even if it is
endorsed in blank. Thus, while it may be transferred by
endorsement coupled with delivery thereof, and therefore merely
quasi-negotiable, it is nonetheless non-negotiable in that the
transferees takes it without prejudice to all the rights and
defenses which the true and lawful owner may have except in so
far as the principles governing estoppels may apply.
He acquired it by virtue of a forged instrument; no matter how
innocent the purchaser is because it is subject to all the rights
and defenses
 What if A endorsed it?
- He is estopped, unless there are other available
defenses
 Transfer is required to be recorded in the books of the
corporation, however even if not recorded, it will be
valid between the parties. Non-registration will not
however, affect the validity thereof at least in so far as
the contracting parties are concerned.
Section 63. Certificate of stock and
transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which
certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary,
and sealed with the seal of the corporation shall be
issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be
transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between
the parties, until the transfer is recorded in the books
of the corporation showing the names of the parties to
the transaction, the date of the transfer, the number
of the certificate or certificates and the number of
shares transferred.
No shares of stock against which the
corporation holds any unpaid claim shall be
transferable in the books of the corporation. (35)
 “Until registration is accomplished, the transfer,
though valid between the parties, cannot be effective
as against the corporation. Thus the, unrecorded
transfer cannot enjoy the status of a stockholder; he
cannot vote nor be voted for, and he will not be
entitled to dividends. The corporation will be
protected when it pays dividend to the registered
owner despite a previous transfer of which it had no
knowledge. The purpose of registration therefore is
twofold: to enable the transferee to exercise all the
rights of a stockholder and to inform the corporation
of any change in shares ownership so that it can
ascertain the persons entitled to the rights and
subject to the liabilities of a stockholder.”

Thus, it was also ruled by the High Court
in Nautica Canning Corp. vs. Yumul that “A
transfer of shares not recorded in the stock
and transfer book of the corporation is
non-existent in so far as the corporation is
concerned.” This is so because “the
corporation looks only through its books
for the purpose of determining who its
stockholders are.”
 Registration is necessary for the following:
1. To enable the corporation to know who its
stockholders are;
2. To enable the transferee to exercise his rights a s
stockholders;
3. To afford the corporation an opportunity to object or
refuse registration of the transfer in case allowed by
law;
4. To avoid fictitious and fraudulent transfers; and,
5. To protect creditors who have the right to look upon
stockholders, in case of no-payment or watered
shares, for the satisfaction of their claims.
 Duty of the secretary is ministerial, hence mandamus
will lie if the secretary refuses to record the transfer,
but he cannot be compelled when the transferee’s title
to the said shares has no prima facie validity or
uncertain
 Transfer- absolute and unconditional transfer to
warrant registration in the books of the corporation in
order to bind the latter and other third persons.
 Other restrictions on the right to transfer shares
would include:
1. It is not valid, except as between the parties, until
recorded in the books of the corporation;
2. Shares of stock against which the corporation holds
any unpaid claim shall not be transferable in the
books of the corporation; unpaid claims, refer to
claims arising from unpaid subscription and not to
any indebtedness which a stockholder may owe the
corporation such as monthly dues;
3. Restrictions required to be indicated in the articles of
incorporation, by-laws and stock certificates of a close
corporation;
4. Restrictions imposed by special law, such as the
Public Service Act requiring the approval of the
government agency concerned if it will vest unto the
transferee 40% of the capital of the public service
company;
5. Sale to aliens in violation of maximum ownership of
shares under the Nationalization Laws;
6. Those covered by reasonable agreement of the parties.
Monserat vs. Ceron
- Does it include mortgage?
- NO, it is not an absolute transfer
- Will not affect the transfer through mortgage
- Absolute and unconditional transfer
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- Only the transfer or absolute conveyance of the
ownership of the title to a share need be entered and
noted upon the books of the corporation in order that
such transfer may be valid, therefore, inasmuch as a
chattel mortgage of the aforesaid title is not a
complete and absolute alienation of the dominion and
ownership thereof, its entry and notation upon the
books of the corporation is not necessary requisite to
its validity
 Chua guan vs. Magsasaka
- Was the mortgage valid and effective as against
subsequent third parties
- Register of deeds where the corporation resides and if
different in the register of deeds of owner’s domicile
 Unson vs. Dinamito
- All transferred not register will not have a valid force
and effect
 Right to transfer may be regulated
 May not be unreasonably restricted
 Violation of nationalization law- Central Bank
Lambert vs. Fox
- Valid , may be reasonably regulated, restricted by
agreement of parties
- Reasonable agreement by the parties
- Reasonable as to length of time
Padgett vs. Babcock
- Any attempt to restrain transfer
- SC, in the absence of a valid lien upon its shares
- Valid restrictions shares are applicable
- Any restriction on a stockholder’s right to dispose of
his shares must be construed strictly; and any
attempt to restrain a transfer of shares is regarded as
being in restraint of trade, in the absence of a valid
lien upon its shares, and except to the extent that
valid restrictive regulations and agreements exist and
are applicable. Subject only to such restrictions, a
stockholder cannot be controlled in or restrained from
exercising his right to transfer by the corporation or
its officers or by other stockholders, even though the
sale is to a competitor of the company, or to an
insolvent person, or even though a controlling interest
is sold to one purchaser.
 Certificate of stocks are transferrable
- By endorsement and delivery of the stock certificate to
the transferee
 In order to be valid, must be registered in the books.
If not, will only be binding among parties
 How may shares of stock be transferred?
- Endorsement of stock certificate by owner or
attorney-in-fact with delivery
Embassy farms vs. CA

- Must be endorsed by owner or attorney-in-fact
coupled with delivery
- Endorsed not delivered
- Proper mode and manner must be complied with
Razon vs. IAC
- Delivered not endorsed
- Reverse of Embassy Farms
- Endorsement alone is not sufficient nor delivery
without endorsement is not allowed
- Endorsement plus delivery is mandatory
 Is there any other mode of transferring stock?
- Notarized deed
- Deed of assignment
Rural bank of Salinas vs. CA
- If denied or refused without good cause, mandamus
will lie
Tay vs. CA
- Mandamus may issue if petition has a clear legal
right
- Never issued in doubtful cases
- Petitioner failed to establish a clear legal right and
alleged ownership is without merit
- Did not acquire ownership by virtue of the contract of
pledge
- In a contract of pledge there must be foreclosure
- In the case there was no attempt to foreclose
- Petitioner must have a prima facie right
Nava vs. Peers Marketing
- A stock subscription is a subsisting liability from the
time the subscription is made
- The subscriber is as much bound to pay his
subscription as he would be to pay any other debt
- No stock certificate was issued. Without stock
certificate, which is the evidence of ownership of
corporate stock, the assignment of corporate shares is
effective only between the parties to the transaction
 Exception to the general rule
Rural Bank of Lipa vs. CA
- By notarized deed
- Certificate of stocks already issued must be coupled
with delivery, exception (TAN vs. SEC)
 Stock certificate has already been issued it must be
coupled with the delivery
100/s
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 After certificate of stock is issued, may it be effectively
transferred even without endorsement or delivery of
the stock certificate?
- Person sought to be a stockholder is an officer and
has custody
 Endorsement and delivery is not necessary (TAN vs.
SEC)
Tan vs. SEC (FULL KNOWLEDGE, HE IS ESTOPPED)
- Persons sought to be stockholder is officer and has
custody of the book (estopped)
 General Rule for valid transfer
- Certificate of stock must be endorsed by owner or
attorney-in-fact coupled with delivery
 Exceptions
- Section 63 uses the word “may”
- Showing that there may be other modes of
transferring shares
 Is there a time frame or fixed period as when transfer
can be made?
- NO, (WON vs. WACK WACK)
Won vs. Wack Wack
- Valid between contracting parties even if not recorded
in corporation books
- Right accrues only if refused
- Statute of limitations does not apply in registration of
shares of stock
- Must determined from the time of refusal
 Why are they non-negotiable when they may be
transferred?
- Transferees pays it without prejudice to all the rights
and defenses as the true and lawful owner may have
under the law except insofar as such rights and
defenses are subject to the limitations imposed by the
principles governing estoppels
De los Santos vs. Republic
- Why is he, not considered as the owner of shares?
When it has been said that when endorsed by the
owner it is considered as strict certificate? Because
certificate of stocks are non-negotiable
- Although a stock-certificate is sometimes regarded as
quasi-negotiable, in the sense that it may be
transferred by endorsement, coupled with delivery, it
is well settled that the instrument is non-negotiable,
because the holder thereof takes it without prejudice
to such rights or defenses as the registered owner or
creditor may have under the law, except insofar as
such rights or defenses are subject to the limitations
imposes by the principles governing estoppels.
 Unauthorized issuance of stock certificates
100
XYZCo

100 pesos per share
Stolen by B and forged the signature of A
B sells to C will C acquire title? NO
ENDORSEMENT FORM
 C armed with the endorsement form certificate, sold to
D (innocent purchaser for value), will D acquire title?
- NO, subject to such rights and defenses as the true
and lawful owner may have
 What if C now goes to the corporation and presents the
form?
- Then the corporation shall cancel the old certificate and
issues a new one, now in the name of C, now
registered in the name of C, will C acquire title?
 A found out what happened and goes to the
corporation who has a better title C or A?
- A, A cannot be deprived of his right by virtue of an
unauthorized transfer
 Corporation can compel C to deliver the new stock
certificate because he made a representation that the
certificate where good.
 Armed with the new certificate issued to C, C delivers
to D a purchaser in good faith and for value will D
acquire title?
- D will acquire title took the shares not by virtue of a
forged or unauthorized transfer, but on the reliance
that the stock certificate is valid and owned by C
 Stock certificate now in possession of D. A knew of
what happened and went to the corporation and
complains. Who will have a better title?
- the corporation may be compelled to recognize both, A
as stockholder (non-negotiable) D, reliance that the
stock certificate is valid and existing and owned by C
 Forged transfers
- If the corporation should issue a new certificate in
pursuance of a forged transfer, the corporation incurs
no liability to the person in whose favor it is issued
and it may demand its return for cancellation. The
corporation in such case has been guilty of no
misrepresentation. On the other hand, it is the duty
of the purchaser to determine that the indorsement of
the owner is genuine. However, if the new certificate
issued to the purchaser comes into the hands of a
bona fide purchaser for value, the corporation will be
stopped from denying validity thereof, since by
issuing such new certificate it represents that the
person named therein is a stockholder of the
corporation. The corporation is thus forced to
recognize both the original certificate and new
certificate-the original, because the true owner could
not be deprived of his title by a forged transfer, and
the new, because of its representation that the person
named therein is the owner of shares in the
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corporation. But if the recognition of both
stockholders would result in an over issue of shares,
then only the original and true owner can be
recognized as a stockholder. The bona fide purchaser
of the new certificate will however have a right of
damages against the corporation. The corporation, in
turn, would have a right of action against the person
who made false representations and in whose favor it
issued a new certificate. The true owner of the shares
which were wrongfully transferred would of course
have a right to compel the corporation to issue him a
certificate in lieu of the original one which was
wrongfully cancelled.
 Authorized capital stock 1M shares
 All are subscribed who will the corporation recognize
as rightful owner A or D? if both will be recognized
there will be over issuance
- only A citing citizens national bank vs. state (but if
recognition of both stockholders would result in an over
issue of shares, then only the original and true owner
can be recognized as a stockholder)
- by virtue of the doctrine of non-negotiability of
certificate of stocks
 The true and lawful owner will never be deprived of
his rights
 What happens to D?
- D will have a cause of action against the corporation for
the value of his acquisition cost inclusive of damages,
attorney’s fees and cost of suit
 D sues the corporation for the value of his acquisition
cost, inclusive of damages, attorney’s fees and cost of
suit. What may the corporation do?
- NO defense, no valid defense, because it was
represented to other parties that the certificate of
stocks is valid, subsisting, etc.
 2nd situation, what cause of action may the
corporation have? Remedy?
- Third party complaint against C, but what if he is a
purchaser for value? 4th party claim against B
 When may certificate of stocks be issued?
- Section 64 provides:
Section 64. Issuance of stock certificates. -
No certificate of stock shall be issued to a subscriber
until the full amount of his subscription together with
interest and expenses (in case of delinquent shares), if
any is due, has been paid. (37)
 A certificate of stock cannot be issued unless he fully
paid the amount subscribed
 Subscription to the capital stocks of the corporation
are indivisible
 Clear mandate of section 148 of the code is that the
ruling of the court in Baltazar vs. Lingayen Gulf, no
longer holds true
Section 148. Applicability to existing
corporations. - All corporations lawfully existing and
doing business in the Philippines on the date of the
effectivity of this Code and heretofore authorized,
licensed or registered by the Securities and Exchange
Commission, shall be deemed to have been
authorized, licensed or registered under the
provisions of this Code, subject to the terms and
conditions of its license, and shall be governed by the

provisions hereof: Provided, That if any such
corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise
herein provided, be given a period of not more than
two (2) years from the effectivity of this Code within
which to comply with the same. (n)
 Subscription to shares of stocks are indivisible
 Also apparent is that once a subscriber has paid his
subscription in full, he becomes entitled to be issued
a stock certificate and in the event that the
corporation refuses to do so, the stockholder my
institute a case for mandamus with damages. Thus, it
has been said that the duty of the corporate officers
to issue stock certificates to those entitled thereto is a
ministerial duty enforceable by mandamus.
Fua Cun vs. Summers and China Banking Corp.
- The court erred in holding the plaintiff as the owner of
250 shares of stock; “the plaintiff’s rights consist in
equity in 500 shares and upon payment of the unpaid
portion of the subscription price he becomes entitled
to the issuance of certificate for said 500 shares in his
favor.”
- No certificate of stock until the full amount has been
paid.
 Watered stock
- One which is issued by the corporation as fully paid-
up shares, when in fact the whole amount of the
value thereof has not been paid.
- Basis is par value and not the fair market value
 Section 62 states that stocks shall not be issued for a
consideration less than par or issued price thereof,
while section 13 states that in no case shall be paid-
up capital be less than five thousand [P5000] pesos.
 If issued below par, issued value considered as water
 How may watered stocks be issued?
1. For a monetary consideration less than its par or
issued value;
2. For a consideration in property, tangible or intangible,
valued in excess of its fair market value;
3. Gratuitously or under an agreement that nothing
shall be paid at all; or
4. In the guise of stock dividends when there are no
surplus profits of the corporation.
 Why is stock watering illegal?
1. The corporation is deprived of its capital thereby
hurting its business prospects, financial capability
and responsibility;
2. Stockholders who paid their subscriptions in full, or
promised to pay the same, are injured and prejudiced
by the reduction of their proportionate interest in the
corporation; and,
3. Present and future creditors are deprived of the
corporate assets for the protection of their interest.
- Corporation is prejudiced
- Stockholders, dilution of interest
- Creditors are prejudiced, virtue of right to look upon
corporations properties for the satisfaction of their
claims
 What is the effect of issuance of watered stocks
1. As to the corporation - when a corporation is guilty of
ultra-vires or illegal acts which constitute an injury to
or fraud upon the public, or which will tend to injure
or defraud the public, the State may institute a quo-
warranto proceeding to forfeit its charter for the
misuse or abuse of its franchise.
2. As between the corporation and the subscriber- The
subscription is void. Such being the case, the
subscriber is liable to pay the full par or issued value
thereof, to render it valid and effective.
3. As to the consenting stockholders - They are stopped
from raising any objection thereto;
4. As to dissenting stockholders - In view of the dilution
of their proportionate interest in the corporation, they
may compel the payment of the “water” in the stock
solidarily against the responsible and consenting
directors and officers inclusive of the holder of the
watered stocks;
5. As to creditors - They may enforce payment of the
difference in the price, or the water in the stock,
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solidarily against the responsible directors/officers
and the stockholders concerned; and’
6. As against transferees of the watered stock – His right
is the same as that of his transferor. If, however, a
certificate of stock has been issued and duly indorsed
to a bona fide purchaser, without knowledge, actual
or constructive, the latter cannot be held liable, at
least as against the corporation, since he took the
shares on reliance of the misrepresentation made by
the corporation that the stock certificate is valid and
subsisting. This is because a corporation is prohibited
from issuing certificates of stock until the full value of
the subscriptions have been paid and could not,
therefore, deny the validity of the stock certificate it
issued as against a purchaser in good faith. Thus,
Ballentine states that whether there is any liability on
the part of the transferee of watered stock is made to
depend upon whether he acquired the same without
notice, either as purchaser or donee. If he had
knowledge thereof, he is subject to the same liability
as his transferor.
 What is the nature of the liability of the corporate
directors consenting to the issuance of watered stocks
and the extent of their liabilities?
- Solidarily liable with the holder of the watered stocks
to the extent of the water from said shares of stocks
 Will all the directors be liable? What if you objected
will you also be liable?
- If you do not issue a written objection, you are still
liable
- Even passive directors may be liable
- Those having knowledge thereof, but did not interpose
their objection shall be liable
- Section 65 provides:
Section 65. Liability of directors for
watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a
consideration less than its par or issued value or for a
consideration in any form other than cash, valued in
excess of its fair value, or who, having knowledge
thereof, does not forthwith express his objection in
writing and file the same with the corporate secretary,
shall be solidarily, liable with the stockholder
concerned to the corporation and its creditors for the
difference between the fair value received at the time
of issuance of the stock and the par or issued value of
the same. (n)
 ACS-100M 100M/S PAR
VALUE-1.00
SUBSCRIBED-50M FAIR MARKET
VALUE-12.00/S
UNSUBSCRIBED-50M
A
B
C
D
E
There is a denial of pre-emptive rights and directors
A,B,C,D,E decided to issue the remaining 50M and
subscribed for 10M each at 2 per share.
 Is there stock watering if the fair market value is
12.00?
- No stock watering
- The basis is the par value
- The shares where in fact paid more than the par
value indicated in the articles of incorporation
3 days later they sold their 10M share for P11.00 each,
therefore making a profit.
 Can you question there actuations? What would be
the cause of action?
- It may be questioned.
- Duty of loyalty or fiduciary duty as such directors

- They cannot advance their own motives to the
damage prejudice of the corporation which they
represents and stockholders as a whole instead of it
being sold outside
- 500M would have gone to the coffers of the
corporation, 500M should be there for the protection
of creditors
- They are placed in a fiduciary relationship
- Sila lang ba ang kikita, pano naman yung
corporation, opportunity na yun para kumita
 When are unpaid subscriptions due and payable?
- Section 67. Payment of balance of subscription. -
Subject to the provisions of the contract of
subscription, the board of directors of any stock
corporation may at any time declare due and payable
to the corporation unpaid subscriptions to the capital
stock and may collect the same or such percentage
thereof, in either case with accrued interest, if any, as
it may deem necessary.
Payment of any unpaid subscription or any
percentage thereof, together with the interest accrued,
if any, shall be made on the date specified in the
contract of subscription or on the date stated in the
call made by the board. Failure to pay on such date
shall render the entire balance due and payable and
shall make the stockholder liable for interest at the
legal rate on such balance, unless a different rate of
interest is provided in the by-laws, computed from
such date until full payment. If within thirty (30) days
from the said date no payment is made, all stocks
covered by said subscription shall thereupon become
delinquent and shall be subject to sale as hereinafter
provided, unless the board of directors orders
otherwise. (38)
 Remedies of the corporation to enforce payment of
unpaid subscription
1. By board action in accordance with the procedure laid
down in sections 67 to 69 of the code
2. By a collection case in court as provided for in section
70
 Are subscribers of shares of stocks not fully paid,
liable to pay interest?
- General rule is they are not liable to pay interest
because the code says unless requires in the by-laws
- Aside from the mandate of the law that subscribers to
shares of stock must pay the full value of their
subscription, they may likewise be required to pay
interest on all unpaid subscriptions if so imposed in
the contract or in the corporate by-laws at such rate
as may be indicated thereat or the legal rate if not so
fixed. Unless so required or provided, however,
subscribers to shares of stock, not fully paid, are not
liable to pay interest on their unpaid subscriptions.
The code thus provides:
Section 66. Interest on unpaid
subscriptions. - Subscribers for stock shall pay to the
corporation interest on all unpaid subscriptions from
the date of subscription, if so required by, and at the
rate of interest fixed in the by-laws. If no rate of
interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)
 Until a call is made, they are not due and payable,
but still subject to the provisions of the contracts
 Procedures in case of sale of delinquent stocks
- Section 68. Delinquency sale. - The board of directors
may, by resolution, order the sale of delinquent stock
and shall specifically state the amount due on each
subscription plus all accrued interest, and the date,
time and place of the sale which shall not be less
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than thirty (30) days nor more than sixty (60) days
from the date the stocks become delinquent.
Notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered mail.
The same shall furthermore be published once a week
for two (2) consecutive weeks in a newspaper of
general circulation in the province or city where the
principal office of the corporation is located.
Unless the delinquent stockholder pays to
the corporation, on or before the date specified for the
sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of
advertisement and expenses of sale, or unless the
board of directors otherwise orders, said delinquent
stock shall be sold at public auction to such bidder
who shall offer to pay the full amount of the balance
on the subscription together with accrued interest,
costs of advertisement and expenses of sale, for the
smallest number of shares or fraction of a share. The
stock so purchased shall be transferred to such
purchaser in the books of the corporation and a
certificate for such stock shall be issued in his favor.
The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise
be entitled to the issuance of a certificate of stock
covering such shares.
Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale,
for the smallest number of shares or fraction of a
share, the corporation may, subject to the provisions
of this Code, bid for the same, and the total amount
due shall be credited as paid in full in the books of
the corporation. Title to all the shares of stock
covered by the subscription shall be vested in the
corporation as treasury shares and may be disposed
of by said corporation in accordance with the
provisions of this Code. (39a-46a)
 Who is the winning bidder in a delinquency sale?
- Bidder who shall “offer to pay the full amount of the
balance on the subscription together with accrued
interest, cost of advertisement and expenses of sale,
for the smallest number of shares or fraction of a
share.”
X Co. has 1M authorized capital stock
500 thousand is already subscribed
A subscribed to 100 thousand shares, 50 thousand is
already paid leaving 50 thousand unpaid
The corporation is at a loss of 250 thousand, the
board decides to make a call for the payment of the
unpaid subscriptions, however A could not paid,
hence declared delinquent and decides to sell his
share at a public auction
55 thousand is to be paid, remaining balance plus
cost and expenses
BIDDERS:
X-55K FOR 99,900 shares
Y-55K FOR 99,500 shares
Z-55K FOR 99,000 shares (winning bidder)
 Assume there is no bidder, may the corporation bid?

- NO. It cannot bid because the law says, subject to the
provisions of this CODE. Section 68 and 41 should be
reconciled. Section 68 states that:
Should there be no bidder at the public
auction who offers to pay the full amount of the
balance on the subscription together with accrued
interest, costs of advertisement and expenses of sale,
for the smallest number of shares or fraction of a
share, the corporation may, subject to the
provisions of this Code, bid for the same, and the
total amount due shall be credited as paid in full in
the books of the corporation. Title to all the shares of
stock covered by the subscription shall be vested in
the corporation as treasury shares and may be
disposed of by said corporation in accordance with
the provisions of this Code. (39a-46a)
- There was no unrestricted retained earnings in the
example given therefore the corporation cannot bid ,
section 41, it states that:
Section 41. Power to acquire own shares. -
A stock corporation shall have the power to purchase
or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover
the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock
dividends;
2. To collect or compromise an indebtedness to the
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. (a)
 What if the shares of A were sold without compliance
of the requirements? May A question the sale?
- The law prescribes two conditions before an action to
recover delinquent stocks irregularly sold may be
allowed. These are:
1. The party seeking to maintain such action first pays
or tenders to the party holding the stock the sum for
which the same was sold, with interest from the date
of the sale at the legal rate; and,
2. The action shall be commenced by the filing of a
complaint within six months from the date of the sale.
- The reason for such is the stability of transactions of
the shares of stock
 Suppose in the example, since there are no
unrestricted retained earnings, hence the corporation
cannot bid, is the corporation left without any
recourse?
- Section 70. Court action to recover unpaid
subscription. - Nothing in this Code shall prevent the
corporation from collecting by action in a court of
proper jurisdiction the amount due on any unpaid
subscription, with accrued interest, costs and
expenses. (49a)
Velasco vs. Poizat
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- The subscriber is as much bound to pay the amount
of the share subscribed by him as he would be to pay
any other debt, and the right of the company to
demand payment is no less incontestable.
- Two available remedies: the first and most special
remedy given by the statute consist in permitting the
corporation to put up the unpaid stock and dispose of
it for the account of the delinquent subscriber. The
other remedy is by action in court.
De Silva vs. Aboitiz and Co.
- Discretionary on the part of the board of directors to
do whatever is provided in the said article relative to
the application of the part of the 70 percent of the
profit distributable in equal parts on the payment of
the shares subscribed to and fully paid
Lingayen Gulf vs. Baltazar
- Exception: pursuant to a bona fide compromise or to
set off a debt due from the corporation, a release
supported by consideration, will be effectual as
against dissenting stockholders and subsequent and
existing creditors. A release which might originally
have been held invalid may be sustained after a
considerable lapse of time
Apocada vs. NLRC
- Set-off is without any legal basis
- It was premature
- Unpaid subscriptions will become due and payable
only upon certain instance
- Call or if there is a stipulation in contract
- If no call and no stipulation in contract then it will
not be demandable or payable at all
Lumanlan vs. Cura
- Trust Fund Doctrine- subscription to the capital of a
corporation constitute a fund to which the creditors
have a right to look for satisfaction of their claims and
that the assignee in insolvency can maintain an
action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.
PNB vs. Bitulak
- Where it not for the promise, the defendants would
have not subscribed
- Trust Fund Doctrine, it is established doctrine that
subscriptions to the capital of a corporation
constitute a fund to which creditors have a right to
look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon
any unpaid stock subscription in order to realize
assets for the payment of its debts.
- A corporation has no power to release an original
subscriber to its capital stock from the obligation of
paying for his shares, without a valuable
consideration for such release; and as against
creditors a reduction of the capital stock can take
place only in the manner and under the conditions
prescribed by the statute or the charter or the articles
of incorporation.

Edward Keller and Co. vs. COB
- May the stockholder be held liable for the debts of the
corporation? YES. To the extent of their unpaid
subscription
- As to the liability of the stockholders, it is settled that
a stockholder is personally liable for the financial
obligations of a corporation to the extent of his
unpaid subscriptions
 Is there a prescriptive period wherein a demand for
unpaid subscription should be made?
- NO. Garcia vs. Suarez case
Garcia vs. Suarez
- Never became due and payable until there is a call
made
- Prescription will not run until and unless there is
demand
- Prescription should be determined from the time
demand has been made and not from the time of
subscription
 If declared delinquent, what would be the effect as to
the owner of said shares?
- Section 71. Effect of delinquency. - No delinquent
stock shall be voted for or be entitled to vote or to
representation at any stockholder's meeting, nor shall
the holder thereof be entitled to any of the rights of a
stockholder except the right to dividends in
accordance with the provisions of this Code, until and
unless he pays the amount due on his subscription
with accrued interest, and the costs and expenses of
advertisement, if any. (50a)
- However if the shares are not delinquent, subscribers
to the capital of a corporation, though not fully paid,
are entitled to all the rights of a stockholder,
according to section 72
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder. (n)
 May the rules governing delinquency sale apply to a
non-stock corporation? Are there unpaid shares in a
non-stock corporation?
- Rules governing stock corporations, when applicable,
also applies to a non-stock corporation
- There are delinquent shareholders also in a non-stock
corporation. Example is membership dues
 A corporation paid 50% of subscription and was later
on declared delinquent when he could not pay upon
call; A is also a director of the corporation. Will A,
upon declaration of delinquency , still be able to
exercise his right as a director?
- Yes, he loses all his right as a stockholder except his
right to receive dividends
- He remains to be a director, only qualification to be a
director is he must own at least 1 share and since it
still stands in his name pending the sale, he remains
to be and act as a director
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- Even if there is sale, he may still be director because
the winning bidder may not bid or pay for all the
shares or there might be remaining shares, which
would be credited in favor of the delinquent
stockholder
- Section 43 provides:
Section 43. Power to declare dividends. -
The board of directors of a stock corporation may
declare dividends out of the unrestricted retained
earnings which shall be payable in cash, in property,
or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any
cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further,
That no stock dividend shall be issued without the
approval of stockholders representing not less than
two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the purpose.
(16a)
Stock corporations are prohibited from
retaining surplus profits in excess of one hundred
(100%) percent of their paid-in capital stock, except:
(1) when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary
under special circumstances obtaining in the
corporation, such as when there is need for special
reserve for probable contingencies. (n)
 When a certificate of stock is loss or destroyed, what
must be done by the owner thereof?
- Section 73. Lost or destroyed certificates. - The
following procedure shall be followed for the issuance
by a corporation of new certificates of stock in lieu of
those which have been lost, stolen or destroyed:
1. The registered owner of a certificate of
stock in a corporation or his legal representative shall
file with the corporation an affidavit in triplicate
setting forth, if possible, the circumstances as to how
the certificate was lost, stolen or destroyed, the
number of shares represented by such certificate, the
serial number of the certificate and the name of the
corporation which issued the same. He shall also
submit such other information and evidence which he
may deem necessary;
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, said corporation shall publish a notice in
a newspaper of general circulation published in the
place where the corporation has its principal office,
once a week for three (3) consecutive weeks at the
expense of the registered owner of the certificate of
stock which has been lost, stolen or destroyed. The
notice shall state the name of said corporation, the
name of the registered owner and the serial number
of said certificate, and the number of shares
represented by such certificate, and that after the
expiration of one (1) year from the date of the last
publication, if no contest has been presented to said
corporation regarding said certificate of stock, the
right to make such contest shall be barred and said
corporation shall cancel in its books the certificate of
stock which has been lost, stolen or destroyed and
issue in lieu thereof new certificate of stock, unless
the registered owner files a bond or other security in
lieu thereof as may be required, effective for a period
of one (1) year, for such amount and in such form
and with such sureties as may be satisfactory to the
board of directors, in which case a new certificate

may be issued even before the expiration of the one
(1) year period provided herein: Provided, That if a
contest has been presented to said corporation or if
an action is pending in court regarding the ownership
of said certificate of stock which has been lost, stolen
or destroyed, the issuance of the new certificate of
stock in lieu thereof shall be suspended until the final
decision by the court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed.
Except in case of fraud, bad faith, or
negligence on the part of the corporation and its
officers, no action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described. (R.A.
201a)
- The rationale of the above-quoted law is to avoid
duplication of certificates of stock and the avoidance
of fictitious and fraudulent transfers.
 When will the replacement certificate be issued?
- The code provides that:
after the expiration of one (1) year from
the date of the last publication, if no contest has
been presented to said corporation regarding said
certificate of stock, the right to make such contest
shall be barred and said corporation shall cancel in
its books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new
certificate of stock,
 Could it be issued earlier than 1 year?
- Yes it can be, the code states that:
unless the registered owner files a bond or
other security in lieu thereof as may be required,
effective for a period of one (1) year, for such amount
and in such form and with such sureties as may be
satisfactory to the board of directors, in which case a
new certificate may be issued even before the
expiration of the one (1) year period provided
herein: Provided, That if a contest has been
presented to said corporation or if an action is
pending in court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed, the issuance of the new certificate of stock
in lieu thereof shall be suspended until the final
decision by the court regarding the ownership of said
certificate of stock which has been lost, stolen or
destroyed.
 May corporate officers be held liable for
unauthorized issuance?
- YES, the code provides that:
Except in case of fraud, bad faith, or
negligence on the part of the corporation and its
officers, no action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described. (R.A.
201a)
 Assuming the last paragraph is not there; would it be
not the same, that they should be held liable due to
fraud, bad faith or negligence?
- YES. Section 31 provides that:
Section 31. Liability of directors, trustees
or officers. - Directors or trustees who willfully and
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knowingly vote for or assent to patently unlawful acts
of the corporation or who are guilty of gross
negligence or bad faith in directing the affairs of the
corporation or acquire any personal or pecuniary
interest in conflict with their duty as such directors or
trustees shall be liable jointly and severally for all
damages resulting there from suffered by the
corporation, its stockholders or members and other
persons.
When a director, trustee or officer attempts
to acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of any
matter which has been reposed in him in confidence,
as to which equity imposes a disability upon him to
deal in his own behalf, he shall be liable as a trustee
for the corporation and must account for the profits
which otherwise would have accrued to the
corporation. (n)
 Certificate of stock was lost, the owner transfers his
shares by way of a notarized deed will it be valid?
- He cannot do so, if a certificate of stock is issued by a
corporation, a mere notarized deed will not suffice
- Deed of assignment was not sufficient since there was
no endorsement (Rural Bank of Lipa vs. CA)
 Rights and liabilities of stockholders
- RIGHTS
1. Participation in the management of the corporate
affairs by exercising their right to vote and be voted
upon either personally or by proxy as provided for
under sections 50 and 58 of the code;
2. To enter into a voting trust agreement subject to the
procedure, requirements and limitations imposed
under section 50;
3. To receive dividends and to compel their declaration if
warranted under section 43;
4. To transfer shares of stock subject only to reasonable
restrictions such as options and preferences as may
be allowed by law inclusive of the right of the
transferee to compel the registration of the transfer in
the books of the corporation as provided for in section
63;
5. To be issued a certificate of stock for fully paid-up
shares in accordance with 64;
the 6. To exercise pre-emptive rights as provided for in
section 39;
7. To exercise their appraisal right in accordance with
the provision of section 81 and in those instance
allowed by law such as section 42 and 105;
8. To institute and file a derivative suit;
9. To recover shares of stock unlawfully sold for
delinquency as may be allowed under section 69;
10. To inspect the books of the corporation subject only
to the limitations imposed by section 73;
11. To be furnished by the most recent financial
statement of the corporation as by section 75;
 49

12. To be issued a new stock certificate in lieu of the lost

or destroyed one subject to the procedure laid down
in section 73;

13. To have the corporation dissolved under section 118

to 121, and section 105 in a close corporation;

14. To participate in the distribution of the assets of the

corporation upon dissolution under section 122;

15. In the case of a close corporation, to petition the SEC

to arbitrate in the event of a deadlock as allowed
under section 104; and,

16. Also in the case of a close corporation, to withdraw

therefrom, for my reason, and compel the corporation
to purchase his shares as provided for under section
105.

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- LIABILITIES
1. To pay to the corporation the balance of his unpaid
subscriptions subject to the provision of section 67 to
70;
2. To pay interest on his unpaid subscription if required
by the by-laws or by the contract of subscription in
accordance with section 66;
3. To answer to the creditors for the unpaid portion of
his subscription under the TRUST FUND DOCTRINE;
4. To answer the “water” in his stocks as provided for in
section 65;
5. To be liable, as general partners, for all debts,
liabilities and damages of a determinable corporation
as envisioned under section 21 (corporation by
estoppel); and,
6. To be personally liable for torts, in the event that a
stockholder in a close corporation actively
participates in the management of the corporate
affairs.
CORPORATE BOOKS AND RECORDS
 What are these books and records that are required to
be kept?
- Section 74. Books to be kept; stock transfer agent. -
Every corporation shall keep and carefully
preserve at its principal office a record of all
business transactions and minutes of all meetings
of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in
detail the time and place of holding the meeting,
how authorized, the notice given, whether the
meeting was regular or special, if special its
object, those present and absent, and every act
done or ordered done at the meeting. Upon the
demand of any director, trustee, stockholder or
member, the time when any director, trustee,
stockholder or member entered or left the
meeting must be noted in the minutes; and on a
similar demand, the yeas and nays must be taken
on any motion or proposition, and a record
thereof carefully made. The protest of any
director, trustee, stockholder or member on any
action or proposed action must be recorded in full
on his demand.
The records of all business transactions of
the corporation and the minutes of any meetings shall
be open to inspection by any director, trustee,
stockholder or member of the corporation at
reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
Any officer or agent of the corporation who
shall refuse to allow any director, trustees,
stockholder or member of the corporation to examine
and copy excerpts from its records or minutes, in
accordance with the provisions of this Code, shall be
liable to such director, trustee, stockholder or
member for damages, and in addition, shall be guilty
of an offense which shall be punishable under Section
144 of this Code: Provided, That if such refusal is
made pursuant to a resolution or order of the board
of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or
trustees who voted for such refusal: and Provided,
further, That it shall be a defense to any action under
this section that the person demanding to examine
and copy excerpts from the corporation's records and
minutes has improperly used any information
secured through any prior examination of the records
or minutes of such corporation or of any other
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corporation, or was not acting in good faith or for a
legitimate purpose in making his demand.
Stock corporations must also keep a book
to be known as the "stock and transfer book", in
which must be kept a record of all stocks in the
names of the stockholders alphabetically arranged;
the installments paid and unpaid on all stock for
which subscription has been made, and the date of
payment of any installment; a statement of every
alienation, sale or transfer of stock made, the date
thereof, and by and to whom made; and such other
entries as the by-laws may prescribe. The stock and
transfer book shall be kept in the principal office of
the corporation or in the office of its stock transfer
agent and shall be open for inspection by any director
or stockholder of the corporation at reasonable hours
on business days.
No stock transfer agent or one engaged
principally in the business of registering transfers of
stocks in behalf of a stock corporation shall be
allowed to operate in the Philippines unless he
secures a license from the Securities and Exchange
Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually:
Provided, That a stock corporation is not precluded
from performing or making transfer of its own stocks,
in which case all the rules and regulations imposed
on stock transfer agents, except the payment of a
license fee herein provided, shall be applicable. (51a
and 32a; P.B. No. 268.)
 To summarize:
1. Records of all business transactions which include,
among others, journals, ledger, contracts, vouchers
and receipts, financial statements and other books of
accounts, income tax returns, and voting trust
agreements which must be kept and carefully
preserved at its principal office;
2. Minutes of all meetings of stockholders or members
and of the directors or trustees setting forth in detail
the date, time, and place of meeting, how authorized,
the notice given whether the same be regular or
special, and if special, the purpose thereof shall be
specified, those present and absent, and every act
done or ordered done there at which ,must likewise be
kept at the principal office of the corporation; and,
3. Stock and transfer book showing the names of the
stockholders, the amount paid or unpaid on all stocks
for which subscription has been made, a statement of
every alienation, sale or transfer of stock made, if any
the date thereof, and by whom and to whom made
which must also be kept at the principal office of the
corporation or in the office of its stock transfer agent.
These corporate books and records, inclusive of all
business transactions and minutes of meetings, are
subject to inspection by any of the directors, trustees,
stockholders or members of the corporation at
reasonable hours on business days and a copy of
excerpts of said records may be demanded. In fact, in
so far as financial statement is concerned, the Code
clearly provides:
Section 75. Right to financial statements. -
Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall
furnish to him its most recent financial statement,
which shall include a balance sheet as of the end of
the last taxable year and a profit or loss statement for
said taxable year, showing in reasonable detail its
assets and liabilities and the result of its operations.
At the regular meeting of stockholders or members,
the board of directors or trustees shall present to
such stockholders or members a financial report of
the operations of the corporation for the preceding
year, which shall include financial statements, duly

signed and certified by an independent certified
public accountant.
However, if the paid-up capital of the corporation is
less than P50,000.00, the financial statements may
be certified under oath by the treasurer or any
responsible officer of the corporation. (n)
 May books and records be examined? Who may
examine? Can they copy them? In whose expense?
- Yes, according to the code:
“The records of all business transactions
of the corporation and the minutes of any
meetings shall be open to inspection by any
director, trustee, stockholder or member of the
corporation at reasonable hours on business days
and he may demand, in writing, for a copy of
excerpts from said records or minutes, at his
expense. “
 Is there any defense available that could be raised?
By the corporate officers to justify the refusal?
- Yes, the code provides that:
“and Provided, further, That it shall be a
defense to any action under this section that the
person demanding to examine and copy excerpts
from the corporation's records and minutes has
improperly used any information secured through
any prior examination of the records or minutes of
such corporation or of any other corporation, or
was not acting in good faith or for a legitimate
purpose in making his demand.”
 What is the stock and transfer? Where should stock
and transfer be kept? Can it be kept elsewhere?
“Stock corporations must also keep a book
to be known as the "stock and transfer book", in
which must be kept a record of all stocks in the
names of the stockholders alphabetically
arranged; the installments paid and unpaid on all
stock for which subscription has been made, and
the date of payment of any installment; a
statement of every alienation, sale or transfer of
stock made, the date thereof, and by and to whom
made; and such other entries as the by-laws may
prescribe. The stock and transfer book shall be kept
in the principal office of the corporation or in the
office of its stock transfer agent and shall be open
for inspection by any director or stockholder of the
corporation at reasonable hours on business days. “
 Stock and transfer agent
- Records every movement
- Person who monitors movement by the minutes or by
the hours
- Non-stock corporation- stock and transfer books
- Club share- membership
 Are stockholders entitled to financial statements?
- Yes, they are entitled to a copy, the code provides
that:
Section 75. Right to financial statements. -
Within ten (10) days from receipt of a written request
of any stockholder or member, the corporation shall
furnish to him its most recent financial statement,
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which shall include a balance sheet as of the end of
the last taxable year and a profit or loss statement for
said taxable year, showing in reasonable detail its
assets and liabilities and the result of its operations.
At the regular meeting of stockholders or
members, the board of directors or trustees shall
present to such stockholders or members a financial
report of the operations of the corporation for the
preceding year, which shall include financial
statements, duly signed and certified by an
independent certified public accountant.
However, if the paid-up capital of the
corporation is less than P50,000.00, the financial
statements may be certified under oath by the
treasurer or any responsible officer of the corporation.
(n)
- Audited financial statement filed in the SEC, 120
days from the end of the final year, or must be filed
on or before April of each year
- Must be stamp received by the BIR
 Those in the stock exchange
- Disclosure of any matter that have to do with
increasing and decreasing
- If not “kulong” violation of securities and regulation
act
 Why is this right of inspection granted to a
stockholder?
- The basis of the right of the stockholder to inspect the
books and records of the corporation for a proper
purpose is to protect his interest as a stockholder.
Thus, it has been said that:
“The right of the shareholders to ascertain
how the affairs of his company are being
conducted by its directors and officers is
founded by his beneficial interest through
ownership of shares and the necessity of
self-protection. Managers of some
corporations deliberately keep the
shareholders in ignorance or under
misapprehension as to the true condition of
its affairs. Business prudence demands
that the investor keep a watchful eye on
the management and the condition of the
business. Those in charge of the company
may be guilty of gross incompetence or
dishonesty for years and escape liability if
the shareholders cannot inspect the
records and obtain information.”
 Is there any distinction of the right of inspection of a
stockholder and that of a director?
- Yes, as compared to a stockholder or member, the
right of a director or trustee to inspect and examine
corporate books and records is considered absolute
and unqualified and without regard to motive. This is
because a director supervises, directs and manages
corporate business and it is necessary that he be
equipped with all the information and data with
regard to the affairs of the company in order that he
may manage and direct its operations intelligently
and according to his best judgment in the interest of
all the stockholders he represents. Thus, while
stockholders and members are entitled to inspect and
examine the books and records as provided in
sections 74 and 75 they may not gain access to highly
sensitive and confidential information. In the case of
directors. “it is not denied” that they have such
access. This would include, among others,

a. Marketing strategies and pricing structure;
b. Budget for expansion and diversification;
c. Research and development;
d. Sources of funding, availability of personnel,
proposals of mergers or tie-ups with other firms
 May this right be exercised, other than by the
stockholders themselves?
- Yes, while the right is founded on stock ownership
thus personal in nature it may be made by the
stockholder’s agent or representative since it may be
unavailing in many instances
 What if the right of the stockholder to inspect is
denied? What is his remedy?
1. Mandamus
2. Damages either against the corporation or responsible
officer who refused the inspection
3. Criminal complaint for violation of his right to inspect
and copy excerpts of all business transactions and
minutes of meeting. Section 74 provides that Any
officer or agent of the corporation who shall refuse to
allow any director, trustees, stockholder or member of
the corporation to examine and copy excerpts from its
records or minutes, in accordance with the provisions
of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition,
shall be guilty of an offense which shall be punishable
under Section 144 of this Code. The latter provision
imposes a penalty of a fine of not less than P1,000
but not more than P10,000 or an imprisonment for
not less than 30 days but not more than 5 years, or
both, at the discretion of the court. If the refusal is
pursuant to a resolution or order of the board, the
liability shall be imposed upon the directors or
trustees who voted for such refusal.
 Defense of the responsible corporate officer
1. That the person demanding has improperly used any
information secured through any prior examination of
the records or minutes of such corporation or of any
other corporation;
2. That he was not acting in good faith or for a legitimate
purpose in making his demand;
3. The right is limited or restricted by special law or the
law of it creation.
W.G. Philpotts vs. Philippine Manufacturing Co.
- The right of inspection given to a stockholder can be
exercised either by himself or by any proper
representative or attorney-in-fact, and either with or
without the attendance of the stockholder
- The right may be regarded as personal, in the sense
that only a stockholder may enjoy it; but the
inspection and examination may be made by another.
Otherwise it would be unavailing in many instances.
o Note: Usually hires an auditor or accountant to
safeguard his interest
Pardo vs. Hercules Lumber Co.
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- The law is clear, it may be exercised during
reasonable hours on any business days, the by-laws
cannot deny this right all together
- The general right given by the statute may not be
lawfully abridged to the extent attempted in this
resolution. It may be admitted that the officials in
charge of a corporation may deny inspection when
sought at unusual hours or under other improper
conditions; but neither the executive officers nor the
board of directors have the power to deprive a
stockholder of the right altogether.
- The corporation, or its responsible directors and
officers cannot unduly restrict this right of inspection
and may not arbitrarily set a few days of the year
within which the stockholder may make the
inspection.
- A by-law unduly restricting the right of inspection is
undoubtedly invalid
Vegaruth vs. Isabela Sugar Co.
- Directors of a corporation have the unqualified right
to inspect the books and records of the corporation at
all reasonable hours.
- We do not conceive, however, that a director or
stockholder has any absolute right to secure certified
copies of the minutes of the corporation until these
minutes have been written up and approved by the
directors.
 May a stockholder of a holding company inspect the
books and records of a subsidiary?
- It depends
- The right of the stockholders to examine corporate
books extends to wholly-owned subsidiary which is
completely under the control and management of the
parent company where he is such a stockholder. But
if the two entities (subsidiary and parent) are legally
being operated as separate and distinct entities, there
is no such right of inspection on the part of the
stockholder of the parent company.
AYALA- HOLDING COMPANY/PARENT COMPANY
SUBSIDIARIES: BPI/GLOBE/AYALA LAND (not
wholly-owned subsidiary)
o HOLD ATLEAST 50 +1 shares in order to be a
PARENT COMPANY
 A, is a stockholder of Ayala, does he have a right to
inspect the records of its subsidiaries?
- If wholly owned pwede, but its subsidiaries are not
wholly owned kaya hindi pwede
Gokongwei vs. SEC
- San Miguel corporation owns all of the shares of stock
of San Miguel International
- It is wholly-owned
- It would be in accord with equity, good faith and fair
dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of such
wholly-owned subsidiary which are in respondent
corporation’s possession and control

 If being operated as separate and distinct
corporations, there is no such right
 Telecommunications- special franchise, it
legislative grant
Gonzales vs. PNB
- Provisions of the old law was unqualified, when it
granted stockholders the right to inspect
- However, whole seemingly enlarging the right of
inspection, the new code has prescribed limitations to
the same. It is now expressly required as a condition
for such examination that the one requesting it must
not have been guilty of using improperly any
information secured through a prior examination and
that the person asking for such examination must be
acting in good faith and for a legitimate purpose in
making his demand
- Admittedly, he sought to be a stockholder in order to
pry into transactions entered into by the respondent
bank even before he became a stockholder. His
obvious purpose was to arm himself with materials he
can use against the respondent bank for acts done by
the latter when the petitioner was a total stranger to
the same.
- Bank was created by a special law, it has its own
charter and primarily governed by the law creating
them
- The bank is only subject to the inspection of the
Central Bank and any information pertaining to the
bank is confidential and shall not be revealed to any
person other than the President of the Philippines,
the Secretary of Finance and the Board of Directors,
nor shall any information relative to the funds in its
custody, its current accounts or deposits belonging to
private individuals, corporations or other entities
except by order of a Court of Competent Jurisdiction,
hence inspection sought to by the petitioner is
violative of the provisions of its charter and is even
subject to penal sanctions
 Assuming you are a stockholder of PNB, and then it
was privatized, may you already have the right to
inspect?
- No, unless its charter has been altered or repealed it
is still subject to the same law
 3 stages in the life of a corporation
- Formation or birth
- We now discuss the union of the corporation
- The last would be its death or dissolution
MERGER AND CONSOLIDATION
 Merger and consolidation
- In corporate parlance it is called spin-off
- Almost a year ago San Miguel separated its brewery
business
- San Miguel Corporation is now a full time holding
company; it can later on absorb the company
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- Corporations are granted by the code to merge or
consolidate
is a - most common type of corporate recognition
- not the same in every case
- but most common in the weal financial or insolvent
condition, aim is to bring it back to its financial
capability
- also a method of recapitalization
o purchase and sale of corporate assets is another
form of corporate reorganization
 How do you value the assets of the merging
corporation, do you consider goodwill?
 First secure favorably recommendation of government
agency
- Section 79. Effectivity of merger or
consolidation. - The articles of merger or of
consolidation, signed and certified as herein above
required, shall be submitted to the Securities and
Exchange Commission in quadruplicate for its
approval: Provided, That in the case of merger or
consolidation of banks or banking institutions,
building and loan associations, trust companies,
insurance companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained. If the Commission is
satisfied that the merger or consolidation of the
corporations concerned is not inconsistent with the
provisions of this Code and existing laws, it shall
issue a certificate of merger or of consolidation, at
which time the merger or consolidation shall be
effective.
If, upon investigation, the Securities and
Exchange Commission has reason to believe that the
proposed merger or consolidation is contrary to or
inconsistent with the provisions of this Code or
existing laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard.
Written notice of the date, time and place of hearing
shall be given to each constituent corporation at least
two (2) weeks before said hearing. The Commission
shall thereafter proceed as provided in this Code. (n)
 Merger
- A union effected by absorbing one or more existing
corporations by another which survives and
continues the combined business
- It is the uniting of two or more corporations by the
transfer of property to one of them which continue in
existence, the other or the others being dissolved and
merged therein.
A B
A transfers all assets, properties, rights, obligations,
liabilities to B
B issues shares of stocks in exchange of the transfer
A is then dissolved and B SURVIVES
o Parties to a merger are called constituent
corporation

 Consolidation
- The uniting or amalgamation of two or more existing
corporations to form a new corporation
- In merger there is a surviving corporation, the others
are dissolved, while in consolidation, all constituent
are dissolved and a new one organized
A B
C 5.
 Like all other corporate acts, it emanates from the
board
1. The board of directors or trustees of each constituent
corporations shall approve a plan of merger or
consolidation setting forth the matters required in
section 76;
2. Approval of the plan by the stockholders
representing 2/3 of the outstanding capital stock
or 2/3 of the member in non-stock corporations of
each of such corporations at separate corporate
meetings called for the purpose;
3. Prior notice of such meeting, with a copy or
summary of the plan of merger or consolidation
shall be given to all stockholders or members at least
two (2) weeks prior to the scheduled meeting, either
personally or registered mail stating the purpose
thereof;
4. Execution of the articles of merger or consolidation by
each constituent corporations to be signed by the
president or vice-president and certified by the
corporate secretary or assistant secretary setting
forth the matters required in section 78;
5. Submission of the articles of merger or
consolidation in quadruplicate to the SEC subject
to the requirement of section 79 that if it involve
corporations under the direct supervision of any other
government agency or governed by special laws the
favorable recommendation of the government agency
concerned shall first be secured and;
6. Issuance of the certificate of merger or
consolidation by the SEC at which time the merger
or consolidation shall be effective. If the plan,
however, is believed to be contrary to law, the SEC
shall set a hearing to give the corporations concerned
an opportunity to be heard upon proper notice and
thereafter, the Commission shall proceed as provided
in the Code.
 Although merger and consolidation is an express
power granted to corporation, it is subject to
limitations, as maybe proscribed by law
 What would be the effect of merger or consolidation?
<sec. 80>
1. There will only be a single corporation. In case of
merger, the surviving corporation or the consolidated
corporation in case of consolidation;
2. The termination of the corporate existence of the
constituent corporations, except that of the surviving
corporation or the consolidated corporation;
3. The surviving corporation or the consolidated
corporation will possess all the rights, privileges,
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immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under
the Code;
4. The surviving or consolidated corporation shall
possess all the rights, privileges, immunities and
franchises of the constituent corporations, and all
property and all receivables due, including
subscriptions to shares and other choses in action,
and every other interest of, or belonging to or due to
the constituent corporations shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act and
deed; and,
The rights of creditors or any lien on the property of
the constituent corporations shall not be impaired by
the merger or consolidation.
 Is there a liquidation process in case of merger or
consolidation?
- None, there is nothing to distribute
Associated Bank vs. CA
- By virtue of a specific provision in the merger
agreement
- Although the subject promissory note names CBTC as
the payee, the reference to CBTC in the note shall be
construed, under the very provision of the merger
agreement, as a reference to petitioner bank, “as if
such reference (was a) direct reference to the latter for
all intents and purposes
- Section 80 par. 4 states:
The surviving or the consolidated
corporation shall thereupon and thereafter possess all
the rights, privileges, immunities and franchises of
each of the constituent corporations; and all property,
real or personal, and all receivables due on whatever
account, including subscriptions to shares and other
choses in action, and all and every other interest of,
or belonging to, or due to each constituent
corporation, shall be deemed transferred to and
vested in such surviving or consolidated corporation
without further act or deed; and
- Without further acts, meaning it is automatic
 When do merger and consolidation become effective?
What if the SEC fails to act on it without fault
attributable to the corporation involved?
- It will never become valid until and unless the SEC
gives its stamp of approval
- It will be up to the constituent corporation to follow it
up
- It will never take effect until the SEC gives its
approval and issues the articles of merger
o Granted 3 years to wing up unless there is a
trustee to wing up its affairs
 Could there be liquidators and winding up with
respect to the corporation in consolidation and
merger?
- No, there is none

- No assets properties or rights to collect, they are
transferred
- No debts and liabilities to pay because they become
the liabilities of the surviving corporations
- No properties transferred because they will be the
properties of the surviving corporations
o Hardest part is the financial act, regarding how
many shares would be issued, probability of
collection and the like
o In merger and consolidation, there is due
diligence and an economist is usually hired
APPRAISAL RIGHT
 Define appraisal
- Right to withdraw from the corporation and demand
payment of the fair value of his shares after
dissenting from certain corporate acts involving
fundamental changes in corporate structure <sec.
81>
 What property? When may this right be exercises?
- Section 81 provides:
Section 81. Instances of appraisal right. -
Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of
his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the
Code; and
3. In case of merger or consolidation. (n)
 May it be exercised by a stockholder who dissents to
the act of a business other than a primary purpose?
X Co. inc
Principal office is in Quezon city, it was changed to
Paranaque
A objects and makes a written demand. May he
exercise his right of appraisal?
- It is not available in all amendments of the
corporation
- It must be changing or restricting the rights of any
stockholder
 What if the principal office is changed from QC to
TAWI-TAWI, will it change or affect the rights of A?
- To some it may change or restrict the rights to others
it may not
 How is the right exercised?
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- According to section 82 of the code:
Section 82. How right is exercised. - The
appraisal right may be exercised by any stockholder
who shall have voted against the proposed corporate
action, by making a written demand on the
corporation within thirty (30) days after the date on
which the vote was taken for payment of the fair value
of his shares: Provided, That failure to make the
demand within such period shall be deemed a waiver
of the appraisal right. If the proposed corporate action
is implemented or affected, the corporation shall pay
to such stockholder, upon surrender of the certificate
or certificates of stock representing his shares, the
fair value thereof as of the day prior to the date on
which the vote was taken, excluding any appreciation
or depreciation in anticipation of such corporate
action.
If within a period of sixty (60) days from the
date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by three
(3) disinterested persons, one of whom shall be
named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall be
final, and their award shall be paid by the corporation
within thirty (30) days after such award is made:
Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover
such payment: and Provided, further, That upon
payment by the corporation of the agreed or awarded
price, the stockholder shall forthwith transfer his
shares to the corporation. (n)
X Co.
Principal Office- QC, it was changed to Manila
A objects and makes a written demand for payment of
fair value of shares. Can he make a demand of
payment of shares?
 True or False, no stockholder in a stock corporation
can ever demand if the principal office is amended,
changing it from QC to Manila
- False, a stockholder in a close corporation may for
any reason compel the close corporation that he be
paid the fair value of his shares
Can he exercise his appraisal rights in the first place?
He hasn’t even paid his subscription in full.
 May a stockholder who hasn’t paid his subscription
in full exercise his appraisal rights?
- Yes, he can exercise his appraisal rights, by
reconciling the provisions of section 72, section 82
and section 86
Section 72. Rights of unpaid shares. -
Holders of subscribed shares not fully paid which are
not delinquent shall have all the rights of a
stockholder. (n)
Section 82. How right is exercised. - The
appraisal right may be exercised by any stockholder
who shall have voted against the proposed corporate
action, by making a written demand on the
corporation within thirty (30) days after the date on
which the vote was taken for payment of the fair value
of his shares: Provided, That failure to make the
demand within such period shall be deemed a waiver
of the appraisal right. If the proposed corporate action
is implemented or affected, the corporation shall
pay to such stockholder, upon surrender of the

certificate or certificates of stock representing his
shares, the fair value thereof as of the day prior to the
date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such
corporate action.
If within a period of sixty (60) days from the
date the corporate action was approved by the
stockholders, the withdrawing stockholder and the
corporation cannot agree on the fair value of the
shares, it shall be determined and appraised by three
(3) disinterested persons, one of whom shall be
named by the stockholder, another by the
corporation, and the third by the two thus chosen.
The findings of the majority of the appraisers shall be
final, and their award shall be paid by the corporation
within thirty (30) days after such award is made:
Provided, That no payment shall be made to any
dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover
such payment: and Provided, further, That upon
payment by the corporation of the agreed or awarded
price, the stockholder shall forthwith transfer his
shares to the corporation. (n)
Section 86. Notation on certificates; rights
of transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his
shares to the corporation for notation thereon that
such shares are dissenting shares. His failure to do
so shall, at the option of the corporation, terminate
his rights under this Title. If shares represented by
the certificates bearing such notation are transferred,
and the certificates consequently cancelled, the rights
of the transferor as a dissenting stockholder under
this Title shall cease and the transferee shall have all
the rights of a regular stockholder; and all dividend
distributions which would have accrued on such
shares shall be paid to the transferee. (n)
- Notation is not mandatory, it is even discretionary
because the code provides “at the option of the
corporation” because it never issued one for that
matter since the subscriptions are not yet fully paid
 May the corporation be compelled to pay the interest
of A
300 T, 150T, 150T and 0 unrestricted retained
earnings
 No stockholder may be able to compel the corporation
to pay the value of his shares if the corporation has
no unrestricted retained earnings
- False, a stockholder of a close corporation may for
any reason, provided only that the corporation has
sufficient assets to cover its debts and liabilities
o General rule: there should be unrestricted
retained earnings
o Exception: section 105 “close corporation”
 The procedure and requirements for the valid exercise
of this rights are:
1. The stockholder must have voted against the
proposed corporate action in any of the instances
allowed by law for the exercise of the right of
appraisal;
2. The written demand for payment must be made by
the dissenting stockholder within thirty (30) days
after the date on which the vote was taken thereon.
Failure to make the demand within the said period
shall be deemed a waiver on the part of the
stockholder concerned to exercise his appraisal right;
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3. Surrender of the certificate of stock by the dissenting
stockholder for notation in the corporate books and
the payment by the corporation of the fair market
value of the said shares as of the day prior to the date
on which the vote was taken. If the stockholder and
the corporation cannot agree on the fair market value
thereof, the same shall be determined in accordance
with the provision of paragraph 2 of section 82;
4. The fair value of the shares of the dissenting
stockholder must be paid by the corporation only if it
has “unrestricted retained earnings” in its books to
cover such payment. If the corporation has no
unrestricted retained earnings, the dissenting
stockholder may not, therefore, be able to effectively
exercise his appraisal rights;
5. Upon payment of the shares by the corporation, the
dissenting stockholder shall transfer his shares to the
corporation.
 What would be the effect if the stockholder exercises
his appraisal rights? What happens to his voting and
dividend rights if he exercises his appraisal rights?
- It will be suspended, with a limitation of 30 days, as
provided for by section 83 of the code:
Section 83. Effect of demand and
termination of right. - From the time of demand for
payment of the fair value of a stockholder's shares
until either the abandonment of the corporate action
involved or the purchase of the said shares by the
corporation, all rights accruing to such shares,
including voting and dividend rights, shall be
suspended in accordance with the provisions of
this Code, except the right of such stockholder to
receive payment of the fair value thereof:
Provided, That if the dissenting stockholder is not
paid the value of his shares within 30 days after
the award, his voting and dividend rights shall
immediately be restored. (n)
 How do you compare the rights of a stockholder,
declared delinquent compared to a dissenting
stockholder exercising his appraisal rights
 What if a stockholder exercising his appraisal rights
is also a director, will he also lose his rights as a
stockholder?
- The shares remain to stand in his name until he is
paid, unless there is a stipulation in the by-laws
 When may the right to be paid the value of his shares
cease? Can he withdraw his right of appraisal?
- Yes, he may withdraw, but there must be consent by
the corporation as provided for by section 83 of the
code:
Section 84. When right to payment ceases.
- No demand for payment under this Title may be
withdrawn unless the corporation consents thereto.
If, however, such demand for payment is withdrawn
with the consent of the corporation, or if the proposed
corporate action is abandoned or rescinded by the
corporation or disapproved by the Securities and
Exchange Commission where such approval is
necessary, or if the Securities and Exchange
Commission determines that such stockholder is not
entitled to the appraisal right, then the right of said
stockholder to be paid the fair value of his shares
shall cease, his status as a stockholder shall
thereupon be restored, and all dividend distributions
which would have accrued on his shares shall be paid
to him. (n)
 Instances when the right of a dissenting stockholder
to be paid the fair value of his shares ceases.

1. When he withdraws his demand for payment and the
corporation consents thereto;
2. When the proposed action is abandoned or rescinded
by the corporation;
3. When the proposed action is disapproved by the SEC
where such approval is necessary;
4. When the SEC determines that he is not entitled to
exercise his appraisal right;
5. When he fails to submit the stock certificate within
ten (10) days from demand to the corporation for
notation that such shares are dissenting shares; and,
6. If the shares are transferred and the certificate
subsequently cancelled.
 Who bears the cost of appraisal?
- It depends
- The corporation bears the cost if
a. The price offered by the corporation is lower
than the fair value of the shares of the
dissenting stockholder as determined by the
appraisers;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justified.
- Dissenting stockholder will be liable for the cost and
expenses of appraisal when
a. When the price offered by the corporation is
approximately the same as the fair value
ascertained by the appraisers;
b. Where the action filed by the dissenting
stockholder and his refusal to accept payment is
found by the court to be unjustified.
 The dissenting stockholder may also sell, transfer or
assign his shares
Section 86. Notation on certificates; rights
of transferee. - Within ten (10) days after demanding
payment for his shares, a dissenting stockholder shall
submit the certificates of stock representing his
shares to the corporation for notation thereon that
such shares are dissenting shares. His failure to do
so shall, at the option of the corporation, terminate
his rights under this Title. If shares represented by
the certificates bearing such notation are
transferred, and the certificates consequently
cancelled, the rights of the transferor as a
dissenting stockholder under this Title shall cease
and the transferee shall have all the rights of a
regular stockholder; and all dividend distributions
which would have accrued on such shares shall be
paid to the transferee. (n)
NON-STOCK CORPORATIONS
 What is a non-stock corporation?
- A non-stock corporation is one where no part of its
income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of this
code on dissolution
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 What provision of the code will govern non-stock
corporations? Would the provision governing stock
corporations also apply to non-stock corporations?
- Yes, 2nd par. Of section 87 provides:
The provisions governing stock corporation,
when pertinent, shall be applicable to non-stock
corporations, except as may be covered by specific
provisions of this Title. (n)
 How is the right to vote exercised in a non-stock
corporation compared to a stock corporation
 May a member in a non-stock corporation vote
cumulatively?
- General rule is NO
 May it be granted or allowed by the by-laws?
- Yes
 May the right to cumulative voting be denied in a
stock corporation?
- No, Doctrine of Limited Capacity
 May members in a non-stock corporation vote by
proxy?
- Yes, section 89 provides that:
“Unless otherwise provided in the articles
of incorporation or the by-laws, a member may vote
by proxy in accordance with the provisions of this
Code. (n) “
 May the right to vote by proxy be validly denied in a
stock corporation?
- No, it is a matter of right in a stock corporation
 May member of a non-stock corporation cast their
vote by text?
- Yes, subject to the approval and terms and conditions
of the SEC <sec. 89>
“Voting by mail or other similar means by
members of non-stock corporations may be
authorized by the by-laws of non-stock corporations
with the approval of, and under such conditions
which may be prescribed by, the Securities and
Exchange Commission. “
 How about in stock?
- Voting by mail or other similar means may also be
authorized and allowed by the by-laws of non-stock
corporations. Generally, in stock corporations, the
vote must be cast at a duly constituted meeting. The
only exception, in case of the latter, is in the matter of
general amendment of the articles of incorporation
where the written assent of the stockholder may be
sufficient.
 How is the governing board constituted in a non-
stock corporation? How many members?
- It may exceed 15 in a non-stock corporation unless
the AOI or by-laws provide otherwise, as provided for
by section 92 of the code:

Section 92. Election and term of trustees. -
Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of
non-stock corporations, which may be more than
fifteen (15) in number as may be fixed in their articles
of incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of
office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall
have a term of three (3) years. Trustees thereafter
elected to fill vacancies occurring before the
expiration of a particular term shall hold office only
for the unexpired period.
No person shall be elected as trustee
unless he is a member of the corporation.
Unless otherwise provided in the articles of
incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members.
(n)
 Qualifications?
1. He is a member of the association;
2. Majority thereof must be residents of the Philippines;
and,
3. Other qualifications as may be provided for in the by-
laws.
 Governing board in a non-stock
- Board of Trustees, however section 138 provides that:
Section 138. Designation of governing
boards. - The provisions of specific provisions of this
Code to the contrary notwithstanding, non-stock or
special corporations may, through their articles of
incorporation or their by-laws, designate their
governing boards by any name other than as board
of trustees. (n)
 Disqualifications
- Section 27 also applies to a non-stock corporation,
same holds true to the manner of removal <sec. 29 ad
30>
Section 27. Disqualification of directors,
trustees or officers. - No person convicted by final
judgment of an offense punishable by imprisonment
for a period exceeding six (6) years, or a violation of
this Code committed within five (5) years prior to the
date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation. (n)
Section 29. Vacancies in the office of
director or trustee. - Any vacancy occurring in the
board of directors or trustees other than by removal
by the stockholders or members or by expiration of
term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still
constituting a quorum; otherwise, said vacancies
must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or
trustee so elected to fill a vacancy shall be elected
only or the unexpired term of his predecessor in
office.
Any directorship or trusteeship to be filled
by reason of an increase in the number of directors or
trustees shall be filled only by an election at a regular
or at a special meeting of stockholders or members
duly called for the purpose, or in the same meeting
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authorizing the increase of directors or trustees if so
stated in the notice of the meeting. (n)
Section 30. Compensation of directors. - In
the absence of any provision in the by-laws fixing
their compensation, the directors shall not receive
any compensation, as such directors, except for
reasonable per diems: Provided, however, That any
such compensation other than per diems may be
granted to directors by the vote of the stockholders
representing at least a majority of the outstanding
capital stock at a regular or special stockholders'
meeting. In no case shall the total yearly
compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax
of the corporation during the preceding year. (n)
 Who elects the other officers?
- Directly by the general members unless the by-laws
or articles provide otherwise. <sec.92>
“Unless otherwise provided in the articles
of incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members.
(n) “
 In stock corporations who elect officers?
- Directors
 The provision that stock corporations cannot validly
provide that members cannot be voted by
stockholders is only a general rule because there is
an exception section 97 of the code states that:
The articles of incorporation of a close
corporation may provide that the business of the
corporation shall be managed by the stockholders
of the corporation rather than by a board of
directors. So long as this provision continues in
effect:
1. No meeting of stockholders need be called to elect
directors;
2. Unless the context clearly requires otherwise, the
stockholders of the corporation shall be deemed to be
directors for the purpose of applying the provisions of
this Code; and
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
The articles of incorporation may
likewise provide that all officers or employees or
that specified officers or employees shall be elected
or appointed by the stockholders, instead of by
the board of directors.
 Nature of membership is non-transferrable and
personal in nature unless the articles of incorporation
or by-laws provide otherwise
Section 90. Non-transferability of
membership. - Membership in a non-stock
corporation and all rights arising there from are
personal and non-transferable, unless the articles of
incorporation or the by-laws otherwise provide. (n)
 How is a membership requirement in a non-stock
corporation
A holds a membership certificate

B goes to the corporation and compels the
corporation to record the transfer in his name
- Membership in non-stock corporations may be
acquired by complying with the provisions of its rules
prescribed in the by-laws. This is in consonance with
the express power granted by law under section 36,
paragraph 6 of the code, authorizing them to admit
members thereof and that authority carries with it the
power to prescribe rules on membership. It has thus
been stated that in the absence of charter or statutory
restrictions, non-stock corporations may determine
who shall be admitted to membership and how they
shall be admitted.
Section 36. Corporate powers and
capacity. - Every corporation incorporated under this
Code has the power and capacity:
6. In case of stock corporations, to issue or sell stocks
to subscribers and to sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions
of this Code; and to admit members to the
corporation if it be a non-stock corporation;
- They can provide the manner in which to admit
depending on their own rules
 The power or authority to terminate members in non-
stock corporations is said to be inherent but strict
compliance with the manner and procedure laid down
in the by-laws must be observed, otherwise it may
render the expulsion ineffective and invalid.
Section 91. Termination of membership. -
Membership shall be terminated in the manner and
for the causes provided in the articles of incorporation
or the by-laws. Termination of membership shall have
the effect of extinguishing all rights of a member in
the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-
laws. (n)
 Power is inherent and may be exercised in certain
situations:
1. When an offense is committed which, although it
has no immediate relation to a member’s duty as
such, it is so infamous as to render him unfit for
society of honest men, which is indictable at
common law;
2. When the offense is a violation of his duty as
member of the corporation; and,
3. When the offense is of a mixed nature, being
both against his duty as a member of the
corporation, and also indictable at common law.
If the conduct of the member comes within any of this
cases, it is a ground for valid expulsion although it
may not be expressly made so by the by-laws
Chinese YMCA vs. Ching
- Right of the corporation to choose who the members
are, cannot be inquired or intervened by the court
- The appealed decision thus contravened the establish
principle that the courts cannot strip a member of a
non-stock corporation of his membership therein
without cause.
Lions Club International vs. CA
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59
- Courts will not generally interfere on matters
involving the internal affairs of an unincorporated
association such as election contest unless the acts
complained of are arbitrary, oppressive, fraudulent,
violative of civil rights and the like
- General rule is that the courts will not interfere with
the internal affairs of an unincorporated association
so as to settle disputes between the members, or
questions of policy, discipline, or internal government,
so long as the government of the society is fairly and
honestly administered in conformity with its by-laws
and the law of the land, and no property or civil rights
are involved.
- Exceptions are the following:
a. Where law and justice so require, and the
proceedings of the association are subject to
judicial review where there is fraud, oppression,
or bad faith, or where the action complained of
is capricious, arbitrary, or unjustly
discriminatory
b. To grant relief in case property or civil rights are
invaded, although it has also been held that the
involvement of property rights does not
necessarily authorize judicial intervention, in the
absence of arbitrariness, fraud or collusion.
c. Are violative of the laws of the society, or the law
of the land, as by depriving the person of due
process of law
d. There is lack of jurisdiction on the part of the
tribunal conducting the proceedings, where the
organization exceeds its powers, or where the
proceedings are otherwise illegal
 Corporations, stock and non-stock, may be dissolved
in accordance and pursuant to the provisions of
Sections 118 to 121 of the Corporation Code and the
pertinent provisions of P.D. 902-A, as amended. If
such be the case, the assets of the corporation are to
be distributed in accordance with law and established
jurisprudence.
 If a non-stock corporation is dissolved how will its
properties be distributed?
Section 94. Rules of distribution. - In case
dissolution of a non-stock corporation in
accordance with the provisions of this Code, its
assets shall be applied and distributed as
follows:
1. All liabilities and obligations of the
corporation shall be paid, satisfied and
discharged, or adequate provision shall be made
therefore;
2. Assets held by the corporation upon a
condition requiring return, transfer or
conveyance, and which condition occurs by
reason of the dissolution, shall be returned,
transferred or conveyed in accordance with such
requirements;
3. Assets received and held by the corporation
subject to limitations permitting their use only
for charitable, religious, benevolent, educational
or similar purposes, but not held upon a
condition requiring return, transfer or
conveyance by reason of the dissolution, shall be
transferred or conveyed to one or more
corporations, societies or organizations engaged
in activities in the Philippines substantially
similar to those of the dissolving corporation
according to a plan of distribution adopted
pursuant to this Chapter;
 60

4. Assets other than those mentioned in the - Between and among themselves, they feel and act
preceding paragraphs, if any, shall be alike
distributed in accordance with the provisions of
the articles of incorporation or the by-laws, to
the extent that the articles of incorporation or - Not more than 20 stockholders
the by-laws, determine the distributive rights of
members, or any class or classes of members, or
- Specified persons, if you are not specified, you cannot
provide for distribution; and
be a stockholder

5. In any other case, assets may be distributed

to such persons, societies, organizations or
corporations, whether or not organized for profit,
as may be specified in a plan of distribution
adopted pursuant to this Chapter. (n)
 Non-stock corporations with 4Billion funds, may it be
distributed for and among its members?
- Section 94 number 3 provides:
3. Assets received and held by the
corporation subject to limitations permitting their use
only for charitable, religious, benevolent, educational
or similar purposes, but not held upon a condition
requiring return, transfer or conveyance by reason of
the dissolution, shall be transferred or conveyed to
one or more corporations, societies or organizations
engaged in activities in the Philippines substantially
similar to those of the dissolving corporation
according to a plan of distribution adopted pursuant
to this Chapter;
- All the issued stocks of all classes is subject to
restrictions
- Shall not be listed in the stock exchange not publicly
offered
- 3 qualifying conditions must be contained in the
articles of incorporation, to be considered as a close
corporation, if not, it will not be considered as such
and will be governed by the general provisions of the
code
- Even if 100 % is owned by one person it will not be
considered a close corporation without the 3
qualifying provisions
- Identity of stockholders, specified persons
- Active management either as directors or partners in
management

- If there is no distributive agreement then they may do - Combination of the corporation and partnership type
so through a plan of distribution under section 95 of business

Section 95. Plan of distribution of assets. -
A plan providing for the distribution of assets, not
inconsistent with the provisions of this Title, may be
adopted by a non-stock corporation in the process of
dissolution in the following manner:
 May any type of corporation, be organized as such
close corporation?
- No, the 3 qualifying conditions must be present

The board of trustees shall, by majority  What if 2/3 of the outstanding capital stock is owned
vote, adopt a resolution recommending a plan of by another corporation which is also a close
distribution and directing the submission thereof to a corporation, will it be a close corporation?
vote at a regular or special meeting of members
having voting rights. Written notice setting forth the
proposed plan of distribution or a summary thereof - No, it will only be a closed corporation if 2/3 of the
and the date, time and place of such meeting shall be voting stocks of a close corporation is also owned by a
given to each member entitled to vote, within the time close corporation. It must be “voting” stocks
and in the manner provided in this Code for the
giving of notice of meetings to members. Such plan of
- Even if another corporation owns or controls 2/3 of
distribution shall be adopted upon approval of at
the voting stocks of a close corporation, the latter may
least two-thirds (2/3) of the members having voting
still be considered as such close corporation if the
rights present or represented by proxy at such
corporation owning or controlling the shares is also a
meeting. (n)
close corporation.

“Notwithstanding the foregoing, a

corporation shall not be deemed a close corporation
CLOSE CORPORATIONS when at least two-thirds (2/3) of its voting stock or
voting rights is owned or controlled by another
corporation which is not a close corporation within
 Section 96. Definition and applicability of Title. - A the meaning of this Code.”
close corporation, within the meaning of this Code, is
one whose articles of incorporation provide that: (1)
All the corporation's issued stock of all classes,  What kind of corporations cannot be a close
exclusive of treasury shares, shall be held of corporation?
record by not more than a specified number of
persons, not exceeding twenty (20); (2) all the
1. Mining or oil companies,
issued stock of all classes shall be subject to one
or more specified restrictions on transfer
permitted by this Title; and (3) The corporation 2. Stock exchange
shall not list in any stock exchange or make any
public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall not 3. Banks and insurance companies,
be deemed a close corporation when at least two-
thirds (2/3) of its voting stock or voting rights is
owned or controlled by another corporation which is 4. Public utilities
not a close corporation within the meaning of this
Code. 5. Educational institutions

6. Corporations vested with public interest

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 Classification of directors
- Ordinary stock- no such right
- Close corporation-yes there is such a right
 Section 97 is a permissive provision
Section 97. Articles of incorporation. - The
articles of incorporation of a close corporation may
provide:
1. For a classification of shares or rights and the
qualifications for owning or holding the same and
restrictions on their transfers as may be stated
therein, subject to the provisions of the following
section;
2. For a classification of directors into one or more
classes, each of whom may be voted for and elected
solely by a particular class of stock; and
3. For a greater quorum or voting requirements in
meetings of stockholders or directors than those
provided in this Code.
 After classification what then?
- After classification, qualification and then restriction
as provided for under the 3 qualifying conditions in
section 96
 Cumulative voting is restricted in close corporations
if will be elected solely by a particular class
 In a close corporation, the articles of incorporation
may provide for a greater quorum and voting
requirement in meetings of both stockholders or
directors to increase the veto power of minority
stockholders, unlike in a stock corporation wherein
only directors meetings may provide for greater
quorum requirement and in stockholders meeting
which may not be altered or increased, as provide for
in section 25, following the doctrine of limited
capacity
 The articles of a close corporation may likewise
provide that the business of the corporation shall be
managed by the stockholders rather than by the
board of directors. However the same must contain
the continuing provisions required in paragraph 2 of
section 97, that is:
1. No meeting of stockholders need be called to
elect directors;
2. Unless the context clearly requires otherwise,
the stockholders of the corporation shall be
deemed to be directors; and;
3. The stockholders of the corporation shall be
subject to all liabilities of directors.
 Liability of stockholders acting as directors in a close
corporation are more extensive since they are
personally liable for corporate torts unless the
corporation has obtained a reasonable adequate
liability insurance, unlike a ordinary stock
corporation, wherein directors thereof are only liable
for corporate torts only if they have been negligent or
acted fraudulently in the performance of their
functions.
 Restrictions
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61
- In ordinary stock corporations, the restrictions must
appear in the articles of incorporation as well as the
certificate of stocks
- In a close corporation, the restrictions must appear in
the articles of incorporation, the by-laws and the
certificate of stocks. Otherwise, the same shall not be
binding on any purchaser thereof in good faith
 What if the stockholders do not want to exercise their
right or option to purchase may it be sold to any
person?
- Yes, any third person, section 98 provides:
Section 98. Validity of restrictions on
transfer of shares. - Restrictions on the right to
transfer shares must appear in the articles of
incorporation and in the by-laws as well as in the
certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith. Said
restrictions shall not be more onerous than granting
the existing stockholders or the corporation the
option to purchase the shares of the transferring
stockholder with such reasonable terms, conditions
or period stated therein. If upon the expiration of
said period, the existing stockholders or the
corporation fails to exercise the option to
purchase, the transferring stockholder may sell
his shares to any third person.
o ordinary stock corporations are liable only
if acted in Bad faith, fraud or negligence in
performance of duty
 What if there are already 20 stockholders and they
want to add 2 more, may it compel?
- In ordinary stock corporations, they may compel by
mandamus
- In close corporations, may not be compelled to admit
because it breaches the qualifying conditions
 Since they cannot be compelled, may they admit?
- Yes, provided all the stockholders consented or
instead of consenting they decide to amend their
articles of incorporation
- Will have to amend the articles of incorporation to
accommodate other purchasers of share
- Will cease to be a close corporation if it amends and
becomes in excess of 20
o Unless all the stockholders consent they
“may”
 What if the other stockholders object to register?
What will be the remedy of the transferee?
- His remedy is rescission. The effect of rescission is
mutual restitution
 How about the stockholder, what is his recourse?
- He may compel the close corporation to purchase his
shares at their fair value for any reason, provided the
corporation has sufficient assets in its books to cover
the debts and liabilities exclusive of capital
- In a close corporation, there is a withdrawing
stockholder, unlike in an ordinary stockholder where

there is none, they may only do so in the exercise of
appraisal rights
Section 105. Withdrawal of stockholder or
dissolution of corporation. - In addition and without
prejudice to other rights and remedies available to a
stockholder under this Title, any stockholder of a
close corporation may, for any reason, compel the
said corporation to purchase his shares at their
fair value, which shall not be less than their par or
issued value, when the corporation has sufficient
assets in its books to cover its debts and liabilities
exclusive of capital stock: Provided, That any
stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission,
compel the dissolution of such corporation whenever
any of acts of the directors, officers or those in control
of the corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly prejudicial to the
corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.
 Agreements may also be entered in a close
corporation <sec.100>
- They can even agree to be partners in management
- Pre-incorporation
- Manner in which the business of the corporation shall
be managed
 Board resolution
- Ordinary stock corporations- sit and act as a body at
a duly constituted meeting, they may do so by virtue
of the E-Commerce Act through teleconference or
video conference
 Exception to the rule: other officers may be directly
appointed and hired by the stockholders
 Close corporations may validly act even without a
meeting provided the conditions are obtained
Section 101. When board meeting is
unnecessary or improperly held. - Unless the by-laws
provide otherwise, any action by the directors of a
close corporation without a meeting shall
nevertheless be deemed valid if:
1. Before or after such action is taken, written
consent thereto is signed by all the directors; or
2. All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
3. The directors are accustomed to take informal
action with the express or implied acquiescence of all
the stockholders; or
4. All the directors have express or implied knowledge
of the action in question and none of them makes
prompt objection thereto in writing.
 Pre-emptive rights in a close corporation is absolute
Section 102. Pre-emptive right in close
corporations. - The pre-emptive right of stockholders
in close corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services, or
in payment of corporate debts, unless the articles of
incorporation provide otherwise.
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62
 Why is it said to be absolute?
- Because there is no public offering in a close
corporation, otherwise it will not be considered as
close
 In a close corporation the pre-emptive rights is
broadened to include all issues without exception
unless denied or limited by the articles of
incorporation
 Section 39 is the governing provision concerning
rights of the stockholder in an ordinary stock
corporation and it may be denied. If it is not denied a
stockholder can exercise his pre-emptive rights for all
issues of shares whether money, property or
previously incurred indebtedness.
Section 39. Power to deny pre-emptive
right. - All stockholders of a stock corporation shall
enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings, unless such right is
denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive
right shall not extend to shares to be issued in
compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares
to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a
previously contracted debt.
 Are treasury shares covered in the exercise of pre-
emptive rights in ordinary stock corporations?
 As regards amendments
Section 103. Amendment of articles of
incorporation. - Any amendment to the articles of
incorporation which seeks to delete or remove any
provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or
voting requirement stated in said articles of
incorporation shall not be valid or effective unless
approved by the affirmative vote of at least two-thirds
(2/3) of the outstanding capital stock, whether with
or without voting rights, or of such greater proportion
of shares as may be specifically provided in the
articles of incorporation for amending, deleting or
removing any of the aforesaid provisions, at a meeting
duly called for the purpose.
 What happens if there is a deadlock?
- Section 104 provides for a remedy
Section 104. Deadlocks. - Notwithstanding
any contrary provision in the articles of incorporation
or by-laws or agreement of stockholders of a close
corporation, if the directors or stockholders are so
divided respecting the management of the
corporation's business and affairs that the votes
required for any corporate action cannot be obtained,
with the consequence that the business and affairs of
the corporation can no longer be conducted to the
advantage of the stockholders generally, the
Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to
arbitrate the dispute. In the exercise of such power,
the Commission shall have authority to make such
order as it deems appropriate, including an order: (1)
cancelling or altering any provision contained in the
articles of incorporation, by-laws, or any stockholder's
agreement; (2) cancelling, altering or enjoining any
resolution or act of the corporation or its board of
directors, stockholders, or officers; (3) directing or
prohibiting any act of the corporation or its board of
directors, stockholders, officers, or other persons
party to the action; (4) requiring the purchase at their
fair value of shares of any stockholder, either by the
corporation regardless of the availability of
 63

unrestricted retained earnings in its books, or by the

other stockholders; (5) appointing a provisional
director; (6) dissolving the corporation; or (7) granting 1. The number of stockholders No limitation as to number of
such other relief as the circumstances may warrant. cannot exceed 20 shareholder

A provisional director shall be an impartial 2. To the extent that all Maximum number of directors
person who is neither a stockholder nor a creditor of stockholders can be is 15
the corporation or of any subsidiary or affiliate of the deemed directors, the
corporation, and whose further qualifications, if any, number of directors can
may be determined by the Commission. A provisional effectively be more than 15
director is not a receiver of the corporation and does
not have the title and powers of a custodian or
receiver. A provisional director shall have all the 3. Shares of stock are subject Generally no restriction on
rights and powers of a duly elected director of the to specified restrictions transfer of shares
corporation, including the right to notice of and to
vote at meetings of directors, until such time as he 4. Shares of stock are No prohibition
shall be removed by order of the Commission or by all prohibited from being listed
the stockholders. His compensation shall be in the stock exchange or
determined by agreement between him and the offered for sale to the public
corporation subject to approval of the Commission,
which may fix his compensation in the absence of
agreement or in the event of disagreement between 5. Stockholders may take an Management is lodged in the
the provisional director and the corporation. active part in corporate Board of Directors
management by vesting
management to them rather
- Powers of the SEC in intra-corporate concerns has than a Board of Director
been transferred to the proper commercial courts
- Prohibit, even if acting in good faith
6. Those active in Directors are liable for torts
management are personally only if they have acted
- Provisional director appointed by the court liable for corporate torts negligently or fraudulently
unless the corporation has
- Requiring the purchase, irrespective of unrestricted obtained an adequate
retained earnings liability insurance

- The provision of the law above-quoted gives the SEC a 7. Directors can validly act Directors must, as a rule, act
very wide discretion in respect to management of a even without a meeting as a body at a duly constituted
close corporation in the event of a deadlock. It may: meeting

1. Cancel or alter any provision in the articles of 8. Agreements between Not valid and binding since
incorporation, by-laws or any stockholders stockholders regarding the stockholders’ agreement
agreement operations of the business cannot limit the discretion of
can validly be made the Board to manage corporate
affairs
2. Cancel, alter or enjoin any resolution or other
act of the corporation or its board of directors,
stockholders or officers 9. To the extent that directors Ordinarily, no such
may be classified into one classification and no
or more classes and to be restrictions on cumulative
3. Prohibit any act of the corporation or its board of voted solely by a particular voting
directors, stockholders or officers or other class of stock, cumulative
persons party to the action; voting may, in effect, be
restricted
4. Requiring the purchase of the par value of the
shares of any stockholders, either by the 10. The articles of Officers are elected by the
corporation regardless of availability of incorporation may provide Board of Directors
unrestricted earnings, or by the other that all officers shall be
shareholders, elected or appointed by the
stockholders
5. Appointment of a provisional director
11. It may provide for greater Although the articles of
quorum and voting incorporation or by-laws may
6. Dissolving the corporation; or
requirements in meetings of provide for greater quorum
stockholders and directors and voting requirements in
7. Other relief as the circumstances may warrant. directors’ meeting under
section 25, those for
stockholders’ meeting cannot
 Section 105 generally be altered

- Dishonesty is a ground for dissolution of a close 12. Restriction on transfer of
corporation shares should be indicated
in the articles of
incorporation, by-laws and
- Even one stockholder may petition for dissolution stock certificates
Valid and binding if indicated
in the articles of incorporation
and stock certificates

o when there is a relief available, dissolution 13. Pre-emptive rights of Pre-emptive rights may be
would not be available in an ordinary stockholders is broader as denied as provided for in
corporation it include all issues without section 39
exception

CLOSE CORPORATION ORDINARY STOCK 14. A stockholder may Unless he sells his shares, a
CORPORATION withdraw and compel the stockholder cannot get back

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 64

 What provision governs educational corporations?

corporation to purchase his his investment nor compel the

shares for any reason with corporation to buy his shares Section 106. Incorporation. - Educational
the limitation only that the except in the exercise of his corporations shall be governed by special laws and by
corporation has sufficient appraisal right the general provisions of this Code. (n)
assets to cover its liabilities
exclusive of capital stock
- Special laws like they Education Act of the Philippines
- These institutions of learning, once recognized by the
15. The proper forum may Courts cannot interfere I the government as such are mandated by law to be
interfere in the business judgment of the incorporated within ninety (90) days under the
management of a close directors/stockholders provisions of the Corporation Code and must,
corporation in case of “BUSINESS JUDGMENT perforce, comply with the requirements and
deadlocks under Section RULE” procedure laid down there under. Their failure to so
104, even of the will not immune the educational institution from suit
directors/stockholders are as a corporation. (Chiang Kai Siek Case)
acting in good faith
- Favorable recommendation of government agency
16. Any stockholder may Dissolution may be had only involved
petition the SEC for on the grounds provided by
corporate dissolution on the provisions of the Code on
grounds among others, dissolution and P.D. 902-A, as  Two types of educational corporations
provides for in section 105 amended
Manuel Dulay Enterprises vs. CA - Certificate of completion in the academic field

- What was the position of Manuel Dulay here? - Vocational and technical one’s
President, General Manager and Treasurer

o Recommendation of DECS if certificate of

- Cannot act both as president and treasurer at the completion in the academic field
same time

 How is the governing board of an educational

- Since it is a close corporation owned by the family of institution instituted?
Manuel Dulay, save and except the secretary, it
should be governed by Title XII
- Non-stock- multiples of 5 only (example: 5,10,15)

- Petitioner is classified as a close corporation and

consequently a board resolution authorizing the sale - Stock- can be anywhere between 5 to 15
or mortgage of the subject property is not necessary
to bind the corporation for the action of its president.
 Can they consist of 7 or 9 members?
At any rate, a corporate action taken at a board
meeting without proper call or notice in a close
corporation is deemed ratified by the absent director - Yes, if stock
unless the latter promptly files his written objection
with the secretary of the corporation after having
knowledge of the meeting which, in this case,  Can they be incorporated also as non-stock?
petitioner Virgilio Dulay failed to do.
- Yes
- Virgilio Dulay is a signatory witness, he knows very
well about the deed of absolute sale, he is estopped
- B.P. 232 allows the organization of an educational
institution that is stock corporation, only if they do
Naguiat vs. NLRC not issue a certificate of completion in the academic
field

- Section 100 par. 5. To the extent that the

stockholders are actively engaged in the management  Qualifications and disqualifications of the
or operation of the business and affairs of a close membership in the board of an educational
corporation, the stockholders shall be held to strict corporation
fiduciary duties to each other and among themselves.
Said stockholders shall be personally liable for - Educational corporations are governed by special
corporate torts unless the corporation has obtained laws and general provisions, hence if there is no
reasonably adequate liability insurance. provision in the special law, you go back to section 25
and 27 of the general provisions
 Family corporations is not automatically a close
corporation the 3 qualifying conditions must be
- Stock- must be a stockholder
present.

- Non-stock- must be a member

SPECIAL CORPORATIONS

- By-laws may provide for additional qualifications and

 2 types of special corporations
disqualifications

1. Educational corporations
Section 25. Corporate officers, quorum. -
Immediately after their election, the directors of a
2. Religious corporations corporation must formally organize by the election of
a president, who shall be a director, a treasurer who
may or may not be a director, a secretary who shall
2.1 Corporation Sole be a resident and citizen of the Philippines, and such
other officers as may be provided for in the by-laws.
Any two (2) or more positions may be held
2.2 Religious Societies concurrently by the same person, except that no one
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shall act as president and secretary or as president
and treasurer at the same time.
The directors or trustees and officers to be
elected shall perform the duties enjoined on them by
law and the by-laws of the corporation. Unless the
articles of incorporation or the by-laws provide for a
greater majority, a majority of the number of directors
or trustees as fixed in the articles of incorporation
shall constitute a quorum for the transaction of
corporate business, and every decision of at least a
majority of the directors or trustees present at a
meeting at which there is a quorum shall be valid as a
corporate act, except for the election of officers which
shall require the vote of a majority of all the members
of the board.
Directors or trustees cannot attend or vote by proxy
at board meetings. (33a)
Section 27. Disqualification of directors, trustees or
officers. - No person convicted by final judgment of an offense
punishable by imprisonment for a period exceeding six (6) years,
or a violation of this Code committed within five (5) years prior
to the date of his election or appointment, shall qualify as a
director, trustee or officer of any corporation. (n)
 Article 14 section 4 par. 2 of the Constitutions
Educational institutions, other than those
established by religious groups and mission boards,
shall be owned solely by citizens of the Philippines or
corporations or associations at least sixty per centum
of the capital of which is owned by such citizens. The
Congress may, however, require increased Filipino
equity participation in all educational institutions.
The control and administration of educational
institutions shall be vested in citizens of the
Philippines.
No educational institution shall be established
exclusively for aliens and no group of aliens shall
comprise more than one-third of the enrollment in
any school. The provisions of this sub section shall
not apply to schools established for foreign diplomatic
personnel and their dependents and, unless
otherwise provided by law, for other foreign temporary
residents.
- Management is left solely to citizens of the Philippines
- Board of Directors manages the corporate affairs,
foreigners cannot therefore be elected in the board
- Exceptions are, mission boards and religious orders,
which may have a governing board consisting of
foreigners
 Term of office of governing board in an educational
institutions
- Can serve a term of 5 years. If that be the case, 1/5 of
their number shall expire every year
 Non-stock or stock, can they serve for a 1 year term
only?
- Yes, the articles of incorporation may provide that it
be 1 year only
 What are these religious corporations spoken off?
- Corporation sole and religious societies
 What is a corporation sole?
- Consists of one person only and his successor in
some particular station, who are incorporated by law
in order to give them some legal capacities and
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advantages, particularly that of perpetuity, which in
their natural persons they could not have had
 May a corporation be organized by less than 5 natural
persons?
- General rule, 5 to 15 natural persons(except
cooperatives and corporations primarily organized to
hold equities in rural banks and may rightfully
become incorporators thereof)
- Exception, corporation sole, consist of only one
person
 May any person form or organize a corporation sole?
- No, not any person can form a corporation sole,
section 110 provides:
Section 110. Corporation sole. - For the
purpose of administering and managing, as trustee,
the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may
be formed by the chief archbishop, bishop, priest,
minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
 Is it required to file the articles of incorporation in the
SEC?
- Yes
 What should be contained in the articles of
incorporation?
- Section 111 and section 112 provides for the contents
and procedures
Section 111. Articles of incorporation. - In
order to become a corporation sole, the chief
archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or
church must file with the Securities and Exchange
Commission articles of incorporation setting forth the
following:
1. That he is the chief archbishop, bishop, priest,
minister, rabbi or presiding elder of his religious
denomination, sect or church and that he desires to
become a corporation sole;
2. That the rules, regulations and discipline of his
religious denomination, sect or church are not
inconsistent with his becoming a corporation sole and
do not forbid it;
3. That as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder, he is charged with
the administration of the temporalities and the
management of the affairs, estate and properties of
his religious denomination, sect or church within his
territorial jurisdiction, describing such territorial
jurisdiction;
4. The manner in which any vacancy occurring in the
office of chief archbishop, bishop, priest, minister,
rabbi of presiding elder is required to be filled,
according to the rules, regulations or discipline of the
religious denomination, sect or church to which he
belongs; and
5. The place where the principal office of the
corporation sole is to be established and located,
which place must be within the Philippines.

The articles of incorporation may include
any other provision not contrary to law for the
regulation of the affairs of the corporation. (n)
Section 112. Submission of the articles of
incorporation. - The articles of incorporation must be
verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied
by a copy of the commission, certificate of election or
letter of appointment of such chief archbishop,
bishop, priest, minister, rabbi or presiding elder, duly
certified to be correct by any notary public.
From and after the filing with the Securities
and Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall become
a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or
church theretofore administered or managed by him
as such chief archbishop, bishop, priest, minister,
rabbi or presiding elder shall be held in trust by him
as a corporation sole, for the use, purpose, behalf and
sole benefit of his religious denomination, sect or
church, including hospitals, schools, colleges, orphan
asylums, parsonages and cemeteries thereof. (n)
 Is it required to indicate its terms of execution? Why
not?
- Not required because they are supposed to exist in
perpetuity
- However, it does not mean that it shall continue to
exist forever, it merely means that it has the capacity
of continuous existence during a particular period
until dissolved in accordance with law
 When will it acquire judicial personality? How do you
compare this to other types of corporation?
- After the filing the verified articles of incorporation
along with the documents required in Section 112
with the SEC, immediately becomes endowed with
corporate personality, this serves as an exception to
the rule that a corporation acquires juridical
personality only upon the issuance of a certificate of
incorporation by the said government agency.
- Upon filing of verified articles of incorporation with
the SEC, will not require the approval of SEC
 A corporation sole is possessed with the same power,
rights and privileges, to own, acquire and hold or
convey properties like any other corporation? True or
False
- False, they have the same power rights and privileges,
but when it comes to alienation and acquisition, it
must possess a court order, however when there is a
regulated method, a court order may be dispensed
with <sec. 113>
Section 113. Acquisition and alienation of
property. - Any corporation sole may purchase and
hold real estate and personal property for its church,
charitable, benevolent or educational purposes, and
may receive bequests or gifts for such purposes. Such
corporation may sell or mortgage real property held
by it by obtaining an order for that purpose from the
Court of First Instance of the province where the
property is situated upon proof made to the
satisfaction of the court that notice of the application
for leave to sell or mortgage has been given by
publication or otherwise in such manner and for such
time as said court may have directed, and that it is to
the interest of the corporation that leave to sell or
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mortgage should be granted. The application for leave
to sell or mortgage must be made by petition, duly
verified, by the chief archbishop, bishop, priest,
minister, rabbi or presiding elder acting as
corporation sole, and may be opposed by any member
of the religious denomination, sect or church
represented by the corporation sole: Provided, That in
cases where the rules, regulations and discipline of
the religious denomination, sect or church, religious
society or order concerned represented by such
corporation sole regulate the method of acquiring,
holding, selling and mortgaging real estate and
personal property, such rules, regulations and
discipline shall control, and the intervention of the
courts shall not be necessary. (159a)
 Since a corporation sole is consists only of one
person, will the registration of the property in the
name of the corporation sole vest unto the head
thereof the ownership of the property?
- No, it will not vest unto the head, the head is acting
merely as a guardian
Roman Catholic Apostolic Adm. Of Davao, inc. vs.
Land Reg. Comm, et al.
- Act only as a guardian
- Ownership devolves upon the congregation or
religious denomination
- A corporation consists of one person only and his
successors (who will always be one at a time, in some
particular station), who are incorporated by law in
order to give them some legal capacities and
advantages, particularly that of perpetuity, which in
their natural persons they could not have had
- Roman Catholic Church has no nationality and that
the framers of the Constitution, as will be hereunder
explained, did not have in mind the religious
corporations sole when they provided that 60 percent
of the capital thereof be owned by Filipino citizens.
Director of Lands vs. CA
- Alienable public land is converted into private land
when the same has been openly, continuously and
exclusively in possession of the property as concept of
an owner for 30 years, automatically that is
Republic of the Philippines vs. IAC
- Determination of the character of the land should be
in mind
- If they still form part of public domain they cannot be
owned, but if they are converted into private land, the
constitutional prohibition will not apply
 If there is vacancy who will fill up the same? What if
there is none, what must the successor do?
- According to section 114:
Section 114. Filling of vacancies. - The
successors in office of any chief archbishop, bishop,
priest, minister, rabbi or presiding elder in a
corporation sole shall become the corporation sole on
their accession to office and shall be permitted to
transact business as such on the filing with the
Securities and Exchange Commission of a copy of
their commission, certificate of election, or letters of
appointment, duly certified by any notary public.

During any vacancy in the office of chief
archbishop, bishop, priest, minister, rabbi or
presiding elder of any religious denomination, sect or
church incorporated as a corporation sole, the person
or persons authorized and empowered by the rules,
regulations or discipline of the religious
denomination, sect or church represented by the
corporation sole to administer the temporalities and
manage the affairs, estate and properties of the
corporation sole during the vacancy shall exercise all
the powers and authority of the corporation sole
during such vacancy. (158a)
 If a corporation exists in equity may it not be
dissolved?
Section 115. Dissolution. - A corporation
sole may be dissolved and its affairs settled
voluntarily by submitting to the Securities and
Exchange Commission a verified declaration of
dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious denomination,
sect or church;
4. The names and addresses of the persons who are
to supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of
dissolution by the Securities and Exchange
Commission, the corporation shall cease to carry on
its operations except for the purpose of winding up its
affairs. (n)
- While section 115 of the code provides for the process
and procedure for the dissolution of a corporate sole,
there is nothing in the law itself which would prohibit
it from amending its articles of incorporation
- It is believed that authorization for the dissolution by
the particular religious denomination, sect or church,
as required in sub-paragraph 3 of section 115 would
still be necessary in the case of amending the articles
of incorporation to affect dissolution.
o Expiration of a corporate term will not
apply to a religious corporation
 May a corporation sole be dissolved by judicial
decree?
- General rule: No, because a corporation sole, is by its
very nature ecclesiastical and religious (doctrine of
separation of church and state)
- Exception: police power of the state, if its purpose is
being carried out and is instead being used for illegal
purpose, it may be so dissolved
 What are religious societies?
- Under common law, a religious society is a body of
persons associated together for the purpose of
maintaining religious worship.
 Is it also required to file its articles of incorporation to
the SEC?
- No <sec. 116> “may”
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 What should be contained in the articles of
incorporation?
- Section 116 provides:
Section 116. Religious societies. - Any
religious society or religious order, or any diocese,
synod, or district organization of any religious
denomination, sect or church, unless forbidden by
the constitution, rules, regulations, or discipline of
the religious denomination, sect or church of which it
is a part, or by competent authority, may, upon
written consent and/or by an affirmative vote at a
meeting called for the purpose of at least two-thirds
(2/3) of its membership, incorporate for the
administration of its temporalities or for the
management of its affairs, properties and estate by
filing with the Securities and Exchange Commission,
articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of
such religious society or religious order, or diocese,
synod, or district organization of the religious
denomination, sect or church, setting forth the
following:
1. That the religious society or religious order, or
diocese, synod, or district organization is a religious
organization of a religious denomination, sect or
church;
2. That at least two-thirds (2/3) of its membership
have given their written consent or have voted to
incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or
religious order, or diocese, synod, or district
organization desiring to incorporate is not forbidden
by competent authority or by the constitution, rules,
regulations or discipline of the religious
denomination, sect, or church of which it forms a
part;
4. That the religious society or religious order, or
diocese, synod, or district organization desires to
incorporate for the administration of its affairs,
properties and estate;
5. The place where the principal office of the
corporation is to be established and located, which
place must be within the Philippines; and
6. The names, nationalities, and residences of the
trustees elected by the religious society or religious
order, or the diocese, synod, or district organization to
serve for the first year or such other period as may be
prescribed by the laws of the religious society or
religious order, or of the diocese, synod, or district
organization, the board of trustees to be not less than
five (5) nor more than fifteen (15). (160a)
 Is it required to indicate its term of existence?
- Likewise to exist in perpetuity, the law does not
require to indicate its term of existence
 When will it acquire juridical personality?
- Only a corporation sole may come into existence
without SEC approval, section 19 will thus govern,
Vested with judicial capacity upon issuance of the
certificate by the SEC
o However it is not accurate according to
atty. Ladia because there are those that
can issue for example cooperatives-
BUREAU OF COOPERATIVES which
register, home insurance guaranty
corporation- HOME OWNERS

 How may religious societies be dissolved?
- Go to the general rules governing dissolution, because
the rules under special corporations do not provide
for such rule
DISSOLUTION
 What is dissolution?
- Extinguishment of the corporate franchise and the
termination of corporate existence
 3 modes of dissolution
1. By expiration of its term;
2. By voluntary surrender of its primary franchise
(voluntary dissolution);
3. By revocation of its corporate franchise (involuntary
dissolution)
Philippine National Bank vs. CFI
- When the period of corporate life expires, the
corporation ceases to be a body corporate for
purposes of continuing the business for which it is
organized. But it shall nevertheless be continued as a
body corporate for three years after the time when it
would have be dissolved, for the purpose of
prosecuting and defending suits by or against it and
for enabling it gradually to settle and close its affairs
to dispose of and convey its property and to divide its
assets. There is no need for the institution of a
proceeding for quo warranto to determine the time
and date of the dissolution of a corporation because
the period of corporate existence is provided in the
articles of incorporation. When such period expires
and without any extension having been made
pursuant to law, the corporation is dissolved
automatically insofar as the continuation of its
business is concerned.
- The rights of the lessor and the lessee over the
improvements which the latter constructed on the
leased premises are governed by Article 1678 of the
Civil Code. The provision gives the lessee the right to
remove the improvements if the lessor chooses not to
pay one half of the value thereof. However, in the case
at bar the law will not apply because the parties
herein have stipulated in the contract their own terms
and conditions concerning the improvements before
the termination of the lease. Petitioner PNB as
assignee of PBM succeeded to the obligation of the
latter under the contract of lease. It could not possess
rights more than what PBM had as lessee under the
contract. Hence, petitioner was duly bound to remove
the improvements before the expiration of the period
of lease. Its failure to do so when the lease was
terminated was tantamount to a waiver of its rights
and interest over the improvements on the leased
premise.
o 3 modes of dissolution, 3 modes of
voluntary dissolution and 3 modes of
liquidation and winding up- FREQUENTLY
ASKED IN THE FINALS
 What are the 3 modes of voluntary dissolution?
1. Voluntary dissolution where no creditors are affected;
<sec.118>
2. Voluntary dissolution where creditors are affected;
<sec. 119>
3. Shortening of corporate term. <sec. 120>
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 Voluntary dissolution where no creditors are affected
<sec.118>
- The formal and procedural requirements necessary
are the following:
1. Majority vote of the board of directors or trustees;
2. Sending of notice of each stockholders or member
either by registered mail or personal delivery at least
thirty (30) days prior to the meeting (scheduled by the
board for the purpose of submitting the board action
to dissolve the corporation for approval of the
stockholder or members.);
3. Publication of the notice of time, place and subject of
the meeting for three (3) consecutive weeks in a
newspaper published in the place where the principal
office of said corporation is located or in a newspaper
of general circulation in the Philippines;
4. Resolution adopted by the affirmative vote of the
stockholders owning at least 2/3 of the outstanding
capital stock or 2/3 of the members at the meeting
duly called for the purpose;
5. A copy of the resolution authorizing the dissolution
must be certified by a majority of the board of
directors or trustees and countersigned by the
corporate secretary;
6. Issuance of a certificate of dissolution by the SEC.
 Should this be strictly complied with?
- Yes, compliance with the requirements and
formalities prescribed above is mandatory such that
failure to comply therewith will have no effect on the
legal existence of the corporation.
 Will dissolution be effective and valid by a mere
resolution of the BOD and stockholders?
- No, a mere resolution by the stockholders or the BOD
of a corporation to dissolve the same does not affect
the dissolution but that some other steps,
administrative or judicial is necessary. (Daguhoy
Enterprises vs. Ponce)
- Since it is the State which grants its right to exist, it
is only through the State which can allow the
termination of its existence; without consent of the
State, it will not be dissolved.
 Voluntary dissolution where creditors are affected
<sec.119>
- By virtue of a petition, when there are creditors
affected
- The following formalities would thus be required:
1. Affirmative vote of the stockholders representing at
least 2/3 of the outstanding capital stock or at least
2/3 of the members at a meeting duly called for that
purpose;
2. Petition for dissolution shall be filed with the SEC
signed by a majority of its board of directors or
trustees or other officers having the management of
its affairs, verified by the president or secretary or one
of its directors or trustees, setting forth all claims and
demands against it.
3. Issuance of an order by the SEC reciting the purpose
of the petition and fixing the date on or before which
objections thereto may be filed by any person, which
date shall not be less than thirty days nor more than
sixty days after entry of the order.

4. Before such date, a copy of the order must be
published once a week for three (3) consecutive weeks
in a newspaper of general circulation published in the
city or municipality where the principal office is
situated or in a newspaper of general circulation in
the Philippines.
5. Posting of the same order for three (3) consecutive
weeks in three (3) public places in such city or
municipality.
6. Upon five (5) days’ notice, given after the date on
which the right to file objections has expired, the SEC
shall hear the petition and try any issue made by the
objections filed.
7. Judgment dissolving the corporation and directing of
its assets as justice requires and the appointment of a
receiver (if necessary in its discretion) to collect such
assets and pay the debts of the corporation.
o The foregoing are also mandatory
requirements
 Is the appointment of a receiver mandatory?
- No, it is merely permissive or discretionary on the
part of the court. The code uses the word “may”; the
law intended to let the shareholders have the control
of the assets of the corporation upon dissolution and
winding up.
- The directors may also undertake liquidation and
winding up of its corporate affairs, and sound
business judgment, on how they will wind up
 Dissolution by shortening of corporate term
<sec.120>
- Will be valid upon approval of the SEC, unlike general
amendments, which will be deemed approved if not
acted upon by the SEC within 6 months from the date
of filing for a cause not attributable to the
corporation.
- Shortening of the corporate term partakes the nature
of an amendment of the articles of incorporation.
Section 16 under general amendments allows “written
assent” section 37 mandates that the vote must be
cast at a duly constituted meeting.
Section 120. Dissolution by shortening
corporate term. - A voluntary dissolution may be
effected by amending the articles of incorporation to
shorten the corporate term pursuant to the provisions
of this Code. A copy of the amended articles of
incorporation shall be submitted to the Securities and
Exchange Commission in accordance with this Code.
Upon approval of the amended articles of
incorporation of the expiration of the shortened term,
as the case may be, the corporation shall be deemed
dissolved without any further proceedings, subject to
the provisions of this Code on liquidation. (n)
o Intra-corporate- special commercial courts
 Another way of dissolving a corporation is through
involuntary dissolution
Section 121. Involuntary dissolution. - A
corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on the
grounds provided by existing laws, rules and
regulations. (n)
- Dissolution is tantamount to the imposition of death
penalty
- Instead of dissolving the corporation, courts normally
enjoin the further commission of the questioned act
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- The relief of dissolution will be awarded only where no
other remedy is available and it will not be allowed
where the rights of the stockholders can be, or are,
protected in some other way (Republic vs. Bisaya
Land Trans. Co. Inc.)
 What are the grounds for involuntary dissolution?
- It is commenced through a verified complaint or motu
proprio by the proper courts
- Section 6 of PD 902-A provides for the grounds for
involuntary dissolution as follows:
1. Fraud in procuring its certificate of registration;
2. Serious misrepresentation as to what the corporation
can do or is doing to the great prejudice of or damage
to the general public;
3. Refusal to comply or defiance of any lawful order of
the Commission restraining commission of acts which
would amount to a grave violation of its franchise;
4. Continuous inoperation for a period of at least five (5)
years;
5. Failure to file by-laws within the required period;
6. Failure to file required reports in appropriate forms as
determined by the Commission within the prescribed
period.
- Other grounds are provided for in the corporation
code itself: among them are:
1. Violation of any provision of the Code under section
144;
2. In case of deadlock in a close corporation as provided
for in section 105;
3. In a close corporation, any acts of directors, officers
or those in control of the corporation which is illegal
or fraudulent or dishonest or oppressive or unfairly
prejudicial to the corporation or any stockholder or
whenever corporate assets are being misapplied or
wasted under section 105.
- Mere dishonesty is also a ground in a close
corporation
- Other grounds can be found in other special laws like
the Securities Regulation Code and the General
Banking Act as well as the Insurance Code.
Government vs. Philippine Sugar Estate
- It is necessary in order to secure judicial foreclosure
of respondent’s charter to show a mis-user of its
franchise justifying such a forfeiture
- Object is to protect the public, and not to redress
private grievances, the mis-user must be such as to
work or threaten a substantial injury to the public, or
such as to amount to a violation of the fundamental
condition of the contract by which the franchise was
granted and thus defeat the purpose of the grant
- Courts proceed with extreme caution which has for
their object the forfeiture of corporate franchise, and
forfeiture will not be allowed, except under express
limitation, or for plain abuse of power by which the
corporation fails to fulfill the design and purpose of
its organization. But when the abuse or violation
constitutes or threatens a substantial injury to the
public or such as to amount to a violation of the
fundamental conditions of its charter, or its conduct

is characterized by obduracy or pertinacity in
contempt of law, dissolution will be granted
- Did the court dissolve the corporation? No, it did not,
it granted the corporation 6 months to cease and
desist the performance of the questioned act
otherwise it will be dissolved
Government vs. El Hogar
- 3 causes of action, the first is that the corporation
violated the law by holding on the property beyond
that provide for by law, the second is that the
corporation undertook the management f petitioners
belonging to delinquent shareholders of the
association, and lastly that the by-law provision,
which empowers the BD to cancel shares and to
return to the owners thereof the balance returning
from the liquidation
 Compare to Philippine Sugar Estate, wherein the
court ruled conditional dissolution. Why decree
conditional dissolution in one and not in the other
case?
- Because in El Hogar the government was at fault, the
government wasn’t able to issue the certificate of title
on time
- When the case was instituted, El Hogar was already
able to dispose the properties in question, in
Philippine Sugar Estate it was still the holding the
properties in order to enrich itself at the expense of
the taxpayers
Republic vs. Security Credit and Acceptance Corp. et
al.
- The corporation here is a lending institution and not
a banking institution
- Defendant corporation violated the law because before
a corporation may engage into a banking activity it
must first obtain a secondary franchise from the
Central Bank
- Defendant corporation threatens substantial injury to
the general public, dissolution is warrant
- If there is a bank run kawawa naman yung depositors
Republic vs. Bisaya Land Transportation Co. Inc
- The relief of dissolution will be awarded only where no
other remedy is available and it will not be allowed
where the rights of the stockholders can be, or are,
protected in some other way
- Misuse and misapplication of the funds and assets of
the respondent were committed particularly by the
corporate officers, where they can instead be held
personally liable
- Since there is another remedy available dissolution is
not warranted
 Assuming the above stated corporation is a close
corporation, would the court decree otherwise?
- Yes, because in a close corporation, mere dishonesty
is a ground for the dissolution
- Can even be dissolved by petition of only one
stockholder on the grounds stated in the code < sec.
105>
Financing Corporation of the Philippines vs. Teodoro
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- Minority stockholders may not ask for the dissolution
of a corporation in private suits and that such actions
should be brought by the Government through its
legal officers, except in cases where the
intervention of the State, for one reason or
another, cannot be obtained, as when the State is
not interested because the complaint is strictly a
matter between the stockholders and does not
involve, in the opinion of the legal officer of the
Government, any of the acts or omissions
warranting quo warranto proceeding , in which
minority stockholders are entitled to have such
dissolution. It should be exercised if necessary in
order not to entirely ignore and disregard the rights of
said minority stockholders, especially when said
minority stockholders are unable to obtain redress
and protection of their rights within the corporation
itself. Stockholders should not be left without
recourse
 Present set up
- Any stockholder or member of a corporation can
institute a dissolution proceeding against his own
corporation before the proper forum
- Special Commercial Courts, shall hear and decide
intra-corporate disputes
 May a corporation ask for dissolution of the
corporation when there is no prejudice to the general
public?
- Yes, in a close corporation, a petition for the
dissolution of the corporation may be instituted by
any one individual shareholder on the ground, even
by mere dishonesty
 Effects of dissolution
- The dissolution of a corporation not only terminates
its primary franchise to be a corporation, but
generally prevents it from further exercising other or
secondary franchises which have been conferred to
its. It terminates its power to enter into contracts or t
o continue the business as a going concern.
- Based on this general rule, the Supreme Court held
that a corporation, whose corporate life expired,
cannot lawfully pursue the business for which it was
organized. It cannot apply for a new certificate or a
secondary franchise for it is incapable of receiving a
grant. Neither can it enforce a contract executed prior
its dissolution for the purpose of continuing the
business of its organization.
- In general the rights and liabilities of the corporation
are not extinguished by its dissolution.
Section 145. Amendment or repeal. - No
right or remedy in favor of or against any corporation,
its stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such
corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said
corporation or by any subsequent amendment or
repeal of this Code or of any part thereof. (n)
Buenaflor vs. Camarines Sur Industry Corp.
- From that time on Camarines Sur was plying in an
activity that was illegal
- A corporation where the corporate life has expired it
cannot lawfully pursue the business for which it was
organized.

- the Supreme Court held that a corporation, whose
corporate life expired, cannot lawfully pursue the
business for which it was organized. It cannot apply
for a new certificate or a secondary franchise for it is
incapable of receiving a grant.
- Awarding it to Camarines Sur is tantamount to a
medal for its illegal acts
- It cannot apply for a new certificate or a secondary
franchise for it is incapable of receiving a grant. It was
not even a corporation de facto. And then, there is no
application subscribed by the new corporation
- And yet as stated, the new corporation has not filed
any application for certificate of public convenience in
Sabang, and has not published such application.
Cebu Port Labor Union vs. State Marine Co
- Even a cursory reading of the provision would convey
the idea clearly manifested in the limitation “but not
for the purpose of continuing the business for which
it was established,” that the 3-year period allowed by
the law is only for the purpose of winding up its
affairs.
Gonzales vs. Sugar Regulatory Administration
- Instead of applying the corporation code, the court
applied the constitutional provision
- Cannot be read as permitting to destroy the
substantive rights
- Such would collide with the non-impairment of
contracts clause of the constitution
- Complainants will have the right to follow the assets
of the corporation in the hands of SRA or any other
agency for that matter
 After dissolution what next?
- Liquidation and winding up should follow
 What is the definition of liquidation and winding up?
- Collection of all corporate assets, the payments of all
its debts and settlement of its obligations and the
ultimate distribution of the corporate assets, if any of
it remains, to all stockholders in accordance with
their proportionate stockholdings in the corporation
or in accordance with their respective contracts of
subscription.
 Preference upon liquidation
- If there are preferred shares, the preference granted
to such should be complied with
- Preferred shares may give the holder thereof,
preference only in the dividends but also in the
distribution of corporate assets upon liquidation or
termination of the corporate existence. If such is the
intent, the contract of subscription must so indicate
lest they are placed on equal footing with common
shareholders
- Preference may be participating or non-participating
 Dissolved corporations are granted a period of 3 years
to liquidate
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Section 122. Corporate liquidation. - Every
corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years
after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by
or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of
continuing the business for which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered to convey
all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons
in interest. From and after any such conveyance by
the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate
affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot be
found shall be escheated to the city or municipality
where such assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts
and liabilities. (77a, 89a, 16a)
 However the 3 year period is not absolute
 Liquidation may be undertaken in either of the 3
ways
1. By the corporation itself through the BOD
- Usual method or procedure of liquidating a
corporation and although there is no law authorizing
it, neither is there anything that prohibits the BOD
from undertaking the same
- If this method is resorted to, the board will only have
a period of 3 years to finish its task of liquidation
- Claims for or against the corporate entity not filed
within the period will become unenforceable as there
exist no corporate entity against which they can be
enforced
- Actions pending for or against the corporation when
the 3 year period expires, are abated since after the
period, the corporation ceases for all intents and
purposes and is no longer capable of suing or being
sued
2. By a trustee appointed by the corporation
- The corporation may opt to convey all corporate
assets to a trustees who will take charge of
liquidation
- If this method is used, the three year period limitation
imposed by section 122 will not apply provided the
designation of the trustee is made within that period
3. By appointment of a receiver
- A receiver may be appointed by the proper forum on
petition or motu proprio upon the dissolution of the
corporation

- The appointment of a receiver is, however, permissive
rather than mandatory and the law tends to recognize
that in cases of voluntary dissolution there is no
occasion for the appointment of a receiver except
under special circumstances and upon proper
showing
- If a receiver is appointed, the 3 year period fixed by
law within which to complete the task of liquidation
will not likewise apply because the dissolved
corporation is substituted by the receiver who may
sue or be sued even after that period
o Mere appointment of a receiver without
anything more does imply in the
dissolution of a corporation
National Abaca other Fibers Co. vs. Pore
- Actions pending for or against the corporation when
the 3 year period expires, are abated since after that
period, the corporation ceases for all intents and
purposes and is no longer capable of suing or being
sued
- May be continued by the trustee provided done within
the 3 year period
- Should the corporation, therefore, finds it difficult to
finish its liquidation, it may, at any time during the
three year period, convey all its assets and receivables
to a trustee to prosecute and defend suits by or
against the corporation begun before the expiration of
said period
- The effect of the conveyance is to make the trustees
the legal owners of the property conveyed, subject to
the beneficial interest therein of creditors and
stockholders
Sumera vs. Valencia
- Thus it was held that when a corporation is dissolved
and the liquidation of the assets is placed in the
hands of receiver or assignee, the period of 3 years
prescribed by law is not applicable and the assignee
may institute all actions leading to the liquidation of
the corporation even after the expiration of 3 years.
- If the corporation carries out the liquidation of its
assets through its own officers and continues and
defends the actions brought by or against it, its
existence shall terminate at the end of three years
from the time of dissolution; but if a receiver or
assignee is appointed, with or without a transfer of its
properties within 3 years, the legal interest passes to
the assignee, the beneficial interest remaining in the
members, stockholders, creditors and other interested
persons and said assignee may bring an action,
prosecute that which has already been commenced
for the benefit of the corporation, or defend the latter
against any other action already instituted or which
may be instituted even outside of the period of three
years fixed for the offices of the corporation.
Board of Liquidators vs. Kalaw
- If there is a trustee, assignee or liquidator, it can
continue prosecuting suit even beyond the 3 year
period fixed by law because he becomes the legal
owner of the rights, assets and properties conveyed to
him
Gelano vs. CA
- “Trustee” as used in the corporation statute must be
understood in its general concept which could include
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the counsel to whom was entrusted in the instant
case, the prosecution of the suit filed by the
corporation. The purpose in the transfer of the assets
of the corporation to a trustee upon its dissolution is
more for the protection of its creditors and
stockholders. Debtors like the petitioners herein may
not take advantage of the failure of the corporation to
transfer its assets to a trustee, assuming it has any to
transfer which petitioner has failed to show, in the
first place. To sustain petitioners’ contention would
be to allow them to enrich themselves at the expense
of another, which all enlightened legal systems
condemn.
- The counsel who prosecuted and defended the
interest of the corporation may be considered as a
“trustee” at least with respect to the matter in
litigation only
 May a corporation that is already dissolved, transfer
and assign its assets and properties to a new
corporation which will continue the business of the
dissolved one?
- Yes, provided all the stockholders gave their consent
(Chung Ka Bio vs. IAC)
Republic vs. Marsman Development Company &
Chung Ka Bio vs. IAC
- During the three year period granted to a corporation
to liquidate or wind up its affairs, the BOD is not
normally permitted to undertake any activity outside
the usual liquidation of the corporation. There is,
however, nothing to prevent the stockholders from
conveying their respective shareholdings toward the
creation of a new corporation to continue the
business of the old. This is because winding up is the
sole activity of the dissolved corporation that does not
intend to incorporate a new. If it does, however, it is
not unlawful for the old board of directors to negotiate
and transfer the assets of the dissolved corporation to
the new corporation intended to be created as long as
the stockholders have given their consent (Republic
vs. Marsman Development Company)
- Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate anew.
If it does, however, it is not unlawful for the old board
of directors to negotiate and transfer the assets of the
dissolved corporation to the new corporation intended
to be created as long as the stockholders have given
their consent (Chung Ka Bio vs. IAC)
 What happens to the remaining assets and properties
of the dissolved corporation if liquidation and winding
up as provided in section 122 is not complied with, as
a result of which the 3 year period has elapsed
- If the three year extended life has expired without a
trustee or receiver having been expressly designated
by the corporation within that period, the board of
directors o trustees itself, following the rationale of
the Supreme Court’s decision in Gelano vs. CA may
be permitted to do so continue as” trustees” by legal
implication to complete the liquidation. Still in the
absence of a BOD or BOT, those having any
pecuniary interest in the assets, including not only
the shareholders but likewise the creditors of the
corporation, acting for and in its behalf, might make
proper representations with the SEC, which has
primary and sufficiently broad jurisdiction in matters
of this nature, for working out a final settlement of
the corporate concerns (Clemente vs. CA)
o According to atty. Ladia the ruling of the
Supreme Court in the case of Clemente vs.
CA is wrong, opinion is further discussed
after the Clemente Case
Clemente vs. CA

- Who owns the properties? SOCIEDAD ANONIMA
- The termination of the life of a juridical entity does
not by itself cause the extinction or diminution of the
rights and liabilities of such entity or those of its
owners and creditors. If the three year extended life
has expired without a trustee or receiver having been
expressly designated by the corporation within that
period, the board of directors o trustees itself,
following the rationale of the Supreme Court’s
decision in Gelano vs. CA may be permitted to do so
continue as” trustees” by legal implication to complete
the liquidation. Still in the absence of a BOD or BOT,
those having any pecuniary interest in the assets,
including not only the shareholders but likewise the
creditors of the corporation, acting for and in its
behalf, might make proper representations with the
SEC, which has primary and sufficiently broad
jurisdiction in matters of this nature, for working out
a final settlement of the corporate concerns
o the ruling is wrong according to atty.
Ladia
 According to atty Ladia: What happens to a
corporation that is already dissolved, that has not
been able to appoint a trustee with in the 3 year
period?
- a corporation dissolved which failed to exercise its
rights granted in section 122 after the 3 year period
has elapsed, ceases to exist for all intents and
purposes, it can no longer sue or be sued
- according to 122 of the code, the property should be
escheated, accordingly:
Section 122. Corporate liquidation. - Every
corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless
be continued as a body corporate for three (3) years
after the time when it would have been so dissolved,
for the purpose of prosecuting and defending suits by
or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to
distribute its assets, but not for the purpose of
continuing the business for which it was established.
At any time during said three (3) years, the
corporation is authorized and empowered to convey
all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons
in interest. From and after any such conveyance by
the corporation of its property in trust for the benefit
of its stockholders, members, creditors and others in
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in
interest.
Upon the winding up of the corporate
affairs, any asset distributable to any creditor or
stockholder or member who is unknown or cannot
be found shall be escheated to the city or
municipality where such assets are located.
Except by decrease of capital stock and as
otherwise allowed by this Code, no corporation shall
distribute any of its assets or property except upon
lawful dissolution and after payment of all its debts
and liabilities. (77a, 89a, 16a)
FOREIGN CORPORATIONS
 Definition
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- Section 123. Definition and rights of foreign
corporations. - For the purposes of this Code, a
foreign corporation is one 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. It shall have the right to transact business in
the Philippines after it shall have obtained a license to
transact business in this country in accordance with
this Code and a certificate of authority from the
appropriate government agency. (n)
 What if the law of the state of the foreign corporation
does not allow Filipino citizens to do business in their
country?
- The phrase “and whose laws allow Filipino citizens
and corporations to do business in its own country or
state” is not, however, an accurate inclusion in the
definition as ay corporation registered or organized
under the laws of another state is necessarily a
foreign corporation whether or not the state of its
incorporation allow Filipino citizens or corporations to
do business in that forum.
- The said phrase was inserted by the framers of the
law only as a condition precedent to the grant of a
license of a foreign corporation to do business in the
Philippines.
 Composed of 100% Americans; organized under the
laws other than the Philippines
- The test is the “incorporation test”
- General rule: the place of its incorporation
irrespective of the nationality
- Exception: control test would apply in determining
the corporate nationality, i.e., the citizenship of the
controlling stockholders determines the nationality of
the corporation
 If a foreign corporation wants to transact business in
the Philippines, what must it do?
- Obtain a license
 How may it do so?
- According to sec. 125:
Section 125. Application for a license. - A
foreign corporation applying for a license to transact
business in the Philippines shall submit to the
Securities and Exchange Commission a copy of its
articles of incorporation and by-laws, certified in
accordance with law, and their translation to an
official language of the Philippines, if necessary. The
application shall be under oath and, unless already
stated in its articles of incorporation, shall specifically
set forth the following:
1. The date and term of incorporation;
2. The address, including the street number, of the
principal office of the corporation in the country or
state of incorporation;
3. The name and address of its resident agent
authorized to accept summons and process in all
legal proceedings and, pending the establishment of a
local office, all notices affecting the corporation;
4. The place in the Philippines where the corporation
intends to operate;

5. The specific purpose or purposes which the
corporation intends to pursue in the transaction of its
business in the Philippines: Provided, That said
purpose or purposes are those specifically stated in
the certificate of authority issued by the appropriate
government agency;
6. The names and addresses of the present directors
and officers of the corporation;
7. A statement of its authorized capital stock and the
aggregate number of shares which the corporation
has authority to issue, itemized by classes, par value
of shares, shares without par value, and series, if
any;
8. A statement of its outstanding capital stock and
the aggregate number of shares which the corporation
has issued, itemized by classes, par value of shares,
shares without par value, and series, if any;
9. A statement of the amount actually paid in; and
10. Such additional information as may be necessary
or appropriate in order to enable the Securities and
Exchange Commission to determine whether such
corporation is entitled to a license to transact
business in the Philippines, and to determine and
assess the fees payable.
Attached to the application for license shall
be a duly executed certificate under oath by the
authorized official or officials of the jurisdiction of its
incorporation, attesting to the fact that the laws of the
country or state of the applicant allow Filipino
citizens and corporations to do business therein, and
that the applicant is an existing corporation in good
standing. If such certificate is in a foreign language, a
translation thereof in English under oath of the
translator shall be attached thereto.
The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of the
president or any other person authorized by the
corporation, showing to the satisfaction of the
Securities and Exchange Commission and other
governmental agency in the proper cases that the
applicant is solvent and in sound financial condition,
and setting forth the assets and liabilities of the
corporation as of the date not exceeding one (1) year
immediately prior to the filing of the application.
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of existing
laws applicable to them. In the case of all other
foreign corporations, no application for license to
transact business in the Philippines shall be accepted
by the Securities and Exchange Commission without
previous authority from the appropriate government
agency, whenever required by law. (68a)
 Is there any deposit or security requirement?
- Yes, within 60 days after the issuance of the license, a
foreign corporation, except those engaged in foreign
banking or insurance, shall deposit with the SEC, for
the benefit of creditors, securities consisting of bonds
or other evidence of indebtedness of the Philippine
government or its political subdivision, or of
government owned or controlled corporation, shares
of stock in “registered enterprises” as this term is
defined in R.A. 5186, shares of stock in domestic
insurance companies and banks or any combination
thereof with an actual market value of 100,000
- Additional securities may be required by the SEC if
the actual market value of the securities on deposit
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has decreased by at least 10%. Section 126 of the
code provides:
Section 126. Issuance of a license. - If the
Securities and Exchange Commission is satisfied that
the applicant has complied with all the requirements
of this Code and other special laws, rules and
regulations, the Commission shall issue a license to
the applicant to transact business in the Philippines
for the purpose or purposes specified in such license.
Upon issuance of the license, such foreign
corporation may commence to transact business in
the Philippines and continue to do so for as long as it
retains its authority to act as a corporation under the
laws of the country or state of its incorporation,
unless such license is sooner surrendered, revoked,
suspended or annulled in accordance with this Code
or other special laws.
Within sixty (60) days after the issuance of
the license to transact business in the Philippines,
the license, except foreign banking or insurance
corporation, shall deposit with the Securities and
Exchange Commission for the benefit of present and
future creditors of the licensee in the Philippines,
securities satisfactory to the Securities and Exchange
Commission, consisting of bonds or other evidence of
indebtedness of the Government of the Philippines, its
political subdivisions and instrumentalities, or of
government-owned or controlled corporations and
entities, shares of stock in "registered enterprises" as
this term is defined in Republic Act No. 5186, shares
of stock in domestic corporations registered in the
stock exchange, or shares of stock in domestic
insurance companies and banks, or any combination
of these kinds of securities, with an actual market
value of at least one hundred thousand (P100,000.)
pesos; Provided, however, That within six (6) months
after each fiscal year of the licensee, the Securities
and Exchange Commission shall require the licensee
to deposit additional securities equivalent in actual
market value to two (2%) percent of the amount by
which the licensee's gross income for that fiscal year
exceeds five million (P5,000,000.00) pesos. The
Securities and Exchange Commission shall also
require deposit of additional securities if the actual
market value of the securities on deposit has
decreased by at least ten (10%) percent of their actual
market value at the time they were deposited. The
Securities and Exchange Commission may at its
discretion release part of the additional securities
deposited with it if the gross income of the licensee
has decreased, or if the actual market value of the
total securities on deposit has increased, by more
than ten (10%) percent of the actual market value of
the securities at the time they were deposited. The
Securities and Exchange Commission may, from time
to time, allow the licensee to substitute other
securities for those already on deposit as long as the
licensee is solvent. Such licensee shall be entitled to
collect the interest or dividends on the securities
deposited. In the event the licensee ceases to do
business in the Philippines, the securities deposited
as aforesaid shall be returned, upon the licensee's
application therefor and upon proof to the satisfaction
of the Securities and Exchange Commission that the
licensee has no liability to Philippine residents,
including the Government of the Republic of the
Philippines. (n)
 Other than section 125 and 126. What other
requirements are set under Philippine Law before a
foreign corporation may transact business in the
Philippines
- Yes. A Resident agent is required. As a condition
precedent to the grant of a license to do or transact
business in the Philippines, the foreign corporation is
required to designate its resident agent on whom
summons and other legal processes may be served in
all actions or legal proceedings against such
corporation
- Section 128 provides:

Section 128. Resident agent; service of
process. - The Securities and Exchange Commission
shall require as a condition precedent to the issuance
of the license to transact business in the Philippines
by any foreign corporation that such corporation file
with the Securities and Exchange Commission a
written power of attorney designating some person
who must be a resident of the Philippines, on whom
any summons and other legal processes may be
served in all actions or other legal proceedings against
such corporation, and consenting that service upon
such resident agent shall be admitted and held as
valid as if served upon the duly authorized officers of
the foreign corporation at its home office. Any such
foreign corporation shall likewise execute and file with
the Securities and Exchange Commission an
agreement or stipulation, executed by the proper
authorities of said corporation, in form and substance
as follows:
"The (name of foreign corporation) does
hereby stipulate and agree, in consideration of its
being granted by the Securities and Exchange
Commission a license to transact business in the
Philippines, that if at any time said corporation shall
cease to transact business in the Philippines, or shall
be without any resident agent in the Philippines on
whom any summons or other legal processes may be
served, then in any action or proceeding arising out of
any business or transaction which occurred in the
Philippines, service of any summons or other legal
process may be made upon the Securities and
Exchange Commission and that such service shall
have the same force and effect as if made upon the
duly-authorized officers of the corporation at its home
office."
Whenever such service of summons or
other process shall be made upon the Securities and
Exchange Commission, the Commission shall, within
ten (10) days thereafter, transmit by mail a copy of
such summons or other legal process to the
corporation at its home or principal office. The
sending of such copy by the Commission shall be
necessary part of and shall complete such service. All
expenses incurred by the Commission for such
service shall be paid in advance by the party at whose
instance the service is made.
In case of a change of address of the
resident agent, it shall be his or its duty to
immediately notify in writing the Securities and
Exchange Commission of the new address. (72a; and
n)
- The necessity of the appointment of a resident agent
is only for the purpose of receiving summons and
other legal processes in any legal action or proceeding
against the foreign corporation
 Who may be appointed as a resident agent?
- Section 127 provides that:
Section 127. Who may be a resident agent.
- A resident agent may be either an individual
residing in the Philippines or a domestic corporation
lawfully transacting business in the Philippines:
Provided, That in the case of an individual, he must
be of good moral character and of sound financial
standing. (n)
 May a partnership be appointed as a resident agent?
- Yes, domestic corporation taken in its general sense
not legal sense
 If there is a resident agent appointed. May summons
be served to any officers of the corporation?
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- No, if there is a resident agent, the designation is
exclusive and service must be made only to the
resident agent or else the service is without force and
effect unless made to him
- Thus, while the law allows service upon the SEC or
any of its officers or agents within the Philippines
- The two modes may become effective only if the
foreign corporation failed or neglected to designate
such a person or an agent
- Summons must be made only to resident agent
except when there is no resident agent appointed
- Where such foreign corporation actually doing
business here has not applied for a license to do and
has not designated an agent to receive summons,
then service of summons on it will be made pursuant
to the provisions of the rules of court. If such foreign
corporation has a license to do business, then
summons to it will be served on the agent designated
by it for the purpose, or otherwise in accordance with
the Corporation Law (General Corporation of the
Philippines vs. Union Insurance Soc. Of Canton Ltd.)
 If the foreign corporation conducts business in the
Philippines without the license requirement. What is
the effect?
- Section 133 provides:
Section 133. Doing business without a
license. - No foreign corporation transacting business
in the Philippines without a license, or its successors
or assigns, shall be permitted to maintain or
intervene in any action, suit or proceeding in any
court or administrative agency of the Philippines; but
such corporation may be sued or proceeded against
before Philippine courts or administrative tribunals
on any valid cause of action recognized under
Philippine laws. (69a)
- if they do so, the responsible officers may be
subjected to the penal sanctions provided for in
section 144 of the code, which may either be fine or
imprisonment
 What if it is not doing business without a license?
- If it is not transacting business in the Philippines,
even without a license, it can sue before the
Philippine Courts
 The general rule is that “it is not the lack of required
license but doing business without a license which
bars a foreign corporation form access to our courts.”
 Exception:
1. Foreign corporations can sue before the
Philippine Courts if the act or transaction
involved is an “isolated transaction” or the
corporation is not seeking to enforce any legal or
contractual rights arising from, or growing out
of, any business which it has transacted in the
Philippines
2. Neither is a license required before a foreign
corporation may sue before the forum if the
purpose of the suit is to protect its trademark,
trade name, corporate name, reputation or
goodwill;
3. Or where it is based on a violation of the Revised
Penal Code;
 76

4. Or merely defending a suit filed against it
5. Or where a party is stopped to challenge the
personality of the corporation by entering into a
contract with it.
 Rules laid down by the SC
- Whatever transaction the Philippine-American Drug
Co. had executed in view of the law, the Mentholatum
Co. did it itself. And the Mentholatum Co. being a
foreign corporation doing business in the Philippines
without the license required by section 68 of the
Corporation Law, it may not prosecute this action for
violation of trade mark and unfair competition
 Why is foreign corporations barred access from our
courts if they do business without a license?

A. As to whether or B. As to whether or
not it can sue not it can be - Marshall-Wells Co. vs. Henry W. Elser and Co.
sued
Marshall-Wells Co. vs. Henry W. Elser and Co.
A foreign corporation A foreign corporation
transacting or doing transacting business in the
- The object of the statute was to subject the foreign
business in the Philippines Philippines with the
with a license can sue requisite license can be corporation doing business in the Philippines to the
before Philippine Courts sued in the Philippine jurisdiction of its courts. The object of the statute was
Courts not to prevent the foreign corporation from performing
single acts, but to prevent it from acquiring a domicile
for the purpose of business without taking the steps
Subject to certain A foreign corporation necessary to render it amenable to suit in local
exceptions, a foreign transacting business in the courts.
corporation doing business Philippines without a
in the country without a license can be sued in
license cannot sue in Philippine Courts Bulakhidas vs. Navarro
Philippine Courts
- It is settled that if a foreign corporation is not engaged
If it is not transacting if it is not doing business in in business in the Philippines, it may not be denied
business in the Philippines, the Philippines, it cannot be the right to file an action in Philippine courts for
even without a license, it sued in Philippine Courts isolated transactions
can sue before the for lack of jurisdiction
Philippine Courts
- The object of section 68 and 69 of the Corporation law
 A foreign corporation not doing business in the
was not to prevent the foreign corporation from
Philippines, may it be sued?
performing single acts, but to prevent it from
acquiring a domicile for the purpose of business
- If it is not transacting business in the country it without taking the steps necessary to render it
cannot be sued for lack of jurisdiction amenable to suit in the local courts. It was never the
purpose of the Legislature to exclude a foreign
corporation which happens to obtain an isolated
 Is there any sanction that can be enforced to foreign order for business from the Philippines, from securing
corporations which are doing business without the redress in the Philippine courts
required license?

The Swedish East Asia Co., Ltd. Vs. Manila Port

- Penal sanctions under section 144 Service

- Any violation of the code is subject to such penal
sanctions
 What would constitute doing business?
- The true test, however, seems to be whether the
foreign corporation is continuing the body or
substance of the business or enterprise for which it
was organized or whether it has substantially retired
from it and turned it over to another. The term
implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some
of the functions normally incident to, and in
progressive prosecution of, the purpose and object of
its organization (Mentholatum Co. Inc. vs. Mangaliman)
Mentholatum vs. Mangaliman
- It must stated that the section is not applicable to a
foreign corporation performing single acts or “isolated
transactions.” There is nothing to show that the
petitioner has been in the Philippines engaged in
continuing business or enterprise for which it was
organized, when the sixteen bundles were erroneously
discharged in manila, for it to be considered as
transacting business in the Philippines. The fact is
that the bundles, the value of which is sought to be
recovered, were landed not as a result of a business
transaction, isolated or otherwise, but due to a
mistaken belief that they were part of the shipment of
forty similar bundles consigned to persons or entities
in the Philippines, there is no justification therefore,
for invoking the section
 There were 3 contracts entered into, how come they
were still not considered as doing business? (Antam
Consolidted, Inc. vs. CA)

- Every case shall be judged in the light of its peculiar

- The true test, however, seems to be whether the
circumstances, where a single act or transaction
foreign corporation is continuing the body or
however, is not merely incidental or casual but
substance of the business or enterprise for which it
indicates the foreign corporation’s intention to do
was organized or whether it has substantially retired
other business in the Philippines, said single act or
from it and turned it over to another. The term
transaction constitutes “doing” or “engaging in” or
implies a continuity of commercial dealings and
“transacting” business in the Philippines
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some
of the functions normally incident to, and in - In the case at bar, the transaction entered into by the
progressive prosecution of, the purpose and object of respondent with the petitioners are not a series of
its organization commercial dealings which signify an intent on the
part of the respondent to do business in the

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Philippines but constitute an isolated one which does
not fall under the category of “doing business.”
- The records show that the only reason why the
respondent entered into the second and third
transactions with the petitioner was because it
wanted to recover the loss it sustained from the
failure of the petitioners to deliver the crude coconut
oil under the first transaction and in order to give the
latter a chance to make good on their obligation.
From these facts alone, it can be deducted that in
reality there was only one agreement between the
petitioners and the respondent.
- The three seemingly different transactions were
entered into by the parties only in an effort to fulfill
the basic agreement and in no way indicate an intent
on the part of the respondent to engage in a
continuity of transactions with petitioners which will
categorize it as a foreign corporation doing business
in the Philippines
- 3 contracts, but according to the court was not doing
business in the Philippines
Far East Int’l import vs. Nankai Kogyo Co. Ltd.
- Only one contract , but according to the Supreme
Court was doing business in the Philippines
- Every case shall be judged in the light of its peculiar
circumstances, where a single act or transaction
however, is not merely incidental or casual but
indicates the foreign corporation’s intention to do
other business in the Philippines, said single act or
transaction constitutes “doing” or “engaging in” or
“transacting” business in the Philippines
- In the instant case, the testimony of Atty. Pablo
Ocampo, that appellant was doing business in the
Philippines corroborated by no less than Nabuo
Toshida, one of appellant’s officers, that he was sent
to the Philippines to look into the operation of mines,
thereby revealing the defendant’s desire to continue
engaging in business here, after receiving the
shipment of the scrap iron under consideration,
making the Philippines a base thereof.
- In such a case, the single act of transaction is not
merely incidental or casual, but is of such character
as distinctly to indicate a purpose on the part of the
operations for the conduct of a part of corporation’s
ordinary business
 If a corporation appoints a distributor or a
representative, will it necessarily imply doing
business in the country?
- If the foreign corporation maintained an independent
status during the existence of the disputed contract.
- Appointment of a distributor or representative in the
Philippines, unless it has an independent status
(transacts and does business in its own name and for
its account and not of the foreign corporation)
- if that be the case the mere appointment of a
distributor will not constitute doing business
 How do you know if it has an independent status?
- Communications Materials and Design vs. CA
Communications Materials and Design vs. CA
- A perusal of the agreements between petitioner
ASPAC and the respondents show that there are
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provisions which are highly restrictive in nature, such
as to reduce petitioner ASPAC to a mere extension or
instrument of the private respondents
- ITEC was doing business without a license, however
ASPAC is estopped
- by entering into the Representative Agreement” with
ITEC, petitioner is charge with knowledge that ITEC
was not licensed to engage in business activities in
the country, and is thus stopped from raising in
defense such incapacity of ITEC, having chosen to
ignore or even presumptively take advantage of the
same
- In top-weld we ruled that a foreign corporation may
be exempted from the license requirements in order to
institute an action in our courts if its representative
in the country maintained an independent status
during the existence of the disputed contract.
Petitioner is deemed to have acceded to such
independent character when it entered into the
Representative Agreement with ITEC
Western Equipment and Supply Co. vs. Reyes
- The company is not here seeking to enforce any legal
or contract rights arising from, or growing out of any
business which it has transacted in the Philippine
Islands. The sole purpose of the action is to protect its
reputation, its corporate name, its goodwill, whenever
that reputation, corporate name or goodwill have
through the natural development of its trade,
established themselves
- And it contends that its rights to the use of its
corporate and trade name, is a property right, a right
in rem, which may assert and protect against all the
world, in any of the courts of the world even in
jurisdictions where it does not transact business just
the same as it may protect its tangible property, real
or personal, against trespass, or conversion
- Since it is the trade and not the mark that is to be
protected a trademark acknowledges no territorial
boundaries or municipalities or states or nations, but
extends to every market where the trader’s goods
have become known and identified by the use of the
mark
General Garments Corporation vs. Director of Patents
- A foreign corporation which has never done business
in the Philippine Islands and which is unlicensed and
unregistered to do business here, but is widely and
favorably known in the Islands through the use
therein of its products bearing its corporate and trade
name has a legal right to maintain an action in the
Islands
- Mentholatum case was subsequently derogated when
Congress, purposely to “counteract the effects” of said
case, enacted R.A. 638, inserting Section 21-A in the
Trademark Law, which allows a foreign corporation or
juristic person to bring an action in Philippine Courts
for infringement of a mark or trade-name, for unfair
competition, or false designation of origin and false
description, “whether or not it has been licensed to do
business in the Philippines under Act Numbered
Fourteen hundred and fifty-nine, as amended,
otherwise known as Corporation Law, at the time it
brings complaint.
Puma Sporschufabriken Rudolf Dassler, K.G. vs. IAC
and MIL-ORO MFG. Corp.
- Treaties for part of the law of the land
- Quoting the Paris Convention and the case of Vanity
Fair Mills Inc. vs. T. Eaton Co. this court further said:

“By the same token, the petitioner should
be given the same treatment in the
Philippines as we make available to our
own citizens. We are obliged to assure to
nationals of countries of the Union an
effective protection against unfair
competition on the same way that they are
obligated to similarly protect Filipino
Citizen and firms
- The ruling in the aforecited case is in consonance
with the Convention of the Union of Paris for the
protection of Industrial Property to which the
Philippines became a party. Article 8 thereof provides
that a trade name shall be protected in all the
countries of the Union without the obligation of filing
or registration, whether or not it forms part of the
trademark
Le Chemiste Lacoste vs. Fernandez
- The French company may gain access to our courts,
in the first place it was not doing business in the
Philippines
- The marketing of its products in the Philippines is
done through an exclusive distributor, Rustan
Commercial Corporation. The latter is an independent
entity which buys and then markets not only
products of the petitioner but also many other
products bearing equally well-known and established
trademarks and trade-names
 Assuming Rustans had no independent status would
the SC grant Lacoste access to our courts?
- Even if Lacoste did business in the Philippines it can
bring action because the case involves a violation of
our penal code
- Such was a violation of article 189 of the RPC, if
prosecution follows after the completion of the
preliminary investigation being conducted by the
Special Prosecutor the information shall be in the
name of the People of the Philippines and no longer
the petitioner which is only an aggrieved party since a
criminal offense is essentially an act against the
State. It is the latter which is principally the injured
party although there is a private right violated
- The records show that the goodwill and reputation of
the petitioner’s products bearing the trademark
Lacoste date back even before 1964 when Lacoste
clothing apparels were forst marketed in the
Philippines. To allow Hemandas to continue using the
trademark Lacoste for the simple reason that he was
the first registrant in the Supplemental Register of a
trademark used in international commerce and not
belonging to him is to render nugatory the very
essence of the law on trademarks and trade names
Atlantic Mutual Insurance Co. vs. Cebu Stevedoring
Co.
- The law denies to a foreign corporation the right to
maintain suit unless it has previously complied with a
certain requirement, then such compliance, or the
fact that the suing corporation is exempt there from,
becomes a necessary averment in the complaint
- These are matters peculiarly within the knowledge of
appellants alone, and it would be unfair to impose
upon appellee the burden of asserting and proving the
contrary. It is enough that foreign corporations are
allowed by law to seek redress in our courts under
certain conditions: the interpretation of the law
should not go so far as to include, in effect, an
inference than those conditions have been met from
the mere fact that the party suing is a foreign
corporation
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Olympia Business Machines Co. vs. E. Razon
- How do you distinguish this case with Atlantic?
- In Atlantic it dismissed the case, while in Olympia it
did not
Time Inc. vs. Reyes
- We fail to see how these doctrines can be a propos in
the case at bar, since the petitioner is not
“maintaining any suit” but is merely defending one
against itself; it did not file any complaint but only a
corollary defensive petition to prohibit the lower court
from further proceeding with a suit that it had no
jurisdiction to entertain
 What law govern foreign corporation doing and
transacting business in the Philippines with a license
- Laws of the Republic of the Philippines save and
except that would normally be those matters which
concern its formation, organization or dissolution, or
those fixing the relationship, liabilities,
responsibilities, or duties of the stockholders,
members or officers of the foreign corporation or their
relations to each other.
- In effect, intra-corporate or internal matters not
affecting creditors or the public in general are
governed not by Philippine laws but the law under
which the foreign corporation was formed or
organized
Section 129. Law applicable. - Any foreign
corporation lawfully doing business in the Philippines
shall be bound by all laws, rules and regulations
applicable to domestic corporations of the same class,
except such only as provide for the creation,
formation, organization or dissolution of corporations
or those which fix the relations, liabilities,
responsibilities, or duties of stockholders, members,
or officers of corporations to each other or to the
corporation. (73a)
 Will the pre-emptive rights of a foreign corporation be
governed by the same section of the code? Is the pre-
emptive rights of a stockholder in a domestic
corporation same as the pre-emptive of a stockholder
of a foreign corporation.
- No
M.E. Grey vs. Insular Lumber Company
- PNB vs. Gonzales, will this apply to a foreign
corporation? How do you distinguish this case from a
Philippine law?
- Since it concerns the rights of stockholders it is the
law of New York that should govern
 Is the license to do business of a foreign corporation
subject to suspension or revocation? What are the
grounds?
- Section 134 provides:
Section 134. Revocation of license. -
Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked
or suspended by the Securities and Exchange
Commission upon any of the following grounds:

1. Failure to file its annual report or pay any fees as
required by this Code;
2. Failure to appoint and maintain a resident agent in
the Philippines as required by this Title;
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and Exchange
Commission a statement of such change as required
by this Title;
4. Failure to submit to the Securities and Exchange
Commission an authenticated copy of any
amendment to its articles of incorporation or by-laws
or of any articles of merger or consolidation within the
time prescribed by this Title;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to the
Philippine Government or any of its agencies or
political subdivisions;
7. Transacting business in the Philippines outside of
the purpose or purposes for which such corporation
is authorized under its license;
8. Transacting business in the Philippines as agent of
or acting for and in behalf of any foreign corporation
or entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines. (n)
 SEC does not have the sole authority to suspend or
revoke the license of a foreign corporation doing
business in the Philippines, other government
agencies like the Central Bank , the Insurance
Commission may also do so within their respective
dominion, despite the provision of section 134
 If the SEC believes that revocation is warranted,
section 135 provides that:
Section 135. Issuance of certificate of
revocation. - Upon the revocation of any such license
to transact business in the Philippines, the Securities
and Exchange Commission shall issue a 
corresponding certificate of revocation, furnishing a
copy thereof to the appropriate government agency in
the proper cases.
The Securities and Exchange Commission
shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation
accompanied by a copy of the certificate of revocation.
(n)
 Voluntary withdrawal of license
- All 3 conditions must be complied with
Section 136. Withdrawal of foreign
corporations. - Subject to existing laws and
regulations, a foreign corporation licensed to transact
business in the Philippines may be allowed to
withdraw from the Philippines by filing a petition for
withdrawal of license. No certificate of withdrawal
shall be issued by the Securities and Exchange
Commission unless all the following requirements are
met;
1. All claims which have accrued in the Philippines
have been paid, compromised or settled;
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2. All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government or any
of its agencies or political subdivisions have been
paid; and
3. The petition for withdrawal of license has been
published once a week for three (3) consecutive weeks
in a newspaper of general circulation in the
Philippines.
P.D. 902-A
 P.D. 902-A was amended by R.A. 8799 or the
SECURITIES REGULATION CODE in the year 2000
 The jurisdiction of SEC for cases falling under section
5 thereof was transferred to the courts of general
jurisdiction designated by the SC, they were called
special commercial courts, the only exceptions were
revocation of corporate franchise and calling of
elections
 However the SEC retained receivership or suspension
payments within June 20,2000
 Jurisdiction of special commercial courts are
exclusive and original, jurisdiction is conferred by
law; 1 Special Commercial Court per region except
MAKATI and QUEZON CITY which has two
 Devices or Schemes
- Pyramid scheme (misrepresentation)-Special
Commercial Courts
- Syndicated estafa- not bailable
 Alleje case
- Falls squarely under sec. 5 (a) Special Commercial
Courts
- Allegation corporate officers employing schemes in
diverting
- Not only detrimental to corporation, but general
membership
- Fraud must be stated with particularity
Abad vs. CFI of Pangasinan
- Fraud must be stated with particularity otherwise it
may be filed to any court
 Intra-corporate
- Exclusive and original jurisdiction of special
commercial courts
- Sole criteria is there must be an intra-corporate
relationship
- Pertaining to a controversy (speaks also of intra-
partnership controversy, that partnership must be
registered with the SEC)
Rule now
1. Necessarily be an intra-corporate relationship; and,
2. The controversy must arise out of said relationship
 Intra-corporate relationship alone will not suffice to
put it in the ambit of special commercial courts and
courts of general jurisdiction may take cognizance
 Case of a transferee of shares of stock to compel the
corporation to recognize him as a stockholder
 How can it be intra-corporate when he is not yet fully
paid
- When the transferee has done all he can be required
to do to render the transfer effectual and the
corporation refuses to register the transfer, the
requirement of the registration is waived and the
transferee is considered technically a stockholder who
may sue to enforce the right to have the transfer
registered
 Florendo vs. rivera, Embassy Farms
- The transferor withheld the delivery, they are not yet
prima facie; it will not be considered intra-corporate
 Controversies in the appointment (asked in the bar)
- Cases involving election, appointment and removal
 In Andaya the court said that a corporate officer
elected or appointed by the BOD is always a corporate
act
- The fact that petitioner sought payment of his back
wages, other benefits as well as moral and exemplary
damages and attorney’s fees in his complaint will not
operate to prevent the SEC from exercising its

jurisdiction under P.D. 902-A. The jurisdiction will
not wrest on the NLRC just because of that
Tabang vs. NLRC
- Jurisdiction lies originally and exclusively to special
commercial courts and not in the NLRC
- SEC has jurisdiction over cases of removal from
employment of corporate officers
- The relationship of a person to a corporation, whether
as officer or as agent or employee or not determined
by the nature of the servides performed, but by the
incidents of the relationship on they actually exist
- Corporate officers dismissal is always a corporate act
or intra-corporate controversy
Midland construction vs. Movilla
- NLRC will be possessed of jurisdiction exception will
not apply to mere recovery
 Main consideration
- Asserts his right to the office or questions the
propriety or validity of his ouster or removal, it will be
the special commercial courts and not the NLRC
 Securities Regulation Code
- Transferred jurisdiction of the SEC to Special
Commercial Courts
- Suspension of payment, appointment of management
receivership
 What is the reason for suspension of all claims?
- The reason for suspending actions for claims against
the corporation is not really to enable the
management committee or the rehabilitation receiver
to substitute the defendant in any pending action
against it before any court, tribunal or body. The real
justification is to enable the management committee
or rehabilitation receiver to effectively exercise his
powers free from any Judicial or extra-judicial
interference that might unduly hinder or prevent the
“rescue” of the debtor company. To allow such other
actions to continue would only add to the burden of
the management committee pr rehabilitation receiver,
whose time, effort and resources would be wasted in
defending claims against the corporation instead of
being directed towards restructuring and
rehabilitation.(PAL vs. Spouses Sadic and
Kurangking)
- To enable the receiver to effectively exercise his or her
power free form any judicial or extra-judicial that may
disturb
 3 types of suspension of payments
1. Simple suspension of payments
- where deferment of payment of claims against a
distress company; ask the court to be given time to
the payment of liability by postponing the payment
- When it has sufficient assets and liabilities but forces
the impossibility of meeting them when they
respectively fall due
2. Suspension of receiver with a management committee
with a rehabilitation play or suspension of payments
accompanied by a proposal for rehabilitation (with or
without rehabilitation)
- corporation has sufficient assets to cover its
liabilities, but sees the possibility; is or without
rehabilitation plans; normally would attach the
rehabilitation plan
- For purpose of economic development
3. Suspension of payments when the corporation has no
sufficient assets to its liabilities
 May it still be revived?
- Yes, it may still be revived
 How can a corporation with more liabilities than
assets continue its operations profitably?
- Even if the distressed company has no sufficient
assets and liabilities it can go for suspension
- It asked for a management committee without a
receiver plan (Victorius Milling case)
 Convert their claims into equity
- Their liability was almost wiped out they became
stockholders instead of creditors
- After 5 years those who converted sold it back to the
corporation, thereby making profits
 Amendment is for the economic development of the
country
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 What if walang amendment, e mas maraming
liabilities kesa assets
 Suspension order- all actions for claims against the
corporation are accordingly suspended at whatever
stage the proceedings maybe
 Effect of suspension- you cannot foreclose
 What are claims?
- Debts or demands of pecuniary nature. Assertion of a
right to have money paid
- Claims against the corporation shall be suspended,
assertion of a right to have money paid; it must
present a monetary claim, liquidated or unliquidated
 Nullification of corporations does not present a
monetary claim of pecuniary nature
Union vs. CA
- It does not allow a mere individual to file the petition
which is limited to corporations partnership or
associations.
- Where no authority is granted to hear petitions of
individuals for suspension of payments, such petition
are beyond the competence of the SEC
 What happens if there is a suspension order?
 Explain the key phrase “quality is equity”
- All creditors stand on equal footing, secure or
unsecure, holding or lien or without a lien, no
creditor may enforce his lien while rehabilitation is
going (Alemar case)
- No preference shall be given
RCBC vs. IAC
- Decided on motion for reconsideration
- It court 7 years to decide authentication
 Rule of the thumb
- Automatic suspension even if not decreed in the
decision itself
- Once lifted the preferred creditors will regain their
preference
 Appointment of a management committee
- Take over the management committee of the
distressed corporation
- Extraordinary and drastic remedy
- Without any remedy
 What is an intra-corporate controversy?
- Section 5(B)
- Sole criteria is whether there exists an intra-corporate
dispute is that if there is an intra-corporate
relationship
 Why is there suspension of all actions against claims
when a receiver is appointed?
- To enable the management committee to exercise its
powers
Sy Chim vs. Sy Siy Ho (before a management
committee may be opt by a court)
- 2 requisites for a valid appointment of management
committee
1. Imminent danger of dissipation, loss, wastage or
destruction of assets or other corporate properties
2. Paralysis of business operations, the mere
apprehension of future misconduct based upon prior
management
- Save and except in the case of a close corporation in
case of deadlock management committee is allowed to
take over right away
Jacinto case
- 2nd par of page 676
- 2 requisites where present
- Wala ng mapautang, there was a paralyzation
Sy Chim
- Did not appoint a management committee
- In the absence of a strong showing of an imminent
danger of dissipation, loss wastage or destruction of
assets or other properties of a corporation and
paralysis of its business operations, the mere
apprehension of future misconduct based upon prior
mismanagement will not authorize the appointment of
a management committee
 Section 5 and 6(D) governed by separate rules;
interim rules and intra-corporate controversy
 Venue of actions
- Rules of court- where the parties are residing

- Intra-corporate- no matter where the parties are
residing it will be in the city or municipality where the
principal office is located
 Rehabilitation proceedings venue
- In rem
- Acquired upon publication without furnishing the
creditors a copy of the petition and attachments
thereof
- A creditor may now file the suspension proceedings;
provides that creditors owns at least 25%
 Intra-corporate- rule 1 section 6
 Service of summons- rule 2 section 5
- Summons may be made to anyone
 In case of intra-corporate dispute, elections, fraud,
etc; if they are governed by interim rules of procedure
on intra-corporate controversies
 Venue
- Special commercial courts where principal office is
located/established (section 5 rule 1)
- Matters of payment/suspension must be filed in the
city/ municipality where corporation is located
 Under old rule, creditors have no right to institute an
action for receivership; now creditors, if they sold 20%
they can institute an action for receivership
 Section 5
- Service of summons may be made by fax/e-mail
E.B. Villarosa vs. Benito
- Will apply only if it is not an intra-corporate
controversy
 If the controversy arose out of an intra-corporate
dispute rules on interim rules of procedure of intra-
corporate controversies shall govern
 Rule 4 section 17- immunity from suit
 Rehabilitation receiver shall not subject to any action,
claim or demand in connection with any act done
omitted by him in good faith in the exercise of his
functions and powers herein conferred
 Claim
- Right to payment, whether or not it is reduced to
judgment, liquidated or unliquidated, fixed or
contingent, matured or unmatured, disputed or
undisputed, legal or equitable and secured or
unsecured
 Investment contracts
- A contract, transaction or scheme whereby a person
invests his money in a common enterprise and is led
to expect profits primarily from the effects of others
 The management committee and rehabilitation
receiver are empowered to:
1. Take custody and control of all assets of the
corporation
2. Evaluate assets and liabilities, earnings operations of
the corporation
3. Determine the best way to protect the investors and
creditors
4. Study, review evaluate the feasibility of continuing
operation and structures
5. Submit recommendations to the RTC regarding
rehabilitation plan
6. Rehabilitate the corporation if determined to be
feasible by the RTC
7. Report to the RTC until the corporation is dissolved
THE SECURITIES REGULATION CODE (RA8799)
- Also known as the Blue Sky Law since it was enacted to
protect the public from unscrupulous promoters who stake
business which have no basis and sell shares and interest
therein to investors, who are then left holding certificates
representing nothing more than a claim to a square of the blue
sky.
-SEC. 2. Declaration of State Policy. – The State shall establish a
socially conscious, free market that regulates itself, encourage
the widest participation of ownership in enterprises, enhance
the democratization of wealth, promote the development of the
capital market, protect investors, ensure full and fair disclosure
about securities, minimize if not totally eliminate insider trading
and other fraudulent or manipulative devices and practices
which create distortions in the free market.
BROKER - person who buys and sells securities for the account
of others.
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DEALER - person who buys and sells securities for his/her own
account in the ordinary course of business.
NOTE: No person shall engage in the
business of buying or selling securities in the
Philippines as a broker or dealer, or act as a
salesman, or an associated person of any broker
or dealer unless registered as such with the
Commission. (Sec 28)
SECURITES - shares, participation or interests in a corporation
or in a commercial enterprise or profit-making venture and
evidenced by a certificate, contract, instrument, whether written
or electronic in character. It includes:
CODE: COFDIPS
a) Certificates of assignments, certificates of
participation, trust certificates, voting trust
certificates or similar instruments;
b) Other instruments as may in the future be
determined by the Commission;
c) Fractional undivided interests in oil, gas or other
mineral rights;
d) Derivatives like option and warrants;
e) Investment contracts, certificates of interest or
participation in a profit sharing agreement,
certificates of deposit for a future subscription;
f) Proprietary or non proprietary membership
certificates incorporations; and
g) Shares of stock, bonds, debentures, notes, evidences
of indebtedness, asset-backed securities;
GR: Securities shall not be sold or offered for sale or distribution
within the PH, without a registration statement filed with and
approved by SEC. Prior to such sale, information on the
securities, in such form and with such substance as the
Commission may prescribe, shall be made available to each
prospective purchaser. (Sec 8)
EXCEPT: Exempt Securities under Sec 9
a) Any security issued or guaranteed by the Government
of the PH, or by any political subdivision or agency
thereof, or by any person controlled or supervised by,
and acting as an instrumentality of said Government.
b) Any security issued or guaranteed by the government
of any country with diplomatic relations with the PH,
or by any state, province or political subdivision
thereof on the basis of reciprocity: Provided, that the
SEC may require compliance with the form and
content of disclosures the Commission may prescribe.
c) Certificates issued by a receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body.
d) Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and
regulation of the Office of the Insurance Commission,
Housing and Land Use Regulatory Board, or the
Bureau of Internal Revenue.
e) Any security issued by a bank except its own shares
of stock.
AND Exempt Transactions under Sec 10
a) A judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or
bankruptcy.
b) By or for the account of a pledge holder, or mortgagee
or any other similar lien holder selling or offering for
sale or delivery in the ordinary course of business and
not for the purpose of avoiding the provisions of this
Code, to liquidate a bona fide debt, a security pledged
in good faith as security for such debt.
c) An isolated transaction in which any security is sold,
offered for sale, subscription or delivery by the owner
thereof, or by his representative for the owner’s
account, such sale or offer for sale, subscription or
delivery not being made in the course of repeated and
successive transactions of a like character by such
owner, or on his account by such representative and
such owner or representative not being the
underwriter of such security.
d) Distribution by a corporation, actively engaged in the
business authorized by its AOI, of securities to its
stockholders or other security holders as a stock
dividend or other distribution out of surplus.
e) Sale of capital stock of a corporation to its own
stockholders exclusively, where no commission or
other remuneration is paid or given directly or

indirectly in connection with the sale of such capital
stock.
f) Issuance of bonds or notes secured by mortgage upon
real estate or tangible personal property, where the
entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a
single sale.
g) Issue and delivery of any security in exchange for any
other security of the same issuer pursuant to a right
of conversion entitling the holder of the security
surrendered in exchange to make such conversion:
Provided, That the security so surrendered has been
registered under this Code or was, when sold, exempt
from the provisions of this Code, and that the security
issued and delivered in exchange, if sold at the
conversion price, would at the time of such conversion
fall within the class of securities entitled to
registration under this Code. Upon such conversion
the par value of the security surrendered in such
exchange shall be deemed the price at which the
securities issued and delivered in such exchange are
sold.
h) Broker’s transactions, executed upon customer’s
orders, on any registered Exchange or other trading
market.
i) Subscriptions for shares of the capital stock of a
corporation prior to the incorporation thereof or in
pursuance of an increase in its authorized capital
stock under the Corporation Code, when no expense
is incurred, or no commission, compensation or
remuneration is paid or given in connection with the
sale or disposition of such securities, and only when
the purpose for soliciting, giving or taking of such
subscriptions is to comply with the requirements of
such law as to the percentage of the capital stock of a
corporation which should be subscribed before it can
be registered and duly incorporated, or its authorized
capital increased.
j) The exchange of securities by the issuer with its
existing security holders exclusively, where no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.
k) The sale of securities by an issuer to fewer than
twenty (20) persons in the Philippines during any
twelve-month period.
l) The sale of securities to any number of the following
qualified buyers: (i) Bank; (ii) Registered investment
house; (iii)insurance company; (iv) Pension fund or
retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or
managed by a bank or other persons authorized by
the Bangko Sentral to engage in trust functions; (v)
investment company or; (vi) Such other person as the
Commission may by rule determine as qualified
buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience
in financial and business matters, or amount of
assets under management.
PROTECTION OF SHAREHOLDERS INTEREST
1. Tender Offers (Sec 19)
2. Proxy solicitation (Sec 20)
3. Internal record keeping and accounting (Sec 22)
TENDER OFFER – A publicly announced intention acting alone
or in concert with others to acquire equity securities of a
company. (2002 Bar Exams)
Instances when Tender Offer is Required
1. When the person intends to acquire 15% or more of
the equity share of a public company pursuant to an
agreement made between or among the person and
one or more sellers;
2. When the person intends to acquire 30% or more of
the equity share of a public company within a period
of 12 months;
3. When the person intends to acquire shares that would
result in an ownership of more than 50% of the equity
shares of a public company.
PROXY SOLICITATION
NOTE: A broker or dealer who holds or acquires the proxy for at
least ten per centum (10%) or such percentage as the Commission
may prescribe of the outstanding share of the issuer, shall submit
a report identifying the beneficial owner within ten (10) days after
such acquisition, for its own account or customer, to the issuer of
Notes on Corporation Law
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82
the security, to the Exchange where the security is traded and to
the Commission. (Sec 20.5)
FRAUDULENT TRANSACTIONS AND OTHER MARKET
MANIPULATIONS
1. Wash Sale (Sec 24.1(a)(i)) – any transaction in a
security which involves no change in the beneficial
ownership thereof.
2. Matched Order (Sec 24.1(a)(ii)) – order or orders for
the purchase or sale of security with the knowledge
that a simultaneous order or orders of substantially
the same size, time and price for the sale or purchase
of such security has, or will be entered by or for the
same or different parties.
Note: Wash sale and matched orders become illegal
when they are used as a means to create false
appearance of active trading in the security concerned.
3. Marking the close – placing the purchase order, at or
near the close of the trading period. The price that
was closed will then be the price that will be posted on
the following trading day.
4. Painting the tape – involves a series of transactions
that are reported publicly to give the impression of an
activity in a security.
5. Squeezing the float – the part of an outstanding
security intentionally held by dealers or other persons
with a view of reselling them later for profit.
6. Hype and dump – Act employed by a person or group
of persons of purchasing the outstanding capital stock
of a dormant public shell company for a nominal
amount and merge it with their privately held
company. They would then gain control of the
majority stocks of the merged entity. Stock
certificates are often re-issued in the name of the
merged entity to relatives and associates who act as
nominees of the person or persons employing the
device. They would then look for a broker-dealer who
would be willing to make a “hype” of the securities.
The broker-dealer then generates volume and advance
bid price. When the market reaches a high price, they
would “dump” their shareholdings and bail out.
7. Boiler Room Operations – involves an intensive
selling campaign through numerous salesmen by
telephone or through direct mail offerings for
securities of either a certain type or from a specific
issuer. Investors are induced to purchase through
hard-sell based on unfounded predictions and mailing
of misleading market letters.
Note: Marking the close, Painting the tape, Squeezing
the float, Hype and dump, Boiler Room Operations
become unlawful if it is effected to either raise the price
or induce the purchase of a security or of a controlling,
controlled, or commonly controlled company by others
or to depress the price to induce the sale of a security,
whether of the same or of a different class, of the same
issuer or of a controlling, controlled company or
common controlled company by others or to create
active trading to induce the purchase through said
devices or schemes.
8. Circulating or Disseminating Information –
circulating an information that any of the security
listed in the exchange will or is likely to rise or fall
because of manipulative market operations of any one
or more persons conducted for the purpose of raising
or depressing the price of the security and thus
inducing the purchase of such security.
9. Making False or Misleading Statements with
respect to any material fact which he knew or had
reasonable ground to believe was so false or
misleading for the purpose of inducing the purchase
or sale of such security.
10. Pegging or Fixing Or Stabilizing the price of
security effected either alone or with others through
any series of transactions for the purchase or sale
thereof, if done for such purpose.
11. Short sale – selling of security which the vendor does
not own unless done in accordance with the rules and
regulations of the SEC.
12. Insider Trading – the act of an insider to buy or sell
security of the issuer while in possession of material
information with respect to such security that is not
generally made known to the public unless (a) The
insider proves that the information was not gained
 83

from such relationship; or (b) If the other party selling

to or buying from the insider (or his agent) is
identified, the insider proves: (i) that he disclosed the
information to the other party, or (ii) that he had
reason to believe that the other party otherwise is also
in possession of the information.

Note: When is information “material non-public”?

- if: (a) It has not been generally disclosed to the public
and would likely affect the market price of the security
after being disseminated to the public and the lapse of
a reasonable time for the market to absorb the
information; or (b) would be considered by a
reasonable person important under the circumstances
in determining his course of action whether to buy, sell
or hold a security.

Note: Who is an “insider”? - “Insider” means: (a) the

issuer; (b) a director or officer (or person performing
similar functions) of, or a person controlling the issuer;
(c) a person whose relationship or former relationship
to the issuer gives or gave him access to material
information about the issuer or the security that is not
generally available to the public; (d) a government
employee, or director, or officer of an exchange,
clearing agency and/or self-regulatory organization
who has access to material information about an issuer
or a security that is not generally available to the
public; or (e) a person who learns such information by
a communication from any of the foregoing insiders.

INDEPENDENT DIRECTOR
Person other than an officer or employee of the
corporation, its parent or subsidiaries, or any other individual
having a relationship with the corporation, which would interfere
with the exercise of independent judgment in carrying out the
responsibilities of a director.

Corporations which require an Independent Director

1. An exchange; or
2. Any corporation with a class of equity securities listed
for trading on an Exchange or with assets in excess of
P50M and having 200 or more holders, at least 200 of
which are holding at least 100 shares of a class of its
equity securities or which has sold a class of equity
securities to the public pursuant to an effective
registration statement shall have at least two (2)
independent directors or such independent directors
shall constitute at least 20% of the members of such
board, whichever is the lesser.

OPTION TRADING
 Put – a transferrable option or offer to deliver a given
number of shares of stock at a stated price on any
given time during the stated period.
 Call – a transferrable option to buy a specified
number of share at a stated price
 Straddle – a combination of put and call.

SETTLEMENT OFFERS
At any time, during an investigation or proceeding
under this Code, parties being investigated and/or charged may
propose in writing an offer of settlement with the Commission.
The Commission may only agree to a settlement offer based on
its findings that such settlement is in the public interest. Any
agreement to settle shall have no legal effect until publicly
disclosed. Such decision may be made without a determination
of guilt on the part of the person making the offer.

DAMAGES
All suits to recover damages shall be brought before
the Regional Trial Court, which shall have exclusive jurisdiction
to hear and decide such suits. The Court is authorized to award
damages in an amount not exceeding triple the amount of the
transaction plus actual damages.

NOTES
 If there are goods involved in the multimarket, it is
beyond the jurisdiction of SEC (Ex First Quadrant)
 Criminal charge for violation of SRC is a specialized
dispute, hence it must be first referred with SEC
(Baviera vs. Paglinawan G.R. No. 168380 Feb
8, 2007)
 T3 Rule in trading of Securities – Trading day + 3
more days you must comply with your obligations.

Notes on Corporation Law

“Notes come in handy only when you have studied…”
©GTan; ASoguilon; VVillanueva