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CORPORATION CODE by DEAN NILO DIVINA 2015

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A. CORPORATION

The one who represents an unincorporated corporation, he


alone is the one liable just like a Single Proprietor.

1. Definition

The SC said the one who represented UPC, is the real party in
interest, the judgment may be enforced against him even if he
was not impleaded as a formal party defendant.

What is a corporation?
Section 2. Corporation defined. A corporation is an artificial
being created by operation of law, having the right of succession
and the powers, attributes and properties expressly authorized by
law or incident to its existence.

In 2010, BA Finance vs. ___ ******* interrupted******


Dean: While looking for the file, Alex can you please
distinguish a corporation from a partnership.

This definition gives us the essential attributes of a


corporation. What are these?

Alex: ***Keeps on reciting *** (Umubo na naman si pete)

Based on these attribute of a corporation, how do we


distinguish
a
corporation
from
a
single
proprietorship?

Dean: Im listening, multitasking.


After several minutes
Dean: I was lying when I said Im listening.

A Single Proprietorship (parang si Zacky Single lol) is not


an artificial being because the proprietor has no legal
personality from its business. It is not created by law.
Whatever the assets and liabilities of the single
proprietorship are likewise the obligations and liabilities of
the proprietor and vice versa.

Class: LOL
**************
Right now there is no one man corporation, its just a proposal.
To repeat, in a Single Proprietorship, the assets of the
proprietor may be held to answer for the obligation of the
business, as if it is the personal obligation of the proprietor
because here, there is no separate legal personality.

If in case a Single Proprietor wants to file a suit or a


legal action, (the suit is related to its business) how
should the caption ____ (umubo si pete) would be?
Lets say Juan Dela Cruz doing business under the
trade name and style of Mabango Flower Shop.

2. Attributes of the Corporation

Juan Dela Cruz doing business under the trade name and
style of Mabango Flower Shop vs. Defendant. Juan dela
Cruz and Mabango Flower Shop are one and the same. In
contrast with the action involving Juan Dela Cruz himself
it must be captioned as Juan Dela Cruz vs. Defendant

Distinguish a Corporation from a Partnership. Based on the


definition, the first one is 1. Artificial being.

Who is liable in a suit filed against a corporation


which is not registered with the SEC but only
represented by one person?

So both corporation and partnership are legal being in the


sense that they have a legal personality separate and distinct
from the persons composing it. Second is created by law, a
corporation is created by law while a Partnership it is by
agreement.

Lets take the case of University


Corporation vs Albert, it is an old case.

Is a Partnership also an artificial being?


Yes, it is also a juridical person

Publishing

When does a Partnership arise or created?

Albert is a commentator, an authority in criminal law,


entered into a contract with UPC, for UPC to publish his
commentary, but UPC did not pay royalties to Albert, so
Justice Albert filed an action for the payment of the
royalties but during the pendency of the case, J. Albert
died so the judgment was rendered in favor of his estate,
but when the judgment was about to be enforced, they
discovered that there is no such corporation registered
with the SEC.

It is created from the moment of meeting of the minds of


the persons to contribute money, industry and property to
a common fund with the intention of dividing the profits
among themselves.
What is the purpose of registration of Articles of
Partnership with the SEC?
To get a license or permit and you cannot operate a
business unless registered with SEC.

Against whom the judgment may be enforced?

What about a Corporation?

The Supreme Court said that the one who represent an


unincorporated corporation is akin to Single Proprietorship.

It is not created from the moment the five (5)


incorporators signed the AOI; likewise it is not created
upon filing of AOI with the SEC but it acquires legal
personality from the moment that SEC issued a certificate
of incorporation.

So there is no corporation by estoppel if there is only one (1)


person because there is a corporation by estoppel if there are
two persons or more assume to be a corporation.
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It is created by operation of law, what law?

under the law there are powers reserved for the


stockholders (SH) only, or joint by the SH and the BOD.

Corporation Code

What about transferability of interest?

Can a corporation be created by some other law?

In Corporation, the SH can sell or transfer his or her share


in the corporation even without the consent of other SH or
the corporation. Whereas in the Partnership, it cannot do
so without the consent of the Partnership because the
personal qualification of the partner is taken into account.

Yes, by special law


When you say law, it may be a general law which is the
corporation code or Special law passed by Congress to create a
GOCC.

Can a corporation require that its consent must be


secured before a SH can sell his share? Is that
restriction reasonable?

Third (3rd) the right to succession, do you mean the


corporation is immortal?
In Partnership, there is no right of succession because the
death of one of the partners will dissolve the Partnership.
The right of the succession of the corporation is the power
to exist continuously because it can extend the corporate
term.

No, it is contrary to law.


What restriction can the corporation require?
The right of first refusal. It must be embodied in the AOI.

Fourth (4th), Attribute, what does it mean? Briefly,


does it mean that a corporation can only exercise
those powers authorized by law, by the AOI or
incident to its existence?

Distinguish the limitation as to liability of the


corporation from Partnership.
Dean: Did you graduate with honors?
Nikki: No Dean.

Yes.

How about you April?

How about the Partnership? What is the limitation of


what the Partnership can do?

April: No Sir! (Dean Feble accent)

Based on what the Articles of Partnership provides.


Is the corporation delimited only by
contrary to law, morals, good customs,
and public order? Can a corporation
contract or transaction for as long
contrary to law, morals, good customs,
and public order?

So it is the non-latin honors are the one excelling. Stephanie


(Teff) also did not graduate with honors in in. in Science,
I think in Science.

what is not
public policy
enter into a
as it is not
public policy

Tituh Kaye: Econ Econ Econ


**********
So lets continue

It is a question of whether or not the action or transaction


of the corporation is consistent with the powers conferred
to it by law.

SH - they cannot be held liable beyond their subscription while


the partners, if the assets of the Partnership are not sufficient
to satisfy the obligation to the creditors, they can be held liable
personally.

While in Partnership, there is no limitation provided that


it is not contrary to law, morals, good customs, public
policy and public order.

BAR: Is that an absolute rule that the liability of the


SH is limited only to his subscription?

What is the term of the corporation?

No. the exception is if he is a director, officer or agent, he


can be made personally liable.

The term specified in the AOI but not to exceed fifty (50)
year and can be extended

************

In Partnership, can we say that the term is


indefinite?

DISCUSSION
Section 2 defines the corporation and at the same time gives all
its attributes.

Yes. It is indefinite unless there is a ground to dissolve.


Who exercises the powers of the corporation?

If five (5) persons, (lets say Zacky, Brynn, Peter, Dustin


and Reggie dream team in Dota 2) put up a corporation
named BLACK LION CORPORATION and registered it with
SEC, now we have six (6) persons composing the corporation,
so the corporation has personality separate from the five (5)
Black Lions composing it.

Corporation generally, it is the Board of Directors


(BOD). In Partnership, it is the General partner. In the
absence of designation any partner may perform the
powers. In corporation, generally it is the BOD because
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The corporation can invoke the right against illegal search and
seizure (Stonehill v. Diokno), but it cannot invoke the right
against self-incrimination (PASECO vs. PCGG)
FILIPINAS BROADCASTINGNETWORK
MEDICAL AND EDUCATIONAL CENTER

v.

Yes, the case of AGO.


It is not correct to say that the corporation cannot be criminally
prosecuted because it can be if the imposable penalty is not
imprisonment like fine, forfeiture of license, revocation of
franchise, in this context, the corporation can be criminally
prosecuted.

AGO

Can a corporation be entitled to moral damages?

Can the corporation be held liable for tort?

In 2004, Justice Carpio, in this case, one of the


broadcasters of Filipinas Broadcasting Network uttered
libelous remarks over a radio against AGO Medical and
Education center. Ago Medical is a medical center in
Legazpi Albay. On air, the said broadcaster said that AGO
Medical is the dumping ground of intellectual misfits.
Held: Under the New Civil Code, in case of libel, oral
defamation or slander, the aggrieved person be entitled to
moral damages. The SC through Justice Carpio said that
the NCC makes no distinction between natural and
juridical person. The law authorizes recovery of damages
to any person victim of libel, defamation or slander,
whatever kind of person whether natural or juridical.

Yes.
The corporation has separate legal personality from the
persons composing the corporation, therefore the properties of
the corporation are neither the properties of the SH vice versa.
The obligations of the corporation are not enforceable against
the SH vice versa.
The cause of action of the corporation can be enforced by the
SH vice versa.

STRONGHOLD INSURANCE v. CUENCA (2013) penned


by Bersamin

In one case, a corporation is not entitled to moral damages


because, not being a natural person, it cannot experience
physical suffering or sentiments with the exception that if the
corporation has a reputation that is debased, resulting to
humiliation in the business realm.

The assets of the corporation levied on attachment.


So a writ of preliminary attachment was issued
against the property of the corporation and the
Stockholders of the corporation filed a petition before
the Court of Appeals to set aside the attachment, on
the ground that it was fraudulently and irregularly
issued by the RTC. So assuming that it was
irregularly issued, can the petition be granted?

MERALCO v. TEAM ELECTRONICS (2007)


Can a corporation sue for Moral Damages if it is a
victim of tort?
Yes.

No, because the assets of the corporation were levied and


not the assets of the SH. So if there is any person who
should file a petition to set aside the attachments, it is the
corporation, not the SH.

The corporation was a tenant in a building, its electrical


connection or supply was disconnected by Meralco
because of the alleged meter tampering, so it sued Meralco
for Moral damages. It lost the case because it did not
establish the connection between the tortious act or
conduct and the injury sustained. Therefore, if the
corporation can establish the connection not on account of
libel, the corporation may be entitled to moral damages.
BAR: Lets say the President of McDonalds Corporation was
spreading rumors that the hamburger of Jollibee is made from
the meat of cat. So the president of Jollibee was not able to
sleep, he suffered from sleepless nights, anxiety and depression
because of the libellous remark uttered against Jollibee. So he
filed an action for damages against McDo.

According to J. Bersamin, the SH are not the real


party in interest and the petition is dismissed
outright.

The principle will not change even though the SHs


control the corporation.

If you will grant a loan to a corporation, how will


you make that the controlling SH be liable, if the
basic principle in Corporation law that ownership of
shares is not enough reason to disregard the
separate legal personality?

Will the suit prosper based on the allegation of the


complaint?

In practical application, you require a Surety or Guaranty


agreement from the SH, he will not be liable as a SH but a
surety or guarantor of the obligation.

No. The aggrieved party is the corporation not the


president because the corporation has separate legal
personality.

The case of EPG, the issue is whether or not the obligation of


the corporation extends to the president because the president
own and controls the 90% of the corporation. The SC held that
the obligation of the corporation do not extend to the president

Can the corporation be entitled to damages?

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because there is no foul play on the part of the President and


the act of resisting the claim if UP is not tantamount to bad
faith.

corporation has no mind of its own with respect to the


transaction
2. When the control is used to perpetuate fraud or breach
the duty in violation of the right of another

NOT YET ASKED IN THE BAR: THE CASE OF NISCE


Nisce is the owner of the Philippine Rabbit. It obtained a loan
from Equitable Bank, secured by mortgage of real property of
Nisce. The latter made as money market placement Nisce
defaults; Equitable bank and PCIB merged to form EPCIB, so
because of the merger, EB acquires the rights, assets and
obligations of PCIB. EB threatened to foreclose but Nisce
argued that his money placement should be set off by the EB.
The SC said the fact that EB was the surviving bank with the
merger with PCIB which eventually resulted in Equitable PCI
bank becoming eventually the parent company of the
subsidiary PCIB, it is not enough reason to disregard the
separate legal personality.

3. The control and the breach of duty are the proximate


causes of the harm suffered by a third person
So dont forget these three elements because many of the bar
questions can be answered by applying these elements.

Now, if you pierce the corporate fiction, does it mean


that the corporation is dissolved?
No
Does it mean that you have to pierce the corporate
fiction in all other transaction involving the
corporation?

Last case, LIM vs CA Pastor Lims wife wanted to include


the corporate properties as far as the settlement of the estate
just because the deceased is the controlling SH. The SC said
that the titles are in the name of the corporation, ownership is
conclusively in favor of the corporation. The fact that Pastor
Lim controls the corporation during his lifetime is not enough
reason to disregard the separate legal personality. Only shares
of stock but not the properties of the corporation.

No.
So only in the transaction where the three elements were
present. The fact that you pierced the corporate fiction with
respect to one transaction does not mean that you have to
pierce the doctrine of corporate fiction in other cases or
transaction if these elements are not present.
BAR: You said that the State allows disregarding, for certain
justifiable reasons, the fiction of the legal personality. When
you mean State means court right? When the court pierces
the veil of corporate fiction over a corporation if it
does not acquire jurisdiction? This was asked in 2014.

What do you understand by this Doctrine of Piercing


the Veil of Corporate Fiction?
The doctrine that allows the State to disregard, for certain
justifiable reasons, the fiction of the legal personality to
the corporation separate from the persons who composed
it.

There are four cases in your outline. KUKAN v. REYES


(2010), GOLD LINE TOURS v. LACSA (2012), LIVESEY
v. BISWANGER PHIL., PACIFIC REHOUSE v. CA
(2014).

Bear in mind that the Doctrine of Corporate Legal Entity


is only a fiction to promote public convenience. If this doctrine
is misused or abused, then the State shall disregard the
separate legal personality, pierce the corporation, and shall
treat the corporation and the stockholders composing it as one
and the same entity.

It depends on the facts of the case. This is because right


now you have these cases and they are even steven
meaning two cases holding the principle that a court may
pierce the veil of corporate fiction even if it does not have
jurisdiction and two cases where the SC said that courts
cannot pierce the veil of corporation if it does not acquire
jurisdiction

What are the areas in which the doctrine of Piercing


of The Corporate Veil applies?
1.
2.
3.

In cases where the fiction is used to defeat


convenience.
In case of Fraud.
Alter-ego or instrumentality cases where the
corporation is used as an instrumentality or alter-ego
of another corporation.

PACIFIC REHOUSE CORP. v. CA (2014)


ABC Bank has a wholly-owned subsidiary, XYZ Stock
Brokerage Firm. XYZ sold the shares of stock of Juan dela Cruz
without his consent. Juan filed and action to recover the shares
but the same cannot be recovered anymore because these have
been sold to a third party who acquired the shares in good
faith. So it was substituted for a money judgment. The court
directed the Stock Brokerage firm to pay the equivalent value
of the shares sold to third persons. It became final and
executory so Juan moved for an issuance of writ of execution
which was granted but could not levy the assets of Stock

ALTER-EGO OR INSTRUMENTALITY TEST has three


elements:
1. Control in shareholdings, control in finances and then
control in business policy and practices such that the

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Brokerage Firm. So he decided to file for the issuance for alias


writ of execution against ABC Bank. Now the RTC issued the
alias writ of execution against the assets of ABC Bank because
ABC Bank owns 99.9% of XYZ Firm and the counsel or
representative of ABC is the same counsel representing XYZ.

The first principle is that ownership of the controlling


shares is NOT enough reason to disregard the separate legal
personality of the corporation.

If ABC Corporation owns 99.9% of XYZ Corporation


because XYZ is the subsidiary of ABC, can Juan
enforce the debts of XYZ against ABC just because it
owns XYZ?

Can it enforce judgment against ABC? Did RTC act


correctly in piercing the veil of the corporate fiction?
This question is worth 10 points.
An alias writ of execution could not be enforced against its
parent company because the court has not acquired
jurisdiction over the latter (it was not made a party
defendant) and while the parent company owns and
controls the brokerage firm, there is no showing that the
control was used to violate the rights of the plaintiff.

No because ownership of the controlling shares per se is


not enough reason to disregard separate corporate
personality.
Otherwise, if such is enough reason for two corporations to
be treated as one and the same entity then basically all
subsidiaries would be treated as the same as parent
companies and we all know that many corporations put up
subsidiaries like BDO. BDO has subsidiaries. They have
BDO Generali (insurance business). So can the policy
holders of BDO Generali enforce their claim against BDO
Bank just because BDO owns 99.9% on the shares of
Generali? The answer is no.

GOLD LINE TOURS v. LACSA (2011)


Maria, a graduate of a nursing school in Albay, went to Manila
to review for the boards. She boarded a bus owned by Travel
Tour Express. Unfortunately the bus collided with a passenger
jeepney and metals were detached from the passenger jeepney
which punctured her heart causing instantaneous death. The
heirs of Maria filed a case against Travel Tour. Judgment was
rendered with respect to the civil action of the case. When the
judgment became final and the heirs of Maria attempted to
enforce the judgment, they levied to the bus owned, however,
by Gold Line Tours. The Gold Line Tours filed a third party
claim asserting ownership, title, and interest over the bus. It
turns out that both Gold Line and Travel Tour Express are
family corporations owned by the same family, with
interlocking directors, officers and have overlapping finance
just that Gold Line was not brought to the courts jurisdiction.

Now, the liability of XYZ will be compressed (?) to those


transactions related to its related operations and not
extend all the way to the parent company.
Remember earlier, when we discussed the elements of
instrumentality test, we said that the control must be
exercised in three areas shares, finances, business values
and practices. So if the subsidiary has independent
operations, then it should have a separate legal personality
from the parent company.

Can the judgment of the court be enforced upon Gold


Line Tours?

PNU v. RITRATTO GROUP (2001)


BAR: This was asked three, four years ago. PNB has the
wholly-owned subsidiary in HK, PNB International Finance
Ltd. It is situated in World Wide House along Central HK so
this is where the Filipinos congregate every weekend so there
are many businesses there owned by corporations in the PH
and one of them is PNB International. So this PNB
International Finance granted LC/TR transactions or
accommodations in favor of Ritratto group secured by a
mortgage on the property of PNB in the PH and the parties to
the mortgage agreement were PNB, as agent of PNB
International Finance Ltd, and Ritratto group. The loan was
not paid prompting PNB to initiate foreclosure proceedings. To
stop the foreclosure, Ritratto Group filed an action in Manila to
compute the debts and payments made by the Ritratto Group
claiming that certain payments were made but were not
credited to its account. The action there was to re-compute the
interest payment to determine the standing obligation of
Ritratto Group and in the meantime, praying for the issuance
of writ of preliminary injunction or TRO. But the case was filed
against PNB period.

Yes.
What makes Pacific Rehouse different from the Gold
Line case?
So we have cases with different rulings. In the first, the
court cannot pierce the corporate veil because the
corporation was not brought to the jurisdiction of the
court while the second case, Court said that you can pierce
the veil of corporate fiction as long as the RTC has
reasonable opportunity to assess the evidence and evaluate
the same, there is a basis to hold these two corporations as
one and the same entity.
So although at the outset, it was not brought to the courts
jurisdiction.
We discussed the circumstances which, by themselves, are
sufficient to disregard the separate legal personality of a
corporation.

Will the suit prosper?


5

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No. This is because the suit was filed against PNB parent
company of PNB International. The fact that PNB is the
parent company of PNB International does not make them
one and the same entity. The loan was granted by PNB
International Finance Ltd. And not by PNB therefore the
action must be filed against the subsidiary PNB
International and not the parent company.

that a corporation has a legal personality separate and distinct


from its stockholders, directors, and officers composing it.
Since this is a doctrine, this is a principle of law. And principle
of law which shaped by jurisprudence (?). Now, is there a
provision in the Corporation Code about piercing the veil of
corporate fiction? There is none, right? Is there a law on the
doctrine of separate legal entity? None.

How should the complaint be captioned?

The Doctrine of Separate Legal Entity is a principle emanating


from the attribute of the corporation that it is a judicial need
and as such the legal personality is separate and distinct from
the persons composing it.

The case should be filed against PNB as agent of PNB


International Finance Ltd and not PNB as parent company
of PNB International Finance Ltd. (I had an ah moment
here hahaha). If it filed an action against PNB as an agent,
then the suit is effective because the suit is ____ filed
against PNB International, the one that granted the loan in
favor of Ritratto Group.

Now, the Doctrine of Piercing the Corporate Veil is an


application of the principle in a sense that if the fiction is
misused or abused, the fiction must yield to the reality.
If a corporation is set up, as we said, there are six persons the
corporation and the 5 incorporators composing it. So this is the
veil that separates the corporation from the stockholder. Thats
why we have seen in the previous discussions that the
properties, right and obligations of the corporation do not go
beyond the veil and cannot extend to the stockholders. Now,
the moment that the fiction is misused or abused, the fiction is
pierced and when it is pierced, there is no more shroud that
separates the corporations from stockholders. They become as
one and the same entity. So this is a principle of law which is
also based on another principle of law.

Okay, another circumstance to disregard separate entity is


interlocking directors and similarity of business. So if
two corporations have common directors, common
stockholders, these are NOT enough reasons to treat them as
one and the same entity, or their similarity of business even if
both admit interlocking directors or common officers, still not
enough reason to disregard separate entity of the corporations
DBP v. HYDRO RESOURCES CORP. (2013)
DBP together with PNB foreclosed mortgage on the property of
Marinduque Mining Company. After foreclosure, it
consolidated title over the assets, it set up a new mining
company called Nonoc Mining and then transferred the
foreclosed assets of DBP to Nonoc. Nonoc engaged a contractor
to help Nonoc in its project. The consultant was only paid in
part by Nonoc so he filed an action against both Nonoc and
DBP claiming that they are one and the same entity because
DBP owns controlling shares of Nonoc and they have common
directors and SH.

So second phrase, it allows the State Can the Sheriff


pierce the corporate fiction?
There are two cases in the outline where the sheriff, on his
own, pierced the veil of corporate fiction and he was charged
administratively.
DALISAY v. CRUZ
Just when the blah blah blah of the corporation and the sheriff
on his own, pierced the corporate veil to enforce the judgment
against the president of the corporation. He was charged
administratively and fired. Nineteen years later, people never
learn from the history. Another sheriff in ___ v. GORIS
(2009), levied on the vehicle of the president to answer for a
judgment against the corporation on the ground that,
according to him, the vehicle was used by the president for the
official use of business.

Can the consultant enforce the collection against


DBP?
The SC said no citing the principles of interlocking
directors, common stockholders, or controlling share are
not enough reason to disregard the separate legal entity of
the corporation
DOCTRINE OF PIERCING THE CORPORATE VEIL
This is a favorite topic in the bar as you all know and every year
SC renders decision involving separate legal entity and piercing
the corporate veil. Every year without fail and that is why we
have to know these decisions, jurisprudence because you have
to answer based on the similarity with the facts decided by the
SC. While this is a basic principle, knowing this is not enough
to answer the questions correctly so it has to be answered
based on the similarity with the facts of a pertinent case.

The Supreme Court said that it is not for the sheriff to


pierce the corporate fiction. It is a judicial function which
cannot be usurped by the sheriff.

As said earlier, this is a doctrine that allows the State to


disregard for certain justifiable reasons the notion or fiction

Can the court pierce the veil of corporate fiction


without acquiring jurisdiction?

Now you know that the State can pierce the corporate veil.
Which agency, instrumentality, or ___ can pierce the
corporate fiction?
Courts all of them

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There are 4 cases that answer this question.

The SC said yes because of the circumstances when ABC Corpo


closed and XYZ suddenly emerged.

KUKAN INTERNATIONAL CORPORATION v. REYES.

PACIFIC REHOUSE CORPORATION v. CA

Juan de la Cruz entered into a contract with Kukan


Corporation to set-up signages in buildings in Makati but he
was not paid his fees. So he filed an action for collection against
the corporation. Judgment by default rendered against Kukan
and attained finality. Juan de la Cruz sought to execute the
judgment. However, what were levied were not the properties
of Kukan Corporation but Kukan International Corporation. So
Kukan International filed a third party claim to the court. The
lawyer of Juan de la Cruz filed a motion to pierce the veil of
corporate veil of Kukan International Corporation on the
ground that Kukan International and Kukan International
Corporation are one and the same entity.

An unsatisfied writ of execution against a subsidiary company


cannot be enforced against its parent company because the
court has not acquired jurisdiction over the said parent
company.
These 4 decisions are conflicting decisions. And the funny
thing is that these decisions did not make reference to each
other. The Lacsa case did not mention the Kukkan case.
To answer the question, look closely at the facts of each cases.
If the question is similar to the lacsa case, apply the lacsa case.
If there is no abuse or misuse or if there is no third party
abused, or if the issue can be resolved in other ways, forget
about piercing the veil of corporate fiction.

Can the court render judgment against Kukan


International Corporation?
SC SAID NO because the court must acquire jurisdiction
over Kukan International Corporation involving a cause of
action fully litigated by the court in a full blown trial
because jurisdiction is not acquired by mere motion.
Jurisdiction is acquired by service of summons and other
recognized modes.
GOLD LINE TOURS
CONCEPCION LACSA

v.

HEIRS

OF

In one case, PHILIPPINE TEXTILE v. CREDIT, one


manufactures yarn and the other one sells it. The issue is
whether the employees of Filipina Credit should form part of
the Collective Bargaining Agreement of Philippine Textile. The
SC said no need because no third party prejudiced.
SC added one test: Test by Objective. The doctrine of piercing
the veil will only apply if the stockholders are being made liable
for the debts of the Corporation. So the end result of piercing
the veil is to make the stockholders liable for the debt of the
Corporation. If that is not the end result, forget about the
doctrine. Conversely, if the Corporation is being made liable for
the debts of the stockholders, do not apply the doctrine.

MARIA

Lacsa board on a bus and was on her way to Ago Medical


Center where she met an accident and died. Judgment was
rendered against the bus company but the court levied the
properties of the sister company of Gold Line Tours.

FRANCISCO MOTORS v. COURT OF APPEALS

The SC said that as long as the RTC has reasonable opportunity


to evaluate the evidence presented. And based on the evidence
presented, there is sufficient basis to warrant the conclusion
that two corporations are one and the same entity, then the veil
can be pierced.

A lawyer purchased motors from the Francisco Motors. He


rendered services for Francisco Motors but he was not paid. He
said that his fees should be applied or offset to the purchase
price. The SC did not apply the doctrine here because the end
result is that the Corporation is being held liable for the debt of
the stockholders.

The real party in interest, even though not impleaded as a party


defendant in the case can be substituted.

What are the areas where the doctrine applies?

The SC took judicial notice that the two bus companies are
owned by one and the same family and they have common
officers. Moreover, it is common knowledge in the Albay region
that they are one and the same entity.

1. Defeat of public convenience


2. Used in case of fraud
3. Alter ego or instrumentality test

LIVESY v. BINSWANGER

Defeat of public convenience like when the veil is used to


evade a contractual duty

There is a compromise agreement between ABC Corp and Juan


de la Cruz and judgment was rendered based on the agreement.
but before the agreement is imposed, ABC closed but it reemerged in the form of XYZ Corporation engaged in the same
line of business and has the same directors. A writ of execution
was issued by the Court upon motion to levy the properties of
XYZ Corporation.

VILLA REY TRANSIT v. FERRER


Villarama sold buses to Tranco and its certificate of public
convenience. The contract stipulates that Villarama should not
engage in the same line of business. Villarama did not engage
in the same line of business but he formed a corporation
engaged in the same line of business the stockholders being his
spouse and children.

The issue whether the writ of execution was valid against XYZ
Corporation even if it was not impleaded as a party to the case.
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The SC said that the corporation was set up to evade a


contractual obligation and the veil was pierced.

Can Lanuza be compelled to arbitrate even when the


agreement is between the two corporations?

Used in case of Fraud

SC: if the complaint alleges bad faith or gross negligence


on the part of the officers and directors, and the same is
proven, then there is no more distinction between the
persons composing the corporation and the corporation

AC RANSOM v. NLRC
A group of laborers filed a complaint against AC Ransom for
the payment of monetary benefits. During the pendency of the
case, the stockholders of AC set up a run-away corporation
called Rosario Corporation. It is engaged in the same line of
business and the assets of AC was transferred to Rosario
corporation.

In this case, it was proven that there was bad faith and the
directors and the corporation was regarded as one and the
same. Hence, the arbitration agreement should continue
against them even if they are not parties to the arbitration
agreement.

The SC said that Rosario was created to evade the obligation of


AC to its laborers and the veil was pierced.

What is the liability of a third party mortgagor?


Only to the value of the mortgaged property. he is not
liable beyond the value of the property because he merely
lend his properties to secure the obligation of another

Alter ego test


3 elements

EXCEPTION:

Control test

The case of Heirs of Fe Tan Uy v. International Exchange


Bank (2013)

The subsidiary corporation is completely under the control


and dominion of the parent company. It is so organized
and controlled as to make it merely an instrumentaliy or
adjunct of the parent corporation.

ABC obtained a loan from the bank secured by a mortgage


given by XYZ corporation. ABC Corp did not pay the loan. The
bank forclosed the mortgage of XYZ. After foreclosing, there
was a deficiency. Should the deficiency be enforced against
either ABC or XYZ or only ABC? the SC said that ABC and XYZ
are one and the same entity because they have a common
president. The same president who signed the loan agreement
of ABC and the mortgage agreement of XYZ. Both are family
corporation. There was overlapping of finances and operations.

If you pierce the corporate veil, it does not mean that the
corporation is extinguished. It does not also mean that in
all transactions of the corporation, the veil should be
pierced. It just means that the veil can be pierced if all the
elements of the control test are present.
Fraud test
The control was used to commit fraud or evade a duty in
violation of the plaintiffs right
Harm test
The control and breach of duty are the proximate cause of
the harm or injury suffered by a third party.
BAR: What are the effects if the veil of corporate
fiction is pierced?
The corporation and the stockholders are treated as one
and the same
LANUZA v. BF CORPORATION
BF corporation was the contractor of Shangri-La corporation to
construct a building in Ortigas. BF was not paid so it filed an
action for collection ag. Included in the suit are the officers and
directors because the complaint alleges that there was bad faith
on the part of the said offices and directors. Shangri La moved
to suspend the case because the construction agreement
between them contains an arbitration clause which means that
resort to court should be preceded by arbitration.
Lanuza and the other directors are not parties to the
construction agreement. It is only between the 2 corps

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B. CLASSES OF CORPORATIONS

Even though its


dividends?

Sec. 3. Classes of corporations. - 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.

If it is silent, Sec. 43 is DEEMED READ into the articles of


incorporation. And under Sec. 43, the corporation can
declare dividends in case of surplus profit.

What is a Stock Corporation?

Second, before dissolution, there is nothing that prohibits


the corporation from distributing dividends. And after
dissolution anyway, the assets are divided to the
stockholders and the stockholders may freely assign it to a
charitable institution.

Its a corporation with capital stock, divided into shares,


authorized to distribute dividends to stockholders on the
basis of their shares.
What about non-stock corporations?

For as long as we have two elements: (1) capital stock


divided into shares; (2) authorized to distribute surplus
profits to the stockholders, it is a STOCK corporation.

Section 3 of the Corporation Code says All the rest are


non-stock corporations.
So Sec. 3 defines stock corporations as corporations with
capital stock, divided into shares, authorized to distributed
dividends or surplus profits to stockholders on the basis of
their shares. And all the rest are non-stock corporations.
the

purposes

of

on the declaration of

Yes. Because its silence does not mean it is prohibited.


What would make it non-stock is if it is prohibited to
declare dividends.

1. Stock and Non-stock

Section 87 defines
corporations

silent

Now, if Sec. 87 enumerates the purposes of the nonstock corporation, what is not allowed for a nonstock corporation? What are the purposes not
allowed? It says charitable, religious, civic, cultural,
literary, social, educational, and so on, so what are
the ones not allowed?

non-stock

Its not for profit okay (okay dean sure). Its a non-stock,
non-profit corporation.

It cannot be organized for profit or organized for partisan


political activity or political purposes. Thats why
NONSTOCK, NONPROFIT.

BAR: A stock corporation has two basic


characteristics: (1) It has capital stock divided into
shares (2) Its authorized to distribute dividends.
Oraaayt, the articles of incorporation of ABC Corp
provides that the authorized capital stock is 1
BILLION PESOS (INSERT DR. EVIL HERE), is that
VALID?

Does that mean the non-stock corporation cannot


earn profit?
As long as the profits are not distributed to the members,
and are used in the furtherance of the purpose of the
corporation.
UST is a non-stock, non-profit corporation, and yet it
is in the TOP 500 corporations in terms of profit, and
theres nothing wrong with that, as long as the profits
are not distributed to the members and used to
further or promote the purposes of the corporation.

Go back to the definition of a stock corporation, and


compare. Its lacking. Its not enough that it says 1
BILLION capital stock. It must be divided INTO one
million shares with a par value of 10 PESOS. So the
product between the shares and the par value is your
authorized capital stock.

Last question before we resume our lecture. How do


we distinguish a public from a private corporation?

How about this? The articles of incorporation of ABC


corp states that it has 1 BILLION PESOS divided into
1 BILLION SHARES, par value 1 pesos. It is engaged
in the business of managing golf courses, and issues
shares to members, allowing them to enjoy the
facilities of the corporation. It is SILENT(silence daw
sabi ni dean) on the power of the corporation to
declare dividends. And their articles further provide
that upon dissolution, their assets shall be donated to
a charitable institution. STOCK OR NON-STOCK?

A public corporation is organized to govern a portion of


the state, while the private corporation is organized for
private ends.
Is a GOCC necessarily a public corporation?
If the corporation is owned by the state does it make it a
public corporation?
Just because it is owned by the government does not make
it a public corporation. A public corporation is organized
for the government of a portion of the State.

It is a stock corporation sir.

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Is Boy Scouts
Corporation?

of

the

Philippines

Public

If the law is declared unconstitutional, then it does not give rise


to a de facto corporation.

It is a public corporation. Justice Teresita Castro said it


was. Because it was created by charter, it was owned and
controlled by the government. Congress cannot enact a law
to create a private corporation. But subsequently, there
were more private individuals that owned shares. So from
government owned, they became privately owned. The
BSPs argument was that since it is now privately owned,
they are no longer subject to COA audit. So BSP refused to
cooprate with COA. We used to be owned by the
government, but now were owned by private individuals,
so now you dont have jurisdiction over us.

BAR: Congress enacted a law to create a private


corporation. And that private corporation, after its
creation, was allowed to exercise corporate powers.
Is this a De Jure, De Facto, or Corporation by
Estoppel?
Is it DE JURE? Its not. Is it DE FACTO? Likewise, no.
Because there is no valid law under which it was
incorporated. The law creating it is unconstitutional
because congress cannot enact a special law to create a
private corporation. They can only enact a law to create a
GOCC.

So if it is not controlled and owned by the government, is it


automatically a private corporation if it is no longer owned
by the government? Justice De Castro said there is another
kind of corporation, that organized for a public purpose,
found in the civil code.

A Group of Lawyers decided to put up a corporation


to engage in the practice of the law profession. They
stated in their AOI that the primary purpose is to
engage in the practice of the law profession and the
one who processed the papers of the corporation
belongs to the same fraternity, and he turned a blind
eye and had the AOI approved by the director of the
SEC. As a consequence the SEC issued a Certificate of
Incorporation. Is that a De Jure or a De Facto
corporation? Or neither de jure nor de facto?

2. De Jure, De Facto, Corporation by Estoppel, Corporation by


Prescription
DE FACTO CORPORATION
Sec. 20. De facto corporations. - The due incorporation of any
corporation claiming in good faith to be a corporation under this Code,
and its right to exercise corporate powers, shall not be inquired into
collaterally in any private suit to which such corporation may be a
party. Such inquiry may be made by the Solicitor General in a quo
warranto proceeding.

Neither, right? It cannot be organized for the practice of a


profession.
The Second
Incorporate

It exists in fact, but not in law. In the sense that the state
reserves the right to question its existence owing to an
infirmity in its incorporation.

Element:

Bona

Fide

Attempt

to

As long as there are no Articles of Incorporation signed by the


parties, there is no De Facto Corporation.
If the AOI is not filed with the SEC?

It is allowed by law to exist, but the State reserves the right to


question its corporate existence because of defects in its
creation. So far as the state is concerned it does not exist, but
exists in fact.

No De Facto Corporation.
If the AOI is signed, and filed with the SEC, but not approved
by them, and no Certificate of Incorporation issued? It is NOT
a De Facto Corporation.

And then you have corporations by estoppel, which is a group


of persons who assume themselves to be a corporation, and
theyre precluded from denying the existence of the ostensible
corporation with respect to third persons relying on their
representations. They are liable as general partners for the
liabilities and damages incurred by the ostensible corporation.

You cannot say that there was a Bona Fide attempt to


incorporate until the SEC at least issues a Certificate of
Incorporation.
So bona fide attempt is not tantamount to good faith
right?
It is tantamount to the actual issuance by the SEC of the
CERTIFCATE OF INCORPORATION.

What are the elements of a De Facto Corporation?


(1) A VALID LAW under which it is incorporated
(2) Bona Fide attempt to incorporate
(3) Exercise of Corporate Powers

So what if five persons sign the articles of


incorporation, subscribe to shares of stock of the
proposed corporation, gave the subscription fees to
the lawyer, and the lawyer pocketed the money, and
he issued to the five incorporators a FALSE or
SPURIOUS Certificate of Incorporation? Is it De Jure
or De Facto?

The First Element: Valid Law under which it is


incorporated

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Its NEITHER. There was no Certificate of Incorporation


issued by the SEC.

legally authorized to do so. That would make them liable


as general partners for the liabilities and damages incurred
by such ostensible corporation.

In these cases, if its neither de jure or de facto, is


there a corporation by estoppel?

What about the liabilities of a De Facto Corporation?

A Corporation by Estoppel is a group of persons who


assume themselves to be a corporation when they are not
legally authorized for that purpose. Therefore in these
cases where there is representation by a group of persons
that they are a corporation, when they are not legally
authorized for that purpose, then there is a corporation by
estoppel.

They have the same liabilities as a de jure corporation.


How about the liabilities of the directors, officers,
and stockholders of the De Facto Corporation? Are
they liable as general partners?
The answer is no. The liability as general partners only
applies to Corporations by Estoppel and not to a De Facto
Corporation. So whatever are the liabilities, rights, of
directors and officers and stockholders of a de jure
corporation are the same rights, duties, and obligations of
directors, officers, and shareholders of De Facto
Corporations. It is the same as a de jure corporation except
that the state reserves its right to question the corporate
existence through a quo warranto proceeding.

So these persons are precluded or estopped from denying


the existence of the ostensible corporation and they are
liable as general partners for all the liabilities and damages
caused or incurred by the ostensible corporation.
So what are the liabilities of these incorporators?
So its not de jure, not de facto, but by estoppel. On the
assumption that there was representation to a third person
that they are a corporation. So what is their liability? Are
they all liable as general partners? The answer is no.

The liabilities of stockholders are limited to their


subscription agreement to the corporation, unless they are
also directors or officers.

There ought to be an OVERT ACT or REPRESENTATION


that they are a corporation so the doctrine of Corporation
by Estoppel can apply. So if there is no overt act, he is just
a mere passive subscriber he is not liable as a general
partner.

BAR: What are the liabilities of A, B, C, D, and E in a


De Facto Corporation?
It depends on the acts they perform. As directors, or
officers, or stockholders. If only as stockholders, then
theyre only liable to the extent of their subscription. If
theyre directors, they can be personally liable in six cases,
which well discuss later on.

EXCEPT, in the case of Philippine Fishing Gear. Here


there was no overt act or representation but the passive
subscriber reaped the benefit from his association with his
partners in another transaction. With respect to the
transaction, there was no overt act, but he obtained the benefit
from the association with these affiliates in other transactions.
So if you reap the benefits as a result of association with other
persons, it makes you liable likewise as a general partner

The existence of a De Facto Corporation cannot be


attacked collaterally. It can only be attacked in a direct
proceeding, a Quo Warranto proceeding.
ABC Corp is a De Facto corporation, it sold
merchandise to XYZ Corp. XYZ did not pay ABC, and
so the latter filed a collection suit against the former.
XYZ moved to dismiss the complaint on the ground
that ABC, as a de facto corporation, cannot sue or be
sued. Will you grant the motion to dismiss?

Does the Good Faith or Bad Faith of the persons who


made the representations that they were a
corporation important in determining whether it is a
Corporation by Estoppel or not?

No. For two reasons:

So five lawyers put up a corporation, its their first time, so


they subscribed to shares of the corporation, they signed
the articles of incorporation, and then they paid the fees to
the lawyer, in the hope that the lawyer would process it.
But then the lawyer pocketed the money, and issued a
FALSE or SPURIOUS Certificate of Incorporation. But
believing in good faith that theyre really authorized, they
entered into contracts, lets say for the purchase of office
equipment for their new office. Is it a corporation by
estoppel? Because 2 out of 5 believed in good faith that
they were really authorized? The answer is no because the
good faith or bad faith is immaterial to determine a
corporation by estoppel. The point is, two or more persons
assume themselves to be a corporation and they were not

A De Facto corporation has the power to sue and be sued,


just like a de jure corporation.
Second, the existence of a de facto corporation cannot be
questioned in a collateral proceeding like in this collection
suit. There must be a direct proceeding, initiated by the
state through the Solicitor General, to oust the corporation
from exercising corporate powers.
CORPORATION BY ESTOPPEL
Sec. 21. Corporation by estoppel. - All persons who assume to act
as a corporation knowing it to be without authority to do so shall be
liable as general partners for all debts, liabilities and damages incurred

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or arising as a result thereof: Provided, however, That when any such
corporation, but not the corporation by estoppel right?
ostensible corporation is sued on any transaction entered by it as a
Thats not how the SC viewed it.
corporation or on any tort committed by it as such, it shall not be
For Bar purposes, if the question is, can you sue an
allowed to use as a defense its lack of corporate personality.

ostensible corporation, the answer is YES. Macasaet


vs Francisco.

On who assumes an obligation to an ostensible corporation as such,


cannot resist performance thereof on the ground that there was in fact
no corporation.

Recently the SC imposed *** possessed certain attributes,


similar to a corporation. It can be sued, it can be made liable
for damages and liabilities it incurred as a corporation.

Can you sue a corporation by estoppel independently


of the persons assuming themselves to be a
corporation?

Alright, in a corporation ______ (***Tengene Pete Ive


repeated this part so many times and I couldnt understand
what Dean was saying dahil sa imbyernong ubo mo!) and the
persons who assumed themselves to be a corporation, are a
corporation by estoppel right? So regardless of the good faith
or bad faith of these persons

Who do you sue? The ostensible Corporation or the


persons or both?
But I thought that in the case of ostensible
corporations, those who assume themselves as a
corporation are liable as general partners? If they
are liable as general partners, so how can you
enforce the liability of those who assume themselves
as a corporation unless you implead them as party
defendants?

In the last meeting we said that, if five persons sign the articles
of incorporation and gave the subscriptions to the treasurer in
trust and then included the filing fee and they were duped into
believing that the SEC issued a Certificate of Incorporation,
and a Falsified Certificate was issued to them, and in good faith
they conducted their operations even though they were not
registered, we said thats not a de jure corporation, not even a
de facto corporation, because there was no attempt to
incorporate. It is a corporation by Estoppel, and those who
assume themselves to be a corporation are liable as general
partners.

Is it ostensible corporation or the persons or both?


Both sir.
Can they have assets? How? How can they have
assets when they are not a corporation?
It is considered as a corporation only for equity purposes,
only because of its representation that the persons forming
it are a corporation.

BAR: If the corporation fails to materialize, (ubo ubo)


is there a partnership created among the
incorporators?

Can it acquire assets?

If the corporation fails to materialize and their


articles of incorporation are not filed with the SEC, is
there
a
partnership
created
among
the
incorporators?

The case of Macasaet vs. Francisco. A newspaper


which the plaintiff thought was registered with the SEC
was sued together with the publisher, editor. The lawyer of
the newspaper company filed a motion to drop Abante
Tonight (Abante Tonight?) as party-defendant because
they were not registered in the SEC. The court denied the
motion. Because a corporation by estoppel cannot be sued
or be sued independently of the persons comprising the
corporation. The SC said the RTC did not abuse its
discretion by denying its motion to drop the ostensible
corporation as a party defendant. So that is your authority
to say that the ostensible corporation , if you do not
register w/ the sec, you may be sued. Supreme Court said
it also possesses certain attributes.

In the PIONEER INSURANCE CASE, we have to make


the distinction between those who assume themselves to
be a corporation, since they are liable as general partners,
but does that mean theres a partnership created among all
of the incorporators?
The Supreme Court said that the failure of the
incorporators to organize does not necessarily give rise to
a partnership, unless the parties intend to form a
partnership in case of failure of incorporation. IN a
partnership, two or more persons bind themselves to
contribute money or property with the intention of
dividing the profits among themselves, and that is NOT
the same as a corporation. There has to be intention to
organize as a partnership in case the corporation fails to
materialize. Otherwise, only the passive and active
subscribers will be liable as general partners, without
having to create a partnership with intent. The others are
not liable to share in the losses incurred by those who
actively held themselves to be a corporation.

If you do not plead the ostensible corporation, how


do you make it liable for damages and liabilities
incurred?
IN my notes, I said that what happens now if judgment is
later on rendered against the ostensible corporation, how
do you enforce the judgment against the ostensible
corporation that presumably will never have any capacity.
So you sue the persons comprising the ostensible
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In the case of Lozano vs De Los Santos (June 1997), there


can be no Corporation by Estoppel unless there is a third
person who relied on the representation that it is a corporation.

Because Juan had a considerable investment in the supposed


financing company, he was made the president of the proposed
corporation. He believed in good faith that the Articles and
other documents were filed with the SEC. So Juan dela Cruz,
with Pedro Reyes (bigla singit new name ha) entered into
various transactions with various clients. Thereafter he
discovered that no Articles were filed, no certificate of
incorporation issued. So they hurriedly remedied it and had a
Certificate of Incorporation issued from the SEC. Three months
after the issuance of the Certification, the corporation collapsed
because of insolvency.

There were two associations of Jeepney drivers and operators


in Mabalacat, Pampanga, and they agreed to unify to create a
consolidated corporation. They agreed that the election of
directors and officers, and the directors elected shall run the
consolidated corporation. They held their election, and typical
of the Philippines, the losing party cried Cheating!. The other
group refused to recognize the election. Thus a suit was filed
with the RTC acting as a Special Commercial Court. The
QUESTION is whether or not it falls as an INTRACORPORATE CONTROVERSY.

What are the liabilities of Juan dela Cruz and Pedro


Reyes? Can they invoke (1) De Facto Corporation; (2)
Corporation by Estoppel against those investors who
made placements with the corporation and did not
get their return on investments?

There was an attempt to bring it under the rules on intracorporate controversies on the argument that there was a
corporation by Estoppel among them. So the proposed
consolidated corporation, at the least, is a Corporation by
Estoppel and they argued that there is an intra-corporate
relationship between the partners.

As to the first question, is there a De Facto


Corporation?
There is. The Certificate of Incorporation was allowed to
issue. But is the doctrine of De Facto Corporation available
as a defense? No. Because that could only be raised in a
direct proceeding and not in a collateral proceeding.

The SC said NO, if the representations made are between them,


and it did not involve a third party, there can be NO
CORPORATION BY ESTOPPEL. Also keep in mind that only
the aggrieved party may invoke the doctrine of Corporation by
Estoppel.

What about the defense of Corporation by Estoppel?


It is not available. They were the ones who claimed the
benefit. They are not the aggrieved party.

He who obtained the benefits from the transaction


cannot invoke the Doctrine of Corporation by
Estoppel.

How about the liabilities of Juan dela Cruz and Pedro


Reyes? Are they personally liable?

In the case of INTERNATIONAL EXPRESS TRAVEL


AND TOURS VS CA, Henri Kahn, on behalf of the Philippine
Football Federation, purchased airline tickets, from Travel and
Tours, for Philippines athletes who will compete in the SEA
games. The tickets were not paid. Travel and Tours filed a
collection case against Kahn, and Kahn invoked the doctrine of
Corporation by Estoppel. Curiously, the Philippine Football
Federation, while registered with the SEC, is still not a
corporation, because under the law creating Sports
Federations, it is not enough that they register with the SEC, it
must also be accredited by the appropriate governing agency.
So the law requires Sports Federations to be registered with the
SEC AND ACCREDITATION with the appropriate governing
agency, TO BE ABLE TO ACQUIRE LEGAL PERSONALITY.
The PFF did not have accreditation from the appropriate
governing agency, so it is not a De Jure corporation but a
Corporation by Estoppel. Here, only Henri Kahn represents
PFF, and he who represents an unincorporated corporation is
the one personally liable. Likewise, the SC said that Kahn
cannot invoke the doctrine because he was the one who
benefited from the transaction. Only the aggrieved party and
NOT the of

It depends. There are six cases where a director of the


corporation may be held personally liable, and they are:
(1) Assenting to a patently unlawful act;
(2) Gross Negligence or Bad Faith in directing the affairs;
(3) Acquiring Interest in conflict with their duty as a
director or officer of the corporation resulting in damage
thereof;
(4) Issuance of Watered Down stocks;
(5) By Agreement to be held liable with the corporation;
(6) By Express provision of law. Unless these are present,
the insolvency of the corporation does not make them
personally liable.
Thats an affirmation of my discussion *fake giggling by
the class*.

3. Domestic and Foreign


What is a Domestic Corporation?

fender may invoke the Doctrine of Corporation by Estoppel.

One formed, organized, and existing, under Philippine


laws.

BAR: Orayt, this was asked in the bar. Juan dela Cruz was
invited by four persons to invest in a financing company.
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Foreign Corporation?

closed
corporation
in
the
ARTICLES
OF
INCORPORATION. In the case of San Juan Steel vs CA,
there were 5 incorporators/subscribers and the Husband
and Wife owned 98.7% of the corporation. Does that make
it a closed corporation? NO. Because it MUST have the
characteristics of a Closed Corporation to be considered as
such.

One formed, organized, and existing, under laws other


than Philippine law, AND whose laws allows Filipino
Citizens to conduct business in their own country or state.
Sec. 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.

What are the characteristics of a Closed Corporation?


(1) The AOI provides that the number of stockholders
should not exceed TWENTY.
(2) Subject to RESTRICTIONS on transfers, as specified
in the AOI, Bylaws, and stock certificate

Under Sec. 123, there are two features of a foreign corporation.

(3) Not available for listing in the stock exchange or


public offering.

1. Formed, organized, existing under FOREIGN LAWS;


AND

BAR (1986): What do you mean by a Corporation


Going public and Going Private?

2. The element of RECIPROCITY whose laws allows


Pinoys to do business in its own country or state.

Not in the corporation code but asked pa rin sa bar.


Tinopak daw si examiner. May kalog ang isip.

What if there is no element of Reciprocity? Is it still a


foreign corporation?

GOING PRIVATE means adopting the features of a Closed


Corporation. GOING PUBLIC means making shares
available in the Stock Exchange and made available for
public trading. (pero kay Pete iba ang Going Public nya.
Chos)

Yes. As long as it is formed, organized, existing under a


foreign law. BUT, if the foreign corporations laws do not
allow Pinoys to do business in its own country, it cannot be
given a license to do business in the Philippines. But it
does not detract from the fact that it is still a foreign
corporation because the test to determine is its PLACE OF
INCORPORATION.

5. Parent and Subsidiary


The Parent Corporation controls another corporation, it owns
shares in that corporation, and elects the directors in the other
corporation.

If ABC corporation is organized in the USA,


composed fully of Filipino citizens, what is it?

Holding Company vis--vis Parent Corporation

Its a foreign corporation because it is formed, organized,


existing under foreign laws.

The Holding company is organized for the purpose of


investing in equity of various corporations. Just like JG
Summit of the Gokongweis or SM Investments of the Sys.
On the other hand, the parent company is not necessarily
organized for the purpose of investing in equity since the
parent company may have a private purpose.

But is it a Philippine National? Can ABC corporation


invest in the equity of a Public Utility company?
Yes. A foreign corporation composed entirely of Pinoys is a
Philippine National if it is registered as doing business in
the Philippines.

So Baket ba kailangan ng Holding Company?

To determine nationality, the test is not the place of


incorporation
but
the
NATIONALITY
of
the
CONTROLLING STOCKHOLDERS, in case of investment
in nationalized activities. The definition of a Philippine
National under the Foreign Investment Act, in case of a
foreign corporation, it is composed entirely of Filipinos,
and registered to do business in the Philippines. Thus, it
can invest in public utilities.

To achieve synergy in various corporations. At the same


time to limit liability with the operations of the various
companies. The best examples of synergy are contracts
between companies with interlocking directors. Under Sec.
33, except in case of Fraud and if it is reasonable under the
circumstances, a contract between two corporations with
interlocking directors is not good right? For example,
when Philippine Airlines was controlled by Ramon Ang of
San Miguel, where did they get the fuel supply? From
Petron (owned by San Miguel).

4. Open and Close


Is a Family corporation a closed corporation?

6. Corporation Sole and Corporation Aggregate

Not necessarily. The SC held that what makes it a Closed


Corporation is whether it has ALL the characteristics of a

7. Public and Private


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8. Government-Owned and Controlled Corporation

to inspect the books of PNB, to investigate the Behest loans it


granted but he wasnt a stockholder of PNB. So he bought one
share of stock (barat lang), and invoked his stockholders right
of inspection of the corporate books under the Corporation
Code. After examining the charter of PNB, the SC said that its
charter limits those allowed to examine the books of PNB, only
allowing the President, the Governor of the Central Bank, and
the Secretary of Finance, and only those authorized by the
board. IT did not include stockholders. Thus, the charter of
PNB prevails over the general law of the Corporation Code. But
of course it is not anymore applicable today since PNB is no
longer a GOCC but a private corporation.

What is a Public Corporation?


It is a corporation formed and organized for the
government of a portion of the State. It has a political
purpose. E.G. Cities, municipalities.

Are all GOCCs considered public corporations?


NO. These GOCCs may not be organized for the
government of a portion of the State. Like DBP, its a
GOCC but it does not exercise control over a portion of the
State.

BAR: Why is there no private corporation organized


by Congress?

What about the Boy Scouts of the Philippines?

Under the constitution, Congress, except by general law,


cannot pass a law for the creation of a private corporation.
So if you want to create a private corporation, do so by
general law (Corporation Code). Thats why there was a
bar question regarding the creation of a private
corporation through congressional act, asking if it is a De
Facto Corporation. The answer is that it is neither De Jure
nor De Facto. IT cannot be de facto because there is no
valid law under which it is incorporated since Congress
cannot enact a law to create a private corporation. It can
only create, by law, a GOCC.

In the Case of Boy Scouts of the Philippines vs CA, penned


by Justice De Castro. According to her, the BSP is a public
corporation. The Boy Scouts were created by Special Law,
it has a charter of its own, and because of its charter, it was
owned and controlled by the government. Thereafter, it
somehow became controlled by private individuals. And
since it is now controlled by private individuals, the BSP
now claims it is no longer a GOCC and not subject to COA
audit. Ayaw nila ma-audit eh. Binay daw kasi. Anyways,
the SC said that just because it is not anymore owned and
controlled by the government does not mean it is already a
private corporation. The SC said there is still ANOTHER
kind of corporation under Sec. 44 of the NEW CIVIL
CODE. These are corporations ORGANIZED FOR A
PUBLIC PURPOSE. Thus, since it was organized for a
public purpose, it is subject to COA audit.

What about the Philippine National Red Cross?


Red Cross was created by special law, theres a charter.
The case cropped up because of a petition filed by former
congressman Dante Liban against Senator Dick Gordon.
According to LIban, Gordon is deemed to forfeit his Senate
seat by virtue of his assumption of the chairmanship of
Red Cross. Citing the Constitution, he argued that no
SINator or TONGressman shall occupy, during his term of
office, a position in government including GOCCs. Liban
said that the PNRC is a GOCC, since it was created by
special law. Therefore, Dicks insertion as the Chairman of
PNRC violated the Constitution and he should forfeit his
Senate seat.

TWO KINDS OF GOCC


There are two kinds: Chartered and Non-Chartered.
Whats the practical distinction between the two?
A chartered GOCC means there is a law creating the
GOCC, thus it is governed primarily by the special law
creating it. The Corporation Code is only suppletory. If it is
a NON-chartered GOCC, the governing law is the
Corporation Code.

The SC said that PNRC is NOT a GOCC. Because the funds


of Red Cross did not come from the Govenrment. It comes
from donations.

Who has jurisdiction over employees of chartered


GOCCs?

Does that mean the law creating Red Cross is


unconstitutional?

The Civil Service Commission


Non-chartered GOCCs?

The SC initially said it is. But upon intervention of PNRC


in the Motion for Recon, the SC said that it is SUI
GENERIS and valid. Lets forget muna about the rules
daw, lets recognize PNRC for what it is, an important ally
of the govt in providing humanitarian service to all people.
Lets close our eyes muna to the legal principles. PNRC
does not need to re-organize anymore as a private
corporation.

The Labor Arbiter and NLRC.


Example: Philippine National Bank. It was created by special
law, and thus governed by its charter. Before it was privatized
and acquired by Lucio Tan, it was a GOCC.
In the case of GONZALES v. PNB (1983), Ramon Gonzales
(the Oliver Lozano of his time, public advocate sya etc) wanted
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So what happens if an employee of PNRC is removed?


In one case, an officer of Red Cross was misappropriating
its funds so he was terminated. The SC said that the
termination dispute should be handled by the CSC, since
the PNRC has a charter of its own.
What makes a corporation a GOCC?
If its a stock corporation, it must be 51% owned by the
government.
In the case of CARANDANG v. DESIERTO (Jan 2011),
Benedicto owned 72.4% of the outstanding capital stock of
RPN and ceded these to the PCGG and the Government.
Later on, he recanted and said that his shares represented
only 32.4% of RPNs stock and not 72.4%. So what does
the government own in this sequestered corporation?
During the pendency of this issue, the GM was removed,
thus giving rise to the question of jurisdiction between the
CSC and LA over his termination. The SC said that
pending conclusive determination as to the governments
shares, it is not considered yet a GOCC. Thus to be
considered a GOCC, it must be conclusively proven that
the government owns at least 51% of the outstanding
capital stock.
FUNA v. MANILA ECONOMIC AND CULTURAL
OFFICE
Is MECO a GOCC?
In the case of, the SC laid the requisites of a GOCC. It is
our cultural office in Taipei, Taiwan that acts as our
embassy there since under the One China Policy we only
recognize the Peoples Republic of China (CHINA) and not
Taiwan, so we dont have any diplomatic ties with Taiwan.
MECO collects fees. Friend daw ni Dean D. ang head ng
MECO now hahaha. So the issue here is whether the fees
collected by MECO are subject to COA audit. The SC said
MECO is NOT a GOCC, because it is organized as a nonstock corporation and their funds dont come from the
government, the fees collected by it partake of
governmental funds and thus subject to COA audit. Paggusto, gagawa ng paraan, pag-ayaw may dahilan. Pag may
alak, may balak! So MECO is not a GOCC but the fees it
collects partake of the nature of governmental funds and
subject to COA audit.

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C. NATIONALITY OF CORPORATIONS
1. Place of Incorporation Test
2. Control Test
3. Grandfather Rule
General Rule is that we dont apply control test, we only
follow control test in times of war and in case of investment in
economic activities reserved in whole or in part to Filipinos.
We follow instead Sec. 123 of the code which is the place of
incorporation.

Retail

So the nationality is determined by the place of incorporation


except in case of investment in economic activities which are
considered nationalized or in times of war, in which case we
follow the control test and the grandfather rule.
Before the case of Nara vs Redmont, we only follow the
control test in determining the nationality of the corporation in
investment in activities reserved for Filipinos.
General Rule: We apply Incorporation Test to determine
Nationality of Corporation

GAMBOA v. TEVES
ABC Corporation is Family Corporation, its
authorized capital stock consists of common shares
60% owned by Filipinos, 40% from the foreigners.
And then suddenly the corporation decided to issue
preferred shares. And all the preferred shares are to
be given to Foreigners the non-voting preferred
shares. Is this issuance of the non- voting preferred
shares given to foreigners allowed?

Exception: In case of investment in economic activities which


are considered nationalized or in times of war.
But in the case of Nara vs Redmont, the Supreme Court said,
that we apply cumulatively both the control test and the
grandfather rule to determine the nationality of the
corporation engaged in nationalized activities.
What are examples of economic activities that are
reserved for Filipinos that is why in these cases we
follow the control test?
Mass Media

100% Reserved for Filipinos

Rice and
Corn

100% Reserved for Filipinos

Small Scale
mining

100% Reserved for Filipinos

Security
Agency

100% for Filipinos

Watchman
and Detective
agencies

100% Reserved for Filipinos

Recruitment
Agency

75% Reserved for Filipinos

Advertising

70% Reserved for Filipinos

Large Scale
Mining

60% Reserved for Filipinos

Banks

60% for Filipinos except if foreign


banks under the foreign bank
liberalization law certain banks are now
allowed to own 100%.

100% reserved for Filipinos but if the


foreigner has a capital of 2.5 Million
Dollars and up. Foreigners are allowed
to own 100%. So below 2.5million
dollars, it is reserved for Filipinos.
Exceptions are high end products like
louis vuitton, hermes, Gucci. You cant
expect hermes to be owned by
Filipinos, otherwise it is not hermes. In
the moment you have a foreigner, you
are subjected to the 2.5 million dollar
requirement. Exceptions to repeat are
High end products which have 30
thousand dollars per store and
convenience store like 7/11 which
should have _____(unclear figure,
hindi dahil sa ubo ni pete) thousand
dollars per store.

In the First case the Supreme Court said that the term
Capital is limited to only Voting shares, so if the preferred
shares are voting they are included in the term Capital
stock, if they are not voting they are not included.
In the Motion for Reconsideration, the Supreme
Court clarified it further. What happens now when a
corporation issues a mixture of shares whether
voting or non-voting?
The Supreme Court said the 60-40 Filipino ownership
participation must be mirrored in all classification
shares. So across the board whether common,
preferred, voting or non-voting, the 60-40 Filipino
Foreign ownership limit must be mirrored in all
classification shares. So both economic rights and
voting rights must reside in the Filipinos by 60%.
Why?
The Rationale given by the Supreme Court under the
Constitution is that the state must adopt a self-reliant
economy effectively controlled by Filipinos. And the
term control applies to both voting rights and
economic rights.

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The control test will only apply in case of investment in


economic activities reserved for Filipinos.
So we have
enumerated the activities that are reserved for Filipinos except
for one.

The Supreme Court said NO, because it is important for


the Filipinos to own 60% of the common shares. OR the
preferred shares if they are voting. So 60% of the
outstanding capital stock is owned by the Filipinos, its not
compliant with the Constitution that requires 60% of the
Capital and NOT outstanding capital stock to be owned by
Filipinos.

What about a financial technical assistant


agreement? May a corporation owned by foreigners
provide financial, and technical assistance to a
mining company?

Now why is it that the term Capital is limited to


voting shares?

The answer is yes, so if the intention is to provide financial


or technical assistance to a mining company or a natural
resource exploration company. That corporation may be
owned by Foreigners.

Because as we said earlier, under the Constitution, the


state must adopt a self-reliant economy effectively
controlled by Filipinos. And control in the corporation is
translated to the ability to elect the directors who would
run the corporation. So unless the Filipinos have the
control in the election of directors, unless they have 60%
of ownership in the corporation to elect the directors, then
you can say that the Filipinos are in control

But a corporation that participated in the exploitation,


utilization, development, exploration of natural resources, you
then have to apply or follow the 60-40 limit. So that
corporation can only own up to 40% of a corporation engaged
in mining activity.

Now, in the Motion for Recon, supposing we make the


preferred shares non-voting, lets say for example the question
we asked earlier. At the outset we have 100,000 common
shares, 60,000 Filipinos 40,000 preferred shares and then the
articles of incorporation amended to include only preferred
shares. 100,000 new preferred shares issued only to foreigners
and they are non-voting. because they are non-voting, is this
still in compliant with the Constitution?

Same principle also applies in investment of public utilities.


Under the Constitution, mining, public utility and corporations
engaged in exploration of natural resources. The constitution
in all these 3 cases provide that 60% of the capital of these
corporations must be owned by Filipinos.
How do you define Capital? Is it similar to
outstanding capital stock, because when we say
outstanding capital stock, it includes both common
and preferred shares; is this how you construe
Capital?

Lets have a second example.


100k = Outstanding Shares, all common shares then 60k =
owned by Filipinos

The Supreme Court said NO, the term capital is limited to


voting shares only.

40k = owned by foreigners. So the 60-40 allocation is complied


with. Now subsequently, the AOI was amended to include the
issuance of non-voting preferred shares. Now all the nonvoting preferred shares are to be given to Foreigners.

For example, lets say a mining company has 200,000


outstanding shares with par value 1 peso and then divided into
100,000 common and 100,000 preferred shares. Now lets say
that 80,000 of the common shares are owned by foreigners
and 20,000 of the 100,000 common shares are owned by
Filipinos. And the entire preferred shares are owned by
Filipinos and the preferred shares are non-voting. Is this
corporation in compliance with the corporation code
that at least 60% of capital are owned by Filipinos?
200,000 outstanding shares consisting of 100,000
common and 100,000 preferred. Preferred shares are
non-voting. Out of the 100,000 common shares,
80,000 are owned by foreigners 20,000 are owned by
Filipinos. But all the preferred shares are owned by
Filipinos. If you compute, it will be 120,000
outstanding shares for Filipinos consisting of 20,000
common, 100,000 preferred. And 80,000 of the
200,000 shares are owned by foreigners, is this
compliant with the Constitution? Because 60% or
120,000 of the 200,000 is 60% and 80,000 of
200,000 is 40%. Is this compliant with the
Constitution?

Now, if we follow the term capital in the first case, then these
corporations comply with the Constitution. Because non-voting
preferred shares are not included in the term capital and the
Filipinos own 60% the Voting shares.
Thats why in the Motion for Recon, the Supreme Court said
that it is not the intention of the framers of the Constitution.
So now, if the corporation will issue a mixture of shares,
common and preferred, voting or non-voting. The 60-40
allocation must be mirrored in all classification of shares. So to
breathe more life to the provision of the Constitution that
Filipinos must control the Corporation. Both economic rights
and voting rights must reside in Filipinos.
(now, I had the chance to talk to marvic leonen about this case,
we came from a conference in manila sponsored by Philippine
Asssosiation of Law Schools. We talked about Gamboa vs Teves
case, and I said, Justice, what about those corporations where
the losses, 60% of the outstanding capital stock, do we apply
the same definition? That it should be limited only to voting
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shares? Of course he didnt answer because whether voting or


non-voting it will have to be 60-40. And I said what about
advertising? Recruitment agency? Do we follow 60-40 or 75-25
or 70-30? What about in advertising, 70-30, do we mirror all
shares? But before he could answer me, nag landing na yung
plane. So thats not clear yet. Because the SC decision on
Gamboa vs Teves pertains to Public Utility. The ruling in Nara
vs redmont pertains to Mining. So we have no case yet on
advertising or recruitment, realty or other corporations
engaged in nationalized activities, lets wait for the SEC ruling)

40% owned by foreigners

Lets move on the different kinds of test to determine


nationality of Corporation.

But, what if it is like this. (DRAWS SOMETHING AGAIN)

So is ABC in compliance with the Constitution that


requires 60% of Capital must be owned by Filipinos?
Yes, because under the Control test, for as long as the
investing corporation is owned by Filipinos, the entire
shares recorded in the name of XYZ, the investing
corporation should be recorded as Filipino owned. And
therefore, despite the fact that foreigners own 40% of XYZ,
XYZ is 60k shares considered as Filipino owned.

ABC (100k shares)

Under Section 123 of the Corporation Code we follow the place


of the incorporation test, regardless the composition of the
stockholders. So a corporation owned by foreigners if
organized under the Philippines, is a Philippine National with
respect to economic activities that are NOT reserved for
Filipinos.

XYZ
(90%)

But, as we said earlier, if it is Nationalized Activities, we follow


the Control Test and the Grand Father Rule.

Filipinos

When do we apply the Control Test?

(50%)

So we dont follow the Grand Father Rule Generally if on its


face 60% of the investing corporation is owned by Filipinos
40% by foreigners

ABC (100k shares)

Filipinos
(60%)

Foreigners
(50%)

Therefore, so you have 45k ownership by foreigners in the XYZ


Corporation plus the 10k ownership from ABC then you have
55k ownership by foreigners. Therefore, not in compliance with
the Consttution.

(DRAWS SOMETHING ON THE WHITE BOARD)

(60%)

(10%)

If the capital of the investing corporation is not 60% owned by


Filipinos, we follow the Grand Father Rule. All the shares
corresponding to percentage owned by Filipinos shall be
recorded as Filipino owned and the shares corresponding to
the percentage owned by foreigners are recorded as foreign
owned.

Under the control test, the nationality of the controlling


Stockholder determines the nationality of the corporation
and for as long as 60% of the Capital of the Investing
Corporation is owned by Filipinos, then the entire shares
of that investing corporation will form as Filipino owned.

XYZ

Foreigners

This is how the Grandfather Rule was played in the first case of
Nara vs Redmont.

Foreigners

Now what about this one. (DRAWS SOMETHING ON THE


WHITE BOARD)

(40%)

ABC Mining Company(100k shares)

XYZ

Foreigners

(60%)

(40%)
Filipinos

Is ABC a Philippine National?

(60%)

ABC corporation has 100k outstanding shares, lets say


they are all common shares and ABC is owned 60% by
XYZ and the Foreigners own 40k.

Foreign Corp
(40%)

Foreigners
(40%)

So on its face, it appears to have complied with the


60-40 limit right? But the SC in this case applied the
Grandfather Rule. Why?

But XYZ is
60% owned by Filipinos,
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Because the subscriptions of the Filipinos are not paid. So


on paper, 60-40 nga, di naman binayaran. And then there
is an agreement between the Filipinos and the foreign
corp. to fund the operations of the mining company.

control means the ability to elect the directors that will run
the affairs of the corporation.
Gamboa v. Teves (2012; Motion for Reconsideration)
There is no more qualification needed for shares to be
considered capital The 60-40 must be mirrored across the
board in ALL classification of shares. (ex: Voting shares must
be 60-40, non-voting shares must be 60-40, preferred shares:
60-40,)

So the SC applied the Grandfather Rule in cases wherein there


is doubt on whether or not the Filipinos really own 60% of the
capital of the public utility of the mining company.
So for the first time in the case of Nara vs Redmont, the SC
applied the control test and the Grandfather rule. It was just a
DOJ opinion, now this opinion has found its way in
Jurisprudence in Nara vs Redmont.

RATIO: There are instances where even non-voting shares may


still be allowed to vote:
Deans Mnemonics: A2SICMID (when youre sick, call a
doctor [MD]): Amendment of the AOI, Amendment of the bylaws, Sale, lease or other disposition of corporate property,
Increase of bonded indebtedness, Increase of Capital Stock,
Merger or Consolidation, Investment of Corporate funds in
another corporation and Dissolution

And before the Motion for recon, we always thought that only
the control test applies, and the grandfather will apply if it is
less than 60% owned by Filipinos in the investment Corp.
ORYT, the SC in the motion for recon said and clarified that
these 2 test do not contradict each other, they can be
cumulatively applied.

Narra v. Redmond: For the first time, the SC applied BOTH


the Control Test and the Grandfather test. Before this case,
either the Control Test or the Grandfather Test was applied.

Conclusion:
You apply control test if on its face, the 60-40 allocation is
complied with. BUT, if there is doubt on whether or not the
Filipinos really own 60% of these corporations, then you can
resort to the Grandfather Rule.

Apply the Control Test IF: The Nationality of the


corporation is determined by the nationality of the controlling
stockholder. As long as 60% of the Investing corporation is
owned by Filipinos, then the entire shareholdings of the
Investing Corporation shall be considered owned by Filipinos.

There are 2 ways in using the Grandfather rule.


FIRST: if the investing corporation is less than 60% owned by
Filipinos then the shares corresponding to the percentage
owned by Filipinos recoded as Filipino owned and the shares
corresponding to the percentage of foreigners will be recorded
as foreign owned.

Apply the Grandfather Rule ONLY IF:


1.) A corporation is engaged in a nationalized activity and its
shares are owned by a corporation.
2.) The Filipino ownership in such a corporate stockholder is
less than 60%;

SECOND: on its face, the 60-40 allocation is complied with,


and yet there is a doubt on whether or not the Filipinos really
own 60% of the Corporation. Then we have to resort to the
grandfather rule.

3.) The ownership of Filipino citizen in the Investing


Corporation is in Doubt, meaning if the 60-40 is complied with
in paper but there are doubts on the extent of beneficial
ownership in such corporation. Any doubt will trigger the
application of the rule.

So there is nothing wrong in corporate layering, you can have


many corporate layers as long as the combined totals of the
investing and the investee corporation must show that 60% of
Capital are owned by Filipinos, and if there is a doubt. You
apply the Grandfather rule,

4.) If the ownership of the corporation is hidden by using a


layer of corporations (ex: Corp1 is owned by Corp 2; Corpo 2 is
owned by Corpo 3, and so on.) In such a case, you trace the
ultimate owner or the grandfather of the corporation. The
combined totals of the investee and the investing corporations
should indicate or establish that Filipinos own 60% of the
capital of such corporate stockholder. Otherwise, the 60-40
requirement cannot be complied with.

REVIEW:
Gamboa v. Teves (2011):
The 60-40 capital requirement of public utilities where
interpreted. The term capital is limited to voting shares. If
shares are allowed to vote, they form part of capital. However,
if the shares are not allowed to vote, they are not considered
capital.
RATIO: It makes reference to a constitutional provision
wherein the State should adopt a self-reliant economy
effectively controlled by Filipinos. In the corporate setting,

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D. INCORPORATION and ORGANIZATION


BAR: What are the qualifications of incorporators?

1.

Not less than 5, not more than 15

Natural persons of legal age

Majority of them must be Philippine residents

Must own at least 1 share of stock in his name in the


books of the corp.

Now what about partly nationalized?


Then foreigners can be incorporators to the extent of the
allowable equity participation.
A public utility company 40% are owned by
foreigners and 60% are owned by Filipinos. 3
foreigners were elected to the board of the Public
Utility corp. Is this a violation of the constitution?
No, foreigners can be elected to the board to the extent of
the allowable foreign equity.

Not less than 5, not more than 15.

Are there exceptions?

Can they be elected officer of the mining company?

Corporation sole and non-stock, non-profit corporations.


They are now entitled to have more than 15 incorporators.

No, while they can be elected or incorporators to the


extent of allowable equity participation, they cannot be
appointed as officers because under the anti dummy law.
The foreigner cannot be appointed to any executive
positions of any corporation engaged in a nationalized
activity whether wholly or partly.

What about mergers of banks?


The law says, 21 directors are allowed. Now this is 21
directors not 21 incorporators.
So there are only 2 exceptions which are Corporation sole and
non-stock nonprofit corporations because the law allows more
than 15 trustees or incorporators for non-stock nonprofit
corporations.
2.

4. Must own at least 1 share of stock in his name in


the books of the corp.
BAR: How do you distinguish
Stockholder/Subscribers?

Natural persons

INCORPORATORS

BAR: Is there an exception?

from

STOCKHOLDERS/
SUBSCRIBERS

Yes, in case of cooperative, which can be the incorporator


of a rural bank
Can juridical persons be incorporators?
No, but can be subscribers. For example BDO organized a
subsidiary. For example with BDO would like to organize
an insurance company, so BDO Generali. Lets say BDO
Generali is 99.9% owned by BDO and at the same time you
have 5 incorporators or natural persons. So how can BDO
own 99.9% of BDO Generali if under the law you need to
have natural persons as incorporators?

Incorporators
are
mentioned in the Articles of
Incorporation as those
originally forming part of
the corporation

Subcribers need NOT be


mentioned in the AOI as
originally forming part of the
corporation

Incorporators should not be


less than 5 not more than 15

Limited by the number of the


Authorized capital stock of the
corporation

EXPN: 1.)
Sole and

Nothing wrong here, because BDO, while cannot be an


incorporator, can be a subscriber. So it can own 99.9% of the
outstanding capital stock of BDO generali. The 5 persons can
be nominees of BDO.
3.

Incorporators

Corporation

2.) Merger or Consolidation


of Banks
Incorporators must be a
Natural Person

Majority of them must be Philippine residents.

Just count how many are incorporators natural persons, so


majority must be Philippine Residents.

May either be a natural person


or a juridical person

EXPN: Incorporators of
Cooperatives/Rural Banks
may be a natural/juridical
person

Is Citizenship a requirement?
Not a requirement as long as majority of them are Philippine
residents except if it is engaged in nationalized activities. If it
is nationalized, obviously you cannot have foreigners as
incorporators of mass media, rice and corn etc. etc.

Majority
of
Incorporators must
Filipino Residents

21

the
be

No citizenship requirement
EXPN: Corporations engaged
in a Nationalized Activity

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BAR: Distinguish Corporator from incorporator. Corporator is


hardly used now, now- subscriber or stockholder.

Discuss the step by step procedure in forming a


corporation/ if you have a client who wants to put up
a corporation, what will your advice be?
1.

Determine the Incorporators

2.

Execute the Articles of Incorporation


-

3.

Majority of the incorporators must be residents. No such


requirement for subscribers.
Incorporators are mentioned in the articles and whose names
are mentioned as forming part originally of the corporation.
Subscribers are not really part of the corporation.

Showing that 25% of the total subscriptions have


been paid

Verification Slip
-

6.

Legal age, same requirements.

May be submitted together with the AOI or 1


month after incorporation

Treasurers Affidavit
-

5.

On natural persons, incorporators shall be natural persons.


Exception: cooperative for rural bank. Subscriber can be
juridical or natural persons.

It must conform with the form prescribed by the


corporation code

Execute the By laws


-

4.

First, as regards number, incorporator not less than 5 not more


than 15 except corporation sole and non-stock non-profit
corporation. Subscribers, no limit on the number of
subscribers to the extent allowed by authorized shares of the
corporation.

SAMAHAN NG MGA OPTOMETRISTS NG PILIPINAS


CASE:

stating that the proposed name is not identical or


confusingly similar to other corporate names

May a corporation
profession?

Undertaking to Change Corporate Name


-

Payment of fees

8.

In case of Banks and other special Corporations, the


favourable recommendation from the appropriate
government agency.

9.

Issuance by
Incorporation
-

the

SEC

of

the

Certificate

of

Promoter - an agent of the 5 Incorporators before the


incorporation or the agent of the Corporation after
incorporation. They promote the idea of the Corporation

NO. Unless the Corporation ratifies or affirms as its own


those contracts.

1.

Number of incorporators, not less than 5 not more


than 15.

2.

AOI must conform to the form prescribed by the


Code. One of the grounds to reject AOI is nonconformity by the form prescribed by the Code.

3.

Execution of the by-laws, there are 2 ways:

Principal duties of an agent

Remit any profit earned in the course of the agency

of

Steps in putting up a corporation

Is the Corporation liable for the contracts entered


into by the Promoter?

2.

practice

SC: No, it is only incidental to the primary purpose of


manufacturing and selling lenses and eye glasses. You cannot
manufacture the appropriate lenses or eye glasses without
examining the eyesight or vision of the patients. The
corporation itself being a juridical person cannot examine
eyesight so it has to hire optometrists to carry out that primary
purpose. Therefore, hiring of optometrists is not tantamount to
the exercise of a profession.

1. Promoter

Account and

Isabela Optical(?) hired optometrists. Isabela optical


manufactures and sells lenses and eye glasses and in the course
of its business, hired optometrists who examine eyesight of
patients to determine appropriate lenses or eyeglasses. They
applied for a permit in Iloilo but blocked by the Samahan on
the ground that Isabela Optical by hiring optometrists is
engaged in the practice of a profession.

Certificate includes: Certificate of Filing of the


AOI and the Certificate of Filing of the By-laws

1.

in

No, limited to natural persons under the Constitution.

In case the SEC finds out that the coporate name


is identical with another corporation

7.

engage

2. Number and Qualifications of Incorporators


An incorporator is always a corporator but a corporator is not
an incorporator.
22

1.

As part of incorporation

2.

Within 1 month after incorporation

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2005 BAR: If the corporation does not submit by laws one


month after incorporation, it is a de-facto corporation.

2.

In practice, the SEC requires a copy of the by-laws along with


the AOI. So dont resort to the 2nd option.
4.

5.

Affidavit of treasurer which is under oath that at least


25% of the authorized capital stock has been
subscribed and 25% of the total subscription must be
paid in money or property.

BAR: A single proprietorship would like to adopt the


name ABC Marketing Incorporated. Is that valid?
No. You cannot adopt the name of a corporation, you
cannot use the name incorporated or corporation or their
abbreviation.

Verification slip, you can now reserve corporate name


online. You conduct a verification to determine if your
proposed corporate name is not similar or confusingly
similar to any corporate name registered in the SEC.
The system will tell you if it is. In case of similarity,
you can get an override from the SEC Official.
Undertaking of the proposed corporation that in the
event name is approved is similar to existing
registered corporate name, the corporation
undertakes to change such corporate name.

Problem: SEC Official to Dean Nilo your corporation


Equitable PCI Bank does not contain the word corporation or
incorporated or the abbreviation. If you change any provision
(amendment) of the plan of merger, you have to go back to the
board and the SHs. Luckily, the SEC official is a friend. Its
good to have many friends.
How come in the signage of BDO, We dont see BDO Inc? Its
just BDO. Because its not marketing savvy to include Inc in
your signage.

Deans former case: My Health clinic vs My Health Clinic. The


SEC approved the corporate name. Remedy, file a petition to
SEC to revoke or direct the corporation to change such
corporate name because it is confusingly similar to a previously
registered corporate name. SEC granted petition on the
strength of the undertaking that the corporation will change
corporate name in the event that it is similar to that already
registered with the SEC. Its what you call fall back mechanism.

National, Maharlika, Barangay words reserved for the


government.
National Bookstore not the name of the corporation
registered with SEC. Not the name of the corporation but the
name of the bookstore.
Principles on corporate name:

When I was with the bank, Equitable PCI Bank. The president
was on his way from Cabanatuan to Manila. He saw Equitable
Disco Club. You cannot preclude the use of a trademark or
tradename for goods not related to the certificate of
registration unless it will affect its goodwill.
6.

If special corporation, example bank,


endorsement from the agency concerned.

7.

Pay the filing fee

8.

Issuance the certificate of incorporation

9.

Filing of AOI and by laws

The proposed corporate name of the applicant


corporation must be similar or confusingly or
deceptively similar with the name registered with the
SEC or the name itself is deceptive or contrary to law.

special

1.

A change of corporate name is not a mode of


dissolution.

2.

Does the corporation have the obligation to inform its


customers or clients about change of corporate name?
SC: No, there is no provision in the Corporation Code
or any law for that matter that obligates the
corporation to do so. It is not a matter of legal
obligation.
Javier case applies to a private or non-public
company. If it is a public company, it is required to
disclose to the PSE and SEC any material change
involving or affecting the company. A change of
corporate name is definitely a material change that
needs to be disclosed to PSE and SEC.

10. You have two years to organize

3. Corporate Name
REFRACTORIES CORPORATION vs. CA

4. Corporate Term

SC: Elements so that a corporation may bar the proposed


corporate name

What is the term of a corporation?

1.

It is the term specified in the AOI but not to exceed 50


years.

Complainant corporation must have a prior right over


the corporate name

What is the remedy available to a corporation in case


of a failure to extend corporate term due to
inadvertence?

How is prior right acquired? By registration, so the


complainant corporation must have registered first.

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Fire the corporate secretary! haha.

Lets say the authorized capital stock is 1 billion


pesos divided into 1 billion shares, par value of 1
peso. Lets say the subscribed capital stock is 500
million shares, par value of 1 peso. Of course its
enough that you subscribe to 25% of 1 billion, so in
the example lets say the subscribed capital stock is
500 million, so 1/2 of the authorized capital stock. We
said that the paid up capital stock should be 25% of
your subscribed, right? Lets make it, lets say 200
million shares, par value of 1 peso. Lets say one of
the subscribers is A, he subscribed to 50 million
shares and then paid 20 million. Thats more than
25% right? Supposing the corporation will issue
additional shares from the remaining 500 million
unissued portion of the authorized capital stock and
A would like to subscribe to 50 million shares more
from the unissued portion of the authorized capital
stock, is he required to pay 25% of the subscription?

REINCORPORATE! Same corporators, same authorized


capital stock, same everything including the corporate
name. The trustees of the defunct corporation may
authorize the adoption of that corporate name. The
trustee will simply authorize the new corporation to
adopt the same corporate name.
Are the assets of the defunct corporation transferred
automatically?
No. Expiration of the term automatically dissolves the
corporation. Next step? SC: the SHs from the defunct
corporation may assign (not sale or conveyance) their right
to the properties of the defunct corporation as their
subscriptions to the newly incorporated corporation.
Note: The term of the corporation may only be extended during
the term of the corporation and not when the term has expired.

Issuance of shares taken from the unissued portion of the


authorized capital stock is not subject to 25% payment
requirement. So the only 2 cases when you are required to
pay 25% of the subscription are upon incorporation and
increase in the authorized capital stock. EXCEPT,
according to SEC, if the corporation is insolvent or about
to be insolvent, in which case, you have to pay 25% of the
subscription.

Is that subject to tax?


Every corporation has a different registration number. The
defunct and the new have different registration numbers.
No taxable gain. Last year, Kim Henares issued a
regulation not to process reincorporation without affidavit
from the incorporators that taxes have been paid. So that
remedy is no longer economically viable. It is still a valid
legal option but you have to deal with the issue of taxation.
Pay the tax otherwise SEC will not approve it.

Issuance of shares or subscription to the unissued portion of


the original authorized capital stock is not subject to the 25%
payment requirement. The price, terms and conditions of
payment, may be determined by the Board of Directors, which
can be less than 25%. It can be 10% payment only, and the
balance at a later date, depending on the contract of
subscription. EXCEPTION is, to repeat, if the corporation is
insolvent, or about to become insolvent, according to the SEC,
you have to pay 25% of the subscription.

5. Minimum Capital Stock and Subscription Requirement


What is the minimum subscribed and minimum
authorized capital stock for a corporation?
Unless otherwise required by special law, there is no
minimum amount of authorized capital stock. Provided,
that the paid up capital is not less than 5,000 pesos.
Is it possible to fully subscribe and pay up the
authorized capital stock?

Lets say if A subscribed to 50 and paid 20, when does


he pay the balance of the subscription?

Yes.

Either the due date, which is the date specified in the


contract of subscription, or if there is no due date, upon
call, or demand by the board.

You said that at least 25% of the authorized capital


stock must be subscribed and at least 25% of the total
subscription must be paid in cash or property. Is it
important that each subscriber must pay 25% of the
subscription?

BAR: Lets say the due date is June 1, 2015. On June 1,


he did not pay. On June 15, the Corporation declared
cash dividends. Is he entitled?

No. As long as 25% of the TOTAL subscription is paid in


cash or property.

Yes, he is entitled to dividends. Because unpaid shares are


not delinquent shares and holders of unpaid shares under
Section 72 of the Corporation Code have all the rights
corresponding to the subscribed shares.

In what other cases may you require to pay at least


25% of the subscription?
1.

Upon incorporation

2.

Increase in capital stock

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.

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the outstanding capital stock at a regular or special meeting duly called
for the purpose.

Can you apply the dividends to unpaid subscription


even if the subscription contract is silent?

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.

No. The right to offset only applies to delinquent stocks


not unpaid shares.
BAR: Supposing on June 30 the Corporation called a
stockholders meeting to elect the directors of the
corporation. Can A vote the shares? Second, is he
qualified to be elected as a director?
Yes to both questions. Because, again, unpaid shares are
not delinquent shares, they have all the rights
corresponding to the subscribed shares.
Therefore, the question is, when do shares become
delinquent?

As we said, the balance of the subscription must be paid on due


date. Due date is either the date specified in the contract of
subscription, if any. Or if there is no due date specified in the
contract, then upon call by the Board. So call in corporate
jargon or parlance means demand. Demand is not necessary to
put the obligor in default if the contract specifies the due date.
According to the SEC, it is one of those cases where demand is
not necessary to put the obligor in default, when the law so
provides.

They become delinquent if not paid within 30 days from


due date. After 30 days, the shares are no longer entitled
to vote, receive stock dividends. In respect to cash
dividends, it shall be applied against unpaid subscription.
Lets clarify that, first, we are clear that unpaid shares are not
delinquent shares.
Next question is, how many unpaid shares of A are entitled to
receive dividends? The answer is, 50 million shares, right? The
standing of a shareholder in a corporation is measured by
subscription. So even though he paid only 20 million, he is
entitled to receive dividends for the entire 50 million shares.
How many shares can he vote during the election of directors?
Same, 50 million shares. So again, lets keep it in mind, the
standing of a stockholder is measured or dependent on his
subscription and not based on what he actually paid, until his
shares become delinquent.

Okay next point, supposing the corporation will issue shares


from the unissued portion of the authorized capital stock, no
longer from the subscribed capital but the unissued portion, is
that subject to stockholders approval? So theres this case in
your outline, the case of Ruby Industrial, penned by Bersamin,
so is that subject to stockholders approval? In our scenario
earlier, in case he subscribes to the additional 50 million
shares, taken from the remaining 500 million unissued shares,
is that subject to stockholders approval, and the answer is no.
Right? Because it is only the increase in capital stock that you
are required to secure stockholders approval. But issuance of
shares from the unissued portion of authorized capital stock
only requires board approval. And when we say board
approval, it means majority of the quorum of the Board of
Directors because it is not one of those cases under the law
which requires majority of the entire board.

Next point, may the corporation apply dividends against


unpaid subscription or unpaid shares? The answer is no, unless
of course the contract of subscription allows set-off. In which
case it is set-off by agreement of the parties, or conventional
set-off but not legal set-off.
Now why is it that the corporation cannot apply
dividends against unpaid subscription?

However, according to the Supreme Court, the issuance of


shares from the unissued portion of authorized capital stock is
subject to registration requirement under the SRC because as
you all know, shares of stock are securities right? And
securities cannot be distributed or sold to the public unless
registered with the SEC. And by registration, as you have taken
up in SRC, when you say registration of securities, when you
say registered with the SEC, its a different concept from
registration of mortgage and sale, right? When you say
securities are registered, it means that the corresponding
registration statement has been filed with and approved by the
SEC and the sale or distribution of those securities, as stated in
the registration statement, has been approved by the SEC. So
thats the only case subject to, not stockholders approval, not

Because Section 43 is very clear. It can only apply


dividends against unpaid subscription only on delinquent
stocks not on unpaid shares.

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

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majority of the entire board, but simply majority of the


quorum.

the assets of the corporation because as we said the term


capital stock has a precise meaning under the Code. In our
example, under Section 43 of the Corporation Code, if the
surplus profit is 100% in excess of the PAID IN CAPITAL, any
excess should be distributed right? Now the term uses PAID
UP CAPITAL, does that include the properties or assets of the
corporation? No, because PAID UP capital stock differs from
capital of the corporation.

Which is part of the so called Trust Fund Doctrine?


The total subscription - those subscriptions are considered
funds held in trust for the benefit of the corporate creditors.
Trust Fund Doctrine means that those subscriptions should be
untouched and unimpaired. They are funds held for the benefit
of the creditors, so it cannot be used, it cannot be distributed to
the stockholders because it is a fund held for the benefit of the
creditors. As you also know, the Trust Fund Doctrine has been
expanded to include not just subscriptions but even properties.
So properties of the corporation cannot be distributed to the
stockholders except in cases allowed by law and equity. The
moment you distribute the properties to stockholders, other
than those cases allowed by law and equity, you violate likewise
the Trust Fund Doctrine. So these properties are, again, held in
trust for the benefit of the creditors.

The definition of capital in Gamboa v. Teves, to repeat, only


applies to nationalized activities right? Particularly mining,
natural resources, and public utilities. The factual backdrop of
Gamboa v. Teves applies to public utility. But it can likewise be
applied to mining, as we saw in Narra v. Redmont. Narra v.
Redmont also made reference to Gamboa v. Teves, definition of
capital, and to corporations engaged in exploitation,
exploration, development of natural resources.
A foreign corporation could provide financial agreements and
technical service agreements to mining companies, that will
not be a violation of the law. Its only when the foreign
corporation participates in exploration, exploitation and
development of natural resources that it could be subjected to
the 60-40 foreign ownership requirement.

Now when are you allowed to distribute properties to the


stockholders? Whats the most common form or distribution of
properties to stockholders?
Dissolution right? Dissolution, liquidation, reduction of capital
stock, redemption of redeemable shares and when you pay
dissenting stockholders in the exercise of his appraisal right.

6. Articles of Incorporation
a. Nature and Functions of Articles

Now you have authorized capital stock, what does it


mean?

The AOI contains the power of the corporation and under


Section 45 of the CC, the corporation cannot exercise powers
other than those conferred upon it by the CC, the AOI, and
powers implied or incidental to it. So therefore, its important
to know the powers of the corporation as contained in the AOI.
Because any act of the corporation, any activity of the
corporation that is outside or contrary to express, implied or
incidental powers of the corporation is ultra vires under
Section 45. So the enumeration of corporate powers under the
AOI serves also as a limitation on what the corporation can do.
So the powers are also limitations because outside these
powers, that would be ultra vires.

It is the maximum number of shares that the corporation may


issue without amending the Articles of Incorporation. It
doesnt represent the maximum amount of capital the
corporation may raise because shares of stock, as you know,
can be issued for an amount higher than par value.
Lets give an example. The authorized capital stock is 1 billion,
par value is 1 peso. So 1 billion is not the maximum amount
that the corporation may raise, but it represents the maximum
number of shares that the corporation may issue without
amending the AOI. So if the corporation wants to issue more
than 1 billion, the over-issuance would be void. So you have to
amend the articles to be able to issue additional shares. Now, if
the share is issued for 10 pesos, then your authorized capital
stock and fully subscribed would be more than 1 billion but
would be 10 billion pesos. So as you know, the par value is only
the minimum value for which the shares may be issued,
otherwise they will be called watered shares.

The AOI is the fundamental law of the corporation. It defines


the relation of the corporation between it and the State, the
corporation and its stockholders.
Theres one question in the bar regarding shares owned by a
stockholder. So the stock and transfer book of the corporation
indicated that Juan dela Cruz only owns 300 common shares
but the AOI provides that he owns X number of founder shares
and X number of common shares. So which one prevails? The
entries in the stock and transfer book or the AOI? The SC said
in Lanuza v.CA that its the AOI because it is the instrument or
document that defines the relation between the corporation
and the State and the corporation and the stockholders.

Also the term capital stock has a precise meaning under the
Corporation Code. As held in the case of MISCI-NACUSIP
Local Chapter v. National Wages and Productivity
Commission, the term capital stock is the portion of the
authorized capital stock subscribed and ACTUALLY PAID UP.
So for example, if a wage order says that employer whose paid
up capital is impaired by 25%, not obligated to pay minimum
wage, so when it says paid up capital stock, you dont include
the properties received by the corporation. You dont include

As regards form, well it has to be in official language, Filipino is


the official language, so the AOI may be in Tagalog or Filipino.
I have seen one in Spanish, UST. Im not so happy you know
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why? Because we amended, for the first time, the Articles of


Incorporation of UST because of a circular issued by Kim
Henares that the phrase non-stock, non-profit corporation
must be in the AOI, otherwise, its not tax-exempt. We argued,
not necessarily! Under the Constitution, as long as the property
is actually, directly and exclusively used for educational
purpose, you are not subject to tax. But no, now it has to be
seen in the AOI that it is a non-stock, non-profit corporation.
So thats why we have to amend the Articles of Incorporation of
UST, and it was successfully amended from Spanish to English.
And we did not have to resort to Google Translator. Very
convenient noh. We were in Brazil for a family vacation, in Rio
no, and the driver has an app in his meter which translates
from Portuguese to English so we can understand each other.

business. But as we will see later the Articles of Incorporation


must be amended to make the business AS A SECONDARY
PURPOSE otherwise it would be ultra vires.
Domicile or place of business
BAR: Where is the residence of the corporation?
The principal office as specified in the AOI. Not the place
of actual operations. (Hyatt v. Goldstar) In this case, the
AOI stated the principal office is Makati, and then they
relocated to Mandaluyong. Wheres the venue for a civil
action? As you all know the venue is the domicile or
residence of the plaintiff/defendant, at the option of the
plaintiff. In this case, if you will consider the domicile of
the corporation as the venue, where do you file the action,
is it in Makati, the principal office, or Mandaluyong, the
place of actual operation? The SC said that it is the place
specified in the AOI and not the place of actual operation.
Otherwise, it will be very easy on the part of the
corporation to evade service of summons because all it will
have to do is to keep on changing its area of operations.

b. Contents
The contents. On the first part, theres your purpose or
purposes. As you all know there is only one primary purpose
and there can be many secondary purposes. You cannot have
more than one primary, its an inconsistency. You can only
have one primary but you can have various secondary
purposes. As long as these purposes are capable of being
lawfully combined. So there can be as many as possible, as
many as you want. As long as they are capable of being lawfully
combined. And what is your test to determine if they are
capable of being lawfully combined? If there is no law that
prohibits the combination of these purposes in the AOI. Now,
can it be a bank and insurance company at the same time? You
cannot because under the law, a bank cannot engage in
insurance business or vice versa. So you cannot have your
primary purpose as a bank and your secondary purpose an
insurance. What banks do is to put up a subsidiary, a
corporation engaged in insurance.

Now what about Metro Manila? Metro Manila, as you all


know, is allowed under the CC, until 2006, the SEC made a
declaration that it has to be specific, the city/municipality.
What happens now to those corporations with AOIs stating
that their principal place of business is Metro Manila? Well, in
the case, it would be the area of actual operations because there
are many cities/municipalities in Metro Manila. According to
the SC, if Metro Manila is still the principal place of office in
the AOI, because it was approved before 2006, then the place
of operations is the residence of the corporation. But in 2012,
the SEC REQUIRED all corporations to amend their AOI which
provided for Metro Manila as their principal office, in order to
indicate the specific address.
Assuming that there are five directors; can the
articles and the by-laws decrease it to two?

However, we have to correlate the prerogative of the


corporation to have various purposes with Section 42 of the
Corporation Code, in the sense that if the funds of the
corporation are devoted to the secondary purpose or purposes,
then the Corporation Code requires the corporation to go back
to the stockholder and secure their approval by atleast 2/3s of
the OCS. And any stockholder not in favor of the proposed
investment of corporate funds in the secondary purpose, then
he can exercise his appraisal right. So its very clear. While the
CC acknowledges and recognizes the prerogative of the
corporation to have many purposes in its AOI, there can only
be one primary and many secondary purposes. But the funds of
the corporation should be devoted to the primary purpose or
any undertaking incidental to the primary purpose. If they
invest in a secondary purpose, it requires not just board
approval by majority vote but likewise, stockholders
representing 2/3s of the OCS.

No, because the law provides that the number of directors


should not be less than five.
Is it possible for the number of directors in a quorum
to be less than majority? Let us say that the number
of directors is fifteen and the articles provided that
the quorum for certain corporate acts will be seven.
Section 25 provides that 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 AOI shall constitute quorum for the
transaction of corporate business, every decision of at least
a majority of directors or trustees present in a meeting at
which there is quorum shall be valid as a corporate act,
except for the election officer which shall require the
majority vote of a majority of all the members of the
board.

As you have learned in Corpo, Section 42 likewise allows a


corporation to invest the funds in another business right? So
either invest the funds in a secondary purpose or in another
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Unless the by-laws provide a GREATER number, quorum


shall be the majority of the number of directors as fixed in
the AOI. There is no prerogative for the by-laws to reduce
for quorum purposes the number of directors to less than
majority.

You cannot extend a corporate term by mere referendum or


written assent of the stockholders.
So even though under Section 23, it is enough that majority of
the directors are Philippine residents, when you check the
contents of the articles you must likewise indicate the
nationality of the incorporators and directors, whether or not
involved in a nationalized activity.

If the AOI substantially conforms to the requirement


of the Code, does the SEC have the power to reject the
AOI? The requirements are not fully complied with
but substantially complied with, does the SEC have
the discretion to reject the AOI?

For stock corporation, the outstanding capital stock, the


amount subscribed, the amount paid-up, the names of the
stockholders, subscribers and the secondary purpose of the
corporation.

Sections 17 and 10 of the Corporation Code clearly


provides that substantial compliance is enough. It is
enough that the AOI substantially complies with the form
prescribed by the Corporation Code. This is also found in
Section 10. The SEC has no discretion to reject the AOI if it
substantially complies with the form prescribed by the
Corporation Code.

Now regarding the non-stock corporation, it says there the


amount of contribution. If the non-stock, non-profit
corporation is also a foundation, then the minimum capital is 1
million pesos. That is the price you have to pay for including
the word foundation as part of the corporate name.
A foundation is essentially, a non-profit, non-stock
corporation, right? Because you only have two kinds: stock or
non-stock. A foundation cannot be a stock corporation because
it is not organized for profit but to have the word foundation as
part of the corporate name, the SEC prescribes that the
minimum capital should be 1 million.

Let us say the term of the Corporation is about to


expire. For example, UCPB is a sequestered
corporation. 90% of its outstanding capital stock is
voted by PCGG under the public character test. Under
the public character test, shares acquired through
public funds can be voted by the Government.
Supposing that the term of UCPB is about to expire
and every time they hold a stockholders meeting
there will be picket from farmers demanding release
of their coco-levy funds and this will be captured by
media and it will give the impression of chaos in the
bank. The bank decided that the extension of the
corporate term be approved by the majority of the
board and by the written assent of PCGG because
anyway that is majority or more than 2/3 of the
outstanding capital stock. Will that be a valid
compliance with the requirements for the extension?

Why?
It is because foundations have been used for fraudulent
purposes. It has become the instrument or vehicle for money
laundering.
Dean: But then I realized that 1 million is small pa din
compared to the amount being funded to various NGOs or
foundations. I mean Napoles is just one of them, there are
many and there is someone even bigger than Napoles. Napoles
is peanuts compared to this guy. There are many Napoles. But
of course, as a lawyer, my lips are sealed. I will not discuss the
details but there are many. Napoles is not even a little player.
So that is the extent of corruption and the organized villains of
our country. Anyway, so we pray for them. That is what we do
as Thomasians, we pray for them to come to the right path.

Section 16 provides Amendment of Articles of


Incorporation. - Unless otherwise prescribed by this
Code or by special law, and for legitimate purposes, any
provision or matter stated in the articles of incorporation
may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the
outstanding capital stock, without prejudice to the
appraisal right of dissenting stockholders in accordance
with the provisions of this Code, or the vote or written
assent of at least two-thirds (2/3) of the members if it be a
non-stock corporation.

c. Amendment
So the example I gave earlier was UCPB. In UCPB, they have
not called a single stockholders meeting for the last 13 years,
until 6 months ago. Because every time they call a stockholders
meeting, there will be picket among the coconut farmers
demanding the release of their cocolevy funds. The rallies and
pickets would be covered by the media and would convey the
impression that there is something wrong in the bank. So the
management decided that there will be no more stockholders
meeting unless absolutely necessary. 6 months ago, when the
term of the corporation was about to expire, I was asked a
question: Can we extend the term of UCPB by the mere written
assent of PCGG who has voting right of more than 2/3 of the
outstanding capital stock?

Section 37 reads that: 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.
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Of course I said that under Section 37 in relation to 16 of the


corporation code, we cannot do so because amendment of the
articles with regard to the extension of the Corporate Term has
to be made in corporate meetings.

But the key issue is: do you need to call a


stockholders meeting every time you approve an
amendment of the articles?
If the amendment requires a stockholders meeting under the
Corporation Code or the By-laws, then written assent is not
enough. But if it is not required in the Corporation Code or in
the By-laws that a meeting be called for that purpose, then any
matter in the AOI may be amended by a vote of at least the
majority of the board and written assent of the stockholders
representing at least 2/3 of the outstanding capital stock.

But just the same I was tasked to talk to the SEC chair if I could
convince the SEC chair to relax the rules given the peculiar
situation of the UCPB. I was able to convince the SEC chair to
dispense with the stockholders meeting. I said that the survival
of the bank is at stake every time we call a stockholders
meeting but then she retired. Before we could implement the
extension of the Corporate Term by mere Referendum, she
retired. She was replaced by Teresita Herbosa. Tesa Herbosa is
much stricter so I didnt bother talking to her because I do not
want to exhaust my good will on an account that does not give
me money anyway. UCPB is for free. So I might as well exhaust
my good will for clients that pay me, right?

Let us do are survey. What are the corporate acts under the
Corporation Code that have to be approved in a meeting
called for that purpose? Some not really part of amendment
but just the same needs to be in a meeting called for that
purpose

So I said we have no choice but to hold a stockholders meeting.


I checked the by-laws and the notice said that it would be by
publication. So I said that we will make it discreet, we will
make it low key (Thors brother?), we can publish the notice of
the meeting in a newspaper not widely read. The by-laws of the
bank provide that it should be general circulation. But looking
at the previous SC decisions, when it says of general
circulation, it does not have to mean the widest circulation. It
means it caters to the general interest of the community, as
long as there is a descent subscriber base. It need not be a
prominent newspaper, so we can publish it in Tiktik, Abante.
So we published it.
But despite the fact that we published it in a least known
newspaper, still more than 1000 attended. Sometimes, you
create your own ghost. Why? Because that is the most peaceful
stockholders meeting that I have attended in my whole life. I
already attended a lot of corporate meetings and I have seen so
many intra-corporate fights. We were expecting fireworks from
the farmers. But none! Within 1 minute we were done.

1.

Section 24 Election of Directors

2.

Section 28 Removal of Directors (replacement of


the removed director)

3.

Section 29 Filling up of vacancy

4.

Section 30 Compensation of directors

5.

Section 37 Power to Extend or Shorten Corporate


Term

6.

Section 38 Increase of Decrease of Capital Stock;


incur, create or increase bonded indebtedness

7.

Section 39 Pre-emptive right

Because there were only 2 items in the agenda: 1) certification


as to quorum; and 2) extension of the corporate term. So
somebody made the motion and that the articles be amended
to read as follows and the corporate term be extended to this
day Second the Motion. Is there any motion to adjourn?
Move to adjourn, mister chairman. Alright, adjourn!! (*Dean
pounds the table with conviction* Dean: Oops, Sorry!)
So what is important under section 16 are the following:
Unless otherwise prescribed by this Code or by special law, and for
legitimate purposes, any provision or matter stated in the articles of
incorporation may be amended by a majority vote of the board of
directors or trustees and the vote or written assent of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock,
without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written
assent of at least two-thirds (2/3) of the members if it be a non-stock
corporation.

29

Now this is debatable. What if the AOI would be


amended to deny pre-emptive right? Do you need
to have a meeting? So, Sec. 39 on pre-emptive
right. So if the AOI will be amended to deny preemptive right, it is clear in the case of ___ vs.
United Shipping Corporation, that that kind of
amendments may justify appraisal rights under
Sec. 81 of the Corporation Code because any kind
of amendment in the AOI, there is the effect of
changing or restricting the rights of the
stockholders as in the instance of exercising
appraisal right and if you deny the stockholders
the right to subscribe to additional shares in the
corporation, you are restricting the right of the
stockholder. Well, the big consideration is a
stockholder can exercise appraisal right only by
dissenting as against the proposed corporation
act because you cannot exercise appraisal right if
he is absent or if he abstains. But should the
dissent be in a meeting or may the dissent be by
expressing likewise which is agreement to the
proposed corporate act? There is no case in the
Philippines but for foreign jurisprudence:
Appraisal right can be exercised even without
having to call a meeting. So long as he dissents.

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For example, if the amendment is to deny preemptive right, it can be routed among the
stockholders and as the beliefs(?) are being
routed to the stockholders, a stockholder may
dissent on the proposed amendment. Of course,
your safe bet is to call a stockholders meeting.
But there is this foreign jurisprudence that it
need not be in a stockholders meeting. The
dissent could be articulated in some other way.
(But that is already going too far, that is going to
deep already)

8.

Section 40 Sale of all or substantial corporate assets

9.

Section 42 Invest corporate funds in another


purpose (secondary purpose)

BAR: Can you amend the names of the incorporator? Can


you amend the date of incorporation? Can you amend the
name of the Notary Public before whom all the incorporators
appeared? What is common denominator to all these?
All these things may not be amended because these are matters
of accomplished fact. Matters of accomplished fact cannot be
amended.
Remember this case? A female incorporator had a falling out
with his husband and it must have been so bad that he wanted
to remove any association with his husband. So she petitioned
the SEC to have his name changed as an incorporator to drop
the name of his husband. Of course, the SEC rejected it because
you cannot amend the name of the incorporator. So the SEC
suggested that if you want you can change your name as
subscriber or stockholder in the stock and transfer book of the
corporation.

10. Section 43 Stock dividends


11. Section 44 Power to enter into management
contract

e. Grounds for disapproval of AOI and Amendments

**Section 46 adoption of by-laws

1. Does not conform substantially to the form prescribed


by the Corporation Code;

When you adopt the by-laws obviously you do not need to hold
a stockholders meeting because when you adopt that is prior to
incorporation.

2. The purposes are contrary to the Constitution, the law,


morals, good custom, public order, public policy;
3. The treasurers affidavit with respect to the amount of
subscribed capital stock is false; and

12. Section 48 Amendment of by-laws


13. Section 76 merger or consolidation

4. The required percentage of Filipino ownership in case


prescribed by law, the constitution are not complied with.

14. Section 117 Dissolution

Are the grounds under section 17 exclusive?

*So other than these corporate acts, it may be done by mere


referendum even if it is amendment of AOI.

They are not exclusive because under P.D. 902-A, there


are other grounds for rejection of the AOI or its
amendment such as:

And you always include this as part of your answer: In


case of banks, insurance company, public utility, educational
corporations and other special corporations governed by
special law, the favorable endorsement of the appropriate
government agency must be obtained.
Now, with respect to amendment, you have to submit the
original and amendment articles of incorporation and not just
the highlighted portion. You must submit both and underscore
the changes made. You also have to indicate that as approved
by the board on this date and approved the stockholders on
this date.
Why does it have to be done that way?

1.

If there is fraud in procuring the AOI;

2.

Misrepresentation
Corporation;

3.

Non-compliance with the laws, rules and regulations


administered by the SEC;

4.

Non-submission of the reports required by the SEC;


and

5.

Non-payment of the filing fees.

as

to

the

purposes

of

the

7. Registration and Issuance of Certificate of Incorporation

First, that is what the law says and for practical purposes.

BAR: When does the corporation acquire legal personality?

When is it effective?

Upon issuance of certificate of incorporation, not upon the


filing of the articles, not upon the payment of filing fees. From
that time on, the group of persons, associated persons, become
a body politic with all the rights privileges and attributes of a
corporation.

Upon the approval of the SEC or the inaction of the SEC


within 6 months from application for reasons not
attributable to the corporation. So you have express
approval or approval by inaction but the inaction must be
for causes beyond or not attributable to the corporation.

Section 9 however failed to take into account corporations


created by special laws; pertains only to corporations created

d. Non-amendable Items
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the directors or trustees countersigned by the secretary of the
corporation, shall be filed with the Securities and Exchange
Commission which shall be attached to the original articles of
incorporation.

under the corporation code because corporations created by


special law acquire legal personality upon the effectivity of the
law. (E.g. _____, Philippine national red cross, Philippine
national railways)

Notwithstanding the provisions of the preceding paragraph, by-laws


may be adopted and filed prior to incorporation; in such case, such bylaws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with
the articles of incorporation.

You have the case of Travel Tours Express vs CA, with regard to
sports federations, it is not enough that they are registered with
the SEC, not enough that they are approved for incorporation,
in addition to registration, they only acquire legal personality
from the time of accreditation by the appropriate government
agency as such sports federations.

In all cases, by-laws shall be effective only upon the issuance by the
Securities and Exchange Commission of a certification that the by-laws
are not inconsistent with this Code.

BAR: A subscribed with the shares of stock of the proposed


corporation by contributing real property and the same was
considered as treasury trust, pending incorporation Y surfaced
and claimed ownership over the property that A contributed.
He files an action for reconveyance against the proposed
corporation. Will the suit prosper?

The Securities and Exchange Commission shall not accept for filing the
by-laws or any amendment thereto of any bank, banking institution,
building and loan association, trust company, insurance company,
public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the
appropriate government agency to the effect that such by-laws or
amendments are in accordance with law.

Answer: It will not because the corporation has not acquired


legal personality yet. Pending issuance of the certificate of
incorporation, it is a mere association of persons without any
legal personality. It acquires legal personality and therefore the
power to sue and be sued only upon issuance of the certificate
of incorporation.

Citibank vs. Chua


Citibank was a defendant in a collection case in Cebu and
during pretrial conference the lawyer was not equipped with a
board resolution authorizing it to appear on behalf of Citibank.
He presented an authorization from the EBP and Country
Manager of Citibank who under the by-laws is empowered to
hire lawyers to represent the corporation. Is it necessary to
submit a SPA to authorize a lawyer to represent the
corporation or will the authority given by the EBP manager
who under the by-laws is empowered to hire lawyers for the
corporation suffice?

Next question, who does he sue then?


The (treasury trust?) who received the property in trust for
the corporation.
8. Adoption of By-Laws
a. Nature and Functions of By-laws

SC said not necessarily, the SPA can be dispensed when there is


a by-laws provision authorizing...

b. Requisites of Valid By-laws


By laws are set of rules and regulations for the internal
government of the corporation. It is the implementing rules
and regulations. Not everything can be captured in the articles,
so the internal governance of the corporation has to be spelled
out in the by-laws. In case of conflict between AOI and by-laws,
AOI prevails.

The SPA in case of corporations is in the form of a board


resolution.
The other question is, what if the corporation is a foreign
corporation and the by-laws were not submitted with the SEC
prior to incorporation, can the provision in the by-laws be
invoked, adopted and relied on?

c. Binding effect

SC said in Citibank vs. Chua, the requirement of submitting bylaws as a condition to acquire legal personality is applicable
only to domestic corporations. As clear in the phrase
"corporations created under this code".

Under sec. 46, is the submission of by-laws as a condition


precedent to acquire legal personality applicable to foreign
corporations?
Section 46. Adoption of by-laws. Every corporation formed under
this Code must, within one (1) month after receipt of official notice of
the issuance of its certificate of incorporation by the Securities and
Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the
corporation the affirmative vote of the stockholders representing at
least a majority of the outstanding capital stock, or of at least a
majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or members
voting for them and shall be kept in the principal office of the
corporation, subject to the inspection of the stockholders or members
during office hours. A copy thereof, duly certified to by a majority of

The by-laws of the foreign corporation are submitted to the


SEC only for the purpose of securing a license and not to
acquire legal personality.
Binding effects of by-laws
There are two cases in your outline, PMI College vs. NLRC and
Chinabank vs. CA
In Chinabank vs CA, valley golf and country club issued a stock
certificate to Juan dela Cruz. Juan dela Cruz obtained a loan
secured by a pledge on the stock certificate. Failed to pay and
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pledge was foreclosed. Chinabank was the winning bidder.


Corporation refused to transfer ownership over the stocks
because of the provision in the by-laws granting first lien to the
corporation in case of non-payment of dues and assessments.
Who is entitled?

SC said it is a valid provision. The fiduciary duty of a director


may be compromised if he sits in the board of two competing
corporations. He may acquire vital sensitive information from
one and share it to the other to the detriment of the former.
What if there is a provision in the by-laws disqualifying a
competitor from being elected to the board?

The court said that the provision in the by-laws is not binding
on Chinabank because the latter is a third person. Exception is
when the third person has actual knowledge of the provision.
The SC added that a corporation may refuse to transfer
ownership only when it has unpaid claims and the term unpaid
claims means and is limited to UNPAID SUBSCRIPTION.
Other obligations such as dues and assessments does not
preclude transfer of shares.

No. Because you have section 33 or 32? It allows corporations


with interlocking directors.
But is it valid to include a non-compete clause in the
by-laws?
Yes. All corporations, public corporations i know have
incorporated the ruling in Gokongwei in their by-laws such that
it is now a standard provision or clause in the by-laws to
disqualify persons who are in conflict with the corporation to
be elected in the board.

d. Allowable provisions
What about the provision in the by-laws that dues
are first lien on the shares?

What about the argument that it deprives a stockholder of its


rights as a stockholder?

SC said that this provision is not self-executory. It does not


authorize the corporation to sell the delinquent shares not
delinquent in terms of subscription but delinquent in payment
of dues. It does not authorize the sale of the shares. There must
be a complementing pledge or chattel mortgage agreement to
authorize the corporation to sell the shares and apply the
proceeds to the payment of dues and assessments and other
obligations owing. This is different with condominium units. In
the latter, it can be sold for non-payment of dues and
assessments if the deed of restrictions authorized the sale. In
case of shares, by-laws provision is not enough but must be
complemented by a pledge or chattel mortgage agreement.

SC said if you join the Corp as a minority, you have to accept


the fact that you are subject to the will of the majority. The
manner by which you exercise your rights is dictated by the
majority.
The Sy family, before they acquired Equitable PCI Bank,
wanted a seat in the board. BDO acquired enough shares for
the boardship. Equitable PCI was concerned that if they let
them sit in the board they may ____ up the entire bank. So we
wanted to exclude them. What case do we use? First we used
LEE VS CA. The shares were not in their names. They were in
the names of the brokers. That is what you call scripless
trading. Yung certificate blank indorsement. Their names were
not in the books, of course the law says "in their own name in
the books". The shares were held in trust by their brokers, not
in their own names. Second ground, they represent interest
adverse to the bank. They sit in the board of BDO a competitor.
So they were not able to take the board seat. The following
year, they were smart enough. They did not include the SY's as
nominees to the board, no Henry Sy, no Teresita Sy but
prominent business personalities. So what did I do? Pursuant
to the case of Gokongwei that before you can disqualify a
nominee, you must give him due process, I required them to
sign a questionnaire under oath to disclose their company
affiliations. BOOM! I discovered that one is the director of this,
a company owned by the Sy family and this and this owned by
the Sy family and so on..... So I discovered that the nominees
are all of the Sy family so we disqualified them. Now before
there was another stockholders' meeting, they bought out
everybody including the Go's SSS GSIS so they now own
Equitable PCI. They merged it with Banco de Oro. That's the
story.

PMI vs. NLRC


A has been teaching for three semesters. On the fourth
semester, the school refused to honor the employment because
the employment contract was signed not by the chairman who
under the by-laws is the only one authorized to sign
employment contracts. But he had been teaching for three
semesters and it is only now that they raise as issue the lack of
authority.
SC said, admission by estoppel, A is not bound by the provision
in the by-laws being a third person.
The most favorite topic in the BAR, five times asked. The case
of Gokongwei vs SEC. What is the effect of a provision in the
by-laws intended to disqualify any person from being elected in
the board for having interest adverse or in conflict with the
business of the corporation?
John Gokongwei accumulated enough shares in San Miguel
Corp. enough for a boardship. San Miguel learned of the plan
so they amended the by-laws in general terms, because if
specific it would be invalid for being discriminatory, stating
that any person having interest in conflict with the corporation
cannot be elected in the board. The SEC approved. It went up
to the SC. Is that provision in the by-laws invalid? Can the bylaws disqualify a competitor from being elected to the board?

(Then puro kwento na about the building in divisoria and bla


bla bla.)

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Tell me whether the provision in the by-laws is valid


or void.

If the by-laws should be adopted prior to incorporation, then


all incorporators must sign the by-laws.

1. Directors of the corporation may or should be elected from


stockholders representing majority of the outstanding capital
stock.

If it adopted during one month from incorporation, only the


stockholders holding in favor of the by-laws and by-laws
adopted during one month of incorporation should be
approved by SH representing at least majority outstanding
capital stock.

- Not valid. This is because they have to be elected from


among all the stockholders

AMENDMENTS

2. The meeting of board may be held in UST.

Amendments, as you know, should be approved by the BOD


that is majority vote and stockholders representing at least
majority of the outstanding capital stock.

- Valid
3. All officers are not required to be directors of the
corporation.

When you go to practice dont forget if you amend AOI, the


matter or item amended has to be mirrored in the by-laws.

- Not valid.

Example: Corporate name. Dont just approve or amend the


corporate name yet not to amend in the by-laws.

4. The annual compensation of directors as such directors shall


not exceed 10 % of the gross income of the corporation for the
income tax in the preceding year.

Theres one transaction we handled. The AOI of the client was


amended. BTW the client is Century Properties, the owner of
Grand Tower, Azure, Milano, and other high-end condo
projects. So anyway We need a backdoor receivers 25 shares
of a dormant listing company.

- Not valid. Its not gross income. Should be net.


5. Proxies must be submitted a day before the stockholders
meeting.
- Valid.

Lets say ABC company is listed but dormant.

6. Proxies must be submitted 30 days before the stockholders


meeting otherwise the proxy is void.

So how do you make shares of your company listed without


issuing a public offering? You can file the shares of the
dormant listing company. This is what you call backdoor
listing. So you buy the shares of a dormant listing company and
then you amend the AOI to make it your company.

- Valid (this is the by-laws of San Miguel) as long as it is


submitted any day before the meeting.
7. By-laws authorized the board to create a corporate office.

So ABC Company is listed but its dormant. Century bought


the shares of the stockholders of ABC Company so now they
become publicly traded and they amended the AOI of the ABC
Company to the Century Properties. So corollary, while the
Articles were amended, they changed the name of ABC to
Century, the by-laws were not. So the by-laws still ABC
Company but the AOI says Century Properties. So make sure
that when you amend the AOI, make the corresponding
changes to be mirrored in the by-laws. You have to amend
likewise the by-laws.

- Only the by-laws can create corporate offices. The board


cannot create a corporate office. This is the decision of SC
in the case of _____
8. Can the by-laws require that proxies must be authorized?
- Valid. Par 3 of Section 47
9. A director may be removed by his co-directors by a vote of at
least majority of the directors in case of non-payment of dues
and assessments and for absences.

So in this case, you need 2/3 for the AOI but you only need a
majority of the outstanding capital stock to amend the by-laws
for the board approval by majority in both cases whether
amendment of AOI or by-laws.

- Not valid. Only stockholders can remove a director.


There are two ways to adopt by-laws.
1. Filing with the articles of incorporation; or

The 2/3 requirement pertains to what? The delegation of


authority by the stockholders to the board and this was asked
in the bar. So the stockholders, may, by 2/3 of vote of
outstanding capital stock may delegate the authority to amend
the by-laws solely for directors but the power delegated may be
revoked by the vote of stockholders representing at least
majority of the outstanding capital stock.

2. Within a month after the incorporation


Although we said in our previous discussions that the SEC now
requires submission of by-laws prior to incorporation. But for
BAR PURPOSES, the submission of by-laws during one
month after incorporation is still allowed by the Corporation
Code.
Whats the distinction then?

Adoption of by-laws within one month of incorporation


stockholders holding majority of the outstanding capital stock
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WITHOUT board. The board is required to certify the copy of


the by-laws as approved by the stockholders.

amend the by-law. This is clear under Section 48 of the


Corporation Code.

Amendment of by-laws - at least majority of the board and


stockholders holding majority.

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.

Delegation of authority by stockholders to the board - 2/3 of


the outstanding capital stock
Revocation of the authority delegated to the stockholders just
majority of the outstanding capital stock
In all cases, such may be made in a meeting called for the
purpose.
Should the delegation of authority be embodied in a
stockholders resolution or can it be in the by-laws?
When I was a corporate secretary of Equitable, I reduced
the number of votes to disqualify a creditor. Under the bylaws of the bank, we needed 2/3 to disqualify a creditor. So
anyone, if you are a creditor you can be disqualified by the
board by a vote of 2/3. So 2/3 is quite a big number so we
decided to reduce it to majority. The problem is we dont
have majority of outstanding capital stock neither a
stockholder owns an outstanding capital stock but we
could call the board. And I saw a provision in the by-laws
that the stockholders have delegated to the board the
authority to amend the by-laws. So on the strength of that
provision, I amended the by-laws solely upon the instance
of the board without stockholders approval. I submitted
the papers to the SEC. It was approved.

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.

It went up to the En Banc. The en banc cited a 1964 SEC


Opinion (before effectivity of the Corporation Code)
stating that the delegation of authority must be embodied
in a stockholders resolution.
How can that be? Its already in the by-laws why should
the delegation of authority be in a stockholders
resolution? So we filed a petition for review before the CA
under the Rule 43 because youre not allowed to file MR
with the SEC but before the decision of the CA,
nagbentahan na ng shares so it was not resolved but it is
interesting no? This is jurisprudence.
To me, the most favorable consideration is: Is that by-laws
that delegated to the board the authority to amend the bylaws approved by the SH voting 2/3? If it is then it should
be a valid delegation and need not be in a SH resolution.
Of course after this, I knew why. The SEC Commissioner
who voted against us is a consultant of SM. So the Director
who approved the amendments is our consultant. The
commissioner who overruled the director is a counsel of
SM.
For BAR PURPOSES, the answer is as long as the
delegation of authority has been approved by the SH
representing at least 2/3 of the outstanding capital stock,
then by the strength of that authority, the board alone may
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E. BOARD OF DIRECTORS AND TRUSTEES

Can the stockholders pass a resolution repudiating


the resolution adopted by the board on questions of
policy and management?

1. Doctrine of Centralized Management


As you all know, under Section 23 of the Corporation Code,
corporate powers, business transacted, property held by the
BOD.

No. SH cannot interfere with the board on how to run


corporate affairs.
REMEDY of SH: Remove the director by 2/3 of vote and
elect new directors but never to supplant BODs judgment
because the powers were not granted to them by law. It is
to the BOD.

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)

Can the court interfere on purely business matters?


No. For as long as the board acts in good faith and not
contrary to law, their (BOD) actions are not reviewable by
the courts.

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.

If the Board made a mistake, they erred in making an


investment or in buying this property that they
thought would increase in value but six months after
the value decreased; can they be made liable for
damages?
No. Under Section 23, 34, and 31 of Corporation Code they
are not liable. They are only liable in case of gross
negligence or bad faith in directing the affairs of the
corporation.

We have this doctrine centralized management so the


stockholders regardless of number they can be 5, 15, or
thousands SH, will have to delegate the power to run the
corporation to a centralized body called Board of Directors. So
BOD is the body who exercises the power of a corporation.

Simple negligence and error in judgment are all part of the


administrative _________. So directors are not infallible.
There are no certainties that they will not make mistakes or
they will not err in the exercise of their judgment. What is
important is that they act in good faith and not contrary to law
and if they do make a mistake, their actions are not reviewable
by the courts and even by the SH.

Under Section 23, there is a qualification unless otherwise


provided meaning there are certain cases where the law
conferred corporate powers only to the SH and there are
corporate powers exercised jointly by the board and the SH.
But other than these, corporate powers are exercised by the
BOD. They decide what is best for the corporation. Questions
on policy and management are left to the sound discretion of
the BOD.

Can the board create positions?


Yes. The board also may create a department. The board
may create ordinary positions, appoint ordinary officers.

BAR QUESTION: A general counsel of the corporation and


the lawyer who handled the case for the corporation entered
into a compromise agreement with a party in a civil case
without approval of the board. Is this compromise agreement
binding?

What the board cannot do and cannot be justified by the


business judgment rule, as held in the case of Filipinas
Port Services v. Go and asked in the bar, is to create an
executive committee that would function like an executive
committee under the Corporation Code neither can they
create corporate offices.

No, because general counsel does not have the power. It has
to be the board unless authorized by the by-laws or board to
enter into a compromise agreement but the lawyer himself
without authority from the board or the by-laws cannot
approve any compromise agreement.

So they cannot create officers and committees which, by


law, can only be created by the by-laws.
Now, you know very well that the board cannot
create corporate offices, but they can create ordinary
office. What does this mean?

2. Business Judgment Rule


This means that questions of policy and management are left to
the discretion of the board and the actions of the board are not
reviewable by the courts and they cannot be interfered with by
the courts and the stockholders for as long as the board acts in
good faith and not contrary to law.

The distinction is not in the importance of the position or


office in the corporation. The importance lies with the
jurisdiction in case of removal or incrimination dispute.
So the holder of a corporate office is considered a
corporate officer and any issue about the removal,
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appointment of a corporate officer is an intra-corporate


controversy cognizable by the RTC acting as a special
commercial court.

So what if the by-laws authorized the board to create a


corporate office and the board pursuant to this, it did
create a corporate office? Is the officer holding an ordinary
or corporate office? SC said its ordinary.

Whereas an officer holding of a by-laws position and


therefore he is not a corporate officer and considered as
ordinary, and in case of election, removal, or appointment
disputes, it becomes a labor issue or dispute cognizable by
Labor Arbiters and not the RTC acting as a special
commercial court.

So the remedy is not for the by-laws to authorize the


board. The remedy is for the by-laws to be amended to
make the office a corporate office.
What about the executive committee? Can the board
create an executive committee functioning as such
under Section 35 of the Corporation Code that can act
on matters with the boards competence?

What makes an office a corporate office?


Its not anymore WON it is appointed by the board. The
test is: Is that office specified in the by-laws?

No. It is beyond the authority of the board.

If it is in the by-laws, it becomes a corporate office. If not,


it is not a corporate office but just an ordinary office.

No amount of business judgment rule can justify the creation


of the executive committee which by law states can only be
created by the by-laws.

There is a recent case. Is the office of the dean a corporate


office? Now it is not the Dean of the Faculty of Civil Law but
another dean somewhere in the north. So the test is WON it is
in the by-laws. In this case, it is not in the by-laws. So where
can the Dean go in case hes been removed? Go to the LA, not
RTC as a special commercial court.

The SC clarified, however, if the committee is called executive


committee but the function is not the same in Section 35, then
the board can create it under the business judgment rule. So
kahit na it is called an execom but management function lang
pala.

EASYCALL v. KING (2005)

So what is so important under Execom in Section 35?

Lets say Vice President for Nationwide Expansion


(although sabi ni Dean is Director for Nationwide
Expansion). Is it a corporate office if he was only
appointed by a managing director?

Execom under 35 is just like a mini-board which can act


on matters within boards competence. Whatever the
board can do, execom can also do except in those 5 cases
under 35. This is why the board cannot create another
board. It must be the by-laws that will create another
board but of course, not less than 3 must come from the
member of the board.

So he is appointed by the managing director, not even by


the board. The title is hifalutin, right? But he is not a
corporate officer because his position is not in the by-laws.

BAR: The corporation has been losing money for


many years and to motivate the SH, directors, and
officers, the board adopted series of resolutions
invoking the business judgment rule. So in good
faith. In first resolution, it says pay dividends to the
SH. Second, pay bonuses to all directors. Third, pay
bonuses to officers. So can they be justified by the
good faith of the board?

GARCIA v. EASTERN TELECOM (2009)


Vice President and Head of Business Support
Services and Human Resource Departments (sabi ni
Dean VP for Personnel and Business Management)?
He is because his position is in the by-laws of the
corporation.
As said earlier, it is not the question of the meaning of the
position. When we say ordinary office, we dont say that youre
less important compared to those who hold a corporate office.
It is to say that in case of removal, then the one who has
jurisdiction over the dispute will be the determined by the
distinction between one holding a corporate office and one who
holds an ordinary office.

And of course in business judgment rule is subject to


the condition that the board acts in good faith. Now,
can the company declare dividends if it is losing?
No it cannot. Under Section 43 of the Corporation Code, a
corporation can only declare dividends if there is surplus
profit.
Can the director authorize payment of compensation
for themselves?

_____v. Joson 2012


Can the board be authorized by the by-laws to create
corporate office?

No because compensation of directors as such directors is


valid only if authorized by the by-laws or approved by the
SH owning or representing majority of the outstanding
capital stock under Section 30.

Before this ruling, as I told you, once youre appointed by the


board, automatically youre a corporate officer. But the test, as
I said, is the inclusion in the by-laws.
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What about payment of bonuses to officers if the


company is losing?

Tenure -if it exceeds 1year period until his successor has


been elected - the amount of time that a person holds a
job, office, or title.

It is unreasonable.

Directors shall have all the qualifications under Sec. 23 and the
by-laws, and none of the disqualifications under Sec. 27 and
the by-laws.

So all of the resolutions cannot be justified by the business


judgment rule.
NOT YET ASKED IN THE BAR:
INTERNATIONAL v. VENUS (2008)

PROVIDENT

One of the qualifications is ownership of a share in the books of


the corporation.

There are two functions in the BOD.

Let's say ABC Corp obtained a loan from XYZ Bank


secured by a voting trust agreement on the shares of
A in ABC Corp. A is the controlling stockholder of
ABC Corp, so by signing a voting trust agreement in
favor of XYZ Bank , A conveyed the legal title to his
shares in ABC Corp in favor of XYZ Bank. The loan
was not paid, promptly XYZ filed an action for
collection. Summons is served on A. Is A still
qualified to act as director of ABC Corp.?

Lets say the first set sided with the minority and the majority
directors filed an affidavit with the SEC that the stock and
transfer book (STB) is lost. So on the strength of the affidavit,
SEC issued a replacement STB but in truth and in fact, it is not
lost. It is in the possession of the corporate secretary.
Once the new STB is obtained by the board, the board passed a
resolution that all entries in the old book are void and all
entries in the new book are valid invoking the business
judgment rule.

A can no longer act as director of ABC Corp. the moment


the director loses legal title over his shares, automatically
he ceases to be a director of the corporation. The case of
Lee v. CA.

Is the invocation of the business judgment rule valid


to make all entries in the old void and the in the new
book, valid? Can the SEC recall that erroneously
registered STB?

CONTENTS OF THE BY LAWS


Section 47. Contents of by-laws. - Subject to the provisions of the
Constitution, this Code, other special laws, and the articles of
incorporation, a private corporation may provide in its by-laws for:

SC: If the book is not lost, no amount of business


judgment can justify the request for additional STB.
The erroneously STB can be recalled by the SEC. It does
not require court intervention. It falls within the general
authority of the SEC over all corporations.

1. The time, place and manner of calling and conducting regular or


special meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;

Can the SEC decide WON the entries in the new book
be valid?

3. The required quorum in meetings of stockholders or members and


the manner of voting therein;

No, because they become intra-corporate controversies


cognizable by RTC acting as special commercial court.

4. The form for proxies of stockholders and members and the manner
of voting them;

3. Tenure, Qualifications and Disqualifications of Directors or


Trustees

5. The qualifications, duties and compensation of directors or trustees,


officers and employees;

There's no quorum during the regular annual stock


holder's meeting to elect BOD. Therefore the
incumbent BOD shall continue to serve in a hold-over
capacity. During the hold over period, a director
resigns; can the remaining directors constituting the
quorum fill such vacancy?

6. The time for holding the annual election of directors of trustees and
the mode or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all
officers other than directors or trustees;
8. The penalties for violation of the by-laws;

No. The BOD holds the position merely in a hold over


capacity. The reason/cause for such vacancy is expiration
of the term and not resignation. Therefore only the
stockholders can fill the vacancy in the board. The case of
Africa v. Valle Golf and Country Club.

9. In the case of stock corporations, the manner of issuing stock


certificates; and
10. Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and affairs.

You must make a distinction between item #1 and #2 - time


place and manner v. time and manner. Place is not specified in
#2, and it's because the place of meeting for stockholders is
provided for by law - city or municipality where the principal
office of the business of the corporation is located.

Is there a difference between term and tenure?


Term is the 1year period in which he has the right to hold
office- the length of time during which a person has
an
official or political office.
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QUORUM

stockholder representing at least 2/3 of the outstanding


capital stocks.

Section 25. Corporate officers, quorum. Immediately after their


election, the directors of a 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 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 concurrently by the
same person, except that no one shall act as president and secretary or
as president and treasurer at the same time.

PROXY
It should be in writing and signed by the stockholder, filed
before the meeting, but the by-laws may prescribe additional
requirements for the sufficiency of proxy.
By laws may for example require that the proxy be notarized.
So a voting trust agreement is required to be notarized under
Sec. 59. The proxy is not required to be notarized under Sec. 58
and yet the by-laws may require that the proxy be notarized.

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.

The only requirement under the Code is that proxy must be


submitted before the meeting, which could be an hour before
the meeting.
Now the by-laws may prescribe a longer period for submission
of proxy, San Miguel for example they require that it be
submitted 10days prior to meeting, public companies 5 days
before the stockholders meeting. It cannot be belated or later
that that period, otherwise the stockholder whose proxy has
been rejected may not have enough time to seek redress or gain
relief. So for a public company, minimum no. of days for
submission of proxy is not less than five days before the
stockholders meeting, so it cannot be any day earlier, to give
time to the course to value the proxy and to enable the
stockholder to seek redress in cases of unjust, improper, and
unlawful rejection of the proxies.

Directors or trustees cannot attend or vote by proxy at board meetings.

Under Section 25, Quorum means majority of the directors as


stated in the AOI. Not fixed in the by-laws but fixed in the AOI.
Unless there is a higher number required in the AOI to
constitute a quorum, majority of the entire board is sufficient
to transact business.
If you see the phrase the BOD as distinguished from majority
of the BOD, the phrase BOD simply means majority of the
quorum. So this language is evident in Sec43-44 of the Code
regarding Declaration of Dividends, as compared to Sec 37-38,
40, 42. If the act is not provided for or is not covered by the
Corporation Code or the by-laws, then majority of the the
quorum is sufficient to transact business.

COMPENSATION OF DIRECTORS
As a GR, directors as such are not entitled to compensation
because they are not presumed to render services gratuitously.
The presumption is the return of their investment is enough
compensation.

Can the by-laws prescribe lesser number?

Are there exceptions? Are there cases were a director


as such director maybe entitled to compensation?

No. It can be greater number but not lesser number.


PENA VS CA.

Yes, if the by-laws fix the compensation of the director.

3 would have been a quorum of 5, but not if the by-laws


provide that 4 out of 5 constitutes a quorum. This involves loan
secured by mortgage. Loan was not paid mortgage was
foreclosed. Then the right to redeem was assigned to
another and the assignee wants to file an action for
ejectment against the mortgagor.

OFFICERS OF THE CORPORATION


It talks about manner of appointment, term of corporate
officers.
Can the by-laws then make the term of the corporate
officers 1 year and subject to renewal every year?

Was there a valid assignment of the right to rede


em considering that 3 out of 5 were present and
approved the assignment
of
the right to
redemption?

The Corporation Code covers only corporate officers, the code


does not cover ordinary officers. Because ordinary officers are
employees and in case of appointment, removal,
disputes/controversies, they partake of labor disputes
cognizable by the Labor Arbiter.

SC said it is invalid because the by-laws prescribed a


greater number and likewise under Sec 40 if what is
assigned is the right to redeem involving the only
property of the corporation that amounts to a sale of
substantially all the corporate assets and that requires
not only board approval but likewise votes of the

So the Corporation Code does not cover it, but only corporate
officers - the president, secretary, treasurer and other officers
whose offices are defined under the by-laws.

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So can the by-laws fix their term to 1 year?

public offering) is expensive, so the cheapest way to do it, to


make your shares listed, is to do backdoor listing. After the
amendment of AOI, the name is now Century City Properties in
the AOI, but still ABC in the by-laws, because the by-laws has
not been amended. So if you have to amend the item in AOI
that is also contained in the by-laws, you also have to amend
the latter to effect the change. How many votes? 2/3 of the
outstanding capital stock and majority of the board for
amendment of AOI.

YES. It is common in public companies, every year they


appoint corporate officers, and in fact this is allowed under
Sec.47.
Then you have manner of calling stock holders meeting. It
requires notice, the mode of giving notice. The notice has to be
by publication because it is difficult to prove notice by mail, or
personal notice of stockholders meeting. Many cases where the
SC rejected or invalidated Stockholders meeting for the failure
to notify one stockholder, because all stockholders must be
notified of such meeting. Regardless even if the number of
shares is/are significant or not, it is not a valid reason/excuse,
not to notify all stockholders. You cannot say that anyway the
vote of the stockholder is not required anyway.

A BOD must have all the qualification of a BOD under


the Corporation Code as well as the qualifications under
the by-laws and none of the disqualifications under the
Corporation Code.
What are the qualifications under the Corporation
Code?

Bottom line is that all stockholders must be notified, quorum


and vote required by the by laws- subject to notice by mail,
personal delivery, but it is best to do it by publication because
all you have to do is to present affidavit of the publisher that
caused the publication.

1.
2.
3.

Is the enumeration under Sec. 47 exclusive or not?

4.

It's not. That's why you have the all-encompassing clause


"Such other matters as may be necessary for the proper or
convenient transaction of its corporate business and
affairs."

5.

Must be a natural person except in case of a


cooperative
Legal age
Ownership of at least 1 share of stock registered in his
name in the books of the corporation
Not less than 5 not more than 15 except in case of
merger or consolidation of banks and corporation sole
Majority of them must be Philippine residence

QUALIFICATION:
Ownership
of
at
least
1
share
of
stock
registered in his name in the books of the corporation as
of the date fixed in the by-laws.

RECORD DATE means the stockholders of record entitled to


exercise the right of stockholders, whether right to vote or right
to dividends.

Such qualification is a continuing qualification. If at any time, a


director loses ownership or ceases to be a SH, he automatically
loses or becomes disqualified to continue discharging the
functions of a director.

Let's say June 1 the corporation declared dividends "the board


thus declared dividends to stockholders of record as of June15,
2015 payable on June 30, 2015." On June 16 stockholder sold
his shares, between your record date June15 and payment date
of June30, there is a change of ownership. Who is entitled to
receive the dividends?

Can the trustee qualify as a director even if he is not a


full owner; he only has legal title over the shares,
NOT A FULL TITLE?

It is the stockholder of record as fixed in the by-laws, the


stockholders of the record date which is June15. Hence it is not
the buyer-transferee of the stocks but the seller-transferor who
is entitled to receive the dividends, being the stockholder of
record as of the June15, even though he is no longer the owner
as of payment date.

The SC held that a trustee can qualify as a director even if


he is not a full owner because it is the legal title that counts
not the beneficial title.
Generally, you have to be a full owner; it means you should
have both the legal title and beneficial title.

If there will be item in the articles that you have to amend but
is likewise mirrored in the by-laws, then you have to effect it in
the by-laws likewise.

But in the case of Lee vs. CA - ABC Corp obtained a loan from
XYZ Bank secured by a voting trust agreement on the shares of
A in ABC Corp. A is the controlling stockholder of ABC Corp, so
by signing a voting trust agreement in favor of XYZ Bank , A
conveyed the legal title to his shares in ABC Corp in favor of
XYZ Bank. The loan was not paid; promptly XYZ filed an action
for collection.

Century Properties will enter into backdoor listing. Backdoor


listing means acquiring the shares of a dormant listed
company. Let's say the listed company is ABC Energy
Company, Century will acquire shares of ABC. Then after the
acquisition they will now amend the AOI to change the purpose
from being an energy company to Realty Company, and they
will also amend the corporate name from ABC Energy
Company to Century City Properties. Because IPO (initial

In the voting trust agreement the lender acquires legal title to


the shares, and because the lender acquires legal title as trustee
then he has the right to elect the directors of the corporation so
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that they can now manage the affairs of the corporation. It is a


more effective way of gaining or acquiring control.

Has Estoppel set in?


No. Estoppel cannot forestall the challenge against an act
which is contrary to law. You cannot have a permanent
representative in the board. Only for a 1 YEAR TERM. You
cannot be a director or trustee of the corporation unless
you are a stockholder or a member for non-stock
corporations.

For qualification purposes who is qualified to be


elected director? The trustor-beneficial owner or the
trustee legal title?
SC said LEE V. CA: One with legal title, not necessarily
with full ownership. Conversely, the moment the director
loses the legal title to the share automatically he forfeits
the director position.

BAR QUESTION: Can the by-laws enlarge the


qualification for a director to own atleast one share?

Why is it legal title suffices not full ownership?

Yes, as long it is not intended to deprive the minority


representation

Because SC said in LEE V. CA the phrase in his own


right under the old corporation code has been deleted.
What about the practice of lodging your shares with
a broker? (SCRIPLESS TRADING)[to be discussed in
detail regarding transfer of share] Lets say you
want to sell your shares as a stockholder, what are
the requirements under the law?

Can the by-laws prescribe other qualification? For


example only law deans be elected as directors of
trustees?
Yes.
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)

Endorsement plus Delivery


To facilitate Scripless trading, the stock certificate of the
stockholder is lodged with the broker. It will be the name
of the broker for the benefit of whoever will be the
beneficial owner of the shares.
For Director qualification purposes, the one who lodged the
shares to a broker is NOT QUALIFIED TO BE A DIRECTOR
because he is no longer the stockholder in record in the books
of the corporation.

GROUNDS FOR DISQUALIFICATION:


1.

CONTINUING QUALIFICATION
BAR QUESTION: Lets say X is a director of ABC Corp. , six
months in his term he sold the shares to Y. So who is qualified
to continue discharging the duties of a Director?

2.

Neither X OR Y. X loss the director position because of the


transfer of shares to Y. Y is not qualified because purchase of
shares of X is not a mode of assumption of office.

Conviction by final judgment of an offense punishable


by imprisonment for period exceeding 6 years

Final Judgment

Gravity of the penalty

Violation of the corporation code committed within 5


years prior to the date of his election or appointment

GRACE CHRISTIAN HIGHSCHOOL V. CA

Not the gravity of the penalty or offense (even


only mere reprimand or a fine), IT IS WHEN
THE VIOLATION IS COMMITTED.

Suppose in the SEC EN BANC, found a director there


violated the corporation code but he filed a petition
for review with the CA. During the pendency of his
appeal can he still run as a director in another
corporation?

The by-laws of Grace Village homeowners association provides


that there are 15 directors and out of the 15 directors only 14
will be elected among the members of the association, the 15th
slot is reserved for the representative of the Grace Christian
School (Not a member of the association). For 14 years the
representative of Grace Christian High School is allowed to
have a seat in the homeowners association. Until one time,
when the board of trustees of the Association (Change of
trustees) decided to withdraw or revoked the privilege which
prompted the case filed by Grace Christian HS against the
association. Grace Christian HSs argument is that the school
has a vested right over the director seat. It has been the
practice and the school was the magnet that drew residence in
the village.

No because decisions of the SEC EN BANC are executory.


Immediately executory but they are not final can be
appealed with the CA. The appeal will not stay the
enforcement of the decision of the SEC EN BANC.
XPN: If the petitioner obtains a TRO or injunction from
the CA

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4. Elections

BAR QUESTION: Which shares are not included in


the determination of majority of outstanding capital
stock?

Section 24. Election of directors or trustees. - At all elections of


directors or trustees, there must be present, either in person or by
representative authorized to act by written proxy, the owners of a
majority of the outstanding capital stock, or if there be no capital stock,
a majority of the members entitled to vote. The election must be by
ballot if requested by any voting stockholder or member. In stock
corporations, every stockholder entitled to vote shall have the right to
vote in person or by proxy the number of shares of stock standing, at
the time fixed in the by-laws, in his own name on the stock books of the
corporation, or where the by-laws are silent, at the time of the election;
and said stockholder may vote such number of shares for as many
persons as there are directors to be elected or he may cumulate said
shares and give one candidate as many votes as the number of directors
to be elected multiplied by the number of his shares shall equal, or he
may distribute them on the same principle among as many candidates
as he shall see fit: Provided, That the total number of votes cast by him
shall not exceed the number of shares owned by him as shown in the
books of the corporation multiplied by the whole number of directors
to be elected: Provided, however, That no delinquent stock shall be
voted. Unless otherwise provided in the articles of incorporation or in
the by-laws, members of corporations which have no capital stock may
cast as many votes as there are trustees to be elected but may not cast
more than one vote for one candidate. Candidates receiving the highest
number of votes shall be declared elected. Any meeting of the
stockholders or members called for an election may adjourn from day
to day or from time to time but not sine die or indefinitely if, for any
reason, no election is held, or if there are not present or represented by
proxy, at the meeting, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the member
entitled to vote.

NON-VOTING SHARES, DELINQUENT SHARES,


TREASURY SHARES but includes unpaid shares which
are not delinquent.
a. Cumulative Voting/Straight Voting
b. Quorum
CUMULATIVE VOTING he may cast his votes in favor of
one nominee or he may spread out equally or various portions
to various nominees as long as it does not exceed the number
of shares owned by him as shown in the books of the
corporation multiplied by the whole number of directors to be
elected.
Such cannot be denied to a stockholder because it is a right
granted by law. The by-laws cannot deprived that right from a
stockholder.
For non-stock non-profit corporation
BAR QUESTION: If there are 6 trustees, how many
votes can one member cast?
6 but not more than once per nominee. There is no
cumulative method voting in non-stock non-profit
corporation unless provided in the by-laws.
INDEPENDENT DIRECTOR is one who is not part of
management and not subject to any circumstance, relationship
or factor present that may impair the exercise of the
independent judgment of a director of the corporation

REQUISITES FOR A VALID ELECTION

Notice of the meeting to the Stockholders in


accordance with the form and mode under the by-laws

There will be present either in person or by


representative authorized to act by written proxy the
owners of a majority of the outstanding capital stock
or majority of the members entitled to vote.

Presided by the officer under the by-laws.

The stockholder may cast such number of votes base


on his shares registered in his name in the books of
corporation multiplied by the directors to be elected.

Example: Legal Counsel of the corporations, adviser


BAR QUESTION: What corporations are required by
law to have an independent director?
Public companies -whose shares of stock are listed in the
stock exchange or with P50 million assets with at least 200
stockholder and each SH owning 100 shares.
5 directors, 2 independent directors at least
15 directors, 2 independent directors

o For example: Let us say a stockholder has 1000


shares, 15 directors to be elected. So 1000
shares x 15 the answer is the number of votes
allowed for such SH to cast (15,000 votes)

How many election are you going to have if you are


required to have an independent director?
Only one
How many directors will you elect?

And the candidate having the highest number of votes


shall be duly elected as director.

Same, the number of directors fixed in the AOI

Number of shares not number of Warm bodies present. So it


can only be one person, there can be a quorum, if that person is
Henry Sy of SM OR BDO. His presence accounts to more than
majority.

How many votes may the SH cast?


Same formula, number of shares under their name X
number of directors to be elected INCLUSIVE OF THE
NUMBER OF INDEPENDENT DIRECTORS

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for the purpose, or in the same meeting authorizing the increase of
directors or trustees if so stated in the notice of the meeting.

One nominee for regular director or one nominee for


independent director, or spread its votes among regular only or
independent only or combination of both as long as the votes
do not exceed the shares of stock in his name multiplied by the
number of directors to be elected

Q: There are 3 cases/instances under Section 29


where vacancies in the board may exist. In cases of
expiration of term, removal and what is the third
one? It is important for us to determine these 3
because the board may fill up vacancy in cases other
than these 3 grounds.

Example 13 directors, 2 independent directors. There are 18


nominees to the positions of regular directors. The top 13 will
be considered regular directors.

A: When the Articles of the corporation is amended to increase


the number of the directors. Removal, Expiration of term and
increase in the number of the board seats, the stockholders
shall fill up the vacancy. For the board to fill up vacancies the
causes may be other ground than removal, expiration of term
and increase in the number of the board seat, it could be
resignation, withdrawal, retirement, abandonment, death,
insanity and incapacity as long as it is not removal, expiration
of term or increase in the number of the board seat. The other
requisite for the board to fill up vacancy is there must be a
quorum.

What if the shares or votes of the 2 independent


directors are less than 14th nominees as general
directors?
The top 13 nominees for regular directors are considered
elected and top 2 nominees for independent directors are
elected as independent directors even though these 2
independent directors obtain less votes than the nominees
for regular directors.
5. Removal
REQUISITE FOR REMOVAL/PROCEDURE TO CARRY OUT
REMOVAL OF DIRECTORS/TRUSTEES:
1.

Notice of the meetings and the procedures prescribe


by the by-laws.

2.

Notice of the meeting must specify the purpose that


there includes the proposed intention to remove a
director although the code does not require that the
name of the director to be removed be specified. Just
include in the agenda that there is intention to remove
a director.

3.

Presence of stockholders representing 2/3 of the


outstanding capital stock.

4.

The removal may be with or without just cause.


However, if the removal is intended to deprive the
minority of their representative, the removal has to be
with cause.

5.

Q: There are 15 directors under the articles of incorporation, 7


went to Brazil to watch a football game. For example, there was
a plane crash and all of them died. The 8 called a special board
meeting to fill up vacancies and all of them showed up but they
were in disagreement as to who will be elected. 5 out of 8 voted
to fill up the vacancies by nominating certain individuals. Is
this valid?
A: Yes, the Code says the majority of the directors present if
they constitute a quorum. 5 out of 8 is a valid vote to fill up a
vacancy.
Quorum of the board meeting constitutes the number of
directors fixed by the articles of incorporation. If a director
abstains but is physically present in the meeting, his presence
is counted for quorum purposes.
How many votes are needed to fill up vacancies
brought about by the removal?

The vacancy brought about by the removal of the


director may be filled up at the same stockholders
meeting where the removal was effected or in a
separate meeting called for that purpose.

The power to remove requires 2/3 of votes of the


stockholder representing the outstanding capital stock
while the filling up of the vacancy require only majority of
the outstanding capital stock. So if for example in the
stockholders meeting where the removal was effected, the
stockholders decided to appoint and elect the director,
appointment/election of the new director need not require
2/3 of the outstanding capital stock, majority suffices.

6. Filling of Vacancies
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.

As we said earlier, the stockholders have the sole power to


remove a director. It does not belong to the board or jointly by
the board and the stockholders. So if the board passes a
resolution that a director who is absent for three consecutive
meetings or if the director fails to pay dues and assessment of
the corporation, the director may be removed, that board
resolution is invalid because the sole power to remove a
director belongs to the stockholders even though this is in the

A 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

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by-laws. Even if the by-laws says that a director who is absent


for three meetings or more or delinquent to pay the dues and
assessment, it cannot be a valid ground for the directors to
remove him because again the power to remove a stockholder
belongs to the stockholders. In case of absences or in case of
non-payment of dues and assessment, it amounts to just cause
and even though he is the representative of the minority, he
can be removed by the stockholders as long as you have 2/3 of
the outstanding capital stock.

STAGGERED ACCEPTANCE OF RESIGNATION


Lets say that your client buys 75% of a company and it is
customary in any sale transaction for nominees of the seller to
tender resignation of the directors in order to pave the way of
the nominees of the buyer. So the nominees of the seller tend
to resign, to be accepted by the board. The problem is if it is
75% and let us say you have 15 directors and 10 came from the
sellers nominees, if the board accepted the resignation then
you will not have the quorum to fill up the vacancies. The board
will have to call a stockholders meeting. Can you request them
to stay and accept the resignation on staggered basis so even
though 10 tendered resignation, 5 will stay for one meeting and
only 5 will resign and the new nominees of the buyer will be
accepted by the 10. After the 5 has been filled up, the
remaining 10 will then reside and accept the resignation of the
5 remaining directors?

CASES WHEN THE STOCKHOLDERS MAY FILL UP


VACANCIES IN THE OFFICE OF DIRECTORS/TRUSTEES:
1.

If the ground or the cause is expiration, removal or


increase in the number of the board seats.

2.

The ground is not expiration, removal nor increase in


the number of the board seats but the remaining
directors do not constitute a quorum.

3.

The ground is not expiration, removal nor increase in


the number of the board seat and the remaining
directors who constitute a quorum decided to delegate
the power to the stockholders.

It is valid. The only requirement is the quorum to fill up


the vacancy brought about by the grounds other than the
expiration, removal or increase in the number of the board. In
fact, this has always been done by the corporation. You do not
have to call a stockholders meeting. All you have to do is to call
a meeting of the remaining directors and accept the resignation
on a staggered basis. The only requirement to repeat, is that the
cause of the vacancy is not expiration, removal or increase in
the number of board seats and the number of the remaining
directors at the time they fill a vacancy constitute a quorum.

REQUISITES FOR THE BOARD TO FILL UP VACANCIES IN


THE OFFICE OF DIRECTORS/TRUSTEE:
1.

2.

The cause of the vacancy must be resignation,


withdrawal, retirement, abandonment, death, insanity
or incapacity or any ground other than removal or
increase in the number of the board seat.

I remember when I was a corporate secretary of the bank, two


nominees come from the GSIS and two from SSS. The two
nominees from the GSIS resign to pave the way for the
appointment of new nominees. They resign 6 months before
their term to give way to the new nominees of GSIS.
Unfortunately the board decided not to fill up the vacancy from
the GSIS nominees and the board only chose one from the two
nominees of GSIS and appointed a third member of the
directors. Of course the GSIS cried and complained that it
should come from their rank. Is that legally correct?

The remaining directors must constitute a quorum.

To fill up the vacancy by the act of the board, majority of the


quorum suffices. These three on Section 29 of the Corporation
Code it says majority of the remaining directors present, if they
constitute a quorum unless if the by-laws requires otherwise.
The by-laws may require that it should be the majority of the
entire board but if not so provided, majority of the quorum
suffice.

Yes, because during the term of the director, you do not


have to set anymore a stockholders meeting, you are on your
own. So the board may decide who would become a member.
You can only use your shares to elect directors during the
stockholders meeting but the board during the incumbency of
the directors, may appoint someone from GSIS or not from the
GSIS as long as the replacement has all the qualification and
none of the disqualification under the by-laws and under the
Corporation Code.

The term of the director who is elected or appointed to fill up


the vacancy is the unexpired portion of the term of the director
replaced.
BAR QUESTION: A was the director appointed June 1, 2013
and then he resigned. On August 1, 2013, D was appointed by
the board. By September, D died and was replaced by X. What
is the term of X?
A: The term of X is the unexpired portion of the one year
term. He can serve only up to June 1, 2014.

Things became difficult when the President of the Philippines


called up our ambassador who seats in the board and said why
do you not appoint this guy from the GSIS, appoint him. So we
immediately called up a board meeting. The president all the
way from the palace called up the ambassador who is in the
board and very close to the chairman. The chairman called me
up and asked what shall we do? I said just elect him to seat in
the board of director. He said how could that be, it is against

Is it mandatory on the part of the board to fill up the


vacancy in case somebody resigns, withdraws or was
incapacitated?
No. It is discretionary on the part of the board and not
mandatory.
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percent of the net income before income tax of the corporation during
the preceding year.

the Articles of the Corporation. I said we will invoke the


provisions under the General Banking Law that allows 21
directors in case of merger and consolidation and in the mean
time we shall give him all the rights of a director. We will give
him per diem allowance and voting rights of a director. In the
meantime, we will get the opinion of the general counsel of the
BSP, to at least to give him the semblance of legitimacy.

Under Section 30 of the Corporation Code, directors as such


are not entitled to compensation because directors are
supposed to render the services to the corporation gratuitously
and the return of their investment is enough consideration for
their services. The directors presumably have significant
number of shares because you cannot be elected to the board if
you do not have sufficient numbers of share. So if they work
hard for the corporation it would translate into profits which
can be declared as dividends and the return on their
investment is enough consideration for their services. That is
why the by-law can entitle them compensation as such as
directors. There exception as we all know, the by-laws may
authorize the compensation or the stockholders by the vote of
the majority of the outstanding capital stock allowed to vote
may favour payment of compensation in the meeting called for
the purpose.

So that was done. We appointed him as the 16 th member of the


board and then the minority directors questioned the
appointment and said how could we appoint the guy when
under the Articles of the bank only allows 15 directors. I said
under the General Banking Law in case of merger or
consolidation, the bank may have 21 directors and we are party
to the merger and the law does not say at the time of the
merger but says in case of merger. Of course, that was wrong
because the Articles of the corporation says that you have to
specify the number of directors, if you want to have 21 in case
of merger or consolidation then that 21 must be specified in the
Articles but I need something in order to sort of give him
legitimacy to be the 16th director of the bank. The good thing
was there was no more contentions or discussion and di
kailangan idivide ang house. That action was unanimous and I
made it appear on the record that the directors participated in
the discussion, deliberation and the votes were counted. We
were waiting for the opinion of the general counsel to say Im
sorry but that cannot be done. At least it buys time for me, the
good thing that I always pray that God be always with us. On
the third month, somebody resigned so it solved the problem
by itself. So there were 15 directors of the bank.

What if the directors render non-director services? What if the


director is also the president or vice president? Can he be paid
compensation if the by-laws is silent and without the vote of
the stockholders owning majority of the capital stock?
WESTERN TECHNOLOGY VS. SALAS
The Supreme Court said that the prohibition is on the payment
of compensation to the directors as such. The director as such
is not entitled to compensation. The prohibition is against the
payment of compensation for directors services. If the director
will be paid compensation for directors services that is the
time that the requirement of the by-laws or vote of the majority
of the stockholders comes in. In case they are paid
compensation in cases other than director capacity or for nondirector services, it does not require the authority of the bylaws or the approval of the stockholders; the board approval
suffices.

AFRICA CASE:
The resignation of the director, may not be filled up the
stockholders and may be done by the board if the vacancy is
other that expiration, removal and increase in the number in
the board seats.
Vacancies due to EXPIRATION OF TERM, REMOVAL and
INCREASE IN THE NUMBER OF BOARD SEATS, IF BOD
DOES NOT CONSTITUTE A QUORUM

Is there a limitation
compensation?

the

amount

of

the

There is, the annual compensation as such should not


exceed 10% of the net income, not gross income, of the
corporation before income tax of the preceding year.

To be filled up by Stockholders in a meeting


called for a purpose

Vacancies due to grounds other than mentioned

in

BAR QUESTION:

BOD can fill it up if there is quorum

The limitation on the directors compensation is that in no


case shall the total yearly compensation of directors, as such
directors, exceed fifty (50%) percent of the gross income
before income tax of the corporation during the preceding
year.

7. Compensation
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%)

NO, it must be 10% of the net income before income tax of


the preceding year.
Again, take note that 10% cut only applies only in
compensation for directors services and if they are paid

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compensation for other services, it is not subject to 10%


limitation.

upon motion of the winning party, enforce the decision to levy


the assets of the corporation. Unfortunately, assuming that
there are no assets, can the President and other corporate
officers of the corporation may be made liable personally
because of the closure or insolvency of the corporation. (Follow
up question) Can the President stand as an employer of the
Ees of the corporation?

What about per diem allowance? Is per diem


allowance? Is per diem allowance part of the
compensation?
NO, under the present Corporation Code.

A: There were SC decisions that the President stood as as


Employer representing the corporations. Those SC decisions
were no longer applicable.

On the proposed new Corporation Code, the per diem


allowance under the proposal is to make the per diem
allowance constitute compensation. Why? Because per
diem allowance becomes so big in many corporations and
bigger than the compensation of members of the faculty of
UST. Take a look at PLDT, the per diem allowance of
PLDT is Php 250,000 per board meeting and for every
committee meeting Php 200,000. For San Miguel
Corporation Php 200,00 per diem allowance and Php
150,000 for a committee meeting.

Supreme Court said in CARAG vs NLRC, the liability of the


President and other officers is not determined by the Labor
Code but by the Corporation Code, sections 31 and 34. That is
why the enumerations are exclusive because you cannot think
of any other ground other than the six (6). asked four (4)
times in the Bar.
Q1: The President signed a surety agreement to secure the
obligation of this corporation. It turns out that the surety
agreement is spurious. Can the President be made liable on
account of gross negligence or bad faith? Q2: What is
important so that the president can be charge personally when
it comes to the gross negligence and bad faith in conducting the
affairs of the corporation? Procedurally, how? What should be
alleged in the complaint?

What is the concept of per diem allowance?


It is supposedly allowance for transportation, board and
lodging. The law says it must be reasonable. There is no
amount and it is a question of reasonableness. If a corporation
earns billions of pesos for PLDT, and you have assets of billions
of pesos, the php 250,000 may be defined as reasonable. It
depends on the facts of the case. And in case of meetings of the
corporation, you should get a committee also. In my case, Im
in the board of UCPB. Despite of the very tight schedule, I have
three committees. Others have 3, 4, 5 or 7 committees, di
naman pwedeng lahat kunin nila so kelangan magbigay ng
kahit konti, so I have to take 3 committees, the most that I can
take. So I am part of the board and I take 3 committees and I
am not a full time director, who can get 7-8 committees. So if
you are a director of PLDT, you have 250,000 and let us say
you have 3 committee memberships. So 200,000 times 3 is
600,000 plus 250,000 is 850,000 for four hours just to take
the board and committee and that is PLDT for you. And this is
abuse by some GOCCs, that is why the officer of the GOCC or
the Good Governance corporate counsel passed a regulation
that board meeting shall not be more than once a month and
the committee meeting has to be every other day. So ginagawa
nung iba Monday para tatlo, Monday, Wednesday and Friday.
Kasi kung Thursday, dalawa lang. When Pnoy took over,
remember the MWSS has so many Board meetings. Wow are
they serious? What are they talking about? What are they
discussing? They have the same problem sewerage problems
etc. The answer is per diem allowance and they get other
bonuses like productivity bonus, compensation bonus. That is
why there is a resolution passed by the good governance
counsel.

A1: No. A2: The SC said that the act constituting the
negligence or bad faith must be alleged; it is not enough
to make averments that they are in bad faith, otherwise it has
no basis.
Q: Can the stockholder be made personally liable?
A: No. It is not included in the enumeration of the directors,
officers and employees. Stockholders are liable only to
the extent of their subscription UNLESS they are
directors, officers or agents of the corporation.
Last Question
Q: What do you understand by the doctrine of corporate
opportunity?
A: When a director, by virtue of his office, acquires for himself
a business opportunity which should belong to the corporation,
thereby obtaining profits to the prejudice of such corporation.
There is a responsibility not just to account but to remit the
profits he realizes.
Last Question.. Dean: I think I lied. Class: LOL
The case of Lanuza vs BF Corporation, penned by J. Leonen
Q: If the complaint alleges bad faith or gross negligence on the
part of the director and officers of the corporation, and they are
found guilty of bad faith and gross negligence in the course of
the trial, is that tantamount to pierce the veil of corporate
fiction?

8. Fiduciaries Duties and Liability Rules


Q: (This is the case of AC Ransom) dito nagstart yung
recording. by virtue of the finality of the judgment, the sheriff
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A: Yes, in the sense that there is no distinction between the


corporation and the directors and officers of the corporation.
In effect it pierce the veil of corporate fiction, you make them
as if they are one and the same person.

In CARAG VS NLRC, the Supreme Court said it is


unlawful if the law declares the act is unlawful. Best
example is in the Labor Code, the Er must notify the
DOLE in case of termination atleast 30 days before the
intended termination, and so what is the consequence? A:
it affects the legality of the termination of the employment,
but will that make the erring officer liable personally? A:
The SC said, no. There is no law that makes that
omission to be unlawful.

Section 31. Liability of directors, trustees or officers. Directors or trustees who wilfully and 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 therefrom suffered by the corporation, its
stockholders or members and other persons.

Second is, Guilty of gross negligence or bad faith in


directing the affairs of the corporation;
As you all know, simple negligence and error in judgment will
not make the director or officer liable.

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)

So if the directors decide to purchase a property and


after 2 months the price of the property went down,
lets say the purchase price is 10 million, after 1
month it went down to 7 or 8 million a significant
reduction in the value. Are they liable for that?
Not necessarily, right? Keep in mind the business
judgment rule, that the business policy and management
are left to the sound discretion of the board as long as the
act in good faith, they can never be made liable. The SH
cannot interfere.

DISCUSSION.
This was asked four times (4X) in the bar, what are the cases
were the liabilities will attach to the directors, officers and
employees?
1.

What constitutes gross negligence?

He wilfully and knowingly votes or assent to patently


unlawful acts of the corporation;

2.

Guilty of gross negligence or bad faith in directing the


affairs of the corporation;

3.

He acquires any personal or pecuniary interest in


conflict with his duty as such director or trustee.

4.

When he consents to the issuance of watered stocks;


or having knowledge thereof, does not forthwith file
with the corporate secretary his written objection
thereto;

5.

He is made by specific provision of law to personally


answer for his corporate action

6.

When he agrees to hold himself personally and


solidarily liable with the corporation.

It depends on the facts of the case. The SC defined gross


negligence as patently negligent act, but in terms of
jurisprudence, it depends on the facts of the case.
Likewise, in bad faith. There is no hard and fast rule as to
what constitutes gross negligence or bad faith. The
complaint must allege with particularity the act
constituting the gross negligence or bad faith.
The case of Lanuza vs BF Corporation, this is an
interesting case. It refers to the construction of Shangri- La
Mall. BF Corp. constructed the Shangri- LA Plaza mall in
Ortigas, for the Shangri-LA Corporation. BF Corporation
alleged that the fees and the amounts due to it under the
construction agreement were not paid. So it filed an action for
collection and damages against the Shangri- LA Corp. and
impleading therein the directors and officers of the
Corporation. There is an arbitration clause under the
construction agreement in the sense that resort to arbitration is
necessary before they can proceed for an action for breach of
contract. The contention of Shangri-La is that the complaint is
premature because there is no arbitration initiated by the
party. Is this defense applicable to directors of the
corporation? BF Corporation alleges that the case will still
continue against the directors and officers because of bad faith.
On the other hand, the directors and officers of the
corporation, insofar as they are concerned the case should be
dismissed, because they are not part in the construction
agreement that has arbitration clause. In your ADR, arbitration
clause is only binding between the contracting parties. It does

Q: Who are covered by this principle?


A: Only directors, officers and agents of the corporation are the
personally liable and not the stockholders, unless he is a
director, officer or employee.
It is not just to vote for but to assent likewise to a patently
unlawful act. Take note of the qualifier, patently. It is not
enough to be unlawful act; it must be patently unlawful
act, meaning without doubt, question or debate whatsoever
that the act is unlawful.
Q: What makes an act unlawful?
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not bind the non-party to the agreement. But in this case the
SC said, because there is an allegation of gross negligence and
bad faith and if this allegation is proven then there is no
distinction between the corporation and the directors and
officers. So the case therefore may continue.

sold these shares for an amount below par. Are those watered
shares?
NO, they are not watered shares because watered shares only
pertain to issuance of shares and not treasury shares. Treasury
shares are assets of the corporation. They are properties of the
corporation having been acquired through surplus profit and as
assets, properties of the corporation they can be disposed of for
any price, terms and conditions as the board may reasonably
determine. So for example if the par value of the share is 10
pesos and then the book value is 40 but it is trading at 20 pesos
per share. So it makes sense for the corporation to buy the
shares for in the market your book value is 40 and yet the
trade-in value is only 20 pesos. In its books each share is worth
40 pesos but it is traded only for 20 pesos so it is cheaper to
buy these shares. These shares acquired by the corporation
through surplus profit become assets of the corporation.

The third one is acquiring any personal or pecuniary


interest in conflict with his duty as such director or
trustee of the corporation. This conflict of interest must
result in damage to the corporation. So, conflict of interest is
nothing.
Section 34. Disloyalty of a director. - Where a director, by virtue
of his office, acquires for himself a business opportunity which should
belong to the corporation, thereby obtaining profits to the prejudice of
such corporation, he must account to the latter for all such profits by
refunding the same, unless his act has been ratified by a vote of the
stockholders owning or representing at least two-thirds (2/3) of the
outstanding capital stock. This provision shall be applicable,
notwithstanding the fact that the director risked his own funds in the
venture. (n)

The par is 10. Supposing the value is not improved, so


the losses of the corporation have not been improved
and the price of the shares would just go down to
even 5pesos, can those shares be sold at 8 pesos?

Under section 34, the consequences if the director seized an


opportunity belonging to the corporation, there is an obligation
to account for and remit any profit he earned form that venture
or transaction. The obligation to account and remit is not
excused even if he risked his own funds unless the act was
ratified by the SHs representing atleast 2/3 of the outstanding
capital stock.

The answer is YES right. The price, terms and conditions


of the sale of treasury shares determined reasonably by
board of directors not subject to the par value limit.
If he contractually binds himself to be liable with the
corporation.

So lets say, Juan Dela Cruz, the president of ABC Corp. is a


good salesman , he was sent by ABC Corporation to Korea to
negotiate with the President and CEO of Samsung to be the
exclusive distributor of SAMSUNG products, S6 in the
Philippines. Because he is so good, he was able to convince the
President of Samsung. Instead, he put up a corporation and
enforced the contract with that corporation. What are his
obligations under section 34? A: to account and remit whatever
he earned in that transaction or venture.

Now there are cases where the Supreme Court said


that the director or officer is liable solidarily with the
corporation. In some cases the Supreme Court simply
says he is liable with the corporation. So if a director
or officer makes himself liable contractually with the
corporation, is he automatically liable solidarily?
Depends on whether or not he signed a surety agreement
or guaranty agreement. So not all cases where they assume
liability will give rise to solidary liability. If he signs a
surety agreement, he is liable solidarily. If he signs a
guaranty agreement, he is subsidiarily liable. But if he
signs a guaranty agreement which contains a waiver of the
right of excussion, the Supreme Court said in one case, it is
not the name that counts but the terms of the agreement,
in such case he is liable soildarily.

Letter D, is when he consents to the issuance of watered stocks;


or having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto;
Q: What are watered stocks?
A: stocks issued for the amount below par (fair value) so what
is the fair value of the share? For PAR VALUE SHARE, (the
minimum is the par value, malabo to, di ko masyadong
maintindihan), what about for NO PAR VALUE SHARE of the
corporation? The issued value fixed in the articles of
incorporation or by the board of directors. So for Par Value
Share of the corporation (malabo din , di ko magets)

Now if he signs as a guaranty or surety agreement,


this must be read in relation to your credit
transactions. There is one case, CUENCA v. CA, the
president of the corporation signed a surety
agreement to secure the obligation of the corporation
and he signed this when he was president. Thereafter
he was replaced as president and when he was
replaced, the term of the loan was extended without
his consent. Now will the extension of the term of the
loan release him from the obligation?

So if the par is ten, issued for 8 pesos, the 2-peso difference


should be for the account of the consenting director and the
subscriber solidarily, jointly and severally.
What about lets say ABC corporation issued shares fully paid
and then reacquired such through purchase, donation and
other lawful means and then subsequently the corporation
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Well that question can never be resolved by Corpo right.


For Corpo he is liable if he contractually binds himself
with the corporation but whether or not he will be made
liable despite the extension of the term of payment is
something that could be answered by your credit
transactions. What is the effect if the surety agreement is
extended without the consent of the surety? As you all
know, any material or adverse change in the terms and
conditions in the principal contract made without consent
of the surety or guarantor shall release him from liability.
So in that case the term was extended without his consent.
That consent cannot be obtained because he was no longer
the president when the term was extended. He is released
from liability under the law on surety.

The person authorized by the board.


Can the chief legal counsel verify or sign the
certificate of non-forum shopping? Can he sign a
petition or complaint in behalf of the corporation?
This is the case of Philippine Rabbit Bus Lines vs. Aladdin
Transit Corp. Philippine Rabbit filed a petition to assail
the order of the judgment of the RTC. It was signed by the
chief legal counsel but he was not authorized by the board.
The Supreme Court said that even if he was the chief legal
counsel and a controlling stockholder, he cannot verify
and sign the certificate of non-forum shopping because he
was not authorized by the board. So therefore, only the
person authorized by the board should sign the pleadings
in behalf of the corporation. If signed by someone else, the
pleadings are considered as unsigned, sham and a mere
scrap of paper.

If by express provision of law he is made to answer for


a corporate act or omission.
So it is the law that makes him liable for the corporate act or
omission. As you all know the general rule is that a director or
officer will not be liable unless the law makes him liable for the
corporate act or omission. An example is PD 115. Under section
30 of PD 115 it is clear that if the offender is a corporation,
criminal liability should be imposed upon the director, officer
or any person responsible for the violation. That is why
remember the case of Ching vs. Secretary of Justice. The fact
that the director or officer did not receive the goods under TR,
the fact that he did not get the loan himself, the fact that he did
not derive any personal benefit under the TR transaction, not
an excuse in so far as the criminal liability is concerned because
it is the law that makes them liable for that corporate act.

What if your last day to file the petition for certiorari


is today and your board is fragmented and you have
no time to call a meeting, what do you do?
You route the minutes of the meeting and make it appear
that the board authorized you to sign. That is if the board
is friendly.
But what if your board is fragmented?
Justice de Castro, in one case, said that the President can
verify the certificate of non-forum shopping even without
board resolution. She relaxed the rule. That was 2010.
Reiterated in 2013 by Justice Peralta and expanded the
list. The following officers may verify or certify against
forum shopping even without board resolution: the

Is the enumeration exclusive?


Yes. Because the previous supreme court decisions,
decisions in the past, that made the president liable in
cases of insolvency of the corporation or closure of
establishment are no longer controlling. Carag vs NLRC.
The Supreme Court said that the liability of the director or
officer is determined not by the Labor code but by the
provisions of the Corporation Code, sections 31 and 32?

1.
2.
3.
4.
5.

Chairman,
President,
General Manager,
Human Resource Officer and
the Employment Specialist in Labor Case.

Have you ever heard of employment specialists in labor


cases? This was reiterated three times already.

There was this bad very bad, bad in the sense that it does not
make sense, Supreme Court decision which makes the officer
liable in the case of closure of business. There was no finding of
gross negligence or bad faith simply a case of closure of the
establishment. That does not make sense right. Just because
the corporation has no more assets does not make the officers
liable. Dean was the Corporate Secretary daw of the Equitable
PCI when this decision was promulgated. The bank almost
closed. Kawawa daw siya kung nagclose yun hahaha.

Why?
SC said that because of their familiarity with the affairs of
the corporation they can certify as to the truthfulness and
accuracy of the allegations in the petition.
UCPB vs Planters
A manager signed a document he called pagares
which means to pay. XYZ wanted to buy property
from ABC. ABC said I would sell to you only if a bank
guarantees that you pay. SO this manager signed
this document called pagares. The bank will pay in
case the buyer does not pay. Buyer failed to pay,
seller goes to the bank. IS the bank liable?

There ought to be gross negligence, bad faith, consenting. to


make the officer or director liable for any corporate act or
omission.
Who can sign pleadings in behalf of the corporation?
Who can sign petitions, complaint or other initiatory
pleading in behalf of the corporation?
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NO. First, he was not authorized. Second, the bank is not


allowed to secure or guaranty the obligation of another.
The only time that the bank may do so is in case of a
STANDBY LETTER OF CREDIT.

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.

9. Responsibility for Crimes

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.

Can the corporation be criminally prosecuted?


Yes, if the penalty is not imprisonment, if the penalty is
fine, forfeiture or revocation of corporate franchise. Case
of ANG vs CA.
10. Inside Information
11. Contracts
a. By self-dealing Directors with the Corporation

ABC corporation is engaged in the manufacture of


prime white cement. It entered into a contract with
Juan dela Cruz, one of the directors, for the right to
be the exclusive distributor of prime white cement in
their entire consortium. The contract stipulated that
the price of the cement is fixed at 9 pesos per pack for
a period of 5 years. Is the contract fair and
reasonable under the circumstances? Is it valid or
not?

b. Between Coporations with Interlocking Directors


i. Voidable Character
ii. Ratification
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;

SC said it is covered by the provision on self-dealing with


directors. It is not valid because the contract is not fair and
reasonable under the circumstances. As you all know there
is no hard and fast rule in determining whether the
contract is fair and reasonable under the circumstances.
Thats why there is a clause under the circumstances. But
if the act has become a norm you no longer apply the
yardstick of fair and reasonable under the circumstances.
In this case the SC said that is not fair and reasonable
because you cannot fix the price for the period of 5 years,
the price fluctuates.

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)

There was a time when my firm handled its biggest


case, UCPB. After that I was crucified in papers
because I was a director of the bank and also acting
as counsel for the bank. Of course, without the
farmers knowing that first, I did not solicit the
engagement, the bank was the one which solicited my
engagement and second, I abstained in the meeting,
and third, I waived my fees. So will section 32 apply
to me? Is it reasonable under the circumstances?

Section 32. What is the status of the contract between the


corporation and the director?
It is voidable at the option of the Corporation. The
option to nullify ceases when the following elements
are present:

Obviously yes because I waived my fees right hehe and I


did not participate in the board meeting.
So 32 is the self-dealing provision under the corporation code.
Self-dealing by a director with the corporation. So as you can
see in 32, the element you cannot do away with, if the contract
is fair and reasonable under the circumstances.

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;

1 and 2, presence of quorum, vote for approval can be


dispensed with as long as you get verification from
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stockholders holding 2/3. But the contract must be fair and


reasonable under the circumstances.

So there were questions about management contract,


is management contract a reality or is it just a codal
provision, an abstract or theory?

The next one, section 33 is the contract between 2 corporations


with interlocking directors. As you know in 32, except if there
is fraud and as long as the contract is fair and reasonable under
the circumstances, a contract between 2 corporations with
interlocking directors cannot be invalidated on that ground.
Just because you have a contract between 2 corporations with
common directors, is not a ground to invalidate the contract.
Because its a guarantee of business that corporations deal with
affiliated companies.

It happens for hotels, so the best example of management


contract is hotels. So Shangri- la manages traders royal
hotel, holiday inn in galleria. So in this kind of contract,
the corporation entrusts management of its affairs to
another corporation and governed by sec. 44.
(We have a client who is a billionaire; he wants to disinherit his
daughter. He has 2 daughters, he wants to disinherit 1, He
came to us, he said Nilo, how can I find grounds to disinherit
my daughter and I said its not easy because the grounds for
disinheritance are very stringent under the civil code and you
have to include it in your will and probated. So I said, just
because you dont like her, doesnt mean you can disinherit her.
So the client said, FIND A WAY and you know in my firm,
WE FIND WAYS (CLASS: HAHAHAHA)

When Ramon Ang was the president of Philippine Airlines,


where did PAL source their fuel requirements? Obviously not
from Caltex, not from Shell because they are competitors, but
they sourced their fuel from Petron.
Now, try taking a loan from BDO. Housing loan. You are
required to mortgage your house as collateral and you are also
required to get insurance. Where would they require you to get
insurance coverage?
o

Because he is a billionaire, he has properties all around the


world, Philippines, Spain and USA, and these are all in the
name of corporations. So to effectively disinherit your
daughter, I said, what you can do is to amend the AOI of these
various corporations to allow the issuance of preferred shares
to make them nonvoting, non-cumulative, non-participating
and all. Now we will divide the shares, the preferred shares to
your common daughter, and the common shares to your
preferred daughter. The common shares will only be given to
the preferred, the favorite. Then the preferred shares which
should be non-voting will be given to the common daughter. So
there will be disinheritance because each of them will get 1
share each equal. But who will control the corporation? Your
preferred daughter right? Because you made those pref shares
non-voting, and the right to receive dividends is subject to the
availability of surplus profits and you can manage the
corporation so that there can be no surplus profits to declare
dividends.

Not from Metrobank, not from AXA, or Ayala but


from their own, BDO Generali.

There is nothing wrong with this, because why would you give
business to your competitor? That is why the law is clear that
except if there is fraud or the contract is not fair and reasonable
under the circumstances, a contract cannot be invalidated just
because it is between 2 corporations with interlocking
directors.
Now if the contract with interlocking directors is a
management contract under sec. 44, then in addition to 33, you
must also apply sec. 44.
What
are the additional requirements
management contracts under sec. 44?

for

The management contract must be approved by the BOD,


majority of the quorum of each of the managed and
managing corporation

And by the stockholders representing at least majority of


the outstanding capital stock of the managing corporation

And 2/3 of the outstanding capital stock of the managed


corporation.
-

But I said it will take time to amend the AOI. He said so what
do I do that in the meantime so that my daughter will control
the corporation?
I said just enter into a management contract between the
daughter and the corporation. Question, is that subject to the 5
year limitation?

(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) (source: Sec. 44,
Corporation Code)

It is not, right? Because the 5 year limitation only


applies
to
management
contract
between
corporations. Not a management contract with the
corporation and a natural person. It is dependent on
the terms and conditions of the agreement.

(So that idea is patented) (HAHAHA)


ABC Corporation granted a loan to a mining company secured
by a mortgage on the properties. The loan was not paid so ABC
foreclosed on the mortgage and the property of the mining

It should not be longer than 5 years.


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company, after foreclosure, the right of redemption may be


exercised. ABC Bank put up a wholly owned subsidiary,
engaged in mining and then ABC transferred the assets
(foreclosed assets) of the old mining company to the new
mining company. It turns out that the old mining company had
unpaid purchase from Remington Steel. Remington steel sold
products to the mining company, the purchase price were not
paid. So when the assets of the old mining company as
foreclosed were transferred to the new mining company,
Remington Steel filed an action to nullify the contract on the
ground that it has Interlocking directors and therefore should
be void.

So what is the limitation of the board to create exec


comm?
What kind of exec comm can the board can create?
What kind of exec comm can be created by the board
so that it would fall under the Business Judgment
Rule?
And what kind of exec comm can the board NOT
create because it is outside its authority?
-

The SC said that the board can create a committee and


call it executive committee as long as it will not
function similar to Exec Comm under sec.35 of the
Corp Code. So its a committee named exec comm.
But cannot function as such under sec 35 of the
corporation code.

If that committee will function as the exec comm.


Under 35, then only the bylaws may create that kind
of committee.

The board may fill up the composition but the


committee must first be created by the bylaws of the
corporation

First Question, does Remington Steel have the legal


personality, to assail the transfer, assignment of
assets from ABC Bank to the New Mining Company?
Remington Steel does not have the legal standing to
assail the creation of the new mining company because
only the corporations, parties to the contract of
interlocking directors or stockholders are allowed, but not
3rd parties.
Second Question, if it does have personality, can the
contract be voided because ABC bank and the new
mining company have common directors and the
new mining company is wholly owned subsidiary by
the bank?
-

Section
33. Contracts
between
corporations
with
interlocking directors. - Except in cases of fraud, and provided the
contract is fair and reasonable under the circumstances, a contract
between two or more corporations having interlocking directors shall
not be invalidated on that ground alone: Provided, That if the interest
of the interlocking director in one corporation is substantial and his
interest in the other corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding section insofar as the
latter corporation or corporations are concerned.

The contract cannot be invalidated just because it is


between 2 corporations with interlocking directors.

Can the Exec Comm approve amendment of the bylaws? Can


the Exec comm approve stock dividends?
-

The exec comm. cannot approve stock dividends,


because it also requires the approval of the
Stockholders.

Stockholdings exceeding twenty (20%) percent of the outstanding


capital stock shall be considered substantial for purposes of
interlocking directors. (n)

So first exception, first item outside the powers of the exec


comm. because the judicial corporate act requires stockholders
approval. The stock dividends require stockholders approval.
Can
the exec
agreement?
-

comm.

Approve

So in addition to what we have said under sec.32, if the


contract is between 2 corporations with interlocking directors
and the interest of the interlocking director is substantial in
one, and nominal in the other, then he shall be subjected to the
requirement of sec 33 of the Corporation Code.

compromise

Yes, if authorized by the Board

Can the board create an exec comm.?


-

So if the interest of Juan dela Cruz in ABC is substantial and


the interest in XYZ is nominal, and Juan dela Cruz is in the
board of both ABC and XYZ corporation, under sec. 33, in so
far as XYZ is concerned where the interest is nominal, Juan
dela Cruz is subjected to the requirements of 32. Which means
that his presence must not be necessary in the meeting of XYZ,
his vote is not necessary for the contract in XYZ and the
contract is fair and reasonable under the circumstances. It is as
if, it is a contract between the corporation and Juan dela Cruz
in so far as the nominal corporation is concerned.

If it is included in the by-laws, then the board is


authorized to create an exec comm.

Can the board have an authority to create exec


comm. If authorized by the bylaws or the board my
simply fill up the composition of the exec comm. Once
approved by the bylaws?
You remember the case of Filipinas Port Services vs Go (2007),
we discussed this 2 meetings ago.

Substantial = more than 20%


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Substantial in the context of sec. 33 is not 50% plus 1, but more


than 20%. 20% or less is nominal.

Who can complain?


Only Petron or San Miguel (San Miguel talaga sinabi niya
haha) or their stockholders either by themselves or by
derivative suit.

Still on Sec. 33, so there are special laws that prohibit


interlocking director unless secured by Monetary Board
approval or Insurance Commission approval, as the case may
be. Somebody can be director of 2 banks without prior BSP
approval. You are going to be a director of a bank and a quasibank without prior BSP approval or a bank and an investment
house likewise without BSP approval.

In the case of DBP vs CA what happened was, DBP granted a


loan to a mining company secured by a mortgage on the
property, the loan was not paid. So DBP foreclosed on the
mortgage. After foreclosure, it put up a new mining company
called Nonoc Mining Company and then transferred the
foreclosed assets to Nonoc Mining Company. Nonoc and DBP
have common directors. Nonoc is a subsidiary of DBP. So
Remington Steel sold steel products to Marinduque Mining,
who did not pay the purchase price. So to enforce payment of
the purchase price, Remington Steel filed an action to nullify
the contract, the assignment, transfer of assets from DBP to
Nonoc Mining company because they have common directors,
and as we have said, that cannot be allowed because he is not a
party to the contract. He is a 3rd party without any legal
personality to nullify the contract on the ground of interlocking
directors.

But save for these cases governed by special laws, under its
provisions under government agencies, there is nothing
wrongful in a contract between 2 corporations with
interlocking directors as long as there is no fraud and the
contract is fair and reasonable under the circumstances, and
then to repeat, if it is a management contract under section 44,
in addition to the requirements of under 33, you have to add
likewise the approval of the board of directors of each
corporation (managing and managed) and through the
stockholders owning majority for the managing corporation
and 2/3 for the managed corporation.
Now under sec.44, you dont need majority of the entire board,
majority of the quorum will suffice. This is clear from the
language of sec.44. It says that the board of directors unlike

Now you remember this case of DBP vs CA was also the factual
background of DBP vs Hydro Resources. So DBP vs Hydro
Resources Corporation on separate legal personality, same
facts right? DBP foreclosed the mortgage, and then transferred
the assets to Nonoc Mining Company and Nonoc Mining
Company engaged a consultant to render services to Nonoc
Mining Company, who was not paid and then filed an action to
enforce his consultancy fees.

Sec. 37 which says majority of the board


Sec. 38 majority of the board
Sec. 40 majority of the board
Sec. 42 majoirty of the board

Can the fees be enforced against DBP and Nonoc


because they have common directors?

But for 43 and 44, it only talks about the board of directors,
which means that for 43 and 44, you only need majority of the
quorum.

Thats your guide, if the Corp Code says the board of directors,
quorum suffices. So as distinguished from the majority of the
entire board.

Interlocking directors is not a ground to pierce the


corporate fiction.

So we have 2 cases with the same factual background, so DBP


vs CA, on the issue of the 3rd party not having the legal
personality to assail the contract between to corporations with
interlocking directors and DBP vs Hydro Resources
Corporation on the issue of interlocking director not enough
reason to pierce the veil of corporate fiction.

Found in 16 37 38 40 42 76 and 117.


As what we said also, in the case of DBP vs CA only the
corporation involved in the transaction or the stockholders
injured can file or by a derivative suit can file the action to
nullify or assail the contract.

12. Executive Committee


Sec. 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 bylaws 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.

Just like the example earlier. Lets say fuel supply


between Philippine Airlines and Petron. Lets say the
price of the fuel product being shouldered by PAL
with Petron is expensive, can you and I complain?
Obviously not because we have no interest in that contract
or transaction

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a. Powers of the Executive Committee

because it already falls under the first. So what is this case? It is


a case of poor craftsmanship.

b. Limitations of the Powers of the Executive Committee

Anyway, for the purpose of the bar, execom cannot take the
place of the board for these matters but it can replace the board
of directors for all other matters as long as it is created by the
by-laws.

Now why is there a need to create and executive


committee?
So the board of directors only meets once a month, the
regular board meetings are conducted only once a month.
There are certain transactions that cannot wait for once a
month. That is why there is a need to create a mini board
of directors that can act on matters with the boards
competence. So effectively, the board delegates the
authority to the executive committee because it can act on
all matters within the boards competence. Whatever the
board can do, the executive committee can also do. What is
important is that kind of committee be first created by the
by-laws because the board cannot create an execom unless
the committee is first created by the by-laws.

Filipinas Port vs. Go


SC: Under the business judgment rule, the board can create
committees and positions but the board cannot create an
execom if it will function as that mentioned in Section 35 of the
Corporation Code. The only kind of execom the board can
create is a committee that is execom by name but not
performing those mentioned under Sec. 35.

What the board can do under sec. 35 is to compose or to fill-up


the composition of the execom after created by the by-laws of
the corporation.
Can you appoint non-board members to the execom?
According to the SEC, you can but they are regulatory or
advisory only in nature. The functions are advisory or
recommendatory and they have no voting rights. Only
directors have voting rights when it comes to execom
meetings.
There are limitations on the powers of the execom, they are not
absolute.
What are the matters outside the competence of the
execom?
1.

Any corporate act requiring stockholders approval;

2.

Adoption of new by-laws, repeal or amendment of the


by-laws;

3.

Amendment of a board resolution which by its express


terms is not so amendable or repealable;

4.

Distribution of cash dividends to shareholders; and

5.

Filling up of vacancies in the board.

We said that stock dividends, likewise, are outside the


competence of the board. The decision of the board cannot be
replaced by the stockholders. For stock dividends, it is the
board and the stockholders. So the execom cannot take the
place of the board when it comes to stock dividends.
If you read section 35, it says stock dividends not included,
right? So the argument is not included if cash but it will fall
under stockholders approval, right? Now what about adoption
of by-laws? How come it is there if it is already covered by the
preceding number? Meaning you do not have to include that

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F. CORPORATE POWERS
Board of Directors
Sec. 16 Amendment of AOI

Majority of the board

Sec. 24 Election of Directors

2/3 of the OCS


At least majority of OCS

Sec. 25 Appointment of Corporate


Officers

Majority of the entire board

Removal of Corporate Officers

Majority of the entire board

Sec. 28 Removal of the Directors


Sec. 29 Filling up of Vacancy: it
depends

Outstanding Capital Stock

2/3 of the OCS


If the ground is not expiration, removal,
increase number of board seats AND the
remaining directors constitute a quorum
Majority of the board

Sec. 30 Payment of Compensation to


Directors

If the ground is expiration, removal,


increase number of directors; OR If the
ground is not expiration, removal, increase
number of board seats BUT the remaining
directors do not constitute a quorum
Majority of the OCS
Majority of OCS

Sec. 35 By-laws create an Executive


Committee appointed by the directors

Majority of the board

Sec. 37 Extension of Term; Shortening of


the term

Majority of the board

2/3 of the OCS

Sec. 38 Incurring, creating or increasing


bonded indebtedness; and increasing or
decreasing OCS

Majority of the board

2/3 of the OCS

Sec. 39 Amendment of the AOI and to


deny pre-emptive right

Majority of the board

2/3 of the OCS

Sec. 40 Sale or other disposition of assets

In the ordinary course Majority of the


quorum (Why majority of the quorum and
not majority of the entire board? Sec. 25
says unless the corporation code or the bylaws requires otherwise, quorum shall
mean majority of the board of directors as
fixed in the AOI. And the majority of the
quorum is sufficient to transact business
under sec. 25. Here the code does not
require majority of entire board)
All or substantially all Majority of the
board

2/3 of the OCS

Sec. 42 Invest funds in the primary


purpose

Majority of the quorum

Invest funds to incidental purpose for


which corporation is created

Majority of the quorum

Invest the funds in a secondary purpose

Majority of the entire board

Cash Dividends

Majority of the quorum

Stock Dividends

Majority of the quorum

2/3 of the OCS

Enter into Management Contract

Majority of the quorum for both managed


and managing corporation

Majority of the OCS of each managed and


managing corporation;

2/3 of the OCS

The only time that 2/3 of the OCS is


required from the managed corporation
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and retain majority of stocks of the


managing corporation is in the case of
interlocking directors and interlocking
stockholders.
Sec. 46 Adoption of by-laws
Sec. 48 Amendment of the by-laws

Adopted
within
1
month
incorporation majority of OCS
Majority of the entire board

after

Majority of the OCS


If delegate authority of the stockholders to
the board 2/3 OCS
If they revoke the delegation majority

Sec. 62 fixing the issued value of no par


value shares

Majority of quorum

OR Majority of OCS

Sec. 76 Merger or Consolidation

Majority of the entire board

2/3 of OCS

Sec. 117 Dissolution

Majority of the entire board

2/3 of OCS

(if you remember the AOI may fix the


issued value of no par value share, or if
there is no provision, the BOD may fix the
value or the stockholders owning majority
of OCS

1. How Exercised

BAR: May a foreigner be appointed as president, secretary and


treasurer of the corporation?

a. By the Shareholders

Yes except if the corporation is engaged in nationalized


activity, whether wholly or partly nationalized, a foreigner
cannot be appointed president under the Anti-Dummy Law. As
to Secretary, whether nationalized or not, a foreigner cannot be
appointed. As to Treasurer, a foreigner may be appointed as
treasurer.

b. By the Board of Directors


c. By the Officers
c.1. Officers of the Corporation
- Statutory Officers

BAR: Who is required to be a resident officer of the


corporation?

- Corporate Officers
- Ordinary officers of the Corporation

President not required for as long as majority of the directors


are Philippine residents

What are the corporate powers reserved solely to the


stockholders? Those exercised jointly with the board
and stockholders? When does it require majority of
the quorum or majority of the entire board? Majority
of the outstanding capital stock or 2/3? (see Table 1)

Secretary YES
Treasurer as to the 2012 SEC Circular, treasurer need not be
a resident of the corporation

On officers of a corporation, who are the officers of


the corporation?
1.

President

2.

Secretary

3.

Treasurer

4.

Other officers as provided in the by-laws

BAR: Who is required to be a director?


Only the president is required to be a director.
Case: There is a contract between a president and a corporation
for 5 years. Let us say Juan dela Cruz will be president for 5
years by ABC Co. The problem is in the second year of his term,
nobody wants to use his shares for him because they want to
use it for their own nominee (nobody now wants to vote for
him). What happens if the president is not a director? He will
now be a de facto president, right? But there is a 5 year
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contract. What do you do now? What is the solution to this


problem?

2. General Powers, Theory of General Capacity


Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:

So I advanced this very noble theory which I have yet to be


tested by the SC. I said let us seed the president. By seed I
mean let us only vote for team under 15. So automatically he is
considered a director because if you dont make him a director,
the corporation would be entitled to damages because of the 5
year contract. Nobody wanted to carry him so naglaban-laban
lang yung 14 out of 15. Is it valid? Well, so far ano pero I dont
think that will be asked in the bar. That is already going too far.
I will kill the bar examiner ano =))))

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;
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;

BAR: What is the only position that can be held at the same
time by the same individual?

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;

President cannot be both secretary and treasurer at the same


time. Secretary and treasurer can be held by the same person.
What about chairman and president?

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;

Yes, except if it is a public company. Under the Code of


Corporate Governance, the chairman must be different from
the president. But if it is an ordinary company, not a public
company, the chairman and president may be held by the same
person at the same time.

8. To enter into merger or consolidation with other corporations as


provided in this Code;

What are the qualifications of the president?


He must be a director, and therefore a stockholder.

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;

Secretary Filipino citizen and resident


Treasurer neither citizen nor resident
SEC issued a circular (Dean: not part of the bar), said that the
Corporate Secretary must have the (Dean: hold your breath)
legal skills of Chief Legal Officer, the vision of a CEO, the
financial _____ of a Chief Financial Officer and skills of a
Human Resource Officer. Good thing we dont consider the
circular and the circular is issued by the SEC and nobody
qualifies. Nobody would qualify if that is the qualifications.
(Pero dean, super qualified ka daw sabi ni Atty. S. Pwede mo
nga kaming iadopt eh. =)))

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.

ABC Corp engaged in cement manufacture. Can it


construct roads or bridges? When does it become an
implied power?

I brought it up because there was one in the conference I


organized for PALS, the examiner in commercial law admitted
that the answer the question is based on a foreign
jurisprudence. So the committee in-charge in the UP Law
Center, answered based on local jurisprudence and the
examiner answered based on a foreign jurisprudence. There
was also a time that there is this examiner that answered based
on an SEC circular and not making reference to the corporation
code. What happens now if the examinee goes beyond the
Corporation Code? He is more diligent than the ordinary
reader. These I tell you are only for discussion purposes only
for intellectual discourse but for the bar you should stick to the
syllabus issued by the SC.

Construction of roads or bridges per se is ultra vires


because it is not related to the primary purpose of the
corporation. However, if the road or bridge leads to or
paves way to the manufacturing site, it is an implied power
of the corporation.
Corporate powers:

56

1.

EXPRESS- when conferred under the AOI or


Corporation Code

2.

IMPLIED- implied from the express powers

3.

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Quarry operations for limestone to form part of cement


manufacture. It is needed for cement manufacture, thus, within
the powers of the corporation.

Corp engaged in trading, can it buy a beach front


property?
No, no relation to its business. However, if the beach
house is a residence of a director, guest house or seminar
house it becomes an implied purpose of the corp.

NAPOCOR vs. VERA


Can NAPOCOR hire stevedores?

Derivative suit - to enforce a corporate right or cause of


action because of wrongful acts of the majority of the board. It
is an exception to the rule that the right to sue and be sued is
lodged with the board.

SC: Primary purpose is electricity generation, stevedores


not related to the primary purpose. However, if they are
hired to transport coal from the pier to the plant, it
becomes an implied power.

GR: it does not require a board resolution

Test: Is this act or transaction or activity in furtherance or


germane to the purpose of the corporation?

XPN: if the SH is a corporate SH, he must be authorized by the


board of the corporate SH but not the board of the corporation
whose acts or majority of acts of the board are being assailed.

YES: Intra Vires


NO: Ultra Vires. Therefore, voidable or unenforceable

VITO CASE

The power to sue and be sued is lodged in the BOD.

He claims to be a trustee of JAVA Publishing Company. He


filed a derivative suit. He is not a SH, SH is JACA Investment.

Is there an exception? Can there be a suit without


board approval?

Board resolution is necessary to authorize filing of derivative


suit by JACA Investment because the shares of stock that he
represents are owned by JACA Investment.

Derivative Suit
A minority SH filed a derivative suit in behalf of ABC
Corporation to assail the acts of mismanagement on
the part of the majority of the board and key
corporate officers. The board convened and then
adopted a resolution instructing its counsel to move
to dismiss the complaint on the ground that it has not
been authorized by the board. Will you grant the
MTD?

With respect to a foreign corp, it cannot sue but can be sued on


any cause of action if it has no license to do business in the
Philippines. Foreign corp lacking license from SEC affects its
legal capacity to sue.
Corporation that is dissolved has no power to sue and be sued.
(ALABANG HILLS CASE)
Can a corporation that is dissolved file a suit?

Answer: The wrongful acts of the majority of the directors


and to require a board resolution would make ILLUSORY
the right of the minority SH to file a derivative suit on
behalf of the corporation.

SC: If the suit is filed AFTER 3 years from dissolution


DISMISSED!
Ground: Lack of legal capacity to sue

General Capacity- general powers of the corporation


1.

EXPRESS

Note: Previous decisions say that a suit filed during its lifetime
can go beyond the 3 year period.

2.

IMPLIED

Board resolution necessary:

3.

INHERENT- a.k.a. INHERENT POWERS

In our jurisdiction, inherent powers are also express powers.


Example: Right to succession inheres in a corporation.
Enumerated likewise as an express power under Sec 36.
Can
a
lending
pawnbrokering?

investor

be

engaged

1.

Filing a suit

2.

Authorize a person to sign pleadings and


verifications on behalf of a corporation

EXCEPTIONS: The following are familiar with the corporate


affairs.

in

No, these are 2 different businesses. Pawnbrokering


requires another authority from the BSP.
PAEL v. CA
Corp engaged in mining, can it acquire property for
urban development?

1.

Chairman

2.

President

3.

General Manager

4.

Human Resource Officer

5.

Employment Specialist

To adopt and use a corporate seal- lack of corporate seal does


not invalidate a stock certificate.

No, not related to mining. Not justified.


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Why? Its a formal requirement only. Directory not mandatory.

and corresponding 10% tax. Whereas if you donate your


property to a foundation, then the income is either tax exempt
or less tax rate. Im sure you have read announcements of
billionaires making donations, so they have to consider
likewise that this must be a tax avoidance scheme, especially if
they control the very foundation of the recipient of the
donation.

Paragraph 6 contemplates:
1.

Issuance of shares- pertains to UNISSUED shares

2.

Sale of shares- pertains to TREASURY shares


(assets of the corporation, as assets, they can be
sold)

But the power to make and the power to accept, likewise


recognized by your CC.

You issue PRIMARY shares!


You sell EXISTING shares!

Benefit Programs

You subscribe from ISSUED shares!

Now what about benefit programs? So pension plan,


retirement plan, and other benefit program for employees,
thats an express power. Regarding retirement plan, what is
your default retirement plan under the Labor Code? Your
default retirement plan is month salary for every year of
service, provided you have rendered at least 5 years of service
and you are 60 years of age. But can a corporation prescribe or
provide for a retirement plan with superior benefits than the
default retirement plan? Yes, that is found under Section 36 of
the CC. A corporation, however, cannot adopt a retirement
plan inferior to that of the basic or default retirement plan.

Paragraph 7. Test: Is the transaction reasonably required by


the business?
Subject to Constitutional limitations.
Example:
Private lands- Corporation must be 60% Filipino owned
Public lands- it can only be for lease not disposition
Can a corporation guarantee obligation of another?
No, it cannot mortgage its own property to secure
obligation of another

What about housing loans? Is it ultra vires? Intra vires? It is


an express power because any welfare or benefit program of
employees cannot be diminished. So any welfare program is an
express power under Section 36 of the CC. Remember this case,
Republic v. Acjoe Mining, putting up a postal office inside a
mining camp. It is for communication of the employees of
Acjoe Mining inside the camp and relatives outside the camp.
So is it ultra vires? Supreme Court said its not because it is a
welfare program for the employees.

Can it act as a 3rd party mortgagor?


No. Property of corp must be used for its purpose and not
for the purpose of another corp
What is the remedy available to the corp to
guarantee obligation of another?
AMEND AOI to include the power to guarantee or secure
obligation of another

What about salary loan? Can the employer corporation grant


salary loan? Yes, again, it being a benefit or welfare program
for its employees.

Section 36 subtitle 8: Merger or Consolidation, then


after that Donations.

What about acting as collection agent for a third party lender?


Supposing a corporation cannot grant a loan to its officers and
employees, but entered into a tripartite agreement among the
employees, employer and the lender, where the lender would
be the one to grant the loan to the employees at concessionary
rate but payment would be made through salary deduction. Is
that an ultra vires or intra vires act? So according to the SEC,
as long as the corporation does not obtain any benefit from that
arrangement, it is intra vires. But the moment it obtains a
benefit, lets say a commission or fee or facilitating the
payments of the employees to the lender, then it becomes an
ultra vires act.

So power to make donations, as you have noticed, there is no


limitation as to amount. Its a question of reasonableness. Of
course in any case it must not be made in favor of any partisan
political activity.
As you all know, there is a distinction between taxability and
ultra vires. To determine whether a donation is ultra vires, the
only test is is it reasonable? Which is different from to what
extent can you claim the donation as a deductible item,
deductible amount? To what extent may the corporation
donate to another? That will be governed by the Tax Code not
by the Corporation Code. CC only determines the issue of intra
vires or ultra vires act. The question is, it is reasonable? And
whatever is reasonable, of course, depends on the facts of each
case, the circumstances peculiar to the corporation.

The enumeration under Article 36 is not exclusive because, as


you all know, the corporation may exercise any other powers as
may be necessary to achieve its corporate ends.

There have been many corporations that made use of


donations and with corresponding press releases. You do
realize that these are all tax saving schemes right? You donate
to a foundation, say, youre a Taipan. You receive dividends

3. Specific Powers, Theory of Specific Capacity


Now moving on to the theory of specific capacity or the specific
powers of the corporation, thats Section 37 to 44, capped with
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a conclusion under Section 35. So the whole chapter on


corporate powers is perfectly arranged. After the enumeration
of corporate powers, it ends with a conclusion that anything
outside this is ultra vires.

2/3s of the OCS. Then you have to comply with


the requirements for amending the AOI.
5.

In the case of banks, insurance company, public


utility corporations, and other corporations
governed by special law, the favorable
endorsement of the appropriate government
agency.

6.

Effective upon approval by the SEC.

a. Power to Extend or Shorten Corporate Term


Sec. 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)

What is the remedy available to the stockholder who


does not favor the extension of corporate term?
It is the exercise of his appraisal right.
What about shortening of corporate term?
Same, same approval requirement.
BAR: Can you shorten the corporate term one year before its
actual expiration?

Now lets take up Section 37, the power to extend or shorten


corporate term. We have taken this up under Section 11 right?
But to repeat, what are the limitations on the power of the
corporation to extend its corporate term?
1.

2.

The answer is yes because the 5 year limitation applies to


extension and not shortening of corporate term.
What is the remedy available to a stockholder in case of
shortening of corporate term?

The extension can only be done during the


lifetime of the corporation but not earlier than 5
years prior to the original expiry date, unless
there are other causes that warrant an earlier
extension as may be determined by the SEC.

Remember our discussion here. If the term is shortened to


dissolve the corporation, no need to exercise appraisal right.
Why? Because once the corporation is dissolved, the next step
anyway is to liquidate the corporation and its assets, after
payment of the claims due to creditors, would be distributed to
the stockholders anyway. So when we talk about appraisal right
as a remedy, in case of shortening of corporate term, it is
provided not under Section 37 but under Section 81.
Remember our conflict here, 37 is silent on the remedy of
appraisal right in case of shortening of corporate term. Senator
Miriam Santiago has a pending bill in the senate to amend only
one section of the CC. Only one, Section 37, to make it clear
that appraisal right is available when it comes to shortening the
corporate term. Which is not necessary because Section 81
already covers shortening of corporate term as an instance that
justifies appraisal right.

In a case (SEC v. _____ Cigar), extension may


not be done within the 3 year liquidation period.

BAR: Suppose a corporation is suffering losses, to recoup the


losses by the corporation, the corporation decided to extend its
term but during the 3-year liquidation period. So for a noble
purpose, to recoup or to recover the losses suffered by
corporation, it decided to extend its term during liquidation
period. Is it valid?
The answer is no.
BAR: What happens upon expiration of the corporate term? Is
the corporation dissolved? Or is there a need for an SEC
approval?

But we have to make a distinction. If the shortening of the


corporate term, as we said, will dissolve the corporation, its
irrelevant to talk about appraisal right. So the corporate term
has to be shortened without dissolving the corporation.

As you all know, under the law, once a corporations term


expires, it is dissolved ipso facto. There is no need for a
certificate of dissolution from the SEC if the term expires. So
ipso facto, the corporation is dissolved. The next step is to
obtain a certificate of dissolution if it is a voluntary dissolution,
not when it comes to expiration of corporate term.

Does it ever happen that the corporations term is shortened


without dissolving it?
Of course, yes.

3.

There is no limit on the number of extensions as


long as the extension does not exceed 50 years in
any single instance.

b. Power to Increase or Decrease Capital Stock or Incur, Create,


Increase Bonded Indebtedness

4.

The extension entails an amendment of the AOI,


and therefore must be approved by at least
majority of the board and stockholders owning

Sec. 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,

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two-thirds (2/3) of the outstanding capital stock shall favor the
trustees and of at least two-thirds (2/3) of the members in a meeting
increase or diminution of the capital stock, or the incurring, creating or
duly called for the purpose.
increasing of any bonded indebtedness. Written notice of the proposed
Bonds issued by a corporation shall be registered with the Securities
increase or diminution of the capital stock or of the incurring, creating,
and Exchange Commission, which shall have the authority to
or increasing of any bonded indebtedness and of the time and place of
determine the sufficiency of the terms thereof. (17a)
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
BAR: Cite practical reasons why a corporation would increase
stockholder at his place of residence as shown on the books of the
its capital stock.
corporation and deposited to the addressee in the post office with
postage prepaid, or served personally.

1.

To have additional funds the most practical


reason why the corporation would increase its
capital stock, to have extra or additional capital.

2.

To have additional shares that can be used to


acquire more assets so that when you increase
capital stock, you have additional shares, which
shares can be used to acquire assets, you issue
shares in exchange for assets.

3.

To have additional shares to support stock


dividend declaration this happens if the
corporations authorized capital stock is almost
fully subscribed and the remaining shares are not
enough to justify your stock dividend declaration.

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;

What if your ACS is almost fully subscribed, you dont have


additional shares to issue, what do you do? Where will you take
the shares to cover your stock dividends? Do you take them
from the existing shares of the corporation or do you split the
existing shares of the stockholder? Where do you source the
shares for stock dividends?

(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.

From the unissued portion of the capital stock.

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.

BAR: What are the various ways, or remedies or tools,


available to the corporation to obtain additional funds?

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.

1.

To issue shares because when you issue shares,


you receive consideration because shares cannot
be issued without consideration, they become
watered shares. You either issue shares from the
unissued portion of the ACS or you increase your
capital stock.

BAR: Are you sure to obtain additional funds when you


increase your capital stock?
Yes because the stockholders are required to pay subscription
(25% of the increase must be subscribed and 25% thereof must
be fully paid).
Supposing your capital stock is 1 billion divided into 1 billion
shares, with a par value of 1 peso per share. Subscribed capital
stock is 500 million. Ordinarily, 250 million will suffice
because the only requirement upon incorporation is to
subscribe to 25% of the ACS. But in this case, lets say the
subscribed capital stock is 500 million. The corporation
intends to increase the capital stock from 1 billion to 2 billion
consisting of 2 billion shares, par value of 1 peso and the
requirement is you have to subscribe to 25%. Can the

Non-stock corporations may incur or create bonded indebtedness, or


increase the same, with the approval by a majority vote of the board of

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corporation still receive additional funds considering that 500


million is already 25% of your 2 billion proposed increase in
capital stock?

Capital stock or capital is different from the authorized


capital stock. Authorized capital stock is an arbitrary
amount indicated in the AOI.

Yes. When you increase your capital stock, you are sure to
obtain funds.

25 % of your authorized capital stock must be subscribed


and 25% of this subscription paid in cash or property. The
subscribed capital stock is your outstanding capital stock,
these are shares subscribed by stockholders and therefore
outstanding in the sense that it is included in the
computation of the needed numbers to approve corporate
acts.

So either you issue shares or increase your capital stock, either


way, the corporation is sure to obtain additional funds.
2.

Advances from stockholders advances are loans

3.

Deposits for future subscription

The stockholders are entitled to all rights pertaining to his


subscribed shares even though he did not pay the entire
subscription.

Are advances and deposits for future subscription considered


as equity already?
Not yet.

TRUST FUND DOCTRINE

Are these securities? Certificates of deposit for future


subscription?

BAR: Does the trust fund doctrine include the


additional paid in capital?

Yes. But they are not equity, they are not shares of stock. They
are considered securities under the SRC. They are not yet
equity, they are not yet converted to shares, but the corporation
still receives additional funds.
4.

No. Your trust fund doctrine is synonymous with your


total subscriptions. It means that the total subscriptions
are funds held in trust for the benefit of the creditors.
Can a corporation increase the capital stock if its
authorized capital stock is not yet fully subscribed?

Loans

Is equity entitled to interest payment?

Yes because there is no prohibition.

No because equity is not a loan. Its only a loan that would earn
interest. Thats why the cheapest way to obtain funds is to issue
shares because there is no obligation to pay any interest. You
only pay interest on a loan but not on equity. For equity, as you
know, dividends. The expectation of the stockholder for
infusing equity to the corporation is dividends, but the right to
receive dividends is
a.
b.

MAJORITY
OF
STOCKHOLDERS
CORPORATION V. MIGUEL LIM (2011)

OF

RUBY

If the corporation will issue shares from your unsubscribed


portion of the original authorized capital stock it is not subject
to SH approval. What is required is board approval, majority of
the quorum suffices because under section 25 unless the
corporation code requires otherwise, majority of the directors
constituting a quorum is sufficient to transact business.

dependent on the availability of surplus profits;


and
always discretionary on the part of the BoD.

The power to issue shares of stock in a corporation is lodged in


the board of directors and no stockholders meeting is required
to consider it because additional issuances of shares of stock do
not need approval of the stockholders. What is only required is
the board resolution approving the additional issuance of
shares.

What is CAPITAL STOCK?


It represents the maximum number of shares that the
corporation may issue without amending the articles of
incorporation.

How many votes are needed when you increase your


capital stock?

What happens if there are no additional shares?


The corporation should increase capital stock to have
additional shares because issuance of shares in excess of
your authorized capital stock is null and void.

Majority of the entire board and at the SHs meeting, 2/3


of outstanding capital stock (important!)

Does it mean that the only amount of capital that the


corporation may raise is the product of authorized
shares multiplied by the par value?

3 PRACTICAL REASONS for INCREASING CAPITAL


STOCK

OBVIOUSLY NOT. It simply represents the maximum


number of shares the corporation may issue without
amending the AOI. It does not reflect the capital of the
corporation because shares of stock may be issued for an
amount above or in excess of par value.

1.

To obtain additional funds

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You are assured to get at least 25 % of


subscription of the increase

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The capital stock of a corporation is 1B divided into shares with


par value of 1 peso and subscribed and paid up capital stock is
500 million and the corporation would like to increase the
capital stock from 1B to 2b. Is there still a need to subscribed to
the 25% of the 2B considering that the paid up capital is of
the capital stock as increased?

REQUIREMENTS IN CASE OF INCREASE/DECREASE


OF THE CAPITAL STOCK

Yes but it must be 25% of the increase not as increased. It is


to make sure that the corporation receives minimum capital
because to interpret otherwise there is no need to subscribed
further because 500M is already of 2B.
2.

Approval of the majority of the entire board.

2.

Approval of stockholders representing 2/3 of the


majority of the outstanding capital stock

3.

Treasurer must sign an affidavit that 25% of the


increase in the capital stock has been subscribed
and 25% of the subscription of the increase has
been paid in cash or in property received by the
corporation. (Applicable only in case of increase
in capital stock)

4.

Certificate of amendment filed with the SEC


which shall embody that the items contained
under Sec. 38 has been complied with or the
requirement for the increase in the capital stock.

To have additional shares to acquire assets for the


corporation

3.

1.

Under section 62 of the Code shares of stock may


be exchange for property. The property is the
consideration for the issuance of shares and those
properties will become the assets of the
corporation.

Under Section 38, there is one item there that you are
supposed to state the amount of bonded indebtedness in the
certificate of amendment. There is increase of stock in one case
that we handled, we did not indicate the amount of bonded
indebtedness assuming there is none but the SEC looked for it.
So just state that there is no amount of bonded indebtedness to
fully comply with the requirements under Section 38.

To support stock dividend declaration

Are advances from SH subject to documentary stamp


tax?
Advances are loans. So if the advances are evidenced by a credit
or debit memo it is subject to DST. If not, just do an
accounting.

And then, What is the effect of the amendment


brought about by the increase of the capital stock?

Until the case of BIR V. UST

It is effective upon the approval of the SEC.

There is no DST unless there is a loan. Doc stamps are not tax
on the document but a tax on the transaction.

Now, what about the reduction of the capital stock?


Are the requirements the same?

Advances, although a loan, usually do not earn interest unlike


in loans it earns interest. A bank which does not charge interest
is performing an ULTRA VIRES ACT.

As to the approval requirements, it is thesame. The


approval of the majority of the entire board and 2/3 of the
stockholders owning the majority of the capital stock.

A SH who grants an advance to corporation without interest


can never be an ultra vires act. It is intended to help the
corporation.

What differs is the affidavit of treasurer. Obviously, it is not


applicable for the simple reason that such requirement is
peculiar only to increase in the capital stock.

Loans or advances are documented in the books of the


corporation as borrowings.

But there is a requirement that is peculiar only to the


reduction of the capital stock and is not applicable to
the increase of capital stock and what is that?

Shares of stock do not earn interest. Shares of stock are entitled


to dividends if declared by the corporation subject to
availability of surplus profits.

The reduction of the capital stock shall not be done or


allowed if it will impair the rights of the third parties. So it
must not impair or prejudice third parties.

BAR: WAYS OF INCREASING CAPITAL STOCK

By increasing the number of shares but maintaining


the par value

By increasing the par value but maintaining the


number of shares

By increasing the par value and increasing likewise


the number of shares

You dont see that when you increase the capital stock. Why?
Because every time you increase your capital stock, there can
be no impairment of rights of the third parties there. It is for
the interest of the third parties that they will have additional
funds for the corporation.
Now an example in the reduction of the capital stock. Lets say
your authorized capital stock is 1 billion divided into 1 billion
shares, you have a par value of one peso per share. Now the
subscribed capital stock is 600 million divided into 600 million
shares, par value of one peso.
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The Corporation reduced the capital stock from 1 billion to 600


million.

Century. This is the problem: ABC incurred losses so that is


why it is sold for a cheap amount.

What happens now to the 400 million shares?

The question is: How do you wipe out the losses?

Then they are retired. They cannot be reissued anymore unless


allowed by the articles of incorporation.

You wipe out losses by reducing the capital stock and it


will take .000001 of par value before you can decrease
capital stock and wipe out the losses. So ganun kalaki yung
reduction ng par value .000001 from 1 peso para ma wipe
out yung losses na 40 million. So ang tanong sakin meron
bang limitations sa par value?

What about this one, supposing that your authorized capital


stock is 1 billion divided by 1 billion share with a par value of 1
peso. Your subscribed is 600 million and your paid up is 500
million. Can you reduced the authorized capital stock from 1
billion to 500 million?

Wala. The 5 peso applies to no par value. So for as long as


you have a monetary value, it can be used. So thats what
we did. We reduce the capital stock. By reducing the par
value to .000001 such as the capital stock of the
corporation became only 150 million.

No, you cannot because it will amount to condonation of your


100 million subscription. And what did we say earlier? That all
subscriptions are funds held in trust for the benefit of the
creditors under the TRUST FUND DOCTRINE. To condone the
unpaid subscription is to violate the trust fund doctrineunless
the net assets of the corporation is 600 million and if the net
asset anyway is 600 million then you can reduce the capital
stock to 500 million.

Now of course, if you are a listed company and you want you
trade shares in the stock exchange and it is .000001, No one
will take you seriously. Sino bibiling stocks mo kung .000001
ang value. So after we reduce the capital stock and wipeout the
losses, we again amended the articles to increase the par value.
So this is what we did to wipe out the losses, we reduce the
capital stock and then again increase it to make it viable. And
the point is, there is no minimum par value according to the
SEC. As long as there is a value attached to it. The 5 peso
limitation is applicable only to no par value shares.

What about this one, Lets say that 1 billion is authorized


capital stock and it has a par value of 1 peso fully subscribed
and paid up. The corporation decides to reduce capital stock to
600 million. What happens to your 400 million? Can they be
returned to the stockholders?
They can be returned only to the extent that it will not impair
third party creditors.

POWER TO INCUR, CREATE OR INCREASE BONDED


INDEBTEDNESS

So in what way can you distribute the excess?

Now moving on to Sec 38, the power to incur, create and to


increase bonded indebtedness. It is the only power of the
corporation that has not been asked in the bar, the power to
incur bonded indebtedness.

If the net assets of the corporation is 1billion pesos and you


have enough to cover the claims of your creditors.
Because if not, lets say that the net asset is only 700 million
and they reduced it to 600 million can they return the 400
million?

In the corporation power to incur debt, for example, 1


million debt or 5billion. Would that require
stockholders approval? For 5 billion? or 10 billion?
Is it a question of amount?

No, only the 100 million excess.


Now, if you return the surplus capital stock, is it a
declaration of dividends?

NO. It is not a question of amount but a question of


whether the following partakes of a bonded indebtedness.
Only bonded indebtedness requires approval of the
majority of the board and stockholders owning at least
2/3 of the outstanding capital stock.

As you all know, when you return the surplus to the


stockholders, it is not dividends under Section 43 but a
return in capital or return in investment of the
corporation.

Ordinary debts of the corporation under the general borrowing


of the corporation, regardless of the amount, only requires
approval of the majority of the quorum.

Our client Century did a backdoor listing. BACKDOOR


LISTING is when you buy the shares of a dormant listed
company. ABC is an energy company, it is listed in the stocks
exchange. Century wants to go public, it wants to trade its
shares publicly. So it wants to apply in the list for public
offering in the Philippine stock exchange. It is very expensive.
You have to hire accountants, lawyers, investment managers so
and so. The cheapest way to do it is to simplify, by buying a
dormant listed company. So Century bought the shares of ABC
company, a dormant listed company, then amended the
articles from energy to realty. Then the name from ABC to

Now, the question there is what is a bonded


indebtedness? And how do you distinguish it from a
mere general borrowing of the corporation?

BONDED INDEBTEDNESS
Is in the form of the bond.

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Is the bond different from a promissory note?

unsubscribed portion of the original authorized


capital stock? Or only in the increase of the capital
stock?

A BOND is long term in nature involving large number of


creditors. Unlike promissory notes which is issued only to
one person and short term of payment, a bond cannot be
for one year. The bond is payable for three years, 5 years or
7 years as the case may be. It cannot be a bond if it is less
than 3 years.

There was an old Supreme Court decision, that the preemptive rights is only applicable in case of increase in the
capital stock and not from the issuance of shares from the
original capital stock.

So a bond is for longer term involving large number of


lenders more than 20. The second feature of a bonded
indebtedness is that it must be secured by an encumbrance
on the corporate assets. So assets are given or assigned to
a trustee and then offered as collaterals or secure the
obligations under the bond.

For example, the authorized capital stock is for 1billion divided


into 1 billion share with a par value of one peso. The subscribed
capital stock is 500 million pesos with 10 stockholders and
each stockholders subscribed into 50 million shares each to
make it 500. Lets say that your paid up is 250 million and 25
million is paid for each stockholders. So you have 10
stockholders holding 50 million shares each, so what does it
mean? Each of them owns 10% of the company.

To repeat, it must be in the form of a bond and then


secured by an encumbrance in the corporate assets and
subject for the approval of the SEC.

Now lets say the corporation will issue shares from


the unsubscribed 500 million. Is that subject to preemptive right?

You cannot issue bond to the public unless you have a SEC
approval. Under SRC, remember that you cannot issue
securities to the public unless you secure SECs approval.
Bonds are securities.

According to the Supreme Court, No. Why? Because if the


stockholders want more than 50 million, in the outset they
should have subscribed for more than 50 million. Having
subscribed to 50 million upon the incorporation, it means
that the only number of shares they want in the
corporation.

Also keep in mind, the act of incurring requires majority and


2/3. The act of increasing requires majority and 2/3. So the if
you have approval of 1 billion bonded indebtedness and after
one year, the corporation once more increase the same, so it is
subject to the same requirement which is majority of the entire
board and 2/3 approval of stockholders.

So according to this case, pre-emptive rights is only applicable


in case of increase in the capital stock.
According to the SEC, this is based on the old corporation code.
Under the new corporation code, when I say new it means the
current Corporation Code, pre-emptive right applies to any and
all issuance of shares whether from the increased or from the
unsubscribed portion of the original authorized capital stock.

c. Power to Deny Pre-Emptive Rights


Sec. 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 preemptive 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.

Bottomline, every time the corporation issues new shares,


whether from the increased or the unsubscribed portion, the
stockholders are entitled to pre-emptive rights. Why?
Because the rationale of pre-emptive right is for the
stockholders to maintain their proportional interest in the
corporation in terms of voting rights, in terms of assets upon
dissolution and in terms of dividends .
In what sense?

The power of the stockholders is to subscribe to any shares of


the corporation. The power of the corporation is to deny.

We have 10 stockholders, each of them has been given 10% of


the shares each. Every time the corporation declares dividends,
each receives 10%. Every time there is a voting of corporate act,
each can vote 10%. If you dissolve the corporation, each of
them gets 10% of the assets. Now of you issue the shares from
whatever source to third parties outside the 10, they will get
diluted from 10% to less than 10%.

The right of the stockholders to subscribe to any and all


issuance of shares or the disposition of shares of any class of
shares of the corporation in proportion to his shareholdings in
the corporation.
As I said, the right to subscribe in any and all issuance of
shares of the corporation.

That is why pre-emptive rights apply to any or all issuance


because any or all issuance may result to dilution of the
stockholders interest or proportion of his interest in the
corporation.

First question, does pre-emptive right apply to


issuance of stock or issuance of shares from the
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Is pre-emptive right applicable to sale of treasury


shares?

In 2013, the SC said in one case,


"you cannot freeze-out the minority SH, in bad faith." In such
case, the corporation is already insolvent, but the majority of
the SH still wanted to continue the existence of the corporation
and revived it by adopting rehabilitation plan that will call for
equity infusion, but the minority SH does not want to put up
more capital with the corporation since it is already insolvent.

YES. Because the word disposition covers such.


It says of any class of shares. For example:
1) At the outset, the corporation has "all common shares." 1B
common shares with par value of One Peso, then the
corporation amended the AOI, to issue preferred shares. Can
the holders of the common shares subscribe to the new
preferred shares? The answer is YES, because the law says "of
any class." So any class whether common or preferred.

The minority SH wanted to dissolve the corporation, liquidate


and distribute the assets to the SH, so they can recover their
investment or whatever is left. But what the majority SH did
was to amend the AOI and increase the capital stock resulting
to dilution of the interest of the minority SH in the corporation.
So when the corporation will liquidate its assets, the minority
will be left with lesser share in the distribution of assets. Then
eventually the SC declared the corporation to be insolvent and
the equity infusion was not advisable, improper, and illegal. It
is in that context that the SC said you cannot dilute the
minority.

2) At the outset you have 2B authorized capital stock, 1B


common shares and 1B preferred shares, and the holders of the
common shares are different from the holders of the preferred
shares. The corporation will increase the capital stock, to
increase only common shares. Can the holders of the preferred
shares exercise pre-emptive right to the new common shares?
The answer is NO, because the pre-emptive right will only
apply to the holders of the common shares. The purpose is to
prevent dilution, so it can only grant pre-emptive right to the
holders of common shares, because the preferred shareholders
are not diluted as the same preferred shares remain the same.

The second one, waiver of pre-emptive right.


When you become a corporate secretary, and you will be
issuing shares, don't forget to include in your board resolution
that "SH are given, for examples, 7 days from notice to exercise
the pre-emptive right, otherwise the right is deemed waived."
Because it cannot be indefinite (the exercise of pre-emptive
right). So given that period, and you did not exercise the right
within that period, then the right is deemed waived impliedly.

Is pre-emptive right absolute?


NO.
EXCEPTIONS TO THE RIGHT OF PRE-EMPTIVE
RIGHT:
1.

If it is denied in the AOI or any amendment


thereto

2.

Waiver of that right, whether express or implied

3.

Shares
issued
in
compliance
with
laws requiring minimum stock ownership to t
he public

4.

5.

The third one, Shares issued in compliance with


laws requiring minimum stock ownership to the public.
What
is
your
minimum
public
requirement for a public company?

ownership

10% must be owned by the public.


What happens if the public does not own 10%?
It will be delisted by the SEC.

Issuance
of
shares
in
exchange for
property
given
for
a
corporate
purpose, if approved by the SH owning at least
2/3 of the outstanding capital stock.

So if you issue shares to comply with laws requiring minimum


SH ownership by the public, then you don't have to offer those
shares to existing SH, you will offer them to third parties to
comply with the requirement.

Issuance of shares in payment of debt made


in
good
faith,
if
approved
by the SH representing 2/3 of the outstanding
capital stock.

The fourth one, Issuance of shares in exchange for


property
given
for
a
corporate
purpose, if approved by the SH owning at least 2/3 of
the outstanding capital stock.

The first one, if the right is denied in the AOI or any


amendment thereto. The by-laws of the corporation were
amended to deny pre-emptive right. The amendment was
approved by majority of the board and SH representing 2/3 of
the outstanding capital stock. Is the denial valid? No. The Code
says "amendment of the AOI." Amendment of the by-laws is
not enough, it must be AOI.

ABC Corporation is on expansion mode and is looking for a


property that could be the site of the factory of the corporation,
and after considerable search, the corporation was able to find
a land. It entered into negotiations with the owner of the
property. The owner wants to sell the property to the
corporation but in exchange for shares of stock in the
corporation. So the president discussed the idea to the BOD,
made proposals to the board, and the board approved it, and
presented it to the SH, to increase the capital stock, for the
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Section 40, there are two kinds of disposition. One is


disposition in the ordinary course of business and the other
one is the disposition, sale, encumbrance of all or substantially
all of properties of the corporation. If it is a sale in the ordinary
course of business, it requires approval of the majority of the
board. Why? The reason is Section 25 of the CC, it provides
that unless the Corporation Code or the by-laws requires
otherwise, majority of the members of the board constituting a
quorum are sufficient to transact business. Sale in the ordinary
course of business does not require majority of the entire
board. If the sale of the properties, mortgage of the properties
is in the ordinary course of business, it only requires the
approval of the board of directors, it means majority of the
quorum.

issuance of shares in exchange of the property to the owner of


the property. The increase in the capital stock, and the issuance
of shares of the corporation in exchange for the property was
approved by the SH owning 2/3 of the outstanding capital
stock or 66.67%. Pedro Reyes who owns 10% claims that the
issuance of shares in exchange of the property is in violation of
his pre-emptive right. Is Pedro correct?
No because it is issuance of shares in exchange for
property
given
for
a
corporate
purpose,
if approved by the SH owning at least 2/3 of
the outstanding capital stock.
The last one, Issuance of shares in payment of a debt made in
good faith, if approved by the SH representing 2/3 of the
outstanding capital stock.

The other one is the disposition, sale, encumbrance of all or


substantially all properties of the corporation, it requires the
approval of the board of directors and the stockholders
representing atleast 2/3 of the outstanding capital stock. It is
also subject to the laws on illegal combination, monopoly,
restraint of trade or other relevant special laws.

d. Power to Sell or Dispose of Corporate Assets


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 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 stockholders or members 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.

This was asked 7 times in the bar, Q: What special law is


applicable when it comes to the sale of all or substantially all of
the corporate properties? A: The Bulk Sales Law. So the Bulk
Sales Law must be read in conjunction with Section 40 of the
Corporation Code. Under this law, any sale in bulk as defined
by law must comply with certain requirements otherwise the
sale is in fraud of the creditors. There is a presumption that if
the sale is in bulk and does not comply with the requirements
under the law, it is a sale in fraud of the creditors.
Q: So what are the different kinds of sales in bulk? A: 1. Sale,
exchange, transfer and mortgage not in the ordinary course of
business, 2. Sale, exchange, transfer and mortgage of all or
substantially all of the assets of the corporation. 3. Sale,
exchange, transfer and mortgage of all or substantially all of
the business or trade of the seller.
The requirements under the Bulk Sales Law are the following,
1.

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.

2.

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.

3.

The seller must provide the buyer a verified list of the


creditors containing the names of the creditors, their
addresses, amounts owing to each of them and the
respective maturity dates.
Inventory of the properties or assets to be sold and
must include the cost price or acquisition price in the
amount being sold.
The inventory and the list must be filed with DTI.

The consent of the creditors is not required because there is no


law requiring the seller or the buyer to secure the consent of
the creditors before the sale can be effected. If the
requirements have not been followed, the consequences are it
is null and void, Q: Against whom? A: Null and void against the
creditors of the corporation.

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.

Q: So what would be the rights and obligations of the buyer in


the bulk sales law if it does not comply with the requirement
under the bulks sales law? A: Well the buyer holds the
properties in trust for the benefit of the creditors with the right
to return the price plus damages if warranted. So holding the
properties in trust for the benefit of the creditors and the right
to require the return of the price plus damages.

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.

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That is why it doesnt make sense not to comply,


because__________ except if you do not know the law.

A: The answer is No. Delfin vs. IAC. Tax avoidance scheme is


valid, it is ethical, it is recognized by the tax code and piercing
the corporate veil only applies in case of misuse or abuse of the
fiction of separate legal personality. There is no misuse or
abuse of legal personality fiction in this case.

That is why this afternoon; we had a meeting with a client who


is selling his assets to a foreign based company. He told us that
he engaged the services of a lawyer from Harvard, lawyers from
so on and so on and he is engaging our firm to make sure that
his interest is protected and to proof read the sale purchase
agreement because he already hired the lawyers from Harvard
who are supposed to be experts. And I said, I feel insulted that
you are hiring us just to proof read. Of course I said it in a nice
way, that I feel insulted. And I said, perhaps those lawyers from
Harvard do not know about the Bulk Sales Law. You are
selling your property in bulk, all of them. Please ask them if
they know about the bulk sales law.

Second Question: What then is the remedy available


to the judgment creditor?
A: The bulk sales law as the transfer or assignment did not
comply with the requirement of the bulk sales law. The
transferee holds the properties in trust for the benefit of the
judgment creditors.
Now the question in the bar, the transfer or assignment was
made during the pendency of the case, so in other words, a case
was already filed against Juan Dela Cruz, and during the
pendency of the case he sought the advice of his lawyer on how
he can save on tax upon his death and he was told to put up a
holding company where he will transfer all of his properties in
the holding company in exchange for shares of stock.

Well if you have a transaction involving a sale of all or


substantially all, the bulk sales law applies. The foreign counsel
was surprised when I cited bulk sales law. He asked me are
you sure there is a law in the Philippines? and I said, Yes, it is
an old law but it has not yet been repealed.

Then the judgment creditor obtains a judgment which became


final and executory. The question then was,

In fact, it is not limited to sale, assignment or transfer, it even


includes mortgage of all or substantially all. So even if it is bulk
sale by name, it also applies to mortgage of all or substantially
all of the properties. If these are not complied with, the
transferee will hold them in trust for the benefit of the creditor.
So might as well comply. Anyway, these are all procedural
requirements, but the consequences can be fatal, can have
adverse effects in implication if you do not comply.

Can he pierce the corporate veil?


Can he pierce the corporate veil? There were two
answers, two conflicting answers, primary and
alternative.
Primary answer- Because the transfer was made during the
pendency of the collection case, it is in bad faith; therefore the
corporate veil should be pierced.

You just notify them right, so better to give the list to the buyer
so the buyer can inform the creditors at least 10 days before the
sale and what will it take to notify the DTI? Nothing, just a
paper, just a letter.

Alternative answer- No, because tax avoidance is valid.


It is better to subscribe to the alternative answer because it is
based on jurisprudence. The primary answer assumes there
was bad faith just because the transfer was made during the
pendency of the case regardless of the intention to save tax. But
here there may still be leviable properties, the shares. You can
levy the shares and that there is no registry of property for
shares. Somebody showed me a book, Sir, according to so and
so... I said, According to Supreme Court (tawanan)

BAR: Supposing Juan Dela Cruz sought the advice of his lawyer
on how he can save on estate tax upon his death. So he was
advised by his lawyer that he can put up a holding company
and that he can transfer all of his real properties in the holding
company in exchange for shares of stock, and he was advised
further that a transfer of real properties in exchange for shares
is a tax exempt transaction provided he acquires control of the
transferee corporation. So he heeded the advice of his lawyer,
he assigned and transferred all of his properties to a transferee
corporation. It turns out that he has a creditor. Oryt, creditor
filed a case against him, obtained a judgment which became
final and executory and implemented judgment the against
transferor, only to find out that there are no real properties to
be levied on execution because they have been transferred to
the holding company.

What is the difference between tax avoidance and tax


evasion?
You can always tell me tax evasion is illegal, unethical, contrary
to public policy. Tax avoidance is valid, allowed by the code.
When you become lawyers, you realize that the difference
between tax avoidance and tax evasion is a good lawyer. A
good lawyer can make tax evasion look like tax avoidance and a
lousy lawyer can make tax avoidance look like tax evasion. But
of course the difference would be whatever Kim Henares says
until June 30, 2016.

And there is no registry when it comes to shares, you do not


find shares right? You will never know where the shares are,
because they are intangible properties and the stock certificate
is in the possession of the stockholder.

Does the Bulk Sales Law apply to sales made by a


manufacturer? Asked twice in the BAR.

First Question: Can the creditor pierce the veil of


corporate fiction? Is the setting up of the holding
company, recipient of the properties from the
transferor, be the basis for the corporate veil to be
pierced?

There is one case on Sale of Corporate Assets on your


outline, Pena vs CA. This has been asked in the Bar.
The question was, Is the assignment of the right to
redeem the property of the corporation subject to
stockholders approval and majority of the boards
approval?

No, because a manufacturer always sells in bulk.

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Sc said, If what is being assigned is the only or substantially all


the properties of the corporation, that is tantamount to sale of
sale of all or substantially all which requires the approval of
stockholders and majority of the board and would fall under
section 40 of the Corporation Code.

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

What is the remedy of one who is not in favour of the


sale of all or substantially all of the corporate
properties?

4. Redeemable Shares (Sec.8)

Appraisal right.

5. Treasury Shares (Sec.9)

That is why the stockholders approval should be secured in a


meeting called for that purpose; because of the appraisal right.
The dissenting stockholder has to be present in the meeting
where he will express his dissent against the proposed sale of
all or substantially all properties.

1. To eliminate fractional shares arising out of stock


dividends

What is the test to determine whether the sale


involves substantially all?

Fractional share (butal) is less than one share.

When can there be a fractional share in case of stock


dividends?

The Bulk Sales Law does not provide for the formula or test but
it is found in the Corporation Code. If after the sale, the
corporation cannot continue with the purpose for which it was
organized, then the sale is considered as a sale of substantially
all of the corporate assets. It is not a question of quantity; it is a
question of effects after the sale.

Example: Let us say a stockholder owns 250 shares and


the corporation declares 25% stock dividends. 25% of 250
is 62.5. The .5 is the fractional share that the corporation
may acquire.

Let us say La vista land has various properties for


development and they were able to sell only the lots in
(a certain place), is that covered by the Bulk Sales
law?

Section 41 is not self executory. It is implemented by a board


resolution. Section 41 only empowers the corporation to
acquire its own share but it has to be authorize by the BOD.

No, it is a sale in the ordinary course of business and it is not


the only or substantially all the properties of the corporation.

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;

When you become corporate secretary, don't forget to include


in your board resolution the authority of the corporation to
acquire fractional shares arising from stock dividends.

e. Power to Acquire Own Shares


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:

Can the corporation acquire or participate in sale of delinquent


shares?
No. The corporation may acquire delinquent shares
only if there is no bidder willing to pay the full amount
of the subscription plus interest, costs and expense
and subject to the existence of surplus profits.

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

3. To pay dissenting or withdrawing stockholders entitled to payment


for their shares under the provisions of this Code. (a)

Appraisal right (sec.81) is the right of the stockholder to


demand payment of the fair value of his share after
dissenting from a proposed corporate act involving
fundamental changes in the corporation in the cases specified
by law.

SECTION 41 refers to the power of the corporation to


acquire its own shares. Relate to Sections 7, 8, and 9.
What are the cases where the corporation can acquire
its own shares?

It is basically the right to get out of the corporation.


In close corporations, appraisal right may be exercised at any
time.

Ordinarily, the corporation cannot acquire its own shares


right? The corporation cannot be its own stockholder. That
does not make sense, so it is only in certain cases that the
corporation becomes its own stockholder.

4. Redeemable Shares (Sec.8)


These are shares classified as such in the AOI which the
Corporation may take up upon expiration of a certain
period, regardless of availability of surplus profits.

Instances when the corporation may acquire its own


shares
1. To eliminate fractional shares arising out of stock dividends;
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5. Treasury Shares (Sec.9)

A: 6 months from acquisition.

Treasury shares are issued, fully paid and outstanding but


they are reacquired by the corporation through purchase,
redemption, donation and any other lawful means.

Now is the 6month period applicable to other


corporations not a bank?
The answer is NO. A corporation may acquire its own shares,
they become treasury shares, they become assets of the
corporation and as assets they can be sold or disposed of at any
time and there is no period for the corporation to dispose of
treasury shares.

Purchase
Example: If the economy is not doing well and the shares are
being traded in the amount below book value, it makes sense
for the corporation to acquire those shares because those
shares acquired become assets. Basically they are cheap assets
because they are acquired below their real worth.

When it comes to shares of a bank, a bank can only acquire its


own shares subject to BSP approval. Any shares acquired by a
bank should be disposed of within 6 months from acquisition
because the bank cannot be a stockholder of its own.

DONATION, well shares may be donated back to the


corporation by the stockholder.

Asked in the Bar: How do you distinguish Treasury


Shares from Redeemable Shares?

What about REDEMPTION? That is confusing because


redemption is a mode of acquiring shares under Sec.
9. Then redemption is also separately discussed under
Sec. 8.

Redeemable shares are shares classified as such in the AOI


and reacquired upon expiration of a certain period regardless
of existence of retained earnings or surplus profit. Treasury
shares cannot be reacquired if there is no surplus profit.

This was asked in the Bar - What are the requisites to


enable the corporation to acquire its own shares?

Redeemable shares have to be denied the right to vote while


Treasury shares need not be denied the right to vote because
by their very nature they cannot vote.

1. For a legitimate purpose only. The corporation may acquire


its own shares for legitimate corporate purposes.
2. Subject to availability of unrestricted retained earnings.

Redeemable shares are generally retired upon redemption


and therefore cannot be reissued whereas Treasury shares
can be resold upon such price or terms and conditions as may
be determined by the board.

3. The condition of the corporation warrants it.


Redemption under Sec. 8 v. Redemption under Sec. 9
If acquisition of its own shares, treasury shares, is subject to
availability of surplus profit and one of the modes of acquiring
treasury shares is redemption under Sec. 9, how do we
distinguish then redemption under Sec. 9 that requires surplus
profit from redemption under Sec. 8 that enables the
corporation to acquire such shares notwithstanding lack of
surplus profit. So the only way you can reconcile is to say that
Sec. 8 on redeemable shares contemplates shares that were
retired and were later on redeemed. So redeemable shares are
shares that are retired, once they are acquired they are retired,
they are no longer outstanding, that is why you have to amend
the AOI to take them out.

The answer to this question, how can the issuance be


allowed in the articles?
If it is a perpetual redeemable share. Perpetual
meaning it can be redeemed anytime. So there is no
period. For example, San Miguel is notorious for this,
they will issue preferred-redeemable shares (these
features go hand in hand, preferred and redeemable
shares). So redeemable up to 3 years. So Lets say the
corporation issues 1 billion worth of preferred
redeemable shares with a term of three years and
every year it pays dividends on a guaranteed basis. So
those are the features. 3% every quarter or 12%
dividends every year. After 3 years, it becomes
redeemable. On the first quarter of the first year, the
corporation must pay dividends.

Can you reissue Redeemable Shares after they are


reacquired by the corporation?
YES if re-issuance is allowed by the AOI. When re-issuance is
allowed by the AOI, then they become treasury shares. So if reissuance is allowed then it will cover shares under Sec. 9. So in
other words, the corporation can redeem redeemable shares
not requiring surplus profit if those shares once redeemed are
retired. If the AOI allow the re-issuance of these redeemable
shares then it will be governed by Sec. 9 which requires now
surplus profit, because you know that such treasury shares can
be re-sold upon such terms and conditions as may be authorize
by the board. (Dean's Note: It may be better to amend these
provisions and take out "redemption" under the modes of
acquiring treasury shares because it is confusing with Sec. 8.
Unless it will be explained the way I explained it to you..)

What if there is no surplus profit and the features of


the preferred and redeemable shares are guaranteed
dividends?
In the case of Republic Planters Bank v. Agana, xxxx can
the holders of such shares compel the corporation to pay
dividends due on the preferred-redeemable shares if the
payment of dividends is guaranteed by the corporation and
there is no surplus profit?
The answer is NO because these shares are not
borrowings and not indebtedness of the corporation.
Although pref shares are ----, they are also
stakeholders of the corporation and the right to
receive dividends is still subordinate or dependent on
availability of surplus profit. So preference comes in
only if there is surplus profit and dividends are

Bar Exam Question: Can a bank acquire its own


shares?
A: YES.
Q: Within what period should the bank dispose of its
treasury shares?
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declared by the corporation. If there is none then


there is no such thing as guaranteed dividends.

f. Power to Invest Corporation Funds in another Corporation


Sec. 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)

This is the case of San Miguel Corporation. San


Miguel Corporation used to be owned by the
government by up to 40% and the Supreme Court
declared that --- goes to Danding Cojuanco. So only
20% are left to the government. Now, the San Miguel
made an offer to Sandiganbayan to convert the
common share into redeemable shares. So from
common, voting diba. Ang sabi ng San Miguel, lets
convert your common to preferred and we will pay
you guaranteed dividends every quarter. Then they
got the approval of the Sandiganbayan all the way to
Supreme Court. So that is why the government is no
longer a voting stockholder of San Miguel, they were
reduced to non-voting pref share holder. When the
new PCGG chairman came in, now the present
chairman of COMELEC, they asked me, can they undo
the deal because they wanted to get back the common
shares to enable the government to vote and elect the
Board of directors of San Miguel. It cannot be undone
anymore right because it was approved validly by the
Supreme Court. The question is suppose San Miguel
loses money and investment, right now they are very
profitable, but supposing it bungle in its many
investments and there is no surplus profit, can the
government insist on payments of dividends because
it was guaranteed?

Again, investment of funds may be for primary purpose or


secondary purpose in another corporation.
If the funds are invested by the corporation for primary
purpose, then obviously it must require approval of the board
of directors (if we say BOD, we mean, majority of the quorum
suffices)

The answer is NO because there is no such


thing as guaranteed dividends if there is no
surplus profit. So they can only pray that the
San Miguel always has surplus profit so
dividends can be declared.

BAR: ABC Corporation is engaged in the business of


manufacture of soft drinks and then it wanted to
invest its funds in the manufacturing of bottles for
the soft drinks and a stockholder required or asked
the board taken up in a stockholders meeting, so he
can dissent and then exercise his appraisal right. If
the funds to be invested by the manufacturer of
softdrink are for manufacture of bottles, does this
require SHs approval? Is this something that a
stockholder can exercise his appraisal right?

So on the third year, what happens now?


It will be redeemed by the corporation, so obviously those
shares once redeemed are deemed retired because it was
only good for 3 years. It cannot be reissued anymore. You
have to amend the articles of incorporation to take out
those redeemable pref shares.
What if there is no period?

Under Section 42, if the funds invested are for primary


purpose, any undertaking or venture incident to primary
the purpose, then board approval suffices. The approval of
the stockholders is not necessary.

It can be redeemed anytime by the corporation. So


kung wala kang redeemable period, it can be
redeemed by San Miguel anytime. If there is no
term, limit, period or time, it can be reissued
anytime upon the terms and conditions approved
by the board of directors and in that case it
becomes treasury shares.

If the funds invested are for secondary purpose, then under


Section 21:
1.
2.

Are treasury shares entitled to dividends? NO.


Can they vote? NO as long as they are in the treasury.

3.

Are they part of the outstanding capital stock?


They are not. They used to be outstanding but when
they are acquired by the corporation they become
mere assets of the corporation.

Approval of the majority of the board of directors


A meeting must be called for the purpose for the
stockholders
The corporation must secure the approval of the SH
holding at least 2/3 of the outstanding capital stock.

So obviously, written assent will not suffice. There must be


a meeting called for that purpose so the SH can exercise
their appraisal right

Can they become a part of outstanding capital stock


again?

Section 42 is not enumerated in Section 81 where cases on


appraisal right may be exercised. Section 42 understandable on
the basis which provides that appraisal right is available for the

Yes, if they are re-issued by the corporation.

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stockholder who dissents in investing the corporation funds for


a secondary purpose with the expectation that the funds will be
invested for primary purpose, not secondary purpose. He puts
his money in a corporation with the expectation that the equity
he made in the corporation would be devoted for primary
purpose.

corporation? According to SEC, idle funds may be devoted


to secondary purpose, in this case, it will be treated as
investment of funds in secondary purpose requiring SHs
approval.
So the property must be devoted for primary purpose, right? If
the property is to be devoted for secondary purpose, it requires
board and SHs approval. So same requirement.

If the funds are invested for secondary purpose, the law


requires stockholders to be consulted, the board must go back
to the SHs to get their consent, and those who are not in favor
can exercise their appraisal right.

g. Power to Declare Dividends


Sec. 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)

What about investment of funds in a business not in


the secondary purpose? Is this allowed by Section
42?
Section 42 says investment of funds in secondary purpose
or another business and this requires approval by the
board likewise and SH by the 2/3.
Does this require amendment of the AOI? Can the
corporation invest its funds in an undertaking or business
not at all related, not at all provided in the AOI as
secondary or primary purpose?

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)

This Section 42, when it comes to investing funds in


another business not part of the secondary purpose must
be read in relation to Sections 16 and 45 of the
Corporation Code. So that business must be incorporated
either as a primary purpose or secondary purpose.
A corporation can only exercise powers conferred upon it
under the Articles, express, implied, or incidental to its
corporate existence.

43 is the heart and soul. Most of the questions on the powers of


a corporation focus on 43 and 45 dividends and ultra vires.

So what 42 recognizes is the prerogative of the corporation


to invest the funds in another business, that requires an
amendment of the AOI otherwise it would be ultra vires.

The heart of the proprietary right of a stockholder is the right


to receive dividends. A stockholder invests money in the
corporation not because he just feels it or likes it but because
he wants to earn dividends, he wants to earn profits and those
profits must be translated(?) to dividends payable to the
stockholders.

BAR: A corporation is engaged in deep sea fishing, it


wants to invest funds in agriculture, it being the
secondary purpose. What steps should be undertaken
by the Corporation to allow investment of funds in
agriculture? What are the procedures that should be
taken up under Section 42 if the corporation invests
its fund for secondary purpose?
1.
2.
3.
4.

BAR: Are profits same as dividends?


Profits are not dividends. Profits are sources of dividends.

Board approval (majority vote)


Notice to the SH of the meeting and must include the
proposal to invest funds in secondary purpose,
and it that meeting, get the approval of the SH
representing 2/3 of the outstanding capital stock,
for the corporation to pay dissenting SH the fair value
of the shares subject to availability of surplus profits

Dividends are profits, in whole or in part, set aside for


distribution to the stockholders.
Profits are not dividends. [To be considered as dividends], they
ought to be separated or segregated, earmarked and
distributed to the stockholders.
REQUIREMENTS
OR
CONDITIONS
CORPORATION TO BE ABLE TO
DIVIDENDS

Section 42 says funds. Does the term funds include


properties?

1.
2.

According to the SEC, the term funds includes properties


in the sense that can an idle asset of a corporation be used
for a different purpose not the primary purpose of the
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FOR
A
DECLARE

Availability of unrestricted retained earnings


Board approval for cash dividends

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3.

Board approval and


stockholders approval
representing 2/3 of the outstanding capital stock for
stock dividends

cause of investment and the value of the share upon dissolution


is your liquidating dividends.
It is called liquidating dividend but it is not really in the
context of what we understand as dividends in Section 43 .
Rather, it is the return of the capital to the stockholders upon
dissolution of the corporation.

RETAINED EARNINGS/SURPLUS PROFIT a


corporation has surplus profit if the assets exceed the
combined subscriptions and liabilities of the corporation
The formula is: Assets liabilities subscriptions

BAR: Can the corporation declare dividends out of


re-appraisal
or
re-evaluation
surplus?
The
corporation acquired a real property 5 years ago
which is 5M. Now, the appraised value of the
property is already 15M. May the 10M difference be
the source of dividend distribution?

Now why is it that subscriptions are deducted from


the assets to determine the surplus profit?
This is because subscriptions cannot be touched. They
cannot be impaired. They are held in benefit for the
creditors under the trust fund doctrine. They cannot be
used as basis/source for dividend contribution. They are
part of capital, and if they are part of capital, they cannot
be available for distribution

No, not allowed because it is merely a paper gain that can


be wiped out anytime, it is not an actual gain. Hence it
cannot be a basis for declaration of dividends.
The BoD, to motivate the stockholders and directors,
invoked the business judgment rule to pay dividends
to stockholders and pay allowance and bonuses to
the officers and directors all in the guise or pretext of
business judgment rule. Can the corporation declare
dividends under the business judgment rule to work
hard for the corporation?

In order to have surplus profit, the corporation must have


something more than subscriptions plus liabilities of the
corporation.
It is not enough to have retained earnings. The law qualifies
retained earnings to be unrestricted, which means that there
is no condition, no burden, no limitation imposed to the
corporation for the declaration of dividends.

No, because there is no surplus profit

For example, if a corporation is a party to the loan agreement


that prohibits the declaration of dividends, despite surplus
profit, it cannot be said that it is unrestricted since there is a
limitation or burden on it.

Anything that increases of the assets enhances the capability of


the corporation to declare dividends. So anything that
increases your assets like donation to the corporation or in
increase in the income of the corporation or gain in sale of a
property of the corporation

BAR: What are the exceptions to the rule that a


corporation must have surplus profit before it can
declare dividends?

Non-recurring claim means it does not recur in the


ordinary course of business.

Cases where the corporation may declare dividends


despite lack of retained earnings.

Operating profit is your recurring claim. It recurs. It is


continuous.

1.) Wasting Asset Doctrine Wasting asset-corporation


whose capital gets depleted during the course of the operations
is NOT required to replenish its depleted capital before it can
declare dividends.

An example of non-recurring claim is lets say, income arising


from sale of real property not used in the usual course of
business. It does not happen all the time that they have an
income arising from the sale of property if youre not a realty
company.

Ex: Mining Companies, timber cutting companies. The capital


of a mining company gets depleted in the course of its
operations. Diba as you complete the mining ___, you deplete
the capital? So the corporation can declare dividends if there is
income without having to make-up or replenish depleted
capital.

And this is where Ramon Ang is an expert because he buys


companies, flips, sells them. (What like Richard Gere sa Pretty
Woman? Haha) He has done this for Coca-cola, Philippine
Daily Inquirer, Meralco, PAL. Thats his formula. So the gain
realized from the sale, of course, is the profit ___________.

Ordinarily, your capital should not be impaired in order to


declare dividends but under this doctrine, it is enough that the
corporation has income or profit to be able to declare
dividends.

Now for Cash Dividends, the law requires approval by the


board, and
Stock Dividends, both board (majority of quorum to pota)
and stockholders (2/3 to ha pota) approval.

2.) Liquidating Dividends

BAR: In a stockholders meeting, a stockholder


demanded the corporation to pay them CASH
dividends, the Corporation presented that it has only

When the corporation dissolves the share will be distributed to


the stockholders so that the gain of the stockholder is subject to
liquidating dividends. The gain is the difference between the
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so much surplus profit. The stockholder stood up, and


demanded the corporation to declare dividends and
prevailed upon the chairman of the corporation to
have a raising of the hands and all the stockholders
in attendance voted to declare CASH dividends. Is
that valid?

president may bring about instability, disorder, chaos. We need


to be prepared for the next election. Lets wait for a while ha
*blah blah blah part of the lectuuure* I have a client who has
accumulated profit in excess of ONE THOUSAND TIMES his
paid-in capital, and has not declared dividends, because they
own 90% of the company, 10% by the minority. If they declare
dividends of 100M, 90M will go to them, and 10M will go to
the minority stockholders. They dont want any leakage, they
want everything for themselves (trulaloo). So they did not
declare dividends. So the SEC came and visited their office,
and inspected the records as part of their visitorial right, and
it became clear to them that the corporation has amassed
surplus profit way in excess of the 100% paid-in capital
threshold. So the SEC asked why, and we said we were in
expansion mode, so the official asked, Wheres your board
resolution approving the expansion program? (because it
cannot be just laway diba?). The code says definite
expansion program as APPROVED by the BOARD of
directors. So I was forced to say, nonono its in the works.
Relax. Come on, declare ka na, nakakaawa naman
stockholders. But in a public company you cannot do it because
in a public company, you would be booted.

Malamang hindi. It has to be approved by the BOARD and


not by the stockholders.
How about the stockholders declaring or voting to
declare STOCK Dividends?
Also NO. Likewise, to declare stock dividends, you need
board approval. (Majority of Quorum of Board and 2/3
vote of shareholders)
Supposing the question is, Can the Stockholders
COMPEL the Board to declare CASH Dividends? Is it
discretionary on the board to declare dividends?
As you all know it is discretionary. The corporation may or
may not declare dividends.
So when is it compellable by MANDAMUS?
It becomes compellable by mandamus when it becomes A
DUTY.

What are the kinds of dividends?


We have cash and stock, as you all know.

It becomes a duty when the surplus profit exceeds 100% of the


PAID-IN CAPITAL. Not subscribed capital ha, but paid-in
capital. Anything in excess of the paid-in capital must be
declared as dividends.

What about property dividends, bond dividends,


scrip dividends, how do you classify them?
In the context of Sec. 43, there are only two kinds. Cash
and Stock. Anything not payable in shares is considered
CASH DIVIDENDS. So other dividends require approval
by the board, not the stockholders.

BUT then, given the language of Sec. 43, there are THREE
exceptions, and these exceptions make the general rule look
like nothing, especially the third exception.

Which of these dividends requires SEC approval?

The three exceptions are:

Cash dividends do not require SEC approval.

(1) When justified by definite corporate expansion


projects or programs approved by the board of
directors

Stock dividends do not require SEC approval, unless you


have to increase your capital stock, but you get SEC
approval not because of stock dividends but because of the
increase in capital stock. Remember Sec. 38, if your
authorized capital stock is not enough when you declare
stock dividends, then you have to increase your capital
stock.

(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 consent, and such consent has not yet been
secured

Declaration of Property dividends are likewise not subject


to SEC approval. But in order to DISTRIBUTE property
dividends to stockholders, you have to get SEC approval.
The declaration PER SE does not require SEC approval,
but to distribute PROPERTY dividends, you have to get
SEC approval.

(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 (codal nayan kasi
dean loves to eat his words)

The third one is the all-encompassing, flexible, vague-ofthem-all exception. The special reserve to meet contingencies.
The corporation can always say, We need extra reserves. You
never know what will happen. You can never tell. A new

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CASH and STOCK dividends can be distributed


WITHOUT SEC APPROVAL.

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BAR: Distinguish CASH from STOCK dividends.


CASH DIVIDENDS

Stock dividend is a 2-step process.


1st step: To declare cash dividends

STOCK DIVIDENDS

payable in cash

payable in shares

board approval only

Board and stockholder


approval.

require cash disbursement on


the part of the corporation

There is no cash outlay


because surplus profit is
capitalized.

increase the wealth of the


stockholder

do not increase the wealth of


the stockholder

cannot be revoked after


declaration

may be revoked even after


declaration BUT BEFORE
ACTUAL ISSUE

Cash dividends received by


natural persons are subject to
tax.

REGARDLESS OF THE
RECIPIENT, SDs are not
subject to tax.

2nd step: The Corporation will use the cash to subscribe


shares of stock at par value and distribute to SHs
What is the consideration for the issuance of shares
brought about by SH?
Section 62 of the Corporation Code paragraph 5- stock
dividends.
No money out from SHs, money comes from corporations
surplus profit. Although the SHs own the money, they
dont have physical enjoyment because the corporation
uses the cash for subscription of shares.
RECORD DATE - date insofar as the corporation is
concerned to recognize SHs right to vote, entitled to receive
dividends or participate in the corporate acts.

Revocation

Declaration date is different from record date and payment


date. If the corporation declares dividends, they are not paid
right away. Usually its a 30-day wait or 1 month.

What consummates you stock dividends?

Example:

Not by declaration but by issuance of shares thats why


before issuance, you can revoke.

Declaration date is June 1


Payment date is June 30

Deans client declared stock dividends, shares of stock are


supposedly listed but the PSE did not approve the listing.
My client asked me, can we revoke the stock dividends
declaration?

Record date could be between June 1 and June 30


If the corporation said that record date is June 15, only
SHs of record are entitled to receive dividends.

Yes, because you have not yet issued the shares. But
revoking it is different from acceptability. Legally allowed
but PR wise, its a nightmare. Can you imagine the feelings
of your SH, you whet their appetite diba? You declared SD
tapos, ay di pala.

If a SH transferred shares on June 16 or 17, who


will get the dividends?
SH of record as of June 15 NOT SH of records on June
30 or payment date.
Who are entitled to receive dividends?

Why is it that after declaration of cash dividends, it


cannot be revoked?

Only SH.

Because the relationship is no longer SH (investor)Corporation, it becomes now creditor-debtor relationship.


The SH becomes the creditor with a right over the money.

NIELSON v. LEPANTO
ABC company enters into a management contract with XYZ
mining company and one of the features of the management
contract is the right of ABC to receive 10% stock dividends but
ABC is not a SH of the mining company.

Increase in wealth
Cash dividends increase the wealth of the SHs, while stock
dividends do not. This the academic distinction good for bar
purposes. But in the real world, you can make money in stock
dividends if you can sell the shares above par. What do I mean?
Cash dividends, there is wealth because the stockholder
receives cash but stock dividends, stockholder receives shares
not cash yet they have the same book value because dinamihan
mo lang yung shares mo pero pareho parin yung capital mo.
You can make money if you can sell your shares above par but
its the selling after the stock dividend that results in increase
in wealth not the stock dividend per se.

So is it entitled to receive the dividends?


No.
What can be the alternative to 10% stock dividends?
It can be PROFIT-SHARING. There is nothing wrong in
giving profit share to a non-SH but its also wrong to pay
dividends for someone who is not a SH.
May the corporation declare dividends midway to
the year?

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part of the capital and not available for distribution. There is


no counterpart provision for PAR VALUE SHARES.

GR: Wait until the end of the fiscal year before you can
determine if you have surplus profit. Thus, its not generally
allowed to declare dividends midway to the year.

Likewise, the trust fund doctrine is limited only to the par value
shares of the corporation. So in excess of the par value is not
covered by the trust fund doctrine. So it can be argued either
way when it comes to cash dividends. But for stock dividends,
no room for argument, it can be declared as stock dividends.

EXCEPTION: If the corporation has so much surplus profit


that it cannot be wiped out by loses in the subsequent quarters
of the year.
Q: Can the corporation declare dividends out of its
additional paid in capital stocks?

Easier question (acc. to Dean): The authorized


capital stock of the corporation is 1 billion divided
into 1 billion shares with a par value of 1 Php fully
subscribed and paid up. The Corporation has surplus
profits of 650 million. Can the corporation declare
STOCK DIVIDENDS of 50%?

Paid in surplus is the consideration received for the issuance of


shares in excess of par value. So if the par value is 10 Php and
the share is issued for 20 Php, this 10 Php share increase is
your paid in surplus.
So, lets say the corporation has a paid in capital stock of 1
billion Php divided into 1 billion shares par value of 1 Php , and
lets say 250 MILLION shares were issued for 2php so can 250
is your subscribed capital stock right? And 250 million
additional of paid-in capital or paid in surplus. The question
now can the corporation declare dividends out of the paid in
surplus? (BAR)

A: Yes.
Q: What is the basis? Your authorized shares or
subscribed shares?
A: Based on the subscribed shares. Based on the example, the
authorized capital is fully subscribed, so if you have 650 M
surplus profits and your subscribed shares is 1 billion par value
is 1php, one-half (1/2) of that is 500 M, so you can declare 50%
stock dividends your surplus profits is more than 500 M, more
than of your subscribed shares.

Q: Remember what section 43? What does section 43


provide with respect to the source of dividends?
A: Unrestricted retained earnings. It means profits in the
course of its operation.

Q: What are the steps to be undertaken by the


corporation to support the 50% stock dividends?

A: No. Section 6 of the corporation code refers to the issuance


of no par value shares. Right? And under this, the
consideration received by the corporation for the issuance of no
par value shares forms part of the capital and not available for
redistribution.

A: There must be an approval of the majority of the board and


the stockholders (SH) representing at least 2/3 of the
outstanding capital stock. There must be notice to the SH.
To complete the process, what do you need to do? Let us
do the math again. Youre authorized 1 million shares par
value and it is fully subscribed and paid off. You have the
money because you have 650 M and you only want to
declare 50% stock dividends. But what do you need to
carry-out this? Do you have enough shares? So what do
you do when you do not have enough shares? You pray to
God? So what would it take to get additional shares? What
do you do under sec. 38? (That is the most leading
question I have ever asked. Do you pray to God, please
grant me enough shared?)

Q: Is there a counterpart provision for par value


shares? That the consideration received for the
issuance of par value shares forms part of the capital
and not available for redistribution?
A: There is none.
Q: So can you now take a position that shares issued
in the excess of par value can be declared as
dividends?
So Im just trying to confuse you noh

-Increase your capital stock by 500 M shares.

Lets make a distinction between a cash and stock dividends.


(BAR)

Q: So what is the maximum increase that the


corporation may effect given that you have 500 M?

Q: So can you declare stock dividends out of paid in


surplus?

A: You can increase up to 2 billion because 500 M is 25% of 2


billion.

A: Yes, because youre not giving away money out to the


stockholders. You are just capitalizing the profits. You just
convert the profit to capital.

Very easy question: A subscribed 200 million shares,


par value is 1php, subscription is hundred million
pesos, hundred million shares, so he paid 25 million,
how many shares can he vote?(BAR) 100 or 25?

With regard to cash dividends, there is a conflicting SEC


Opinion. One argument in support of declaring dividends out
of paid in surplus is section 43 that says that dividends shall be
taken resource from unrestricted retained earnings (profits in
the course of operations). On the other hand, you can take the
position that the excess of the par value may be declared as
cash dividends because under section 6 there is a provision to
the effect that the entire consideration received by the
corporation for the issuance of NO PAR VALUE shares forms

A: 100.
Can the corporation apply the cash dividends against
the unpaid subscription?
A: No. Under section 43 of the CC, the power of the corporation
to apply the cash dividends applies to delinquent stocks.

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h. Power to enter into Management Contract

NO because any program to promote the welfare of the


employees is not considered ultra vires. Even assuming that it
is ultra vires, it is not a void act it may still be ratified by
estoppel.

Sec. 44. Power to enter into Management Contract in


relation to Sec. 33 contract with interlocking directors
The contract can be called by any name for as long as the
intention is to delegate or entrust to another corporation the
management of the corporation.

Ultra vires act on the Part of the Board


Is it possible that an act be an intra-vires act on the part of
the corporation but ultra-vires in the part of the board?

Just because the corporation is entering into a management


contract does not mean that the BoD is neglecting its duty to
the corporation because the BoD can still exercise its powers.

Example:
Lets say the corporation is allowed to invest its funds in the
primary purpose, no problem right?

Approval requirements:
-

by the majority of the quorum of the BoD of both the


managing and the managed company

by the majority of the stockholders of both the


managing and the managed corporation

The only time that the requirement is elevated to 2/3


of the stockholders is in cases of interlocking
stockholders/directors

Or secondary purpose.
Now lets say the board of directors approved the investment of
funds for the secondary purpose, but no stockholders approval
was obtained.
Q: Is that act ultra vires on the part of the
corporation?
A: Its not. Because the corporation is authorized to invest
funds for secondary purpose.

Interlocking directors in the context of Sec. 44 and Interlocking


directors in the context of sec. 33 are not the same.

But that act is ultra vires because the board acted beyond the
scope of its authority. By itself it cannot approve investment
funds in secondary purpose; it must be approved likewise by
the stockholders owning 2/3 of the outstanding capital stock.

In sec. 33, there is only one director seating in the board of the
two corporations. however under sec.44 majority of the
managed corporation is also the majority of the managing
corporation and the stockholder owns more than 1/3 of the
managing corporation. In which case, the approval requires
majority of the outstanding capital stock of the managing
corporation and 2/3 of the OCS in the managed corporation

Now that kind of act may be ratified because what you only
need to do is to get the approval of the stockholders
representing 2/3 of the outstanding capital stock.
What about ultra vires act on the part of the officer, is it
possible that the act is intra vires because it is the power of the
corporation and yet unenforceable because the officer has no
authority or acted beyond the scope of his authority?

Period of Management Contract


GR: 5 years as long as the contract is between TWO
CORPORATIONS.
EXPN: 1.) Management contract between two corporations
may be longer than 5 years pursuant to Mining laws (Mining
Act of 1995). Under the said law, the contract may be for 25
years.

Example:
Lets say a person signed a deed of sale without the consent of
the corporation. Lets say its a purchase of a property in the
ordinary course of business, but the one who signed the deed of
sale was not the one authorized by the board, so the act is intra
vires but still unenforceable against the corporation because
the officer was not authorized to transact business for the
corporation unless the act is ratified with the doctrine of
apparent authority ___.

2.) Technical/Financial Service Agreement or Production


Agreement can be for 25 years.
4. Ultra Vires Acts
May ultra vires act be ratified?
It depends. If the act is contrary to law, morals, good
customs, public order, it cannot be ratified. It is void. If it
is not contrary to law but simply outside of the express,
implied and incidental powers of the corporation, it can be
ratified. (Akohe? Mining) An ultra vires act, which is not
contrary to law may be ratified on equitable grounds such
as estoppel.

Q: What is the remedy for ultra vires act?


A: Injunction, to prevent the execution, performance of the
ultra vires act.
Q: Now once the act is performed or executed, what is
the remedy of the corporation? What if it has been
performed partly or wholly?

Akohe Mining Case: The company set up a posting office inside


its business premises to facilitate the communications between
its employees and their relatives. The director of posts agreed
to its request to set up the postal office on the strength of his
representation that it would agree to the terms and conditions
that the director may impose. The act was contested on the
ground that it was ultra vires. Is it an ultra vires act?

A: NOT injunction. Because you cannot enjoin an act that has


been consummated. So the remedy is a DERIVATIVE SUIT.
A stock holder may file a derivative suit on behalf of the
corporation to set aside, assail or question the ultra vires act.
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G. MEETINGS

A: 1 day

There are only 2 kinds of meetings under the code. BOARD and
STOCKHOLDERS. Management meeting is not indicated.

Q: should it be in writing?

For board meetings, you only have to 2 options, Majority of the


entire board Quorum unless the by-laws provides otherwise

A: not necessary, unless the by-laws requires otherwise.


BAR:

And for stockholders you only have 2 options, majority or 2/3.

The AOI of ABC Corporation provides that its principal office is


in Makati. Its area of operations is in Ortigas. The board meets
in Manila hotel and stockholders likewise Makati Shangri-La,
so are the meetings valid?

Quick review.
Stockholders meetings, there are 2 kinds. Regular and Special.
Q: Regular, how often?
A: once, annual regular stockholders meeting

Principal office Makati


Area of operations Ortigas

Q: For what purpose?


A: to elect directors of the corporation, because their term is
only 1 year.

Board meetings Manila hotel


Stockholders meeting - Makati

Q: Special stockholders meeting, how often?


Are the meetings valid?

A: as often as may be necessary upon call by the presiding


officer.

So the board met in a place other than the principal office of


the corporation, not in the city where the office is located.

Q: notice requirement?
A: it is valid, because it can be even outside the country unless
the by-laws provides otherwise.

A: Regular meetings 2 weeks written notice


Special meetings 1 week written notice unless otherwise
provided by the by-laws

For the stockholders meeting in Makati?


A: as long as it is in the city where the principal place of office
is located. Preferably in the principal office itself.

Q: Where do you hold your stockholders meeting,


regular or special, where?
A: in the city or municipality where the principal office is
located preferably the principal office itself

BAR
Q: Who presides over the meetings?

Q: When?

A: president. Unless otherwise provided by the by-laws

A: in the date fixed by the by-laws. If the by-laws is silent, any


date on April as approved by the board.

*in practice it is the chairman of the board but the chairman


must be authorized by the by-laws

Q: What about Board meetings?

Q: Can you hold stockholders meetings through


teleconference?

A: Regular once a month unless otherwise provided by the


by-laws

A: you cannot, teleconference not allowed in the Philippines

Special as often as may be necessary


Q: What about board meetings, can you hold board
meetings through teleconference or videoconference?

Q: Where?

A: Yes. The SEC has already issued a regulation regarding


teleconference or videoconference.

A: any place even outside the country unless the by-laws


provides otherwise.

Q: What are the requirements of teleconference or


videoconference, should it be in the by-laws?

Q: Notice requirement?
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A: Not necessarily. It is enough that the director expressed his


intention to participate through teleconference or
videoconference and he must be identified, and the
proceedings are recorded.

agreement was not really authorized by the board. So


if it was not authorized and approved by the board,
then he couldnt be charged
The issue here is whether the minutes of the meeting
need to be signed by majority of the entire board to be
given PROBATIVE VALUE?

To repeat, under the SEC rules, he must express his intentions


to participate in teleconference or videoconference. He must be
identified as a director of the corporation participating in the
proceeding and second it must be recorded.

The Shupreme Court said that there is nothing in the


Corporation Code, or any law in the Philippines, that requires
the minutes of the meeting to be signed by majority of the
entire board. As long as it is signed by the CORPORATE
SECRETARY, it will be given probative value.

When I was corporate secretary of the bank, there was a


measure we are pushing for approval and it was a very
important measure. We needed everyone to be present.
Because we only have 8 out of 15, we control the board but it is
a very slim majority, so therefore, no one should be absent. If
one is absent, it becomes a tie with 7-7, now if 2 are absent, our
proposal might not be carried out. Our board meeting is at 2pm
and 1 is in California, the time there is 11pm, and the other one
is in New York with 2am there in New York. 1 is 60+ and the
other 1 is 80. So because no one could be absent and they
expressed their intention to participate in teleconference. So I
asked, are you blah blah the director of the bank, he answered
Yes, and I asked do you confirm or affirm your intention to
participate via teleconference, he replied yes. And before I can
even go to the measure, he said, Im in favor of everything that
you will present to the board, is that valid?

RULE ON ABSTENTION

I think I told you about GSIS vs CA right? In one of the


meetings I attended, as Corporate Secretary, after
certifying that there was a quorum, Atty. Winston
Garcia stood up and moved that the POSITIONS of
Chairman and Corporate Secretary be declared
Vacant.
He invoked the sovereign will of the
stockholders, we own this company, and we have
the right to appoint our own chairman and corp. sec.

Pena vs CA, we covered this right? Remember that the


issue in this case, is that the By-laws provide that a
quorum is 4/5 and only three (directors) approved the
mortgage and assigned their right to redeem, so is the
mortgage and the assignment of the right of
redemption valid?

Of course thats wrong, since stockholders have no


right to appoint the corporate officers. The
stockholders must appoint the board, and it is the
board who will appoint the officers. The stockholders
cannot by-pass the board, and directly appoint or
remove the corporate officers. So I declared him out
of order (ano sya vending machine?)

It is not valid. The by-laws of the corporation provided that 4/5


of the directors constitute a quorum and only 3/5 were present.
There was no quorum to validly transact business. Sec. 25
states that the by-laws of the corporation may fix a greater
number tha the majority of the number of board members to
constitute the quorum.

Because they saw our strategy, that only nominees for


independent directors allied with us were qualified,
they got more directors than us, but we have the
independent directors, so we got 8/15, so we control
the corporation.

Theres this case also, People vs Dumlao. Dumlao was


a trustee of GSIS, so when he was still a trustee, he
and other members of the board of GSIS authorized
GSIS to enter into a lease with option to purchase
agreement. After a new set of trustees were elected,
the new set found the contract to be disadvantageous
to the government, so they filed a criminal complaint
for violation of RA 3019 against Dumlao et al. for
entering into a contract that is disadvantageous to the
government.

So they walked out, and had their own meeting in


Mandaluyong.
So we had two sets of directors, so which one is
controlling?
So theres this case, Marbel(?) vs CA, so right after we had an
election, I faxed the names of our directors to the SEC. Because
under that case (supra), whoever are listed in the GIS, are the
directors of the corporation.
The following day, they also faxed their set. Now we have two
sets of directors, our set and their set. Now that cannot be
decided by the SEC (obviously), because it is an intra-corporate
controversy cognizable by the RTC acting as a Special
Commercial Court.

Dumlao motioned to quash the information on the


ground that the minutes attached to the information
showed that only THREE OUT OF SEVEN signed the
minutes. So his argument was if only 3/7 signed the
minutes, then the lease with option to purchase
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So for two weeks we had two sets of directors, until the Go


family could not take it anymore because the Bank was
bleeding, many customers were withdrawing their funds. The
Go family sold their bank. (Equitable PCI Bank yung
corporation. Thanks Dean for not emphasizing that earlier).
SO THE QUESTION NOW IS: Can the meeting
continue if the stockholders walked out?
Yes of course. Once the Corporate Secretary certifies that there
is a quorum, then the meeting can continue, even if, during the
meeting, some stockholders leave and there is subsequently no
quorum. Unless the meeting is adjourned, then the meeting
can continue.

What will take precedence over a Motion to Adjourn?


What motion takes precedence over it?
A motion to declare the person out of order. Here, one
stockholder moved to have the meeting adjourned since there
was no more quorum after some stockholders walked out. So
obviously I cannot adjourn the meeting because I have no more
quorum. A Motion to Declare A Person OUT OF ORDER is
superior to a Motion to Adjourn. Anyways, thats too technical,
lets move on to bar matters. (K!)

What is the effect of abstention on stockholders


meeting?
The effect is that a stockholder is NOT entitled to Appraisal
Right. In those cases allowed by law where appraisal right may
be exercised, so amended of AOI to restrict stockholders
rights, the stockholder who is present BUT ABSTAINS, is NOT
ENTITLED TO EXERCISE HIS APPRAISAL RIGHTS. He
cannot demand payment of his fair value shares. Because one
of the elements of appraisal rights is that he must DISSENT. So
abstention is tantamount to a waiver of the right to demand the
payment of fair value of his shares.

What is the effect of abstention in BOARD meetings?


Is the abstaining director considered present for quorum
purposes? Yes of course.
Lets say we have FIFTEEN directors, the quorum is EIGHT.
The 8 are present, but one keeps on abstaining, on everything
I abstain.
So on those matters where only majority of the quorum is
needed, his abstention is immaterial.
If the requirement is approval of majority of the entire board,
his abstention is tantamount to no vote. Therefore they cannot
get the approval.
*alright, the other (better) class is joining tonight, so youll
have the same page*
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filing of a certificate thereof with the Securities and Exchange
Commission.

H. STOCKHOLDERS AND MEMBERS


1. Rights of Stockholders and Members

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.

BAR: What are the rights of the SH?


1.

2.

3.

PROPRIETARY
economic benefits

RIGHTS

anything

about

a.

The right to receive dividends

b.

The right to participate in the assets of the


corporation upon dissolution and liquidation

A corporation may, furthermore, classify its shares for the purpose of


insuring compliance with constitutional or legal requirements.

MANAGEMENT RIGHTS
a.

The right to vote on all corporate acts requiring


SHs approval

b.

The right to elect the directors of the


corporation

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:

REMEDIAL

1. Amendment of the articles of incorporation;

a.

Appraisal right

b.

Pre-emptive right

c.

Right to inspect

d.

Right to copy financial statements of the


company

4. Incurring, creating or increasing bonded indebtedness;

Right to file a derivative suit

6. Merger or consolidation of the corporation with another


corporation or other corporations;

e.

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;

5. Increase or decrease of capital stock;

a. Doctrine of Equality of Shares

7. Investment of corporate funds in another corporation or


business in accordance with this Code; and

BAR: What is the Doctrine of Equality of Shares


DOCTRINE OF EQUALITY OF SHARES - all shares have
the same rights and privileges UNLESS classified differently in
the AOI. Note: Not just in the by-laws or by approval of
directors

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.

Sec. 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.

CLASSIFICATIONS OF SHARES
1.

Par value

2.

No par value

3.

Voting

4.

Non-voting

5.

Common

6.

Preferred

CLASSIFICATION TO COMPLY WITH CONSTITUTIONAL


LIMITATIONS:

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

7.

Founders (Section 7)

8.

Treasury (Section 8)

9.

Redeemable (Section 9)

10. Watered (Section 65)

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2. Participation in Management
How does a SH participate in the management of the
corporation?
1.

By voting and
corporation

electing

directors

of

the

2.

By voting in the corporate acts requiring SHs


approval

a. Proxy

Presence of
SH
or
principal

b. Voting Trust

Revokes
authority of
proxy holder

the
the

The right to vote may be done:


1.

In person

2.

Through a proxy

3.

Through a voting trust agreement

All rights that may be


exercised by the SH can
be exercised by the
trustee
EXCEPT
beneficial ownershipthe right to receive
dividends

How do you distinguish proxy from VTA?

As to form

PROXY

VTA

In writing, signed by
the SH, filed with
the
corporate
secretary before the
meeting.
Not
required
to
be
notarized.

In writing, signed by the


SH, must be notarized,
copy of the VTA must
be submitted to the SEC
otherwise it is not
enforceable

Presence of trustor, SH,


Transferor does not
revoke the authority of
trustee. Trustee can
exercise right to vote, he
can inspect corporate
books, he can obtain
copy
of
financial
statements.

You cannot extend a proxy

Can you renew a proxy?


Yes, you can have another proxy agreement in increments of 5
years. Renew it on the 4th year and you can have a new proxy
agreement. Existing agreement is good only for 5 years.
VTA of course can be longer than 5.
What is a VTA? What are the limitations?

Only the
vote. No
inspect
separately
authorized
purpose.

Rights
conferred

right to
right to
UNLESS
for that

Cannot be voted and


cannot qualify as
director
of
the
corporation

Term
Period

or

Good only for the


meeting
intended
UNLESS
general
and continuing in
nature but not to
exceed 5 years

Legal title to the shares


and other rights a SH
may exercise. Qualified
to be elected as director
(trustee).

VTA - agreement whereby the SH conveys legal title and other


rights pertaining to the shares in favor of a trustee.
Why would parties enter into a VTA?
In ordinary transactions:
If a bank wants to lend money, what are the collaterals it can
require from the borrower?

LEE CASE: If a director


loses legal title over the
shares, he ceases to be
director
of
the
corporation

It can require mortgage, surety, guarantee, antechresis but all


these will not give the lender or bank the power to control the
corporation.
In VTA:
The lender will gain control of the corporation because he will
have the voting shares of the stocks of the SH-transferor.

Valid for 5 years. Can be


longer than 5 years if
pursuant to a loan
agreement but it expires
upon full payment of a
loan. Can be extended if
it is co-terminus with
the loan agreement

What does the trustor get in return?


He gets a voting trust certificate. The stock certificate in the
SHs name will be cancelled to give way to the VTA. A voting
trust certificate is transferable just like a stock certificate. Once
the VTA expires, then the stock certificate issued will be
cancelled and the stock certificate issued in favor of the trustor.

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BAR: A executed a voting trust agreement in favor of


XYZ bank transferring legal title over his shares in
favor of XYZ bank. At the same time, ABC
Corporation mortgaged a property in favor of XYZ
bank. The loan was not paid so the bank foreclosed
the mortgage. Upon expiration of the voting trust
agreement, A requested that XYZ turns over the
management of the corporation back to the trustor.
Can he demand that the trustee turns over the
corporation to the trustor? Let us take a look at the
facts again. By virtue of the voting trust agreement,
XYZ bank acquired legal title over the shares of A
effectively voting the shares and taking management
control of ABC corporation. To complement the
voting trust agreement, ABC corporation mortgaged
the property to secure the loan which XYZ granted
likewise to ABC. The loan was not paid, xyz bank
foreclosed the mortagage. After foreclosure, xyz
became the owner of the foreclosed assets. Now, the
voting trust agreement expired, it was good only for
five years. Can the trustor now demand that xyz, the
trustee, turns over the management and control of
corporation A? Is that concept similar to the voting
trust agreement under section 59 of the Corporation
Code?

the stockholder, and third to be chosen by the nominees of


the corporation and the stockholder. A day before the vote
was taken- so if the merger, for example, is voted upon by
the stockholders today, it is the value yesterday regardless
of any appreciation or depreciation to prevent any
speculation on the stocks brought about by the corporate
act subject of the appraisal right. It is by agreement of the
corporation and the stockholder; if they agree, there is no
dispute, but if they don't agree, the corporation code
provides for a mechanism to resolve the differences (three
appraisers). The award of the appraiser is final and
executory.
After dissenting from a proposed corporate act, it is important
for the stockholder to dissent, to express his disagreement,
objection or disapproval to the proposed corporate act. If he
waives his presence, or if he is present but abstains, then he
cannot demand the fair value of his shares. So one of the
elements is PHYSICAL PRESENCE AND DISSENT to the
proposed corporate act.
In the cases provided by law Appraisal right can only be
exercised in the cases provided by law. So not all types of
disagreement, not all forms of dissent. So just because he does
not agree with how the board runs the corporation does not
justify the exercise of appraisal right.

No, because the assets have been foreclosed. Foreclosure


of the mortgage is different from the voting trust
agreement. The foreclosure is a distinct right and remedy
available the lender.

There is only one corporation where you can exercise the


right for any reason whatsoever even though there is no
surplus profit, in case of a Close corporation.

What are these cases?

c. Cases When Stockholders Action is Required

1. Amendment of the AOI which has the effect of changing


or restricting the rights of stockholders or any shares of
any class or authorizing preference of shares over the
others and extension or shortening of corporate term.

i. by a majority vote
ii. by a two-thirds vote
iii. by cumulative voting

2. Merger or consolidation

3. Proprietary Rights

3. Sale, mortgage, encumbrance or disposition of all or


substantially all if the corporate assets.

a. Right to Dividend
b. Right of Appraisal

4. Even if not enumerated in section 81, investment of


corporate funds in the secondary purpose under section
42.

What is appraisal right?


The right of a stockholder to demand the payment of the
fair value of his shares after dissenting from a proposed
corporate act in cases specified by law.

AMENDMENT OF AOI WHICH CHANGES


RESTRICTS THE RIGHTS OF STOCKHOLDERS

OR

Take note the amendment has to be in the AOI and has to have
the effect of changing or restricting the rights of stockholders
or any shares of any class.

It is a right of a stockholder - that right can only be


exercised by a stockholder. To demand the fair value of his
shares

Example:

What do you mean by the fair value of his shares?

NOT YET ASKED IN THE BAR: If the corporation


amends the AOI to deny preemptive right, can a
stockholder exercise his appraisal right?

The value of the shares the day before the vote was taken
regardless of any depreciation or appreciation of the value
of the shares as agreed upon by the corporation and the
stockholders and in case of disagreement, by three
appraisers, one chosen by the corporation, the second by

Yes, because that amendment restricts his right to


subscribe to any issuance of shares of the corporation.
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Let us say all of the shares are common and the


corporation amended the AOI to issue preferred
shares, does the issuance of preferred shares justify
the exercise of appraisal right?

So it has to be shortening the corporate term without


dissolution of the corporation.
SECOND MERGER OR CONSOLIDATION
We will take this up under Sec.76

Yes, because the issuance of preferred shares restricts the


rights of the common shares.

SALE OF ALL OR SUBSTANTIALLY ALL OF THE


CORPORATE ASSETS

That's why you remember the anecdote I told you about Dean
Dimayuga and I. We were called by the Father Rector about the
problem caused by the minority SH. That there was increased
in capital stock and denying pre-emptive right, then issue new
shares to third party. It was done in good faith.

We have covered this under Sec.40.


INVESTMENT OF FUNDS IN SECONDARY PURPOSE
We have covered this under Sec.42.

Now, what is your remedy if the AOI was amended


denying pre-emptive right?

REQUISITES for the exercise of Appraisal Right:


1. It can only be exercise in the cases provided by law.

Appraisal Right.

2. The SH must make a demand for payment for the fair


value of his share within 30 days from the date the
vote was taken.

That is why there is no bad faith because there is a remedy


available to the SH. If they are not in favor of the amendment
to deny pre-emptive right, then "get-out of the company" and
demand payment of the fair value of your shares.

3. The value of the shares must be determined in


accordance with the Corporation Code. That is, the fair
value of the share shall be the value as of the day
before the vote was taken as agreed upon by the board
and the SH. In case of disagreement, then 3 appraisers
shall be appointed in accordance with the procedure set
forth in the Corporation Code.

What if at the outset you have common and preferred


shares, can a stockholder exercise his appraisal right
because there are preferred shares that restrict his
rights as a stockholder?
The answer is NO. There has to be an amendment in the
AOI. So if at the outset you already have preferred shares,
and those preferred shares have better rights in terms of
dividends, the right to receive assets over the common
shares, you cannot exercise your appraisal right because
you got into the corporation knowing that there are shares
superior than your common shares. So there has to be an
amendment to the AOI.

4. The corporation must have surplus profit.


5. Submission of stock certificate to the corporation, for
notation, of those shares subject to appraisal right, within
10days from demand for payment of the fair value of the
shares.
6. Once the shares are paid, Cancellation of the certificate
of stock and acquisition of the corporation of such shares
of stock as treasury shares.

Another example would be, if, let's say common shares


converted to preferred shares, or preferred shares converted to
common shares.

THE CORPORATION MUST HAVE SURPLUS PROFIT

So remember the example of San Miguel Corporation,


so if the common shares of the government were
converted to preferred shares, can the holders of the
common shares exercise their appraisal right?

Sec.41 is complemented by Sec.81 onwards of the Corporation


Code.
To refresh your memory under Sec.41, Treasury shares, one of
the cases where a corporation may acquire its own shares is to
pay a dissenting stockholder exercising his appraisal right, and
Sec.41 is clear on the condition before the corporation may
acquire the shares of a dissenting SH - legitimate purpose and
availability of surplus profit. So Sec.41 is complemented by
Sec.81 onwards. Reiterating the need for surplus profit.

YES because by converting the common shares to


preferred shares, they are given preference superior to the
holders of common shares.
AMENDMENT OF AOI TO EXTEND OR SHORTEN
CORPORATE TERM

TURNER v. LORENZO SHIPPING CORP (2010)

Amendment of the Articles to Extend or Shorten Corporate


term both justify Appraisal right. When it comes to shortening
of the corporate term, it has to be shortening the corporate
term without dissolving the corporation.

When should the corporation have surplus profit to


warrant the exercise of appraisal right? Is it the time
for demand for payment, or the time of actual
payment, or the time of the surrender of the shares?

If it will dissolve the corporation, it is pointless, irrelevant to


talk about the exercise appraisal right because the stockholder,
anyway, will receive the properties or assets of the corporation.

The surplus profit must be available at the TIME OF DEMAND


FOR PAYMENT OF THE FAIR VALUE OF THE ASSETS, not
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the time of actual payment. (Turner v. Lorenzo Shipping Corp


2010)

Submission of stock certificate for notation that is


subject to appraisal right

What happened in this case is that Lorenzo Shipping Corp


amended its AOI to deny pre-emptive right. So Turner, a SH,
dissented from the amendment, and then after, he demanded
the fair value of his shares. At the time he demanded the
payment, the corporation has no surplus profit, so not enough
retained earnings. Despite the non-availability of surplus
profit, Turner filed an action to enforce the payment of the fair
value of his shares. During the pendency of the course of action
to enforce payment of the fair value of his shares, the
corporation posted surplus profit.

So why the stockholders certificates should be


submitted for notation that is subject to appraisal
right?
Because as you all know, once the right is exercised and
the stockholder dissents and demands the right of
payment of the fair value of the shares, all of his rights are
suspended.
So the moment he demands for payment for the fair value of
the shares, all of his rights as a stockholder shall be suspended.
Everything. There is only one right available to him, it is just a
redundancy but thats what the law says. What is the right
available to the dissenting stockholder upon dissent and
demand the payment of the fair value of the shares? It is the
right to receive the fair value of the shares. That is redundant
because that is the essence of appraisal right but that is what
the law says. So all the rights are suspended except the right to
receive the payment of the fair value of the shares.

So the question now is does the fact that the


corporation posted surplus profit retroact to the date
of demand for payment. Is Turner entitled to
appraisal right?
The SC said NO, because at the time he made a demand
for payment, the corporation have no surplus profit. So the
cause of action of Turner is premature. So it can only be a
cause of action if the corporation has surplus profit and
with the ability to pay the fair value of the shares, and the
fact that during the pendency of the case the corporation
earned surplus profit does not cure the defect, it does not
retroact to the date of demand for payment.

And the last one, of course, once the corporation pays the fair
value of the shares, the shares are acquired by the corporation
making them treasury shares. So the stock certificates named
before the stockholder will be cancelled and the shares become
the properties and assets of the corporation.

Existence of surplus profit at the time of payment (but not


at the time of demand) will not retroact to the date of
demand, in order for the appraisal right may be exercised.

BAR: Stockholder dissented from the proposed


corporate act and the demanded payment for the fair
value of the shares. While waiting for payment, he
sold the shares. Can the buyer demand for the fair
value of the shares? It is a very funny question right.
Why very funny?

Now the Supreme Court did not answer the question however.
What happens now to the 30 days or the 30-day period to make
the demand for payment. Is it not under the Code, you
suppose that tomake the demand for payment within 30 days
right after the date the vote was taken. So supposing that
the 30 days is about to lapse and you have no surplus
profit? So when do we start counting now the 30-day
period?

If you are the buyer, why would you buy the shares only to
demand the fair value of the shares? Might as well not buy
if that is what you are interested anyway.
So because that was asked in the bar, we have to answer.
And the answer under the Code is that the buyer cannot
exercise appraisal right because the sale of the dissenting
shares cleansed the effects of appraisal right. So all of the
rights pertaining to the shares will be acquired by the
buyer so the effects of appraisal right are removed. He
becomes a regular stockholder of the corporation.

So the Supreme Court did not answer that question. It


simply said that when you make a demand for payment,
you better be sure that the corporation has surplus profit.
Otherwise, your cause of action is premature.
Remedy: wait for the corporation to have surplus profit
and once so earned, make the demand for payment and if
was not paid, that is the time to demand and go to Court.

c. Right to Inspect
Right to inspect is more interesting.

So eventually by virtue of this ruling, the period is


extended if the corporation has no surplus profit. So the
30-day period would seem to apply to a situation where
the corporation has surplus profit. If none, the period is
extended until such time the corporation earns surplus
profit.

Under Section 74 of the Corporation Code, every stockholder


has the right to inspect the corporate records of the
corporation.
YUICO v. QUIAMBAO (2014)
Does the right of inspection extend to the stock and
transfer book?

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If you read the code, it does not mention stock and


transfer book, it refers to the minutes of the meeting and
other records of the corporation because minutes and
other records qualified by that minutes. Can we include
stock and transfers book? So can the stockholder demand
that he sees the entries in the stocks and transfer books or
the entries in such book confidential?

we had delivered your message that you cannot be taken


lightly. Do you want them convicted? He said yes. I said, they
could not go to jail because they were more than 70 years old.
Nevermind noh heh, he wants a conviction. He was the same
guy, (well take this up on transpo if youll be under me next
sem) who filed a suit against Cathay Pacific because he was
upgraded to first class. He was in business class and moved to
first class, he sued Cathay for breach of contract and won a
nominal damage of one peso.

The Supreme Court said in Yuico v. Quimbao (2014),


the right of inspection extends to the stocks and transfer
book because it is deemed part of the record of the
corporation.

Is the right of inspection absolute?


No

Now as we all know under 74, the refusal of the right of


inspection is criminal in nature. It is the only provision in the
code that imposes criminal liability to the responsible officer in
case of refusal of the right to inspection. So other provisions
are governed by Section 144 saying that all violation of the
provisions of the Code are criminal in nature. So this is the only
section where the law or the Corporation code is clear that
refusal or denial of the right of inspection is a criminal offense
that imposes liability to the responsible officer of the
corporation.

Exceptions to the Right of Inspection (Cases when the


right of inspection is not available)
1.

If the purpose of inspection is not germane to the


interest of the stockholder

The stockholder cannot just pry into the affairs of the


corporation. He must have a purpose germane to his interest as
a stockholder.
GONZALES V. PNB

And who is the responsible officer?

Gonzales was not a stockholder of PNB and he was not allowed


to inspect the corporate records of PNB. What he did, he
acquired one share of stock from a certain Montano and after
buying one share of stock from Montano, he invoked his right
of inspection under the corporation code.

The corporate secretary because he is the custodian of


corporate records.
Now what about the directors? Can you sue the
directors for refusal of the right of inspection?

He was denied for two reasons: 1) the charter of PNB at that


time allows only inspection to specified persons; 2) SC said that
the purpose of Gonzales is not germane to his interest as a
stockholder. He only wants to satisfy his own sense of curiosity.

If you read the code it says if the refusal of is in the form of


board resolution, they too can be charged of violation of
Sec. 74 of the corporation code. But who among the
directors would be stupid enough to deny the right of
inspection in the board resolution. So why would they pass
a resolution saying we are denying to you your right of
inspection? So the only one usually sued is the corporate
secretary unless the directors openly deny the right of
inspection.
We are handling a case about the right of inspection and for the
first time in the history of Makati prosecution office, somebody
got indicted for the violation of Sec. 74 of the corporation code.
Our client is 83 years old, he sued the chairman and the
corporate secretary of a condo association in Makati because he
was not given minutes of the meeting. And after we filed the
complaint, he was given the minutes. Of course, the crime has
been committed. Can you imagine 83 years old suing another
80-year old lady?

2.

If the stockholder has improperly used the


information secured in previous examination or if he
is prompted by bad faith or ill motive

3.

It cannot be exercised outside office hours

4.

Not in the Code but by Jurisprudence, Right of


inspection does not extend to Trade Secrets

So if youre a stockholder, can you demand for the


formula of Jollibee, Coke, or San Miguel beer?
You cannot, it is outside the right of inspection

So pag away ng matatanda, labas tayong mga bata. So I asked


him, are you sure you want to do this? So we got an indictment,
so they did the piano. The chairman and the corporate
secretary did the piano. In practice, pag sinabing do the piano
that means you take the finger prints. Because if you post bail,
you are required to give your finger prints. So they did the
piano, their finger prints were taken. After we got indictment, I
asked our client. Okay we got indictment, you made your point,

a.

One case stated that Formula for Chemicals is


Trade Secret.

b.

One case that they handled, the RTC and CA


ruled that the right of inspection does not extend
to names of customers and suppliers.

A stockholder demanded inspection for the corporate records.


We opposed but if we deny the right of inspection they will sue
us criminally. What we did we file a petition for declaratory
relief to determine if the request is made in bad faith or in good
faith. So if they file a written complaint, we can invoke the
petition for declaratory relief as a prejudicial question. We said
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that they are the competitor of the corporation engaged in the


same business steel manufacturing and for us to open the
books would mean to give them the name of the suppliers and
creditors and customers. So the RTC ruled that the right to
inspection does not extend to the names of customers and
suppliers. They appealed to the CA, CA affirmed the decision of
the RTC. I was hoping they would go up to the SC to enrich
jurisprudence, not to mention our pockets, but unfortunately
they did not appeal to the SC so its still just a CA decision but
just the same it has a persuasive effect.
c.

Generally, right
to
inspection
includes
information about the amount of attorneys fees if
there is no confidentiality clause, you can
demand because you have every reason to know
how much funds is being paid to your lawyer.

But in one case handled by Divina Firm involving Maxicare.


The other stockholders demanded from management the
amount of fees Maxicare pays to the Firm. They wanted to
inspect the corporate records to check and verify the amount of
fees. So Firm anticipated that once they determine the figures.
They would file a derivative suit on behalf of Maxicare to stop
the payment of fees to the firm. The RTC ruled that Attorneys
fees are not subject to inspection right because of the presence
of a non-disclosure agreement between the firm and Maxicare.
Guess who the Judge is? RTC Makati. JUDGE PIMENTEL.
Do you agree with that decision? Of course I agree. Again, I was
hoping they would go to the SC to enrich jurisprudence.

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