I.
INTRODUCTION
A. Laws Governing Corporations Before the Corporation Code
1. Code of Commerce Articles 151 to 159 of the Spanish Code of
Commerce of 1885
Benguet Consolidated Mining Co. v. Pineda, 98 Phil. 711 (1956 ). The
entity was then known as "sociedades anonimas" and not as
"corporations".
PROHIBITION AGAINST EXTENSION OF CORPORATE
EXISTENCE BY AMENDMENT OF THE ORIGINAL ARTICLES,
APPLICABLE TO "SOCIEDADES ANONIMAS,"- The prohibition contained
in section 18 of Act No. 1459, against extending the period of corporate
existence by amendment articles, was intended to apply, and does apply
to sociedades anonimas, already formed, organized and existing, at the
time of the effectivity of the Corporation Law (Act 1459)
PROHIBITION VALID AND IMPAIRS NO VESTED RIGHT- The
aforesaid statutory prohibition is valid and impairs no vested rights or
constitutional inhibition where no agreement to extend the original period
of corporate life was perfected before the enactment of the Corporation
Law.
WHEN "SOCIEDAD ANONIMAS", MAY NOT CLAIM TO REFORM
INTO CORPORATION UNDER SECTION 75 OF THE ACT.--A socieciad
anonima, existing before the Corporation Law, that continues to do
business as such for a reasonable time after its enactment, is deemed to
have made its election and may not sub-sequently claim to reform into a
corporation under section 75 of Act No. 1459. Particularly should this be
the case where it has asserted its privileges as such sociedad anOnima
before invoking its alleged right to reform into a corporation.
2. Corporation Law (Act No. 1459) - It had some 27 piecemeal
amendments during the Act's 74 year history. It rapidly became
obsolete and antiquated and not adapted to the changing times in the
business and industrial world. Benguet, supra.
Harden v. Benguet Consolidated Mining Co., 58 Phil. 141 (1933).
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CORPORATIONS ; MINING CORPORATION ; PROHIBITION
AGAINST OWWNG INTEREST IN OTHER MINING CORPORATION ;
RIGHT OF ACTION
Inasmuch as the Corporation Law contains, in section 190 (A),
provisions fully penalizing the violation of subsection 6 of section 13 of Act
no 1459 - which prohibits the acquisition by one mining corporation of any
interest in another and in as much as these provisions have been enacted
in the exercise of the general police powers of the government , it results
that, where one mining corporation acquires a prohibited interest in
another such corporation, the shareholders of the latter cannot maintain
an action to annul the contract by which such interest was acquired. The
remedy must be sought in a criminal proceeding or quo warranto action,
under section 190 (A), instituted by the government. Until thus assailed in
a direct proceeding the contract by which the interest was acquired will be
treated as valid, as between the parties.
B. The Corporation Code
Philippine corporate law is now governed by the present
Corporation Code (the "Code", or Batas Pambansa Blg. 68, which
became effective on May 1, 1980. Explanatory Note of Cabinet Bill No. 3
which was later approved as BP 68).
The Code implements Section 16, Article XII of the Philippine
Constitution which provides, among others, that "(t)he Congress shall not,
except by general law, provide for the formation, organization, or
regulation of private corporations."
All references to the Code shall pertain to the Corporation Code of the
Philippines and to sections therein.
C. Other Special Laws
While the Code is the general law on corporations, there are
special laws which govern special kinds of corporations like the Insurance
Code, the General Banking Law, the Condominium Law, and Finance
Company Act.
Section 4, the Code: Corporations created by special laws or
charters are governed primarily by the provisions of the special law or
charter creating them or applicable to them, supplemented by the
provisions of the Code, insofar as they are applicable.
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II. DEFINITION AND ATTRIBUTES OF A CORPORATION
A Definition
Sec. 2. Corporation defined. (ACSP)
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.
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or
purpose, created by law; their personality begins as soon as they have
been constituted according to law;
(3) Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member. (35a)
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the
preceding article are governed by the laws creating or recognizing them.
Private corporations are regulated by laws of general application on the
subject.
Partnerships and associations for private interest or purpose are
governed by the provisions of this Code concerning partnerships. (36 and
37a)
Art. 46. Juridical persons may acquire and possess property of all
kinds, as well as incur obligations and bring civil or criminal actions, in
conformity with the laws and regulations of their organization. (38a)
Art. 1775. Associations and societies, whose articles are kept
secret among the members, and wherein any one of the members may
contract in his own name with third persons, shall have NO JURIDICAL
PERSONALITY, and shall be GOVERNED by the provisions relating to
CO-OWNERSHIP. (1669)
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B. Four Distinguishing Characteristics of a Corporation
A corporation is an artificial being
It is created by operation of law
A corporation has a right of succession
It has the powers, attributes and properties expressly authorized by law
or incidental to its existence
1 A corporation is an artificial being
Situs Dev. Corporation vs. Asiatrust Bank, Inc., G.R. No. 180036, January
16, 2013.
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY: It is a
fundamental principle in corporate law that a corporation is a juridical
entity with a legal personality separate and distinct from the people
comprising it. Hence, the rule is that assets of stockholders may not be
considered as assets of the corporation, and vice-versa. The mere fact
that one is a majority stockholder of a corporation does not make one s
property that of the corporation, since the stockholder and the corporation
are separate entities.
Spouses Borromeo vs. CA and Equitable Savings Bank, 550 SCRA 269
[2008]
THE RIGHT OF FORECLOSURE CANNOT BE EXERCISED BY
AGAINST THE MORTGAGOR BY ANY PERSON OTHER THAN
CREDITOR-MORTGAGEE OR ITS ASSIGNS - In this case, petitioners
rights to their property is restricted by the REM they executed over it.
Upon their default on the mortgage debt, the right to foreclose the property
would be vested upon the creditor-mortgagee. Nevertheless, the right of
foreclosure cannot be exercised against the petitioners by any person
other than the creditor-mortgagee or its assigns.
THE FACT THAT A CORPORATION OWNS ALL OF THE
STOCKS OF AN OTHER CORPORATION, TAKEN ALONE, IS NOT
SUFFICIENT TO JUSTIFY THEIR BEING TREATED AS ONE ENTITY -
ANY CLAIM OR SUIT OF THE PARENT CORPORATION CANNOT BE
PURSUED BY THE SUBSIDIARY BASED SOLELY ON THE REASON
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THAT THE FORMER OWNS THE MAJORITY OR EVEN THE ENTIRE
STOCK OF THE LATTER - Respondent, although a wholly-owned
subsidiary of EPCIB, has an independent and separate juridical
personality from its parent company. The fact that a corporation owns all
of the stocks of another corporation, taken alone, is notsufficient to justify
their being treated as one entity. If used to perform legitimate functions, a
subsidiary's separate existence shall be respected, and the liability of the
parent corporation, as well as the subsidiary, shall be confined to those
arising from their respective. businesses. A corporation has a separate
personality distinct from its stockholders and other corporations to which it
may be conducted. Any claim or suit of the parent corporation cannot be
pursued by the subsidiary based solely on the reason that the former
owns the majority or even the entire stock of the latter. From a perusal of
the records, petitioners did not enter into a Loan Agreement and REM with
respondent. respondent, therefore, has no right to foreclose the subject
property even after default, since this right can only be claimed by the
creditor-mortgagor, EPCIB ; and, consequently, the extrajudicial
foreclosure of the REM by respondent would be in violation of petitioners
property rights.
Asia's Emerging Dragon Corporation vs. DOTC, et al., 549 SCRA 44
[2008]
THE INTEREST OF A STOCKHOLDER, IF ANY, IS INDIRECT,
CONTINGENT AND INCHOATE IN SO FAR AS THE STRUCTURE THAT
WAS BUILT BY THE CORPORATION IS CONCERNED.-The matter in
controversy is the NAIA IPT III. MIIC has no connection at all to this
structure. It is merely a stockholder of PIATCO, the builder of NAIA IPT III.
Its interest, if any, is indirect, contingent and inchoate. PIATCO has a legal
personality separate and distinct from that of its stockholders, including
MI-IC. It has rights and obligations which pertain solely to itself, not to any
of its component members (I. e., its stockholders). The members may
change but the juridical person (in this case, PIATCO) remains the same
without alteration. Its property is not merged with those owned by its
stockholders. No stockholder can identify itself with the corporation. Nor
can any stockholder claim to possess a right which properly and
exclusively belongs to the corporation. Thus, it is PIATCO alone which is
entitled to receive payment of just compensation.
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If parties with conjectural, collateral, consequential, expectant and
remote interest were allowed to intervene, proceedings would become
unnecessarily complicated, expensive and interminable.- MHC has no
right to the reliefs it prays for. It wants to complete NAIA IPT Ill and mana it
for 25 years. But on what ground? As stockholder of PIATCO, the bidder
whose contracts were nullified? How can MHC derive its claim tooperate
NATA IPT III from PIATCO when PIATCO itself has no Legal right to
operate the facility? Clearly, mhcs claim js not only baseless but also
absurd. If parties with such a conjectural, collateral, consequential,
expectant and remote interest were allowed to intervene. proceedings
would become unnecessarily complicated, expensive and interminable. It
will only unduly delay and prolong the adjudication of the rights of the
original parties.
Manila Elec. Co. vs. TE.A.M. Elec. Corp. (TEC), et al., 540 SCRA 62
[2008]
AS A RULE, A CORPORATION IS NOT ENTITLED TO MORAL
DAMAGES BECAUSE, NOT BEING A NATURAL PERSON, IT CANNOT
EXPERIENCE PHYSICAL SUFFERING OR SENTIMENTS LIKE
WOUNDED FEELINGS,SERIOUS ANXIETY, MENTAL ANGUISH AND
MORAL SHOCK, THE ONLY EXCEPTION TO THIS RULE IS WHEN THE
CORPORATION HAS A REPUTATION THAT IS DEBASED, RESULTING
IN ITS HUMILIATION IN THE BUSINESS REALM.-We, however, deem it
proper to delete the award of moral damages. TEC's claim was premised
allegedly on the damage to its goodwill and reputation. As a rule, a
corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded
feelings, serious anxiety, mental anguish and moral shock. The only
exception to this rule is when the corporation has a reputation that is
debased, resulting in its
humiliation in the business realm. But in such a case, it is imperative for
the claimant to present proof to justify the award. It is essential to prove
the existence of the factual basis of the damage and its causal relation to
petitioners acts. In the present case, the records are bereft of any
evidence that the name or reputation of TEC/TPC has been debased as a
result of petitioner's acts. Besides, the trial court simply awarded moral
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damages in the dispositive portion of its decision without stating the basis
thereof.
Doctrine of Piercing the Veil of Corporate Fiction - A corporation will be
looked upon as a legal entity as a general rule, and until sufficient reason
to the contrary appears, but when the notion of legal entity is used to
defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association of persons. The main
effect is that stockholders will be held personally liable for the acts and
contracts of the corporation whose existence, at least for the purpose of
the particular situation involved, is ignored.
Hacienda Cataywa/Manuel Villanueva vs. Rosario Lorenzo, G.R. No.
179640, March 18, 2015
While a corporation may exist for any lawful purpose, the law will
regard it as an association of persons or, in case of two corporations,
merge them into one, when its corporate legal entity is used as a cloak for
fraud or illegality. This is the doctrine of piercing the veil of corporate
fiction.
The doctrine applies only when such corporate fiction is used
to defeat public convenience, justify wrong, protect fraud,
or defend crime,
or when it is made as a shield to confuse the legitimate issues,
or where a corporation is the mere alter ego or business conduit of a
person,
or where the corporation is so organized and controlled and its affairs
are so conducted as to make it merely an instrumentality, agency,
conduit or adjunct of another corporation.
To disregard the separate juridical personality of a corporation, the
wrongdoing must be established clearly and convincingly. It cannot be
presumed.
Basic rule that "the corporate veil may be pierced only if it becomes a
shield for fraud, illegality or inequity committed against a third person.3
The Court has expressed the language of piercing doctrine when applied
to alter ego cases, as follows: Where the stock of a corporation is owned
by one person whereby the corporation functions only for the benefit of
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such individual owner, the corporation and the individual should be
deemed the same.
FVR Skills and Services Exponents, Inc., et al. vs. Jovert Seva et aL, G.R.
No. 200857, October 22, 2014
A corporation is a juridical entity with legal personality separate
and distinct from those acting for and in its behalf and, in general, from the
people comprising it. The general rule is that, obligations incurred by
the corporation, acting through its directors, officers and employees,
are its sole liabilities.
A director or officer shall only be personally liable for the
obligations of the corporation, if the following conditions concur: (1) the
complainant alleged in the complaint that the director or officer assented
to patently unlawful acts of the corporation, or that the officer was guilty of
gross negligence or bad faith; and (2) the complainant clearly and
convincingly proved such unlawful acts, negligence or bad faith.
To hold an officer personally liable for the debts of the corporation,
and thus pierce the veil of corporate fiction, it is necessary to clearly and
convincingly establish the bad faith or wrongdoing of such officer, since
bad faith is never presumed. Because the respondents were not able to
clearly show the definite participation of Burgos and Rana in their illegal
dismissal, we uphold the general rule that corporate officers are not
personally liable for the money claims of the discharged employees,
unless they acted with evident malice and bad faith in terminating their
employment.
Gerardo Lanuza Jr. and Antonio 0. Olbes vs. BF Corporation, et al., G.R.
No. 17438, October 1, 2014
A corporation is an artificial entity created by fiction of law. This
means that while it is not a person, naturally, the law gives it a distinct
personality and treats it as such. A corporation, in the legal sense, is an
individual with a personality that is distinct and separate from other
persons including its stockholders, officers, directors,
representatives,and other juridical entities. The law vests in
corporations rights,powers, and attributes as if they were natural persons
4
with physical existence and capabilities to act on their own.For instance,
they have the power to sue and enter into transactions or contracts.
Because a corporations existence is only by fiction of law, it can
only exercise its rights and powers through itsdirectors, officers, or agents,
who are all natural persons. A corporation cannot sue or enter into
contracts without them.A consequence of a corporations separate
personality is that consent by a corporation through its representatives is
not consent of the representative, personally. Its obligations, incurred
through official acts of its representatives, are its own. A stockholder,
director, or representative does not become a party to a contract just
because a corporation executed a contract through that stockholder,
director or representative.Hence, a corporations representatives are
generally not bound by the terms of the contract executed by the
corporation. They are not personally liable for obligations and
liabilities incurred on or in behalf of the corporation.
Piercing the corporate veil is warranted when "[the separate
personality of a corporation] is used as a means to perpetrate fraud
or an illegal act, or as a vehicle for the evasion of an existing
obligation, the circumvention of statutes, or to confuse legitimate
issues."85 It is also warranted in alter ego cases "where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person,
or where the corporation is so organized and controlled and its affairs are
so conducted as to make it merely an instrumentality, agency, conduit or
adjunct of another corporation." When corporate veil is pierced, the
corporation and persons who are normally treated as distinct from the
corporation are treated as one person, such that when the corporation is
adjudged liable, these persons, too, become liable as if they were the
corporation. Among the persons who may be treated as the corporation
itself under certain circumstances are its directors and officers.
Instance when directors, trustees or officers may become liable for
corporate acts. Sec. 31. Liability of directors, trustees or officers. -
Directors or trustees who willfully 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.When a director, trustee or officer
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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)
Based on the above provision, a director, trustee, or officer of a
corporation may be made solidarily liable with it for all damages suffered
by the corporation, its stockholders or members, and other persons in any
of the following cases:
a) The director or trustee willfully and knowingly voted for or
assented to a patently unlawful corporate act;
b) The director or trustee was guilty of gross negligence or
bad faith in directing corporate affairs; and
c) The director or trustee acquired personal or pecuniary
interest in conflict with his or her duties as director or trustee.
Solidary liability with the corporation will also attach in the following
instances:
a) "When a director or officer has consented to the issuance
of watered stocks or who, having knowledge thereof, did not
forthwith file with the corporate secretary his written
objection thereto";87
b) "When a director, trustee or officer has contractually
agreed or stipulated to hold himself personally and solidarily
liable with the corporation";88 and
c) "When a director, trustee or officer is made, by specific
provision of law, personally liable for his corporate action."89
When there are allegations of bad faith or malice against corporate
directors or representatives, it becomes the duty of courts or
tribunals to determine if these persons and the corporation should
5
be treated as one. Without a trial, courts and tribunals have no basis
for determining whether the veil of corporate fiction should be
pierced. Courts or tribunals do not have such prior knowledge. Thus, the
courts or tribunals must first determine whether circumstances exist to
warrant the courts or tribunals to disregard the distinction between the
corporation and the persons representing it. The determination of these
circumstances must be made by one tribunal or court in a proceeding
participated in by all parties involved, including current representatives of
the corporation, and those persons whose personalities are impliedly the
same as the corporation. This is because when the court or tribunal finds
that circumstances exist warranting the piercing of the corporate veil, the
corporate representatives are treated as the corporation itself and should
be held liable for corporate acts. The corporations distinct personality is
disregarded, and the corporation is seen as a mere aggregation of
persons undertaking a business under the collective name of the
corporation.
However, when the courts disregard the corporations distinct and
separate personality from its directors or officers, the courts do not say
that the corporation, in all instances and for all purposes, is the same as
its directors, stockholders, officers, and agents. It does not result in an
absolute confusion of personalities of the corporation and the persons
composing or representing it. Courts merely discount the distinction and
treat them as one, in relation to a specific act, in order to extend the terms
of the contract and the liabilities for all damages to erring corporate
officials who participated in the corporations illegal acts. This is done so
that the legal fiction cannot be used to perpetrate illegalities and injustices.
Thus, in cases alleging solidary liability with the corporation
or praying for the piercing of the corporate veil, parties who are
normally treated as distinct individuals should be made to
participate in the arbitration proceedings in order to determine if
such distinction should indeed be disregarded and, if so, to
determine the extent of their liabilities.
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WPM International Trading Inc., and Warlito Manlapaz vs. Fe Corazon
Labayen, G.R. No. 182770, September 17, 2014
The question of whether a corporation is a mere
instrumentality or alter-ego of another is purely one of fact.
The rule is settled that a corporation has a personality separate and
distinct from the persons acting for and in its behalf and, in general,
from the people comprising it. Following this principle, the obligations
incurred by the corporate officers, or other persons acting as corporate
agents, are the direct accountabilities of the corporation they represent,
and not theirs. Thus, a director, officer or employee of a corporation is
generally not held personally liable for obligations incurred by the
corporation; it is only in exceptional circumstances that solidary liability will
attach to them.
Incidentally, the doctrine of piercing the corporate veil applies only in
three (3) basic instances, namely:
when the separate and distinct corporate personality defeats
public convenience, as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation;
in fraud cases, or when the corporate entity is used to justify a
wrong, protect a fraud, or defend a crime; or
is used in alter ego cases, i.e., where a corporation is
essentially a farce, since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized
and controlled and its affairs so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of
another corporation.
Piercing the corporate veil based on the alter ego theory requires
the concurrence of three elements, namely:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiff's legal right;
and
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(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of. DcITaC
The absence of any of these elements prevents piercing the corporate
veil.
The mere ownership by a single stockholder of even all or
nearly all of the capital stocks of a corporation is not by itself a
sufficient ground to disregard the separate corporate personality. To
disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established.
The control necessary to invoke the instrumentality or alter ego rule
is not majority or even complete stock control but such domination
of finances, policies and practices that the controlled corporation
has, so to speak, no separate mind, will or existence of its own, and
is but a conduit for its principal. The control must be shown to have
been exercised at the time the acts complained of took place. Moreover,
the control and breach of duty must proximately cause the injury or unjust
loss for which the complaint is made.
The piercing of the veil of corporate fiction is frowned upon
and thus, must be done with caution. It can only be done if it has been
clearly established that the separate and distinct personality of the
corporation is used to justify a wrong, protect fraud, or perpetrate a
deception. The court must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was committed
against another, in disregard of its rights; it cannot be presumed.
Olongapo City vs Subic Water and Sewerage Company, GR No. 171626,
August 6, 2014
Subic Water is a corporation. A corporation, as a juridical entity,
primarily acts through its board of directors, which exercises its corporate
powers. In this capacity, the general rule is that, in the absence of
authority from the board of directors, no person, not even its
officers, can validly bind a corporation. Section 23 of the Corporation
Code provides:
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
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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.
OCWD is just a ten percent (10%) shareholder of Subic Water. As
a mere shareholder, OCWD's juridical personality cannot be equated nor
confused with that of Subic Water. It is basic in corporation law that a
corporation is a juridical entity vested with a legal personality
separate and distinct from those acting for and in its behalf and, in
general, from the people comprising it. Under this corporate reality,
Subic Water cannot be held liable for OCWD's corporate obligations in the
same manner that OCWD cannot be held liable for the obligations
incurred by Subic Water as a separate entity. The corporate veil should
not and cannot be pierced unless it is clearly established that the separate
and distinct personality of the corporation was used to justify a wrong,
protect fraud, or perpetrate a deception.
Palm Avenue Holding Co., Inc and Palm Avenue Realty and Development
Corporation vs. Sandiganbayan, G.R. No. 173082, August 6, 2014
The Court's ruling in Presidential Commission on Good
Government v. Sandiganbayan, which remains good law, reiterates the
necessity of the Republic to actually implead corporations as
defendants in the complaint, out of recognition for their distinct and
separate personalities, failure to do so would necessarily be denying
such entities their right to due process. Here, the writ of sequestration
issued against the assets of the Palm Companies is not valid because the
suit in Civil Case No. 0035 against Benjamin Romualdez as shareholder
in the Palm Companies is not a suit against the latter. The Court has held,
contrary to the assailed Sandiganbayan Resolution in G.R. No.173082,
that failure to implead these corporations as defendants and merely
annexing a list of such corporations to the complaints is a violation of their
right to due process for it would be, in effect, disregarding their distinct and
separate personality without a hearing. Here, the Palm Companies were
merely mentioned as Item Nos. 47 and 48, Annex A of the Complaint, as
among the corporations where defendant Romualdez owns shares of
stocks. Furthermore, while the writ of sequestration was issued on
October 27, 1986, the Palm Companies were impleaded in the case only
7
in 1997, or already a decade from the ratification of the Constitution in
1987, way beyond the prescribed period.
Girly G. Ico vs. Systems Technology Institute Inc, et aL, G.R. 185100,
July 9, 2014
A corporation, as a juridical entity, may act only through its
directors, officers and employees. Obligations incurred as a result of the
directors and officers acts as corporate agents, are not their personal
liability but the direct responsibility of the corporation they represent. As a
rule, they are only solidarily liable with the corporation for the illegal
termination of services of employees if they acted with malice or bad faith.
To hold a director or officer personally liable for corporate
obligations, two requisites must concur:
(1) it must be alleged in the complaint that the director or officer
assented to patently unlawful acts of the corporation or that the
officer was guilty of gross negligence or bad faith; and
(2) there must be proof that the officer acted in bad faith.
Arco Pulp and Paper Co., Inc., and Candida Santos vs. Dan T. Lim, doing
business under the name and style of Quality Papers & Plastics Products
Enterprises, G.R. No. 206806, June 25, 2014
As a general rule, directors, officers, or employees of a
corporation cannot be held personally liable for obligations incurred
by the corporation. However, this veil of corporate fiction may be pierced
if complainant is able to prove, as in this case, that
(1) the officer is guilty of negligence or bad faith, and
(2) such negligence or bad faith was clearly and convincingly proven.
Here, petitioner Santos entered into a contract with respondent in her
capacity as the President and Chief Executive Officer of Arco Pulp and
Paper. She also issued the check in partial payment of petitioner
corporation's obligations to respondent on behalf of petitioner Arco Pulp
and Paper. This is clear on the face of the check bearing the account
name, "Arco Pulp & Paper, Co., Inc." Any obligation arising from these
acts would not, ordinarily, be petitioner Santos' personal undertaking for
which she would be solidarily liable with petitioner Arco Pulp and Paper.
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Pacific Rehouse Corporation vs. Court of Appeals, G.R. No. 199687,
March 24, 2014
The Court already ruled in Kukan International Corporation v.
Reyes that compliance with the recognized modes of acquisition of
jurisdiction cannot be dispensed with even in piercing the veil of
corporate fiction, to wit:
The principle of piercing the veil of corporate fiction, and the
resulting treatment of two related corporations as one and the same
juridical person with respect to a given transaction, is basically applied
only to determine established liability; it is not available to confer on the
court a jurisdiction it has not acquired, in the first place, over a party not
impleaded in a case. Elsewise put, a corporation not impleaded in a
suit cannot be subject to the court's process of piercing the veil of
its corporate fiction. In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any proceedings taken
against that corporation and its property would infringe on its right to due
process. Aguedo Agbayani, a recognized authority on Commercial Law,
stated as much:
"23. Piercing the veil of corporate entity applies to determination of liability
not of jurisdiction. . . .
This is so because the doctrine of piercing the veil of
corporate fiction comes to play only during the trial of the case after
the court has already acquired jurisdiction over the
corporation. Hence, before this doctrine can be applied, based on the
evidence presented, it is imperative that the court must first have
jurisdiction over the corporation. . . ."
From the preceding, it is therefore correct to say that the court
must first and foremost acquire jurisdiction over the parties; and only then
would the parties be allowed to present evidence for and/or against
piercing the veil of corporate fiction. If the court has no jurisdiction over
the corporation, it follows that the court has no business in piercing
its veil of corporate fiction because such action offends the
corporation's right to due process.
"The question of whether one corporation is merely an alter
ego of another is purely one of fact. So is the question of whether a
corporation is a paper company, a sham or subterfuge or whether
8
petitioner adduced the requisite quantum of evidence warranting the
piercing of the veil of respondent's corporate entity."
"It is a fundamental principle of corporation law that a corporation
is an entity separate and distinct from its stockholders and from other
corporations to which it may be connected. But, this separate and distinct
personality of a corporation is merely a fiction created by law for
convenience and to promote justice. So, when the notion of separate
juridical personality is used to defeat public convenience, justify
wrong, protect fraud or defend crime, or is used as a device to defeat
the labor laws, this separate personality of the corporation may be
disregarded or the veil of corporate fiction pierced. This is true
likewise when the corporation is merely an adjunct, a business conduit or
an alter ego of another corporation."
"Where one corporation is so organized and controlled and
its affairs are conducted so that it is, in fact, a mere instrumentality
or adjunct of the other, the fiction of the corporate entity of the
"instrumentality" may be disregarded. The control necessary to invoke
the rule is not majority or even complete stock control but such domination
of finances, policies and practices that the controlled corporation has, so
to speak, no separate mind, will or existence of its own, and is but a
conduit for its principal. It must be kept in mind that the control must be
shown to have been exercised at the time the acts complained of took
place. Moreover, the control and breach of duty must proximately cause
the injury or unjust loss for which the complaint is made
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiff's legal right;
and
(3) The aforesaid control and breach of duty must [have] proximately
caused the injury or unjust loss complained of.
The absence of any one of these elements prevents 'piercing the
corporate veil' in applying the 'instrumentality' or 'alter ego' doctrine, the
courts are concerned with reality and not form, with how the corporation
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operated and the individual defendant's relationship to that
operation. Hence, all three elements should concur for the alter ego
doctrine to be applicable.
Livesey vs. Binswanger Philippines, G.R. No. 177493, March 19, 2014
It has long been settled that the law vests a corporation with a
personality distinct and separate from its stockholders or members.
In the same vein, a corporation, by legal fiction and convenience, is an
entity shielded by a protective mantle and imbued by law with a character
alien to the persons comprising it. Nonetheless, the shield is not at all
times impenetrable and cannot be extended to a point beyond its reason
and policy. Circumstances might deny a claim for corporate personality,
under the "doctrine of piercing the veil of corporate fiction."
Piercing the veil of corporate fiction is an equitable doctrine
developed to address situations where the separate corporate
personality of a corporation is abused or used for wrongful
purposes. Under the doctrine, the corporate existence may be
disregarded where the entity is formed or used for non-legitimate
purposes, such as to evade a just and due obligation, or to justify a wrong,
to shield or perpetrate fraud or to carry out similar or inequitable
considerations, other unjustifiable aims or intentions, in which case, the
fiction will be disregarded and the individuals composing it and the two
corporations will be treated as identical.
Nuccio Saverios vs. Puyat, G.R. No. 186433, November 27, 2013
The rule is settled that a corporation is vested by law with a
personality separate and distinct from the persons composing it.
Following this principle, a stockholder, generally, is NOT answerable
for the acts or liabilities of the corporation, and vice versa. The
obligations incurred by the corporate officers, or other persons
acting as corporate agents, are the direct accountabilities of the
corporation they represent, and not theirs. A director, officer or
employee of a corporation is generally NOT held personally liable for
obligations incurred by the corporation and while there may be
instances where solidary liabilities may arise, these circumstances
are exceptional.
9
Incidentally, we have ruled that mere ownership by a single stockholder or
by another corporation of all or nearly all of the capital stocks of the
corporation is not, by itself, a sufficient ground for disregarding the
separate corporate personality. Other than mere ownership of capital
stocks, circumstances showing that the corporation is being used to
commit fraud or proof of existence of absolute control over the corporation
have to be proven. In short, before the corporate fiction can be
disregarded, alter-ego elements must first be sufficiently established.
In Hi-Cement Corporation v. Insular Bank of Asia and America
(later PCI-Bank, now Equitable PCI-Bank), we refused to apply the
piercing the veil doctrine on the ground that the corporation was a mere
alter ego because mere ownership by a stockholder of all or nearly all of
the capital stocks of a corporation does not, by itself, justify the disregard
of the separate corporate personality. In this cited case, we ruled that in
order for the ground of corporate ownership to stand, the following
circumstances should also be established:
(1) that the stockholders had control or complete domination of the
corporation's finances and that the latter had no separate existence with
respect to the act complained of;
(2) that they used such control to commit a wrong or fraud; and
(3) the control was the proximate cause of the loss or injury.
Abbot Laboratories vs. Alacaraz, G.R. No. 192571, July 23, 2013
Doctrine dictates that a corporation is invested by law with a
personality separate and distinct from those of the persons composing it,
such that, save for certain exceptions, corporate officers who entered into
contracts in behalf of the corporation cannot be held personally liable for
the liabilities of the latter. Personal liability of a corporate director, trustee,
or officer, along (although not necessarily) with the corporation, may
validly attach, as a rule, Only when
(1) he assents to a patently unlawful act of the corporation, or when he is
guilty of bad faith or gross negligence in directing its affairs, or when there
is a conflict of interest resulting in damages to the corporation, its
stockholders, or other persons;
(2) he consents to the issuance of watered down stocks or who, having
knowledge thereof, does not forthwith file with the corporate secretary his
written objection thereto;
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(3) he agrees to hold himself personally and solidarily liable with the
corporation; or
(4) he is made by a specific provision of law personally answerable for his
corporate action.
It is a well-settled rule that bad faith cannit be presumed and he who
alleges bad fauth has the onus of proving it
Development Bank of the Philippines vs. Hydro Resources Contractors
Corporation, GR. No. 167603, March 13, 2013
A corporation is an artificial entity created by operation of law. It
possesses the right of succession and such powers, attributes, and
properties expressly authorized by law or incident to its existence. It has a
personality separate and distinct from that of its stockholders and from
that of other corporations to which it may be connected. As a
consequence of its status as a distinct legal entity and as a result of a
conscious policy decision to promote capital formation, a corporation
incurs its own liabilities and is legally responsible for payment of its
obligations. In other words, by virtue of the separate juridical
personality of a corporation, the corporate debt or credit is not the
debt or credit of the stockholder. This protection from liability for
shareholders is the principle of limited liability.
Equally well-settled is the principle that the corporate mask may
be removed or the corporate veil pierced when the corporation is
just an alter ego of a person or of another corporation. For reasons of
public policy and in the interest of justice, the corporate veil will justifiably
be impaled only when it becomes a shield for fraud, illegality or inequity
committed against third persons.
Sarona v. National Labor Relations Commission 46 has defined
the scope of application of the doctrine of piercing the corporate
veil:
The doctrine of piercing the corporate veil applies only in three (3)
basic areas, namely:
1) defeat of public convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation;
2) fraud cases or when the corporate entity is used to justify a wrong,
protect fraud, or defend a crime; or
10
3) alter ego cases, where a corporation is merely a farce since it is a mere
alter ego or business conduit of a person, or where the corporation is so
organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another
corporation.
In this connection, case law lays down a three-pronged test to
determine the application of the alter ego theory, which is also
known as the instrumentality theory, namely:
(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit fraud
or wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiff's legal right;
and
(3) The aforesaid control and breach of duty must have proximately
caused the injury or unjust loss complained of.
The first prong is the "instrumentality" or "control" test. This test
requires that the subsidiary be completely under the control and
domination of the parent. It examines the parent corporation's relationship
with the subsidiary. It inquires whether a subsidiary corporation is so
organized and controlled and its affairs are so conducted as to make it a
mere instrumentality or agent of the parent corporation such that its
separate existence as a distinct corporate entity will be ignored. It seeks
to establish whether the subsidiary corporation has no autonomy and the
parent corporation, though acting through the subsidiary in form and
appearance, "is operating the business directly for itself."
The second prong is the "fraud" test. This test requires that the parent
corporation's conduct in using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the relationship of the plaintiff to the
corporation. It recognizes that piercing is appropriate only if the parent
corporation uses the subsidiary in a way that harms the plaintiff
creditor. As such, it requires a showing of "an element of injustice or
fundamental unfairness."
The third prong is the "harm" test. This test requires the plaintiff to show
that the defendant's control, exerted in a fraudulent, illegal or otherwise
unfair manner toward it, caused the harm suffered. A causal connection
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between the fraudulent conduct committed through the instrumentality of
the subsidiary and the injury suffered or the damage incurred by the
plaintiff should be established. The plaintiff must prove that, unless the
corporate veil is pierced, it will have been treated unjustly by the
defendant's exercise of control and improper use of the corporate form
and, thereby, suffer damages.
To summarize, piercing the corporate veil based on the alter
ego theory requires the concurrence of three elements: control of the
corporation by the stockholder or parent corporation, fraud or fundamental
unfairness imposed on the plaintiff, and harm or damage caused to the
plaintiff by the fraudulent or unfair act of the corporation. The absence of
any of these elements prevents piercing the corporate veil.
This Court finds that none of the tests has been satisfactorily met in this
case. In applying the alter ego doctrine, the courts are concerned
with reality and not form, with how the corporation operated and the
individual defendant's relationship to that operation. With respect to
the control element, it refers not to paper or formal control by majority or
even complete stock control but actual control which amounts to "such
domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its
own, and is but a conduit for its principal." In addition, the control must be
shown to have been exercised at the time the acts complained of took
place.
While ownership by one corporation of all or a great majority of
stocks of another corporation and their interlocking directorates may serve
as indicia of control, by themselves and without more, however, these
circumstances are insufficient to establish an alter ego relationship or
connection between DBP and PNB on the one hand and NMIC on the
other hand, that will justify the puncturing of the latter's corporate cover.
This Court has declared that "mere ownership by a single stockholder
or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the
separate corporate personality." This Court has likewise ruled that the
"existence of interlocking directors, corporate officers and shareholders is
not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations."
11
Stronghold Insurance Company, Inc. vs. Tomas Cuenca, et. al., G.R. No.
173297, March 6, 2013
Given the separate and distinct legal personality of Arc Cuisine,
Inc., the Cuencas and Tayactac lacked the legal personality to claim the
damages sustained from the levy of the former's properties.
The injury complained of is thus primarily to the corporation,
so that the suit for the damages claimed should be by the
corporation rather than by the stockholders (3 Fletcher, Cyclopedia of
Corporation pp. 977-980). The stockholders may not directly claim
those damages for themselves for that would result in the appropriation
by, and the distribution among them of part of the corporate assets before
the dissolution of the corporation and the liquidation of its debts and
liabilities, something which cannot be legally done in view of section 16 of
the Corporation Law, which provides:
No shall corporation shall make or declare any stock or bond dividend or
any dividend whatsoever except from the surplus profits arising from its
business, or divide or distribute its capital stock or property other than
actual profits among its members or stockholders until after the payment
of its debts and the termination of its existence by limitation or lawful
dissolution.
xxx xxx xxx
In the present case, the plaintiff stockholders have brought the
action not for the benefit of the corporation but for their own benefit,
since they ask that the defendant make good the losses occasioned by his
mismanagement and pay to them the value of their respective
participation in the corporate assets on the basis of their respective
holdings. Clearly, this cannot be done until all corporate debts, if
there be any, are paid and the existence of the corporation
terminated by the limitation of its charter or by lawful dissolution in
view of the provisions of section 16 of the Corporation Law.
- Heirs of Fe Tan Uy, represented by her heir, Mauling Uy Lim vs. 3 of 22
International Exchange Bank, G.R. No. 166282 & 83, February 13, 2013 -
Park Hotel vs Soriano, GR No. 171118, September 10, 2012 Gold Line
Tours vs. Heirs of Maria Concepcion Lacsa, GR No. 159108, June 18,
2012 Ramirez, et aL vs. Mar Fishing Co., Inc., G.R. No. 168208, January
Corporation Law 2016: JVL & JSD
13, 2012 - Jiao, et al. vs. NLRC, et aL, 670 SCRA 184 [2012] - Prince
Transport, Inc. vs. Garcia, G.R. No. 167291, January 12, 2011 Marc ll
Marketing, Inc. vs. Joson, 662 SCRA 35 [2011] - Hacienda Luisita, Inc. vs.
Presidential Agrarian Reform Council, 660 SCRA 525 [2011] - Kukan
International Corporation vs. Hon. Judge Amor Reyes, G.R. No. 182729,
September 29, 2010 Continental Cement Corp. vs. Asea Brown Boveri,
659 SCRA 137 [2010] - Perforated Materials, Inc., et aL vs. Diaz, 633
SCRA 258 [2010] - Queensland-Tokyo Commodities, Inc. et aL vs.
George, 630 SCRA 304 [2010] - Wensha Spa Center, Inc. vs. Yung, 628
SCRA 311 [2010] - Prisma Construction and Devt. Corp. vs. Menchavez,
614 SCRA 590 [2010] - Yamamoto vs. Nishino Leather Industries, 551
SCRA 447 [2008] - Lim vs. Court of Appeals 323 SCRA 102 [2000] - test
in determining the applicability of the doctrine of piercing the veil of
corporate fiction. - Luxuria Homes, Inc. vs. Court of Appeals, 302 SCRA
315 (1999)
Notes:
(1) Moral Damages cannot be awarded in favor of corporations because
they do not have feelings and mental state. They may not even claim
moral damages for besmirched reputation (NAPOCOR v. Philipp Brothers
Oceanic, 2001).However, a corporation can recover moral damages under
Art 2219 (7) if it was the victim of defamation (Pilipinas Broadcasting
Network v. Ago Medical and Educational Center, 2005).
(2) Criminal Liability Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against criminally because it cannot commit
a crime in which personal violence or malicious intent is required. Criminal
action is limited to the corporate agents guilty of an act amounting to a
crime and never against the corporation itself (West Coast Life Ins. Co. v.
Hurd [1914], Time Inc. v. Reyes, 1971)
(2) Doctrine of Separate Personality: A corporation, upon coming into
existence, is invested by law with a personality separate and distinct from
those persons composing it as well as from any other legal entity to which
it may be related. (Yutivo Sons Hardware v. CTA, 1961)
12
Liability for Torts and Crimes
Alfredo Ching vs. the Secretary of Justice, et aL, G. R. No. 164317,
February 6, 2006 Singian, Jr. vs. Sandiganbayan G.R. Nos. 160577-94,
December 16, 2005 The Executive Secretary, et al. vs. Court of Appeals,
et al., G.R. No. 131719, May 25, 2004 Edward C. Ong vs. the Court of
Appeals and the People of the Philippines, G.R. No. 119858, April 29,
2003 Naguiat vs. National Labor Relations Commission G.R. No. 116123,
March 13, 1997 Philippine National Bank vs. Court of Appeals, et aL, G.R.
No. L-27155, May 18, 1978
Recovery of Moral Damages - Herman C. Crystal, et aL vs. Bank of the
Philippine Islands, G.R. No. 172428, November 28, 2008 Manila Electric
Company vs. T.E.A.M. Electronics Corporation, Technology Electronics
Assembly and Management Pacific Corporation; and Ultra Electronics
Instruments, Inc., G.R. No. 131723, December 13, 2007 Filipinas
Broadcasting Network, Inc.,vs. AGO Medical And Educational Center-
Bicol Christian College of Medicine, (AMEC-BCCM) and Angelita F. Ago,
G.R. No. 141994, January 17, 2005
2 It is created by operation of law
Sec. 16, Art. XII, 1987 Constitution
The Congress shall not, except by general law, provide for the formation,
organization, or regulation of private corporations. Government-owned or
controlled corporations may be created or established by special charters
in the interest of the common good and subject to the test of economic
viability.
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or
purpose, created by law; their personality begins as soon as they have
been constituted according to law;
(3) Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member. (35a)
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Notes:
Mere consent of the parties to form a corporation is not sufficient. The
State must give its consent either through a special law (in case of
government corporations) or a general law (i.e., Corporation Code in case
of private corporations).
A corporation comes into existence upon the issuance of the certificate of
incorporation. Then and only then will it acquire juridical personality to sue
and be sued, enter into contracts, hold or convey property or perform any
legal act in its own name (Ladia).
3 A corporation has a right of succession
Sec. 11. . Corporate term. - A corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner
dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code;
Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission.
Sec. 116. Religious societies. - Any religious society or religious
order, or any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution, rules,
regulations, or discipline of the religious denomination, sect or church of
which it is a part, or by competent authority, may, upon written consent
and/or by an affirmative vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership, incorporate for the administration
of its temporalities or for the management of its affairs, properties and
estate by filing with the Securities and Exchange Commission, articles
of incorporation verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious society or religious
order, or diocese, synod, or district organization of the religious
denomination, sect or church, setting forth the following:
13
1. That the religious society or religious order, or diocese, synod, or
district organization is a religious organization of a religious denomination,
sect or church;
2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the
body;
3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is not
forbidden by competent authority or by the constitution, rules, regulations
or discipline of the religious denomination, sect, or church of which it
forms a part;
4. That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its
affairs, properties and estate;
5. The place where the principal office of the corporation is to be
established and located, which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the
religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization, the board of trustees to be not
less than five (5) nor more than fifteen (15). (160a)
Note:
Its continued existence during its stated term cannot be affected by any
change in the members or stockholders or by any transfer of shares by a
stockholder to a 3rd person.
4 It has the powers, attributes and properties expressly authorized
by law or incidental to its existence
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in
the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
Corporation Law 2016: JVL & JSD
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;
6. In case of stock corporations, to issue or sell stocks to subscribers
and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to
the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public welfare
or for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of
its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary
to carry out its purpose or purposes as stated in the articles of
incorporation.
Note:
A corporation has no power except those expressly conferred on it by the
Corporation Code and by its articles of incorporation, those which may be
incidental to such conferred powers, those that are implied from its
existence, and those reasonably necessary to accomplish its purposes. In
turn, a corporation exercises said powers through its Board of Directors
and/or its duly authorized officers and agents. (Monfort Hermanos
Agricultural Dev. Corp. v. Monfort III, 2004).
14
 Ryuichi Yamamoto vs. Nishino Leather Industries, Inc. and Ikuo Nishino,
G.R. No. 150283, April 16, 2008 International Express Travel & Tours vs.
Court of Appeals, 373 SCRA 474 (2002) Rebecca Boyer-Roxas and
Guillermo Roxas vs. Hon. Court of Appeals and Heirs of Eugenia V.
Roxas, Inc., G.R. No. 100866, July 14, 1992
C. Alternative Forms of Business Organizations (Differentiated From
a Corporation):
1. Single Proprietorship - A form of business organization with only one
proprietary owner; a single individual conducts business under his own
name.
2. Partnerships
Art. 1767 (Civil Code) By the contract of partnership two or more
persons bind themselves to contribute money, property, industry to a
common fund, with the intention of dividing the profits among themselves.
Limited Partnership
Art. 1844 (Civil Code) A limited partnership is one formed by two
or more persons under the provisions of the following articles, having as
members one or more general partners and one or more limited partners.
The limited partners as such shall NOT be bound by the obligations of the
partnership.
3. Joint Ventures
Aurbach v Sanitary Wares, December 15, 1989 - "generally understood to
mean an organization formed for some temporary purpose. It is in fact
hardly distinguishable from the partnership, since their elements are
similar community of interest in the business, sharing of profits and losses,
and a mutual right of control. The main distinction cited by most opinions
in common law jurisdictions is that the partnership contemplates a general
business with some degree of continuity, while the joint venture is formed
for the execution of a single transaction, and is thus of a temporary nature.
This observation is not entirely accurate in this jurisdiction, since under the
Civil Code, a partnership may be particular or universal, and a particular
Corporation Law 2016: JVL & JSD
partnership may have for its object a specific undertaking. It would seem
therefore that under Philippine law, a joint venture is a form of partnership
and should thus be governed by the law of partnerships. The Supreme
Court has however recognized a distinction between these two business
forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint venture with
others."
4. Business Trusts -
Art. 1440 NCC (1442 CC) A legal relation whereby one person,
called the Trustor, conveys a property in confidence to another, called the
trustee, for the benefit of a person called the beneficiary.
5. Cooperatives -
Sec. 3, R.A. No. 6938, are dully registered association of persons
with a common bond of interest, who have voluntarily joined together to
achieve lawful common social and economic end, making equitable
contributions to the capital required and accepting a fair share of the risks
and benefits of the undertaking in accordance with the universally
accepted cooperative principles.
Benny Hung vs. BPI Finance Corporation, G.R. No. 182398, July 20, 2010
III. CLASSIFICATIONS OF CORPORATIONS
A. STOCK CORPORATIONS
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.
15
Notes:
It is organized for profit. The governing body of a stock corporation is
usually the Board of Directors (except in certain instances, e.g. close
corporations).
Republic vs. City of Paranaque, 677 SCRA 246 [2012]
B. NON-STOCK CORPORATIONS
Sec. 87. Definition. - For the purposes of this Code, a non-stock
corporation is one where no part of its income is distributable as
dividends to its members, trustees, or officers, subject to the provisions
of this Code on dissolution: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized, subject to the
provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title. (n)
Sec. 88. Purposes. - Non-stock corporations may be formed or
organized for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes, like
trade, industry, agricultural and like chambers, or any combination thereof,
subject to the special provisions of this Title governing particular classes
of non-stock corporations. (n)
Notes:
-All other corporations are non-stock corporations (Sec. 3)
-Not organized for profit.
-Its governing body is usually the Board of Trustees.
There are two elements for a stock corporation to exist:
(1) Capital stock divided into shares, and
(2) An authority to distribute to the holders of such shares, dividends or
allotments of the surplus profits on the basis of shares held. (Test of WON
a stock corporation)
Corporation Law 2016: JVL & JSD
Even if there is a statement of capital stock, the corporation is still NOT a
stock corporation if dividends are NOT supposed to be declared, that is,
there is no distribution of retained earnings. (CIR v. Club Filipino de Cebu,
1962)
Under Sec. 43 of the Corporation Code, a corporation is deemed to have
the power to declare dividends. Thus, so long as the corporation has
capital stock and there is no prohibition in its Articles of Incorporation or in
its by-laws for it to declare dividends, such corporation is a stock
corporation.
C. CLOSE CORPORATION
Sec. 96. Definition and applicability of Title. - A close
corporation, within the meaning of this Code, is one whose articles of
incorporation provide that:
(1) All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20);
(2) all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall NOT be deemed a
close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except
mining or oil companies, stock exchanges, banks, insurance companies,
public utilities, educational institutions and corporations declared to be
vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
San Juan Structural and Steel Fabricators, Inc., 296 SCRA 631 [1998].
16
D. FOREIGN CORPORATION
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. (n)
E. RELIGIOUS CORPORATION
Sec. 109. Classes of religious corporations. - Religious
corporations may be incorporated by one or more persons. Such
corporations may be classified into corporations sole and religious
societies.
Religious corporations shall be governed by this Chapter and by the
general provisions on non-stock corporations insofar as they may be
applicable. (n)
1. Sec. 110. Corporation sole. - For the purpose of administering
and managing, as trustee, the affairs, property and temporalities
of any religious denomination, sect or church, a corporation sole
may be formed by the chief archbishop, bishop, priest, minister,
rabbi or other presiding elder of such religious denomination, sect
or church. (154a)
Iglesia Evangelista Metodista en las Islas Filipinas, Inc. et al. vs. Bishop
Nathanael Lazaro, et al., 624 SCRA 224 [2010]
Republic vs. Iglesia Ni Cristo 127 SCRA 687
2. Sec. 116. Religious societies. - Any religious society or
religious order, or any diocese, synod, or district organization
of any religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations, or discipline of the
religious denomination, sect or church of which it is a part, or by
competent authority, may, upon written consent and/or by an
affirmative vote at a meeting called for the purpose of at least two-
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thirds (2/3) of its membership, incorporate for the administration of
its temporalities or for the management of its affairs, properties
and estate by filing with the Securities and Exchange
Commission, articles of incorporation verified by the affidavit of the
presiding elder, secretary, or clerk or other member of such
religious society or religious order, or diocese, synod, or district
organization of the religious denomination, sect or church, setting
forth the following:
1. That the religious society or religious order, or diocese, synod, or
district organization is a religious organization of a religious
denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their
written consent or have voted to incorporate, at a duly convened
meeting of the body;
3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is not
forbidden by competent authority or by the constitution, rules,
regulations or discipline of the religious denomination, sect, or church
of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its
affairs, properties and estate;
5. The place where the principal office of the corporation is to be
established and located, which place must be within the Philippines;
and
6. The names, nationalities, and residences of the trustees elected by
the religious society or religious order, or the diocese, synod, or
district organization to serve for the first year or such other period as
may be prescribed by the laws of the religious society or religious
order, or of the diocese, synod, or district organization, the board of
trustees to be not less than five (5) nor more than fifteen (15). (160a)
F. EDUCATIONAL CORPORATIONS
Sec. 106. Incorporation. - Educational corporations shall be
governed by special laws and by the general provisions of this Code. (n)
17
 Sec. 107. Pre-requisites to incorporation. - Except upon
favorable recommendation of the Ministry of Education and Culture, the
Securities and Exchange Commission shall not accept or approve the
articles of incorporation and by-laws of any educational institution. (168a)
Sec. 108. Board of trustees. - Trustees of educational institutions
organized as non-stock corporations shall NOT be less than five (5) nor
more than fifteen (15): Provided, however, That the number of trustees
shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws,
the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify themselves
that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the
expiration of a particular term, shall hold office only for the unexpired
period. Trustees elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and
authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations.
(169a)
B.P. Bldg 232, the Education Act of 1982
Section 25. Establishment of Schools - ALL schools shall be
established in accordance with law. The establishment of new national
schools and the conversion of existing schools from elementary to
national secondary or tertiary schools shall be by law: Provided, That any
private school proposed to be established must incorporate as an non-
stock educational corporation in accordance with the provisions of the
Corporation Code of the Philippines. This requirement to incorporate may
be waived in the case of family-administered pre-school institutions.
Government assistance to such schools for educational programs shall be
used exclusively for that purpose.
G. GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS
(GOCCS)
Section 16, Article XII, 1987 Constitution - The Congress shall
not, except by general law, provide for the formation, organization, or
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regulation of private corporations. Government-owned or controlled
corporations may be created or established by special charters in the
interest of the common good and subject to the test of economic viability.
Funa vs. Manila Economic and Cultural Office, GR. No. 193462, February
4, 2014 - Philippine Society for the Prevention of Cruelty to Animals vs.
COA, 534 SCRA 112 [2007] - - Boy Scouts of the Philippines vs.
Commission on Audit, G.R. No. 177131, June 7, 2011 - Carandang vs.
Desierto, G.R. No. 148076, January 12, 2011 - Liban vs. Gordon, GR No.
175352, January 10, 2011 - Manila International Airport Authority vs. CA,
495 SCRA 591 [20061 - Feliciano vs. COA, 419 SCRA 363 [2003] - NHA
vs. Heirs of Guivelindo, 404 SCRA 389 [2003] - Baluyot vs. Holganza, 325
SCRA 248 [2000] - Bliss Dev. Corp. Employees Union v. Calleja, 237
SCRA 271 (1994)
H. 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.
Sawadjaaan vs. CA, 459 SCRA 516 [2005] Hall vs. Piccio, 86 Phil. 603
(1950)
I. 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
or arising as a result thereof: Provided, however, That when any such
ostensible corporation is sued on any transaction entered by it as a
corporation or on any tort committed by it as such, it shall NOT be
allowed to use as a defense its lack of corporate personality.
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.
18
Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc. 317 SCRA 728
[1999]
J. PUBLIC CORPORATION (CIVIL CODE)
Art. 44. The following are juridical persons:
(1) The State and its political subdivisions;
(2) Other corporations, institutions and entities for public interest or
purpose, created by law; their personality begins as soon as they have
been constituted according to law;
(3) Corporations, partnerships and associations for private interest or
purpose to which the law grants a juridical personality, separate and
distinct from that of each shareholder, partner or member. (35a)
Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the
preceding article are governed by the laws creating or recognizing them.
Private corporations are regulated by laws of general application on the
subject.
Partnerships and associations for private interest or purpose are
governed by the provisions of this Code concerning partnerships.
Boy Scouts of the Philippines vs. COA, 651 SCRA 146 [2011] Macasaet
vs. Francisco, G.R. No. 156759, June 5, 2013 International Express
Travel & Tour Services, Inc. vs. Hon. Court of Appeals, G.R. No. 119002,
October 19, 2000 Reynaldo M. Lozano vs. Hon. Eliezer R. De los Santos,
Presiding Judge, RTC, Br. 58, Angeles City; and Antonio Anda, G.R. No.
125221, June 19, 1997 People of the Philippines vs. Engr. Carlos Garcia,
G.R. No. 117010, April 18, 1997 Pioneer Surety & Insurance Corporation
vs. Court of Appeal, 175 SCRA 668 (1989)
K. NATIONALITY OF CORPORATIONS
1. PLACE OF INCORPORATION TEST
The corporation is a national of the country under whose laws it is
organized or incorporated (Sec. 123).
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
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Philippines after it shall have obtained a license to transact business in
this country in accordance with this Code and a certificate of authority
from the appropriate government agency. (n)
Domestic corporations organized and governed under and by Philippine
laws
Foreign Corporations organized under laws other than those of the
Philippines and can operate only in the territory of the state under whose
laws it was formed. However, they may be licensed to do business here
(Campos).
2. CONTROL TEST
A corporation shall be considered a Filipino corporation if the
Filipino ownership of its capital stock is at least 60%, and where the 60-40
Filipino-alien equity ownership is NOT in doubt (SEC Opinion dated 6
November 1989; DOJ Opinion No. 18, s. 1989).
Therefore, its shareholdings in another corporation shall be
considered to be of Filipino nationality when computing the percentage of
Filipino equity of that second corporation (SEC Opinion dated 23
November 1993).
Control test is applied in the following:
Exploitation of Natural Resources - Section 2, Art. XII CONST.
only Filipino Citizens or Corporations whose capital stock are at
least 60% owed by Filipinos can qualify to exploit natural
resources.
Public Utilities - Sec. 11, Art XII, CONST. xxx no franchise,
certificate or any other form of authorization for the operation of a
public utility shall be granted except to citizens of the Philippines
or to corporations or associations organized under the laws of the
Philippines at least 60% of whose capital is owned by such
citizens.
War-time Test - If the controlling stockholders are enemies, then
the nationality of the corporation will be base on the citizenship of
the majority stockholders in times of war (Filipinas Compania de
Seguros v Christian Huenfeld, 1951) .
Investment Test - Sec. 3(a) and (b), Foreign Investments Act of
1991 (RA7042). It considers for purpose of investment a
19
 Philippine National as a corporation organized under the laws of
the Philippines of which at least 60% of the capital stock
outstanding and entitled to vote is owned and held by citizens of
the Philippines, or a trustee of the funds for pension or other
employee retirement or separation benefits, where the trustee is a
Philippine national and at least 60% of the fund will accrue to the
benefit of Philippine nationals.
Note: In the recently decided case of Gamboa vs. Teves (G.R. No.
176579, June 28, 2011), the SC ruled as follows:
The term "capital" in Section 11, Article XII of the 1987
Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-
voting preferred shares).
The 60 percent of the "capital" assumes, or should result in,
"controlling interest" in the corporation. Compliance with the required
Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the voting rights of
which have been assigned or transferred to aliens cannot be considered
held by Philippine citizens or Philippine nationals.
Individuals or juridical entities not meeting the aforementioned
qualifications are considered as non-Philippine nationals.
In the later 2012 case of Gamboa v. Teves, (G.R. No. 176579, October
9, 2012) The SC reversed the previous ruling and held that:
Since the constitutional requirement of at least 60 percent Filipino
ownership applies not only to voting control of the corporation but also to
the beneficial ownership of the corporation, it is therefore imperative that
such requirement apply uniformly and across the board to all classes of
shares, regardless of nomenclature and category, comprising the capital
of a corporation. Under the Corporation Code, capital stock consists of
all classes of shares issued to stockholders, that is, common shares
Corporation Law 2016: JVL & JSD
as well as preferred shares, which may have different rights,
privileges or restrictions as stated in the articles of incorporation.
Since a specific class of shares may have rights and privileges or
restrictions different from the rest of the shares in a corporation, the 60-40
ownership requirement in favor of Filipino citizens in Section 11, Article XII
of the Constitution must apply not only to shares with voting rights but also
to shares without voting rights. Preferred shares, denied the right to vote
in the election of directors, are anyway still entitled to vote on the eight
specific corporate matters mentioned above under Section 6 of the
Corporation Code. Thus, if a corporation, engaged in a partially
nationalized industry, issues a mixture of common and preferred non-
voting shares, at least 60 percent of the common shares and at least 60
percent of the preferred nonvoting shares must be owned by Filipinos. Of
course, if a corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by Filipinos.
In short, the 60-40 ownership requirement in favor of Filipino citizens
must apply separately to each class of shares, whether common,
preferred non-voting, preferred voting or any other class of shares. This
uniform application of the 60- 40 ownership requirement in favor of Filipino
citizens clearly breathes life to the constitutional command that the
ownership and operation of public utilities shall be reserved exclusively to
corporations at least 60 percent of whose capital is Filipino-owned.
Applying uniformly the 60- 40 ownership requirement in favor of Filipino
citizens to each class of shares, regardless of differences in voting rights,
privileges and restrictions, guarantees effective Filipino control of public
utilities, as mandated by the Constitution.
Heirs of Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et
al., G.R. No. 176579, October 9, 2012 Wilson P. Gamboa vs. Finance
Secretary Margarito B. Teves, et al., G.R. No. 176579, June 28, 2011
Marissa R. Unchuan vs. Antonio J.P. Lozada, Anita Lozada and the
Register of Deeds of Cebu City, G.R. No. 172671, April 16, 2009
3. GRANDFATHER RULE
Method used to determine the nationality of a corporation by which
the percentage of Filipino equity in corporations engaged in nationalized
and/or partly nationalized areas of activities, provided for under the
constitution and other nationalization laws, is computed, in cases where
20
corporate shareholders are present in the situation, by attributing the
nationality of the second or even subsequent tier of ownership to A. Persons Involved in Incorporation
determine the nationality of the corporate stockholder. (Villanueva, 2003).
It involves the computation of Filipino ownership of a corporation 1. Promoters
in which another corporation of partly Filipino and partly foreign equity
owns capital stock. The percentage of shares held by the second Sec. 3.10, The Securities Regulation Code, Rep. Act No. 8799
corporation in the first is multiplied by the latters own Filipino equity, and Promoter" is a person who, acting alone or with others, takes initiative in
the product of these percentages is determined to be the ultimate Filipino founding and organizing the business or enterprise of the issuer and
ownership of the subsidiary corporation (SEC Opinion re; Silahis Intl Hotel receives consideration therefor.
May 4, 1987).
The Grandfather Rule must be applied to accurately determine the LIABILITY OF PROMOTER
actual participation, both direct and indirect, of foreigners in a corporation General rule: The promoter binds himself PERSONALLY &
engaged in a nationalized activity or business. assumes the responsibility of looking to the proposed corporation for
Compliance with the constitutional limitation(s) on engaging in reimbursement.
nationalized activities must be determined by ascertaining if 60% of the Exceptions:
investing corporations outstanding capital stock is owned by Filipino (1) Express or implied agreement to the contrary
citizens, or as interpreted, by natural or individual Filipino citizens. If such (2) Novation, not merely adoption or ratification of the
investing corporation is in turn owned to some extent by another investing contract
corporation, the same process must be observed. One must not stop until
the citizenships of the individual or natural stockholders of layer after layer LIABILITY OF CORPORATION FOR PROMOTERS CONTRACTS
of investing corporations have been established, the very essence of the General rule: A corporation is NOT bound by the contract. A
Grandfather Rule (Redmont Consolidated Mines, Corp v. McArthur Mining, corporation, until organized, has no life and no legal existence. It could not
Inc., et al., 2010). have had an agent (the promoter) who could legally bind it. (Cagayan
SEC formula: SEC Letter Opinion Shares belonging to Fishing Development Co., Inc. v. Sandiko)
corporations or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of Philippine Exceptions: A corporation may be bound by the contract if it
nationality, but if the percentage of Filipino ownership in the makes the contract its own by:
corporation or partnership is less than 60% only the number of
shares corresponding to such percentage shall be considered as (1) Adoption or ratification of the ENTIRE contract after
of Philippine nationality. incorporation.
Notes:
Narra Nickel Mining and Development Corporation, et al. vs. Redmont (a) Power of the corporation to adopt a contract must
Consolidated Mines Corporation, G.R. No. 199580, January 28, 2015 be understood to be limited to such contracts as
Narra Nickel Mining and Development Corporation, et al., vs. Redmont the corporation itself, after its organization, would be authorized to
Consolidated Mines Corporation, G.R. No. 199580, April 21, 2014 make. (Builders Duntile Co. v. Dunn Mfg. Co.)
(b) Novation or the intent to novate the original
contract is required to adopt or ratify the pre-
IV. FORMATION OF CORPORATIONS incorporation contract. (Campos, 1990)

21
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 (2) Acceptance of benefits under the contract with knowledge of
the terms thereof.
(3) Performance of its obligation under the contract
Cagayan Fishing Development Co., Inc. vs. Sandiko, 65 Phil. 223 [1937]
Rizal Light & Ice Co., Inc. vs. Mun. of Morong, 25 SCRA 302, 306 [1968]
Fletcher, Cyclopedia on Corporation, Permanent H., Vol I, Chap. 9, sec.
189, p.335 - a "promoter is an organizer and projector who brings
persons to unite in forming a corporation, "promoter" is not the same
as "incorporator; any person, who acting alone or in conjunction with
one or more persons, directly or indirectly takes initiative in
founding or organizing the business or enterprise of an issuer."
Sec. 60. Subscription contract. - Any contract for the acquisition
of unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or some
other contract. (n)
Sec. 61. Pre-incorporation subscription. - A subscription for
shares of stock of a corporation still to be formed shall be irrevocable for
a period of at least six (6) months from the date of subscription,
unless all of the other subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize within said period or
within a longer period as may be stipulated in the contract of subscription:
Provided, That no pre-incorporation subscription may be revoked after the
submission of the articles of incorporation to the Securities and Exchange
Commission. (n)
2. Incorporators
Sec. 10. Number and qualifications of incorporators. - Any
number of natural persons not less than five (5) but not more than fifteen
(15), all of legal age and a majority of whom are residents of the
Philippines, may form a private corporation for any lawful purpose or
purposes. Each of the incorporators of s stock corporation must own or be
a subscriber to at least one (1) share of the capital stock of the
corporation.
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NUMBER AND QUALIFICATIONS OF INCORPORATORS
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a subscriber to at least 1 share of
the capital stock of the corporation (Sec. 10)
i. Natural Persons - except that Sec. 4, Rural Banks Act (R.A. No.
7353), allows duly established cooperatives and corporations primarily
organized to hold equities in rural banks may organize a rural bank
ii. Capacity to contract
iii. At least five (5) incorporatiors but NOT more than 15
iv. Residence requirement
Sec. 5., Rural Banks Act (R.A. No. 7353), ALL members of the
Board of Directors of the rural bank shall be citizens of the Philippines at
the time of their assumption to office: Provided, however, That nothing in
this Act shall be construed as prohibiting any appointive or elective public
official from serving as director, officer, consultant or in any capacity in the
bank.
No Director or officer of any rural bank shall, either directly or
indirectly, for himself or as the representative or agent of another borrow
any of the deposits or funds of such banks, nor shall he become a
guarantor, indorser, or surety for loans from such bank to others, or in any
manner be an obligor for money borrowed from the bank or loaned by it
except with the written approval of the majority of the directors of the
bank, excluding the director concerned. Any such approval shall be
entered upon the records of the corporation and a copy of such entry shall
be transmitted forthwith to the appropriate supervising department. The
director/officer of the bank who violates the provisions of this section shall
be immediately dismissed from his office and shall be penalized in
accordance with Section 26 of this Act.
The Monetary Board may regulate the amount of credit
accommodations that may be extended directly to the directors, officers or
stockholders of rural banks of banking institutions. However, the
outstanding credit accommodations which a rural bank may extend to
each of its stockholders owning two percent (2%) or more of the
subscribed capital stock, its directors, or officers shall be limited to an
22
amount equivalent to the respective outstanding deposits and book value
of the paid-in capital contributions in the bank.
Section 11, Art. XVI, 1987 Constitution
(1) The ownership and management of mass media shall be
limited to citizens of the Philippines, or to corporations,
cooperatives or associations, wholly-owned and managed by such
citizens. The Congress shall regulate or prohibit monopolies in
commercial mass media when the public interest so requires. No
combinations in restraint of trade or unfair competition therein
shall be allowed.
(2) The advertising industry is impressed with public interest, and
shall be regulated by law for the protection of consumers and the
promotion of the general welfare.
ONLY Filipino citizens or corporations or associations at least
seventy (70) per centum of the capital of which is owned by
such citizens shall be allowed to engage in the advertising
industry. The participation of foreign investors in the governing
body of entities in such industry shall be limited to their
proportionate share in the capital thereof, and all the executive
and managing officers of such entities must be citizens of the
Philippines.
Sec. 5, Retail Trade Liberalization Act of 2000 (R.A. No. 8762)
Foreign Equity Participation. - Foreign-owned partnerships,
associations and corporation formed and organized under the
laws of the Philippines may, upon registration with the Securities
and Exchange Commission (SEC) and the Department of Trade
and Industry (DTI), or in case of foreign owned single
proprietorships, with the DTI, Engage or invest in the retail trade
business, subject to the following categories.
Category A Enterprises with paid-up capital of the equivalent
in Philippine Peso of the than Two million five hundred thousand
US dollars (US$2,500,000.00) shall be reserved exclusively for
Filipino citizens and corporations wholly owned by Filipino
citizens.
Category B Enterprises with a minimum paid-up capital of the
equivalent in Philippine Pesos of two million five hundred
thousand US dollar (US$2,500,000.00) but less than Seven
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million five hundred thousand US dollars (US$7,500,000.00)
may be wholly owned by foreigners except for the first two (2)
years after the effectivity of this Act wherein foreign participation
shall be limited to not more than sixty percent (60%) of total
equity.
Category C Enterprises with a paid-up capital of the equivalent
in Philippine Pesos of Seven million five hundred thousand US
dollars (US$7,500,000.00), or more may be wholly owned by
foreigners: Provided, however, That in no case shall the
investments for establishing a store in vestments for establishing a
store in Categories B and C be less than the equivalent in
Philippine pesos of Eight hundred thirty thousand US dollars
(US$830,000.00).
Category D Enterprises specializing in high-end or luxury
products with a paid-up capital of the equivalent in Philippine
Pesos of Two hundred fifty thousand US dollars (US$250,000.00)
per store may be wholly owned by foreigners.
The foreign investor shall be required to maintain in the
Philippines the full amount of the prescribed minimum capital
unless the foreign investor has notified the SEC and the DTI of its
intention to repatriate its capital and cease operations in the
Philippines. The actual use in Philippine operations of the inwardly
remitted minimum capital requirement shall be monitored by the
SEC.
Failure to maintain the full amount of the prescribed minimum
capital prior to notification of the SEC and the DTI, shall subject
the foreign investor to penalties or restrictions on any future
trading activities/business in the Philippines.
Foreign retail stores shall secure a certification from the Bangko
Sentral ng Pilipinas (BSP) and the DTI, which will verify or confirm
inward remittance of the minimum required capital investments.
B. Articles of Incorporation
Lanuza vs. CA, 454 SCRA 54 [2005] - Alicia E. Gala, et al. vs. Ellice Agro-
Industrial Corporation, et al., G.R. No. 156819, December 11, 2003
23

1. Form and Contents Required - Sec. 14 and 15
Hyatt Elevators and Escalators Corporation vs. Goldstar Elevators Phils.
Inc., G.R. No. 161026, October 24, 2005
a. Corporate Name
Sec. 18. Corporate name. - NO corporate name may be allowed by
the Securities and Exchange Commission if the proposed name is
identical or deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law or is patently
deceptive, confusing or contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.
Sec. 19. Commencement of corporate existence. - A private
corporation formed or organized under this Code commences to have
corporate existence and juridical personality and is deemed incorporated
from the date the Securities and Exchange Commission issues a
certificate of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors shall constitute
a body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period
is extended or the corporation is sooner dissolved in accordance with law.
Sec. 14. Contents of the articles of incorporation. - All corporations
organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages duly
signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this
Code or by special law:
(1) The name of the corporation; x x x
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
(1) To sue and be sued in its corporate NAME; x x x
Corporation Law 2016: JVL & JSD
(11 Zuellig Freight and Cargo Systems vs. National Labor Relations
Commission, et al., G.R. No. 157900, July 22, 2013 United Church of
Christ in the Phils Inc. vs. Bradford United Church of Christ, 674 SCRA 92
[2012] - P.C. Javier & Sons, Inc., et al. vs. CA, 462 SC RA 36 [2005] --
Industrial Refractories Corporation of the Philippines vs. Court of Appeals,
Securities and Exchange Commission and Refractories Corporation of the
Philippines, G.R. No. 122174, October 3, 2002 Laureano Investment and
Development Corporation v. Court of Appeals, 272 SCRA 253 [1997] -
Pison-Arceo Agricultural Development Corp. v. NLRC, 279 SCRA 312
[1997]
SEC requires a Name Verification Slip and a Consent to Change
Name to be submitted as part of incorporation papers. See also SEC
Guidelines in the Approval of Corporate and Partnership Names (1977).
b. Purpose Clause
Sec. 14. Contents of the articles of incorporation. - All
corporations organized under this code shall file with the Securities and
Exchange Commission articles of incorporation in any of the official
languages duly signed and acknowledged by all of the incorporators,
containing substantially the following matters, except as otherwise
prescribed by this Code or by special law:
(2) The specific purpose or purposes for which the corporation is
being incorporated. Where a corporation has more than one stated
purpose, the articles of incorporation shall state which is the primary
purpose and which is/are he secondary purpose or purposes:
Provided, That a non-stock corporation may not include a purpose which
would change or contradict its nature as such; x x x
Sec. 45. Ultra vires acts of corporations.
NO corporation under this Code shall possess or exercise any
corporate powers
except those conferred by this Code or by its articles of incorporation and
except such as are necessary or incidental to the exercise of the powers
so conferred. (n)
24
 Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
(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.
3 reasons for requiring a purpose clause:
(i) to inform a prospective stockholder what line of business his money is
to be risked.
(ii) to inform management within what lines of business it is authorized to
act; and
(iii) to inform those who deal with the corporation whether a contract
into which he contemplates entering is one within the general authority of
the management. (Ballantine on Corporations, Rev. ed. [1946]
Sec. 17(2), Grounds when articles of incorporation or
amendment may be rejected or disapproved. - The Securities and
Exchange Commission may reject the articles of incorporation or
disapprove any amendment thereto if the same is not in compliance
with the requirements of this Code: Provided, That the Commission shall
give the incorporators a reasonable time within which to correct or modify
the objectionable portions of the articles or amendment. The following are
grounds for such rejection or disapproval:
(2) That the purpose or purposes of the corporation are
patently unconstitutional,
illegal,
immoral, or
contrary to government rules and regulations; x x x
Sec. 88. Purposes. - Non-stock corporations may be formed or
organized for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes, like
trade, industry, agricultural and like chambers, or any combination thereof,
subject to the special provisions of this Title governing particular classes
of non-stock corporations. (n)
Luneta Motor Co. v. AD Santos, Inc. 5 SCRA 809
Corporation Law 2016: JVL & JSD
c. Place of Principal Office
Sec. 14. Contents of the articles of incorporation. - All corporations
organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages duly
signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this
Code or by special law:
(3) The place where the principal office of the corporation is to be
located, which must be within the Philippines; x x x
Sec. 51. Place and time of meetings of stockholders
or members. - Stockholders' or members' meetings, whether regular or
special, shall be held in the city or municipality where the principal office
of the corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place thereof
stated therein.
All proceedings had and any business transacted at any meeting of
the stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided ALL the stockholders or members of the corporation are
present or duly represented at the meeting. (24 and 25)
Rule 4, Sec. 2, 1997 Rules of Civil Procedure
Venue of personal actions. - All other actions may be commenced and
tried where the plaintiff or any of the principal plaintiffs resides, or where
the defendant or any of the principal defendants resides, or in the case of
a non-resident defendant where he may be found, at the election of the
plaintiff.
Sy v. Tyson Enterprises, Inc., 119 SCRA [1982] - Clavecilla Radio System
v. Antillon, 19 SCRA 379 [1967] - Chua Guan vs. Samahang Magsasaka,
62 Phil. 472 [1935] d.
d. Corporate Term.
25
 Sec. 14. Contents of the articles of incorporation. - All corporations
organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages duly
signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this
Code or by special law:
(4) The term for which the corporation is to exist; x x x
Sec. 11. Corporate term. - A corporation shall exist for a period
not exceeding fifty (50) years from the date of incorporation unless sooner
dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code;
Provided, That no extension can be made earlier than five (5) years
prior to the original or subsequent expiry date(s) unless there are
justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission.
Sec. 116. Religious societies. - Any religious society or religious
order, or any diocese, synod, or district organization of any religious
denomination, sect or church, unless forbidden by the constitution, rules,
regulations, or discipline of the religious denomination, sect or church of
which it is a part, or by competent authority, may, upon written consent
and/or by an affirmative vote at a meeting called for the purpose of at
least two-thirds (2/3) of its membership, incorporate for the administration
of its temporalities or for the management of its affairs, properties and
estate by filing with the Securities and Exchange Commission, articles of
incorporation verified by the affidavit of the presiding elder, secretary, or
clerk or other member of such religious society or religious order, or
diocese, synod, or district organization of the religious denomination, sect
or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or
district organization is a religious organization of a religious denomination,
sect or church;
2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the
body;
3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is not
Corporation Law 2016: JVL & JSD
forbidden by competent authority or by the constitution, rules, regulations
or discipline of the religious denomination, sect, or church of which it
forms a part;
4. That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its
affairs, properties and estate;
5. The place where the principal office of the corporation is to be
established and located, which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the
religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be
prescribed by the laws of the religious society or religious order, or of the
diocese, synod, or district organization, the board of trustees to be not
less than five (5) nor more than fifteen (15). (160a)
e. Incorporators and Directors - number and qualifications:
Sec. 10. Number and qualifications of incorporators. - Any number of
natural persons not less than five (5) but not more than fifteen (15), all of
legal age and a majority of whom are residents of the Philippines, may
form a private corporation for any lawful purpose or purposes. Each of the
incorporators of s stock corporation must own or be a subscriber to at
least one (1) share of the capital stock of the corporation.
NUMBER AND QUALIFICATIONS OF INCORPORATORS
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a subscriber to at least 1 share of
the capital stock of the corporation (Sec. 10)
Sec. 14. Contents of the articles of incorporation. - All corporations
organized under this code shall file with the Securities and Exchange
Commission articles of incorporation in any of the official languages duly
signed and acknowledged by all of the incorporators, containing
substantially the following matters, except as otherwise prescribed by this
Code or by special law: x x x
26
(6) The number of directors or trustees, which shall NOT be less than
five (5) nor more than fifteen (15);
Sec. 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.
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.
Sec. 92. Election and term of trustees. - Unless otherwise
provided in the articles of incorporation or the by-laws, the board of
trustees of non-stock corporations, which may be more than fifteen (15)
in number as may be fixed in their articles of incorporation or by-laws,
shall, as soon as organized, so classify themselves that the term of office
of one-third (1/3) of their number shall expire every year; and subsequent
elections of trustees comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall have a term of three
(3) years. Trustees thereafter elected to fill vacancies occurring before the
expiration of a particular term shall hold office only for the unexpired
period.
No person shall be elected as trustee unless he is a member of
the corporation.
Unless otherwise provided in the articles of incorporation or the
by-laws, officers of a non-stock corporation may be directly elected by the
members. (n)
Nautica Canning Corporation, et aL vs. Roberto C. Yumul, G.R.
No.164588, October 19, 2005
Corporation Law 2016: JVL & JSD
i. Not less than 5 nor more than 15;
Non-stock except educational corporations may be more
than 15 trustees Sec. 92.
In case of merged or consolidated banks, the number of
directors shall NOT exceed 21 Sec. 17, General Banking
Law of 2000, RA 8791 (GBL).
ii. Nationality must be stated in the Articles.
Majority of directors of corporations organized under the Code
must be residents of the Philippines.
"Philippine National" a citizen of the Philippines or a domestic
partnership or association wholly owned by citizens of the
Philippines; or a corporation organized under the laws of the
Philippines of which at least sixty percent (60%) of the capital
stock outstanding and entitled to vote is owned and held by
citizens of the Philippines; - at least 60% of the members of the
Board of Directors of each of both corporations must be citizens of
the Philippines, in order that corporations shall be considered as
Philippine national. Sec. 3(a), RA 7042, as amended, the Foreign
Investments Act of 1991.
Anti-Dummy Law, CA 108, as amended In areas which are
partially nationalized, aliens may be directors of a corporation,
proportionate to their allowable participation or shares in the
capital of the corporation. See also Sec. 15, GBL
f. Authorized Capital Stock; subscribed and paid-up
Sec. 12. Minimum capital stock required of stock
corporations. - Stock corporations incorporated under this Code shall
NOT be required to have any minimum authorized capital stock
except as otherwise specifically provided for by special law, and
subject to the provisions of the following section.
No required minimum authorized capital stock except as required
by special law but paid-up capital stock cannot be lower than
P5,000
(Sec. 13). to insure the adequacy of corporate capitalization for
the protection of third persons who deal with the corporation; to
give assurance to the public that may deal with the new
27
 corporation that it is actually able to operate and undertake to do
business and to meet obligations as they arise from the start of the
operations.
Authorized amount fixed in the articles of incorporation to
be subscribed and paid-in or secured to be paid in by the
shareholders of a corporation, at the organization of the
corporation or afterwards, and upon which it is to conduct its
operations. 11 Fletcher, Cyclopedia of the Law of Private
Corporation, perm ed., p. 10.
Subscription Bayla vs. Silang Traffic Co., Inc., 73 Phil 557
(1942 Sec. 13).
Sec. 13. Amount of capital stock to be subscribed and paid
for the purposes of incorporation. - At least twenty-five percent
(25%) of the authorized capital stock as stated in the articles of
incorporation must be subscribed at the time of incorporation, and at
least twenty-five (25%) per cent of the total subscription must be paid
upon subscription, the balance to be payable on a date or dates fixed
in the contract of subscription without need of call, or in the absence
of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital
be less than five Thousand (P5,000.00) pesos.
SUBSCRIPTION REQUIREMENT
The amount of capital stock to be subscribed and paid for the
purposes of incorporation (Sec. 13):
(1) At the time of incorporation, at least 25% of the authorized capital
stock stated in the AOI should be subscribed;
(2) At least 25% of the said 25% above, must be paid upon
subscription;
(3) The balance to be payable on
(a) Dates fixed in the subscription contract or
(b) Upon call by the BOD in the absence of fixed dates
(4) The paid-up capital can in no case be lower than P5,000.00
Paid-up
Sec. 14. Contents of the articles of incorporation. - All
corporations organized under this code shall file with the Securities
Corporation Law 2016: JVL & JSD
and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the
incorporators, containing substantially the following matters, except as
otherwise prescribed by this Code or by special law: x x x
The Securities and Exchange Commission shall NOT accept the
articles of incorporation of any stock corporation unless
accompanied by a sworn statement of the Treasurer elected
by the subscribers showing that at least twenty-five (25%)
percent of the authorized capital stock of the corporation has
been subscribed, and at least twenty-five (25%) of the total
subscription has been fully paid to him in actual cash and/or
in property the fair valuation of which is equal to at least
twenty-five (25%) percent of the said subscription, such paid-
up capital being not less than five thousand (P5,000.00)
pesos.
Par value share value stated in the certificate of stock as an
amount in pesos representing the nominal value of the shares.
The par value must be stated in the articles of incorporation, and
par shares cannot be issued at less than the par value, which can
be changed only by an amendment of the articles of incorporation.
Campos, The Corporation Code, p. 80(1980].
No Par share
Sec. 14. Contents of the articles of incorporation. - All
corporations organized under this code shall file with the Securities
and Exchange Commission articles of incorporation in any of the
official languages duly signed and acknowledged by all of the
incorporators, containing substantially the following matters, except as
otherwise prescribed by this Code or by special law: x x x
(8) If it be a stock corporation, the amount of its authorized capital
stock in lawful money of the Philippines, the number of shares into
which it is divided, and in case the share are par value shares , the
par value of each, the names, nationalities and residences of the
original subscribers, and the amount subscribed and paid by each
on his subscription, and if some or all of the shares are without par
value, such fact must be stated;
28

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.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case
of liquidation and in the distribution of dividends, or such other
preferences as may be stated in the articles of incorporation which are
not violative of the provisions of this Code: Provided, That preferred
shares of stock may be issued only with a stated par value. The
board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any
series thereof: Provided, That such terms and conditions shall be
effective upon the filing of a certificate thereof with the Securities and
Exchange Commission.
Shares of capital stock issued WITHOUT par value shall be
deemed fully paid and non-assessable and the holder of such shares
shall NOT be LIABLE to the corporation or to its creditors in respect
thereto: Provided; That shares without par value may not be issued for
a consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and
shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose
of insuring compliance with constitutional or legal requirements.
Corporation Law 2016: JVL & JSD
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all
respects to every other share.
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all
or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation
or other corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the
vote necessary to approve a particular corporate act as provided in
this Code shall be deemed to refer only to stocks with voting rights.
Issued value Sec. 6. g.
g. Other Matters:
should not be inconsistent with law;
may include that which the incorporators may deem necessary
and convenient.
May include
(i) classes of shares;
(ii) preferences;
(iii) restrictions, e.g. partially nationalized business (Sec. 15[11]).
h.
h. Treasurer's Affidavit: Sworn Statement of the Treasurer-in-trust
that at least 25% of the authorized capital stock of the corporation
has been subscribed, and at least 25% of the total subscription
has been fully paid to him in actual cash and/or in property the fair
29
 valuation of which is equal to at least 25% of said subscription,
such paid-up capital being not less than p5,000.
2. Grounds for Rejection by SEC (SEC 17)
a. Non-compliance with prescribed form. (Sec. 14 and 15)
b. Patently unconstitutional, immoral, illegal purposes, or those which
contravene government rules and regulations.
c. False Treasurer's Affidavit
d. Non-compliance with the Required Percentage of ownership of
capital stock of Filipinos.
Constitutional and statutory requirements:
1. Mass media - Sec. 11, Art. XVI, Phi. Consti.; 100%
2. Domestic Banks - Sec.11, GBL of 2000; 60%
3. Telecommunications - Sec. 7(2); Art. XV, Phi. Consti,;
60%
4. Recruitment Agency - Labor Code, Art. 27; 75%
5. Foreign Investment Act
Sec. 17. Grounds when articles of incorporation or amendment may
be rejected or disapproved. - The Securities and Exchange Commission
may reject the articles of incorporation or disapprove any amendment
thereto if the same is not in compliance with the requirements of this
Code: Provided, That the Commission shall give the incorporators a
reasonable time within which to correct or modify the objectionable
portions of the articles or amendment. The following are grounds for such
rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer's Affidavit concerning the amount of capital stock
subscribed and/or paid if false;
4. That the percentage of ownership of the capital stock to be owned by
citizens of the Philippines has not been complied with as required by
existing laws or the Constitution.
Corporation Law 2016: JVL & JSD
No articles of incorporation or amendment to articles of incorporation
of banks, banking and quasi-banking institutions, building and loan
associations, trust companies and other financial intermediaries,
insurance companies, public utilities, educational institutions, and other
corporations governed by special laws shall be accepted or approved by
the Commission unless accompanied by a favorable recommendation of
the appropriate government agency to the effect that such articles or
amendment is in accordance with law.
GROUNDS FOR DISAPPROVING Articles of Incorporation (SEC.
17) (F2P2)
(1) AOI does not SUBSTANTIALLY comply with the form prescribed
(2) Purpose is patently unconstitutional, illegal, immoral, contrary to
government rules and regulations
(3) Treasurers Affidavit concerning the amount of capital subscribed
and or paid is false
(4) Required percentage of ownership of Filipino citizens has not
been complied with.
Remedy in case of rejection of AOI: Petition for review in accordance
with the Rules of Court (Sec. 6, last par., PD 902-A)
C. By-Laws
Sec. 36 - one of the inherent powers and capacities of a corporation is
to adopt by law, not contrary to law, morals, public policy, and to amend or
repeal the same in accordance with the Code.
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
30
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;
6. In case of stock corporations, to issue or sell stocks to subscribers and
to sell stocks to subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the corporation if it
be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers
Forest Hills Golf and Country Club Inc. vs. Gardpro Inc., G.R. No. 164686,
October 22, 2014
1) Time of Adoption:
Sec. 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
Corporation Law 2016: JVL & JSD
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 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.
Notwithstanding the provisions of the preceding paragraph, by-laws
may be adopted and filed PRIOR to incorporation; in such case, such
by-laws shall be approved and signed by all the incorporators and
submitted to the Securities and Exchange Commission, together with the
articles of incorporation.
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.
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. (20a)
WHEN ADOPTION IS MADE (SEC. 46)
(1) Prior to incorporation approved and signed by all the incorporators &
submitted to SEC together with AOI
(2) After incorporation within 1 month after receipt of official notice of
the issuance of its certificate of incorporation by the SEC.
EFFECT OF FAILURE TO FILE THE BY-LAWS WITHIN THE PERIOD
Does not imply the "demise" of the corporation. By-laws may be
required by law for an orderly governance and management of
corporations but they are not essential to corporate birth. Therefore,
failure to file them within the period required by law by no means tolls the
automatic dissolution of a corporation (Loyola Grand Villas
Homeowners Assn. v. CA (1997)
31
Note: Section 22 on the effect of failure to formally organize within 2 years
from incorporation, the corporations corporate powers cease and the
corporation is deemed dissolved. Organization includes: the filing &
approval of bylaws with the SEC and the election of directors and officers
(Campos).
NATURE AND FUNCTION OF BY LAWS
(1) Product of agreement of the stockholders/members and establish the
rules for internal government of the corporation (Campos)
(2) A rule or law of a corporation for its government (13 Am. Jur., 283)
(3) Mere internal rules among stockholders and cannot affect or prejudice
3rd persons who deal with the corporation unless they have knowledge of
the same (China Banking Corp v CA, 1997)
(4) According to its function, by-laws may be defined as the rules and
regulations or private laws enacted by the corporation to regulate, govern
and control its own actions, affairs and concerns and its stockholders or
members and directors and officers with relation thereto and among
themselves in their relation to it. (9 Fletcher Cyc. Corp., 1963 rev. ed.,
Sec. 4166 at 622 cited in Lopez, 1994)
REQUISITES OF VALID BY-LAWS
(1) Must be approved by the affirmative vote of the stockholders
representing MAJORITY of the outstanding capital stock or majority of
members (If filed pre-incorporation: must be approved and signed by all
incorporators)
(2) Must be kept in the principal office of the corporation, subject to
inspection of stockholders or members during office hours (Sec. 74)
BINDING EFFECTS
ONLY from date of issuance of SEC of certification that bylaws are not
inconsistent with the Code
Pending approval, they CANNOT bind stockholders or corporation
AMENDMENT OR REVISION
Effected by: Majority vote of the members of the Board and majority vote
of the owners of the OCS or members, in a meeting duly called for the
purpose. Delegation to the BOD of the power to amend or repeal by-laws:
Corporation Law 2016: JVL & JSD
by vote of stockholders representing 2/3 of the OCS or 2/3 of the
members
How delegation is revoked: 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.
Loyola Grand Villas Homeowners (South) Asso., Inc. vs. CA, 276 SCRA
681 (1997)
2) Contents:
Sec. 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:
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;
3. The required quorum in meetings of stockholders or members and
the manner of voting therein;
4. The form for proxies of stockholders and members and the manner
of voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
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;
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. (21a)
a) time, place and manner of calling and conducting directors'
or trustees' regular or special meetings; Sec. 53 allows
meetings to be held outside of the Philippines;
32
 b) time and manner of calling and conducting stockholders' or
members' regular or special meetings; the place is a
matter of law, i.e. Sec. 51
c) required quorum in stockholders' or members' meetings
and the manner of voting; i
d) form for proxies of stockholders and members and the
manner of voting them;
e) qualifications, duties and compensation of directors or
trustees, officers and employees; Sec. 25 - sets the
statutory officers to be elected, i.e. President, Secretary
and Treasurer, but by-laws can provide for others;
f) time for directors' annual elections; mode and manner of
giving notice thereof;
g) manner of election or appointment and the term of office of
all officers other than directors or trustees;
h) manner of stock issuance;
i) other matters necessary for the proper or convenient
transaction of its corporate business and affairs
3) Other Allowable Contents
i. sec. 24 - time to exercise right to vote;
ii. sec. 25 - additional officers;
iii. sec. 35 - executive committee creation;
iv. sec. 54 - presiding officer at meetings;
v. sec. 66 - interest rate on unpaid subscriptions;
vi. sec. 74 - entries in the stock and transfer book
4) Role: -
Fleischer vs. Botica Nolasco, 47 Phil. 583!19251
But the Corporation Code now ALLOWS reasonable transfer
restrictions in close corporations).
Pena vs. CA, 193 SCRA 717 (1991)
Corporation Law 2016: JVL & JSD
The by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation. They are
in effect, written, into the charter. In this sense they become part of the
fundamental law of the corporation with which the corporation and its
directors and officers must comply.
Apparently, only three (3) out of five (5) members of the board
of directors of respondent PAMBUSCO convened on November 19,
1974 by virtue of a prior notice of a special meeting. There was no
quorum to validly transact business since, under Section 4 of the
amended by-laws herein above reproduced, at least four (4)
members must be present to constitute a quorum in a special
meeting of the board of directors of respondent PAMBUSCO.
Under Section 25 of the Corporation Code of the Philippines, the
articles of incorporation or by-laws of the corporation may fix a greater
number than the majority of the number of board members to constitute
the quorum necessary for the valid transaction of business. Any number
less than the number provided in the articles or by-laws therein cannot
constitute a quorum and any act therein would not bind the corporation; all
that the attending directors could do is to adjourn.
As a matter of fact, the three (3) alleged directors who attended
the special meeting on November 19, 1974 were not listed as directors of
respondent PAMBUSCO in the latest general information sheet of
respondent PAMBUSCO filed with the SEC dated 18 March 1951.
Similarly, the latest list of stockholders of respondent PAMBUSCO on file
with the SEC does not show that the said alleged directors were among
the stockholders of respondent PAMBUSCO. Under Section 30 of the then
applicable Corporation Law, only persons who own at least one (1)
share in their own right may qualify to be directors of a corporation.
Further, under Section 28 1/2 of the said law, the sale or disposition
of all and/or substantially all properties of the corporation requires,
in addition to a proper board resolution, the affirmative votes of the
stockholders holding at least two-thirds (2/3) of the voting power in
the corporation in a meeting duly called for that purpose. No doubt,
the questioned resolution was not confirmed at a subsequent stockholders
meeting duly called for the purpose by the affirmative votes of the
stockholders holding at least two-thirds (2/3) of the voting power in the
corporation. The same requirement is found in Section 40 of the present
Corporation Code.
33
PMI College vs. NLRC, 277 SCRA 462 (1997)
BY LAWS; OPERATE MERELY AS INTERNAL RULES AMONG THE
STOCKHOLDERS, THEY CANNOT AFFECT OR PREJUDICE THIRD
PERSONS UNLESS THEY HAVE KNOWLEDGE OF THE SAME;
Neither can we concede that such contract would be invalid just because
the signatory thereon was not the Chairman of the Board which allegedly
violated petitioner's by-laws. Since by-laws operate merely as internal
rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge
of the same." No proof appears on record that private respondent ever
knew anything about the provisions of said by-laws. In fact, petitioner itself
merely asserts the same without even bothering to attach a copy or
excerpt thereof to show that there is such a provision. How can it now
expect the Labor Arbiter and the NLRC to believe it? That this allegation
has never been denied by private respondent does not necessarily signify
admission of its existence because technicalities of law and procedure
and the rules obtaining in the courts of law do not strictly apply to
proceedings of this nature.
5) Limitations:
a. Not contrary to law, morals, or public policy (sec. 36(5))
b. Not inconsistent with the Code (sec. 46(3); sec. 23)
c. Cannot impair contract obligations
d. General and uniform in operation; affect all alike
e. Consistent with Articles of Incorporation
f. Reasonable and not arbitrary and oppressive
a. Not contrary to law, morals, or public policy
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
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;
Corporation Law 2016: JVL & JSD
Grace Christian High School vs. CA, 281 SCRA 133 [1997])
These provisions of the former and present corporation law leave
no room for doubt as to their meaning: the board
of directors of corporations must be elected from among the
stockholders or members. There may be corporations in which there are
unelected members in the board but it is clear that in the examples cited
by petitioner the unelected members sit as ex officio members, i.e., by
virtue of and for as long as they hold a particular office. But in the
case of petitioner, there is no reason at all for its representative to be
given a seat in the board. Nor does petitioner claim a right to such seat by
virtue of an office held. In fact it was not given such seat in the beginning.
It was only in 1975 that a proposed amendment to the by-laws sought to
give it one.
Since the provision in question is contrary to law, the fact that for
fifteen years it has not been questioned or challenged but, on the contrary,
appears to have been implemented by the members of the association
cannot forestall a later challenge to its validity. Neither can it attain validity
through acquiescence because, if it is contrary to law, it is beyond the
power of the members of the association to waive its invalidity. For that
matter the members of the association may have formally adopted the
provision in question, but their action would be of no avail because no
provision of the by-laws can be adopted if it is contrary to law.
It is probable that, in allowing petitioner's representative to sit on
the board, the members of the association were not aware that this was
contrary to law. It should be noted that they did not actually implement the
provision in question except perhaps insofar as it increased the
number of directors from 11 to 15, but certainly not the
allowance of petitioner's representative as an unelected member of the
board of directors. It is more accurate to say that the members merely
tolerated petitioner's representative and tolerance cannot be considered
ratification.
Nor can petitioner claim a vested right to sit in the board on the
basis of "practice." Practice, no matter how long continued, cannot
give rise to any vested right if it is contrary to law. Even less tenable
is petitioner's claim that its right is "coterminus with the existence of the
association."
34
 b. Not inconsistent with the Code
Sec. 46. Adoption of by-laws. -
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.
Sec 23
c. Cannot impair contract obligations (Fleischer vs. Nolasco,
supra).
Salafranca vs. Philamlife (Pamplona) Village v. Homeowners Asso., Inc.,
300 SCRA 469, 479 (1998)
TERMINATION BASED ON AMENDED BY-LAWS CANNOT
IMPAIR OBLIGATION OF EXISTING CONTRACTS OR RIGHTS.
Admittedly, the right to amend the by-laws lies solely in the discretion of
the employer, this being in the exercise of management prerogative or
business judgment. However this right, extensive as it may be, cannot
impair the obligation of existing contracts or rights. If private respondent
wanted to make the petitioner's position co-terminus with that of the Board
of Directors, then the amendment must be effective after petitioner's stay
with the private respondent, not during his term. Obviously, the measure
taken by the private respondent in amending its by-laws is nothing but a
devious, but crude, attempt to circumvent petitioner's right to security of
tenure as a regular employee guaranteed under the Labor Code.
d. General and uniform in operation; affect all alike - (8 Fletcher
Cyc. Corp., Sec. 4192).
e. Consistent with Articles of Incorporation - (Fletcher, supra, Sec.
410)
Rural Bank of Salinas, Inc. vs. CA, 210 SCRA 510 (1992), quoting from
Tomson on Corporation Sec. 4137, cited in Fleischer vs. Nolasco, 47 Phil.
583.
Corporation Law 2016: JVL & JSD
Section 5 (b) of P.D. No. 902-A grants to the SEC the original
and exclusive jurisdiction to hear and decide cases involving
intracorporate controversies. An intracorporate controversy has
been defined as one which arises between a stockholder and the
corporation. There is no distinction, qualification, nor any exception
whatsoever
A corporation, either by its board, its by-laws, or the act of its
officers, cannot create restrictions in stock transfers
The right of a transferee/assignee to have stocks transferred
to his name is an inherent right flowing from his ownership of the
stocks
The corporation's obligation to register is ministerial.
"In transferring stock, the secretary of a corporation acts in purely
ministerial capacity, and does not try to decide the question of ownership."
The duty of the corporation to transfer is a ministerial one and if it refuses
to make such transaction without good cause, it may be compelled to do
so by mandamus."
f. Reasonable and not arbitrary and oppressive - (Fletcher, supra,
Sec. 4191).
Thomson vs. Court of Appeals, 298 SCRA 280 (1988).
AUTHORIZED TO REGULATE BUT NOT RESTRICT
STOCKHOLDERS RIGHT TO TRANSFER THEIR SHARES;
TRANSFER OF SHARES BETWEEN PARTIES IN CASE AT BAR IS
FEASIBLE. Private respondent does not insist nor intend to transfer the
club membership in its name but rather to its designated nominee. The
Manila Polo Club does not necessarily prohibit the transfer of proprietary
shares by its members. The Club only restricts membership to deserving
applicants in accordance with its rules, when the amended
Articles ofIncorporation states that: "No transfer shall be valid except
between the parties, and shall be registered in the Membership Book
unless made in accordance with these Articles and the By-Laws." Thus, as
between parties herein, there is no question that a transfer is feasible.
Moreover, authority granted to a corporation to regulate the
transfer of its stock does not empower it to restrict the right of a
35
stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. In this case, the petitioner was the
nominee of the private respondent to hold the share and enjoy the
privileges of the club. But upon the expiration of petitioner's employment
as officer and consultant of AmCham, the incentives that go with the
position, including use of the MPC share, also ceased to exist. It now
behooves petitioner to surrender said share to private respondent's next
nominee, another natural person. Obviously this arrangement of trust and
confidence cannot be defeated by the petitioner's citation of the MPC rules
to shield his untenable position, without doing violence to basic
tenets of justice and fair dealing.
D. Commencement of Corporate Existence
Sec. 19. Commencement of corporate existence. - A private
corporation formed or organized under this Code commences to have
corporate existence and juridical personality and is deemed incorporated
from the date the Securities and Exchange Commission issues a
certificate of incorporation under its official seal; and thereupon the
incorporators, stockholders/members and their successors shall constitute
a body politic and corporate under the name stated in the articles of
incorporation for the period of time mentioned therein, unless said period
is extended or the corporation is sooner dissolved in accordance with law.
Sec. 22. Effects on non-use of corporate charter and
continuous in-operation of a corporation.- If a corporation does not
formally organize and commence the transaction of its business or the
construction of its works within two (2) years from the date of its
incorporation, its corporate powers cease and the corporation shall be
deemed dissolved. However, if a corporation has commenced the
transaction of its business but subsequently becomes continuously
inoperative for a period of at least five (5) years, the same shall be a
ground for the suspension or revocation of its corporate franchise or
certificate of incorporation.
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to
continuously operate is due to causes beyond the control of the
Corporation Law 2016: JVL & JSD
corporation as may be determined by the Securities and Exchange
Commission.
Sec. 112. Submission of the articles of incorporation. - The
articles of incorporation must be verified, before filing, by affidavit or
affirmation of the chief archbishop, bishop, priest, minister, rabbi or
presiding elder, as the case may be, and accompanied by a copy of the
commission, certificate of election or letter of appointment of such chief
archbishop, bishop, priest, minister, rabbi or presiding elder, duly certified
to be correct by any notary public.
From and after the filing with the Securities and Exchange Commission of
the said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph,
such chief archbishop, bishop, priest, minister, rabbi or presiding elder
shall become a corporation sole and all temporalities, estate and
properties of the religious denomination, sect or church theretofore
administered or managed by him as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be held in trust by him as a
corporation sole, for the use, purpose, behalf and sole benefit of his
religious denomination, sect or church, including hospitals, schools,
colleges, orphan asylums, parsonages and cemeteries thereof. (n)
Sec. 117. Methods of dissolution. - A corporation formed or
organized under the provisions of this Code may be dissolved voluntarily
or involuntarily. (n)
V. POWERS OF CORPORATIONS
A. General Powers - Secs. 36 and 45 - Sec. 36 confers the powers and
capacity of a corporation and Sec. 45 states that corporate powers not
expressly conferred by the Code or the articles of incorporation or those
which are not necessary or incidental to the exercise of the conferred
powers are Ultra Vires Acts.
Sec. 36. Corporate powers and capacity. - Every corporation
incorporated under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
36
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;
6. In case of stock corporations, to issue or sell stocks to subscribers and
to sell stocks to subscribers and to sell treasury stocks in accordance with
the provisions of this Code; and to admit members to the corporation if it
be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property,
including securities and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably and necessarily
require, subject to the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public welfare or
for hospital, charitable, cultural, scientific, civic, or similar purposes:
Provided, That no corporation, domestic or foreign, shall give donations in
aid of any political party or candidate or for purposes of partisan political
activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to
carry out its purpose or purposes as stated in the articles of incorporation.
Sec. 45. Ultra vires acts of corporations. - No corporation under
this Code shall possess or exercise any corporate powers except those
conferred by this Code or by its articles of incorporation and except such
as are necessary or incidental to the exercise of the powers so conferred.
(n)
Spouses Afulugencia vs. Metropolitan Bank and Trust Co. G.R. No.
185145, February 05, 2014
Wala ako nakita related sa corpo
Corporation Law 2016: JVL & JSD
Ligaya Esguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571,
September 2, 2013
The general rule is that a corporation can only exercise its powers and
transact its business through its board of directors and through its officers
and agents when authorized by a board resolution or its bylaws. The
power of a corporation to sue and be sued is exercised by the board
of directors. The physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for
the purpose by corporate bylaws or by a specific act of the board. Absent
the said board resolution, a petition may not be given due course.52
In Bank of the Philippine Islands v. Court of Appeals, 53 the Court held that
the application of the rules must be the general rule, and the suspension
or even mere relaxation of its application, is the exception. This Court may
go beyond the strict application of the rules only on exceptional cases
when there is truly substantial compliance with the rule. 54
In the event that the petitioners claim is beyond the subject area and
period, and HOLCIM denies such indebtedness, the governing rule should
be Section 43, Rule 39 of the Rules of Court, to wit:
SEC. 43. Proceedings when indebtedness denied or another person
claims the property. If it appears that a person or corporation, alleged to
have property of the judgment obligor or to be indebted to him, claims an
interest in the property adverse to him or denies the debt, the court may
authorize, by an order made to that effect, the judgment obligee to
institute an action against such person or corporation for the recovery of
such interest or debt, forbid a transfer or other disposition of such interest
or debt within one hundred twenty (120) days from notice of the order, and
may punish disobedience of such order as for contempt. Such order may
be modified or vacated at any time by the court which issued it, or by the
court in which the action is brought, upon such terms as may be just.
(Emphasis ours)
Pursuant to this Rule, in the examination of a person, corporation, or
other juridical entity who has the property of such judgment obligor
or is indebted to him (Rule 39, Section 37), and such person,
corporation, or juridical entity denies an indebtedness, the court may
only authorize the judgment obligee to institute an action against
such person or corporation for the recovery of such interest or debt.
37
Nothing in the Rules gives the court the authority to order such
person or corporation to pay the judgment obligee and the court
exceeds its jurisdiction if it orders the person who denies the
indebtedness to pay the same. In Atilano II v. Asaali,72 the Court held
that an "[e]xecution of a judgment can only be issued against one who is a
party to the action, and not against one who, not being a party thereto, did
not have his day in court. Due process dictates that a court decision can
only bind a party to the litigation and not against innocent third parties." 73
Skyway Traffic Management and Security Division Workers Organization
vs. PNCC Skyway Corporation, GR No. 171231, February 17, 2010
The purpose of requiring verification is to secure an assurance that
the allegations in the petition have been made in good faith; or are
true and correct, not merely speculative. This requirement is simply a
condition affecting the form of pleadings, and non-compliance therewith
does not necessarily render it fatally defective. Truly, verification is only a
formal, not a jurisdictional, requirement.
With respect to the certification of non-forum shopping, it has been held
that the certification requirement is rooted in the principle that a party-
litigant shall not be allowed to pursue simultaneous remedies in different
fora, as this practice is detrimental to an orderly judicial procedure.
However, this Court has relaxed, under justifiable circumstances, the rule
requiring the submission of such certification considering that, although it
is obligatory, it is not jurisdictional. Not being jurisdictional, it can be
relaxed under the rule of substantial compliance. 12
The rationale to justify the authority of corporate officers or
representatives of the corporation to sign the verification or
certificate against forum shopping, being "in a position to verify the
truthfulness and correctness of the allegations in the petition."
In the case at bar, We rule that Rene Soriano has sufficient authority to
sign the verification and certification against forum shopping for the
following reasons: First, the resolution dated June 30, 2006 was merely a
reiteration of the authority given to the Union President to file a case
before this Court assailing the CBA violations committed by the
management, which was previously conferred during a meeting held on
Corporation Law 2016: JVL & JSD
October 5, 2005. Thus, it can be inferred that even prior to the filing of the
petition before Us on February 27, 2006, the president of the union was
duly authorized to represent the union and to file a case on its
behalf. Second, being the president of the union, Rene Soriano is in a
position to verify the truthfulness and correctness of the allegations in the
petition. Third, assuming that Mr. Soriano has no authority to file the
petition on February 27, 2006, the passing on June 30, 2006 of a
Board Resolution authorizing him to represent the union is deemed a
ratification of his prior execution, on February 27, 2006, of the
verification and certificate of non-forum shopping, thus curing any
defects thereof. Ratification in agency is the adoption or confirmation by
one person of an act performed on his behalf by another without
authority.14
Mid Pasig Land and Development Corporation vs. Tablante, G.R. No.
162924, February 4, 2010; PNCC
It must be borne in mind that Sec. 23, in relation to Sec. 25 of the
Corporation Code, clearly enunciates that all corporate powers are
exercised, all business conducted, and all properties controlled by
the board of directors. A corporation has a separate and distinct
personality from its directors and officers and can only exercise its
corporate powers through the board of directors. Thus, it is clear
that an individual corporate officer cannot solely exercise any
corporate power pertaining to the corporation without authority from
the board of directors. This has been our constant holding in cases
instituted by a corporation.
In sum, we have held that the following officials or employees of the
company can sign the verification and certification without need of a board
resolution: (1) the Chairperson of the Board of Directors, (2) the President
of a corporation, (3) the General Manager or Acting General Manager, (4)
Personnel Officer, and (5) an Employment Specialist in a labor
case.1avvphi1
While the above cases do not provide a complete listing of authorized
signatories to the verification and certification required by the rules, the
determination of the sufficiency of the authority was done on a case to
case basis. The rationale applied in the foregoing cases is to justify the
38
authority of corporate officers or representatives of the corporation to sign
the verification or certificate against forum shopping, being "in a position to
verify the truthfulness and correctness of the allegations in the petition." 10
From the foregoing, it is thus clear that the failure to attach the
Secretarys Certificate, attesting to General Manager Antonio
Mereloss authority to sign the Verification and Certification of Non-
Forum Shopping, should not be considered fatal to the filing of the
petition. Nonetheless, the requisite board resolution was
subsequently submitted to the CA, together with the pertinent
documents.11 Considering that petitioner substantially complied with
the rules, the dismissal of the petition was, therefore, unwarranted.
Time and again, we have emphasized that dismissal of an appeal on a
purely technical ground is frowned upon especially if it will result in
unfairness. The rules of procedure ought not to be applied in a very rigid,
technical sense for they have been adopted to help secure, not override,
substantial justice. For this reason, courts must proceed with caution so
as not to deprive a party of statutory appeal; rather, they must ensure that
all litigants are granted the amplest opportunity for the proper and just
ventilation of their causes, free from the constraint of technicalities.12
1. To sue and be sued
COSCO Philippines, Inc. vs. Kemper Insurance Co., 670 SCRA 343.
A corporation has no powers except those expressly conferred on it by the
Corporation Code and those that are implied from or are incidental to its
existence. In turn, a corporation exercises said powers through its board
of directors and/or its duly authorized officers and agents. It has been
observed that the power of a corporation to sue and be sued in any
court is lodged with the board of directors that exercises its
corporate powers. Physical acts, like the signing of documents, can
be performed only by natural persons duly authorized for the
purpose by corporate by-laws or by a specific act of the board of
directors.37 Thus, any person suing on behalf of the corporation should
present proof of such authority.
Pasricha vs. Don Luis Dison Realty, Inc., 548 SCRA 273 [2008
Corporation Law 2016: JVL & JSD
The capacity of a corporation to institute an ejectment suit is not
affected by the subsequent suspension and revocation of certificate
of registration
We uphold the capacity of respondent company to institute the ejectment
case. Although the Securities and Exchange Commission (SEC)
suspended and eventually revoked respondents certificate of registration
on February 16, 1995, records show that it instituted the action for
ejectment on December 15, 1993. Accordingly, when the case was
commenced, its registration was not yet revoked. 35 Besides, as correctly
held by the appellate court, the SEC later set aside its earlier orders of
suspension and revocation of respondents certificate, rendering the issue
moot and academic.36
We likewise affirm Ms. Bautistas capacity to sue on behalf of the
company despite lack of proof of authority to so represent it. A corporation
has no powers except those expressly conferred on it by the Corporation
Code and those that are implied from or are incidental to its existence. In
turn, a corporation exercises said powers through its board of directors
and/or its duly authorized officers and agents. Physical acts, like the
signing of documents, can be performed only by natural persons duly
authorized for the purpose by corporate by-laws or by a specific act of the
board of directors.37 Thus, any person suing on behalf of the corporation
should present proof of such authority. Although Ms. Bautista
(corporate officer) initially failed to show that she had the capacity to
sign the verification and institute the ejectment case on behalf of the
company, when confronted with such question, she immediately
presented the Secretarys Certificate38 confirming her authority to
represent the company.
There is ample jurisprudence holding that subsequent and
substantial compliance may call for the relaxation of the rules of
procedure in the interest of justice
Munoz vs. People of the Philippine, 548 SCRA 473 [2008]
The issue of whether a corporate officer may bring suit on behalf of his
corporation for violation of B.P. Blg. 22 is not novel. In Tam Wing Tak v.
Makasiar,35 the Court affirmed the dismissal of a criminal case for violation
of B.P. Blg. 22 for lack of authority of the private complainant, thus:
39
Second, it is not disputed in the instant case that Concord, a domestic
corporation, was the payee of the bum check, not petitioner. Therefore, it
is Concord, as payee of the bounced check, which is the injured party.
Since petitioner was neither a payee nor a holder of the bad check, he
had neither the personality to sue nor a cause of action against Vic Ang
Siong. Under Section 36 of the Corporation Code, read in relation to
Section 23, it is clear that where a corporation is an injured party, its
power to sue is lodged with its board of directors or trustees. Note
that petitioner failed to show any proof that he was authorized or
deputized or granted specific powers by Concord's board of director
to sue Victor And Siong for and on behalf of the firm. Clearly,
petitioner as a minority stockholder and member of the board of
directors had no such power or authority to sue on Concord's
behalf. x x x36
Cagayan ValL Drug Corp. vs. Comm. of int. Rev. 545 SCRA 10 [2008]
It must be borne in mind that Sec. 23, in relation to Sec. 25 of the
Corporation Code, clearly enunciates that all corporate powers are
exercised, all business conducted, and all properties controlled by the
board of directors. A corporation has a separate and distinct personality
from its directors and officers and can only exercise its corporate powers
through the board of directors. Thus, it is clear that an individual
corporate officer cannot solely exercise any corporate power
pertaining to the corporation without authority from the board of
directors. This has been our constant holding in cases instituted by a
corporation.
In sum, we have held that the following officials or employees of the
company can sign the verification and certification without need of a
board resolution:
(1) the Chairperson of the Board of Directors,
(2) the President of a corporation,
(3) the General Manager or Acting General Manager,
(4) Personnel Officer, and
(5) an Employment Specialist in a labor case.
Corporation Law 2016: JVL & JSD
Philippine Airlines v. Flight Attendants and Stewards Association of the
Philippines, we ruled that only individuals vested with authority by a
valid board resolution may sign the certificate of non-forum
shopping on behalf of a corporation. The action can be dismissed if the
certification was submitted unaccompanied by proof of the signatorys
authority.14 We believe that appending the board resolution to the
complaint or petition is the better procedure to obviate any question
on the authority of the signatory to the verification and certification.
The required submission of the board resolution is grounded on the basic
precept that corporate powers are exercised by the board of
directors,15 and not solely by an officer of the corporation. Hence, the
power to sue and be sued in any court or quasi-judicial tribunal is
necessarily lodged with the said board.
United Paragon Mining Corporation vs. CA, 497 SCRA 638 [2006]
We start with the basic concept that a corporation, like petitioner UPMC,
has no power except those expressly conferred on it by the Corporation
Code and those that are implied or incidental to its existence. In turn, a
corporation exercises said powers through its board of directors and/or its
duly authorized officers and agents. It has thus been observed that the
power of a corporation to sue and be sued in any court is lodged
with its board of directors that exercises its corporate powers. In
turn, physical acts of the corporation, like the signing of documents,
can be performed only by natural persons duly authorized for the
purpose by the corporate by-laws or by a specific act of the board of
directors. 9
Throughout the proceedings before the Voluntary Arbitrator, that is, from
the filing of the position papers up to the filing of the motion for
reconsideration, UPMC was duly represented by its counsel, Atty.
Archimedes O. Yanto. True it is that Cesarios complaint for illegal
dismissal was filed against the corporation and Daniel. It appears obvious
to us, however, that Daniel was merely a nominal party in that
proceedings, as in fact he was impleaded thereat in his capacity as
UPMCs Personnel Superintendent who signed the termination letter. For
sure, Cesarios complaint contains no allegation whatsoever for specific
claim or charge against Daniel in whatever capacity. As it is, Daniel was
40
not in anyway affected by the outcome of the illegal dismissal case
because only the corporation was made liable therein to Cesario. Being
not a real party-in-interest, Daniel has no right to file the petition in
CA-G.R. SP No. 44450 in behalf of the corporation without any
authority from its board of directors. It is basic in law that a
corporation has a legal personality entirely separate and distinct
from that of its officers and the latter cannot act for and on its behalf
without being so authorized by its governing board.
In Premium Marble Resources, Inc. v. Court of Appeals, 10 we made it
clear that in the absence of an authority from the board of directors, no
person, not even the officers of the corporation, can validly bind the latter:
Gonzales vs. Climax Mining Ltd., 452 SCRA 607 [2005]
Under Section 3, Rule 46 of the Rules of Court, a petitioner is required to
submit, together with the petition, a sworn certification of non-forum
shopping, and failure to comply with this requirement is sufficient ground
for dismissal of the petition. The requirement that petitioner should sign
the certificate of non-forum shopping applies even to corporations, the
Rules of Court making no distinction between natural and juridical
persons. The signatory in the case of the corporation should be "a duly
authorized director or officer of the corporation" who has knowledge of the
matter being certified.15 If, as in this case, the petitioner is a corporation,
a board resolution authorizing a corporate officer to execute the
certification against forum-shopping is necessary. A certification not
signed by a duly authorized person renders the petition subject to
dismissal.16
PET Plans, Inc. vs. CA, 446 SCRA 510 [2005]
In the present case, a reading of the subject resolution issued by the
Board of Directors of PET PLANS, shows that it authorizes Espino to
represent only PET PLANS, not its co-petitioner, Ocampo. Nothing in the
records at hand indicates that Espino is clothed with special authority to
represent Ocampo. Hence, Espino does not represent Ocampo, in the
filing of CA-G.R. SP No. 62410. As such, Ocampo, being a petitioner in his
own right, should have also signed the verification and certificate of non-
Corporation Law 2016: JVL & JSD
forum shopping attached to the petition of CA-G.R. SP No. 62410.
Ordinarily, Ocampo should have been considered a nominal party as
he was merely impleaded by complainant in his capacity as the
president of PET PLANS and no specific claim or charge against
him, in his personal capacity, was alleged in the complaint filed with
the NLRC, Regional Arbitration Branch. However, considering that
the Labor Arbiter's decision made him jointly and solidarily liable
with PET PLANS, he has become a real party-in-interest whose
stake, subsequent to the Labor Arbiter's decision, have become
distinct from those of petitioner corporation. As such, it becomes
inevitable for him to sign the verification and certificate of non-forum
shopping.
In the present case, it cannot be said with certainty that Espino knows
beyond doubt that Ocampo has not filed before any court or tribunal a
separate case related to the present petition and the petition in CA-G.R.
SP No. 62410. In Loquias vs. Office of the Ombudsman, 16 we held that
failure of one of the petitioners to sign the verification and certificate
against forum shopping constitutes a defect in the petition, which is a
ground for dismissing the same. While we have held in rulings subsequent
to Loquias that this rule may be relaxed, petitioners must comply with
two conditions:
first, petitioners must show justifiable cause for their failure to
personally sign the certification and;
second, they must also be able to prove that the outright dismissal
of the petition would seriously impair the orderly administration of
justice.17 In the present case, we find that petitioners failed to prove the
presence of these conditions. The dismissal by the Court of Appeals of
CA-G.R. SP No. 62410 should have put petitioners on guard as to the
basic procedural requirements in filing the petition. Notwithstanding such
dismissal and their subsequent filing of a motion for reconsideration,
petitioners still failed to substantially comply with the requirements of the
Rules by the failure of Ocampo to sign the certificate of non-forum
shopping. In the present petition filed before us, PET PLANS once again
failed to submit proof that it has authorized Espino to file the present
petition or to sign the verification and certificate against forum shopping
attached thereto. Likewise, petitioner Ocampo again failed to sign the
certificate of non-forum shopping. We cannot allow a party to gain an
41
advantage from its flagrant disregard of the Rules. 18 We find this fatal
to petitioners' cause.
2. Succession
3. To Adopt and use a Corporate Seal - Sec. 63
4. To Amend Articles of Incorporation
5. To Adopt By-laws and to Amend or Repeal the Same
6. To Issue Stocks to Subscribers and to Admit Members
7. To Acquire and Convey Property
8. To Enter into Mergers/Consolidation
9. To Make Reasonable Donations
10. To Establish pension, Retirement and Other Plans for Directors,
Trustees, Officers and Employees
11. To Exercise Essential, Necessary or Incidental or Implied Powers to
Carry Out Purposes (Sec. 45)
B. Specific (Express) Powers Different provisions of the Code grant a
corporation the power to:
1. 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)
Sec. 81. Instances of appraisal right.- Any stockholder of a
corporation shall have the right to dissent and demand payment of the fair
value of his shares in the following instances:
Corporation Law 2016: JVL & JSD
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or
of authorizing preferences in any respect superior to those of outstanding
shares of any class, or of extending or shortening the term of corporate
existence;
2. Increase or Decrease Capital Stock
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, two-
thirds (2/3) of the outstanding capital stock shall favor the increase or
diminution of the capital stock, or the incurring, creating or increasing of
any bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or increasing of
any bonded indebtedness and of the time and place of the stockholder's
meeting at which the proposed increase or diminution of the capital stock
or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of
the corporation and countersigned by the chairman and the secretary of
the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or
number of shares of no-par stock thereof actually subscribed, the names,
nationalities and residences of the persons subscribing, the amount of
capital stock or number of no-par stock subscribed by each, and the
amount paid by each on his subscription in cash or property, or the
amount of capital stock or number of shares of no-par stock allotted to
each stock-holder if such increase is for the purpose of making effective
stock dividend therefor authorized;
42
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or
the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From
and after approval by the Securities and Exchange Commission and the
issuance by the Commission of its certificate of filing, the capital stock
shall stand increased or decreased and the incurring, creating or
increasing of any bonded indebtedness authorized, as the certificate of
filing may declare: Provided, That the Securities and Exchange
Commission shall not accept for filing any certificate of increase of capital
stock unless accompanied by the sworn statement of the treasurer of the
corporation lawfully holding office at the time of the filing of the certificate,
showing that at least twenty-five (25%) percent of such increased capital
stock has been subscribed and that at least twenty-five (25%) percent of
the amount subscribed has been paid either in actual cash to the
corporation or that there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%) percent of the
subscription: Provided, further, That no decrease of the capital stock shall
be approved by the Commission if its effect shall prejudice the rights of
corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or
increase the same, with the approval by a majority vote of the board of
trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
Corporation Law 2016: JVL & JSD
Central Textile Mills, Inc. vs. National Wages and Productivity
Commission, 260 SCRA 368 [1996].
Petitioner maintains in the instant action that its authorized capital stock,
not its unauthorized paid-up capital, should be used in arriving at its
capital impairment for 1990. Citing two SEC Opinions dated August 10,
1971, and July 28, 1978, interpreting Section 38 of the Corporation Code,
it claims that "the capital stock of a corporation stand(s) increased or
decreased only from and after approval and the issuance of the certificate
of filing of increase of capital stock."
We agree.
The guidelines on exemption specifically refer to paid-up capital, not
authorized capital stock, as the basis of capital impairment for
exemption from WO No. NCR-02. The records reveal, however, that
petitioner included in its total paid-up capital payments on advance
subscriptions, although the proposed increase in its capitalization had not
yet been approved by, let alone presented for the approval of, the SEC. As
observed by the Board in its order of February 4, 1992, "the
aforementioned (r)esolution (of August 15, 1990) has not been filed by the
corporation with the SEC, nor was a petition to amend its Articles of
Incorporation by reason of the increase in its capitalization filed by the
same.
In the case at hand, petitioner's capital held answerable for the additional
wages would include funds it only holds in trust, which to reiterate may not
be deemed par of its paid-up capital, the losses of which shall be the basis
of the 25% referred to above. To include such funds in the paid-up
capital would be prejudicial to the corporation as an employer
considering that the records clearly show that it is entitled to exemption,
even as the anomaly was brought about by an auditing error.
3. Incur, Create or Increase Bonded Indebtedness (Sec. 38)
4. Deny Preemptive Right
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
43
shareholdings, unless such right is denied by the articles of incorporation
or an amendment thereto: Provided, That such pre-emptive right shall not
extend to shares to be issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public; or to shares to be
issued in good faith with the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock, in exchange for property
needed for corporate purposes or in payment of a previously contracted
debt.
Majority of Stockholders of Ruby Industrial Corporation vs. Lim, GR No.
165887, June 6, 2011
A stock corporation is expressly granted the power to issue or sell
stocks.59 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 does not need approval
of the stockholders.60 What is only required is the board resolution
approving the additional issuance of shares. The corporation shall also file
the necessary application with the SEC to exempt these from the
registration requirements under the Revised Securities Act (now the
Securities Regulation Code).
Pre-emptive right under Sec. 39 of the Corporation Code refers to the
right of a stockholder of a stock corporation to subscribe to all
issues or disposition of shares of any class, in proportion to their
respective shareholdings. The right may be restricted or denied under
the articles of incorporation, and subject to certain exceptions and
limitations. The stockholder must be given a reasonable time within which
to exercise their preemptive rights. Upon the expiration of said period, any
stockholder who has not exercised such right will be deemed to have
waived it.
The validity of issuance of additional shares may be questioned if done in
breach of trust by the controlling stockholders. Thus, even if the pre-
emptive right does not exist, either because the issue comes within
the exceptions in Section 39 or because it is denied or limited in the
articles of incorporation, an issue of shares may still be
objectionable if the directors acted in breach of trust and their
primary purpose is to perpetuate or shift control of the corporation,
Corporation Law 2016: JVL & JSD
or to "freeze out" the minority interest.66 In this case, the following
relevant observations should have signaled greater circumspection on the
part of the SEC -- upon the third and last remand to it pursuant to our
January 20, 1998 decision -- to demand transparency and accountability
from the majority stockholders, in view of the illegal assignments and
objectionable features of the Revised BENHAR/RUBY Plan, as found by
the CA and as affirmed by this Court:
5. Sell or Dispose of Substantially All Assets
Sec. 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 stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the
board of directors or trustees may, nevertheless, in its discretion, abandon
such sale, lease, exchange, mortgage, pledge or other disposition of
property and assets, subject to the rights of third parties under any
44
contract relating thereto, without further action or approval by the
stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property
and assets if the same is necessary in the usual and regular course of
business of said corporation or if the proceeds of the sale or other
disposition of such property and assets be appropriated for the conduct of
its remaining business.
In non-stock corporations where there are no members with voting rights,
the vote of at least a majority of the trustees in office will be sufficient
authorization for the corporation to enter into any transaction authorized
by this section.
Islamic Directorate of the Philippines vs. CA, 272 SCRA 454 (1997);
A juridical person cannot be a party where it was not duly
represented by its legitimate governing board
It is true that Civil Case No. Q-90-6937, which gave rise to G.R. No.
107751, was entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of
the Philippines, Defendant," 31 the IDP can not be considered essentially a
formal party thereto for the simple reason that it was not duly represented
by a legitimate Board of Trustees in that case. As a necessary
consequence, Civil Case No. Q-90-6937, a case for Specific Performance
with Damages, a mere action in personam, did not become final and
executory insofar as the true IDP is concerned since petitioner
corporation, for want of legitimate representation, was effectively deprived
of its day in court in said case. Res inter alios judicatae nullum allis
praejudicium faciunt. Matters adjudged in a cause do not prejudice those
who were not parties to it. 32 Elsewise put, no person (natural or juridical)
shall be affected by a proceeding to which he is a stranger.
The SEC has the unquestionable authority to pass upon the issue as
to who among the different contending groups is the legitimate
governing board of a corporate body
Corporation Law 2016: JVL & JSD
Premises considered, all acts carried out by the Carpizo Board,
particularly the sale of the Tandang Sora property, allegedly in the name of
the IDP, have to be struck down for having been done without the consent
of the IDP thru a legitimate Board of Trustees. Article 1318 of the New
Civil Code lays down the essential requisites of contracts:
There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
All these elements must be present to constitute a valid contract. For,
where even one is absent, the contract is void. As succinctly put by
Tolentino, consent is essential for the existence of a contract, and where it
is wanting, the contract is non-existent. 38 In this case, the IDP, owner of
the subject parcels of land, never gave its consent, thru a legitimate Board
of Trustees, to the disputed Deed of Absolute Sale executed in favor of
INC. This is, therefore, a case not only of vitiated consent, but one
where consent on the part of one of the supposed contracting
parties is totally wanting. Ineluctably, the subject sale is void and
produces no effect whatsoever. (where a corporate body never gave
its consent thru a legitimate governing board, to a deed of absolute
sale, the subject sale is void and produces no effect whatsoever.
The Tandang Sora property, it appears from the records, constitutes the
only property of the IDP. Hence, its sale to a third-party is a sale or
disposition of all the corporate property and assets of IDP falling squarely
within the contemplation of the foregoing section. For the sale to be
valid, the majority vote of the legitimate Board of Trustees,
concurred in by the vote of at least 2/3 of the bona fide members of
the corporation should have been obtained. These twin requirements
were not met as the Carpizo Group which voted to sell the Tandang Sora
property was a fake Board of Trustees, and those whose names and
signatures were affixed by the Carpizo Group together with the sham
Board Resolution authorizing the negotiation for the sale were, from all
indications, not bona fide members of the IDP as they were made to
appear to be. Apparently, there are only fifteen (15) official members of the
petitioner corporation including the eight (8) members of the Board of
Trustees.
45
Pena vs. CA, 193 SCRA 717 (1991)**
6. Acquire its Own Shares
Sec. 41. Power to acquire own shares. - A stock corporation
shall have the power to purchase or acquire its own shares for a
legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained
earnings in its books to cover the shares to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
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.
7. Invest Corporate Funds in Another Corporation or Business or For Any
Other Purpose
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.
Corporation Law 2016: JVL & JSD
De la Rama vs. Ma-ao Sugar Central Co., 27 SCRA 247(19693).
Plaintiff-appellants contend that the investment of corporate funds
by defendants-appelleant in another coporations constitutes a
violation of section 17 of the Corporation Law. e of shares, bonds,
securities, and other evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of the stockholders;
but when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its
incorporation, the vote of approval of the stockholders is necessary.
In the judgment, the lower court ordered the management of the Ma-ao
Sugar Central Co., Inc. "to refrain from making investments in Acoje
Mining, Mabuhay Printing and any other company whose purpose is not
connected with the sugar central business." This portion of the decision
should be reversed because, Sec. 17- of the Corporation Law allows
a corporation to "invest its fund in any other corporation or
business, or for any purpose other than the main purpose for which
it was organized," provided that its board of directors has been so
authorized by the affirmative vote of stockholders holding shares entitling
them to exercise at least two-thirds of the voting power.
8. 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)
46
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.
Nelson & Co. vs. Lepanto Consolidated Mining Co., 26 SCRA 540 [1968]).
Lepanto maintains that this Court erred in ordering Lepanto to issue and
deliver to Nielson shares of stock together with fruits thereof.
From the above-quoted provision of Section 16 of the Corporation Law,
the consideration for which shares of stock may be issued are: (1) cash;
(2) property; and (3) undistributed profits. Shares of stock are given the
special name "stock dividends" only if they are issued in lieu of
undistributed profits. If shares of stocks are issued in exchange of cash or
property then those shares do not fall under the category of "stock
dividends". A corporation may legally issue shares of stock in
consideration of services rendered to it by a person not a stockholder, or
in payment of its indebtedness. A share of stock issued to pay for services
rendered is equivalent to a stock issued in exchange of property, because
services is equivalent to property.14 Likewise a share of stock issued in
payment of indebtedness is equivalent to issuing a stock in exchange for
cash. But a share of stock thus issued should be part of the original capital
stock of the corporation upon its organization, or part of the stocks issued
when the increase of the capitalization of a corporation is properly
authorized. In other words, it is the shares of stock that are originally
issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property; that is, if the
corporation has original shares of stock unsold or unsubscribed, either
coming from the original capitalization or from the increased capitalization.
Those shares of stock may be issued to a person who is not a
Corporation Law 2016: JVL & JSD
stockholder, or to a person already a stockholder in exchange for services
rendered or for cash or property. But a share of stock coming from
stock dividends declared cannot be issued to one who is not a
stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the
corporation declaring or authorizing such dividend. It is, what the term
itself implies, a distribution of the shares of stock of the corporation among
the stockholders as dividends. A stock dividend of a corporation is a
dividend paid in shares of stock instead of cash, and is properly payable
only out of surplus profits.15 So, a stock dividend is actually two things: (1)
a dividend, and (2) the enforced use of the dividend money to purchase
additional shares of stock at par.16 When a corporation issues stock
dividends, it shows that the corporation's accumulated profits have been
capitalized instead of distributed to the stockholders or retained as surplus
available for distribution, in money or kind, should opportunity offer. Far
from being a realization of profits for the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock
has been transferred from surplus to assets and no longer available for
actual distribution.17 Thus, it is apparent that stock dividends are issued
only to stockholders. This is so because only stockholders are entitled to
dividends. They are the only ones who have a right to a proportional share
in that part of the surplus which is declared as dividends. A stock dividend
really adds nothing to the interest of the stockholder; the proportional
interest of each stockholder remains the same. 18If a stockholder is
deprived of his stock dividends - and this happens if the shares of stock
forming part of the stock dividends are issued to a non-stockholder
then the proportion of the stockholder's interest changes radically. Stock
dividends are civil fruits of the original investment, and to the owners of
the shares belong the civil fruits.19
The term "dividend" both in the technical sense and its ordinary
acceptation, is that part or portion of the profits of the enterprise which the
corporation, by its governing agents, sets apart for ratable division among
the holders of the capital stock. It means the fund actually set aside, and
declared by the directors of the corporation as dividends and duly ordered
by the director, or by the stockholders at a corporate meeting, to be
divided or distributed among the stockholders according to their respective
interests.20
47

National Tel. Commission vs. CA, 311 SCRA 508, 514-515 (1999).
The term "capital" and other terms used to describe the capital structure of
a corporation are of universal acceptance, and their usages have long
been established in jurisprudence. Briefly, capital refers to the value of the
property or assets of a corporation. The capital subscribed is the total
amount of the capital that persons (subscribers or shareholders) have
agreed to take and pay for, which need not necessarily be, and can be
more than, the par value of the shares. In fine, it is the amount that the
corporation receives, inclusive of the premiums if any, in consideration of
the original issuance of the shares. In the case of stock dividends, it is the
amount that the corporation transfers from its surplus profit account to its
capital account. It is the same amount that can loosely be termed as the
"trust fund" of the corporation. The "Trust Fund" doctrine considers this
subscribed capital as a trust fund for the payment of the debts of the
corporation, to which the creditors may look for satisfaction. Until the
liquidation of the corporation, no part of the subscribed capital may be
returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must
never impair the subscribed capital; subscription commitments cannot be
condoned or remitted; nor can the corporation buy its own shares using
the subscribed capital as the consideration therefor.
In the same way that the Court in PLDT vs. PSC has rejected the
"value of the property and equipment" as being the proper basis for the
fee imposed by Section 40(e) of the Public Service Act, as amended by
Republic Act No. 3792, so also must the Court disallow the idea of
computing the fee on "the par value of [PLDT's] capital stock subscribed
or paid excluding stock dividends, premiums, or capital in excess of par."
Neither, however, is the assessment made by the National
Telecommunications Commission on the basis of the market value of
the subscribed or paid-in capital stock acceptable since it is itself a
deviation from the explicit language of the law.
All things studiedly considered, and mindful of the aforesaid ruling of this
Court in the case of Philippine Long Distance Telephone Company
vs. Public Service Commission, it should be reiterated that the proper
basis for the computation of subject fee under Section 40(e) of the
Public Service Act, as amended by Republic Act No. 3792, is "the
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capital stock subscribed or paid and not, alternatively, the property
and equipment.
9. Enter into Management Contracts
Sec. 44. Power to enter into management contract. - No
corporation shall conclude a management contract with another
corporation unless such contract shall have been approved by the board
of directors and by stockholders owning at least the majority of the
outstanding capital stock, or by at least a majority of the members in the
case of a non-stock corporation, of both the managing and the managed
corporation, at a meeting duly called for the purpose: Provided, That (1)
where a stockholder or stockholders representing the same interest of
both the managing and the managed corporations own or control more
than one-third (1/3) of the total outstanding capital stock entitled to vote of
the managing corporation; or (2) where a majority of the members of the
board of directors of the managing corporation also constitute a majority
of the members of the board of directors of the managed corporation, then
the management contract must be approved by the stockholders of the
managed corporation owning at least two-thirds (2/3) of the total
outstanding capital stock entitled to vote, or by at least two-thirds (2/3) of
the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any
one term.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating agreements
which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations.
B Who Exercises Corporate Powers (Sec. 23) -
Sec. 23. The board of directors or trustees. - Unless otherwise
provided in this Code, the corporate powers of all corporations formed
48
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.
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
ABS-CBN Corp. vs. CA, 301 SCRA 572 (1999).
In the case at bar, ABS-CBN made no unqualified acceptance of VIVA's
offer. Hence, they underwent a period of bargaining. ABS-CBN then
formalized its counter-proposals or counter-offer in a draft contract, VIVA
through its Board of Directors, rejected such counter-offer, Even if it be
conceded arguendo that Del Rosario had accepted the counter-offer, the
acceptance did not bind VIVA, as there was no proof whatsoever that Del
Rosario had the specific authority to do so.
Under Corporation Code, 46 unless otherwise provided by said Code,
corporate powers, such as the power; to enter into contracts; are
exercised by the Board of Directors. However, the Board may
delegate such powers to either an executive committee or officials or
contracted managers. The delegation, except for the executive
committee, must be for specific purposes, 47 Delegation to officers makes
the latter agents of the corporation; accordingly, the general rules of
agency as to the bindings effects of their acts would
apply. 48 For such officers to be deemed fully clothed by the corporation to
exercise a power of the Board, the latter must specially authorize them to
do so. That Del Rosario did not have the authority to accept ABS-CBN's
counter-offer was best evidenced by his submission of the draft contract to
VIVA's Board of Directors for the latter's approval. In any event, there was
between Del Rosario and Lopez III no meeting of minds.
Corporation Law 2016: JVL & JSD
D. Ultra Vires Acts
Sec. 45. Ultra vires acts of corporations. - No corporation under
this Code shall possess or exercise any corporate powers except those
conferred by this Code or by its articles of incorporation and except such
as are necessary or incidental to the exercise of the powers so conferred.
1. Concept and Types merely a voidable ad which may be enforced by
performance, ratification, or estoppel.
Atrium Management Corporation vs. CA, 353 SCRA 23, [2001]
Hi-Cement, however, maintains that the checks were not issued for
consideration and that Lourdes and E.T. Henry engaged in a "kiting
operation" to raise funds for E.T. Henry, who admittedly was in need of
financial assistance. The Court finds that there was no sufficient evidence
to show that such is the case. Lourdes M. de Leon is the treasurer of the
corporation and is authorized to sign checks for the corporation. At the
time of the issuance of the checks, there were sufficient funds in the bank
to cover payment of the amount of P2 million pesos.
It is, however, our view that there is basis to rule that the act of issuing
the checks was well within the ambit of a valid corporate act, for it
was for securing a loan to finance the activities of the corporation,
hence, not an ultra vires act.
"An ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and
therefore beyond the power conferred upon it by law" 16 The
term "ultra vires" is "distinguished from an illegal act for the former is
merely voidable which may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be validated." 17
The next question to determine is whether Lourdes M. de Leon and
Antonio de las Alas were personally liable for the checks issued as
corporate officers and authorized signatories of the check.
"Personal liability of a corporate director, trustee or officer along
(although not necessarily) with the corporation may so validly
attach, as a rule, only when:
"1. He assents
49
 (a) to a patently unlawful act of the corporation, or
(b) for bad faith or gross negligence in directing its affairs, or
(c) for conflict of interest, resulting in damages to the
corporation, its stockholders or other persons;
"2. He consents to the issuance of watered down stocks or who,
having knowledge thereof, does not forthwith file with the corporate
secretary his written objection thereto;
"3. He agrees to hold himself personally and solidarily liable with the
corporation; or
"4. He is made, by a specific provision of law, to personally answer
for his corporate action."18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as
treasurer and Chairman of Hi-Cement were authorized to issue the
checks. However, Ms. de Leon was negligent when she signed the
confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of
E.T. Henry for the rediscounting of the crossed checks issued in
favor of E.T. Henry. She was aware that the checks were strictly
endorsed for deposit only to the payee's account and not to be
further negotiated. What is more, the confirmation letter contained a
clause that was not true, that is, "that the checks issued to E.T. Henry
were in payment of Hydro oil bought by Hi-Cement from E.T. Henry". Her
negligence resulted in damage to the corporation. Hence, Ms. de
Leon may be held personally liable therefor.
2. Ratification of Ultra Vires Acts:
Pirovano v. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954];
Can defendant corporation give by way of donation the proceeds of said
insurance policies to the minor children of the late Enrico Pirovano under
the law or its articles of corporation, or is that donation an ultra vires act?
After a careful perusal of the provisions above quoted we find that the
corporation was given broad and almost unlimited powers to carry out the
purposes for which it was organized among them, (1) "To invest and deal
with the moneys of the company not immediately required, in such
manner as from time to time may be determined" and, (2) "to aid in any
other manner any person, association, or corporation of which any
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obligation or in which any interest is held by this corporation or in the
affairs or prosperity of which this corporation has a lawful interest.", a
donation made to the heirs of its late president in recognition of the
valuable services rendered by the latter which had immensely
contributed to its growth , comes within this broad grant of power
and cannot be considered as an ultra vires act.
Illegal acts contemplates the doing of an act which is contrary to law,
morals, or public policy or public duty, and are, like similar transactions
between the individuals void. They cannot serve as basis of a court action,
nor require validity ultra vires acts on the other hand, or those which
are not illegal and void ab initio, but are merely within are not illegal
and void ab initio, but are not merely within the scope of the articles
of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
Harden v. Benguet Consolidated Mining Co., 58 Phil. 140 [1933]. ***
(a) Estoppel or Ratification
Vicente vs. Geraldez, 52 SCRA 210 (1973).
The law specifically requires that "juridical persons may
compromise only in the form and with the requisites which may be
necessary to alienate their property." Under the corporation law the
power to compromise or settle claims in favor of or against the
corporation is ordinarily and primarily committed to the Board of
Directors. The right of the Directors "to compromise a disputed claim
against the corporation rests upon their right to manage the affairs
of the corporation according to their honest and informed judgment
and discretion as to what is for the best interests of the
corporation." 6 This power may however be delegated either
expressly or impliedly to other corporate officials or agents. Thus it
has been stated, that as a general rule an officer or agent of the
corporation has no power to compromise or settle a claim by or against
the corporation, except to the extent that such power is given to him either
50
expressly or by reasonable implication from the circumstances. 7 It is
therefore necessary to ascertain whether from the relevant facts it could
be reasonably concluded that the Board of Directors of the HI Cement
Corporation had authorized its lawyers to enter into the said compromise
agreement.
Whatever authority the officers or agents of a corporation
may have is derived from the board of directors, or other governing
body, unless conferred by the charter of the corporation. A
corporation officer's power as an agent of the corporation must
therefore be sought from the statute, the charter, the by-laws, or in a
delegation of authority to such officer, from the acts of board of
directors, formally expressed or implied from a habit or custom of
doing business. 8 In the case at bar no provision of the charter and by-
laws of the corporation or any resolution or any other act of the board of
directors of HI Cement Corporation has been cited, from which We could
reasonably infer that the administrative manager had been granted
expressly or impliedly the power to bind the corporation or the authority to
compromise the case. Absent such authority to enter into the compromise,
the signature of Atty. Cardenas on the agreement would be legally
ineffectual.
In order to ratify the unauthorized act of an agent and make it
binding on the corporation, it must be shown that the governing
body or officer authorized to ratify had full and complete knowledge
of all the material facts connected with the transaction to which it
relates. 9 It cannot be assumed also that Atty. Cardenas, as administrative
manager of the corporation, had authority to ratify. For ratification can
never be made "on the part of the corporation by the same persons who
wrongfully assume the power to make the contract, but the ratification
must be by the officer or governing body having authority to make such
contract and, as we have seen, must be with full knowledge."
Aguenza vs. Metropolitan Bank Co., 271 SCRA 1 (1997).
A careful study of the responsive pleading filed by Atty. Francisco
Pangilinan, counsel for Intertrade, would reveal that there was neither
express nor implied admission of corporate liability warranting the
application of the general rule. Thus, the alleged judicial admission may
Corporation Law 2016: JVL & JSD
be contradicted and controverted because it was taken out of context and
no admission was made at all.
In any event, assuming arguendo that the responsive pleading did contain
the aforesaid admission of corporate liability, the same may not still be
given effect at all. As correctly found by the trial court, the alleged
admission made in the answer by the counsel for Intertrade was "without
any enabling act or attendant ratification of corporate act," 9 as would
authorize or even ratify such admission. In the absence of such
ratification or authority, such admission does not bind the
corporation.
The respondent appellate court likewise adjudged Intertrade liable
because of the two letters emanating from the office of Mr. Arrieta which
the respondent court considered "as indicating the corporate liability of the
corporation." 10 These documents and admissions cannot have the effect
of a ratification of an unauthorized act. As we elucidated in the case
of Vicente v. Geraldez, "ratification can never be made on the part of
the corporation by the same persons who wrongfully assume the
power to make the contract, but the ratification must be by the
officer as governing body having authority to make such contract." In
other words, the unauthorized act of respondent Arrieta can only be
ratified by the action of the Board of Directors and/or petitioner Aguenza
jointly with private respondent Arrieta.
(b) Apparent Authority
Advance Paper Corporation vs. Arma Traders Corporation, G.R. No
176897, December 11, 2013.
The doctrine of apparent authority provides that a corporation
will be estopped from denying the agents authority if it knowingly
permits one of its officers or any other agent to act within the scope
of an apparent authority, and it holds him out to the public as
possessing the power to do those acts. The doctrine of apparent
authority does NOT apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a
result of the exercise of reasonable prudence. Moreover, the agents
acts or conduct must have produced a change of position to the
third partys detriment.
51
 A]pparent authority is derived not merely from practice. Its
existence may be ascertained through
(1) the general manner in which the corporation holds out an officer or
agent as having the power to act or, in other words the apparent authority
to act in general, with which it clothes him; or
(2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond the scope of his
ordinary powers. It requires presentation of evidence of similar act(s)
executed either in its favor or in favor of other parties. It is not the
quantity of similar acts which establishes apparent authority, but the
vesting of a corporate officer with the power to bind the corporation
Inasmuch as a corporate president is often given general
supervision and control over corporate operations, the strict rule that said
officer has no inherent power to act for the corporation is slowly giving way
to the realization that such officer has certain limited powers in the
transaction of the usual and ordinary business of the corporation." 80 "In
the absence of a charter or bylaw provision to the contrary, the
president is presumed to have the authority to act within the domain
of the general objectives of its business and within the scope of his
or her usual duties
Banate, et al. vs. Philippine Countryside Rural Bank, Inc. 625 SCRA 21
[2010]
The authority of a corporate officer or agent in dealing with third
persons may be actual or apparent. Actual authority is either express or
implied. The extent of an agents express authority is to be measured by
the power delegated to him by the corporation, while the extent of his
implied authority is measured by his prior acts which have been ratified or
approved, or their benefits accepted by his principal. 18 The doctrine of
"apparent authority," on the other hand, with special reference to banks,
had long been recognized in this jurisdiction. The existence of apparent
authority may be ascertained through:
1) the general manner in which the corporation holds out an officer or
agent as having the power to act, or in other words, the apparent authority
to act in general, with which it clothes him; or
Corporation Law 2016: JVL & JSD
2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond the scope of his ordinary
powers.
Accordingly, the authority to act for and to bind a corporation may be
presumed from acts of recognition in other instances when the
power was exercised without any objection from its board or
shareholders
Under the doctrine of apparent authority, acts and contracts of the
agent, as are within the apparent scope of the authority conferred on him,
although no actual authority to do such acts or to make such contracts has
been conferred, bind the principal.20 The principals liability, however, is
limited only to third persons who have been led reasonably to believe by
the conduct of the principal that such actual authority exists, although
none was given. In other words, apparent authority is determined only
by the acts of the principal and not by the acts of the agent.21There
can be no apparent authority of an agent without acts or conduct on the
part of the principal; such acts or conduct must have been known and
relied upon in good faith as a result of the exercise of reasonable
prudence by a third party as claimant, and such acts or conduct must
have produced a change of position to the third partys detriment.
Further, we would be unduly stretching the doctrine of
apparent authority were we to consider the power to undo or nullify
solemn agreements validly entered into as within the doctrines
ambit. Although a branch manager, within his field and as to third
persons, is the general agent and is in general charge of the
corporation, with apparent authority commensurate with the ordinary
business entrusted him and the usual course and conduct
thereof, yet the power to modify or nullify corporate contracts
remains generally in the board of directors.26 Being a mere branch
manager alone is insufficient to support the conclusion that Mondigo has
been clothed with "apparent authority" to verbally alter terms of written
contracts, especially when viewed against the telling circumstances of this
case: the unequivocal provision in the mortgage contract; PCRBs
vigorous denial that any agreement to release the mortgage was ever
entered into by it; and, the fact that the purported agreement was not even
reduced into writing considering its legal effects on the parties interests.
To put it simply, the burden of proving the authority of Mondigo to alter or
novate the mortgage contract has not been established.
52

Associated Bank vs. Sps. Pronstroller, 558 SCRA 113[2008]
The general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a corporation.
The power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in the board of
directors. However, just as a natural person may authorize another to do
certain acts for and on his behalf, the board may validly delegate some of
its functions and powers to officers, committees and agents. The authority
of such individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either expressly or
impliedly, by habit, custom, or acquiescence, in the general course of
business.34
The authority of a corporate officer or agent in dealing with third persons
may be actual or apparent. The doctrine of "apparent authority," with
special reference to banks, had long been recognized in this
jurisdiction. Apparent authority is derived not merely from practice. Its
existence may be ascertained through
1) the general manner in which the corporation holds out an officer
or agent as having the power to act, or in other words, the apparent
authority to act in general, with which it clothes him; or
2) the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond the scope of his
ordinary powers.36
Accordingly, the authority to act for and to bind a corporation may
be presumed from acts of recognition in other instances, wherein the
power was exercised without any objection from its board or shareholders.
Undoubtedly, petitioner had previously allowed Atty. Soluta to enter into
the first agreement without a board resolution expressly authorizing him;
thus, it had clothed him with apparent authority to modify the same via the
second letter-agreement. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer
with the power to bind the corporation.
Naturally, the third person has little or no information as to what
occurs in corporate meetings; and he must necessarily rely upon the
external manifestations of corporate consent. The integrity of
commercial transactions can only be maintained by holding the
Corporation Law 2016: JVL & JSD
corporation strictly to the liability fixed upon it by its agents in
accordance with law.What transpires in the corporate board room is
entirely an internal matter. Hence, petitioner may not impute negligence
on the part of the respondents in failing to find out the scope of Atty.
Solutas authority. Indeed, the public has the right to rely on the
trustworthiness of bank officers and their acts.
We would like to emphasize that if a corporation knowingly permits
its officer, or any other agent, to perform acts within the scope of an
apparent authority, holding him out to the public as possessing power to
do those acts, the corporation will, as against any person who has dealt in
good faith with the corporation through such agent, be estopped from
denying such authority.
DBP vs. Spouses Ong, 460 SCRA 170 [2005]
In passing upon the liability of a corporation in cases of this kind it
is always well to keep in mind the situation as it presents itself to the third
party with whom the contract is made. Naturally he can have little or no
information as to what occurs in corporate meetings; and he must
necessarily rely upon the external manifestation of corporate consent. The
integrity of commercial transactions can only be maintained by holding the
corporation strictly to the liability fixed upon it by its agents in accordance
with law; and we would be sorry to announce a doctrine which would
permit the property of man in the city of Paris to be whisked out of his
hands and carried into a remote quarter of the earth without recourse
against the corporation whose name and authority had been used in the
manner disclosed in this case. As already observed, it is familiar
doctrine that if a corporation knowingly permits one of its officers, or
any other agent, to do acts within the scope of an apparent authority,
and thus holds him out to the public as possessing power to do
those acts, the corporation will, as against any one who has in good
faith dealt with the corporation through such agent, be estopped
from denying his authority; and where it is said 'if the corporation
permits this means the same as 'if the thing is permitted by the
directing power of the corporation."
In this light, the bank is estopped from questioning the authority of
the bank manager to enter into the contract of sale. If a corporation
knowingly permits one of its officers or any other agent to act within the
53
scope of an apparent authority, it holds the agent out to the public as
possessing the power to do those acts; thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be
estopped from denying the agent's authority.
Unquestionably, petitioner has authorized Tena to enter into the
Deed of Sale. Accordingly, it has a clear legal duty to issue the board
resolution sought by respondents. Having authorized her to sell the
property, it behooves the bank to confirm the Deed of Sale so that the
buyers may enjoy its full use.
There is, however, a striking and very material difference between the
aforecited case and the one at bar. For, unlike in Milaor where it was
the branch manager who approved the sale for and in behalf of the bank,
here, there is absolutely no approval whatsoever by any responsible bank
officer of the petitioner. True it is that the signature of branch manager
Lagrito appears below the typewritten word "NOTED" at the bottom of
respondents offer to purchase dated May 25, 1988. 14 By no stretch of
imagination, however, can the mere "NOTING" of such an offer be taken
to mean an approval of the supposed sale. Quite the contrary, the very
circumstance that the offer to purchase was merely "NOTED" by the
branch manager and not "approved", is a clear indication that there
is no perfected contract of sale to speak of.
Inter-Asia Investments Industries, Inc. vs. CA, 403 SCRA 452 [2003
[A]pparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in which
the corporation holds out an officer or agent as having the power to act or,
in other words the apparent authority to act in general, with which it
clothes him; or (2) the acquiescence in his acts of a particular nature,
with actual or constructive knowledge thereof, within or beyond the
scope of his ordinary powers.
It requires presentation of evidence of similar act(s) executed either i
n its favor or in favor of other parties. It is not
the quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with power to bind the corporation.
x x x (Emphasis and underscoring supplied)
As correctly argued by private respondent, an officer of a
corporation who is authorized to purchase the stock of another
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corporation has the implied power to perform all other obligations
arising therefrom, such as payment of the shares of stock. By
allowing its president to sign the Agreement on its behalf, petitioner
clothed him with apparent capacity to perform all acts which are
expressly, impliedly and inherently stated therein.
Prime White Cement Corp. vs. IAC, 220 SCRA 103, 113 [1993];
There is only one legal issue to be resolved by this Court: whether
or not the "dealership agreement" referred by the President and Chairman
of the Board of petitioner corporation is a valid and enforceable contract.
Under the Corporation Law, which was then in force at the time
this case arose, as well as under the present Corporation Code, all
corporate powers shall be exercised by the Board of Directors, except as
otherwise provided by law. 6 Although it cannot completely abdicate its
power and responsibility to act for the juridical entity, the Board may
expressly delegate specific powers to its President or any of its officers. In
the absence of such express delegation, a contract entered into by its
President, on behalf of the corporation, may still bind the corporation if the
board should ratify the same expressly or impliedly. Implied ratification
may take various forms like silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of
benefits flowing therefrom. Furthermore, even in the absence of express
or implied authority by ratification, the President as such may, as a
general rule, bind the corporation by a contract in the ordinary course of
business, provided the same is reasonable under the
circumstances. These rules are basic, but are all general and thus quite
flexible. They apply where the President or other officer, purportedly acting
for the corporation, is dealing with a third person, i. e., a
person outside the corporation.
A board of director or other corporate officer cannot readily
enter into a contract with his own corporation
The situation is quite different where a director or officer is dealing
with his own corporation. In the instant case respondent Te was not an
ordinary stockholder; he was a member of the Board of Directors and
Auditor of the corporation as well. He was what is often referred to as a
"self-dealing" director.
54
A director of a corporation holds a position of trust and as such, he owes a
duty of loyalty to his corporation. In case his interests conflict with those of
the corporation, he cannot sacrifice the latter to his own advantage and
benefit. As corporate managers, directors are committed to seek the
maximum amount of profits for the corporation. This trust relationship "is
not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders
3. Legal Consequences of Ultra Vires Act
(a) On the corporation itself:
Rule 66, Sec. 2, Revised Rules of Court: - the corporation may be
dissolved under a quo warrant proceeding instituted by the Solicitor
General.
Sec. 2. When Solicitor General or public prosecutor must
commence action.
The Solicitor General or a public prosecutor, when directed by the
President of the Philippines, or when upon complaint or otherwise he has
good reason to believe that any case specified in the preceding section
can be established by proof, must commence such action.
b) On the immediate parties to the ultra vires contract:
Republic of the Philippines vs. Acoje Mining Co., 7 SCRA 361 (1963).
While as a rule an ultra vires act is one committed outside the object for
which a corporation is created as defined by the law of its organization
and therefore beyond the powers conferred upon it by law (19 C.J.S.,
Section 965, p. 419), there are however certain corporate acts that
may be performed outside of the scope of the powers expressly
conferred if they are necessary to promote the interest or welfare of
the corporation. Thus, it has been held that "although not expressly
authorized to do so a corporation may become a surety where the
particular transaction is reasonably necessary or proper to the
conduct of its business,"and here it is undisputed that the establishment
Corporation Law 2016: JVL & JSD
of the local post office is a reasonable and proper adjunct to the conduct
of the business of appellant company. Indeed, such post office is a vital
improvement in the living condition of its employees and laborers who
came to settle in its mining camp which is far removed from the postal
facilities or means of communication accorded to people living in a city or
municipality.
Even assuming arguendo that the resolution in question
constitutes an ultra vires act, the same however is not void for it was
approved not in contravention of law, customs, public order or public
policy. The term ultra vires should be distinguished from an illegal act for
the former is merely voidable which may be enforced by performance,
ratification, or estoppel, while the latter is void and cannot be validated. 2 It
being merely voidable, an ultra vires act can be enforced or validated if
there are equitable grounds for taking such action. Here it is fair that the
resolution be upheld at least on the ground of estoppel. The current of
modern authorities favors the rule that where the ultra vires transaction
has been executed by the other party and the corporation has
received the benefit of it, the law interposes an estoppel, and will not
permit the validity of the transaction or contract to be questioned,
and this is especially true where there is nothing in the circumstances to
put the other party to the transaction on notice that the corporation has
exceeded its powers in entering into it and has in so doing overstepped
the line of corporate privileges
Notice that the phraseology and the terms employed are so clear
and sweeping and that the defendant assumed 'full responsibility for all
cash received by the Postmaster.' Here the responsibility of the defendant
is not just that of a guarantor. It is clearly that of a principal."
Pirovano vs. De la Rama Steamship Co., Inc., 96 Phil. 335 [1954]***.
(c) On the rights of the stockholders: Derivative suits
VI. CONTROL AND MANAGEMENT OF THE CORPORATION
3 Levels of Control Over Corporate Affairs.
55
A. Board of Directors or Trustees (Sec. 23)
Section 23. The board of directors or trustees.
Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until
their successors are elected and qualified.
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.
- Manila Metal Container Corp. vs. PhiL National Bank, 511 SCRA 447
[2006]
As this Court ruled in AF Realty Development, Inc. vs. Diesehuan Freight
Services, Inc.:
Section 23 of the Corporation Code expressly provides that the corporate
powers of all corporations shall be exercised by the board of
directors. Just as a natural person may authorize another to do certain
acts in his behalf, so may the board of directors of a corporation validly
delegate some of its functions to individual officers or agents appointed by
it. Thus, contracts or acts of a corporation must be made either by the
board of directors or by a corporate agent duly authorized by the
board. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the
corporation, but not in the course of, or connected with the performance of
authorized duties of such director, are held not binding on the corporation.
Corporation Law 2016: JVL & JSD
Thus, a corporation can only execute its powers and transact its business
through its Board of Directors and through its officers and agents when
authorized by a board resolution or its by-laws.
- Tan vs. Sycip, 499 SCRA 216 [2006]
For stock corporations, the quorum referred to in Section 52 of the
Corporation Code is based on the number of outstanding
voting stocks. For nonstock corporations, only those who are actual,
living members with voting rights shall be counted in determining the
existence of a quorum during members meetings. Dead members shall
not be counted.
[A]cts of management pertain to the board; and those of ownership, to the
stockholders or members. In the latter case, the board cannot act alone,
but must seek approval of the stockholders or members.
Conformably with the foregoing principles, one of the most important
rights of a qualified shareholder or member is the right to vote -- either
personally or by proxy -- for the directors or trustees who are to manage
the corporate affairs. The right to choose the persons who will direct,
manage and operate the corporation is significant, because it is the main
way in which a stockholder can have a voice in the management of
corporate affairs, or in which a member in a nonstock corporation can
have a say on how the purposes and goals of the corporation may be
achieved. Once the directors or trustees are elected, the stockholders or
members relinquish corporate powers to the board in accordance with law.
In the absence of an express charter or statutory provision to the contrary,
the general rule is that every member of a nonstock corporation, and
every legal owner of shares in a stock corporation, has a right to be
present and to vote in all corporate meetings. Conversely, those who are
not stockholders or members have no right to vote. Voting may be
expressed personally, or through proxies who vote in their representative
capacities. Generally, the right to be present and to vote in a meeting is
determined by the time in which the meeting is held.
- Gamboa vs. Victorian, 90 SCRA 40 [1979]
56

[The] courts cannot undertake to control the discretion of the board of
directors about administrative matters as to which they have legitimate
power of, action and contracts intra vires entered into by the board of
directors are binding upon the corporation and courts will not interfere
unless such contracts are so unconscionable and oppressive as to
amount to a wanton destruction of the rights of the minority. In the instant
case, the plaintiffs aver that the defendants have concluded a transaction
among themselves as will result to serious injury to the interests of the
plaintiffs, so that the trial court has jurisdiction over the case.
1. Board Must Act As a Body in a Meeting - Sec. 25;
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.
The directors or trustees and officers to be elected shall perform
the duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of
corporate business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum shall
be valid as a corporate act, except for the election of officers which
shall require the vote of a majority of ALL the members of the board.
Directors or trustees CANNOT attend or vote by proxy at board
meetings
NOTA BENE: Cases assigned are malabo for the present topic.
- Firme vs. Bukal Enterprises, 414 SCRA 190 [2003]
Corporation Law 2016: JVL & JSD
[T]here was no approval from the Board of Directors of Bukal Enterprises
as would finalize any transaction with the Spouses Firme. Aviles, an
agent, did not have the proper authority to negotiate for Bukal Enterprises.
De Castro, as Bukal Enterprises vice president, testified that HE
authorized Aviles to buy the Property. However, there is no Board
Resolution authorizing Aviles to negotiate and purchase the Property on
behalf of Bukal Enterprises. It is the board of directors or trustees which
exercises almost all the corporate powers in a corporation. Under
Sections 23 and 36 of the Corporation Code, the power to purchase real
property is vested in the board of directors or trustees. While a corporation
may appoint agents to negotiate for the purchase of real property needed
by the corporation, the final say will have to be with the board, whose
approval will finalize the transaction. A corporation can only exercise its
powers and transact its business through its board of directors and
through its officers and agents when authorized by a board resolution or
its by-laws.
- Hornilla vs. Salunat, 405 SCRA 220 [2003]
[A] corporations board of directors is understood to be that body which (1)
exercises all powers provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3) controls and holds all
property of the corporation. Its members have been characterized as
trustees or directors clothed with a fiduciary character. It is clearly
separate and distinct from the corporate entity itself.
Where corporate directors have committed a breach of trust either by their
frauds, ultra vires acts, or negligence, and the corporation is unable or
unwilling to institute suit to remedy the wrong, a stockholder may sue on
behalf of himself and other stockholders and for the benefit of the
corporation, to bring about a redress of the wrong done directly to the
corporation and indirectly to the stockholders. This is what is known as a
derivative suit, and settled is the doctrine that in a derivative suit, the
corporation is the real party in interest while the stockholder filing suit for
the corporations behalf is only nominal party. The corporation should be
included as a party in the suit.
57
- Safic Alcan &Cie vs. Imperial Vegetable Oil Co., Inc. 355 SCRA 559
A president has no blanket authority to bind a corporation to any contract.
An elected president must act according to the instructions of the Board of
Directors. Even in instances when the president is authorized by the
corporations' by-laws to act according to his discretion, that discretion
must not conflict with prior Board orders, resolutions and instructions. A
prior authorization from the board is necessary to bind a corporation,
unless ratification was made thereafter. It must be pointed out that the
Board of Directors, not a lone officer, exercises corporate power.
- Board of Liquidators v. Heirs of Kalaw, 20 SC RA 987 [1967]
Issue: Plaintiff levelled a major attack on the lower court's holding that
Kalaw justifiedly entered into the controverted contracts without the prior
approval of the corporation's directorate. Plaintiff leans heavily on
NACOCO's corporate by-laws. Article IV (b), Chapter III thereof, recites,
as amongst the duties of the general manager, the obligation: "(b) To
perform or execute on behalf of the Corporation upon prior approval of the
Board, all contracts necessary and essential to the proper
accomplishment for which the Corporation was organized."
A rule that has gained acceptance through the years is that a corporate
officer "intrusted with the general management and control of its business,
has implied authority to make any contract or do any other act which is
necessary or appropriate to the conduct of the ordinary business of the
corporation. As such officer, "he may, without any special authority from
the Board of Directors perform all acts of an ordinary nature, which by
usage or necessity are incident to his office, and may bind the corporation
by contracts in matters arising in the usual course of business.
The problem, therefore, is whether the case at bar is to be taken out of the
general concept of the powers of a general manager, given the cited
provision of the NACOCO by-laws requiring prior directorate approval of
NACOCO contracts.
Settled jurisprudence has it that where similar acts have been approved
by the directors as a matter of general practice, custom, and policy, the
Corporation Law 2016: JVL & JSD
general manager may bind the company without formal authorization of
the board of directors. In varying language, existence of such authority is
established, by proof of the course of business, the usage and practices of
the company and by the knowledge which the board of directors has, or
must be presumed to have, of acts and doings of its subordinates in and
about the affairs of the corporation.
So also,
x x x authority to act for and bind a corporation may be presumed from
acts of recognition in other instances where the power was in fact
exercised.
x x x Thus, when, in the usual course of business of a corporation, an
officer has been allowed in his official capacity to manage its affairs, his
authority to represent the corporation may be implied from the manner in
which he has been permitted by the directors to manage its business.
In the case at bar, the practice of the corporation has been to allow its
general manager to negotiate and execute contracts in its copra trading
activities for and in NACOCO's behalf without prior board approval. If the
by-laws were to be literally followed, the board should give its stamp of
prior approval on all corporate contracts. But that board itself, by its acts
and through acquiescence, practically laid aside the by-law requirement of
prior approval.
- Lopez Really vs. Fontecha, 247 SCRA 183, 192 [1995]
As a general rule, a corporation through its board of directors should act in
the manner and within the formalities prescribed by its charter or by the
general law. Thus, directors must act as a body in a meeting called
pursuant to the law or corporations by- laws, otherwise any action may be
questioned by any objecting stockholder. However, an action of the board
of directors during a meeting, which was illegal for lack of notice may be
ratified either expressly, by the action of the directors in subsequent legal
meeting or impliedly by the corporations subsequent course of conduct.
Thus, a director who was not notified of a board meeting is precluded from
questioning the validity of the resolution granting gratuity pay to employee
58
approved at that meeting if she later on acquiesced to it by signing the
vouchers for the payment of the gratuity pay.
2. Business Judgment Rule
- Ong Yong vs, Tiu, 401 SCRA 1 (2003)
[A] judicial order to decrease capital stock without the assent of
FLADC's directors and stockholders is a violation of the
"business judgment rule" which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors
are binding upon the corporation and courts will not interfere unless
such contracts are so unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority, as when plaintiffs aver
that the defendants (members of the board), have concluded a
transaction among themselves as will result in serious injury to the
plaintiffs stockholders.
The reason behind the rule is aptly explained by Dean Cesar L.
Villanueva, an esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment
of the board mainly because, courts are not in the business of
business, and the laissez faire rule or the free enterprise system
prevailing in our social and economic set-up dictates that it is better for
the State and its organs to leave business to the businessmen;
especially so, when courts are ill-equipped to make business
decisions. More importantly, the social contract in the corporate family
to decide the course of the corporate business has been vested in the
board and not with courts.
Corporation Law 2016: JVL & JSD
- Montelibano vs. Bacolod-Murcia Miling Co., Inc., 5 SCRA 36 [1962];
There can be no doubt that the directors of the appellee company had
authority to modify the proposed terms of the Amended Milling Contract
for the purpose of making its terms more acceptable to the other
contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to
the corporate purpose expressed in the charter. If that act is one which is
lawful in itself, and not otherwise prohibited, is done for the purpose of
serving corporate ends, and is reasonably tributary to the promotion of
those ends, in a substantial, and not in a remote and fanciful sense, it may
fairly be considered within charter powers. The test to be applied is
whether the act in question is in direct and immediate furtherance of the
corporation's business, fairly incident to the express powers and
reasonably necessary to their exercise. If so, the corporation has the
power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950,
pp. 266-268)
As the resolution in question was passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the central, the court has no authority to review
them.
They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be
controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss during
depression, or close down at a smaller loss, is a purely business and
economic problem to be determined by the directors of the corporation
and not by the court. It is a well-known rule of law that questions of policy
or of management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute
its judgment of the board of directors; the board is the business manager
of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).
59

- Philippine Stock Exchange, Inc. v. CA, 281 SCRA 232 [1997].
A corporation is but an association of individuals, allowed to transact
under an assumed corporate name, and with a distinct legal personality. In
organizing itself as a collective body, it waives no constitutional immunities
and perquisites appropriate to such a body. As to its corporate and
management decisions, therefore, the state will generally not interfere with
the same. Questions of policy and of management are left to the honest
decision of the officers and directors of a corporation, and the courts are
without authority to substitute their judgment for the judgment of the board
of directors. The board is the business manager of the corporation,
and so long as it acts in good faith, its orders are not reviewable by
the courts.
Thus, notwithstanding the regulatory power of the SEC over the PSE, and
the resultant authority to reverse the PSE's decision in matters of
application for listing in the market, the SEC may exercise such power
only if the PSE's judgment is attended by bad faith. In Board of
Liquidators vs. Kalaw, it was held that bad faith does not simply connote
bad judgment or negligence. It imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means a breach of a
known duty through some motive or interest of ill will, partaking of the
nature of fraud.
- Benguet Electric Cooperative, Inc. vs. NLRC, 209 SCRA 55 (1992)
[The] applicable general rule is clear enough. The Board members and
officers of a corporation who purport to act for and in behalf of the
corporation, keep within the lawful scope of their authority in so acting,
and act in good faith, do not become liable, whether civilly or
otherwise, for the consequences of their acts, Those acts, when they
are such a nature and are done under such circumstances, are
properly attributed to the corporation alone and no personal liability is
incurred by such officers and Board members.
Corporation Law 2016: JVL & JSD
In this case, the record showed strong indications that respondent
Board members had illegally suspended and dismissed Cosalan
precisely because he was trying to remedy the financial irregularities
and violations of NEA regulations which the COA had brought to the
attention of Beneco.
The Solicitor General has urged that respondent Board members may
be held liable for damages under the foregoing circumstance under
Section 31 of the Corporation Code which reads as follows:
Sec. 31. Liability of directors, trustees or officers. Directors or
trustees who willfully 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 jointly liable and severally for all damages
resulting therefrom suffered by the corporation, its stockholders or
members and other persons . . . (Emphasis supplied)
We agree with the Solicitor General, firstly, that Section 31 of the
Corporation Code is applicable in respect of Beneco and other
electric cooperatives similarly situated. Section 4 of the Corporation
Code renders the provisions of that Code applicable in a
supplementary manner to all corporations, including those with special
or individual charters so long as those provisions are not inconsistent
with such charters.
60
We agree with the Solicitor General, secondly, that respondent Board
members were guilty of "gross negligence or bad faith in
directing the affairs of the corporation" in enacting the series of
resolutions noted earlier indefinitely suspending and dismissing
respondent Cosalan from the position of General Manager of
Beneco. Respondent Board members, in doing so, acted belong
the scope of their authority as such Board members. The
dismissal of an officer or employee in bad faith, without lawful cause
and without procedural due process, is an act that is contra legem. It
cannot be supposed that members of boards of directors derive any
authority to violate the express mandates of law or the clear legal rights
of their officers and employees by simply purporting to act for the
corporation they control.
3. Requirements of Meeting - Sec. 49- Regular or special meetings;
Sec. 53
Section 49. Kinds of meetings.
Meetings of directors, trustees, stockholders, or members may
be regular or special.
(a) Notice - state the date, time and place of meeting sent 1 day
before, unless by-laws provide otherwise, or waived by
directors.
(b) Place - may be anywhere it pleases even outside of the
Philippines.
(c) Quorum and vote - articles of incorporation CANNOT provide
for lesser majority.
Director CANNOT be represented by proxy.
Corporation Law 2016: JVL & JSD
Directors can now participate by video or teleconferencing
provided the corporation adopts practices to preserve the
recording of the meetings. (New SEC ruling in light of the
General Banking Law and E-Commerce Act).
- Expert.avel & Tours, Inc. vs. CA, 459 SCRA 147 [2005].
[A] court cannot take judicial notice of any fact which, in part, is
dependent on the existence or non-existence of a fact of which
the court has no constructive knowledge.
In this age of modern technology, the courts may take judicial notice
that business transactions may be made by individuals through
teleconferencing. Teleconferencing is interactive group
communication (three or more people in two or more locations) through
an electronic medium. In general terms, teleconferencing can bring
people together under one roof even though they are separated by
hundreds of miles. This type of group communication may be used in a
number of ways, and have three basic types: (1) video conferencing -
television-like communication augmented with sound; (2) computer
conferencing - printed communication through keyboard terminals, and
(3) audio-conferencing-verbal communication via the telephone with
optional capacity for telewriting or telecopying.
A teleconference represents a unique alternative to face-to-face (FTF)
meetings.
In the Philippines, teleconferencing and videoconferencing of members
of board of directors of private corporations is a reality, in light of
Republic Act No. 8792. The Securities and Exchange Commission
61
issued SEC Memorandum Circular No. 15, on November 30, 2001,
providing the guidelines to be complied with related to such
conferences. Thus, the Court agrees with the RTC that persons in the
Philippines may have a teleconference with a group of persons in
South Korea relating to business transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim
participated in a teleconference along with the respondents Board of
Directors, the Court is not convinced that one was conducted; even if
there had been one, the Court is not inclined to believe that a board
resolution was duly passed.
[I]n their affidavit, Suk Kyoo Kim declared that the respondent do[es]
not keep a written copy of the aforesaid Resolution because no
records of board resolutions approved during teleconferences
were kept.
The Court is, thus, more inclined to believe that the alleged
teleconference never took place, and that the resolution allegedly
approved by the respondents Board of Directors during the said
teleconference was a mere concoction purposefully foisted on the
RTC, the CA and this Court, to avert the dismissal of its complaint
against the petitioner.
(d) Agenda
(e) Presiding officer
Corporation Law 2016: JVL & JSD
- Lopez Realty Inc. and Asuncion Lopez-Gonzales vs. Spouses
Reynaldo Tanjangco and Maria Luisa Arguelles-Tanjangco, G.R.
No. 154291, November 12, 2014
The Court agrees with the petitioners that the August 17, 1981 Board
Resolution did NOT give Arturo the authority to act as LRIs
representative in the subject sale, as the meeting of the board of
directors where such was passed was conducted without giving
any notice to Asuncion. Section 53 of the Corporation Code provides
for the following:
SEC. 53. Regular and special meetings of directors or trustees.
Regular meetings of the board of directors or trustees of every
corporation shall be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or trustees may be held at
any time upon call of the president or as provided in the by-laws.
Meetings of directors or trustees of corporations may be held anywhere
in or outside of the Philippines, unless the by-laws provide otherwise.
Notice of regular or special meetings stating the date, time and place
of the meeting must be sent to every director or trustee at least one (1)
day prior to the scheduled meeting, unless otherwise provided by the
by-laws. A director or trustee may waive this requirement, either
expressly or impliedly. (Emphasis ours)
The Court took this matter up in Fontecha, involving herein parties,
where it was held that a meeting of the board of directors is legally
infirm if there is failure to comply with the requirements or formalities of
62
the law or the corporations by laws and any action taken on such
meeting may be challenged as a consequence:
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed
by its charter or by the general law. Thus, directors must act as a body
in a meeting called pursuant to the law or the corporations bylaws,
otherwise, any action taken therein may be questioned by any
objecting director or shareholder. However, the actions taken in such a
meeting by the directors or trustees may be ratified expressly or
impliedly. "Ratification means that the principal voluntarily adopts,
confirms and gives sanction to some unauthorized act of its agent on
its behalf. It is this voluntary choice, knowingly made, which amounts
to a ratification of what was theretofore unauthorized and becomes the
authorized act of the party so making the ratification. The substance of
the doctrine is confirmation after conduct, amounting to a substitute for
a prior authority. Ratification can be made either expressly or impliedly.
Implied ratification may take various forms like silence or
acquiescence, acts showing approval or adoption of the act, or
acceptance and retention of benefits flowing therefrom."
The Court's decision in Fontecha concerns the implied ratification of
one of the resolutions passed on August 17, 1981 by the board of
directors of LRI despite of the lack of notice of meeting to Asuncion.
This was owing to the subsequent actions taken therein by the
stockholders, including Asuncion herself, as cited by the CA in its
decision. On the other hand, the sale of the property to the spouses
Tanjangco was ratified, not because of implied ratification as was the
Corporation Law 2016: JVL & JSD
case in Fontecha but through the passage of the July 30, 1982 Board
Resolution.
In the present case, the ratification was expressed through the July 30,
1982 Board Resolution. Asuncion claims that the July 30, 1982 Board
Resolution did not ratify the Board Resolution dated August 17, 1981
for lack of the required number of votes because Juanito is not entitled
to vote while Leo voted "no" to the ratification ofthe sale even if the
minutes stated otherwise. Asuncion assails the authority of Juanito to
vote because he was not a director and he did not own any share of
stock which would qualify him to be one. On the contrary, Juanito
defends his right to vote as the representative of Teresitas estate.
Upon examination of the July 30, 1982 minutes of the meeting, it can
be deduced that the meeting is a joint stockholders and directors
meeting. The Court takes into account that majority of the board of
directors except for Asuncion, had already approved of the sale to the
spouses Tanjangco prior to this meeting. As a consequence, the power
to ratify the previous resolutions and actions of the board of directors in
this case lies inthe stockholders, not in the board of directors. It would
be absurd to require the board of directors to ratify their own actsacts
which the same directors already approved of beforehand. Hence,
Juanito, as the administrator of Teresitas estate even though not
a director, is entitled to vote on behalf of Teresitas estate as the
administrator thereof. The Court reiterates its ruling in Tan v. Sycip:
In stock corporations, shareholders may generally transfer their shares.
Thus, on the death of a shareholder, the executor or administrator duly
appointed by the Court is vested with the legal title to the stock and
entitled to vote it. Until a settlement and division of the estate is
63
effected, the stocks of the decedent are held by the administrator or
executor. (Citation omitted and emphasis ours)
On the issue that Leo voted against the ratification of sale, the Court
notes that only Juanito, Benjamin and Rosendo signed the minutes of
the meeting. It was also not stated who prepared the minutes, given
that Asuncion as the corporate secretary refused to record the same.
Also, it was not explained why Leo was not able to affix his signature
on the said minutes if he really voted in favor of the ratification of the
sale. Whats more, Leo was not presented to testify on the witness
stand. Hence, contrary to the position adopted by the CA, only those
whose signatures appear on the minutes of the meeting can be said to
have voted in favor of the ratification. This case must be differentiated
from the Courts ruling in People v. Dumlao, et al.
In Dumlao, the Court ruled that the signing of the minutes by all the
directors is not a requisite and that the lack of signatures on the
minutes does not mean that the resolution was not passed by the
board. However, there is a notable disparity between the facts in
Dumlaoand the instant case. In Dumlao, the corporate secretary
therein recorded, prepared and certified the correctness of the minutes
of the meeting despite the fact that not all directors signed the minutes.
In this case, it could not even be established who recorded the
minutes in view of Asuncions refusal to do so, as demonstrated
during the cross examination of Benjamin by the petitioners
counsel:
Corporation Law 2016: JVL & JSD
It is the signature of the corporate secretary, as the one who is
tasked to prepare and record the minutes, that gives the minutes
of the meeting probative value and credibility,
Thus, without the certification of the corporate secretary, it is
incumbent upon the other directors or stockholders as the case may
be, to submit proof that the minutes of the meeting is accurate and
reflective of what transpired during the meeting. Conformably to the
foregoing, in the absence of Asuncions certification, only Juanito,
Benjamin and Rosendo, whose signatures appeared on the minutes,
could be considered as to have ratified the sale to the spouses
Tanjangco.
In Cua, Jr. et al. v. Tan, et al., the Court held that by virtue of
ratification, the acts of the board of directors become the acts of the
stockholders themselves, even if those acts were, at the outset,
unauthorized.
4. Close Corporations - Sec 97
Section 97. Articles of incorporation.
The articles of incorporation of a close corporation may provide:
64
 1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as may be
stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each
of whom may be voted for and elected solely by a particular class of
stock; and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders
of the corporation shall be deemed to be directors for the purpose of
applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all
liabilities of directors.
The articles of incorporation may likewise provide that all officers or
employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors.
5. Qualifications of Directors and Trustees (Secs. 23 and 27; Sec.
47(5);
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.
Corporation Law 2016: JVL & JSD
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.
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.
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:
5. The qualifications, duties and compensation of directors or
trustees, officers and employees;
- Gokongwel, Jr. vs. SEC, 89 SCRA 336 [1979]).
The validity or reasonableness of a by-law of a corporation in purely a
question of law. Whether the by-law is in conflict with the law of the land,
or with the charter of the corporation, or is in a legal sense unreasonable
and therefore unlawful is a question of law. This rule is subject, however,
to the limitation that where the reasonableness of a by-law is a mere
matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-
laws and who have exercised their authority.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS
OF DIRECTORS EXPRESSLY CONFERRED BY LAW
65
Private respondents contend that the disputed amended by laws were
adopted by the Board of Directors of San Miguel Corporation a-, a
measure of self-defense to protect the corporation from the clear and
present danger that the election of a business competitor to the Board
may cause upon the corporation and the other stockholders inseparable
prejudice. Submitted for resolution, therefore, is the issue whether or
not respondent San Miguel Corporation could, as a measure of self-
protection, disqualify a competitor from nomination and election to its
Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent
power to adopt by-laws 'for its internal government, and to regulate the
conduct and prescribe the rights and duties of its members towards itself
and among themselves in reference to the management of its affairs. At
common law, the rule was "that the power to make and adopt by-laws
was inherent in every corporation as one of its necessary and inseparable
legal incidents. And it is settled throughout the United States that in the
absence of positive legislative provisions limiting it, every private
corporation has this inherent power as one of its necessary and
inseparable legal incidents, independent of any specific enabling provision
in its charter or in general law, such power of self-government being
essential to enable the corporation to accomplish the purposes of its
creation.
In this jurisdiction, under section 21 of the Corporation Law, a corporation
may prescribe in its by-laws "the qualifications, duties and compensation
of directors, officers and employees ... " This must necessarily refer to a
qualification in addition to that specified by section 30 of the Corporation
Law, which provides that "every director must own in his right at least one
share of the capital stock of the stock corporation of which he is a
director ... " In Government v. El Hogar, the Court sustained the validity of
a provision in the corporate by-law requiring that persons elected to the
Board of Directors must be holders of shares of the paid up value of
P5,000.00, which shall be held as security for their action, on the ground
that section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and
is "highly prudent and in conformity with good practice. "
Corporation Law 2016: JVL & JSD
(a) A director must OWN at least ONE share of stock
- Nautica Canning Corp. vs. Yumul, 473 SCRA 417 [2005]
Section 23 of Batas Pambansa (BP) Blg. 68 or The Corporation Code
of the Philippines requires that every director must own at least one
share of the capital stock of the corporation of which he is a
director. Before one may be elected president of the corporation,
he must be a director. Since Yumul was elected as Nauticas
Director and as President thereof, it follows that he must have
owned at least one share of the corporations capital stock.
Thus, from the point of view of the corporation, Yumul was the owner
of one share of stock. As such, the SEC correctly ruled that he has
the right to inspect the books and records of Nautica, pursuant to
Section 74 of BP Blg. 68 which states that the records of all
business transactions of the corporation and the minutes of any
meetings shall be open to inspection by any director, trustee,
stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
- Pena vs. CA, 193 SC RA 717 [1991];
The by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the
corporation. They are in effect, written, into the charter. In this
sense they become part of the fundamental law of the
corporation with which the corporation and its directors and
66
 officers must comply.
Apparently, only three (3) out of five (5) members of the board
of directors of respondent PAMBUSCO convened by virtue of a
prior notice of a special meeting. There was no quorum to
validly transact business since it is required under its by-laws
that at least four (4) members must be present to constitute a
quorum in a special meeting of the board of directors.
Under Section 25 of the Corporation Code of the Philippines,
the articles of incorporation or by-laws of the corporation may
fix a greater number than the majority of the number of board
members to constitute the quorum necessary for the valid
transaction of business. Any number less than the number
provided in the articles or by-laws therein cannot constitute a
quorum and any act therein would not bind the corporation; all
that the attending directors could do is to adjourn.
Moreover, the records show that respondent PAMBUSCO
ceased to operate for about 25 years prior to the board
meeting. Being a dormant corporation for several years, it was
highly irregular, for a group of three (3) individuals representing
themselves to be the directors of respondent PAMBUSCO to
pass a resolution disposing of the only remaining asset of the
corporation in favor of a former corporate officer.
As a matter of fact, the three (3) alleged directors who attended
the special meeting on November 19, 1974 were not listed as
directors of respondent PAMBUSCO in the latest general
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information sheet. Similarly, the latest list of stockholders of
respondent PAMBUSCO on file with the SEC does not show
that the said alleged directors were among the stockholders of
respondent PAMBUSCO, in contravention of the rule requiring
a director to own one (1) share in their to qualify as director of a
corporation.
Further, under the Corporation Law, the sale or disposition of
any and/or substantially all properties of the corporation
requires, in addition to a proper board resolution, the affirmative
votes of the stockholders holding at least two-thirds (2/3) of the
voting power in the corporation in a meeting duly called for that
purpose. This was not complied with in the case at bar.
At the time of the passage of the questioned resolution,
respondent PAMBUSCO was insolvent and its only remaining
asset was its right of redemption over the subject properties.
Since the disposition of said redemption right of respondent
PAMBUSCO by virtue of the questioned resolution was not
approved by the required number of stockholders, the said
resolution, as well as the subsequent assignment and sale,
were null and void.
- Detective & Protective Bureau, Inc. vs. Cloribel, 26 SCRA 255
[1969]
[Petitioner contended that respondent Alberto had arrogated to himself
the powers of the Board of Directors of the corporation because he
refused to vacate the office and surrender the same to Jose de la Rosa
who had been elected managing director by the Board to succeed him.
67
This assertion, however, was disputed by respondent Alberto who
stated that Jose de la Rosa could not be elected managing director
because he did not own any stock in the corporation.]
There is in the record no showing that Jose de la Rosa owned a share
of stock in the corporation. If he did not own any share of stock,
certainly he could not be a director pursuant to the mandatory
provision of Section 30 of the Corporation Law, which in part provides:
Sec. 30. Every director must own in his own right at least one share
of the capital stock of the stock corporation of which he is a
director, which stock shall stand in his name on the books of the
corporation
The manager shall be elected by the Board of Directors from among its
members
If the managing director-elect was not qualified to become managing
director, respondent Fausto Alberto could not be compelled to vacate
his office and cede the same to the managing director-elect because
the by-laws of the corporation provides in articles IV, Section 1 that
"Directors shall serve until the election and qualification of their duly
qualified successor.
(b) Mere beneficial ownership in a voting trust arrangement
NO longer qualifies
- Lee vs. CA, 205 SCRA 752 [1992].
Corporation Law 2016: JVL & JSD
[W/N the voting trust agreement is valid despite being contrary to the
general principle that a corporation can only be bound by such acts
which are within the scope of its officers' or agents' authority]
In resolving the issue of the propriety of the service of summons in the
instant case, we dwell first on the nature of a voting trust agreement and
the consequent effects upon its creation in the light of the provisions of the
Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the
stockholders of a corporation and the trustee or by a group
of identical agreements between individual stockholders
and a common trustee, whereby it is provided that for a
term of years, or for a period contingent upon a certain
event, or until the agreement is terminated, control over
the stock owned by such stockholders, either for certain
purposes or for all purposes, is to be lodged in the trustee,
either with or without a reservation to the owners, or
persons designated by them, of the power to direct how
such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19
Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly
recognizes voting trust agreements, a more definitive meaning may be
gathered. The said provision partly reads:
Sec. 59. Voting Trusts One or more stockholders of a
stock corporation may create a voting trust for the purpose
of conferring upon a trustee or trustees the right to vote
and other rights pertaining to the share for a period rights
pertaining to the shares for a period not exceeding five (5)
years at any one time: Provided, that in the case of a
voting trust specifically required as a condition in a loan
agreement, said voting trust may be for a period exceeding
(5) years but shall automatically expire upon full payment
68
 of the loan. A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions
thereof. A certified copy of such agreement shall be filed
with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock
covered by the voting trust agreement shall be cancelled
and new ones shall be issued in the name of the trustee or
trustees stating that they are issued pursuant to said
agreement. In the books of the corporation, it shall be
noted that the transfer in the name of the trustee or
trustees is made pursuant to said voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the
voting rights of a stockholder from his other rights such as the right to
receive dividends, the right to inspect the books of the corporation, the
right to sell certain interests in the assets of the corporation and other
rights to which a stockholder may be entitled until the liquidation of the
corporation. However, in order to distinguish a voting trust agreement from
proxies and other voting pools and agreements, it must pass three criteria
or tests, namely: (1) that the voting rights of the stock are separated from
the other attributes of ownership; (2) that the voting rights granted are
intended to be irrevocable for a definite period of time; and (3) that the
principal purpose of the grant of voting rights is to acquire voting control of
the corporation. (5 Fletcher, Cyclopedia of the Law on Private
Corporations, section 2075 [1976] p. 331 citing Tankersly v. Albright, 374
F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement
may confer upon a trustee not only the stockholder's voting rights but also
other rights pertaining to his shares as long as the voting trust agreement
is not entered "for the purpose of circumventing the law against
monopolies and illegal combinations in restraint of trade or used for
purposes of fraud." (section 59, 5th paragraph of the Corporation Code)
Thus, the traditional concept of a voting trust agreement primarily intended
to single out a stockholder's right to vote from his other rights as such and
made irrevocable for a limited duration may in practice become a legal
Corporation Law 2016: JVL & JSD
device whereby a transfer of the stockholder's shares is effected subject
to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a
dichotomy between the equitable or beneficial ownership of the corporate
shares of a stockholders, on the one hand, and the legal title thereto on
the other hand.
The law simply provides that a voting trust agreement is an agreement in
writing whereby one or more stockholders of a corporation consent to
transfer his or their shares to a trustee in order to vest in the latter voting
or other rights pertaining to said shares for a period not exceeding five
years upon the fulfillment of statutory conditions and such other terms and
conditions specified in the agreement. The five year-period may be
extended in cases where the voting trust is executed pursuant to a loan
agreement whereby the period is made contingent upon full payment of
the loan.
In the instant case, the point of controversy arises from the effects of the
creation of the voting trust agreement. The petitioners maintain that with
the execution of the voting trust agreement between them and the other
stockholders of ALFA, as one party, and the DBP, as the other party, the
former assigned and transferred all their shares in ALFA to DBP, as
trustee. They argue that by virtue to of the voting trust agreement the
petitioners can no longer be considered directors of ALFA.
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as
to the most immediate effect of a voting trust agreement on the status of a
stockholder who is a party to its execution from legal titleholder or
owner of the shares subject of the voting trust agreement, he becomes
the equitable or beneficial owner.
The penultimate question, therefore, is whether the change in his status
deprives the stockholder of the right to qualify as a director under section
69
23 of the present Corporation Code which deletes the phrase "in his own
right." Section 30 of the old Code states that:
Every director must own in his own right at least one share
of the capital stock of the stock corporation of which he is
a director, which stock shall stand in his name on the
books of the corporation. A director who ceases to be the
owner of at least one share of the capital stock of a stock
corporation of which is a director shall thereby cease to be
a director . . . (Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly
speaking, cannot be adversely affected by the simple act of such director
being a party to a voting trust agreement inasmuch as he remains owner
(although beneficial or equitable only) of the shares subject of the voting
trust agreement pursuant to which a transfer of the stockholder's shares in
favor of the trustee is required (section 36 of the old Corporation Code).
No disqualification arises by virtue of the phrase "in his own right"
provided under the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees
and other persons who in fact are not beneficial owners of the shares
registered in their names on the books of the corporation becomes
formally legalized (see Campos and Lopez-Campos, supra, p. 296)
Hence, this is a clear indication that in order to be eligible as a director,
what is material is the legal title to, not beneficial ownership of, the stock
as appearing on the books of the corporation.
(c) Majority must be RESIDENTS of the Philippines.
(d) Morally upright and honest.
(e) Not have substantial interest in a competing corporation.
(f) Only NATURAL persons.
(g) Other qualifications provided by by-laws.
6. Election of Diectors and Trustees
(a) Directors Secs. 24 and 26;
Corporation Law 2016: JVL & JSD
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 bylaws, 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.
Section 26. Report of election of directors, trustees and
officers.
Within thirty (30) days after the election of the directors, trustees
and officers of the corporation, the secretary, or any other officer of the
corporation, shall submit to the Securities and Exchange Commission, the
names, nationalities and residences of the directors, trustees, and officers
elected. Should a director, trustee or officer die, resign or in any manner
70
cease to hold office, his heirs in case of his death, the secretary, or any
other officer of the corporation, or the director, trustee or officer himself,
shall immediately report such fact to the Securities and Exchange
Commission.
- Premium Marble Resources vs. Court of Appeals, 234 SC RA 11
[1996]).
[In case where there are 2 lists of Board Of Directors submitted to
SEC, which one is controlling?]
While the Minutes of the Meeting of the Board on April 1, 1982 states
that the newly elected officers for the year 1982 were Oscar Gan,
Mario Zavalla, Aderito Yujuico and Rodolfo Millare, petitioner failed to
show proof that this election was reported to the SEC. In fact, the last
entry in their General Information Sheet with the SEC, as of 1986
appears to be the set of officers elected in March 1981.
By the express mandate of the Corporation Code (Section 26), all
corporations duly organized pursuant thereto are required to submit
within the period therein stated (30 days) to the Securities and
Exchange Commission the names, nationalities and residences of the
directors, trustees and officers elected.
Sec. 26 of the Corporation Code provides, thus:
Sec. 26. Report of election of directors, trustees and officers. Within
thirty (30) days after the election of the directors, trustees and officers
of the corporation, the secretary, or any other officer of the corporation,
shall submit to the Securities and Exchange Commission, the names,
Corporation Law 2016: JVL & JSD
nationalities and residences of the directors, trustees
and officers elected. xxx
Evidently, the objective sought to be achieved by Section 26 is to give
the public information, under sanction of oath of responsible officers, of
the nature of business, financial condition and operational status of the
company together with information on its key officers or managers so
that those dealing with it and those who intend to do business with it
may know or have the means of knowing facts concerning the
corporations financial resources and business responsibility.
The claim, therefore, of petitioners as represented by Atty. Dumadag,
that Zaballa, et al., are the incumbent officers of Premium has not been
fully substantiated. In the absence of an authority from the board of
directors, no person, not even the officers of the corporation, can
validly bind the corporation
(b) Trustee (Secs. 92 and 138).
Section 92. Election and term of trustees.
Unless otherwise provided in the articles of incorporation or the
by-laws, the board of trustees of nonstock corporations, which may be
more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of their number shall
expire every year; and subsequent elections of trustees comprising one-
third (1/3) of the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees thereafter elected to
fill vacancies occurring before the expiration of a particular term shall hold
office only for the unexpired period. NO person shall be elected as
trustee unless he is a member of the corporation. Unless otherwise
provided in the articles of incorporation or the by-laws, officers of a non-
stock corporation may be directly elected by the members.
71
 Section 138. Designation of governing boards.
The provisions of specific provisions of this Code to the contrary
notwithstanding, non-stock or special corporations may, through their
articles of incorporation or their by-laws, designate their governing boards
by any name other than as board of trustees.
(c) Cumulative Voting (Sec. 24).
7. Removal of Directors or Trustees -Sec. 28;
Section 28. Removal of directors or trustees.
Any director or trustee of a corporation may be removed from
office by a vote of the stockholders holding or representing at least
two-thirds (2/3) of the outstanding capital stock, or if the corporation
be a non-stock corporation, by a vote of at least two-thirds (2/3) of
the members entitled to vote: Provided, That such removal shall take
place either at a regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose
such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the secretary on order of the
president or on the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock, or, if it be a
non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the
special meeting upon such demand or fail or refuse to give the notice, or if
there is no secretary, the call for the meeting may be addressed directly to
the stockholders or members by any stockholder or member of the
corporation signing the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code. Removal
may be with or without cause: Provided, That removal without cause
may not be used to deprive minority stockholders or members of the right
of representation to which they may be entitled under Section 24 of this
Code.
Corporation Law 2016: JVL & JSD
- Roxas vs. De la Rosa, 49 Phil. 609 [1928]
[U]nder the law the directors of a corporation can only be removed from
office by a vote of the stockholders representing at least two-thirds of the
subscribed capital stock entitled to vote (Act No. 1459, sec. 34); while
vacancies in the board, when they exist, can be filled by mere majority
vote, (Act No. 1459, sec. 25). Moreover, the law requires that when action
is to be taken at a special meeting to remove the directors, such purpose
shall be indicated in the call (Act No. 1459, sec. 34).
[Take note: de facto incumbent board of directors' acts will be valid until
they shall be lawfully removed from the office or cease from the
discharge of their functions.]
8. Vacancy in the Board (Sec. 29)
Section 29. Vacancies in the office of director or trustee.
Any vacancy occurring in the board of directors or trustees other
than by removal by the stockholders or members or by expiration of term,
may be filled by the vote of at least a majority of the remaining
directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special
meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired term of his predecessor in
office.
Any directorship or trusteeship to be filled by reason of an
increase in the number of directors or trustees shall be filled only by an
election at a regular or at a special meeting of stockholders or members
duly called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the meeting.
- Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969,
September 4, 2009
72
[T]he issue for the Court to resolve is whether the remaining directors of a
corporations Board, still constituting a quorum, can elect another director
to fill in a vacancy caused by the resignation of a hold-over director. The
resolution of this legal issue is significantly hinged on the determination of
what constitutes a directors term of office.
The holdover period is not
part of the term of office of
a member of the board of
directors
The word term has acquired a definite meaning in jurisprudence. In
several cases, we have defined term as the time during which the officer
may claim to hold the office as of right, and fixes the interval after which
the several incumbents shall succeed one another. The term of office is
not affected by the holdover. The term is fixed by statute and it does not
change simply because the office may have become vacant, nor because
the incumbent holds over in office beyond the end of the term due to the
fact that a successor has not been elected and has failed to qualify.
Term is distinguished from tenure in that an officers tenure represents the
term during which the incumbent actually holds office. The tenure may be
shorter (or, in case of holdover, longer) than the term for reasons within or
beyond the power of the incumbent.
Based on the above discussion, when Section 23 of the Corporation Code
declares that the board of directorsshall hold office for one (1) year until
their successors are elected and qualified, we construe the provision to
mean that the term of the members of the board of directors shall be only
for one year; their term expires one year after election to the office. The
holdover period that time from the lapse of one year from a members
election to the Board and until his successors election and qualification
is not part of the directors original term of office, nor is it a new term; the
holdover period, however, constitutes part of his tenure. Corollary, when
an incumbent member of the board of directors continues to serve in a
holdover capacity, it implies that the office has a fixed term, which has
expired, and the incumbent is holding the succeeding term.
Corporation Law 2016: JVL & JSD
After the lapse of one year from his election as member of the VVCC
Board in 1996, Makalintals term of office is deemed to have already
expired. That he continued to serve in the VVCC Board in a holdover
capacity cannot be considered as extending his term. To be precise,
Makalintals term of office began in 1996 and expired in 1997, but, by
virtue of the holdover doctrine in Section 23 of the Corporation Code, he
continued to hold office until his resignation on November 10, 1998. This
holdover period, however, is not to be considered as part of his term,
which, as declared, had already expired.
With the expiration of Makalintals term of office, a vacancy resulted which,
by the terms of Section 29 of the Corporation Code, must be filled by the
stockholders of VVCC in a regular or special meeting called for the
purpose. To assume as VVCC does that the vacancy is caused by
Makalintals resignation in 1998, not by the expiration of his term in 1997,
is both illogical and unreasonable. His resignation as a holdover director
did not change the nature of the vacancy; the vacancy due to the
expiration of Makalintals term had been created long before his
resignation.
The powers of the
corporations board of
directors emanate from its
stockholders
VVCCs construction of Section 29 of the Corporation Code on the
authority to fill up vacancies in the board of directors, in relation to Section
23 thereof, effectively weakens the stockholders power to participate in
the corporate governance by electing their representatives to the board of
directors. The board of directors is the directing and controlling body of the
corporation. It is a creation of the stockholders and derives its power to
control and direct the affairs of the corporation from them. The board of
directors, in drawing to themselves the powers of the corporation,
occupies a position of trusteeship in relation to the stockholders, in the
sense that the board should exercise not only care and diligence, but
utmost good faith in the management of corporate affairs. [12]
73
The underlying policy of the Corporation Code is that the business and
affairs of a corporation must be governed by a board of directors whose
members have stood for election, and who have actually been elected by
the stockholders, on an annual basis. Only in that way can the directors'
continued accountability to shareholders, and the legitimacy of their
decisions that bind the corporation's stockholders, be assured. The
shareholder vote is critical to the theory that legitimizes the exercise of
power by the directors or officers over properties that they do not own. [13]
This theory of delegated power of the board of directors similarly explains
why, under Section 29 of the Corporation Code, in cases where the
vacancy in the corporations board of directors is caused not by the
expiration of a members term, the successor so elected to fill in a vacancy
shall be elected only for the unexpired term of the his predecessor in
office. The law has authorized the remaining members of the board to fill
in a vacancy only in specified instances, so as not to retard or impair the
corporations operations; yet, in recognition of the stockholders right to
elect the members of the board, it limited the period during which the
successor shall serve only to the unexpired term of his predecessor in
office.
While the Court in El Hogar approved of the practice of the directors to fill
vacancies in the directorate, we point out that this ruling was made before
the present Corporation Code was enacted [14] and before its Section 29
limited the instances when the remaining directors can fill in vacancies in
the board, i.e., when the remaining directors still constitute a quorum and
when the vacancy is caused for reasons other than by removal by the
stockholders or by expiration of the term.
It also bears noting that the vacancy referred to in Section 29
contemplates a vacancy occurring within the directors term of
office. When a vacancy is created by the expiration of a term, logically,
there is no more unexpired term to speak of.Hence, Section 29 declares
that it shall be the corporations stockholders who shall possess the
authority to fill in a vacancy caused by the expiration of a members term.
As correctly pointed out by the RTC, when remaining members of the
VVCC Board elected Ramirez to replace Makalintal, there was no more
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unexpired term to speak of, as Makalintals one-year term had already
expired. Pursuant to law, the authority to fill in the vacancy caused by
Makalintals leaving lies with the VVCCs stockholders, not the remaining
members of its board of directors.
- Grace Christian High School vs. CA, 281 SCRA 133 [1997])
[Petitioner disputes the ruling that the provision in question, giving
petitioners representative a permanent seat in the board of the
association, is contrary to law. Petitioner claims that that is not so because
there is really no provision of law prohibiting unelected members of boards
of directors of corporations. Referring to 92 of the present Corporation
Code, petitioner says:
It is clear that the above provision of the Corporation Code only provides
for the manner of election of the members of the board of trustees of non-
stock corporations which may be more than fifteen in number and which
manner of election is even subject to what is provided in the articles of
incorporation or by-laws of the association thus showing that the above
provisions [are] not even mandatory.]
It is actually 28 and 29 of the Corporation Law not 92 of the present law or
29 of the former one which require members of the boards of directors of
corporations to be elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate powers of all
corporations formed under this Act shall be exercised, all business
conducted and all property of such corporations controlled and held by
a board of not less than five nor more than eleven directors to be
elected from among the holders of stock or, where there is no stock,
from the members of the corporation: Provided, however, That in
corporations, other than banks, in which the United States has or may
have a vested interest, pursuant to the powers granted or delegated
by the Trading with the Enemy Act, as amended, and similar Acts of
Congress of the United States relating to the same subject, or by
Executive Order No. 9095 of the President of the United States, as
heretofore or hereafter amended, or both, the directors need not be
74
 elected from among the holders of the stock, or, where there is no
stock from the members of the corporation. (emphasis added)
29. At the meeting for the adoption of the original by-laws, or at such
subsequent meeting as may be then determined, directors shall be
elected to hold their offices for one year and until their successors are
elected and qualified.Thereafter the directors of the corporation shall
be elected annually by the stockholders if it be a stock corporation or
by the members if it be a nonstock corporation, and if no provision is
made in the by-laws for the time of election the same shall be held on
the first Tuesday after the first Monday in January. xxx.(Emphasis
added)
The present Corporation Code (B.P. Blg. 68), which took effect on May 1,
1980, similarly provides:
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 and until their successors are elected
and qualified. (Emphasis added)
These provisions of the former and present corporation law leave no room
for doubt as to their meaning: the board of directors of corporations must
be elected from among the stockholders or members. There may be
corporations in which there are unelected members in the board but it is
clear that in the examples cited by petitioner the unelected members sit
as ex officio members, i.e., by virtue of and for as long as they hold a
particular office. Nor can petitioner claim a vested right to sit in the
board on the basis of practice. Practice, no matter how long
continued, cannot give rise to any vested right if it is contrary to law.
Even less tenable is petitioners claim that its right is coterminus with
the existence of the association.
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9. Term of Office; Hold-Over Principle - Sec. 23;
Section 23. The board of directors or trustees.
Unless otherwise provided in this Code, the corporate powers of
all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the
holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until
their successors are elected and qualified.
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.
- Government vs. El Hagar Filipino, 50 Phil. 399 [1927];
[The failure of the corporation to hold annual meetings and the filling of
vacancies in the directorate in the manner described constitute
misdemeanours on the part of the respondent which justify the resumption
of the franchise by the Government and dissolution of the corporation; and
in this connection it is charge that the board of directors of the respondent
has become a permanent and self perpetuating body composed of
wealthy men instead of wage earners and persons of moderate means. ]
Ruling 5: We are unable to see the slightest merit in the charge. No fault
can be imputed to the corporation on account of the failure of the
shareholders to attend the annual meetings; and their non-attendance at
such meetings is doubtless to be interpreted in part as expressing their
satisfaction of the way in which things have been conducted. The doctrine
above stated finds expressions in article 66 of the by-laws of the
75
respondent which declares in so many words that directors shall hold
office "for the term of one year on until their successors shall have been
elected and taken possession of their offices." It result that the practice of
the directorate of filling vacancies by the action of the directors
themselves is valid. Nor can any exception be taken to then personality of
the individuals chosen by the directors to fill vacancies in the body.
Certainly it is no fair criticism to say that they have chosen competent
businessmen of financial responsibility instead of electing poor persons to
so responsible a position. The possession of means does not disqualify a
man for filling positions of responsibility in corporate affairs.
- Nueno vs. Angeles, 76 Phil. 22;
[The four petitioners, including Jose Topacio Nueno, instituted this
action against the six respondents on the ground that petitioners,
having been elected as members of the Municipal Board of Manila in
the general election held in December, 1940, for three years, their term
of office has not yet expired because they have not served for three
years completely due to the Japanese occupation, and besides,
because they entitled to hold-over or continue in office until their
successors are elected and qualified, and therefore respondents'
appointments are null and void. ISSUE: whether or not, under the law,
petitioners are entitled to hold-over as members of the Municipal Board
of the City of Manila]
The contention that petitioners are entitled to continue in office
because they have not completely served for three years due to the
war, is untenable, even assuming that they had not discharged the
duties of their office during the Japanese occupation of Manila.
For the simple reason that the term of an office must be distinguished
from the tenure of the incumbent. The term means the time during
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which the officer may claim to hold the office as of light, and fixes the
interval after which the several incumbents shall succeed one another.
The tenure represents the term during which the incumbent actually
holds the office. The term of office is not affected by the hold-over. The
tenure may be shorter than the term for reasons within or beyond the
power of the incumbent. There is no principle, law or doctrine by which
the term of an office may be extended by reason of war.
From the foregoing it clearly appears that petitioners are not entitled to
hold-over, and after the expiration of their term of office on December
31, 1943, the offices of members of the Municipal Board of Manila
became vacant from January 1, 1944, because of failure to hold the
regular election on the second Tuesday of December 1943 and the
special election, and consequently to elect the would-be incumbents.
And during the interregnum or temporary vacancy from January 1,
1944, until the said special election is held and new members elected
or, in case of failure to elect, appointed by the President (under section
16 [c] and [d] of Commonwealth Act No. 357) the President had, under
section 16 (a) of the same Act, the power to appoint the respondents or
any other, at his discretion, to fill said temporary vacancy or vacancies.
As the petitioners are not entitled to hold-over or continue, after the
expiration of their term, in the offices claimed by them and held now by
the respondents, they have no right to bring the present action and
impugn the validity of the latter's appointments, according to the
provisions of section 6, Rule 68, of the Rules of Court.
- Ponce vs. Encarnacion, 94 Phil. 81 [1953]).
76
The only question to determine in this case is whether under and
pursuant to section 26 of Act No. 1459, known as the Corporation law,
the respondent court may issue the order complained of. Said section
provides:
Whenever, from any cause, there is no person authorized to call a
meeting, or when the officer authorized to do so refuses, fails or
neglects to call a meeting, any judge of a Court of First Instance on the
showing of good cause therefor, may issue an order to any stockholder
or member of a corporation, directing him to call a meeting of the
corporation by giving the proper notice required by this Act or by-laws;
and if there be no person legally authorized to preside at such meeting,
the judge of the Court of First Instance may direct the person calling
the meeting to preside at the same until a majority of the members or
stockholders representing a majority of the stock members or
stockholders presenting a majority of the stock present and permitted
by law to be voted have chosen one of their number to act as presiding
officer for the purposes of the meeting.
On the showing of good cause therefor, the court may authorize a
stockholder to call a meeting and to preside threat until the majority
stockholders representing a majority strockholders representing a
majority of the stock present and permitted to be voted shall have
chosen one among them to preside it. And this showing of good cause
therefor exists when the court is apprised of the fact that the by-laws of
the corporation require the calling of a general meeting of the
stockholders to elect the board of directors but call for such meeting
has not been done.
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The requirement that "on the showing of good cause therefor"
the court may grant to a stockholder the authority to call such meeting
and to preside thereat does not mean that the petition for such
authority must be set for hearing with notice served upon the board of
directors. It may be likened to a writ of preliminary injunction or
attachment may be issued ex parte upon compliance with the
requirements of the rules and upon the court being satisfied that the
same should be issued.
The alleged illegality of the election of one member of the board
of directors at the meeting called as authorised by the court being
subsequent to the order complained of cannot affect the validity and
legality of the order. If it be true that one of the directors elected at such
meeting was not qualified in accordance with the provisions of the by-
laws, the remedy of an aggrieved party would be a quo warranto.
An alleged previous agreement to dissolve the corporation does not
affect or render illegal the said order of the court.
10. Compensation of Directors - Sec. 30
Section 30. Compensation of directors.
In the absence of any provision in the by-laws fixing their
compensation, the directors shall NOT receive any compensation, as
such directors, except for reasonable per diems: Provided, however, That
any such compensation other than per diems may be granted to directors
by the vote of the stockholders representing at least a MAJORITY of the
outstanding capital stock at a regular or special stockholders' meeting. In
NO case shall the total yearly compensation of directors, as such
77
directors, exceed ten (10%) percent of the net income before income
tax of the corporation during the preceding year.
- Singson, et al. vs. COA, 627 SCRA 36 [2010]
[Whether or not the disallowance of RATA is valid? YES.]
Section 30 of the corporation code stress that the directors of a
corporation shall not receive any compensation except reasonable per
diems. The two instances where the directors are to be entitled to
compensation shall be when it is (1) fixed by the corporation's by-laws
or (2) when the stockholders, representing at least majority of the
outstanding capital stock, vote to grant the same at a regular or special
stockholders meeting, subject to the qualification that, in any of the two
situations, the total yearly compensation of directors, as such directors
shall in no case exceed 10% of the net income before income tax of
the corporation during the preceding year.
Section 8 of the amended by-laws of PICC in consonance with
section 30 of the corporation code restricted the scope of the
compensation by fixing their per diem at Php. 1000. Thus petitioners
are allowed to receive only per diems of Php. 1000 for every meeting
attended. However the board of directors may increase or decrease the
amount of per diems, when the prevailing circumstance shall warrant.
No other compensation may be given to them, except only when they
serve the corporation in another capacity.
- Western Institute of Tech., Inc. vs. Solos, 278 SCRA 216, 223 [1997];
Under the foregoing section, there are only two (2) ways by which
members of the board can be granted compensation apart from
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reasonable per diems: (1) when there is a provision in the by-laws fixing
their compensation; and (2) when the stockholders representing a majority
of the outstanding capital stock at a regular or special stockholders'
meeting agree to give it to them. The proscription, however, against
granting compensation to directors/trustees of a corporation is not a
sweeping rule. Worthy of note is the clear phraseology of Section 30
which states: " . . . [T]he directors shall not receive any compensation, as
such directors, . . . ." The phrase as such directors is not without
significance for it delimits the scope of the prohibition to compensation
given to them for services performed purely in their capacity as directors
or trustees. The unambiguous implication is that members of the board
may receive compensation, in addition to reasonable per diems; when
they render services to the corporation in a capacity other than as
directors/ trustees.
- Kuenzle & Streiff Inc. vs. Comm. of Internal Revenue,120 Phil. 1099);
There is no fixed test for determining reasonableness of a given bonus
as compensation. this depends upon many factors, one of them being
"the amount and quality of the services performed with relation to the
business" Other tests suggested are: payment must be made in good
faith; the character of tax payers' business, the volume and amount of
its net earnings, its locality, the type and extend of the services
rendered, the salary policy of the corporation, the size of the particular
business, the employees qualifications and contributions to the
business venture and general economic conditions.
- Central Cooperative Exchange, Inc. vs. Enciso, 162 SCRA 706).
. It will be noted that in interpreting section 8 of the By-laws of CCE, the
court held that the right of the stockholders to determine the
compensation of the board of directors was explicitly reserved and
even without reservation, the directors are not entitled to
compensation. The court ruled that the directors of corporations
78
presumptively serve without compensation so that while the directors,
in assigning themselves additional duties acted within their power, they
nonetheless acted in excess of their jurisdiction by voting for
themselves compensation for such additional duties.
11. Board Committees (Sec. 35; 5 non-delegable functions
Section 35. Executive committee.
The by-laws of a corporation may create an executive committee,
composed of not less than three members of the board, to be appointed
by the board. Said committee may act, by majority vote of all its members,
on such specific matters within the competence of the board, as may be
delegated to it in the by-laws or on a majority vote of the board, except
with respect to: (1) approval of any action for which shareholders'
approval is also required; (2) the filing of vacancies in the board; (3)
the amendment or repeal of by-laws or the adoption of new by-laws;
(4) the amendment or repeal of any resolution of the board which by
its express terms is not so amendable or repealable; and (5) a
distribution of cash dividends to the shareholders.
12. Duties of Directors
(a) Duty of Diligence
(b) Duty of Loyalty
(c) Duty of Obedience
(d) Duty to Creditors
(a) Duty of Diligence imposes on the directors the obligation to act only
within the corporate powers, under the penalty of liability for damages
unless they acted in good faith and with due diligence relate to business
judgment rule - (Sec. 31);
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
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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.
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.
- Park Hotel, et aL vs. Harbutt, et al., 680 SCRA 328 [2012]
A corporation, being a juridical entity, may act only through its directors,
officers and employees. Obligations incurred by them, while acting as
corporate agents, are not their personal liability but the direct
accountability of the corporation they represent. 38 However, corporate
officers may be deemed solidarily liable with the corporation for the
termination of employees if they acted with malice or bad faith. 39 In the
present case, the lower tribunals unanimously found that Percy and
Harbutt, in their capacity as corporate officers of Burgos, acted maliciously
in terminating the services of respondents without any valid ground and in
order to suppress their right to self-organization.
Section 31 of the Corporation Code makes a director personally liable for
corporate debts if he willfully and knowingly votes for or assents to
patently unlawful acts of the corporation. It also makes a director
personally liable if he is guilty of gross negligence or bad faith in directing
the affairs of the corporation. Thus, Percy and Harbutt, having acted in
bad faith in directing the affairs of Burgos, are jointly and severally liable
with the latter for respondents' dismissal.
- Urban Bank vs. Pena, 659 SCRA 418 [2011]
To hold a director or an officer personally liable for corporate
obligations two requisites must concur: 1) The complainant must allege
in the complaint that the direcots or officers assented to patently
unlawful acts of the corporation, or that the officers was guilty of gross
79
negligence or bad faith; and 2) the complaint must clearly prove such
unlawful acts, negligence or bad faith.
- Alert Security and Investigation Agency vs. Pasawilan, 657 SCRA 655
[2011]
Basic is the rule that a corporation has a separate and distinct
personality apart from its directors, officers, or owners. In exceptional
cases, courts find it proper to breach this corporate personality in order
to make directors, officers, or owners solidarily liable for the
companies acts. This is when directors or trustees willfully 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. Absent any malice or bad faith on the part of the
corporate officer, he cannot be liable. Here, he was not using the veil of
corporate fiction.
- Cebu Country Club, Inc. vs. ELIZAGAQUE, et al., 542 SC RA 65 [2008]
CCCI Board of Directors, under its Articles of Incorporation, has the
right to approve or disapprove an application for proprietary
membership. But such right should not be exercised arbitrarily. Articles
19 and 21 of the Civil Code on the Chapter on Human Relations
provide restrictions, thus:
Article 19. Every person must, in the exercise of his rights and in the
performance of his duties, act with justice, give everyone his due, and
observe honesty and good faith.
Article 21. Any person who willfully causes loss or injury to another in a
manner that is contrary to morals, good customs or public policy shall
compensate the latter for the damage.
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- Garcia vs. Social Security Commission, 540 SC RA 456 [2007]
Taking a cue from the above provision, a corporate director, a trustee or
an officer, may be held solidarily liable with the corporation in the following
instances:
1. When directors and trustees or, in appropriate cases, the officers of a
corporation
(a) vote for or assent to patently unlawful acts of the corporation;
(b) act in bad faith or with gross negligence in directing the corporate
affairs;
(c) are guilty of conflict of interest to the prejudice of the corporation, its
stockholders or members, and other persons.
2. When a director or officer has consented to the issuance of watered
stocks or who, having knowledge thereof, did not forthwith file with the
corporate secretary his written objection thereto.
3. When a director, trustee or officer has contractually agreed or stipulated
to hold himself personally and solidarily liable with the Corporation.
4. When a director, trustee or officer is made, by specific provision of law,
personally liable for his corporate action.
The situation of petitioner, as a director of Impact Corporation when said
corporation failed to remit the SSS premium contributions falls exactly
under the fourth situation. Section 28 (f) of
the Social Security Law imposes a civil liability for any act or omission
pertaining to the violation of the Social Security Law, to wit:
(f) If the act or omission penalized by this Act be committed by an
association, partnership, corporation or any other institution, its managing
head, directors or partners shall be liable to the penalties provided in this
Act for the offense.
- Powton Conglomerate, Inc. vs. Agcolicol, 400 SC RA 523 [2003]
Personal liability of a corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only
when (1) he assents to a patently unlawful act of the corporation, or
when he is guilty of bad faith or gross negligence in directing its affairs, or
80
when there is a conflict of interest resulting in damages to the corporation,
its stockholders or other persons; (2) he consents to the issuance of
watered down stocks or who, having knowledge thereof, does not
forthwith file with the corporate secretary his written objection thereto; (3)
he agrees to hold himself personally and solidarily liable with the
corporation; or (4) he is made by a specific provision of law personally
answerable for his corporate action. Considering that none of the
foregoing exceptions was established in the case at bar, petitioner Chien,
who entered into a contract with respondent in his capacity as President
and Chairman of the Board of Powton, cannot be held solidarily liable with
the latter
- Benguet Electric Cooperative vs. NLRC, 209 SC RA 55;
The applicable general rule is clear enough. The Board members and
officers of a corporation who purport to act for and in behalf of the
corporation, keep within the lawful scope of their authority in so acting,
and act in good faith, do not become liable, whether civilly or otherwise,
for the consequences of their acts. Those acts, when they are such a
nature and are done under such circumstances, are properly attributed to
the corporation alone and no personal liability is incurred by such officers
and Board members.
We agree with the Solicitor General, secondly, that respondent Board
members were guilty of "gross negligence or bad faith in directing the
affairs of the corporation" in enacting the series of resolutions noted earlier
indefinitely suspending and dismissing respondent Cosalan from the
position of General Manager of Beneco. Respondent Board members, in
so doing, acted beyond the scope of their authority as such Board
members. The dismissal of an officer or employee in bad faith, without
lawful cause and without the procedural due process, is an act that
is contra legem. It cannot be supposed that members of boards of
directors derive any authority to violate the express mandates of law or
the clear legal rights of their officers and employees by simply purporting
to act for the corporation they control.
We believe and so hold, further, that not only are Beneco and respondent
Board members properly held solidarily liable for the awards made by the
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Labor Arbiter, but also that petitioner Beneco which was controlled by and
which could act only through respondent Board members, has a right to
be reimbursed for any amounts that Beneco may be compelled to pay to
respondent Cosalan. Such right of reimbursement is essential if the
innocent members of Beneco are not to be penalized for the acts of
respondent Board members which were both done in bad faith and ultra
vires. The liability-generating acts here are the personal and individual
acts of respondent Board members, and are not properly attributed to
Beneco itself.
- Board of Liquidators vs. Kalaw, 20 SC RA 987 [1967];
Bad faith does not simply connote bad judgment or negligence; it imports
a dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty through some motive or interest
or ill will; it partakes of the nature of fraud.
- Montelibano, et aL, vs. Bacolod-Murcia Milling Co., Inc. 5 SCRA 3
As the resolution in question was passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the central, the court has no authority to review
them.
"They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be
controlled in the reasonable exercise and performance of such duty.
Whether the business of a corporation should be operated at a loss during
depression, or close down at a smaller loss, is a purely business and
economic problem to be determined by the directors of the corporation
and not by the court. It is a well-known rule of law that questions of policy
or of management are left solely to the honest decision of officers and
directors of a corporation, and the court is without authority to substitute
its judgment of the board of directors; the board is the business manager
of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts."
81

- Steinberg vs. Velasco, 52 Phil. 1929.
The directors of a corporation are bound to care for its property and
manage its affairs in good faith, and for a violation of their duties resulting
in waste of its assets or injury to its property, they are liable to account the
same as any other trustee.
If the directors of a corporation do acts clearly beyond their power, by
reason of which a loss ensued, or dispose of its property without authority,
they will be required to make good the loss out of their private estate.
A director of a corporation is bound to exercise ordinary skill and judgment
and cannot excuse his negligence or unlawful acts on the ground of
ignorance or inexperience.
(b) Duty of Loyalty Fiduciary Duty (Secs. 31 to 34;
Section 32. Dealings of directors, trustees or officers with the
corporation.
A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation, unless all
the following conditions are present:
1. That the presence of such director or trustee in the board
meeting in which the contract was approved was not necessary to
constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for
the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been previously
authorized by the board of directors. Where any of the first two conditions
set forth in the preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock or of at least twothirds (2/3) of the members in a meeting
called for the purpose:
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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.
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. Stockholdings exceeding twenty (20%) percent of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors.
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.
-Gokongwei vs. SEC, 89 SC RA 336, 367; see cited cases [1979)
Although in the strict and technical sense, directors of a private
corporation are not regarded as trustees, there cannot be any doubt that
their character is that of a fiduciary insofar as the corporation and the
stockholders as a body are concerned. As agents entrusted with the
management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the
relation is one of trust." The ordinary trust relationship of directors of a
corporation and stockholders is not a matter of statutory or technical law. It
82
springs from the fact that directors have the control and guidance of
corporate affairs and property and hence of the property interests of the
stockholders. Equity recognizes that stockholders are the proprietors of
the corporate interests and are ultimately the only beneficiaries thereof.
-Polymer Rubber Corporation and Ang vs. Salamuding, G.R. No. 185160,
July 24, 2013
A corporation, as a juridical entity, may act only through its directors,
officers and employees. Obligations incurred as a result of the directors'
and officers' acts as corporate agents, are not their personal liability but
the direct responsibility of the corporation they represent. As a rule, they
are only solidarily liable with the corporation for the illegal termination of
services of employees if they acted with malice or bad faith."
To hold a director or officer personally liable for corporate obligations, two
requisites must concur: (1) it must be alleged in the complaint that the
director or officer assented to patently unlawful acts of the corporation or
that the officer was guilty of gross negligence or bad faith; and (2) there
must be proof that the officer acted in bad faith.
-Rolando DS. Torres vs. Rural Bank of San Juan, Inc.,et al., G.R. No.
184520, March 13, 2013
As provided in Article 282 of the Labor Code and as firmly entrenched in
jurisprudence, an employer has the right to dismiss an employee by
reason of willful breach of the trust and confidence reposed in him.
To temper the exercise of such prerogative and to reconcile the same with
the employee's Constitutional guarantee of security of tenure, the law
imposes the burden of proof upon the employer to show that the dismissal
of the employee is for just cause failing which would mean that the
dismissal is not justified. Proof beyond reasonable doubt is not necessary
but the factual basis for the dismissal must be clearly and convincingly
established.
Further, the law mandates that before validity can be accorded to a
dismissal premised on loss of trust and confidence, two requisites must
Corporation Law 2016: JVL & JSD
concur, viz.: (1) the employee concerned must be holding a position of
trust; and (2) the loss of trust must be based on willful breach of trust
founded on clearly established facts.
-Mercy Vda. de Roxas vs. Our Lady's Foundation, Inc., G.R. No. 182378,
March 6, 2013
[Issue: Whether or not the general manager may be held liable for the
obligations of the corporation]
This Court upholds the doctrine of separate juridical personality of
corporate entities. The case emphasizes that a corporation is a juridical
entity with a legal personality separate and distinct from those acting for
and on its behalf and, in general, of the people comprising it. Hence, the
obligations incurred by the corporation, acting through its officers such as
in this case, are its sole liabilities.
-Heirs of Fe Tan Uy, represented by her heir, Mauling Uy Lim vs.
International Exchange Bank, G.R. No. 166282 & 83, February 13, 2013
These shortcomings of Uy are not sufficient to justify the piercing of the
corporate veil which requires that the negligence of the officer must be so
gross that it could amount to bad faith and must be established by clear
and convincing evidence. Gross negligence is one that is characterized by
the lack of the slightest care, acting or failing to act in a situation where
there is a duty to act, wilfully and intentionally with a conscious
indifference to the consequences insofar as other persons may be
affected.||
-United Coconut Planters Bank vs. Planters Products, Inc., Janet Layson
and Gregory Grey, G.R. No. 179015, June 13, 2012
A corporation like UCPB is liable to innocent third persons where it
knowingly permits its officer, or any other agent, to perform acts within the
scope of his general or apparent authority, holding him out to the public as
possessing power to do those acts.
83
But, here, it is plain from the guarantee Grey executed that he was acting
for himself, not in representation of UCPB. UCPB cannot be bound by
Grey's above undertaking since he appears to have made it in his
personal capacity. He signed it under his own name, not in UCPB's name
or as its branch manager. Indeed, the wordings of the undertaking do not
at all make any allusion to UCPB.
As it happens, bank guarantees are highly regulated transactions under
the law. They are undertakings that are not so casually issued by banks or
by their branch managers at the dorsal side of a client's promissory note
as if an afterthought. A bank guarantee is a contract that binds the bank
and so may be entered into only under authority granted by its board of
directors. Such authority does not appear on any document. Indeed, PPI
had no right to expect branch manager Grey to issue one without such
authorization.
-Antonio C. Carag vs. National Labor Relations Commission, et aL, G.R.
No. 147590, April 2, 2007
To hold a director personally liable for debts of the corporation, and thus
pierce the veil of corporate fiction, the bad faith or wrongdoing of the
director must be established clearly and convincingly. Bad faith is never
presumed. Bad faith does not connote bad judgment or negligence. Bad
faith imports a dishonest purpose. Bad faith means breach of a known
duty through some ill motive or interest. Bad faith partakes of the nature of
fraud.
Neither does bad faith arise automatically just because a corporation fails
to comply with the notice requirement of labor laws on company closure or
dismissal of employees. The failure to give notice is not an unlawful act
because the law does not define such failure as unlawful. Such failure to
give notice is a violation of procedural due process but does not amount to
an unlawful or criminal act. Such procedural defect is called illegal
dismissal because it fails to comply with mandatory procedural
requirements, but it is not illegal in the sense that it constitutes an unlawful
or criminal act.
Corporation Law 2016: JVL & JSD
For a wrongdoing to make a director personally liable for debts of the
corporation, the wrongdoing approved or assented to by the director must
be a patently unlawful act. Mere failure to comply with the notice
requirement of labor laws on company closure or dismissal of employees
does not amount to a patently unlawful act. Patently unlawful acts are
those declared unlawful by law which imposes penalties for commission of
such unlawful acts. There must be a law declaring the act unlawful and
penalizing the act.
(i) Doctrine ot Corporate Opportunity
(Sec. 34; Gokongwei, at p. 371).
DOCTRINE OF "CORPORATE OPPORTUNITY". Corporate
officers are not permitted to the use their position of trust and
confidence to further their interests. The doctrine of "corporate
opportunity" is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was
acting for two entities with competing interests. This doctrine rests
fundamentally of the unfairness, in particular circumstances, of an
officer or director taking advantage of an opportunity for his own
personal profit when the interest of the corporation justly calls for
protection.
(ii) Self-dealing Directors
(Sec. 32; Prime White Cement Corp. vs. IAC, 220 SC RA 111
[1993])
A director of a corporation holds a position of trust and as such, he
owes a duty of loyalty to his corporation. In case his interests
conflict with those of the corporation, he cannot sacrifice the latter
to his own advantage and benefit. As corporate managers,
directors are committed to seek the maximum amount of profits for
the corporation. This trust relationship "is not a matter of statutory
or technical law. It springs from the fact that directors have the
control and guidance of corporate affairs and property and hence
of the property interests of the stockholders." In the case of
84
 Gokongwei v. Securities and Exchange Commission, this Court
quoted with favor from Pepper v. Litton, (89 scra 336) thus: ". . .
He cannot by the intervention of a corporate entity violate the
ancient precept against serving two masters . . . He cannot utilize
his inside information and his strategic position for his own
preferment. He cannot violate rules of fair play by doing indirectly
through the corporation what he could not do directly. He cannot
use his power for his personal advantage and to the detriment of
the stockholders and creditors no matter how absolute in terms
that power may be and no matter how meticulous he is to satisfy
technical requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the
aggrandizement, preference, or advantage of the fiduciary to the
exclusion or detriment of the cestuis . .
A director's contract with his corporation is not in all instances void
or voidable. If the contract is fair and reasonable under the
circumstances, it may be ratified by the stockholders provided a
full disclosure of his adverse interest is made as provided in
Section 32 of the Corporation Code.
(iii) Fixing 01 Compensation
See cases cited above in Part VI, A, 10.
(iv) Use 01 Inside Intormation
(Secs. 3.8; 23.2; 27 Securities Regulation Code, RA 8799)
3.8. "Insider" means (a) the issuer; (b) a director or officer (or any
person performing similar functions) of, or a person controlling the
issuer; gives or gave him access to material information about the
issuer or the security that is not generally available to the public;
(d) A government employee, director, or officer of an exchange,
clearing agency and/or self-regulatory organization who has
access to material information about an issuer or a security that is
not generally available to the public; or (e) a person who learns
such information by a communication from any forgoing insiders
Corporation Law 2016: JVL & JSD
23.2. For the purpose of preventing the unfair use of information
which may have been obtained by such beneficial owner, director
or officer by reason of his relationship to the issuer, any profit
realized by him from any purchase or sale, or any sale or
purchase, of any equity security of such issuer within any period of
less than (6) months unless such security was acquired in good
faith in connection with a debt previously contracted, shall inure to
and be recoverable by the issuer, irrespective of any intention of
holding the security purchased or of not repurchasing the security
sold for a period exceeding six (6) months. Suit to recover such
profit may be instituted before the Regional Trial Court by the
issuer, or by the owner of any security of the issuer in the name
and in behalf of the issuer if the issuer shall fail or refuse to bring
such suit within sixty (60) days after request or shall fail diligently
to prosecute the same thereafter, but not such shall be brought
more than two years after the date such profit was realized. This
Subsection shall not be construed to cover any transaction were
such beneficial owner was not such both time of the owner or the
sale, or the sale of purchase, of the security involved, or any
transaction or transactions which the Commission by rules and
regulations may exempt as not comprehended within the purpose
of this subsection.
Section 27. Insiders Duty to Disclose When Trading.
27.1. It shall be unlawful for an insider to sell or buy a security of
the issuer, while in possession of material information with respect
to the issuer or the security that is not generally available to the
public, unless: (a) The insider proves that the information was not
gained from such relationship; or (b) If the other party selling to or
buying from the insider (or his agent) is identified, the insider
proves: (I) that he disclosed the information to the other party, or
(ii) that he had reason to believe that the other party otherwise is
also in possession of the information. A purchase or sale of a
security of the issuer made by an insider defined in Subsection
3.8, or such insiders spouse or relatives by affinity or
consanguinity within the second degree, legitimate or common-
85
 law, shall be presumed to have been effected while in possession
of material nonpublic information if transacted after such
information came into existence but prior to dissemination of such
information to the public and the lapse of a reasonable time for
market to absorb such information: Provided, however, That this
presumption shall be rebutted upon a showing by the purchaser or
seller that he was aware of the material nonpublic information at
the time of the purchase or sale.
27.2. For purposes of this Section, information is "material
nonpublic" if: (a) It has not been generally disclosed to the public
and would likely affect the market price of the security after being
disseminated to the public and the lapse of a reasonable time for
the market to absorb the information; or (b) would be considered
by a reasonable person important under the circumstances in
determining his course of action whether to buy, sell or hold a
security.
27.3. It shall be unlawful for any insider to communicate material
nonpublic information about the issuer or the security to any
person who, by virtue of the communication, becomes an insider
as defined in Subsection 3.8, where the insider communicating the
information knows or has reason to believe that such person will
likely buy or sell a security of the issuer whole in possession of
such information.
27.4. (a) It shall be unlawful where a tender offer has commenced
or is about to commence for: (i) Any person (other than the tender
offeror) who is in possession of material nonpublic information
relating to such tender offer, to buy or sell the securities of the
issuer that are sought or to be sought by such tender offer if such
person knows or has reason to believe that the information is
nonpublic and has been acquired directly or indirectly from the
tender offeror, those acting on its behalf, the issuer of the
securities sought or to be sought by such tender offer, or any
insider of such issuer; and (ii) Any tender offeror, those acting on
its behalf, the issuer of the securities sought or to be sought by
such tender offer, and any insider of such issuer to communicate
material nonpublic information relating to the tender offer to any
other person where such communication is likely to result in a
violation of Subsection 27.4 (a)(I). (b) For purposes of this
Corporation Law 2016: JVL & JSD
subsection the term "securities of the issuer sought or to be
sought by such tender offer" shall include any securities
convertible or exchangeable into such securities or any options or
rights in any of the foregoing securities.
(v) Interlocking Directors (Sec. 33)
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. Stockholdings exceeding twenty (20%) percent of the
outstanding capital stock shall be considered substantial for
purposes of interlocking directors.
(c) Duty of Obedience
-Lopez Realty vs. Fontecha, 247 SCRA 183 [1995]
The general rule is that a corporation, through its board of directors,
should act in the manner and within the formalities, if any, prescribed by its
charter or by the general law. Thus, directors must act as a body in a
meeting called pursuant to the law or the corporation's by-laws, otherwise,
any action taken therein may be questioned by any objecting director or
shareholder
(d) Duty to Creditors
Steinberg vs. Velasco supra; Secs. 31 and 65
The creditors of a corporation have the right to assume that so long as
there are debts and liabilities, the board of directors of the corporation will
86
not use its assets to purchase its own stock or to declare dividends to its
stockholders when the corporation is insolvent.
B. Corporate Officers (Sec. 25)
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.
The directors or trustees and officers to be elected shall perform
the duties enjoined on them by law and the by-laws of the corporation.
Unless the articles of incorporation or the by-laws provide for a greater
majority, a majority of the number of directors or trustees as fixed in the
articles of incorporation shall constitute a quorum for the transaction of
corporate business, and every decision of at least a majority of the
directors or trustees present at a meeting at which there is a quorum shall
be valid as a corporate act, except for the election of officers which
shall require the vote of a majority of ALL the members of the board.
Directors or trustees CANNOT attend or vote by proxy at board
meetings
-Barba vs. Liceo de Cagayan University, D.R. No. 193857, November 28,
2012
It bears stressing that the appointive officials mentioned in Article V of
respondent's by-laws are not corporate officers under the contemplation of
the law. Though the board of directors may create appointive positions
other than the positions of corporate officers, the persons occupying such
positions cannot be deemed as corporate officers as contemplated by
Section 25 of the Corporation Code.
Corporation Law 2016: JVL & JSD
-Matling Industrial and Commercial Corp., et al., 633 SCRA 12 120101
The phrase "such other officers as may be provided for in the by-laws" has
been clarified, thus:
Conformably with Section 25, a position must be expressly mentioned in
the By-Laws in order to be considered as a corporate office. Thus, the
creation of an office pursuant to or under a By-Law enabling provision is
not enough to make a position a corporate office. Guerrea v. Lezama, the
first ruling on the matter, held that the only officers of a corporation were
those given that character either by the Corporation Code or by the By-
Laws; the rest of the corporate officers could be considered only as
employees of subordinate officials. Thus, it was held in Easycall
Communications Phils., Inc. v. King:
An "office" is created by the charter of the corporation and the officer is
elected by the directors or stockholders. On the other hand, an employee
occupies no office and generally is employed not by the action of the
directors or stockholders but by the managing officer of the corporation
who also determines the compensation to be paid to such employee.
(Emphasis supplied)
SEC Opinion dated November 25, 1993: Thus, pursuant to the above
provision (Section 25 of the Corporation Code), whoever are the corporate
officers enumerated in the by-laws are the exclusive Officers of the
corporation and the Board has no power to create other Offices without
amending first the corporate By-laws. However, the Board may create
appointive positions other than the positions of corporate Officers, but the
persons occupying such positions are not considered as corporate officers
within the meaning of Section 25 of the Corporation Code and are not
empowered to exercise the functions of the corporate Officers, except
those functions lawfully delegated to them. Their functions and duties are
to be determined by the Board of Directors/Trustees.
-Pamplona Plantation Company vs. Acosta, 510 SC RA 249 [2006]
Under Section 25 of the Corporation Code, three officers are specifically
provided for which a corporation must have: president, secretary, and
87
treasurer. The law, however, does not limit corporate officers to these
three. Section 25 gives corporations the widest latitude to provide for such
other offices, as they may deem necessary. The by-laws may and usually
do provide for such other officers, e.g., vice-president, cashier, auditor,
and general manager.
-Metro Drug Inc. vs. Narciso, 495 SC RA 286 [2006]
In Zulueta v. Asia Brewery, Inc., we held th
at the requirement for petitioner to sign the certificate of non-forum
shopping applied even to corporations, considering that the mandatory
directives of the Rules of Court made no distinction between natural and
juridical persons.
In case of a corporation, it has long been settled that the certificate must
be signed for and on its behalf by a specifically authorized officer or agent
who has personal knowledge of the facts required to be disclosed.
We discussed the rationale behind the rule in National Steel Corporation v.
Court of Appeals: Unlike natural persons, corporations may perform
physical actions only through properly delegated individuals; namely, its
officers and/or agents. The corporation, such as the petitioner, has no
powers except those expressly conferred on it by the Corporation Code
and those that are implied or incidental to its existence. In turn, a
corporation exercises said powers through its board of directors and/or its
duly authorized officers or agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly authorized for
the purpose by corporate by-laws or by specific act of the board of
directors.
Consequently, without the needed proof from the board of directors, the
certificate would be considered defective. Thus, in another case, 23 we
held that even the regular officers of a corporation, like the chairman and
president, may not even know the details required in a certificate of non-
forum shopping; they must therefore be authorized by the board of
directors just like any other officer or agent.
1. Powers of Corporate Officers:
Corporation Law 2016: JVL & JSD
(a) Agent of Corporation
-Reyes vs. RCPI Employees Credit Union, Inc., 499 SCRA 319
[2006]
Indisputably, the respondent is a credit cooperative duly organized
and existing under Philippine laws. As such corporate entity, it has its own
acts and liabilities and exercises corporate powers, including the power to
enter into all contracts, through its board of directors pursuant to Section
23 of the Corporation Code.|
Indeed, the evidence submitted by the [petitioner] to prove her
claim is insufficient to establish the fact that [respondent] is indebted to it
for . . . it has been held that the power to borrow money is one of those
cases where even a special power of attorney is required. Such being the
case, there is invariably a need of an enabling act of the corporation to be
approved by its Board of Directors. This fact is what the trial court omitted
to consider. It failed to recognize the fact that while [petitioner] sufficiently
established the fact that the President and Chairman of the Board of
Directors of the [respondent] as well as its Accounting Officer, had signed
the promissory note, she however dismally failed to prove that Halican
was, in the first place, authorized to borrow money by the Board of
Directors of the defendant corporation. Much less, execute a promissory
note in behalf of the said corporation promising to pay the loaned amount
at a stipulated date. We note that [petitioner] was also a member of the
Board of Directors which allegedly resolved to allow the corporation to
borrow money from outside sources and such being the case, she could
have just presented said board resolution to prove that Halican was
authorized to borrow money as it can be fairly presumed that she had
access to copies of the defendant corporation's board resolution. Failing in
this respect, [petitioner's] action was left without any leg to stand on
insofar as the claimed liability of the [respondent] is concerned. (Words in
brackets added
-Yasuma vs. Heirs of Cecilia S. de Villa, 499 SCRA 466 [2006]
The general principles of agency govern the relation between the
corporation and its officers or agents. 11 When authorized, their acts can
bind the corporation. Conversely, when unauthorized, their acts cannot
bind it.
88
 However, the corporation may ratify the unauthorized act of its
corporate officer. 12 Ratification means that the principal voluntarily
adopts, confirms and gives sanction to some unauthorized act of its agent
on its behalf. It is this voluntary choice, knowingly made, which amounts to
a ratification of what was theretofore unauthorized and becomes the
authorized act of the party so making the ratification. 13 The substance of
the doctrine is confirmation after conduct, amounting to a substitute for a
prior authority. 14 Ratification can be made either expressly or impliedly.
Implied ratification may take various forms like silence or
acquiescence, acts showing approval or adoption of the act, or
acceptance and retention of benefits flowing therefrom.
The power to borrow money is one of those cases where
corporate officers as agents of the corporation need a special power of
attorney. 16 In the case at bar, no special power of attorney conferring
authority on de Villa was ever presented. The promissory notes
evidencing the loans were signed by de Villa (who was the president of
respondent corporation) as borrower without indicating in what capacity he
was signing them. In fact, there was no mention at all of respondent
corporation. On their face, they appeared to be personal loans of de Villa.
- Litonjua, Jr. vs. Eternit Corporation, 490 SCRA 204 [2006]
Under Section 36 of the Corporation Code, a corporation may sell
or convey its real properties, subject to the limitations prescribed by law
and the Constitution.
The property of a corporation, however, is not the property of the
stockholders or members, and as such, may not be sold without express
authority from the board of directors. Physical acts, like the offering of the
properties of the corporation for sale, or the acceptance of a counter-offer
of prospective buyers of such properties and the execution of the deed of
sale covering such property, can be performed by the corporation only by
officers or agents duly authorized for the purpose by corporate by-laws or
by specific acts of the board of directors. Absent such valid
delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or
connected with, the performance of authorized duties of such director, are
not binding on the corporation.
While a corporation may appoint agents to negotiate for the sale of
its real properties, the final say will have to be with the board of directors
Corporation Law 2016: JVL & JSD
through its officers and agents as authorized by a board resolution or by
its by-laws. An unauthorized act of an officer of the corporation is not
binding on it unless the latter ratifies the same expressly or impliedly by its
board of directors. Any sale of real property of a corporation by a person
purporting to be an agent thereof but without written authority from the
corporation is null and void. The declarations of the agent alone are
generally insufficient to establish the fact or extent of his/her authority.
An agency may be expressed or implied from the act of the
principal, from his silence or lack of action, or his failure to repudiate the
agency knowing that another person is acting on his behalf without
authority. Acceptance by the agent may be expressed, or implied from his
acts which carry out the agency, or from his silence or inaction according
to the circumstances. Agency may be oral unless the law requires a
specific form. However, to create or convey real rights over immovable
property, a special power of attorney is necessary. Thus, when a sale of a
piece of land or any portion thereof is through an agent, the authority of
the latter shall be in writing, otherwise, the sale shall be void.
-DBP vs. Ong, 460 SC RA 170 [2005]
The representation of Roy Palasan, a mere clerk at petitioner's
Cagayan de Oro City branch, that the manager had already approved the
sale, even if true, cannot bind the petitioner bank to a contract of sale with
respondents, it being obvious to us that such a clerk is not among the
bank officers upon whom such putative authority may be reposed by a
third party. There is, thus, no legal basis to bind petitioner into any valid
contract of sale with the respondents, given the absolute absence of any
approval or consent by any responsible officer of petitioner bank
-Vicente vs. Geraldez, 52 SC RA 210 [19731;
Special powers of attorney are necessary, among other cases, in
the following: to compromise and to renounce the right to appeal from a
judgment. Attorneys have authority to bind their clients in any case by any
agreement in relation thereto made in writing, and in taking appeals, and
in all matters of ordinary judicial procedure, but they cannot, without
special authority, compromise their clients' litigation, or receive anything in
discharge of their clients' claims but the full amount in cash.
89
 The law specifically requires that "juridical persons may
compromise only in the form and with the requisites which may be
necessary to alienate their property." Under the corporation law the power
to compromise or settle claims in favor of or against the corporation is
ordinarily and primarily committed to the Board of Directors. The right of
the Directors "to compromise a disputed claim against the corporation
rests upon their right to manage the affairs of the corporation according to
their honest and informed judgment and discretion as to what is for the
best interests of the corporation." This power may however be delegated
either expressly or impliedly to other corporate officials or agents. Thus it
has been stated, that as a general rule an officer or agent of the
corporation has no power to compromise or settle a claim by or against
the corporation, except to the extent that such power is given to him either
expressly or by reasonable implication from the circumstances. It is
therefore necessary to ascertain whether from the relevant facts it could
be reasonably concluded that the Board of Directors of the HI Cement
Corporation had authorized its lawyers to enter into the said compromise
agreement.
-reiterated in Boyer-Roxas vs. CA, 211 SC RA 470 [1992];
The corporation transacts its business only through its officers or
agents. (Western Agro Industrial Corporation v. Court of Appeals, supra)
Whatever authority these officers or agents may have is derived from the
board of directors or other governing body unless conferred by the charter
of the corporation. An officer's power as an agent of the corporation must
be sought from the statute, charter, the by-laws or in a delegation of
authority to such officer, from the acts of the board of directors, formally
expressed or implied from a habit or custom of doing business. (Vicente v.
Geraldez, 52 SCRA 210 [1973]) In the present case, the record shows
that Eufrocino V. Roxas who then controlled the management of the
corporation, being the majority stockholder, consented to the petitioners'
stay within the questioned properties. Specifically, Eufrocino Roxas gave
his consent to the conversion of the recreation hall to a residential house,
now occupied by petitioner Guillermo Roxas. The Board of Directors did
not object to the actions of Eufrocino Roxas. The petitioners were allowed
to stay within the questioned properties until August 27, 1983, when the
Board of Directors approved a Resolution ejecting the petitioners.
Corporation Law 2016: JVL & JSD
(b) Corporate Secretary
- Torres, Jr. vs. CA, 278 SCRA 793 [1997];
It is the corporate secretary's duty and obligation to register valid
transfers of stocks and if said corporate officer refuses to comply, the
transferor-stockholder may rightfully bring suit to compel performance. In
other words, there are remedies within the law that petitioners could have
availed of, instead of taking the law in their own hands, as the cliche goes.
- Esguerra vs. CA, 267 SC RA 380 [1997].
VECCI's sale of all the properties mentioned in the judicially-
approved compromise agreement was done on the basis of its Corporate
Secretary's Certification of these two resolutions. The partial decision did
not require any further board or stockholder resolutions to make VECCI's
sale of these properties valid. Being regular on its face, the Secretary's
Certification was sufficient for private respondent Sureste Properties, Inc.,
to rely on. It did not have to investigate the truth of the facts contained in
such certification. Otherwise, business transactions of corporations would
become tortuously slow and unnecessarily hampered. Ineluctably,
VECCI's sale of Esguerra Building II to private respondent was not ultra
vires but a valid execution of the trial court's partial decision. Based on the
foregoing, the sale is also deemed to have satisfied the requirements of
Section 40 of the Corporation Code.
(c) Corporate Treasurer
-San Juan Structural and Steel Fabricators, Inc. vs. Court of
Appeals, 296 SC RA 631, 645 [1998].
Indubitably, a corporation may act only through its board of
directors or, when authorized either by its bylaws or by its board
resolution, through its officers or agents in the normal course of business.
The general principles of agency govern the relation between the
corporation and its officers or agents, subject to the articles of
incorporation, bylaws, or relevant provisions of law. Thus, this Court has
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held that " 'a corporate officer or agent may represent and bind the
corporation in transactions with third persons to the extent that the
authority to do so has been conferred upon him, and this includes powers
which have been intentionally conferred, and also such powers as, in the
usual course of the particular business, are incidental to, or may be
implied from, the powers intentionally conferred, powers added by custom
and usage, as usually pertaining to the particular officer or agent, and
such apparent powers as the corporation has caused persons dealing with
the officer or agent to believe that it has conferred.' " Furthermore, the
Court has also recognized the rule that "persons dealing with an assumed
agent, whether the assumed agency be a general or special one, are
bound at their peril, if they would hold the principal liable, to ascertain not
only the fact of agency but also the nature and extent of authority, and in
case either is controvert, the burden of proof is upon them to establish it
(Harry Keeler vs. Rodriguez, 4 Phil. 19)." Unless duly authorized, a
treasurer, whose powers are limited, cannot bind the corporation in a sale
of its assets. In the case at bar, Respondent Motorich categorically denies
that it ever authorized Nenita Gruenberg, its treasurer, to sell the subject
parcel of land. Consequently, petitioner had the burden of proving that
Nenita Gruenberg was in fact authorized to represent and bind Motorich in
the transaction. Petitioner failed to discharge this burden. Its offer of
evidence before the trial court contained no proof of such authority. It has
not shown any provision of said respondent's articles of incorporation,
bylaws or board resolution to prove that Nenita Gruenberg possessed
such power. That Nenita Gruenberg is the treasurer of Motorich does not
free petitioner from the responsibility of ascertaining the extent of her
authority to represent the corporation. Petitioner cannot assume that she,
by virtue of her position, was authorized to sell the property of the
corporation. Selling is obviously foreign to a corporate treasurer's function,
which generally has been described as "to receive and keep the funds of
the corporation and to disburse them in accordance with the authority
given him by the board or the properly authorized officers." Neither was
such real estate sale shown to be a normal business activity of Motorich.
The primary purpose of Motorich is marketing, distribution, export and
import in relation to a general merchandising business. Unmistakably, its
treasurer is not cloaked with actual or apparent authority to buy or sell real
property, an activity which falls way beyond the scope of her general
authority.
Corporation Law 2016: JVL & JSD
(d) Corporate Bookkeeper
-Pabon vs. NLRC, 296 SCRA 7 [1998]
We are of the view that a bookkeeper can be considered as an
agent of private respondent corporation within the purview of Section 13,
Rule 14 of the old Rules of Court. The rationale of all rules with respect to
service of process on a corporation is that such service must be made to
an agent or a representative so integrated with the corporation sued as to
make it a priori supposable that he will realize his responsibilities and
know what he should do with any legal papers served on him. The
bookkeeper's task is one under consideration. The job of a bookkeeper is
so integrated with the corporation that his regular recording of the
corporation's "business accounts" and "essential facts about the
transactions of a business or enterprise" safeguards the corporation from
possible fraud being committed adverse to its own corporate interest.
Although it may be true that the service of summons was made on a
person not authorized to receive the same in behalf of the petitioner,
nevertheless since it appears that the summons and complaint were in
fact received by the corporation through its said clerk, the Court finds that
there was substantial compliance with the rule on service of summons.
Indeed the purpose of said rule as above stated to assure service of
summons on the corporation had thereby been attained. The need for
speedy justice must prevail over technicality.
an "agent" may also be shown to represent his principal in some
one or more of his relations to others, even though he may not have the
power to enter into contracts. The rules on service of process make
service on "agent" sufficient. It does not in any way distinguish whether
the "agent" be general or special, but is complied with even by a service
upon an agent having limited authority to represent his principal. As such,
it does not necessarily connote an officer of the corporation. However,
though this may include employees other than officers of a corporation,
this does not include employees whose duties are not so integrated to the
business that their absence of presence will not toll the entire operation of
the business. It is for this reason that we lend credence to the finding of
the Labor Arbiter when it ruled that it acquired jurisdiction over private
respondent on the basis of Section 5, Rule III of the NLRC Rules of
Procedure.
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 "Service by registered mail is complete upon receipt by the
addressee or his agent." As can be gleaned from the records, all
summons and notices of hearing addressed to private respondent were
served on and received by its bookkeeper on behalf of private respondent
as its employer who, under the circumstances of this case, is considered
as an agent within the contemplation of the aforecited NLRC rule. Such an
employee is not one of those lesser employees of the corporation who
would not have been able to appreciate the importance of the papers
delivered to her. In fact in G & G Trading Corporation v. Court of Appeals,
we held that service of summons was properly made to a corporation
through a clerk who was not even authorized to receive the same on
behalf of its employer, since what is of paramount importance is that the
purpose of the rule has been attained, thereby the interest of speedy
justice has been subserved.
(e) General Manager
(Section 11, Rule 14 of the 1997 Rules ot Civil Procedure);
Section 11. Service upon domestic private juridical entity.
When the defendant is a corporation, partnership or association
organized under the laws of the Philippines with a juridical personality,
service may be made on the president, managing partner, general
manager, corporate secretary, treasurer, or in-house counsel.
2. Liabilities of Corporate Officers: (Sec. 31)
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.
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
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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.
- Ever Electrical Manufacturing, Inc. vs. Samahang Manggagawa ng Ever
Electrical/NAMWU Local 224, 672 SCRA 562 [2012]
In the present case, Go may have acted in behalf of EEMI but the
company's failure to operate cannot be equated to bad faith. Cessation of
business operation is brought about by various causes like
mismanagement, lack of demand, negligence, or lack of business
foresight. Unless it can be shown that the closure was deliberate,
malicious and in bad faith, the Court must apply the general rule that a
corporation has, by law, a personality separate and distinct from that of its
owners. As there is no evidence that Go, as EEMI's President, acted
maliciously or in bad faith in handling their business affairs and in
eventually implementing the closure of its business, he cannot be held
jointly and solidarily liable with EEMI.
-Jaime Gosiaco vs. Leticia Ching and Edwin Casta, O.R. No. 173807,
April 16, 2009
B.P. Blg. 22 is popularly known as the Bouncing Checks Law. Section 1
of B.P. Blg. 22 provides:
xxx xxx xxx
Where the check is drawn by a corporation, company or entity, the person
or persons, who actually signed the check in behalf of such drawer shall
be liable under this Act.
When a corporate officer issues a worthless check in the corporate
name he may be held personally liable for violating a penal statute. The
statute imposes criminal penalties on anyone who with intent to defraud
another of money or property, draws or issues a check on any bank with
knowledge that he has no sufficient funds in such bank to meet the check
on presentment. Moreover, the personal liability of the corporate officer is
predicated on the principle that he cannot shield himself from liability from
his own acts on the ground that it was a corporate act and not his
personal act.
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 Let us pursue this point further. B.P. Blg. 22 imposes a distinct civil
liability on the signatory of the check which is distinct from the civil liability
of the corporation for the amount represented from the check. The civil
liability attaching to the signatory arises from the wrongful act of signing
the check despite the insufficiency of funds in the account, while the civil
liability attaching to the corporation is itself the very obligation covered by
the check or the consideration for its execution. Yet these civil liabilities
are mistaken to be indistinct. The confusion is traceable to the singularity
of the amount of each.
If we conclude, as we should, that under the current Rules of
Criminal Procedure, the civil action that is impliedly instituted in the B.P.
Blg. 22 action is only the civil liability of the signatory, and not that of the
corporation itself, the distinctness of the cause of action against the
signatory and that against the corporation is rendered beyond dispute. It
follows that the actions involving these liabilities should be adjudged
according to their respective standards and merits. In the B.P. Blg. 22
case, what the trial court should determine whether n or not the signatory
had signed the check with knowledge of the insufficiency of funds or credit
in the bank account, while in the civil case the trial court should ascertain
whether or not the obligation itself is valid and demandable. The litigation
of both questions could, in theory, proceed independently and
simultaneously without being ultimately conclusive on one or the other.
It might be argued that under the current rules, if the signatory were made
liable for the amount of the check by reason of the B.P. Blg. 22 case, such
signatory would have the option of recovering the same amount from the
corporation. Yet that prospect does not ultimately satisfy the ends of
justice. If the signatory does not have sufficient assets to answer for the
amount of the check a distinct possibility considering the occasional
large-scale transactions engaged in by corporations the corporation
would not be subsidiarily liable to the complainant, even if it in truth the
controversy, of which the criminal case is just a part, is traceable to the
original obligation of the corporation. While the Revised Penal Code
imposes subsidiary civil liability to corporations for criminal acts engaged
in by their employees in the discharge of their duties, said subsidiary
liability applies only to felonies, 24 and not to crimes penalized by special
laws such as B.P. Blg. 22. And nothing in B.P. Blg. 22 imposes such
subsidiary liability to the corporation in whose name the check is actually
issued. Clearly then, should the check signatory be unable to pay the
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obligation incurred by the corporation, the complainant would be bereft of
remedy unless the right of action to collect on the liability of the
corporation is recognized and given flesh.
There are two prevailing concerns should civil recovery against
the corporation be pursued even as the B.P. Blg. 22 case against the
signatory remains extant. First, the possibility that the plaintiff might be
awarded the amount of the check in both the B.P. Blg. 22 case and in the
civil action against the corporation. For obvious reasons, that should not
be permitted. Considering that petitioner herein has no chance to recover
the amount of the check through the B.P. Blg. 22 case, we need not
contend with that possibility through this case. Nonetheless, as a matter of
prudence, it is best we refer the matter to the Committee on Rules for the
formulation of proper guidelines to prevent that possibility. CaESTA
The other concern is over the payment of filing fees in both the
B.P. Blg. 22 case and the civil action against the corporation. Generally,
we see no evil or cause for distress if the plaintiff were made to pay filing
fees based on the amount of the check in both the B.P. Blg. 22 case and
the civil action. After all, the plaintiff therein made the deliberate option to
file two separate cases, even if the recovery of the amounts of the check
against the corporation could evidently be pursued through the civil action
alone.
Nonetheless, in petitioner's particular case, considering the
previous legal confusion on whether he is authorized to file the civil case
against ASB, he should, as a matter of equity, be exempted from paying
the filing fees based on the amount of the checks should he pursue the
civil action against ASB. In a similar vein and for a similar reason, we
likewise find that petitioner should not be barred by prescription should he
file the civil action as the period should not run from the date the checks
were issued but from the date this decision attains finality. The courts
should not be bound strictly by the statute of limitations or the doctrine of
laches when to do so, manifest wrong or injustice would result.
-Elcee Farms, Inc. vs. NLRC, 512 SCRA 602 [2007]
This Court, nonetheless, finds merit in the petitioners' allegation that
Corazon Saguemuller should not be subsidiarily liable with Elcee Farms
for separation pay and damages. It is basic that a corporation is invested
by law with a personality separate and distinct from those of the persons
93
composing it as well as from that of any other legal entity to which it may
be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of
itself sufficient ground for disregarding the separate corporate personality.
33 In the case of Santos v. National Labor Relations Commission, 34 a
corporate officer was not held liable for the obligations incurred by the
corporation, where the corporate officer was not even shown to have had
a direct hand in the dismissal of the employee enough to attribute to him
an unlawful act.
-Ching vs. Secretary of Justice, 481 SCRA 609 [2006]
The crime defined in P.D. No. 115 is malum prohibitum but is classified as
estafa under paragraph 1 (b), Article 315 of the Revised Penal Code, or
estafa with abuse of confidence. It may be committed by a corporation or
other juridical entity or by natural persons. However, the penalty for the
crime is imprisonment for the periods provided in said Article 315. Article
315. Swindling (estafa). Any person who shall defraud another by any
of the means mentioned hereinbelow shall be punished by: 1st. The
penalty of prision correccional in its maximum period to prision mayor in
its minimum period, if the amount of the fraud is over 12,000 pesos but
does not exceed 22,000 pesos; and if such amount exceeds the latter
sum, the penalty provided in this paragraph shall be imposed in its
maximum period, adding one year for each additional 10,000 pesos; but
the total penalty which may be imposed shall not exceed twenty years. In
such cases, and in connection with the accessory penalties which may be
imposed and for the purpose of the other provisions of this Code, the
penalty shall be termed prision mayor or reclusion temporal, as the case
may be. Though the entrustee is a corporation, nevertheless, the law
specifically makes the officers, employees or other officers or persons
responsible for the offense, without prejudice to the civil liabilities of such
corporation and/or board of directors, officers, or other officials or
employees responsible for the offense. The rationale is that such officers
or employees are vested with the authority and responsibility to devise
means necessary to ensure compliance with the law and, if they fail to do
so, are held criminally accountable; thus, they have a responsible share in
the violations of the law. If the crime is committed by a corporation or other
juridical entity, the directors, officers, employees or other officers thereof
Corporation Law 2016: JVL & JSD
responsible for the offense shall be charged and penalized for the crime,
precisely because of the nature of the crime and the penalty therefor. A
corporation cannot be arrested and imprisoned; hence, cannot be
penalized for a crime punishable by imprisonment. However, a corporation
may be charged and prosecuted for a crime if the imposable penalty is
fine. Even if the statute prescribes both fine and imprisonment as penalty,
a corporation may be prosecuted and, if found guilty, may be fined.
-Tupaz IV vs. CA, 475 SCRA 398 [2005]
CORPORATE OFFICERS SIGNING JOINTLY AND SEVERALLY WITH
THE CORPORATION IN A TRUST RECEIPT CONTRACT IS LIABLE
ONLY AS GUARANTOR; RATIONALE. In Prudential Bank v.
Intermediate Appellate Court, the Court interpreted a substantially
identical clause in a trust receipt signed by a corporate officer who bound
himself personally liable for the corporation's obligation. The petitioner in
that case contended that the stipulation "we jointly and severally agree
and undertake" rendered the corporate officer solidarily liable with the
corporation. We dismissed this claim and held the corporate officer liable
as guarantor only. The Court further ruled that had there been more than
one signatories to the trust receipt, the solidary liability would exist
between the guarantors. We held: Petitioner [Prudential Bank] insists that
by virtue of the clear wording of the . . . clause ". . . we jointly and
severally agree and undertake . . .," and the concluding sentence on
exhaustion, [respondent] Chi's liability therein is solidary. . . . Our . . .
reading of the questioned solidary guaranty clause yields no other
conclusion than that the obligation of Chi is only that of a guarantor. This is
further bolstered by the last sentence which speaks of waiver of
exhaustion, which, nevertheless, is ineffective in this case because the
space therein for the party whose property may not be exhausted was not
filled up. Under Article 2058 of the Civil Code, the defense of exhaustion
(excussion) may be raised by a guarantor before he may be held liable for
the obligation. Petitioner likewise admits that the questioned provision is a
solidary guaranty clause, thereby clearly distinguishing it from a contract
of surety. It, however, described the guaranty as solidary between the
guarantors; this would have been correct if two (2) guarantors had signed
it. The clause "we jointly and severally agree and undertake" refers to the
undertaking of the two (2) parties who are to sign it or to the liability
94
existing between themselves. It does not refer to the undertaking between
either one or both of them on the one hand and the petitioner on the other
with respect to the liability described under the trust receipt. . . .
Furthermore, any doubt as to the import or true intent of the solidary
guaranty clause should be resolved against the petitioner. The trust
receipt, together with the questioned solidary guaranty clause, is on a
form drafted and prepared solely by the petitioner; Chi's participation
therein is limited to the affixing of his signature thereon. It is, therefore, a
contract of adhesion; as such, it must be strictly construed against the
party responsible for its preparation.
C. Stockholders
1. Duty of Controlling Interest Although a shareholder, even if he is also
a director, is NOT disqualified from voting at a stockholders' meeting by
the fact that he has some interest adverse to the corporation, it does NOT
mean that a stockholder who is able, either by owning a majority of the
voting shares or otherwise, to control a corporation, owes no duly of good
faith to the corporation or to the minority stockholders. A majority
shareholder is subject to the duly of good faith when he acts by voting at a
stockholders' meeting with respect to a matter in which he has a personal
interest. This may occur when he votes to ratify voidable action by the
directors, or where the transaction is one for which a stockholders' vote is
necessary, like merger, dissolution or sale of all the corporate assets.
2. Rights of Stockholders and Members:
(Stockholders of F. Guanson and Sons, Inc. vs. Register of Deeds of
Manila, 6 SCRA 373 [1962])
A corporation is a juridical person distinct from the members
composing it. Properties registered in the name of the corporation are
owned by it as an entity separate and distinct from its members. While
shares of stock constitute personal property, they do not represent
property of the corporation. A share of stock only typifies an aliquot part of
the corporation's property, or the right to share in its proceeds to that
extent when distributed according to law and equity but its holder is not
the owner of any part of the capital of the corporation. Nor is he entitled to
the possession of any definite portion of its property or assets. The
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stockholder is not a co-owner or tenant in common of the corporate
property.
(a) Right to Vote and to Attend Meetings: (Sec. 6, Sec. 89;
Section 6. Classification of shares.
The shares of stock of stock corporations may be divided into
classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in
the articles of incorporation: Provided, That NO share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may
have a par value or have no par value as may be provided for in the
articles of incorporation: Provided, however, That banks, trust
companies, insurance companies, public utilities, and building and
loan associations shall NOT be permitted to issue NO-par value
shares of stock.
Preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other preferences
as may be stated in the articles of incorporation which are not violative of
the provisions of this Code: Provided, That preferred shares of stock
may be issued only with a stated par value. The board of directors,
where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided,
That such terms and conditions shall be effective upon the filing of a
certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued WITHOUT par value shall be
deemed fully paid and non-assessable and the holder of such shares
shall NOT be liable to the corporation or to its creditors in respect thereto:
Provided; That shares without par value may NOT be issued for a
consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the
corporation for its no-par value shares shall be treated as capital and shall
NOT be available for distribution as dividends.
95
 A corporation may, furthermore, classify its shares for the purpose
of insuring compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and
stated in the certificate of stock, each share shall be equal in all respects
to every other share.
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the
vote necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
Section 89. Right to vote. - The right of the members of any
class or classes to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-laws. Unless so limited,
broadened or denied, each member, regardless of class, shall be
entitled to one vote. Unless otherwise provided in the articles of
incorporation or the by-laws, a member may vote by proxy in accordance
with the provisions of this Code. Voting by mail or other similar means by
members of non-stock corporations may be authorized by the by-laws of
non-stock corporations with the approval of, and under such conditions
which may be prescribed by, the Securities and Exchange Commission.
- RP vs. COCOFED, 372 SC RA 462 [2001]
The Supreme Court uphold the contention of the PCGG ands set
aside the assailed order of the Sandiganbayan. The Court held that the
Corporation Law 2016: JVL & JSD
government should be allowed to continue voting those shares inasmuch
as they were purchased with coconut levy funds funds that are prima
facie public in character or, at the very least, are "clearly affected withy
public interest," and because they belong to it as the prima facie beneficial
and true owner thereof. Voting is an act of dominion that should be
exercised by the share owner. One of the recognized rights of an owner is
the right to vote at meetings of the corporation. The right to vote is
classified as the right to control. Voting rights may be for the purpose of,
among others, electing or removing directors, amending a charter or
making or amending by laws. Because the subject UCPB shares were
acquired with government funds, the government becomes their prima
facie beneficial and true owner. Ownership includes the right to enjoy,
dispose of, exclude and recover a thing without limitations other than
those established by law or by the owner. Ownership has been aptly
described as the most comprehensive of all real rights and the right to
vote shares is a mere incident of ownership. In the present case, the
government has been shown to be the prima facie owner of the funds
used to purchase the shares. Hence, it should be allowed the rights and
privileges flowing from such fact.
- PCGG vs. Cojuancgo, 302 SC RA 217 [1999]
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT; HAS
NO RIGHT TO VOTE THE SEQUESTERED SHARES OF STOCK.
Since 1986, petitioner had been voting the sequestered SMC shares and
continued to exercise such right until 1997, except for some period in the
year 1991. During the latter year, the Court in the case of Cojuangco, Jr.
vs. Roxas, (195 SCRA 797), on which both respondent stockholders and
SB anchor their position in this case, ruled that the PCGG had no right to
vote the said shares. As said by the Court: "The PCGG cannot perform
acts of strict ownership of sequestered property. It is a mere conservator.
It may not vote the shares in a corporation and elect the members of the
board of directors. The only conceivable exception is in a case of a
takeover of a business belonging to the government or whose
capitalization comes from public funds, but which landed in private hands
as in BASECO. The constitutional right against deprivation of life, liberty
and property without due process of law is so well-known and too precious
so that the hand of the PCGG must be stayed in its indiscriminate
96
takeover of the voting of shares allegedly ill-gotten in these cases. It is
only after appropriate judicial proceedings when a clear determination is
made that said shares are truly ill-gotten when such a takeover and
exercise of acts of strict ownership by the PCGG are justified. In the light
of the foregoing discussion, the Court finds and so holds that the PCGG
has no right to vote the sequestered shares of petitioners including the
sequestered corporate shares. Only their owners, duly authorized
representatives or proxies may vote the said shares.
- Price and Sulu Dev. Co. vs. Martin, 58 Phil. 707 [1933];
Until challenged in a proper proceeding, a stockholder according
to the books of the company has a right to participate in any meeting, and
in the absence of fraud the action of the stockholders' meeting cannot be
collaterally attacked on account of such participation.
A person who has purchased stock, and who desires to be
recognized as a stockholder, for the purpose of voting, must secure such
a standing by having the transfer recorded upon the books. If the transfer
is not duly made upon request, he has, as his remedy, to compel it to be
made.
- Cojuangco Jr. vs. Roxas, 195 SC RA 797 (1991).
It is through the right to vote that the stockholder participates in the
management of the corporation. The right to vote, unlike the rights to
receive dividends and liquidating distributions, is not a passive thing
because management or administration is, under the Corporation Code,
vested in the board of directors, with certain reserved powers residing in
the stockholders directly. The board of directors and executive committee
(or management committee) and the corporate officers selected by the
board may make it very difficult if not impossible for the PCGG to carry out
its duties as conservator if the Board or officers do not cooperate, are
hostile or antagonistic to the conservator's objectives.
(i) Notice (Sec. 50; Sec. 51;
Section 50. Regular and special meetings of stockholders or
members.
Corporation Law 2016: JVL & JSD
Regular meetings of stockholders or members shall be held
annually on a date fixed in the by-laws, or if not so fixed, on any date in
April of every year as determined by the board of directors or trustees:
Provided, That written notice of regular meetings shall be sent to ALL
stockholders or members of record at least two (2) weeks prior to the
meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at
any time deemed necessary or as provided in the by-laws: Provided,
however, That at least one (1) week written notice shall be sent to ALL
stockholders or members, unless otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by
any stockholder or member.
Whenever, for any cause, there is NO person authorized to call a
meeting, the Securities and Exchange Commission, upon petition of a
stockholder or member on a showing of good cause therefor, may issue
an order to the petitioning stockholder or member directing him to call a
meeting of the corporation by giving proper notice required by this Code
or by the by-laws. The petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders or members present
have chosen one of their number as presiding officer. (24, 26)
Section 51. Place and time of meetings of stockholders of
members.
Stockholder's or member's meetings, whether regular or special,
shall be held in the city or municipality where the principal office of the
corporation is located, and if practicable in the principal office of the
corporation: Provided, That Metro Manila shall, for purposes of this
section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time and place
thereof stated therein.
All proceedings had and any business transacted at any meeting
of the stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided ALL the stockholders or members of the corporation are
present or duly represented at the meeting.
97
 Board of Directors and Election Committee of the SMB Workers
Savings and Loan Association, Inc., et al. vs. Tan, et aL, 105 Phil. 426
[1959])
When it appears that a fair election cannot be had, the court in the
exercise of its equity jurisdiction may appoint a committee with the
authority to call, conduct and supervise the election of the directors or the
association.
(ii) Place of Meeting (Sec. 51; 93)
Section 93. Place of meetings.
The by-laws may provide that the members of a non-stock
corporation may hold their regular or special meetings at any place even
outside the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the date,
time and place of the meeting: and Provided, further, That the place of
meeting shall be within the Philippines.
(iii) Quorum (sec. 52)
Section 52. Quorum in meetings.
Unless otherwise provided for in this Code or in the by-laws, a
quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-
stock corporations.
(iv) Vote (Sec. 137; 89;
Section 137. Outstanding capital stock defined.
The term "outstanding capital stock", as used in this Code, means
the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.
Section 89. Right to vote. - The right of the members of any
class or classes to vote may be limited, broadened or denied to the extent
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specified in the articles of incorporation or the by-laws. Unless so limited,
broadened or denied, each member, regardless of class, shall be
entitled to one vote. Unless otherwise provided in the articles of
incorporation or the by-laws, a member may vote by proxy in accordance
with the provisions of this Code. Voting by mail or other similar means by
members of non-stock corporations may be authorized by the by-laws of
non-stock corporations with the approval of, and under such conditions
which may be prescribed by, the Securities and Exchange Commission.
joint owners sec. 56;
Section 56. Voting in case of joint ownership of stock.
In case of shares of stock owned jointly by two or more persons,
in order to vote the same, the consent of ALL the co-owners shall be
necessary, unless there is a written proxy, signed by all the co-owners,
authorizing one or some of them or any other person to vote such share
or shares: Provided, That when the shares are owned in an "and/or"
capacity by the holders thereof, any one of the joint owners can vote said
shares or appoint a proxy therefor.
pledgors sec. 55;
Section 55. Right to vote of pledgors, mortgagors, and
administrators.
In case of pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and vote at meetings
of stockholders, unless the pledgee or mortgagee is expressly given by
the pledgor or mortgagor such right in writing which is recorded on the
appropriate corporate books.
Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and vote in
behalf of the stockholders or members WITHOUT need of any written
proxy.
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 Lim Tay vs. Court of Appeals. 293 SCRA 634 (1998);
The registration of shares in a stockholder's name, the issuance of
stock certificates, and the right to receive dividends which pertain to the
said shares are all rights that flow from ownership. The determination of
whether or not a shareholder is entitled to exercise the above-mentioned
rights falls within the jurisdiction of the SEC. However, if ownership of the
shares is not clearly established and is still unresolved at the time the
action for mandamus is filed, then jurisdiction lies with the regular courts.
As a general rule, the jurisdiction of a court or tribunal over the subject
matter is determined by the allegations in the complaint. In the present
case, however, petitioner's claim that he was the owner of the shares of
stock in question has no prima facie basis. In his Complaint, petitioner
alleged that, pursuant to the contracts of pledge, he became the owner of
the shares when the term for the loans expired. However, the contracts of
pledge, which were made integral parts of the Complaint, contain this
common proviso: In the event of the failure of the PLEDGOR to pay the
amount within a period of six (6) months from the date hereof, the
PLEDGEE is hereby authorized to foreclose the pledge upon the said
shares of stock . . .."
treasury shares sec. 57)
Section 57. Voting right for treasury shares.
Treasury shares shall have NO voting right as long as such shares
remain in the Treasury
(v) Non-voting stocks or members (sec. 6)
Section 6. Classification of shares.
Where the articles of incorporation provide for non-voting shares
in the cases allowed by this Code, the holders of such shares shall
nevertheless be entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of
all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
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5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the
vote necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
(vi) All stockholders present (sec. 51, last par.)
Section 51. Place and time of meetings of stockholders of
members.
All proceedings had and any business transacted at any meeting
of the stockholders or members, if within the powers or authority of the
corporation, shall be valid even if the meeting be improperly held or
called, provided ALL the stockholders or members of the corporation are
present or duly represented at the meeting.
(vii) No meeting called (Sec. 50; last par.;
Section 50. Regular and special meetings of stockholders or
members.
Whenever, for any cause, there is NO person authorized to call a meeting,
the Securities and Exchange Commission, upon petition of a stockholder
or member on a showing of good cause therefor, may issue an order to
the petitioning stockholder or member directing him to call a meeting of
the corporation by giving proper notice required by this Code or by the by-
laws. The petitioning stockholder or member shall preside thereat until at
least a majority of the stockholders or members present have chosen one
of their number as presiding officer.
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 Ponce et aL vs. Encarnacion, et aL, 94 Phil. 81 [1953])
Under and pursuant to section 26 of Act. No. 1459, on the showing
of good cause therefor the court may authorize a stockholder to call a
meeting and to preside thereat until the majority stockholders representing
a majority of the stockholders present and permitted to be voted shall
have chosen one among them to preside it. And this showing of good
cause therefor exists when court is apprised of the fact that the by-laws of
the corporation require the calling of a general meeting of the stockholders
to elect the board of directors but the call for such meeting has not been
done.
The requirement that "on the showing of good cause therefor, " the
court may grant to a stockholder the authority to call such meeting and to
preside thereat does not mean that the petition for such authority must be
set for hearing with notice served upon the board of directors. It may be
likened to a writ of preliminary injunction or of attachment may be issued
ex-parte upon compliance with the requirements of the rules and upon the
court being satisfied that the same should issue. Such provisional reliefs
have not been deemed and held as violative of the due process of law
clause of the Constitution.
The alleged illegality of the election of one member of the board of
directors at the meeting called as authorized by the court being
subsequent to the order complained of cannot affect the validity and
legality of the order. If it be true that one of the directors elected at such
meeting was not qualified in accordance with the provisions of the by-
laws, the remedy of an aggrieved party would be quo warranto.
(viii) Necessary Stockholders' Votes:
Election of directors and trustees (Sec. 24; 92; 93; 108; 29).
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
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to vote in person or by proxy the number of shares of stock standing, at
the time fixed in the bylaws, 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.
Section 92. Election and term of trustees.
Unless otherwise provided in the articles of incorporation or the
by-laws, the board of trustees of nonstock corporations, which may be
more than fifteen (15) in number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as organized, so classify
themselves that the term of office of one-third (1/3) of their number shall
expire every year; and subsequent elections of trustees comprising one-
third (1/3) of the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees thereafter elected to
fill vacancies occurring before the expiration of a particular term shall hold
office only for the unexpired period. NO person shall be elected as
trustee unless he is a member of the corporation. Unless otherwise
provided in the articles of incorporation or the by-laws, officers of a non-
stock corporation may be directly elected by the members.
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Section 93. Place of meetings.
The by-laws may provide that the members of a non-stock
corporation may hold their regular or special meetings at any place even
outside the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the date,
time and place of the meeting: and Provided, further, That the place of
meeting shall be within the Philippines.
Section 108. Board of trustees.
Trustees of educational institutions organized as non-stock
corporations shall NOT be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples of
five (5).
Unless otherwise provided in the articles of incorporation on the
by-laws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify themselves
that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the
expiration of a particular term, shall hold office only for the unexpired
period. Trustees elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and
authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and
term of directors shall be governed by the provisions on stock
corporations.
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.
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Any directorship or trusteeship to be filled by reason of an
increase in the number of directors or trustees shall be filled only by an
election at a regular or at a special meeting of stockholders or members
duly called for the purpose, or in the same meeting authorizing the
increase of directors or trustees if so stated in the notice of the meeting.
- Barayuga vs. Adventist University of the Philippines, 655 SCRA
640 [ 2011]
Section 108 of the Corporation Code determines the membership
and number of trustees in an educational corporation, viz.:
Section 108. Board of trustees. Trustees of educational
institutions organized as educational corporations shall not be less than
five (5) nor more than fifteen (15): Provided, however, That the number of
trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or the
by-laws, the board of trustees of incorporated schools, colleges, or other
institutions of learning shall, as soon as organized, so classify themselves
that the term of office of one-fifth (1/5) of their number shall expire every
year. Trustees thereafter elected to fill vacancies, occurring before the
expiration of a particular term, shall hold office only for the unexpired
period. Trustees elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. A majority of the trustees shall
constitute a quorum for the transaction of business. The powers and
authority of trustees shall be defined in the by-laws.
For institutions organized as stock corporations, the number and
term of directors shall be governed by the provisions on stock
corporations.
The second paragraph of the provision, although setting the term
of the members of the Board of Trustees at five years, contains a proviso
expressly subjecting the duration to what is otherwise provided in the
articles of incorporation or by-laws of the educational corporation. That
contrary provision controls on the term of office.
In AUP's case, its amended By-Laws provided the term of the
members of the Board of Trustees, and the period within which to elect the
officers, thusly:
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 Article I
Board of Trustees
Section 1. At the first meeting of the members of the corporation,
and thereafter every two years, a Board of Trustees shall be elected. It
shall be composed of fifteen members in good and regular standing in the
Seventh-day Adventist denomination, each of whom shall hold his office
for a term of two years, or until his successor has been elected and
qualified. If a trustee ceases at any time to be a member in good and
regular standing in the Seventh-day Adventist denomination, he shall
thereby cease to be a trustee.
xxx xxx xxx
Article IV
Officers
Section 1. Election of officers. At their organization meeting, the
members of the Board of Trustees shall elect from among themselves a
Chairman, a Vice-Chairman, a President, a Secretary, a Business
Manager, and a Treasurer. The same persons may hold and perform the
duties of more than one office, provided they are not incompatible with
each other. 26 HICSaD
In light of foregoing, the members of the Board of Trustees were to
serve a term of office of only two years; and the officers, who included the
President, were to be elected from among the members of the Board of
Trustees during their organizational meeting, which was held during the
election of the Board of Trustees every two years. Naturally, the officers,
including the President, were to exercise the powers vested by Section 2
of the amended By-Laws for a term of only two years, not five years.
Ineluctably, the petitioner, having assumed as President of AUP on
January 23, 2001, could serve for only two years, or until January 22,
2003. By the time of his removal for cause as President on January 27,
2003, he was already occupying the office in a hold-over capacity, and
could be removed at any time, without cause, upon the election or
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appointment of his successor. His insistence on holding on to the office
was untenable, therefore, and with more reason when one considers that
his removal was due to the loss of confidence on the part of the Board of
Trustees.
Removal of Directors (Sec. 28)
Section 28. Removal of directors or trustees.
Any director or trustee of a corporation may be removed from
office by a vote of the stockholders holding or representing at least
two-thirds (2/3) of the outstanding capital stock, or if the corporation
be a non-stock corporation, by a vote of at least two-thirds (2/3) of
the members entitled to vote: Provided, That such removal shall take
place either at a regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous notice to
stockholders or members of the corporation of the intention to propose
such removal at the meeting. A special meeting of the stockholders or
members of a corporation for the purpose of removal of directors or
trustees, or any of them, must be called by the secretary on order of the
president or on the written demand of the stockholders representing or
holding at least a majority of the outstanding capital stock, or, if it be a
non-stock corporation, on the written demand of a majority of the
members entitled to vote. Should the secretary fail or refuse to call the
special meeting upon such demand or fail or refuse to give the notice, or if
there is no secretary, the call for the meeting may be addressed directly to
the stockholders or members by any stockholder or member of the
corporation signing the demand. Notice of the time and place of such
meeting, as well as of the intention to propose such removal, must be
given by publication or by written notice prescribed in this Code. Removal
may be with or without cause: Provided, That removal without cause
may not be used to deprive minority stockholders or members of the right
of representation to which they may be entitled under Section 24 of this
Code.
Amendment of articles of incorporation (Sec. 16; 103)
Section 16. Amendment of Articles of Incorporation.
102
 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.
The original and amended articles together shall contain all
provisions required by law to be set out in the articles of incorporation.
Such articles, as amended shall be indicated by underscoring the change
or changes made, and a copy thereof duly certified under oath by the
corporate secretary and a majority of the directors or trustees stating the
fact that said amendment or amendments have been duly approved by
the required vote of the stockholders or members, shall be submitted to
the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the
Securities and Exchange Commission or from the date of filing with the
said Commission if NOT acted upon within six (6) months from the date of
filing for a cause not attributable to the corporation.
Section 103. Amendment of articles of incorporation.
Any amendment to the articles of incorporation which seeks to
delete or remove any provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or voting requirement
stated in said articles of incorporation shall NOT be valid or effective
unless approved by the affirmative vote of at least two-thirds (2/3) of the
outstanding capital stock, whether with or without voting rights, or of such
greater proportion of shares as may be specifically provided in the articles
of incorporation for amending, deleting or removing any of the aforesaid
provisions, at a meeting duly called for the purpose.
Sale of other disposition of substantially all assets (sec. 40)
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
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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 stockholder's or
member's meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That
any dissenting stockholder may exercise his appraisal right under
the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially
all the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or
members, the board of directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, exchange, mortgage, pledge or
other disposition of property and assets, subject to the rights of third
parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or members, to
sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular
course of business of said corporation or if the proceeds of the sale or
other disposition of such property and assets be appropriated for the
conduct of its remaining business.
In non-stock corporations where there are NO members with
voting rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any transaction
authorized by this section.
103
 Investment in another business or corporation (Secs. 36 and 42;
Section 36. Corporate powers and capacity.
Every corporation incorporated under this Code has the power
and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time
stated in the articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
. 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;
6. In case of stock corporations, to issue or sell stocks to
subscribers and to sell stocks to subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to admit members to the
corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as the
transaction of the lawful business of the corporation may reasonably and
necessarily require, subject to the limitations prescribed by law and the
Constitution;
8. To enter into merger or consolidation with other corporations as
provided in this Code;
9. To make reasonable donations, including those for the public
welfare or for hospital, charitable, cultural, scientific, civic, or similar
purposes: Provided, That no corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or for purposes of
partisan political activity;
10. To establish pension, retirement, and other plans for the
benefit of its directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or
necessary to carry out its purpose or purposes as stated in the articles of
incorporation. (13a)
Section 42. Power to invest corporate funds in another
corporation or business or for any other purpose.
Corporation Law 2016: JVL & JSD
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
Gokongwei vs. SEC, 89 SCRA 336 whether or not SEC gravely
abused its discretion in allowing the stockholders of respondent
corporation to ratify the investment of corporate funds in a foreign
corporation).
section 17-1/2 of the Corporation Law allows a corporation to
"invest its fund in any corporation or business or for any purpose other
than the main purpose for which it was organized" provided that its Board
of Directors has been so authorized by the affirmative vote of stockholders
holding shares entitling them to exercise at least two-thirds of the voting
power. If the investment is made in pursuance of the corporate purpose, it
does not need the approval of the stockholders. It is only when the
purchase of shares is done solely for investment and not to accomplish
the purpose of its incorporation that the vote of approval of the
stockholders holding shares entitling them to exercise at least two-thirds
of the voting power is necessary.
Where the Board of Directors had no authority to make an
investment, the corporation, like an individual, may ratify and thereby
render binding upon it the originally unauthorized acts of its officers or
other agents. Mere ultra vires acts or those which are not illegal and void
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ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
The purchase of beer manufacturing facilities by San Miguel
Corporation was an investment in the same business as its main purpose
in its Articles of Incorporation and is relevant to the corporate purpose.
The mere fact that a corporation submits the assailed investment
to the stockholders for its ratification at the annual meeting cannot be
construed as an admission that the corporation had committed an ultra
vires act, considering the common practices of corporations of periodically
submitting for ratification of their stockholders the acts of their directors,
officers and managers.
Chas Realty & Dev't. Corp. vs. Talavera, 397 SCRA 84 [2003]
The trial court and appellate court, unfortunately, have taken an
inaccurate understanding of the memorandum to the Supreme Court of
Justice Reynato S. Puno, the committee chair on the draft of the rules on
corporate rehabilitation, still then being proposed; the memorandum
reads, in part, thusly: "3. Rule 4. Rehabilitation "The following are the
principal deviation from the SEC Rules: "a) The proposed Rules now
require, as an attachment to the petition, a Certificate attesting, among
others, that the governing body and owners of the petitioning debtor have
approved and consented to whatever is necessary or desirable (including
but not limited to increasing or decreasing the authorized capital stock of
the company and modification of stockholders' right) to rehabilitate the
debtor (Sec. 2, par. (k), Rule 4). This is to avoid a situation where a
rehabilitation plan, after being developed for years, cannot be
implemented because of the refusal of shareholders to approve the
arrangements necessary for its implementation." Nowhere in the
aforequoted paragraph can it be inferred that an affirmative vote of
stockholders representing at least two-thirds (2/3) of the outstanding stock
is invariably necessary for the filing of a petition for rehabilitation
regardless of the corporate action that the plan envisions. Just to the
contrary, it only requires in the filing of the petition that the corporate
actions therein proposed have been duly approved or consented to by the
directors and stockholders "in consonance with existing laws." The
requirement is designed to avoid a situation where a rehabilitation plan,
Corporation Law 2016: JVL & JSD
after being developed and judicially sanctioned, cannot ultimately be seen
through because of the refusal of directors or stockholders to cooperate in
the full implementation of the plan. In fine, a certification on the approval
of stockholders is required but the question, whether such approval should
be by a majority or by a two-thirds (2/3) vote of the outstanding capital
stock, would depend on the existing law vis-a-vis the corporate act or acts
proposed to be done in the rehabilitation of the distressed corporation.
The rehabilitation plan submitted by petitioner merely consists of a
repayment or re-structuring scheme of CRDC's bank loans to Land Bank
of the Philippines and Equitable-PCI Bank and of leasing out most of the
available spaces in the Megacenter, including the completion of the
construction of the fourth floor, to increase rental revenues. None of the
proposed corporate actions would require a vote of approval by the
stockholders representing at least two-thirds (2/3) of the outstanding
capital stock.
Merger and consolidation (Sec. 77).
Section 77. Stockholder's or member's approval.
Upon approval by majority vote of each of the board of directors or
trustees of the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate
corporate meetings duly called for the purpose. Notice of such meetings
shall be given to ALL stockholders or members of the respective
corporations, at least two (2) weeks prior to the date of the meeting, either
personally or by registered mail. Said notice shall state the purpose of the
meeting and shall include a copy or a summary of the plan of merger or
consolidation. The affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least two-thirds
(2/3) of the members in the case of non-stock corporations shall be
necessary for the approval of such plan. Any dissenting stockholder in
stock corporations may exercise his appraisal right in accordance with the
Code: Provided, That if after the approval by the stockholders of such
plan, the board of directors decides to abandon the plan, the appraisal
right shall be extinguished.
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 Any amendment to the plan of merger or consolidation may be
made, provided such amendment is approved by majority vote of the
respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of
two-thirds (2/3) of the members of each of the constituent corporations.
Such plan, together with any amendment, shall be considered as the
agreement of merger or consolidation.
Increase and Decrease of capital stock (Sec. 38).
Section 38. Power to increase or decrease capital stock;
incur, create or increase bonded indebtedness.
NO corporation shall increase or decrease its capital stock or
incur, create or increase any bonded indebtedness unless approved by
a majority vote of the board of directors and, at a stockholder's
meeting duly called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase or diminution of
the capital stock, or the incurring, creating or increasing of any
bonded indebtedness. Written notice of the proposed increase or
diminution of the capital stock or of the incurring, creating, or increasing of
any bonded indebtedness and of the time and place of the stockholder's
meeting at which the proposed increase or diminution of the capital stock
or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the
directors of the corporation and countersigned by the chairman and the
secretary of the stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock
or number of shares of no-par stock thereof actually subscribed, the
names, nationalities and residences of the persons subscribing, the
amount of capital stock or number of no-par stock subscribed by each,
and the amount paid by each on his subscription in cash or property, or
the amount of capital stock or number of shares of no-par stock allotted to
Corporation Law 2016: JVL & JSD
each stock-holder if such increase is for the purpose of making effective
stock dividend therefor authorized; (
4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the
meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital
stock, or the incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring,
creating or increasing of any bonded indebtedness shall require prior
approval of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of
the corporation and the other shall be filed with the Securities and
Exchange Commission and attached to the original articles of
incorporation. From and after approval by the Securities and Exchange
Commission and the issuance by the Commission of its certificate of filing,
the capital stock shall stand increased or decreased and the incurring,
creating or increasing of any bonded indebtedness authorized, as the
certificate of filing may declare: Provided, That the Securities and
Exchange Commission shall NOT accept for filing any certificate of
increase of capital stock unless accompanied by the sworn statement of
the treasurer of the corporation lawfully holding office at the time of the
filing of the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least
twenty-five (25%) percent of the amount subscribed has been paid either
in actual cash to the corporation or that there has been transferred to the
corporation property the valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further, That NO decrease of the
capital stock shall be approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness,
or increase the same, with the approval by a majority vote of the board of
trustees and of at least two-thirds (2/3) of the members in a meeting duly
called for the purpose.
Bonds issued by a corporation shall be registered with the
Securities and Exchange Commission, which shall have the authority to
determine the sufficiency of the terms thereof.
106
 Adoption, amendment and repeal of by-laws (Sec. 48).
Section 48. Amendments to by-laws.
The board of directors or trustees, by a majority vote thereof, and
the owners of at least a majority of the outstanding capital stock, or at
least a majority of the members of a non-stock corporation, at a regular or
special meeting duly called for the purpose, may amend or repeal any
by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the
power to amend or repeal any by-laws or adopt new by-laws: Provided,
That any power delegated to the board of directors or trustees to amend
or repeal any by-laws or adopt new by-laws shall be considered as
revoked whenever stockholders owning or representing a majority of the
outstanding capital stock or a majority of the members in non-stock
corporations, shall so vote at a regular or special meeting.
Whenever any amendment or new by-laws are adopted, such
amendment or new by-laws shall be attached to the original by-laws in the
office of the corporation, and a copy thereof, duly certified under oath by
the corporate secretary and a majority of the directors or trustees, shall be
filed with the Securities and Exchange Commission the same to be
attached to the original articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the
issuance by the Securities and Exchange Commission of a
certification that the same are NOT inconsistent with this Code
Declaration of stock dividends (Sec. 43).
Section 43. Power to declare dividends.
The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That NO stock dividend shall be issued
WITHOUT the approval of stockholders representing NOT less than two-
Corporation Law 2016: JVL & JSD
thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus
profits in excess of one hundred (100%) percent of their paid-in
capital stock, except:
(1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or
(2) when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has not yet
been secured; or
(3) when it can be clearly shown that such retention is necessary
under special circumstances obtaining in the corporation, such as when
there is need for special reserve for probable contingencies
Management contracts (Sec. 44).
Section 44. Power to enter into management contract.
NO corporation shall conclude a management contract with
another corporation unless such contract shall have been approved
by the board of directors and by stockholders owning at least the
majority of the outstanding capital stock, or by at least a majority of
the members in the case of a non-stock corporation, of both the
managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That
(1) where a stockholder or stockholders representing the same
interest of both the managing and the managed corporations own or
control more than one-third (1/3) of the total outstanding capital stock
entitled to vote of the managing corporation; or
(2) where a majority of the members of the board of directors of
the managing corporation also constitute a majority of the members of the
board of directors of the managed corporation, then the management
contract must be approved by the stockholders of the managed
corporation owning at least two-thirds (2/3) of the total outstanding
capital stock entitled to vote, or by at least two-thirds (2/3) of the
members in the case of a non-stock corporation. NO management
contract shall be entered into for a period longer than five years for any
one term.
107
 The provisions of the next preceding paragraph shall apply to any
contract whereby a corporation undertakes to manage or operate all or
substantially all of the business of another corporation, whether such
contracts are called service contracts, operating agreements or otherwise:
Provided, however, That such service contracts or operating agreements
which relate to the exploration, development, exploitation or utilization of
natural resources may be entered into for such periods as may be
provided by the pertinent laws or regulations.
Fixing of consideration of no par value shares (Sec. 62).
Section 62. Consideration for stocks.
Stocks shall NOT be issued for a consideration less than the par
or issued price thereof. Consideration for the issuance of stock may be
any or a combination of any two or more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful purposes
at a fair valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the
corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; and
6. Outstanding shares exchanged for stocks in the event of
reclassification or conversion.
Where the consideration is other than actual cash, or consists of
intangible property such as patents of copyrights, the valuation thereof
shall initially be determined by the incorporators or the board of directors,
subject to approval by the Securities and Exchange Commission.
Shares of stock shall NOT be issued in exchange for promissory
notes or future service.
The same considerations provided for in this section, insofar
as they may be applicable, may be used for the issuance of bonds by
the corporation.
The issued price of no-par value shares may be fixed in the
articles of incorporation or by the board of directors pursuant to authority
conferred upon it by the articles of incorporation or the by-laws, or in the
Corporation Law 2016: JVL & JSD
absence thereof, by the stockholders representing at least a majority of
the outstanding capital stock at a meeting duly called for the purpose.
Dissolution (Sec. 117,118 and 119)
Section 117. Methods of dissolution.
A corporation formed or organized under the provisions of this
Code may be dissolved voluntarily or involuntarily. (n)
Section 118. Voluntary dissolution where no creditors are
affected.
If dissolution of a corporation does NOT prejudice the rights of any
creditor having a claim against it, the dissolution may be effected by
majority vote of the board of directors or trustees, and by a resolution duly
adopted by the affirmative vote of the stockholders owning at least two-
thirds (2/3) of the outstanding capital stock or of at least two-thirds (2/3) of
the members of a meeting to be held upon call of the directors or trustees
after publication of the notice of time, place and object of the meeting for
three (3) consecutive weeks in a newspaper published in the place
where the principal office of said corporation is located; and if no
newspaper is published in such place, then in a newspaper of general
circulation in the Philippines, after sending such notice to each
stockholder or member either by registered mail or by personal delivery at
least thirty (30) days prior to said meeting. A copy of the resolution
authorizing the dissolution shall be certified by a majority of the board of
directors or trustees and countersigned by the secretary of the
corporation. The Securities and Exchange Commission shall thereupon
issue the certificate of dissolution. (62a)
Section 119. Voluntary dissolution where creditors are
affected.
Where the dissolution of a corporation may prejudice the rights of
any creditor, the petition for dissolution shall be filed with the Securities
and Exchange Commission. The petition shall be signed by a majority of
its board of directors or trustees or other officers having the
management of its affairs, verified by its president or secretary or
one of its directors or trustees, and shall set forth all claims and
demands against it, and that its dissolution was resolved upon by the
108
affirmative vote of 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 at a meeting of its stockholders or members called for that
purpose.
If the petition is sufficient in form and substance, the Commission
shall, by an order reciting the purpose of the petition, fix a date on or
before which objections thereto may be filed by any person, which date
shall NOT be less than thirty (30) days nor more than sixty (60) days after
the entry of the order. Before such date, a copy of the order shall be
published at least once a week for three (3) consecutive weeks in a
newspaper of general circulation published in the municipality or city
where the principal office of the corporation is situated, or if there be no
such newspaper, then in a newspaper of general circulation in the
Philippines, and a similar copy shall be posted for three (3) consecutive
weeks in three (3) public places in such municipality or city.
Upon five (5) day's notice, given after the date on which the
right to file objections as fixed in the order has expired, the
Commission shall proceed to hear the petition and try any issue made
by the objections filed; and if NO such objection is sufficient, and the
material allegations of the petition are true, it shall render judgment
dissolving the corporation and directing such disposition of its assets as
justice requires, and may appoint a receiver to collect such assets and
pay the debts of the corporation.
Incurring, creating or increasing bonded indebtedness (Sec. 38)
(b) Pre-emptive right Sec. 39;
Section 39. Power to deny pre-emptive right.
ALL stockholders of a stock corporation shall enjoy pre-emptive
right to subscribe to ALL issues or disposition of shares of any class, in
proportion to their respective shareholdings, unless such right is denied
by the articles of incorporation or an amendment thereto: Provided, That
such pre-emptive right shall NOT extend to shares to be issued in
compliance with laws requiring stock offerings or minimum stock
ownership by the public; or to shares to be issued in good faith with the
approval of the stockholders representing twothirds (2/3) of the
Corporation Law 2016: JVL & JSD
outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
-Majority Stockholder of Ruby Industrial Corporation vs. Lim, 650
SCRA 461 [2011]
Pre-emptive right under Sec. 39 of the Corporation Code refers to
the right of a stockholder of a stock corporation to subscribe to all issues
or disposition of shares of any class, in proportion to their respective
shareholdings. The right may be restricted or denied under the articles of
incorporation, and subject to certain exceptions and limitations. The
stockholder must be given a reasonable time within which to exercise their
preemptive rights. Upon the expiration of said period, any stockholder who
has not exercised such right will be deemed to have waived it. 65
The validity of issuance of additional shares may be questioned if
done in breach of trust by the controlling stockholders. Thus, even if the
pre-emptive right does not exist, either because the issue comes within
the exceptions in Section 39 or because it is denied or limited in the
articles of incorporation, an issue of shares may still be objectionable if the
directors acted in breach of trust and their primary purpose is to
perpetuate or shift control of the corporation, or to "freeze out" the minority
interest. 66 In this case, the following relevant observations should have
signaled greater circumspection on the part of the SEC upon the third
and last remand to it pursuant to our January 20, 1998 decision to
demand transparency and accountability from the majority stockholders, in
view of the illegal assignments and objectionable features of the Revised
BENHAR/RUBY Plan, as found by the CA and as affirmed by this Court
Sec. 10(e), Securities Regulation Code, RA 8799 on Exempt
Transactions The requirement of registration at securities shall NOT
apply to the sale of capital stock of a corporation to its own stockholders
exclusively, where NO commission or other remuneration is paid or given
directly or indirectly in connection with the sale at such capital stock;
in close corporations: Sec. 102
Section 102. Pre-emptive right in close corporations.
109
 The pre-emptive right of stockholders in close corporations shall
extend to all stock to be issued, including reissuance of treasury
shares, whether for money, property or personal services, or in payment
of corporate debts, unless the articles of incorporation provide otherwise.
(c) Rights to Dividends Sec. 43;
Section 43. Power to declare dividends.
The board of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings which shall be
payable in cash, in property, or in stock to all stockholders on the basis of
outstanding stock held by them: Provided, That any cash dividends due
on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be
withheld from the delinquent stockholder until his unpaid subscription is
fully paid: Provided, further, That NO stock dividend shall be issued
WITHOUT the approval of stockholders representing NOT less than two-
thirds (2/3) of the outstanding capital stock at a regular or special meeting
duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus
profits in excess of one hundred (100%) percent of their paid-in
capital stock, except:
(1) when justified by definite corporate expansion projects or
programs approved by the board of directors; or
(2) when the corporation is prohibited under any loan agreement
with any financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such 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
- Imelda 0. Cojuanco, et al. vs. Sandiganbayan et al., G.R. No.
18327, April 24, 2009
Corporation Law 2016: JVL & JSD
Dividends are payable to the stockholders of record as of the date
of the declaration of dividends or holders of record on a certain future
date, as the case may be, unless the parties have agreed otherwise. 11
And a transfer of shares which is not recorded in the books of the
corporation is valid only as between the parties, hence, the transferor has
the right to dividends as against the corporation without notice of transfer
but it serves as trustee of the real owner of the dividends, subject to the
contract between the transferor and transferee as to who is entitled to
receive the dividends.
- Republic Planters Bank vs. Agana, 269 SC RA 1 [1997])
The respondent judge also stated that since the stock certificate
granted the private respondents the right to receive a quarterly dividend of
One Per Centum (1%), cumulative and participating, it "clearly and
unequivocably (sic) indicates that the same are 'interest bearing stocks' or
stocks issued by a corporation under an agreement to pay a certain rate
of interest thereon. As such, plaintiffs (private respondents herein) become
entitled to the payment thereof as a matter of right without necessity of a
prior declaration of dividend." There is no legal basis for this observation.
Both Sec. 16 of the Corporation Law and Sec. 43 of the present
Corporation Code prohibit the issuance of any stock dividend 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. These provisions underscore the fact that payment of dividends
to a stockholder is not a matter of right but a matter of consensus.
Furthermore, "interest bearing stocks," on which the corporation agrees
absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of
interest as dividends from net earnings or surplus only. Clearly, the
respondent judge, in compelling the petitioner to redeem the shares in
question and to pay the corresponding dividends, committed grave abuse
of discretion amounting to lack or excess of jurisdiction in ignoring both
the terms and conditions specified in the stock certificate, as well as the
clear mandate of the law.
(i) Form and Dividends cash; property and stock
110
 - Fisher vs. Trinidad, 43 Phil. 973119221;
A dividend is defined as a corporate profit set aside, declared, and
ordered by the directors to be paid to the stockholders on demand or at a
fixed time. Until the dividend is declared, the corporate profits belong to
the corporation and not to the stockholders, and are liable for the payment
of the debts of the corporation.
A stock dividend, when declared, is merely a certificate of stock
which evidences the interest of the stockholder in the increased capital of
the corporation. There is a clear distinction between a cash dividend and a
stock dividend. The one is a disbursement to the stockholder of
accumulated earnings, and the corporation parts irrevocably with all
interest therein; the other involves no disbursement by the corporation; the
corporation parts with nothing to its stockholder. When a cash dividend is
declared and paid to stockholders, such cash becomes the absolute
property of the stockholders and cannot be reached by the creditors of
corporation in the absence of fraud. The property represented by a stock
dividend, however, still being the property of corporation, and not of the
stockholder, it may be reached by an execution against the corporation,
and sold as a part of the property of the corporation. In such a case, if all
of the property of the corporation is sold under execution, then the
stockholders certainly could not be charged with having received an
income by virtue of the issuance of the stock dividend. If the ownership of
the property represented by a stock dividend is still in the corporation and
not in the holder of such stock, certainly such stock cannot be regarded as
income to the stockholder. The stockholder has received nothing but a
representation of an interest in the property of the corporation and, as a
matter of fact, he may never receive anything, depending upon the final
outcome of the business of the corporation.
- Nielson & Co. vs. Lepanto Con. Mining Co., 26 SCRA 540
[1968])
From Section 16 of the Corporation Law, the consideration for
which shares of stock may be issued are: (1) cash; (2) property and (3)
undistributed profits. Shares of stock are given the special name "stock
dividends" only if they are issued in lieu of undistributed profits. If the
shares of stocks are issued in exchange of cash or Property then those
Corporation Law 2016: JVL & JSD
shares do not fall under the category of "stock dividends". A corporation
may legally issue shares of stock in consideration of services rendered to
it by a person not a stockholder, or in payment of its indebtedness. A
share of stock issued to pay for services rendered is equivalent to a stock
issued in exchange of property because services is equivalent to property.
Likewise a share of stock issued in payment of indebtedness is equivalent
to issuing a stock in exchange for cash. But a share of stock thus issued
should be part of the original capital stock of the corporation upon its
organization, or part of the stocks issued when the increase of the
capitalization of a corporation is properly authorized.
A "stock dividend" is any dividend payable in shares of stock of the
corporation declaring or authorizing such dividend. It is, what the term
itself implies, a distribution of the shares of stock of the corporation among
the stockholders as dividends. A stock dividend of a corporation is a
dividend paid in shares of stock instead of cash and is properly payable
only out of surplus profits. So, a stock dividend is actually two things: (1) a
dividend, and (2) the enforced use of the dividend money to purchase
additional shares of stock at par. When a corporation issues stock
dividends, it shows that the corporations' accumulated profits have been
capitalized instead of distributed to the stockholders or retained as surplus
available for distribution, in money or in kind, should opportunity offer. Far
from being a realization of profits for the stockholder, it tends rather to
postpone said realization, in that the fund represented by the new stock
has been transferred from the surplus to assets and no longer available
for actual distribution.
The term "dividend" both in the technical sense and its ordinary
acceptation, is that part or portion of the profits of the enterprise which the
corporation, by its governing agents, sets apart for ratable division among
the holders of the capital stock. It means the fund actually set aside, and
declared by the directors of the corporation as a dividend, and duly
ordered by the directory, or by the stockholders at a corporate meeting to
be divided or distributed among the stockholders according to their
respective interests.
(ii) Source of Dividends unrestricted retained earnings the
undistributed earnings of the corporation which have NOT been allocated
for any managerial, contractual or legal purposes and which are tree for
111
distribution to the stockholders as dividends (SEC Rules Governing
Redeemable and Treasury Shares, 1982)
(iii) When Right to Dividends Vests as soon as the same have
been lawfully declared by the Board of Directors. From that time, it
becomes a debt owing by the corporation to each stockholder.
(d) Right to Transfer Shares (Sec. 63);
Section 63. Certificate of stock and transfer of shares.
The capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or vice president,
countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by
the owner or his attorney-in-fact or other person legally authorized
to make the transfer. NO transfer, however, shall be valid, except as
between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date
of the transfer, the number of the certificate or certificates and the number
of shares transferred. NO shares of stock against which the corporation
holds any unpaid claim shall be transferable in the books of the
corporation.
- Fil-Estate Golf and Development vs. Vertex Sales and Trading
Inc., D.R. No. 202079, June 10, 2013
Section 63 of the Corporation Code provides:
SEC. 63. Certificate of stock and transfer of shares. The capital
stock of stock corporations shall be divided into shares for which
certificates signed by the president or vice-president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by delivery
of the certificate or certificates indorsed by the owner or his attorney-in-
fact or other person legally authorized to make the transfer. No transfer,
Corporation Law 2016: JVL & JSD
however, shall be valid, except as between the parties, until the transfer is
recorded in the books of the corporation showing the names of the parties
to the transaction, the date of the transfer, the number of the certificate or
certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable in the books of the corporation.
In this case, Vertex fully paid the purchase price by February 11,
1999 but the stock certificate was only delivered on January 23, 2002 after
Vertex filed an action for rescission against FEGDI.
Under these facts, considered in relation to the governing law,
FEGDI clearly failed to deliver the stock certificates, representing the
shares of stock purchased by Vertex, within a reasonable time from the
point the shares should have been delivered. This was a substantial
breach of their contract that entitles Vertex the right to rescind the sale
under Article 1191 of the Civil Code. It is not entirely correct to say that a
sale had already been consummated as Vertex already enjoyed the rights
a shareholder can exercise. The enjoyment of these rights cannot suffice
where the law, by its express terms, requires a specific form to transfer
ownership.
-Republic vs. Estate of Hans Menzi, 476 SCRA 20 [20051
The Corporation Code acknowledges that the delivery of a duly
indorsed stock certificate is sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of transfer is valid between the
parties. In order to bind third persons, however, the transfer must be
recorded in the books of the corporation. . . . The absence of delivery is a
fatal defect which is not cured by mere execution of a deed of assignment.
- Rural Bank of Lipa City, Inc. vs. CA, 366 SCRA 188
We have uniformly held that for a valid transfer of stocks, there
must be strict compliance with the mode of transfer prescribed by law. The
requirements are: (a) There must be delivery of the stock certificate; (b)
The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and (c) To be valid
112
against third parties, the transfer must be recorded in the books of the
corporation.
While it may be true that there was an assignment of private
respondents' shares to the petitioners, said assignment was not sufficient
to effect the transfer of shares since there was no endorsement of the
certificates of stock by the owners, their attorneys-in-fact or any other
person legally authorized to make the transfer. Moreover, petitioners admit
that the assignment of shares was not coupled with delivery, the absence
of which is a fatal defect. The rule is that the delivery of the stock
certificate duly endorsed by the owner is the operative act of transfer of
shares from the lawful owner to the transferee. Title may be vested in the
transferee only by delivery of the duly indorsed certificate of stock. . . .
Consequently, the petitioners, as mere assignees, cannot enjoy the status
of a stockholder, cannot vote nor be voted for, and will not be entitled to
dividends, insofar as the assigned shares are concerned. Parenthetically,
the private respondents cannot, as yet, be deprived of their rights as
stockholders, until and unless the issue of ownership and transfer of the
shares in question is resolved with finality.
- Thomson vs. CA, 298 SCRA 280 [1998]
Private respondent does not insist nor intend to transfer the club
membership in its name but rather to its designated nominee. The Manila
Polo Club does not necessarily prohibit the transfer of proprietary shares
by its members. The Club only restricts membership to deserving
applicants in accordance with its rules, when the amended Articles of
Incorporation states that: "No transfer shall be valid except between the
parties, and shall be registered in the Membership Book unless made in
accordance with these Articles and the By-Laws." Thus, as between
parties herein, there is no question that a transfer is feasible. Moreover,
authority granted to a corporation to regulate the transfer of its stock does
not empower it to restrict the right of a stockholder to transfer his shares,
but merely authorizes the adoption of regulations as to the formalities and
procedure to be followed in effecting transfer. In this case, the petitioner
was the nominee of the private respondent to hold the share and enjoy the
privileges of the club. But upon the expiration of petitioner's employment
as officer and consultant of AmCham, the incentives that go with the
position, including use of the MPC share, also ceased to exist. It now
Corporation Law 2016: JVL & JSD
behooves petitioner to surrender said share to private respondent's next
nominee, another natural person. Obviously this arrangement of trust and
confidence cannot be defeated by the petitioner's citation of the MPC rules
to shield his untenable position, without doing violence to basic tenets of
justice and fair dealing.
- Batong Buhay Gold Mines vs. CA, 147 SC RA 4 [1987]
The stipulation of facts of the parties does not at all show that
private respondent intended to sell, or would sell or would have sold the
stocks in question on specified dates, While it is true that shares of stock
may go up or down in value (as in fact the concerned shares here really
rose from fifteen (15) centavos to twenty three or twenty four (23/24)
centavos per share and then fell to about two (2) centavos per share, still
whatever profits could have been made are purely SPECULATIVE, for it
was difficult to predict with any decree of certainty the rise and fall in the
value of the shares. Thus this Court has ruled that speculative damages
cannot be recovered.
Forged and Unauthorized Transers
-J. Santamaria vs. Hongkong Shanghai Bkng. Corp. 89 Phil. 780
[1955]
The fact that, on the right margin of the said certificate, the name
of S appeared written, granting it to be true, cannot be considered
sufficient reason to indicate that its owner was S, considering that said
certificate was indorsed in blank by W, in whose name it had been issued,
indorsement which was guaranteed by C's indorsement in blank and was
transferred in due course by the latter to the Bank under a letter of
hypothecation. Said indicium could at best give the impression that S was
the original holder of the certificate
Even assuming that S had really approached the proper official of
the Bank demanding the return of the certificate or its value, such an
incident would merely show that S has an adverse claim to the ownership
of said certificate of stock, but that would not necessarily place the bank in
a position to inquire as to the real basis of her claim, nor would it place the
bank in the obligation to recognize her claim and return to her the
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certificate outright. A mere claim of ownership does not establish the fact
of ownership
The most that S could claim is the return to her of the said
certificate of stock (Howison vs. Mechanics Sav. Bank, 183 Atl., p. 697).
The defendant bank having expressed its willingness from the very
beginning to compromise the case by delivering to S the new certificate of
stock issued to the bank by the issuing corporation in lieu of the original,
the defendant bank should be ordered to deliver to S the said new
certificate of stock.
- Neugene Marketing, Inc. vs. CA, 303 SC RA 295 [1999])
As stressed by the Court of Appeals, there is no reliable showing
of any valuable consideration for the supposed transfer of subject stocks
to petitioners. Fundamental and crucial is the rule that if a contract has no
cause, it does not produce any effect whatsoever and is inexistent or void
from the beginning. The complete absence of a cause or consideration
renders the contract absolutely void and inexistent.
Stock and Transfer Book (Secs. 63, 72 and 74);
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
Section 74. Books to be kept; stock transfer agent.
Every corporation shall keep and carefully preserve at its
principal office a record of all business transactions and minutes of
all meetings of stockholders or members, or of the board of
directors or trustees, in which shall be set forth in detail the time and
place of holding the meeting, how authorized, the notice given, whether
the meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. Upon the
demand of any director, trustee, stockholder or member, the time when
any director, trustee, stockholder or member entered or left the meeting
must be noted in the minutes; and on a similar demand, the yeas and
nays must be taken on any motion or proposition, and a record thereof
carefully made. The protest of any director, trustee, stockholder or
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member on any action or proposed action must be recorded in full on his
demand.
The records of ALL business transactions of the corporation and
the minutes of any meetings shall be open to inspection by any
director, trustee, stockholder or member of the corporation at
reasonable hours on business days and he may demand, in writing,
for a copy of excerpts from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow
any director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director,
trustee, stockholder or member for damages, and in addition, shall be
guilty of an offense which shall be punishable under Section 144 of
this Code: Provided, That if such refusal is made pursuant to a resolution
or order of the board of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or trustees who voted
for such refusal: and Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and copy
excerpts from the corporation's records and minutes has improperly
used any information secured through any prior examination of the
records or minutes of such corporation or of any other corporation, or
was not acting in good faith or for a legitimate purpose in making his
demand.
Stock corporations must also keep a book to be known as the
"stock and transfer book", in which must be kept a record of ALL stocks in
the names of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been made, and
the date of payment of any installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, and by and to whom
made; and such other entries as the by-laws may prescribe. The stock
and transfer book shall be kept in the principal office of the corporation or
in the office of its stock transfer agent and shall be open for inspection by
any director or stockholder of the corporation at reasonable hours on
business days.
NO stock transfer agent or one engaged principally in the
business of registering transfers of stocks in behalf of a stock corporation
shall be allowed to operate in the Philippines unless he secures a
license from the Securities and Exchange Commission and pays a
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fee as may be fixed by the Commission, which shall be renewable
annually: Provided, That a stock corporation is NOT precluded from
performing or making transfer of its own stocks, in which case all the rules
and regulations imposed on stock transfer agents, except the payment of
a license fee herein provided, shall be applicable.
-Batangas Laguna Tayabas Bus Co. Inc. vs. Bitanga, 362 SC RA
635 [2001]
The SEC En Banc issued a writ of preliminary injunction against
the Bitanga group. In so ruling, the SEC En Banc merely exercised its
wisdom and competence as a specialized administrative agency
specifically tasked to deal with corporate law issues. We are in full accord
with the SEC En Banc on this matter. Indeed, until registration is
accomplished, the transfer, though valid between the parties, cannot be
effective as against the corporation. Thus, the unrecorded transferee, the
Bitanga group in this case, cannot vote nor be voted for. The purpose of
registration, therefore, is two-fold: to enable the transferee to exercise all
the rights of a stockholder, including the right to vote and to be voted for,
and to inform the corporation of any change in share ownership so that it
can ascertain the persons entitled to the rights and subject to the liabilities
of a stockholder. Until challenged in a proper proceeding, a stockholder of
record has a right to participate in any meeting; his vote can be properly
counted to determine whether a stockholders' resolution was approved,
despite the claim of the alleged transferee. On the other hand, a person
who has purchased stock, and who desires to be recognized as a
stockholder for the purpose of voting, must secure such a standing by
having the transfer recorded in the corporate books. Until the transfer is
registered, the transferee is not a stockholder but an outsider.
- Fua Cun vs. Summers, 44 Phil. 704 [1923];
A banking corporation has no lien upon its own stock for the
indebtedness of the stockholders even when the by-laws provide that the
shares shall be transferable only upon the books of the corporation and
that no such transfer shall be made if the holder of the shares is indebted
to the corporation.
Corporation Law 2016: JVL & JSD
n the absence of special agreement to the contrary, a subscriber
for a certain number of shares of stock does not, upon payment of one-
half of the subscription price, become entitled to the issuance of
certificates for one-half the number of shares subscribed for; the
subscriber's right consists only in an equity entitling him to a certificate for
the total number of shares subscribed for by him upon payment of the
remaining portion of the subscription price.
An equity in shares of stock may be assigned, the assignment
becoming effective as between the parties and as to third parties with
notice.
An attachment levied upon assigned rights or interests in an action
against the assignor after the attaching creditor has received notice of the
assignment creates no lien as against the assignee.
Whether in this jurisdiction an equity in shares of stock may
properly be made the subject of a chattel mortgage, quaere, but such
chattel mortgage will at least operate as a conditional equitable
assignment.
- Garcia vs. Jomouad, 323 SCRA 424;
Section 63 of the Corporation Code reads: "Sec. 63 Certificate of
stock and transfer of shares. . . . No transfer, however, shall be valid,
except as between the parties, until the transfer is recorded in the books
of the corporation showing the names of the parties to the transaction, the
date of the transfer, the number of the certificate or certificates and the
number of shares transferred.
we hold that the transfer of the subject certificate made by Dico to
petitioner was not valid as to the spouses Atinon, the judgment creditors,
as the same still stood in the name of Dico, the judgment debtor, at the
time of the levy on execution. In addition, as correctly ruled by the CA, the
entry in the minutes of the meeting of the Club's board of directors noting
the resignation of Dico as propriety member thereof does not constitute
compliance with Section 63 of the Corporation Code. Said provision of law
strictly requires the recording of the transfer in the books of the
corporation, and not elsewhere, to be valid as against third parties.
Accordingly, the CA committed no reversible error in rendering the
assailed decision.
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 - Chemphil Export & Import Corp. vs. CA, 251 SC RA 257 [1995];
The attachment lien acquired by the consortium is valid and
effective. Both the Revised Rules of Court and the Corporation Code do
not require annotation in the corporation's stock and transfer books for the
attachment of shares of stock to be valid and binding on the corporation
and third-party. Section 74 of the Corporation Code enumerates the
instances where registration in the stock and transfer books of a
corporation is proper. Are attachments of shares of stock included in the
term "transfer" as provided in Sec. 63 of the Corporation Code? We rule in
the negative. As succinctly declared in the case of Monserrat v. Ceron,
"chattel mortgage over shares of stock need not be registered in the
corporation's stock and transfer book inasmuch as chattel mortgage over
shares of stock does not involve a "transfer of shares," and that only
absolute transfers of shares of stock are required to be recorded in the
corporation's stock and transfer book in order to have "force and effect as
against third persons." Although this Monserrat case refers to a chattel
mortgage over shares of stock, the same may be applied to the
attachment of the disputed shares of stock in the present controversy
since an attachment does not constitute an absolute conveyance of
property but is primarily used as a means "to seize the debtor's property in
order to secure the debt or claim of the creditor in the event that a
judgment is rendered." Petitioner CEIC's claim is the Deed of Sale under
which it purchased the disputed shares. It is, however, a settled rule that a
purchaser of attached property acquires it subject to an attachment legally
and validly levied thereon.
A secretary's major function is to assist his or her superior. He/she
in effect an extension of the latter. Obviously, as such, one of her duties is
to receive letters and notices for and in behalf of her superior, as in the
case at bench. The notice of garnishment was addressed to and was
actually received by Chemphil's president through his secretary who
formally received it for him. Thus, in one case, we ruled that the secretary
of the president may be considered an "agent" of the corporation and held
that service of summons on him is binding on the corporation. Moreover,
the service and receipt of the notice of garnishment was duly
acknowledged and confirmed by the corporate secretary of Chemphil, and
his successor through their respective certifications. We rule, therefore,
Corporation Law 2016: JVL & JSD
that there was substantial compliance with Sec. 7(d), Rule 57 of the Rules
of Court.
- Torres vs. CA, 278 SCRA 793 [1997];
It is precisely the brewing family discord between Judge Torres
and private respondents his nephew and nieces that should have
placed Judge Torres on his guard. He should have been more careful in
ensuring that his actions (particularly the assignment of qualifying shares
to his nominees) comply with the requirements of the law. Petitioners
cannot use the flimsy excuse that it would have been a vain attempt to
force the incumbent corporate secretary to register the aforestated
assignments in the stock and transfer book because the latter belonged to
the opposite faction. It is the corporate secretary's duty and obligation to
register valid transfers of stocks and if said corporate officer refuses to
comply, the transferor-stockholder may rightfully bring suit to compel
performance. In other words, there are remedies within the law that
petitioners could have availed of, instead of taking the law in their own
hands, as the cliche goes.
All corporations, big or small, must abide by the provisions of the
Corporation Code. Being a simple family corporation is not an exemption.
Such corporations cannot have rules and practices other than those
established by law. prLL||
- Magsaysay Labrador vs. CA 180 SCRA 266 [1989];
While a share of stock represents a proportionate or aliquot
interest in the property of the corporation, it does not vest the owner
thereof with any legal right or title to any of the property, his interest in the
corporate property being equitable or beneficial in nature. Shareholders
are in no legal sense the owners of corporate property, which is owned by
the corporation as a distinct legal person.
The petitioners cannot claim the right to intervene on the strength
of the transfer of shares allegedly executed by the late Senator. The
corporation did not keep books and records. Perforce, no transfer was
ever recorded, much less affected as to prejudice third parties. The
transfer must be registered in the books of the corporation to affect third
persons. The law on corporations is explicit, Section 63 of the Corporation
Code provides, thus: "No transfer, however, shall be valid, except as
116
between the parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the transaction, the date
of the transfer, the number of the certificate or certificates and the number
of shares transferred."
- Bitong vs. CA, 292 SCRA 503 [1998].
Section 63 of the Corporation Code envisions a formal certificate
of stock which can be issued only upon compliance with certain requisites.
First, the certificates must be signed by the president or vice-president,
countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation. A mere typewritten statement advising a
stockholder of the extent of his ownership in a corporation without
qualification and/or authentication cannot be considered as a formal
certificate of stock. Second, delivery of the certificate is an essential
element of its issuance. Hence, there is no issuance of a stock certificate
where it is never detached from the stock books although blanks therein
are properly filled up if the person whose name is inserted therein has no
control over the books of the company. Third, the par value, as to par
value shares, or the full subscription as to no par value shares, must first
be fully paid. Fourth, the original certificate must be surrendered where
the person requesting the issuance of a certificate is a transferee from a
stockholder. The certificate of stock itself once issued is a continuing
affirmation or representation that the stock described therein is valid and
genuine and is at least prima facie evidence that it was legally issued in
the absence of evidence to the contrary. However, this presumption may
be rebutted. Similarly, books and records of a corporation which include
even the stock and transfer book are generally admissible in evidence in
favor of or against the corporation and its members to prove the corporate
acts, its financial status and other matters including one's status as a
stockholder. They are ordinarily the best evidence of corporate acts and
proceedings. However, the books and records of a corporation are not
conclusive even against the corporation but are prima facie evidence only.
Parol evidence may be admitted to supply omissions in the records,
explain ambiguities, or show what transpired where no records were kept,
or in some cases where such records were contradicted. The effect of
entries in the books of the corporation which purport to be regular records
of the proceedings of its board of directors or stockholders can be
Corporation Law 2016: JVL & JSD
destroyed by testimony of a more conclusive character than mere
suspicion that there was an irregularity in the manner in which the books
were kept. The foregoing considerations are founded on the basic
principle that stock issued without authority and in violation of law is void
and confers no rights on the person to whom it is issued and subjects him
to no liabilities. Where there is an inherent lack of power in the corporation
to issue the stock, neither the corporation nor the person to whom the
stock is issued is estopped to question its validity since an estoppel
cannot operate to create stock which under the law cannot have
existence.
Based on the admission of petitioner, there is no truth to the
statement written in Certificate of Stock No. 008 that the same was issued
and signed on 95 July 1983 by its duly authorized officers specifically the
President and Corporate Secretary because the actual date of signing
thereof was 17 March 1989. Verily, a formal certificate of stock could not
be considered issued in contemplation of law unless signed by the
president or vice-president and countersigned by the secretary or
assistant secretary.
Situs of Shares of Stocks (Sec. 55;
Section 55. Right to vote of pledgors, mortgagors, and
administrators.
In case of pledged or mortgaged shares in stock corporations, the
pledgor or mortgagor shall have the right to attend and vote at meetings
of stockholders, unless the pledgee or mortgagee is expressly given by
the pledgor or mortgagor such right in writing which is recorded on the
appropriate corporate books.
Executors, administrators, receivers, and other legal
representatives duly appointed by the court may attend and vote in
behalf of the stockholders or members WITHOUT need of any written
proxy.
Tayag vs. Benguet Consolidated, Inc. 26 SCRA 242 [1968].
The rule is that the endorsement of the certificate of stock by the owner or
his attorney-in-fact or any other person legally authorized to make the
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transfer shall be sufficient to effect the transfer of shares only if the same
is coupled with delivery. The delivery of the stock certificate duly endorsed
by the owner is the operative act of transfer of shares from the lawful
owner to the new transferee. Thus, for a valid transfer of stocks, the
requirements are as follows: (a) There must be delivery of the stock
certificate; (b) The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to make the transfer;
and, (c) to be valid against third parties, the transfer must be recorded in
the books of the corporation. At most, in the instant case, petitioner has
satisfied only the third requirement. Compliance with the first two
requisites has not been clearly and sufficiently shown.
(e) Right to Certificate of Stock for Fully Paid Shares (Sec. 64);
Section 64. Issuance of stock certificates.
NO certificate of stock shall be issued to a subscriber until the full
amount of his subscription together with interest and expenses (in case of
delinquent shares), if any is due, has been paid.
- Makati Sports Club, Inc. vs. Cheng, et aL, 621 SCRA 103 [2010]
A certificate of stock is the paper representative or tangible
evidence of the stock itself and of the various interests therein.
The certificate is not a stock in the corporation but is merely
evidence of the holder's interest and status in the corporation, his
ownership of the share represented thereby. It is not in law the
equivalent of such ownership. It expresses the contract between
the corporation and the stockholder, but is not essential to the
existence of a share of stock or the nature of the relation of
shareholder to the corporation.
Therefore, Mc Foods properly complied with the
requirement of Section 30 (e) of the Amended By-Laws on MSCI's
pre-emptive rights. Without doubt, MSCI failed to repurchase Mc
Foods' Class "A" share within the thirty (30) day pre-emptive
period as provided by the Amended By-Laws. It was only on
January 29, 1996, or 32 days after December 28, 1995, when
MSCI received Mc Foods' letter of offer to sell the share, that Mc
Foods and Hodreal executed the Deed of Absolute Sale over the
Corporation Law 2016: JVL & JSD
said share of stock. While Hodreal had the right to demand the
immediate execution of the Deed of Absolute Sale after his full
payment of Mc Foods' Class "A" share, he did not do so. Perhaps,
he wanted to wait for Mc Foods to first comply with the pre-
emptive requirement as set forth in the Amended By-Laws. Neither
can MSCI argue that Mc Foods was not yet a registered owner of
the share of stock when the latter offered it for resale, in order to
void the transfer from Mc Foods to Hodreal. The corporation's
obligation to register is ministerial upon the buyer's acquisition of
ownership of the share of stock. The corporation, either by its
board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers.
- Lao vs. Lao, O.R. No. 170585, October 6, 2008
While it may be true that petitioners were named as shareholders
in the General Information Sheet submitted to the SEC, that document
alone does not conclusively prove that they are shareholders of PFSC.
The information in the document will still have to be correlated with the
corporate books of PFSC. As between the General Information Sheet and
the corporate books, it is the latter that is controlling.
It should be stressed that the burden of proof is on petitioners to
show that they are shareholders of PFSC. This is so because they do not
have any certificates of shares in their name. Moreover, they do not
appear in the corporate books as registered shareholders. If they had
certificates of shares, the burden would have been with PFSC to prove
that they are not shareholders of the corporation.
- Tan vs. SEC, 206 SCRA 740 [1992]);
"But delivery is not essential where it appears that the persons
sought to be held as stockholders are officers of the corporation, and have
the custody of the stock book . . ."
A certificate of stock is the paper representative or tangible
evidence of the stock itself and of the various interests therein. The
certificate is not stock in the corporation but is merely evidence of the
holder's interest and status in the corporation, his ownership of the share
represented thereby, but is not in law the equivalent of such ownership. It
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expresses the contract between the corporation and the stockholder, but it
is not essential to the existence of a share in stock or the creation of the
relation of shareholder to the corporation.
In Philippine jurisprudence, a certificate of stock is not a negotiable
instrument. "Although it is sometime regarded as quasi-negotiable, in the
sense that it may be transferred by endorsement, coupled with delivery, it
is well-settled that it is non-negotiable, because the holder thereof takes it
without prejudice to such rights or defenses as the registered owners or
transferor's creditor may have under the law, except insofar as such rights
or defenses are subject to the limitations imposed by the principles
governing estoppel."
A by-law which prohibits a transfer of stock without the consent or
approval of all the stockholders or of the president or board of directors is
illegal as constituting undue limitation on the right of ownership and in
restraint of trade.
Lost or Destroyed Certificates (Sec. 63 and 73)
Section 73. Lost or destroyed certificates.
The following procedure shall be followed for the issuance by a
corporation of new certificates of stock in lieu of those which have been
lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or
his legal representative shall file with the corporation an affidavit in
triplicate setting forth, if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number of shares
represented by such certificate, the serial number of the certificate and
the name of the corporation which issued the same. He shall also submit
such other information and evidence which he may deem necessary;
2. After verifying the affidavit and other information and evidence
with the books of the corporation, said corporation shall publish a notice
in a newspaper of general circulation published in the place where
the corporation has its principal office, once a week for three (3)
consecutive weeks at the expense of the registered owner of the
certificate of stock which has been lost, stolen or destroyed. The
notice shall state the name of said corporation, the name of the registered
owner and the serial number of said certificate, and the number of shares
represented by such certificate, and that after the expiration of one (1)
Corporation Law 2016: JVL & JSD
year from the date of the last publication, if NO contest has been
presented to said corporation regarding said certificate of stock, the
right to make such contest shall be barred and said corporation shall
cancel in its books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new certificate of stock,
unless the registered owner files a bond or other security in lieu thereof as
may be required, effective for a period of one (1) year, for such amount
and in such form and with such sureties as may be satisfactory to the
board of directors, in which case a new certificate may be issued even
before the expiration of the one (1) year period provided herein: Provided,
That if a contest has been presented to said corporation or if an action is
pending in court regarding the ownership of said certificate of stock which
has been lost, stolen or destroyed, the issuance of the new certificate
of stock in lieu thereof shall be suspended until the final decision by
the court regarding the ownership of said certificate of stock which has
been lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, NO action may be brought against any
corporation which shall have issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the procedure above-described.
(R.A. 201a)
(f) Right of Inspection (Sec. 74, 75 and 141)
Section 75. Right to financial statements.
Within ten (10) days from receipt of a written request of any
stockholder or member, the corporation shall furnish to him its most
recent financial statement, which shall include a balance sheet as of the
end of the last taxable year and a profit or loss statement for said taxable
year, showing in reasonable detail its assets and liabilities and the result
of its operations.
At the regular meeting of stockholders or members, the board of
directors or trustees shall present to such stockholders or members a
financial report of the operations of the corporation for the preceding year,
which shall include financial statements, duly signed and certified by an
independent certified public accountant.
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 However, if the paid-up capital of the corporation is less than
P50,000.00, the financial statements may be certified under oath by the
treasurer or any responsible officer of the corporation. (n)
Section 141. Annual report or corporations.
Every corporation, domestic or foreign, lawfully doing business in
the Philippines shall submit to the Securities and Exchange
Commission an annual report of its operations, together with a
financial statement of its assets and liabilities, certified by any
independent certified public accountant in appropriate cases, covering the
preceding fiscal year and such other requirements as the Securities and
Exchange Commission may require. Such report shall be submitted within
such period as may be prescribed by the Securities and Exchange
Commission.
(i) Basis of Right
Gokongwei, Jr. vs. SEC, 89 SCRA 336 [1979] whether or not
respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International, Inc.,
a fully owned subsidiary of SMC.
The stockholders' right of inspection of the corporation's books
and records is based upon their ownership of the assets and property of
the corporation. It is an incident of ownership of the corporate property,
whether this ownership or interest be termed an equitable ownership, a
beneficial ownership, or quasi-ownership. It is predicated upon the
necessity of self-protection.
Where a right is granted by statute to the stockholder, it is given to
him as such and must be exercised by him with respect to his interest as
stockholder and for some purpose germane thereto or in the interest of
the corporation. In other words, the inspection has to be germane to the
petitioner's interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. It must be
exercised in good faith, for specific and honest purpose, and not to gratify
curiosity, or for speculative or vexatious purposes.
On application for mandamus to enforce the right to examine the
books of a corporation, it is proper for the court to inquire into and
Corporation Law 2016: JVL & JSD
consider the stockholder's good faith and his purpose and motives in
seeking inspection. The right given by the statute is not absolute and may
be refused when the information is not sought in good faith or is used to
the detriment of the corporation.
While the right of a stockholder to examine the books and records
of a corporation for a lawful purpose is a matter of law, the right of such
stockholder to examine the books and records of a wholly-owned
subsidiary of the corporation in which he is a stockholder is a different
thing. Where a foreign subsidiary is wholly owned by respondent
corporation and, therefore, under its control, it would be in accord with
equity, good faith and fair dealing to construe the statutory right of a
stockholder to inspect the books and records of the corporation as
extending to books and records of such wholly owned subsidiary which
are in respondent corporation's possession and control.
Aderito Z. Yujuico and Bonifacio C. Sumbilla vs. Cezar T.
Quiambao and Eric C. Pilapil, G.R. No. 180416, June 02, 2014
While Section 74 of the Corporation Code expressly mentions the
application of Section 144 only in relation to the act of "refus[ing] to allow
any director, trustees, stockholder or member of the corporation to
examine and copy excerpts from [the corporation's] records or minutes,"
the same does not mean that the latter section no longer applies to any
other possible violations of the former section.
It must be emphasized that Section 144 already purports to
penalize "[v]iolations" of "any provision" of the Corporation Code "not
otherwise specifically penalized therein." Hence, we find inconsequential
the fact that that Section 74 expressly mentions the application of Section
144 only to a specific act, but not with respect to the other possible
violations of the former section.
Indeed, we find no cogent reason why Section 144 of the
Corporation Code cannot be made to apply to violations of the right of a
stockholder to inspect the stock and transfer book of a corporation under
Section 74 (4) given the already unequivocal intent of the legislature to
penalize violations of a parallel right, i.e., the right of a stockholder or
member to examine the other records and minutes of a corporation under
Section 74 (2). Certainly, all the rights guaranteed to corporators under
Section 74 of the Corporation Code are mandatory for the corporation to
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respect. All such rights are just the same underpinned by the same policy
consideration of keeping public confidence in the corporate vehicle thru an
assurance of transparency in the corporation's operations.
Verily, we find inaccurate the pronouncement of the RTC that the
act of refusing to allow inspection of the stock and transfer book is not a
punishable offense under the Corporation Code. Such refusal, when done
in violation of Section 74 (4) of the Corporation Code, properly falls within
the purview of Section 144 of the same code and thus may be penalized
as an offense.
It is clear then that a criminal action based on the violation of the
second or fourth paragraphs of Section 74 can only be maintained against
corporate officers or such other persons that are acting on behalf of the
corporation. Violations of the second and fourth paragraphs of Section 74
contemplates a situation wherein a corporation, acting thru one of its
officers or agents, denies the right of any of its stockholders to inspect the
records, minutes and the stock and transfer book of such corporation.
(ii) Extent of and Limitations on Right
Corporate Reports:
(aa) Books that record all business transactions of the corporation
which shall include contracts, memoranda, journal, ledgers, etc.
(bb) Minutes book for the meetings of stockholders or members
(cc) Minutes book for the meetings of the Board of Directors or
trustees
(dd) Stock and Transfer Book
Nautica Canning Corp. vs. Yumul, supra. Lanuza vs. CA, 454
SCRA 54 [2005]
Thus, when the controversy involves matters purely civil in
character, it is beyond the ambit of the limited jurisdiction of the SEC. As
held in Viray v. Court of Appeals, 29 the better policy in determining which
body has jurisdiction over a case would be to consider not only the status
or relationship of the parties, but also the nature of the question that is the
subject of their controversy. This, however, is now moot and academic due
to the passage of Republic Act No. 8799 or The Securities Regulation
Corporation Law 2016: JVL & JSD
Code which took effect on August 8, 2000. The Act transferred from the
SEC to the regional trial court jurisdiction over cases involving intra-
corporate disputes. Thus, whether or not the issue is intra-corporate, it is
now the regional trial court and no longer the SEC that takes cognizance
of the controversy.
(ee) Annual Financial Statements
(ff) Annual Report to SEC
-Africa vs. PCGG, 205 SCRA 39 [1992]
Although the challenge against the temporary restraining order
issued by the Securities and Exchange Commission in SEC Case No.
3297 became moot and academic by virtue of the expiration of its 20-day
effectivity period, the Court nevertheless ruled that the issuance of the
same was tainted with grave abuse of discretion considering that the SEC
Hearing Panel should have then realized that there existed an element in
the case which effectively removed it from the jurisdiction of the SEC, to
wit, the presence of the PCGG which, as another quasijudicial body, is a
co-equal entity over whose actions the SEC has no power of control.
- Philpotts vs. Phil. Mfg. Co., 40 Phil. 471 [1919]
The right of examination into corporate affairs which is conceded
to the stockholder by section 51 of the Corporation Law may be exercised
either by the stockholder in person or by any duly authorized
representative.
- Veraguth vs. Isabela Sugar Co. 57 Phil. 266 [1932]
Directors of a corporation have the unqualified right to inspect the
books and records of the corporation at all reasonable times.
Pretexts may not be put forward by the officers of a corporation to
keep a director or shareholder from inspecting the books and minutes of
the corporation, and the right of inspection is not to be denied on the
ground that the director or shareholder is on unfriendly terms with the
officers of the corporation whose records are sought to be inspected.
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 A director or shareholder can make copies, abstracts, and
memoranda of documents, books, and papers as an incident to the right
of inspection, but cannot, without an order of a court, be permitted to take
books from the office of the corporation.
A director or stockholder has no absolute right to secure certified
copies of the minutes of a corporation until these minutes have been
written up and approved by the directors.
On the facts and the law, it is ruled that the petitioner has not
made out a case for relief by mandamus.
- Pardo vs. Hercules Lumber Co., 47 Phil. 964 [1924]
A resolution of the board of directors of a corporation limiting the
right of stockholders to inspect its records to a period of ten days shortly
prior to the annual stockholders' meeting is an unreasonable restriction on
the right of inspection may be exercised at reasonable hours on business
days throughout the year, and not merely during an arbitrary period of a
few days chosen by the directors.
(iii) Remedy it Denied Rule 65;
RULE 65
Certiorari, Prohibition and Mandamus
- Rep. vs. Sandiganbayan 199 SC RA 39 [1991]);
In the absence of evidence, the PCGG cannot unilaterally deny a
stockholder from exercising his statutory right of inspection based on an
unsupported and naked assertion that private respondent's motive is
improper or merely for curiosity or on the ground that the stockholder is
not in friendly terms with the corporation's officers. Being a stockholder
beyond doubt, there is no reason why private respondent may not
exercise his statutory right of inspection in accordance with Sec. 74 of the
Corporation Code, the only express limitation being that the right of
inspection should be exercised at reasonable hours on business days; (2)
the person demanding to examine and copy excerpts from the
corporation's records and minutes has not improperly used any
information secured through any previous examination of the records of
Corporation Law 2016: JVL & JSD
such corporation; and 3) the demand is made in good faith or for a
legitimate purpose. The latter two limitations, however, must be set up as
a defense by the corporation if it is to merit judicial cognizance.
- Gonzales vs. PNB, 122 SCRA 490 [1983];
The unqualified provision on the right of inspection previously
contained in Section 51, Act No. 1459, as amended, no longer holds true
under the provisions of the present law. The argument of the petitioner
that the right granted to him under Section 51 of the former Corporation
law should not be dependent on the propriety of his motive or purpose in
asking for the inspection of the books of the respondent bank loses
whatever validity it might have had before the amendment of the law. If
there is any doubt in the correctness of the ruling of the trial court that the
right of inspection granted under Section 51 of the old Corporation Law
must be dependent on a showing of proper motive on the part of the
stockholder demanding the same, it now dissipated by the clear language
of the pertinent provision contained in Section 74 of Batas Pambansa Blg.
68.
Although the petitioner has claimed that he has justifiable motives
in seeking the inspection of the books of the respondent bank, he has not
set forth the reasons and the purposes for which be desires such
inspection, except to satisfy himself as to the truth of published reports
regarding certain transactions entered into by the respondent bank and to
inquire into their validity. The circumstances under which he acquired one
share of stock in the respondent bank purposely to exercise the right of
inspection do not argue in favor of his good faith and proper motivation.
Admittedly he sought to be a stockholder in order to pry into transactions
entered into by the respondent bank even before he became a
stockholder. His obvious purpose was to arm himself with materials which
he can use against the respondent bank for acts done by the latter when
the petitioner was a total stranger to the same. He could have been
impelled by a laudable sense of civil consciousness, but it could not be
said that his purpose is germane to his interest as a stockholder.|
The Philippine National Bank is not an ordinary corporation.
Having a charter of its own, it is not governed, as a rule, by the
Corporation Code of the Philippines. Section 4 of the said Code provides:
"SEC. 4. Corporations created by special laws or charters.
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Corporations created by special laws or charters shall be governed
primarily by the provisions of the special law or charter creating them or
applicable to them, supplemented by the provisions of this Code, insofar
as they are applicable." The provision of Section 74 of Batas Pambansa
Blg. 68 of the new Corporation Code with respect to the right of a
stockholder to demand an inspection or examination of the books of the
corporation may not be reconciled with the above-quoted provisions of the
charter of the bank. It is not correct to claim, therefore, that the right of
inspection under Section 74 of the new Corporation Code may apply in a
supplementary capacity to the charter of the respondent bank.
- Pascual vs. CA, 339 SC RA 117 [2000]
Sec. 5(b) of P.D. 902-A does not define what an intra-corporate
controversy is, but case law has fashioned out two tests for determining
what suit is cognizable by the SEC or the regular courts, and sometimes
by the National Labor Relations Commission. The first test uses the
enumeration in 5(b) of the relationships to determine jurisdiction, to wit:
(1) Those between and among stockholders and members; (2) Those
between and among stockholders and members, on one hand, and the
corporation, on the other hand; and (3) Those between the corporation
and the State but only insofar as its franchise or right to exist as an entity
is concerned. The second test, on the other hand, focuses on the nature
of the controversy itself. Recent decisions of this Court consider not only
the subject of their controversy but also the status of the parties.
It is true that a complaint for accounting, reconveyance, etc. of
corporate properties has previously been held to be within the jurisdiction
of the SEC. Nonetheless, a distinction can be drawn between those cases
and the case at bar, for, in those cases, the corporations involved were
still existing, whereas in the present case, there is no more corporation
involved. There is no question that assessing the financial status of an
existing corporation, for purposes of an action for accounting, requires the
expertise of the SEC. But in the case of a dissolved corporation, no such
expertise is required, for all its business has been properly accounted for
already, and what is left to be determined is properly within the
competence of regular courts. It may be noted in this connection that
pursuant to R.A. No. 8799, 5.2, which took effect on August 8, 2000, the
jurisdiction of the SEC to decide cases involving intra-corporate dispute
Corporation Law 2016: JVL & JSD
was transferred to courts of general jurisdiction and, in accordance
therewith, all cases of this nature, with the exception only of those
submitted for decision, were transferred to the regular courts. Hence, the
question whether this case should be filed in the SEC is now only of
academic interest. For even if it involves an intra-corporate dispute, it
would be remanded to the Regional Trial Court just the same.
-re Jurisdiction, Sec. 5.2, Securities Regulation Code -RA 8799
The SEC's jurisdiction over all cases enumerated under Section 5 of PD
502-A is now transferred to the Courts of general jurisdiction or the
appropriate Regional Trial Court;
- Government Service Insurance System vs. CA, et aL, G.R. No.
183905, April 16, 2009;
Securities and Exchange Commission et al. vs. Anthony V. Rosete
et aL, G.R. No. 184275, April 16, 2009.
Shares of stock in corporations may be divided into voting shares
and non-voting shares, which are generally issued as "preferred" or
"redeemable" shares. 45 Voting rights are exercised during regular or
special meetings of stockholders; regular meetings to be held annually on
a fixed date, while special meetings may be held at any time necessary or
as provided in the by-laws, upon due notice. 46 The Corporation Code
provides for a whole range of matters which can be voted upon by
stockholders, including a limited set on which even non-voting
stockholders are entitled to vote on. 47 On any of these matters which
may be voted upon by stockholders, the proxy device is generally
available. 48
Under Section 5 (c) of Presidential Decree No. 902-A, in relation to
the SRC, the jurisdiction of the regular trial courts with respect to election-
related controversies is specifically confined to "controversies in the
election or appointment of directors, trustees, officers or managers of
corporations, partnerships, or associations". Evidently, the jurisdiction of
the regular courts over so-called election contests or controversies under
Section 5 (c) does not extend to every potential subject that may be voted
on by shareholders, but only to the election of directors or trustees, in
which stockholders are authorized to participate under Section 24 of the
Corporation Code. 49
123
 This qualification allows for a useful distinction that gives due
effect to the statutory right of the SEC to regulate proxy solicitation, and
the statutory jurisdiction of regular courts over election contests or
controversies. The power of the SEC to investigate violations of its rules
on proxy solicitation is unquestioned when proxies are obtained to vote on
matters unrelated to the cases enumerated under Section 5 of
Presidential Decree No. 902-A. However, when proxies are solicited in
relation to the election of corporate directors, the resulting controversy,
even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the
original and exclusive jurisdiction of the trial courts by virtue of Section 5.2
of the SRC in relation to Section 5 (c) of Presidential Decree No. 902-A.
The conferment of original and exclusive jurisdiction on the regular
courts over such controversies in the election of corporate directors must
be seen as intended to confine to one body the adjudication of all related
claims and controversy arising from the election of such directors. For that
reason, the aforequoted Section 2, Rule 6 of the Interim Rules broadly
defines the term "election contest" as encompassing all plausible incidents
arising from the election of corporate directors, including: (1) any
controversy or dispute involving title or claim to any elective office in a
stock or nonstock corporation, (2) the validation of proxies, (3) the manner
and validity of elections and (4) the qualifications of candidates, including
the proclamation of winners. If all matters anteceding the holding of such
election which affect its manner and conduct, such as the proxy
solicitation process, are deemed within the original and exclusive
jurisdiction of the SEC, then the prospect of overlapping and competing
jurisdictions between that body and the regular courts becomes
frighteningly real. From the language of Section 5 (c) of Presidential
Decree No. 902-A, it is indubitable that controversies as to the
qualification of voting shares, or the validity of votes cast in favor of a
candidate for election to the board of directors are properly cognizable
and adjudicable by the regular courts exercising original and exclusive
jurisdiction over election cases. Questions relating to the proper
solicitation of proxies used in such election are indisputably related to
such issues, yet if the position of GSIS were to be upheld, they would be
resolved by the SEC and not the regular courts, even if they fall within
"controversies in the election" of directors.
Corporation Law 2016: JVL & JSD
- Reyes vs. RTC Makati, Zenith Ins. Corp., 561 SCRA 598 [2008]
A review of relevant jurisprudence shows a development in the
Court's approach in classifying what constitutes an intra-corporate
controversy. Initially, the main consideration in determining whether a
dispute constitutes an intra-corporate controversy was limited to a
consideration of the intra-corporate relationship existing between or
among the parties. 19 The types of relationships embraced under Section
5 (b), as declared in the case of Union Glass & Container Corp. v. SEC,
20 were as follows: SAEHaC
a) between the corporation, partnership, or association and the
public;
b) between the corporation, partnership, or association and its
stockholders, partners, members, or officers;
c) between the corporation, partnership, or association and the
State as far as its franchise, permit or license to operate is concerned; and
d) among the stockholders, partners, or associates themselves.
[Emphasis supplied.]
The existence of any of the above intra-corporate relations was
sufficient to confer jurisdiction to the SEC, regardless of the subject matter
of the dispute. This came to be known as the relationship test.
However, in the 1984 case of DMRC Enterprises v. Esta del Sol
Mountain Reserve, Inc., 21 the Court introduced the nature of the
controversy test. We declared in this case that it is not the mere existence
of an intra-corporate relationship that gives rise to an intra-corporate
controversy; to rely on the relationship test alone will divest the regular
courts of their jurisdiction for the sole reason that the dispute involves a
corporation, its directors, officers, or stockholders. We saw that there is no
legal sense in disregarding or minimizing the value of the nature of the
transactions which gives rise to the dispute.
Under the nature of the controversy test, the incidents of that
relationship must also be considered for the purpose of ascertaining
whether the controversy itself is intra-corporate. 22 The controversy must
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not only be rooted in the existence of an intra-corporate relationship, but
must as well pertain to the enforcement of the parties' correlative rights
and obligations under the Corporation Code and the internal and intra-
corporate regulatory rules of the corporation. If the relationship and its
incidents are merely incidental to the controversy or if there will still be
conflict even if the relationship does not exist, then no intra-corporate
controversy exists.
The Court then combined the two tests and declared that
jurisdiction should be determined by considering not only the status or
relationship of the parties, but also the nature of the question under
controversy. 23 This two-tier test was adopted in the recent case of Speed
Distribution, Inc. v. Court of Appeals:
To determine whether a case involves an intra-corporate
controversy, and is to be heard and decided by the branches of the RTC
specifically designated by the Court to try and decide such cases, two
elements must concur: (a) the status or relationship of the parties; and (2)
the nature of the question that is the subject of their controversy.
The first element requires that the controversy must arise out of
intra-corporate or partnership relations between any or all of the parties
and the corporation, partnership, or association of which they are
stockholders, members or associates; between any or all of them and the
corporation, partnership, or association of which they are stockholders,
members, or associates, respectively; and between such corporation,
partnership, or association and the State insofar as it concerns their
individual franchises. The second element requires that the dispute
among the parties be intrinsically connected with the regulation of the
corporation. If the nature of the controvers
- Consuelo Metal Corporation vs. Planters Development Bank,
G.R. No. 152580, June 28, 2008.
Republic Act No. 8799 (R.A. 8799) 15 transferred to the
appropriate regional trial courts the SEC's jurisdiction defined under
Section 5 (d) of Presidential Decree No. 902-A. Section 5.2 of R.A. 8799
provides:
The Commission's jurisdiction over all cases enumerated under
Sec. 5 of Presidential Decree No. 902-A is hereby transferred to the
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Courts of general jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction
over these cases. The Commission shall retain jurisdiction over pending
cases involving intra-corporate disputes submitted for final resolution
which should be resolved within one (1) year from the enactment of this
Code. The Commission shall retain jurisdiction over pending suspension
of payments/rehabilitation cases filed as of 30 June 2000 until finally
disposed.
However, the SEC's jurisdiction does not extend to the liquidation
of a corporation. While the SEC has jurisdiction to order the dissolution of
a corporation, 16 jurisdiction over the liquidation of the corporation now
pertains to the appropriate regional trial courts. This is the reason why the
SEC, in its 29 November 2000 Omnibus Order, directed that "the
proceedings on and implementation of the order of liquidation be
commenced at the Regional Trial Court to which this case shall be
transferred." This is the correct procedure because the liquidation of a
corporation requires the settlement of claims for and against the
corporation, which clearly falls under the jurisdiction of the regular courts.
The trial court is in the best position to convene all the creditors of the
corporation, ascertain their claims, and determine their preferences.
-Rule 7, Interim Rules of Procedure Governing
-Mira-Corporate Controversies under RA 8799, SC A.M. No. 01-2-
04
Complaint must state
(aa) that the case is for the enforcement of plaintiff's right of
inspection of corporate orders or records and/or to be furnished with
financial statements under Sections 74 and 75 of the Code;
(bb) that a demand was made for inspection and copying of books
and records and/or to be furnished financial statements made by the
plaintiff upon defendant;
(cc) that the defendant refused to grant the demands of the
plaintiff and the reasons given for such refusal, if any; and
125
 (dd) that the reasons why the refusal of defendant to grant the
demands of the plaintiff is unjustified and illegal, stating the law and
jurisprudence in support thereof.
(ee) Court is given 2 days within which to dismiss outright, if not
sufficient in form and substance, or 11 sufficient, order the issuance of
summons to be served within 2 days from the issuance. Defendant is
given 10 days from service of summons and the complaint.)
- Gulfo vs. Ancheta, 678 SCRA459 [2012]
We take this opportunity to reiterate what constitutes intra-
corporate disputes. Jurisprudence consistently states that an intra-
corporate dispute is one that arises from intra-corporate relations;
relationships between or among stockholders; or the relationships
between the stockholders and the corporation. In order to limit the broad
definition of intra-corporate dispute, this Court has applied the relationship
test and the controversy test. These two tests, when applied, have been
the guiding principle in determining whether the dispute is an intra-
corporate controversy or a civil case.
In Union Glass & Container Corp., et al. v. SEC, et al., 23 the
Court declared that the relationship test determines whether the
relationship is: "[a] between the corporation, partnership or association
and the public; [b] between the corporation, partnership or association and
its stockholders, partners, members, or officers; [c] between the
corporation, partnership or association and the [S]tate [insofar] as its
franchise, permit or license to operate is concerned; and [d] among the
stockholders, partners or associates themselves."
Under this test, no doubt exists that the parties were members of
the same association, but this conclusion must still be supplemented by
the controversy test before it may be considered as an intra-corporate
dispute. Relationship alone does not ipso facto make the dispute intra-
corporate; the mere existence of an intra-corporate relationship does not
always give rise to an intra-corporate controversy. The incidents of that
relationship must be considered to ascertain whether the controversy itself
is intra-corporate. This is where the controversy test becomes material.
EaISTD
Under the controversy test, the dispute must be rooted in the
existence of an intra-corporate relationship, and must refer to the
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enforcement of the parties' correlative rights and obligations under the
Corporation Code, as well as the internal and intra-corporate regulatory
rules of the corporation, in order to be an intra-corporate dispute. These
are essentially determined through the allegations in the complaint which
determine the nature of the action.
We found from the allegations in the complaint that the respondent
did not question the status of the petitioners as members of the
association. There were no allegations assailing the petitioners' rights or
obligations on the basis of the association's rules and by-laws, or
regarding the petitioners' relationships with the association. What were
alleged were only demands for civil indemnity and damages. The intent to
seek indemnification only (and not the petitioners' status, membership, or
their rights in the association) is clear from paragraphs 7, 8 and 9 of the
complaint.
- Atwel, et al vs. Concepcion Progr Asso., Inc., 551 SCRA 272
[2008].
Originally, Section 5 of Presidential Decree (PD) 902-A 13
conferred on the SEC original and exclusive jurisdiction over the following:
(1) Devices or schemes employed by, or any act of, the board of
directors, business associates, officers or partners, amounting to fraud or
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, or members of any corporation,
partnership, or association;
(2) Controversies arising out of intra-corporate, partnership, or
association relations, between and among stockholders, members, or
associates; or association of which they are stockholders, members, or
associates, respectively;
(3) Controversies in the election or appointment of directors,
trustees, officers or managers of corporations, partnerships, or
associations; TAIESD
(4) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payment in cases where the
corporation, partnership or association possesses sufficient property to
cover all its debts but foresees the impossibility of meeting them when
they fall due or in cases where the corporation, partnership or association
has no sufficient assets to cover its liabilities but is under the management
126
of a rehabilitation receiver or management committee . . . (emphasis
supplied)
Upon the enactment of RA 8799 in 2000, the jurisdiction of the
SEC over intra-corporate controversies and other cases enumerated in
Section 5 of PD 902-A was transferred to the courts of general jurisdiction.
Under this authority, Branch 8 of the Tacloban City RTC, acting as a
special commercial court, deemed the mandatory injunction case filed by
CPAI an intra-corporate dispute falling under subparagraph (2) of the
aforecited provision as it involved the officers and members thereof.
To determine whether a case involves an intra-corporate
controversy to be heard and decided by the RTC, two elements must
concur:
(1) the status or relationship of the parties and
(2) the nature of the question that is subject of their controversy.
The first element requires that the controversy must arise out of
intra-corporate or partnership relations: (a) between any or all of the
parties and the corporation, partnership or association of which they are
stockholders, members or associates; (b) between any or all of them and
the corporation, partnership or association of which they are stockholders,
members or associates and (c) between such corporation, partnership or
association and the State insofar as it concerns their individual franchises.
On the other hand, the second element requires that the dispute among
the parties be intrinsically connected with the regulation of the corporation.
15 If the nature of the controversy involves matters that are purely civil in
character, necessarily, the case does not involve an intra-corporate
controversy.
- Punongbayan vs. Punongbayan, Jr., 491 SC RA 477 [2006]
Under Section 5 7 of Presidential Decree No. 902-A, the SEC has
jurisdiction, among others, to hear and decide controversies in the
appointments of directors, trustees, officers or managers of corporations.
Section 6 provides:
Corporation Law 2016: JVL & JSD
SECTION 6. In order to effectively exercise such jurisdiction, the
Commission shall possess the following powers:
xxx xxx xxx
d) To create a management committee . . .
The management committee . . . shall have the power to take
custody of, and control over, all the existing assets and property of such
entities under management; to evaluate the existing assets and liabilities,
earnings and operations of such corporations, partnerships or other
associations; to determine the best way to salvage and protect the interest
of the investors and creditors; to study, review and evaluate the feasibility
of continuing operations and restructure and rehabilitate such entities if
determined to be feasible by the Commission. It shall report and be
responsible to the Commission until dissolved by order of the
Commission: Provided, however, That the Commission may, on the basis
of the findings and recommendation of the management committee . . . or
on its own findings, determine that the continuance in business of such
corporation or entity would not be feasible or profitable nor work to the
best interest of the stockholders, parties-litigants, creditors, or the general
public, order the dissolution of such corporation entity and its remaining
assets liquidated accordingly. The management committee . . . may
overrule or revoke the actions of the previous management and board of
directors of the entity or entities under management notwithstanding any
provision of law, articles of incorporation or by-laws to the contrary.
ATcaEH
xxx xxx xxx
A management committee is tasked to manage, take custody of
and control all existing assets, funds and records of the corporation, and
to determine the best way to protect the interest of its stockholders and
creditors.
In this case, the SEC created a management committee, upon
Sotero's application, and appointed its five members. However, one
member, Carmen Dormitorio (representing the CHED), inhibited herself
127
from sitting in the committee, resulting in a deadlock among the remaining
members. The committee became so divided, hence, the school's
business and affairs could no longer be conducted effectively to the
prejudice of the stockholders and the students. In the meantime, the
SEC's jurisdiction over intra-corporate controversies was transferred to the
RTC. This prompted Sotero to file with the RTC, Branch 5, Iligan City, a
motion to abolish the management committee created by the SEC. The
RTC denied his motion and instead, ordered the reorganization of the
management committee. Sotero challenged the RTC Orders before the
Court of Appeals via a petition for certiorari. The Appellate Court ruled that
the RTC should have directed the remaining members of the Board to
reconvene instead of ordering the reorganization of the management
committee.
Republic Act No. 8799, which became effective on August 8, 2000,
transferred the jurisdiction of the SEC over cases involving intra-corporate
disputes to the Regional Trial Courts. 8 Thus, the RTC assumed powers
provided under Sections 5 and 6 of Presidential Decree No. 902-A quoted
earlier. As such, it has the discretion to grant or deny an application for the
creation of a management committee. This discretion, however, must be
exercised with great caution and circumspection.
Having the power to create a management committee, it follows
that the RTC can order the reorganization of the existing management
committee. Here, knowing that the deadlock among the members of the
committee (appointed by the SEC) may lead to the paralyzation of the
school's business operations, the RTC removed the said members and
appointed new members. This is pursuant to Section 11, Rule 9 of the
Interim Rules of Procedure Governing Intra-Corporate Controversies
which provides:
A member of the management committee is deemed removed
upon appointment by the court of his replacement chosen in accordance
with Section 4 of this Rule.
Such appointment of new members does not mean the creation of
a new management committee. The existing management committee was
not abolished. The RTC merely reorganized it by appointing new
members. The management committee created by the SEC continues to
exist. However, when it failed to function due to the division among the
Corporation Law 2016: JVL & JSD
members, the RTC replaced them. Clearly, there was no revocation of the
final Order of the SEC.
- Calleja vs. Panday, 483 SC RA 680 [2006]
However, R.A. No. 8799 was passed and Section 5.2 thereof
provides as follows:
5.2. The Commission's jurisdiction over all cases enumerated
under Section 5 of Presidential Decree No. 902-A is hereby transferred to
the Courts of general jurisdiction or the appropriate Regional Trial Court:
Provided, That the Supreme Court in the exercise of its authority may
designate the Regional Trial Court branches that shall exercise jurisdiction
over these cases. . . .
Therefore, actions of quo warranto against persons who usurp an
office in a corporation, which were formerly cognizable by the Securities
and Exchange Commission under PD 902-A, have been transferred to the
courts of general jurisdiction. But, this does not change the fact that Rule
66 of the 1997 Rules of Civil Procedure does not apply to quo warranto
cases against persons who usurp an office in a private corporation.
Presently, Section 1(a) of Rule 66 reads thus:
Section 1. Action by Government against individuals. An action
for the usurpation of a public office, position or franchise may be
commenced by a verified petition brought in the name of the Republic of
the Philippines against
(a) A person who usurps, intrudes into, or unlawfully holds or
exercises a public office, position or franchise;
xxx xxx xxx
As explained in the Unilongo 12 case, Section 1(a) of Rule 66 of
the present Rules no longer contains the phrase "or an office in a
corporation created by authority of law" which was found in the old Rules.
Clearly, the present Rule 66 only applies to actions of quo warranto
against persons who usurp a public office, position or franchise; public
officers who forfeit their office; and associations which act as corporations
without being legally incorporated despite the passage of R.A. No. 8799. It
128
is, therefore, The Interim Rules of Procedure Governing Intra-Corporate
Controversies Under R.A. No. 8799 (hereinafter the Interim Rules) which
applies to the petition for quo warranto filed by respondents before the trial
court since what is being questioned is the authority of herein petitioners
to assume the office and act as the board of directors and officers of St.
John Hospital, Incorporated.
- Sy Chim vs. Sy Siy Ho & Sons, Inc., 480 SC RA 465 [2006]
Section 1, Rule 9 of the Interim Rules provides:
SECTION 1. Creation of a management committee. As an
incident to any of the cases filed under these Rules or the Interim Rules
on Corporate Rehabilitation, a party may apply for the appointment of a
management committee for the corporation, partnership or association,
when there is imminent danger of:
(1) Dissipation, loss, wastage or destruction of assets or other
properties; and
(2) Paralyzation of its business operations which may be
prejudicial to the interest of the minority stockholders, parties-litigants or
the general public.
The said Rules, which took effect on April 1, 2001, was
promulgated by the Court pursuant to its power to promulgate rules
concerning "pleading, practice and procedure in all courts . . . providing for
simplified and inexpensive procedure for the speedy disposition of cases"
under Section 5(5), Article VIII of the Constitution.
We do not agree with petitioners' contention that the word "and" in
Section 1, Rule 9 of the Interim Rules should be interpreted to mean "or."
While it is true that in Section 6(d) of Presidential Decree No. 902-A, 56 an
applicant for the appointment of a management committee is mandated to
prove only one of the two requisites provided therein, the Court, in Jacinto
v. First Women's Credit Corporation, 57 ruled that the two requisites
should be present before a management committee may be created and a
receiver appointed by the RTC:
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A reading of the aforecited legal provision reveals that for a
minority stockholder to obtain the appointment of an interim management
committee, he must do more than merely make a prima facie showing of a
denial of his right to share in the concerns of the corporation; he must
show that the corporate property is in danger of being wasted and
destroyed; that the business of the corporation is being diverted from the
purpose for which it has been organized; and that there is serious
paralyzation of operations all to his detriment. . . .
The rationale for the need to establish the confluence of the two
(2) requisites under Section 1, Rule 9 by an applicant for the appointment
of a management committee is primarily based upon the fact that such
committee and receiver appointed by the court will immediately take over
the management of the corporation, partnership or association, including
such power as it may deem appropriate, and any of the powers specified
in Section 5 of the Rule.
Indeed, upon the appointment of a receiver, the duly
elected/appointed officers of the corporation are divested of the
management of such corporation in favor of the management
committee/receiver. Such transference of the corporation's management
will certainly have a negative, if not crippling effect, on the
operations/affairs of the corporation not only with banks and other
business institutions including those abroad which it deals business with.
A wall of uncertainty is erected; the short and long-term plans of the
management of the corporation are disrupted, if not derailed.
Thus, the creation and appointment of a management committee
and a receiver is an extraordinary and drastic remedy to be exercised with
care and caution; and only when the requirements under the Interim Rules
are shown. It is a drastic course for the benefit of the minority
stockholders, the parties-litigants or the general public are allowed only
under pressing circumstances and, when there is inadequacy, ineffectual
or exhaustion of legal or other remedies. The power to intervene before
the legal remedy is exhausted and misused when it is exercised in aid of
such a purpose. The power of the court to continue a business of a
corporation, partnership or association must be exercised with the
greatest care and caution. There should be a full consideration of all the
attendant facts, including the interest of all the parties concerned.
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 Neither Presidential Decree No. 902-A and Republic Act No. 8799
nor the Interim Rules of Procedure define "imminent danger." "Danger" is
a general term, including peril, jeopardy, hazard and risk; as used in the
Rule, it refers to exposure or liability to injury. "Imminent" refers to
something which is threatening to happen at once, something close at
hand, something to happen upon the instant, close although not yet
happening, and on the verge of happening.
In the present case, petitioners failed to make a strong showing
that there was an imminent danger of dissipation, loss, wastage or
destruction of assets or other properties of respondent corporation and
paralysis of its business operations which may be prejudicial to the
interest of the parties-litigants, petitioners, or the general public. The RTC
thus committed grave abuse of its discretion amounting to excess of
jurisdiction in creating a management committee and the subsequent
appointment of a comptroller.
(g) Appraisal Right (Secs. 81 to 86 and 105)
Section 81. Instances of appraisal right.
Any stockholder of a corporation shall have the right to dissent
and demand payment of the fair value of his shares in the following
instances:
1. In case any amendment to the articles of incorporation has the
effect of changing or restricting the rights of any stockholder or class of
shares, or of authorizing preferences in any respect superior to those of
outstanding shares of any class, or of extending or shortening the term of
corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or
other disposition of all or substantially all of the corporate property and
assets as provided in the Code; and
3. In case of merger or consolidation. (n)
Section 82. How right is exercised.
The appraisal right may be exercised by any stockholder who
shall have voted against the proposed corporate action, by making a
written demand on the corporation within thirty (30) days after the
date on which the vote was taken for payment of the fair value of his
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shares: Provided, That failure to make the demand within such period
shall be deemed a waiver of the appraisal right. If the proposed
corporate action is implemented or affected, the corporation shall pay to
such stockholder, upon surrender of the certificate or certificates of stock
representing his shares, the fair value thereof as of the day prior to the
date on which the vote was taken, excluding any appreciation or
depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate
action was approved by the stockholders, the withdrawing stockholder
and the corporation CANNOT agree on the fair value of the shares, it
shall be determined and appraised by three (3) disinterested
persons, one of whom shall be named by the stockholder, another by
the corporation, and the third by the two thus chosen. The findings of
the majority of the appraisers shall be final, and their award shall be paid
by the corporation within thirty (30) days after such award is made:
Provided, That NO payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained earnings in its books to
cover such payment: and Provided, further, That upon payment by the
corporation of the agreed or awarded price, the stockholder shall forthwith
transfer his shares to the corporation. (n)
Section 83. Effect of demand and termination of right.
From the time of demand for payment of the fair value of a
stockholder's shares until either the abandonment of the corporate action
involved or the purchase of the said shares by the corporation, ALL rights
accruing to such shares, including voting and dividend rights, shall be
suspended in accordance with the provisions of this Code, except the
right of such stockholder to receive payment of the fair value thereof:
Provided, That if the dissenting stockholder is NOT paid the value of his
shares within 30 days after the award, his voting and dividend rights shall
immediately be restored. (n)
Section 84. When right to payment ceases. - NO demand for
payment under this Title may be withdrawn unless the corporation
consents thereto. If, however, such demand for payment is withdrawn with
the consent of the corporation, or if the proposed corporate action is
abandoned or rescinded by the corporation or disapproved by the
Securities and Exchange Commission where such approval is necessary,
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or if the Securities and Exchange Commission determines that such
stockholder is not entitled to the appraisal right, then the right of said
stockholder to be paid the fair value of his shares shall cease, his status
as a stockholder shall thereupon be restored, and all dividend
distributions which would have accrued on his shares shall be paid
to him. (n)
Section 85. Who bears costs of appraisal. - The costs and
expenses of appraisal shall be borne by the corporation, unless the fair
value ascertained by the appraisers is approximately the same as the
price which the corporation may have offered to pay the stockholder, in
which case they shall be borne by the latter. In the case of an action to
recover such fair value, ALL costs and expenses shall be assessed
against the corporation, unless the refusal of the stockholder to receive
payment was unjustified. (n)
Section 86. Notation on certificates; rights of transferee.
Within ten (10) days AFTER demanding payment for his shares, a
dissenting stockholder shall submit the certificates of stock representing
his shares to the corporation for notation thereon that such shares are
dissenting shares. His failure to do so shall, at the option of the
corporation, terminate his rights under this Title. If shares represented
by the certificates bearing such notation are transferred, and the
certificates consequently cancelled, the rights of the transferor as a
dissenting stockholder under this Title shall cease and the transferee shall
have all the rights of a regular stockholder; and all dividend distributions
which would have accrued on such shares shall be paid to the transferee.
(n)
Section 105. Withdrawal of stockholder or dissolution of
corporation.
In addition and without prejudice to other rights and remedies
available to a stockholder under this Title, any stockholder of a close
corporation may, for any reason, compel the said corporation to
purchase his shares at their fair value, which shall NOT be less than
their par or issued value, when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of capital stock: Provided,
That any stockholder of a close corporation may, by written petition to the
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Securities and Exchange Commission, compel the dissolution of such
corporation whenever any of acts of the directors, officers or those in
control of the corporation is illegal, or fraudulent, or dishonest, or
oppressive or unfairly prejudicial to the corporation or any stockholder, or
whenever corporate assets are being misapplied or wasted.
Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479,
November 24, 2010
Clearly, the right of appraisal may be exercised when there is a
fundamental change in the charter or articles of incorporation substantially
prejudicing the rights of the stockholders. It does not vest unless
objectionable corporate action is taken. It serves the purpose of enabling
the dissenting stockholder to have his interests purchased and to retire
from the corporation.
Now, however, a corporation can purchase its own shares,
provided payment is made out of surplus profits and the acquisition is for a
legitimate corporate purpose. In the Philippines, this new rule is embodied
in Section 41 of the Corporation Code.
The Corporation Code defines how the right of appraisal is
exercised, as well as the implications of the right of appraisal, as follows:
1. The appraisal right is exercised by any stockholder who has
voted against the proposed corporate action by making a written demand
on the corporation within 30 days after the date on which the vote was
taken for the payment of the fair value of his shares. The failure to make
the demand within the period is deemed a waiver of the appraisal right.
2. If the withdrawing stockholder and the corporation cannot agree
on the fair value of the shares within a period of 60 days from the date the
stockholders approved the corporate action, the fair value shall be
determined and appraised by three disinterested persons, one of whom
shall be named by the stockholder, another by the corporation, and the
third by the two thus chosen. The findings and award of the majority of the
appraisers shall be final, and the corporation shall pay their award within
30 days after the award is made. Upon payment by the corporation of the
agreed or awarded price, the stockholder shall forthwith transfer his or her
shares to the corporation.
131
 3. All rights accruing to the withdrawing stockholder's shares,
including voting and dividend rights, shall be suspended from the time of
demand for the payment of the fair value of the shares until either the
abandonment of the corporate action involved or the purchase of the
shares by the corporation, except the right of such stockholder to receive
payment of the fair value of the shares.
4. Within 10 days after demanding payment for his or her shares,
a dissenting stockholder shall submit to the corporation the certificates of
stock representing his shares for notation thereon that such shares are
dissenting shares. A failure to do so shall, at the option of the corporation,
terminate his rights under this Title X of the Corporation Code. If shares
represented by the certificates bearing such notation are transferred, and
the certificates are consequently canceled, the rights of the transferor as a
dissenting stockholder under this Title shall cease and the transferee shall
have all the rights of a regular stockholder; and all dividend distributions
that would have accrued on such shares shall be paid to the transferee.
5. If the proposed corporate action is implemented or effected, the
corporation shall pay to such stockholder, upon the surrender of the
certificates of stock representing his shares, the fair value thereof as of
the day prior to the date on which the vote was taken, excluding any
appreciation or depreciation in anticipation of such corporate action.
Notwithstanding the foregoing, no payment shall be made to any
dissenting stockholder unless the corporation has unrestricted retained
earnings in its books to cover the payment. In case the corporation has no
available unrestricted retained earnings in its books, Section 83 of the
Corporation Code provides that if the dissenting stockholder is not paid
the value of his shares within 30 days after the award, his voting and
dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of unrestricted
retained earnings to fund the payment of the shares of stocks of the
withdrawing stockholders. Under the doctrine, the capital stock, property,
and other assets of a corporation are regarded as equity in trust for the
payment of corporate creditors, who are preferred in the distribution of
corporate assets. 24 The creditors of a corporation have the right to
assume that the board of directors will not use the assets of the
corporation to purchase its own stock for as long as the corporation has
outstanding debts and liabilities. 25 There can be no distribution of assets
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among the stockholders without first paying corporate debts. Thus, any
disposition of corporate funds and assets to the prejudice of creditors is
null and void.
(h) Derivative Suits
(Rule 8, Interim Rules of Procedure Governing Intra-Corporate
Controversies under RA 8799, SC A.M. No. 01-2-04 - A stockholders or
member may bring an action in the name of the corporation or
association, as the case may be, provided, that:
(i) he was a stockholder or member at the time the acts or
transactions subject of the action occurred and at the time the
action was filed;
(ii) he exerted all reasonable efforts, and alleges the same
with particularity in the complaint, to exhaust all remedies available
under the articles of incorporation; by-laws, laws or rules
governing the corporation or partnership to obtain the relief he
desires;
(iii) NO appraisal rights are available for the act or acts
complained of; and
(iv) the suit is NOT a nuisance or harassment (otherwise,
shall be dismissed).
There will be NO discontinuance, compromise or settlement WITHOUT
approval of the court. During the pendency of the action, any sale of
shares of the complaining stockholder shall be approved by the court. If
the court determines that the interest of the stockholders will be
substantially affected by the discontinuance, compromise or settlement,
the court may direct that notice, by publication or otherwise, be given to
the stockholders or members whose interests it determines will be so
affected.
Rule 10, Provisional remedies - may be available for the purposes, but
NO TRO or status quo order shall be issued save in exceptional cases
and only after hearing the parties and the posting of a bond.
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- Alfredo Villamor Jr. vs. John S. Umale in Substitution of Hernando
Balmores, G.R. No. 172843, September 24, 2014,
Rule 8, Section 1 of the Interim Rules of Procedure for Intra-Corporate
Controversies (Interim Rules) provides the five (5) requisite for filing
derivative suits:
SECTION 1. Derivative action. A stockholder or member may bring an
action in the name of a corporation or association, as the case may be,
provided, that: cDTaSH
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation
or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss
the case.
The fifth requisite for filing derivative suits, while not included in the
enumeration, is implied in the first paragraph of Rule 8, Section 1 of the
Interim Rules: The action brought by the stockholder or member must be
"in the name of [the] corporation or association. . . ." This requirement has
already been settled in jurisprudence.
Thus, in Western Institute of Technology, Inc., et al. v. Salas, et al.,
this court said that "[a]mong the basic requirements for a derivative suit to
prosper is that the minority shareholder who is suing for and on behalf of
the corporation must allege in his complaint before the proper forum that
he is suing on a derivative cause of action on behalf of the corporation
and all other shareholders similarly situated who wish to join [him]."
Moreover, it is important that the corporation be made a party to the case.
Corporation Law 2016: JVL & JSD
This court explained in Asset Privatization Trust v. Court of Appeals why it
is a condition sine qua non that the corporation be impleaded as party in
derivative suits. Thus:
Not only is the corporation an indispensible party, but it is also the present
rule that it must be served with process. The reason given is that the
judgment must be made binding upon the corporation in order that the
corporation may get the benefit of the suit and may not bring a
subsequent suit against the same defendants for the same cause of
action. In other words the corporation must be joined as party because it
is its cause of action that is being litigated and because judgment must be
a res judicata against it.
In the same case, this court enumerated the reasons for
disallowing a direct individual suit.
The reasons given for not allowing direct individual suit are:
(1) . . . "the universally recognized doctrine that a stockholder in a
corporation has no title legal or equitable to the corporate property; that
both of these are in the corporation itself for the benefit of the
stockholders." In other words, to allow shareholders to sue separately
would conflict with the separate corporate entity principle;
(2) . . . that the prior rights of the creditors may be prejudiced. Thus, our
Supreme Court held in the case of Evangelista v. Santos, that 'the
stockholders may not directly claim those damages for themselves for that
would result in the appropriation by, and the distribution among them of
part of the corporate assets before the dissolution of the corporation and
the liquidation of its debts and liabilities, something which cannot be
legally done in view of Section 16 of the Corporation Law. . .";
(3) the filing of such suits would conflict with the duty of the management
to sue for the protection of all concerned;
(4) it would produce wasteful multiplicity of suits; and
(5) it would involve confusion in ascertaining the effect of partial recovery
by an individual on the damages recoverable by the corporation for the
same act.
133
While it is true that the basis for allowing stockholders to file derivative
suits on behalf of corporations is based on equity, the above legal
requisites for its filing must necessarily be complied with for its institution.
-Nestor Ching and Andrew Wellington vs. Subic Bay Golf and Country
Club Inc., et aL, G.R. No. 174353, September 10, 2014 \
A derivative suit must be differentiated from individual and representative
or class suits, thus:
"Suits by stockholders or members of a corporation based on wrongful or
fraudulent acts of directors or other persons may be classified into
individual suits, class suits, and derivative suits. Where a stockholder or
member is denied the right of inspection, his suit would be individual
because the wrong is done to him personally and not to the other
stockholders or the corporation. Where the wrong is done to a group of
stockholders, as where preferred stockholders' rights are violated, a class
or representative suit will be proper for the protection of all stockholders
belonging to the same group. But where the acts complained of constitute
a wrong to the corporation itself, the cause of action belongs to the
corporation and not to the individual stockholder or member. Although in
most every case of wrong to the corporation, each stockholder is
necessarily affected because the value of his interest therein would be
impaired, this fact of itself is not sufficient to give him an individual cause
of action since the corporation is a person distinct and separate from him,
and can and should itself sue the wrongdoer. Otherwise, not only would
the theory of separate entity be violated, but there would be multiplicity of
suits as well as a violation of the priority rights of creditors. Furthermore,
there is the difficulty of determining the amount of damages that should be
paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are
committed by the directors or trustees themselves, a stockholder or
member may find that he has no redress because the former are vested
by law with the right to decide whether or not the corporation should sue,
and they will never be willing to sue themselves. The corporation would
thus be helpless to seek remedy. Because of the frequent occurrence of
such a situation, the common law gradually recognized the right of a
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stockholder to sue on behalf of a corporation in what eventually became
known as a "derivative suit." It has been proven to be an effective remedy
of the minority against the abuses of management. Thus, an individual
stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are
the ones to be sued or hold the control of the corporation. In such actions,
the suing stockholder is regarded as the nominal party, with the
corporation as the party in interest."
-Ang, for and in behalf of Sunrise Marketing (Bacolod), Inc. vs. Spouses
Ang, G.R. No. 201675, June 19, 2013
Since damage to the corporation was not sufficiently proven by Juanito,
the Complaint cannot be considered a bona fide derivative suit. A
derivative suit is one that seeks redress for injury to the corporation, and
not the stockholder. No such injury was proven in this case.
The Complaint also failed to allege that all available corporate
remedies under the articles of incorporation, by-laws, laws or rules
governing the corporation were exhausted, as required under the Interim
Rules.
-Legaspi Towers, Inc. vs. Muer, et al., 673 SCRA 453 [2012]
A derivative suit must be differentiated from individual and representative
or class suits, thus:
Suits by stockholders or members of a corporation based on wrongful or
fraudulent acts of directors or other persons may be classified into
individual suits, class suits, and derivative suits. Where a stockholder or
member is denied the right of inspection, his suit would be individual
because the wrong is done to him personally and not to the other
stockholders or the corporation. Where the wrong is done to a group of
stockholders, as where preferred stockholders' rights are violated, a class
or representative suit will be proper for the protection of all stockholders
belonging to the same group. But where the acts complained of constitute
a wrong to the corporation itself, the cause of action belongs to the
134
corporation and not to the individual stockholder or member. Although in
most every case of wrong to the corporation, each stockholder is
necessarily affected because the value of his interest therein would be
impaired, this fact of itself is not sufficient to give him an individual cause
of action since the corporation is a person distinct and separate from him,
and can and should itself sue the wrongdoer. Otherwise, not only would
the theory of separate entity be violated, but there would be multiplicity of
suits as well as a violation of the priority rights of creditors. Furthermore,
there is the difficulty of determining the amount of damages that should be
paid to each individual stockholder.
However, in cases of mismanagement where the wrongful acts are
committed by the directors or trustees themselves, a stockholder or
member may find that he has no redress because the former are vested
by law with the right to decide whether or not the corporation should sue,
and they will never be willing to sue themselves. The corporation would
thus be helpless to seek remedy. Because of the frequent occurrence of
such a situation, the common law gradually recognized the right of a
stockholder to sue on behalf of a corporation in what eventually became
known as a "derivative suit." It has been proven to be an effective remedy
of the minority against the abuses of management. Thus, an individual
stockholder is permitted to institute a derivative suit on behalf of the
corporation wherein he holds stock in order to protect or vindicate
corporate rights, whenever officials of the corporation refuse to sue or are
the ones to be sued or hold the control of the corporation. In such actions,
the suing stockholder is regarded as the nominal party, with the
corporation as the party-in-interest.
The stockholder's right to file a derivative suit is not based on any
express provision of The Corporation Code, but is impliedly recognized
when the law makes corporate directors or officers liable for damages
suffered by the corporation and its stockholders for violation of their
fiduciary duties, which is not the issue in this case.
-Philip Go, et al. vs. Distinction Properties Development and Construction
Inc., 671 SCRA 461 [2012]
The doctrine of exhaustion of administrative remedies is a cornerstone of
our judicial system. The thrust of the rule is that courts must allow
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administrative agencies to carry out their functions and discharge their
responsibilities within the specialized areas of their respective
competence. It has been held, however, that the doctrine of exhaustion of
administrative remedies and the doctrine of primary jurisdiction are not
ironclad rules. In the case of Republic of the Philippines v. Lacap, the
Court enumerated the numerous exceptions to these rules, namely: (a)
where there is estoppel on the part of the party invoking the doctrine; (b)
where the challenged administrative act is patently illegal, amounting to
lack of jurisdiction; (c) where there is unreasonable delay or official
inaction that will irretrievably prejudice the complainant; (d) where the
amount involved is relatively so small as to make the rule impractical and
oppressive; (e) where the question involved is purely legal and will
ultimately have to be decided by the courts of justice; (f) where judicial
intervention is urgent; (g) where the application of the doctrine may cause
great and irreparable damage; (h) where the controverted acts violate due
process; (i) where the issue of non-exhaustion of administrative remedies
has been rendered moot; (j) where there is no other plain, speedy and
adequate remedy; (k) where strong public interest is involved; and (l) in
quo warranto proceedings.
-Lisam Enterprises, Inc., et aL vs. Banco de Oro Unibank, Inc. et aL, 670
SCRA 310 [2012]
The Court enumerated the requisites for filing a derivative suit, as follows:
a)the party bringing the suit should be a shareholder as of the time
of the act or transaction complained of, the number of his shares not being
material;
b)he has tried to exhaust intra-corporate remedies, i.e., has made
a demand on the board of directors for the appropriate relief but the latter
has failed or refused to heed his plea; and
c)the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the corporation and
not to the particular stockholder bringing the suit.
A reading of the amended complaint will reveal that all the foregoing
requisites had been alleged therein. Hence, the amended complaint
135
remedied the defect in the original complaint and now sufficiently states a
cause of action.
-Atty. Garcia vs. Eastern Telecommunications Phils., Inc. and Any
Salvador Hizon, G.R. Nos. 173115, April 16, 2009
We have ruled that an intra-corporate controversy is one which pertains to
any of the following relationships: (1) between the corporation, partnership
or association and the public; (2) between the corporation, partnership or
association and the State insofar as the former's franchise, permit or
license to operate is concerned; (3) between the corporation, partnership
or association and its stockholders, partners, members or officers; and (4)
among the stockholders, partners or associates themselves. 89 In Lozon
v. National Labor Relations Commission, 90 we declared that Presidential
Decree No. 902-A confers on the SEC original and exclusive jurisdiction to
hear and decide controversies and cases involving intra-corporate and
partnership relations between or among the corporation, officers and
stockholders and partners, including their elections or appointments . . .
Before a dismissal or removal could properly fall within the
jurisdiction of the SEC, it has to be first established that the person
removed or dismissed was a corporate officer. 91 "Corporate officers" in
the context of Presidential Decree No. 902-A 92 are those officers of the
corporation who are given that character by the Corporation Code or by
the corporation's by-laws. 93 There are three specific officers whom a
corporation must have under Section 25 of the Corporation Code. 94
These are the president, secretary and the treasurer. The number of
officers is not limited to these three. A corporation may have such other
officers as may be provided for by its by-laws like, but not limited to, the
vice-president, cashier, auditor or general manager. The number of
corporate officers is thus limited by law and by the corporation's by-laws.
-Yujuico vs. Quiambao, 513 SC RA 243 [2007]
The duty of the court taking cognizance of an application for a writ of
preliminary injunction is to determine whether the requisites necessary for
the grant of such writ are present. The requisites for the issuance of a writ
of preliminary injunction are: (1) the applicant for such writ must show that
he has a clear and unmistakable right that must be protected; and (2)
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there exists an urgent and paramount necessity for the writ to prevent
serious damage.
To repeat, the purpose of the writ of preliminary injunction is to
preserve the status quo until the court could hear the merits of the case.
The status quo is the last actual peaceable uncontested status that
preceded the controversy which, in the instant case, is the holding of the
annual stockholders' meeting on March 1, 2004 and the ensuing election
of the directors and officers of STRADEC. But instead of preserving the
status quo, Judge Emuslan's Order messed it up when, in compliance
therewith, a special stockholders' meeting was held anew and a new set
of directors and officers of STRADEC was elected. That effectively
resolved respondents' principal action without even a full-blown trial on the
merits since the Order impliedly ruled that the March 1, 2004 annual
stockholders' meeting and election are void. Verily, the issuance of the
questioned Order violates the established principle that courts should
avoid granting a writ of preliminary injunction that would in effect dispose
of the main case without trial.
-R.N. Symaco Trading Corp. vs. Santos, 467 SCRA 312 [2005]
The Court also agrees with the petitioners' contention that the CA erred in
ordering that all the original members of the MFBAI should be impleaded
as parties in respondent Santos' complaint. Contrary to the CA ruling, all
the MFBAI members are not indispensable parties in a derivative suit. It is
enough that a member or a minority of such members file a derivative suit
for and in behalf of the corporation. After all, the members/stockholders
who filed a derivative suit are merely nominal parties, the real party-in-
interest being the corporation.
-Chua vs. CA, 446 SCRA 259
Petitioner Chua's petition for mandamus in G.R. No. 152823,
which seeks to compel the Court of Appeals to consider the records of the
case as reconstituted, must fail. Reconstitution is not a ministerial task. It
involves the exercise of discretion on the part of a court in evaluating the
authenticity and relevance of all evidence to be presented before it. Thus,
the extraordinary writ of mandamus cannot be used to dictate upon the
court how it will rule in the admission of the reconstituted evidence,
136
inasmuch as this calls for the exercise of discretion. We have ruled that
the court may be compelled by mandamus to pass and act upon a
question submitted to it for decision, but it cannot be enjoined to decide for
or against one of the parties. A judicial act is not compellable by
mandamus; the court has to decide a question according to its own
judgment and understanding of the law.
(i)Voting Devices Affecting Control
(i) Proxy (Sec. 58; Sec. 89; for listed companies: see Section 20,
Securities Regulation Code and Rule 20, of the Implementing Rules of the
SRC)
Section 58. Proxies.
Stockholders and members may vote in person or by proxy in
ALL meetings of stockholders or members. Proxies shall in writing, signed
by the stockholder or member and filed before the scheduled meeting with
the corporate secretary. Unless otherwise provided in the proxy, it shall be
valid only for the meeting for which it is intended. NO proxy shall be
valid and effective for a period longer than five (5) years at any one
time
Section 89. Right to vote. - The right of the members of any
class or classes to vote may be limited, broadened or denied to the extent
specified in the articles of incorporation or the by-laws. Unless so limited,
broadened or denied, each member, regardless of class, shall be
entitled to one vote. Unless otherwise provided in the articles of
incorporation or the by-laws, a member may vote by proxy in accordance
with the provisions of this Code. Voting by mail or other similar means by
members of non-stock corporations may be authorized by the by-laws of
non-stock corporations with the approval of, and under such conditions
which may be prescribed by, the Securities and Exchange Commission.
Section 20. Proxy solicitations.
20.1. Proxies must be issued and proxy solicitation must be made
in accordance with rules and regulations to be issued by the Commission;
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20.2. Proxies must be in writing, signed by the stockholder or his
duly authorized representative and file before the scheduled meeting with
the corporate secretary.
20.3. Unless otherwise provided in the proxy, it shall be valid only
for the meeting for which it is intended. No proxy shall be valid only for the
meting for which it is intended. No proxy shall be valid and effective for a
period longer than five (5) years at one time.
20.4. No broker or dealer shall give any proxy, consent or any
authorization, in respect of any security carried for the account of the
customer, to a person other than the customer, without written
authorization of such customer.
20.5. A broker or dealer who holds or acquire the proxy for at least
ten percent (10%) or such percentage as the commission may prescribe
of the outstanding share of such issuer, shall submit a report identifying
the beneficial owner of ten days after such acquisition, for its own account
or customer, to the issuer of security, to the exchange where the security
is traded and to the Commission.
Meaning;
Purpose;
Who may be a proxy;
Form;
Extent of Authority.
Kinds Duration;
Revocation;
(ii) Voting Trust Agreements (Sec. 59)
Section 59. Voting trusts.
One or more stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a trustee or trustees
the right to vote and other rights pertaining to the shares for a period
NOT exceeding five (5) years at any time: Provided, That in the case of
a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding five (5) years but shall
automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the terms
and conditions thereof. A certified copy of such agreement shall be filed
137
with the corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement
shall be cancelled and new ones shall be issued in the name of the
trustee or trustees stating that they are issued pursuant to said
agreement. In the books of the corporation, it shall be noted that the
transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors
voting trust certificates, which shall be transferable in the same manner
and wit
h the same effect as certificates of stock.
The voting trust agreement filed with the corporation shall be
subject to examination by any stockholder of the corporation in the
same manner as any other corporate book or record: Provided, That both
the transferor and the trustee or trustees may exercise the right of
inspection of all corporate books and records in accordance with the
provisions of this Code.
Any other stockholder may transfer his shares to the same trustee
or trustees upon the terms and conditions stated in the voting trust
agreement, and thereupon shall be bound by all the provisions of said
agreement.
NO voting trust agreement shall be entered into for the purpose
of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud.
Unless expressly renewed, ALL rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period, and
the voting trust certificates as well as the certificates of stock in the name
of the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the
agreement provides otherwise.
-Lee v. CA, 205 SCRA 752 [1992];
Under Section 59 of the new Corporation Code which expressly
recognizes voting trust agreements, a more definite meaning may be
gathered. The said provision partly reads: "Section 59. Voting Trusts
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One or more stockholders of a stock corporation may create a voting trust
for the purpose of conferring upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a period not exceeding five (5)
years at any one time: Provided, that in the case of a voting trust
specifically required as a condition in a loan agreement, said voting trust
may be for a period exceeding (5) years but shall automatically expire
upon full payment of the loan. A voting trust agreement must be in writing
and notarized, and shall specify the terms and conditions thereof. A
certified copy of such agreement shall be filed with the corporation and
with the Securities and Exchange Commission; otherwise, said agreement
is ineffective and unenforceable. The certificate or certificates of stock
covered by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating that they are
issued pursuant to said agreement. In the books of the corporation, it shall
be noted that the transfer in the name of the trustee or trustees is made
pursuant to said voting trust agreement."
By its very nature, a voting trust agreement results in the
separation of the voting rights of a stockholder from his other rights such
as the right to receive dividends, the right to inspect the books of the
corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled until
the liquidation of the corporation. However, in order to distinguish a voting
trust agreement from proxies and other voting pools and agreements, it
must pass three criteria or tests, namely: (1) that the voting rights of the
stock are separated from the other attributes of ownership; (2) that the
voting rights granted are intended to be irrevocable for a definite period of
time; and (3) that the principal purpose of the grant of voting rights is to
acquire voting control of the corporation.
The law simply provides that a voting trust agreement is an
agreement in writing whereby one or more stockholders of a corporation
consent to transfer his or their shares to a trustee in order to vest in the
latter voting or other rights pertaining to said shares for a period not
exceeding five years upon the fulfillment of statutory conditions and such
other terms and conditions specified in the agreement. The five year-
period may be extended in cases where the voting trust is executed
pursuant to a loan agreement whereby the period is made contingent
upon full payment of the loan.
138
 Under section 59 of the Corporation Code, supra, a voting trust
agreement may confer upon a trustee not only the stockholder's voting
rights but also other rights pertaining to his shares as long as the voting
trust agreement is not entered "for the purpose of circumventing the law
against monopolies and illegal combinations in restraint of trade or used
for purposes of fraud." (section 59, 5th paragraph of the Corporation
Code). Thus, the traditional concept of a voting trust agreement primarily
intended to single out a stockholder's right to vote from his other rights as
such and made irrevocable for a limited duration may in practice become
a legal device whereby a transfer of the stockholders shares is effected
subject to the specific provision of the voting trust agreement. The
execution of a voting trust agreement, therefore, may create a dichotomy
between the equitable or beneficial ownership of the corporate shares of a
stockholder, on the one hand, and the legal title thereto on the other hand.
Both under the old and the new Corporation Codes there is no
dispute as to the most immediate effect of a voting trust agreement on the
status of a stockholder who is a party to its execution from legal title
holder or owner of the shares subject of the voting trust agreement, he
becomes the equitable or beneficial owner.
-Everett v. Asia Banking Corporation, 49 Phil. 512 [1926]
When the board of directors in a corporation is under the complete
control of the principal defendants in the case and it is obvious that a
demand upon the board of directors to institute an action and prosecute
the same effectively would be useless, the action may be brought by one
or more of the stockholders without such demand.|
-National Development Corporation vs. Aquino, 163 SCRA 153
[1988]
In any event, a voting trust transfers only voting or other rights
pertaining to the shares subject of the agreement, or control over the
stock. The law on the matter is Section 59, paragraph 1 of the Corporation
Code (BP 68) which provides:
"Sec. 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon a
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trustee or trustees the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: . . ." 26
The acquisition by PNB-NIDC of the properties in question was not
made or effected under the capacity of a trustee but as a foreclosing
creditor for the purpose of recovering on a just and valid obligation of
Batjak
Meaning;
Purpose;
Distinction from Proxy and Pooling Agreement
Extent of Authority
Duration
(iii) Pooling and Voting Agreements (Sec. 100)
Section 100. Agreements by stockholders.
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation and shall
continue to be valid and binding between and among such stockholders, if
such be their intent, to the extent that such agreements are NOT
inconsistent with the articles of incorporation, irrespective of where the
provisions of such agreements are contained, except those required by
this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing
and signed by the parties thereto, may provide that in exercising any
voting rights, the shares held by them shall be voted as therein provided,
or as they may agree, or as determined in accordance with a procedure
agreed upon by them.
3. NO provision in any written agreement signed by the
stockholders, relating to any phase of the corporate affairs, shall be
invalidated as between the parties on the ground that its effect is to make
them partners among themselves.
4. A written agreement among some or all of the stockholders in a
close corporation shall NOT be invalidated on the ground that it so relates
to the conduct of the business and affairs of the corporation as to restrict
or interfere with the discretion or powers of the board of directors:
139
Provided, That such agreement shall impose on the stockholders who are
parties thereto the liabilities for managerial acts imposed by this Code on
directors.
5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to each
other and among themselves. Said stockholders shall be personally
liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance.
(iv) Cumulative Voting (See earlier discussion)
(v) Classification of Shares (Sec. 6 voting and non-voting
redeemable and preferred)
VII. STRUCTURE OF CORPORATION'S CAPITAL
A. Concept of "Capital Stock" amount fixed usually by the corporate
charter "to be subscribed and paid in or secured to be paid in by the
shareholders of a corporation, either in money or property, labor or
services at the organization of the corporation or afterwards, and upon
which it is to conduct its operations"
(11 Fletcher, Cyclopedia of the Law of Private Corporations, perm. ed. 14)
- Gamboa vs. Teves, 682 SCRA 397 [2012]; 652 SCRA 690 [2011]
The term "capital" in Section 11, Article XII of the Constitution refers only
to shares of stock entitled to vote in the election of directors, and thus in
the present case only to common shares, 41 and not to the total
outstanding capital stock comprising both common and non-voting
preferred shares.
Indisputably, one of the rights of a stockholder is the right to
participate in the control or management of the corporation. 43 This is
exercised through his vote in the election of directors because it is the
board of directors that controls or manages the corporation. 44 In the
absence of provisions in the articles of incorporation denying voting rights
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to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded
from any control, that is, deprived of the right to vote in the election of
directors and on other matters, on the theory that the preferred
shareholders are merely investors in the corporation for income in the
same manner as bondholders. 45 In fact, under the Corporation Code
only preferred or redeemable shares can be deprived of the right to vote.
46 Common shares cannot be deprived of the right to vote in any
corporate meeting, and any provision in the articles of incorporation
restricting the right of common shareholders to vote is invalid. 47
Considering that common shares have voting rights which translate to
control, as opposed to preferred shares which usually have no voting
rights, the term "capital" in Section 11, Article XII of the Constitution refers
only to common shares. However, if the preferred shares also have the
right to vote in the election of directors, then the term "capital" shall
include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to
vote in the election of directors. In short, the term "capital" in Section 11,
Article XII of the Constitution refers only to shares of stock that can vote in
the election of directors.
- Cen. TxtL Mills v. Natl. Wage and Prod. Comm., 260 SCRA 368 [1996).
The guidelines on exemption specifically refer to paid-up capital, not
authorized capital stock, as the basis of capital impairment for exemption
from WO No. NCR-02. The records reveal, however, that petitioner
included in its total paid-up capital payments on advance subscription,
although the proposed increase in its capitalization had not yet been
approved by, let alone presented for the approval of, the SEC. These
payments cannot as yet be deemed part of petitioner's paid-up capital,
technically speaking, because its capital stock has not yet been legally
increased. Thus, its authorized capital stock in the year when exemption
from WO No. NCR-02 was sought stood at P128,000,000.00, which was
impaired by loses of nearly 50%. Such payments constitute deposits on
future subscriptions, money which the corporation will hold in trust for the
subscribers until it files a petition to increase its capitalization and a
certificate of filing of increase of capital stock is approved and issued by
the SEC. As a trust fund, this money is still withdrawable by any of the
140
subscribers at any time before the issuance of the corresponding shares
of stock, unless there is a pre-subscription agreement to the contrary,
which apparently is not present in the instant case. Consequently, if a
certificate of increase has not yet been issued by the SEC, the
subscribers to the unauthorized issuance are not to be deemed as
stockholders possessed of such legal rights as the rights to vote and
dividends.
- MSCI-NACUSIP Local Chap. v. Natl. Wages and Prod. Comm., 269
SCRA 173 (1997).
NWPC (National Wages and Productivity Commission) Guidelines No. 01,
Series of 1992 as well as the new NWPC Guidelines No. 01 Series of
1996, define Capital as referring to paid-up capital at the end of the last
full accounting period, in the case of corporations, or total invested capital
at the beginning of the period under review, in the case of partnerships
and single proprietorships. To have a clear understanding of what paid-up
capital is, however, a referral to Sections 12 and 13 of BP Blg. 68 or the
Corporation Code would be very helpful, viz: "Sec. 12. Minimum capital
stock required of stock corporations. Stock corporations incorporated
under this Code shall not be required to have any minimum authorized
capital stock except as otherwise specifically provided for by special law,
and subject to the provisions of the following section." "Sec. 13. Amount of
capital stock to be subscribed and paid for purposes of incorporation.
At least twenty-five (25%) percent of the authorized capital stock as stated
in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) percent of the total
subscription must be paid upon subscription, the balance to be payable on
a date or dates fixed in the contract of subscription without need of call, or
in the absence of a fixed date or dates, upon call for payment by the board
of directors: Provided, however, That in no case shall the paid-up capital
be less than five thousand (P5,000.00) pesos. (n)" By express provision of
Section 13, paid-up capital is that portion of the authorized capital stock
which has been both subscribed and paid. To illustrate, where the
authorized capital stock of a corporation is worth P1 million and the total
subscription amounts to P250,000.00, at least 25% of this amount,
namely, P62,500.00 must be paid up per Section 13. The latter,
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P62,500.00, is the paid-up capital or what should more accurately be
termed as "paid-up capital stock."
- National TeL Comm. v. CA, 311 SCRA 508, 514-515 (1999).
The term "capital" and other terms used to describe the capital
structure of a corporation are of universal acceptance, and their usages
have long been established in jurisprudence. Briefly, capital refers to the
value of the property or assets of a corporation.
The capital subscribed is the total amount of the capital that
persons (subscribers or shareholders) have agreed to take and pay for,
which need not necessarily be, and can be more than, the par value of the
shares. In fine, it is the amount that the corporation receives, inclusive of
the premiums if any, in consideration of the original issuance of the
shares. In the case of stock dividends, it is the amount that the corporation
transfers from its surplus profit account to its capital account. It is the
same amount that can loosely be termed as the "trust fund" of the
corporation.
"Trust Fund" doctrine considers this subscribed capital as a trust
fund for the payment of the debts of the corporation, to which the creditors
may look for satisfaction. Until the liquidation of the corporation, no part of
the subscribed capital may be returned or released to the stockholder
(except in the redemption of redeemable shares) without violating this
principle. Thus, dividends must never impair the subscribed capital;
subscription commitments cannot be condoned or remitted; nor can the
corporation buy its own shares using the subscribed capital as the
consideration therefor.
Outstanding Capital Stock - Sec. 137
Section 137. Outstanding capital stock defined.
The term "outstanding capital stock", as used in this Code, means
the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.
- Tan vs. Sycip, ibid.
141
 In stock corporations, the presence of a quorum is ascertained
and counted on the basis of the outstanding capital stock, as defined by
the Code thus:
"SECTION 137. Outstanding capital stock defined. The term
'outstanding capital stock' as used in this Code, means the total shares of
stock issued under binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid, except treasury
shares."
B. Kinds of Shares of Stock units into which the capital stock is
divided - Sec. 6
- Hacienda Luisita, Inc. vs. Presidential Agrarian Reform Council, 653
SCRA 154 [2011]
1. Common Stocks
2. Preferred Stocks
(a) Preference as to Dividends
(i) Participating and Non-participating
(ii) Cumulative and Non-cumulative
(b) Preference as to Distribution of Assets at Liquidation
3. Par and No-Par (Sec. 6; Sec. 62; Sec. 65);
Section 65. Liability of directors for watered stocks.
Any director or officer of a corporation consenting to the issuance
of stocks for a consideration LESS than its par or issued value or for a
consideration in any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does NOT forthwith express his
objection in writing and file the same with the corporate secretary, shall
be solidarily, liable with the stockholder concerned to the
corporation and its creditors for the difference between the fair value
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received at the time of issuance of the stock and the par or issued
value of the same. (n)
- Delpher Trades Corp. v. IAC, 157 SCRA 349, 353-354 [1999])
"A no-par value share does not purport to represent any stated
proportionate interest in the capital stock measured by value, but only an
aliquot part of the whole number of such shares of the issuing corporation.
The holder of no-par shares may see from the certificate itself that he is
only an aliquot sharer in the assets of the corporation. But this character
of proportionate interest is not hidden beneath a false appearance of a
given sum in money, as in the case of par value shares. The capital stock
of a corporation issuing only no-par value shares is not set forth by a
stated amount of money, but instead is expressed to be divided into a
stated number of shares, such as, 1,000 shares. This indicates that a
shareholder of 100 such shares is an aliquot sharer in the assets of the
corporation, no matter what value they may have, to the extent of
100/1,000 or 1/10. Thus, by removing the par value of shares, the
attention of persons interested in the financial condition of a corporation is
focused upon the value of assets and the amount of its debts.
4. Treasury Shares (Sec. 9; Sec. 137);
Section 9. Treasury shares.
Treasury shares are shares of stock which have been issued and
fully paid for, but subsequently reacquired by the issuing corporation
by purchase, redemption, donation or through some other lawful means.
Such shares may again be disposed of for a reasonable price fixed by the
board of directors.
- Commissioner of Internal Revenue vs. Manning, 66 SCRA 14
[1970]; SEC Rules Governing Redeemable and Treasury Shares [1982])
Treasury shares are stocks issued and fully paid for and re-
acquired by the corporation either by purchase, donation, forfeiture or
other means. They are therefore issued shares, but being in the treasury
they do not have the status of outstanding shares. Consequently, although
a treasury share, not having been retired by the corporation re-acquiring it,
142
may be re-issued or sold again, such share, as long as it is held by the
corporation as a treasury share, participates neither in dividends, because
dividends cannot be declared by the corporation to itself, nor in the
meetings of the corporations as voting stock, for otherwise equal
distribution of voting powers among stockholders will be effectively lost
and the directors will be able to perpetuate their control of the corporation
though it still represent a paid for interest in the property of the
corporation.
Where the manifest intention of the parties to the trust agreement
was, in sum and substance, to treat the shares of a deceased stockholder
as absolutely outstanding shares of said stockholder's estate until they
were fully paid. the declaration of said shares as treasury stock dividend
was a complete nullity and plainly violative of public policy.
5. Founders' Shares (Sec. 7)
Section 7. Founders' shares.
Founders' shares classified as such in the articles of
incorporation may be given certain rights and privileges NOT
enjoyed by the owners of other stocks, provided that where the
exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period NOT to exceed five (5) years
subject to the approval of the Securities and Exchange Commission. The
five-year period shall commence from the date of the aforesaid approval
by the Securities and Exchange Commission. (n)
6. Special Kinds Warrants; Options
7. Consideration for Shares of Stocks (Sec. 62; Sec.13; Secs. 67-
71;)
Section 13. Amount of capital stock to be subscribed and
paid for the purposes of incorporation.
At least twenty-five percent (25%) of the authorized capital stock
as stated in the articles of incorporation must be subscribed at the time of
incorporation, and at least twenty-five (25%) per cent of the total
subscription must be paid upon subscription, the balance to be payable
on a date or dates fixed in the contract of subscription WITHOUT need of
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call, or in the absence of a fixed date or dates, upon call for payment by
the board of directors: Provided, however, That in NO case shall the
paid-up capital be less than five Thousand (P5,000.00) pesos. (n)
- Velasco vs. Poizat, 37 Phil. 802 [1918];
A stock subscription is a contract between the corporation and the
subscriber, and courts will enforce it for or against either. No express
promise to pay is necessary to make the subscriber liable.
The corporation has two remedies against the subscriber to the
corporate shares, namely (1) to sell the stock for the account of the
delinquent subscriber, and (2) to bring a legal action against him for the
amount due.
The provisions of section 38 to 48, inclusive, of the Corporation
Law are applicable only where the directors of a corporation intend to
subject the stock of the delinquent subscriber to sale in order to enforce
payment of the subscription. They have no application in case a legal
action is brought to recover upon the stock subscription.
When insolvency supervenes upon a corporation and the court
assumes jurisdiction demand, and are at once recoverable in an action
instituted by the assignee in insolvency.
A corporation has no legal capacity to release a subscriber to its
capital stock from the obligation to pay for his shares; and any agreement
to this effect is invalid.
- Lingayen Gulf Elec. Power Co., Inc. vs. lrineo Baltazar, 93 Phil.
404 [1953])
If the corporation involved in insolvent, all unpaid stock
subscriptions become payable on demand and are immediately
recoverable in an action instituted by the assignee. But when the
corporation is a solvent concern, the law requires that notice of any call for
the payment of unpaid subscription should be made not only personally
but also by publication. (Act 1459, section 40 as amended.)
In order to effect the release of a stockholder from his stock
subscription, there must be unanimous consent of the stockholders of the
corporation. (18 C. J. S. 1874; 2 Thompson on Corporations, pp. 186,
194.) From this rule, however, there are exceptions: "Where it is given
143
pursuant to a bona fide compromise, or to set off a debt due from the
corporation, a release, supported by consideration, will be effectual as
against dissenting stockholders and subsequent and existing creditors. A
release which might originally have been held invalid may be sustained
after a considerable lapse of time."
D. Watered Stocks (Sec. 65;
Section 65. Liability of directors for watered stocks.
Any director or officer of a corporation consenting to the issuance of
stocks for a consideration LESS than its par or issued value or for a
consideration in any form other than cash, valued in excess of its fair
value, or who, having knowledge thereof, does NOT forthwith express his
objection in writing and file the same with the corporate secretary, shall
be solidarily, liable with the stockholder concerned to the
corporation and its creditors for the difference between the fair value
received at the time of issuance of the stock and the par or issued
value of the same.
Philippine Trust Co. vs. Rivera, 44 Phil. 469 [1923])
A corporation has no power to release an original subscriber to its
capital stock from the obligation of paying for his shares, without a
valuable consideration for such release; and as against creditors a
reduction of the capital stock can take place only in the manner and under
the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is
necessary
E. Trust Fund Doctrine capital stock of a corporation, or the
assets it an insolvent corporation representing its capital, is a trust
fund for the benefit of the company's creditors Fletcher, 7369; Sec. 122;
- that the corporation receives in consideration of the original issuance of
Section 122. Corporate liquidation.
Every corporation whose charter expires by its own limitation or is
annulled by forfeiture or otherwise, or whose corporate existence for other
purposes is terminated in any other manner, shall nevertheless be
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continued as a body corporate for three (3) years after the time when
it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its
affairs, to dispose of and convey its property and to distribute its assets,
but not for the purpose of continuing the business for which it was
established.
At any time during said three (3) years, the corporation is
authorized and empowered to convey all of its property to trustees for the
benefit of stockholders, members, creditors, and other persons in interest.
From and after any such conveyance by the corporation of its property in
trust for the benefit of its stockholders, members, creditors and others in
interest, ALL interest which the corporation had in the property terminates,
the legal interest vests in the trustees, and the beneficial interest in
the stockholders, members, creditors or other persons in interest.
Upon the winding up of the corporate affairs, any asset
distributable to any creditor or stockholder or member who is unknown or
cannot be found shall be escheated to the city or municipality where such
assets are located.
Except by decrease of capital stock and as otherwise allowed by
this Code, NO corporation shall distribute any of its assets or
property except upon lawful dissolution and after payment of all its
debts and liabilities.
-PLDT vs. NTC et aL, 539 SC RA 365 [2007]
Dividends, regardless of the form these are declared, that is, cash,
property or stocks, are valued at the amount of the declared dividend
taken from the unrestricted retained earnings of a corporation. Thus, the
value of the declaration in the case of a stock dividend is the actual value
of the original issuance of said stocks. In G.R. No. 127937 we said that "in
the case of stock dividends, it is the amount that the corporation transfers
from its surplus profit account to its capital account" or "it is the amount
the shares." It is "the distribution of current or accumulated earnings to the
shareholders of a corporation pro rata based on the number of shares
owned." Such distribution in whatever form is valued at the declared
amount or monetary equivalent.
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 Thus, it cannot be said that no consideration is involved in the
issuance of stock dividends. In fact, the declaration of stock dividends is
akin to a forced purchase of stocks. By declaring stock dividends, a
corporation ploughs back a portion or its entire unrestricted retained
earnings either to its working capital or for capital asset acquisition or
investments. It is simplistic to say that the corporation did not receive any
actual payment for these. When the dividend is distributed, it ceases to be
a property of the corporation as the entire or portion of its unrestricted
retained earnings is distributed pro rata to corporate shareholders.
When stock dividends are distributed, the amount declared ceases
to belong to the corporation but is distributed among the shareholders.
Consequently, the unrestricted retained earnings of the corporation are
diminished by the amount of the declared dividend while the stockholders'
equity is increased. Furthermore, the actual payment is the cash value
from the unrestricted retained earnings that each shareholder foregoes for
additional stocks/shares which he would otherwise receive as required by
the Corporation Code to be given to the stockholders subject to the
availability and conditioned on a certain level of retained earnings.
Elsewise put, where the unrestricted retained earnings of a corporation
are more than 100% of the paid-in capital stock, the corporate Board of
Directors is mandated to declare dividends which the shareholders will
receive in cash unless otherwise declared as property or stock dividends,
which in the latter case the stockholders are forced to forego cash in lieu
of property or stocks.
In essence, therefore, the stockholders by receiving stock
dividends are forced to exchange the monetary value of their dividend for
capital stock, and the monetary value they forego is considered the actual
payment for the original issuance of the stocks given as dividends.
Therefore, stock dividends acquired by shareholders for the monetary
value they forego are under the coverage of the SRF and the basis for the
latter is such monetary value as declared by the board of directors
-Ong Yong vs Tiu, supra.
The distribution of corporate assets and property cannot be made
to depend on the whims and caprices of the stockholders, officers or
directors of the corporation, or even, for that matter, on the earnest desire
of the court a quo "to prevent further squabbles and future litigations"
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unless the indispensable conditions and procedures for the protection of
corporate creditors are followed. Otherwise, the "corporate peace"
laudably hoped for by the court will remain nothing but a dream because
this time, it will be the creditors' turn to engage in "squabbles and
litigations" should the court order an unlawful distribution in blatant
disregard of the Trust Fund Doctrine. In the instant case, the rescission of
the Pre-Subscription Agreement will effectively result in the unauthorized
distribution of the capital assets and property of the corporation, thereby
violating the Trust Fund Doctrine and the Corporation Code, since
rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed.
Garcia vs. Lim Chu Sing, 59 Phil. 562 [1934];
The shares of stock of a banking corporation do not constitute an
indebtedness thereof to the stockholder and, therefore, the latter is not a
creditor of the former for such shares.
A stockholder's indebtedness to a banking corporation cannot be
compensated with the amount of his shares in the same institution, there
being no relation of creditor and debtor with regard to such shares.
-Boman Environmental Devt Corp. vs CA, 167 SC RA 540 [1988])
The requirement of unrestricted retained earnings to cover the
shares is based on the trust fund doctrine which means that the capital
stock, property and other assets of a corporation are regarded as equity in
trust for the payment of corporate creditors. The reason is that creditors of
a corporation are preferred over the stockholders in the distribution of
corporate assets. There can be no distribution of assets among the
stockholders without first paying corporate creditors. Hence, any
disposition of corporate funds to the prejudice of creditors is null and void.
"Creditors of a corporation have the right to assume that so long as there
are outstanding debts and liabilities, the board of directors will not use the
assets of the corporation to purchase its own stock . . ."
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VIII. CORPORATE COMBINATIONS
A. Merger or Consolidation Secs. 76, 77, 78, 79
Section 76. Plan or merger of consolidation.
Two or more corporations may merge into a single corporation
which shall be one of the constituent corporations or may consolidate
into a new single corporation which shall be the consolidated
corporation.
The board of directors or trustees of each corporation, party to the
merger or consolidation, shall approve a plan of merger or consolidation
setting forth the following:
1. The names of the corporations proposing to merge or
consolidate, hereinafter referred to as the constituent corporations;
2. The terms of the merger or consolidation and the mode of
carrying the same into effect;
3. A statement of the changes, if any, in the articles of
incorporation of the surviving corporation in case of merger; and, with
respect to the consolidated corporation in case of consolidation, all the
statements required to be set forth in the articles of incorporation for
corporations organized under this Code; and
4. Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or desirable. (n)
Section 77. Stockholder's or member's approval.
Upon approval by majority vote of each of the board of directors or
trustees of the constituent corporations of the plan of merger or
consolidation, the same shall be submitted for approval by the
stockholders or members of each of such corporations at separate
corporate meetings duly called for the purpose. Notice of such meetings
shall be given to ALL stockholders or members of the respective
corporations, at least two (2) weeks prior to the date of the meeting, either
personally or by registered mail. Said notice shall state the purpose of the
meeting and shall include a copy or a summary of the plan of merger or
consolidation. The affirmative vote of stockholders representing at
least two-thirds (2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or at least two-thirds
(2/3) of the members in the case of non-stock corporations shall be
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necessary for the approval of such plan. Any dissenting stockholder in
stock corporations may exercise his appraisal right in accordance with the
Code: Provided, That if after the approval by the stockholders of such
plan, the board of directors decides to abandon the plan, the appraisal
right shall be extinguished.
Any amendment to the plan of merger or consolidation may be
made, provided such amendment is approved by majority vote of the
respective boards of directors or trustees of all the constituent
corporations and ratified by the affirmative vote of stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or of
two-thirds (2/3) of the members of each of the constituent corporations.
Such plan, together with any amendment, shall be considered as the
agreement of merger or consolidation.
Section 78. Articles of merger or consolidation.
AFTER the approval by the stockholders or members as required
by the preceding section, articles of merger or articles of consolidation
shall be executed by each of the constituent corporations, to be signed
by the president or vice-president and certified by the secretary or
assistant secretary of each corporation setting forth:
1. The plan of the merger or the plan of consolidation;
2. As to stock corporations, the number of shares outstanding, or
in the case of non-stock corporations, the number of members; and
3. As to each corporation, the number of shares or members
voting for and against such plan, respectively. (n)
Section 79. Effectivity of merger or consolidation.
The articles of merger or of consolidation, signed and certified as
herein above required, shall be submitted to the Securities and Exchange
Commission in quadruplicate for its approval: Provided, That in the case
of merger or consolidation of banks or banking institutions, building and
loan associations, trust companies, insurance companies, public utilities,
educational institutions and other special corporations governed by
special laws, the favorable recommendation of the appropriate
government agency shall first be obtained. If the Commission is satisfied
that the merger or consolidation of the corporations concerned is not
inconsistent with the provisions of this Code and existing laws, it shall
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issue a certificate of merger or of consolidation, at which time the
merger or consolidation shall be effective.
If, upon investigation, the Securities and Exchange Commission
has reason to believe that the proposed merger or consolidation is
contrary to or inconsistent with the provisions of this Code or existing
laws, it shall set a hearing to give the corporations concerned the
opportunity to be heard. Written notice of the date, time and place of
hearing shall be given to each constituent corporation at least two (2)
weeks before said hearing. The Commission shall thereafter proceed as
provided in this Code. (n)
1. Concepts
Consolidation is the union of two or more existing corporations to
Minn a new corporation called the consolidated corporation.
Merger is a union whereby one or more existing corporations are
absorbed by another corporation which survives and continues the
combined business. Parties to a merger or consolidation are called
constituent corporations. In consolidation all the constituents are dissolved
and absorbed by the new consolidated enterprise. In merger, all
constituents, except the surviving corporation, are dissolved. In both
cases, however, there is NO liquidation of the assets of the dissolved
corporations, and the surviving or consolidated corporation acquires all
their properties, rights and franchises.
-Bank of Commerce vs. Radio Philippines Network Inc., et al.,
G.R. No. 195615, April 21, 2014
The Corporation Code requires the following steps for merger or
consolidation:
(1) The board of each corporation draws up a plan of merger or
consolidation. Such plan must include any amendment, if necessary, to
the articles of incorporation of the surviving corporation, or in case of
consolidation, all the statements required in the articles of incorporation of
a corporation.
(2) Submission of plan to stockholders or members of each
corporation for approval. A meeting must be called and at least two (2)
weeks' notice must be sent to all stockholders or members, personally or
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by registered mail. A summary of the plan must be attached to the notice.
Vote of two-thirds of the members or of stockholders representing two-
thirds of the outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles
of merger o[r] consolidation, by the corporate officers of each constituent
corporation. These take the place of the articles of incorporation of the
consolidated corporation, or amend the articles of incorporation of the
surviving corporation. AHcaDC
(4) Submission of said articles of merger or consolidation to the
SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all
corporations concerned at least two weeks before.
(6) Issuance of certificate of merger or consolidation.
The dissenting opinion of Justice Mendoza finds, however, that a
"de facto" merger existed between TRB and Bancommerce considering
that (1) the P & A Agreement between them involved substantially all the
assets and liabilities of TRB; (2) in an Ex Parte Petition for Issuance of
Writ of Possession filed in a case, Bancommerce qualified TRB, the
petitioner, with the words "now known as Bancommerce;" and (3) the BSP
issued a Circular Letter (series of 2002) advising all banks and non-bank
financial intermediaries that the banking activities and transaction of TRB
and Bancommerce were consolidated and that the latter continued the
operations of the former.
The idea of a de facto merger came about because, prior to the
present Corporation Code, no law authorized the merger or consolidation
of Philippine Corporations, except insurance companies, railway
corporations, and public utilities. 16 And, except in the case of insurance
corporations, no procedure existed for bringing about a merger. 17 Still,
the Supreme Court held in Reyes v. Blouse, 18 that authority to merge or
consolidate can be derived from Section 28 1/2 (now Section 40) of the
former Corporation Law which provides, among others, that a corporation
may "sell, exchange, lease or otherwise dispose of all or substantially all
of its property and assets" if the board of directors is so authorized by the
affirmative vote of the stockholders holding at least two-thirds of the voting
147
power. The words "or otherwise dispose of," according to the Supreme
Court, is very broad and in a sense, covers a merger or consolidation.
In his book, Philippine Corporate Law, Dean Cesar Villanueva
explained that under the Corporation Code, "a de facto merger can be
pursued by one corporation acquiring all or substantially all of the
properties of another corporation in exchange of shares of stock of the
acquiring corporation. The acquiring corporation would end up with the
business enterprise of the target corporation; whereas, the target
corporation would end up with basically its only remaining assets being
the shares of stock of the acquiring corporation." (Emphasis supplied)
No de facto merger took place in the present case simply because
the TRB owners did not get in exchange for the bank's assets and
liabilities an equivalent value in Bancommerce shares of stock.
Bancommerce and TRB agreed with BSP approval to exclude from the
sale the TRB's contingent judicial liabilities, including those owing to RPN,
et al.
-Commission of Internal Revenue vs. Bank of Commerce, G.R.
No. 180529, November 25, 2013
Merger is defined under Section 40 (C)(6)(b) of the Tax Code as
follows:
"b) The term "merger" or "consolidation", when used in this
Section, shall be understood to mean: (i) the ordinary merger or
consolidation, or (ii) the acquisition by one corporation of all or
substantially all the properties of another corporation solely for stock:
Provided, [t]hat for a transaction to be regarded as a merger or
consolidation within the purview of this Section, it must be undertaken for
a bona fide business purpose and not solely for the purpose of escaping
the burden of taxation: . . . ."
-PNB vs. Andrada Electric Eng'g Co., 381 SCRA 245 [2002];
Campos, Corporation Code, p.441).
A consolidation is the union of two or more existing entities to form
a new entity called the consolidated corporation. A merger, on the other
hand, is a union whereby one or more existing corporations are absorbed
by another corporation that survives and continues the combined
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business. The merger, however, does not become effective upon the mere
agreement of the constituent corporations. Since a merger or
consolidation involves fundamental changes in the corporation, as well as
in the rights of stockholders and creditors, there must be an express
provision of law authorizing them. For a valid merger or consolidation, the
approval by the Securities and Exchange Commission (SEC) of the
articles of merger or consolidation is required. These articles must likewise
be duly approved by a majority of the respective stockholders of the
constituent corporations. In the case at bar, we hold that there is no
merger or consolidation with respect to PASUMIL and PNB. The
procedure prescribed under Title IX of the Corporation Code was not
followed.
-McLeod vs. NLRC, 512 SCRA 222 [2007]
As a rule, a corporation that purchases the assets of another will
not be liable for the debts of the selling corporation, provided the former
acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where the
purchaser expressly or impliedly agrees to assume the debts, (2) where
the transaction amounts to a consolidation or merger of the corporations,
(3) where the purchasing corporation is merely a continuation of the
selling corporation, and (4) where the selling corporation fraudulently
enters into the transaction to escape liability for those debts.
Consolidation is the union of two or more existing corporations to
form a new corporation called the consolidated corporation. It is a
combination by agreement between two or more corporations by which
their rights, franchises, and property are united and become those of a
single, new corporation, composed generally, although not necessarily, of
the stockholders of the original corporations.
Merger, on the other hand, is a union whereby one corporation
absorbs one or more existing corporations, and the absorbing corporation
survives and continues the combined business.
The parties to a merger or consolidation are called constituent
corporations. In consolidation, all the constituents are dissolved and
absorbed by the new consolidated enterprise. In merger, all constituents,
except the surviving corporation, are dissolved. In both cases, however,
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there is no liquidation of the assets of the dissolved corporations, and the
surviving or consolidated corporation acquires all their properties, rights
and franchises and their stockholders usually become its stockholders.
The surviving or consolidated corporation assumes automatically
the liabilities of the dissolved corporations, regardless of whether the
creditors have consented or not to such merger or consolidation. 27
In the present case, there is no showing that the subject dation in
payment involved any corporate merger or consolidation. Neither is there
any showing of those indicative factors that SRTI is a mere instrumentality
of PMI.
2. Procedure
(a) Plan of Merger or Consolidation (Sec. 76);
(b) Stockholders' or Members' Approval (Sec. 77);
(c) Articles of Merger or Consolidation (Sec. 78);
(d) Approval by SEC (Sec. 79)
-Mindanao Savings and Loan Asso. Inc. vs. Willkom, et al., G.R.
No. 178618, October 11, 2010
The steps necessary to accomplish a merger or consolidation, as
provided for in Sections 76, 24 77, 25 78, 26 and 79 27 of the Corporation
Code, are:
(1) The board of each corporation draws up a plan of merger or
consolidation. Such plan must include any amendment, if necessary, to
the articles of incorporation of the surviving corporation, or in case of
consolidation, all the statements required in the articles of incorporation of
a corporation.
(2) Submission of plan to stockholders or members of each
corporation for approval. A meeting must be called and at least two (2)
weeks' notice must be sent to all stockholders or members, personally or
by registered mail. A summary of the plan must be attached to the notice.
Vote of two-thirds of the members or of stockholders representing two-
thirds of the outstanding capital stock will be needed. Appraisal rights,
when proper, must be respected.
(3) Execution of the formal agreement, referred to as the articles of
merger o[r] consolidation, by the corporate officers of each constituent
corporation. These take the place of the articles of incorporation of the
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consolidated corporation, or amend the articles of incorporation of the
surviving corporation.
(4) Submission of said articles of merger or consolidation to the
SEC for approval.
(5) If necessary, the SEC shall set a hearing, notifying all
corporations concerned at least two weeks before. EACTSH
(6) Issuance of certificate of merger or consolidation. 28
Clearly, the merger shall only be effective upon the issuance of a
certificate of merger by the SEC, subject to its prior determination that the
merger is not inconsistent with the Corporation Code or existing laws.
Where a party to the merger is a special corporation governed by its own
charter, the Code particularly mandates that a favorable recommendation
of the appropriate government agency should first be obtained.
-Poliand Industrial Ltd. vs. NDC, 467 SCRA 500 [2005]
Ordinarily, in the merger of two or more existing corporations, one
of the combining corporations survives and continues the combined
business, while the rest are dissolved and all their rights, properties and
liabilities are acquired by the surviving corporation. The merger, however,
does not become effective upon the mere agreement of the constituent
corporations. As specifically provided under Section 79 of said Code, the
merger shall only be effective upon the issuance of a certificate of merger
by the Securities and Exchange Commission (SEC), subject to its prior
determination that the merger is not inconsistent with the Code or existing
laws. Where a party to the merger is a special corporation governed by its
own charter, the Code particularly mandates that a favorable
recommendation of the appropriate government agency should first be
obtained. The issuance of the certificate of merger is crucial because not
only does it bear out SEC's approval but also marks the moment
whereupon the consequences of a merger take place. By operation of law,
upon the effectivity of the merger, the absorbed corporation ceases to
exist but its rights, and properties as well as liabilities shall be taken and
deemed transferred to and vested in the surviving corporation.
3. Effects of Merger or Consolidation (Sec. 80;
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 Section 80. Effects of merger or consolidation.
The merger or consolidation shall have the following effects:
1. The constituent corporations shall become a single corporation
which, in case of merger, shall be the surviving corporation designated in
the plan of merger; and, in case of consolidation, shall be the
consolidated corporation designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall
cease, except that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess ALL
the rights, privileges, immunities and powers and shall be subject to all
the duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon
and thereafter possess ALL the rights, privileges, immunities and
franchises of each of the constituent corporations; and all property, real or
personal, and all receivables due on whatever account, including
subscriptions to shares and other choses in action, and all and every
other interest of, or belonging to, or due to each constituent corporation,
shall be deemed transferred to and vested in such surviving or
consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible
and liable for ALL the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or against any of such
constituent corporations may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or liens upon the property
of any of such constituent corporations shall NOT be impaired by such
merger or consolidation. (n)
- Bank of Philippine Islands vs. Lee, D.R. No. 190144, August 1, 2012
Corollarily, it should be emphasized that a merger of two corporations
produces, among others, the following effects:
1. The constituent corporations shall become a single corporation
which, in case of merger, shall be the surviving corporation designated in
the plan of merger; and in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;
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2. The separate existence of the constituent corporation shall
cease, except that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all
the rights, privileges, immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon
and thereafter possess all the rights, privileges, immunities and franchises
of each of the constituent corporations; and all property, real or personal,
and all receivables due on whatever account, including subscriptions to
shares and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or consolidated corporation
without further act or deed; and
5. The surviving or consolidated corporation shall be responsible
and liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any
pending claim, action or proceeding brought by or against any of such
constituent corporations may be prosecuted by or against the surviving or
consolidated corporation. The rights of creditors or liens upon the property
of any of such constituent corporations shall not be impaired by such
merger or consolidation.
- Bank of the Philippine Islands vs. BPI Employees Union-Davao Chapter,
637 SCRA 590 [2010]
Upon merger, BPI, as the surviving entity, absorbs FEBTC and continues
the combined business of the two banks. BPI assumes the legal
personality of FEBTC, and automatically acquires FEBTC's rights,
privileges and powers, as well as its liabilities and obligations. Section 80
of Batas Pambansa Blg. 68, otherwise known as "The Corporation Code
of the Philippines" enumerates the effects of merger, to wit:
1. The constituent corporations shall become a single corporation
which, in case of merger, shall be the surviving corporation designated in
the plan of merger; ...
2. The separate existence of the constituent corporations shall
cease, except that of the surviving ...corporation;
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 3. The surviving ...corporation shall possess all the rights,
privileges, immunities and powers and shall be subject to all the duties
and liabilities of a corporation organized under this Code; DAESTI
4. The surviving ...corporation shall thereupon and thereafter
possess all the rights, privileges, immunities and franchises of each of the
constituent corporations;and all property, real or personal, and all
receivables due on whatever account, including subscriptions to shares
and other choses in action, and all and every other interest of, or
belonging to, or due to each constituent corporation, shall be deemed
transferred to and vested in such surviving ...corporation without further
act or deed; and
5. The surviving ...corporation shall be responsible and liable for
all the liabilities and obligations of each of the constituent corporations in
the same manner as if such surviving ...corporation had itself incurred
such liabilities or obligations; and any pending claim, action or proceeding
brought by or against any of such constituent corporations may be
prosecuted by or against the surviving or consolidated corporation. The
rights of creditors or liens upon the property of any of such constituent
corporations shall not be impaired by such merger. (Emphasis supplied)
Among the obligations and liabilities of FEBTC is to continue the
employment of FEBTC employees. These employees have already
acquired certain employment status, tenure, salary and benefits. They are
regular employees of FEBTC. Since after the merger, BPI has continued
the business of FEBTC, FEBTC's obligation to these employees is
assumed by BPI, and BPI becomes duty-bound to continue the
employment of these FEBTC employees.
Under Article 279 of the Labor Code,regular employees acquire
security of tenure, and hence, may not be terminated by the employer
except upon legal grounds. These grounds are the "just causes"
enumerated under Article 282 of the Code, which include serious
misconduct or willful disobedience by the employee, gross habitual
neglect of duties, fraud or willful breach of employer's trust, and
commission of a crime; or "authorized causes" under Article 283, which
include installation of labor saving devices, redundancy, retrenchment to
prevent losses, and closing or cessation of business operations. Without
any of these legal grounds, the employer cannot validly terminate the
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employment of regular employees; otherwise, the employees' right to
security of tenure would be violated.
The merger of two corporations does not authorize the surviving
corporation to terminate the employees of the absorbed corporation in the
absence of just or authorized causes as provided in Articles 282 and 283
of the Labor Code.Merger of two corporations is not one of the just or
authorized causes for termination of employment. Not even a union shop
agreement is just or authorized cause to terminate a permanent
employee. A union shop clause is only a ground to terminate a
probationary employee who refuses to join the union as a condition for
continued employment. Once an employee becomes permanent, he is
protected by the security of tenure clause in the Constitution, and he can
be terminated only for just or authorized causes as provided by law.
The right to security of tenure of regular employees is enshrined in
the Constitution. This right cannot be eroded, let alone be forfeited except
upon a clear and convincing showing of a just and lawful cause. 36 In this
case, there is no showing that legal ground exists to warrant a termination
of the FEBTC employees. Therefore, BPI is obligated to continue FEBTC
employees' regular employment in deference to their constitutional right to
security of tenure. SDTaHc
Meanwhile, the FEBTC employees had no choice but to accept
the absorption by way of merger. A merger is a legitimate management
prerogative which cannot be opposed or rejected by the employees of the
merging entities. Hence, the absorption by BPI of the FEBTC employees
was not within the FEBTC employees' control, and the latter had no
choice but to be absorbed by BPI, unless they opted to give up their
means of livelihood
-Associated Bank v. Court of Appeals, 291 SCRA 511 [1998];
The fact that the promissory note was executed after the effectivity date of
the merger does not militate against petitioner. The agreement itself
clearly provides that all contracts irrespective of the date of execution
entered into in the name of CBTC shall be understood as pertaining to
the surviving bank, herein petitioner. Since, in contrast to the earlier
aforequoted provision, the latter clause no longer specifically refers only to
contracts existing at the time of the merger, no distinction clause must
have been deliberately included in the agreement in order to protect the
151
interests of the combining banks; specifically, to avoid giving the merger
agreement a farcical interpretation aimed at evading fulfillment of a due
obligation. Thus, although the subject promissory note names CBTC as
the payee, the reference to CBTC in the note shall be construed, under
the very provisions of the merger agreement, as a reference to petitioner
bank, as if such reference [was a] direct reference to the latter for all
intents and purposes. No other construction can be given to the
unequivocal stipulation. Being clear, plain and free of ambiguity, the
provision must be given its literal meaning and applied without a
convoluted interpretation. Verba legis non est recedendum. In light of the
foregoing, the Court holds that petitioner has a valid cause of action
against private respondent. Clearly, the failure of private respondent to
honor his obligation under the promissory note constitutes a violation of
petitioners right to collect the proceeds of the loan it extended to the
former.
-First General Marketing Corp. v. NLRC, 223 SC RA 337 [1993]).
Merger agreement compelled the respondents, FGMC and Uy, to respect
the permanent status of the complainants. They could not be dismissed
without cause. The seasonal demand of respondents for workers was not
a lawful cause to dismiss the complainants who have always been
considered permanent, rather than seasonal, workers at Paramount. The
respondents were directed to reinstate then to their former positions with
full back wages. Jose Uy signed the agreement as President and General
Manager of both Paramount Gloves Phils. Inc. and FGMC. Therefore, he
is estopped from disclaiming any liability under it. The probationary
employment contracts which the private respondents were made to sign
on May 23, 1988, a week after the execution of the merger agreement on
March 16, 1988, violated the terms of the merger agreement and the
employees' right to security of tenure.
B. Sale of All or Substantially All Corporate Assets. (Sec. 40)
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
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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 stockholder's or
member's meeting duly called for the purpose. Written notice of the
proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as
shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That
any dissenting stockholder may exercise his appraisal right under
the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially
all the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
After such authorization or approval by the stockholders or
members, the board of directors or trustees may, nevertheless, in its
discretion, abandon such sale, lease, exchange, mortgage, pledge or
other disposition of property and assets, subject to the rights of third
parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any
corporation, without the authorization by the stockholders or members, to
sell, lease, exchange, mortgage, pledge or otherwise dispose of any of its
property and assets if the same is necessary in the usual and regular
course of business of said corporation or if the proceeds of the sale or
other disposition of such property and assets be appropriated for the
conduct of its remaining business.
In non-stock corporations where there are NO members with
voting rights, the vote of at least a majority of the trustees in office will be
sufficient authorization for the corporation to enter into any transaction
authorized by this section.
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IX. DISSOLUTION
A. Voluntary Dissolution (Sec. 117)
Section 117. Methods of dissolution.
A corporation formed or organized under the provisions of this Code may
be dissolved voluntarily or involuntarily
B. Involuntary Dissolution (Sec. 121; Rule 66, Rules of Court)
Section 121. Involuntary dissolution.
A corporation may be dissolved by the Securities and Exchange
Commission upon filing of a verified complaint and after proper notice and
hearing on the grounds provided by existing laws, rules and regulations.
1. Quo Warranto
2. Expiration of Term
3. Shortening of Corporate Term (Sec. 120)
Section 120. Dissolution by shortening corporate term.
A voluntary dissolution may be effected by amending the
articles of incorporation to shorten the corporate term pursuant to the
provisions of this Code. A copy of the amended articles of incorporation
shall be submitted to the Securities and Exchange Commission in
accordance with this Code. Upon approval of the amended articles of
incorporation of the expiration of the shortened term, as the case may be,
the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of this Code on liquidation. (n)
4. Non-user of Corporate Charter and Continuous Inoperation of a
Corporation (Sec. 22)
Section 22. Effects on non-use of corporate charter and
continuous inoperation of a corporation.
If a corporation does NOT formally organize and commence the
transaction of its business or the construction of its works within two (2)
years from the date of its incorporation, its corporate powers cease and
the corporation shall be deemed dissolved. However, if a corporation
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has commenced the transaction of its business but subsequently
becomes continuously inoperative for a period of at least five (5) years,
the same shall be a ground for the suspension or revocation of its
corporate franchise or certificate of incorporation. (19a) This provision
shall NOT apply if the failure to organize, commence the transaction of its
businesses or the construction of its works, or to continuously operate is
due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
C. Legal Effects of Dissolution
-Alabang Development Corporation vs. Alabang Hills Village Association
and Rafael Tinio, G.R. No. 187456, June 02, 2014
It is to be noted that the time during which the corporation, through
its own officers, may conduct the liquidation of its assets and sue and be
sued as a corporation is limited to three years from the time the period of
dissolution commences; but there is no time limit within which the trustees
must complete a liquidation placed in their hands. It is provided only
(Corp. Law, Sec. 78 [now Sec. 122]) that the conveyance to the trustees
must be made within the three-year period. It may be found impossible to
complete the work of liquidation within the three-year period or to reduce
disputed claims to judgment. The authorities are to the effect that suits by
or against a corporation abate when it ceased to be an entity capable of
suing or being sued (7 R.C.L., Corps., par. 750); but trustees to whom the
corporate assets have been conveyed pursuant to the authority of Sec. 78
[now Sec. 122] may sue and be sued as such in all matters connected
with the liquidation. .
In the absence of trustees, this Court ruled, thus:
. . . Still in the absence of a board of directors or trustees, those having
any pecuniary interest in the assets, including not only the shareholders
but likewise the creditors of the corporation, acting for and in its behalf;
might make proper representations with the Securities and Exchange
Commission, which has primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final settlement of the corporate
concerns.
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-Metropolitan Bank & Trust Co., Inc. vs. The Board of Trustees of
Riverside Mills Corp. Provident and Retirement Fund, et al., 630 SCRA
350 [2010]
Under Section 122 of the Corporation Code, a dissolved corporation shall
nevertheless continue as a body corporate for three (3) years for the
purpose of prosecuting and defending suits by or against it and enabling it
to settle and close its affairs, to dispose and convey its property and to
distribute its assets, but not for the purpose of continuing the business for
which it was established. Within those three (3) years, the corporation
may appoint a trustee or receiver who shall carry out the said purposes
beyond the three (3)-year winding-up period. Thus, a trustee of a
dissolved corporation may commence a suit which can proceed to final
judgment even beyond the three (3)-year period of liquidation.
In the same manner, during and beyond the three (3)-year
winding-up period of RMC, the Board of Trustees of RMCPRF may do no
more than settle and close the affairs of the Fund. The Board retains its
authority to act on behalf of its members, albeit, in a limited capacity. It
may commence suits on behalf of its members but not continue managing
the Fund for purposes of maximizing profits. Here, the Board's act of
issuing the Resolution authorizing petitioner to release the Fund to its
beneficiaries is still part of the liquidation process, that is, satisfaction of
the liabilities of the Plan, and does not amount to doing business. Hence,
it was properly within the Board's power to promulgate.
-Paramount Insurance Corp. vs. A.C. Ordonez Corp., 561 SC RA 327
[2008]
There is likewise no merit in petitioner's claim that respondent corporation
lacks legal personality to file an appeal. Although the cancellation of a
corporation's certificate of registration puts an end to its juridical
personality, Sec. 122 of the Corporation Code, however provides that a
corporation whose corporate existence is terminated in any manner
continues to be a body corporate for three years after its dissolution for
purposes of prosecuting and defending suits by and against it and to
enable it to settle and close its affairs. 11 Moreover, the rights of a
corporation, which is dissolved pending litigation, are accorded protection
by law pursuant to Sec. 145 of the Corporation Code, to wit:
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Section 145. Amendment or repeal. No right or remedy in favor of
or against any corporation, its stockholders, members, directors, trustees,
or officers, nor any liability incurred by any such corporation, stockholders,
members, directors, trustees, or officers, shall be removed or impaired
either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Code or of any part thereof.
Dissolution or even the expiration of the three-year liquidation
period should not be a bar to a corporation's enforcement of its rights as a
corporation.
-Pepsi-Cola Products Phils., Inc. vs. CA, 446 SC RA 571
The termination of the life of a corporate entity does not by itself
cause the extinction or diminution of the rights and liabilities of such entity.
27 If the three-year extended life has expired without a trustee or receiver
having been expressly designated by the corporation, within that period,
the board of directors (or trustees) itself, may be permitted to so continue
as "trustees" by legal implication to complete the corporate liquidation.
-Knecht vs. United Cigarette Corp., 384 SCRA 45 [2002]
The dissolution of UCC itself, or the expiration of its three-year
liquidation period, should not be a bar to the enforcement of its rights as a
corporation. One of these rights, to be sure, includes the UCC's right to
seek from the court the execution of a valid and final judgment in Civil
Case No. 9165 through its trustee/liquidator Encarnacion Gonzales
Wong for the benefit of its stockholders, creditors and any other person
who may have legal claims against it. To hold otherwise would be to allow
petitioners to unjustly enrich themselves at the expense of UCC. This, in
effect, renders nugatory all the efforts and expenses of UCC in its quest to
secure justice, not to mention the undue delay in disposing of this case
prejudicial to the administration of justice.
-Clement vs. Court of Appeals, 242 SCRA 717, 723 [1995]
The corporation continues to be a body corporate for three (3) years
after its dissolution for purposes of prosecuting and defending suits by
and against it and for enabling it to settle and close its affairs, culminating
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in the disposition and distribution of its remaining assets. It may, during the
three-year term, appoint a trustee or a receiver who may act beyond that
period. The termination of the lite of a juridical entity does NOT by itsell
cause the extinction or diminution of the rights and liabilities of such entity
nor those of its owners and creditor. It the three-year extended lite has
expired without a trustee or receiver having been expressly designated by
the corporation within that period, the board of directors (or trustee) itselt,
tollowing the rationale of the Supreme Courts decision in Gelano v. Court
of Appeals (103 SCRA 90) may be permitted to so continue as trustees"
by legal implication to complete the corporate liquidation. Still in the
absence of a board of directors or trustees, those having any pecuniary
interest in the assets, including NOT only the shareholders but likewise
the creditors of the corporation, acting for and in its behalf, might make
proper representations with the Securities and Exchange Commission,
which has primary and sufficient broad jurisdiction in matters of this
nature, for working out a final settlement of the corporate concerns.
Reburiano vs. Court of Appeals, 301 SCRA 342 [1999]
In Gelano case, the counsel of the dissolved corporation was considered
a trustee. In the later case of Clemente vs. Court of Appeals [242 SCRA
717 (1995)], we held that the board of directors may be permitted to
complete the corporate liquidation by continuing as "trustees" by legal
implication. Under Section 145 ot the Corporation Code, NO right ot
remedy in favor or against any corporation . . . shall be removed or
impaired either by the subsequent dissolution of said corporation or by
any subsequent amendment or repeal of this Code or of any part thereof."
This provision safeguards the rights ot a corporation which is dissolved
pending litigation.
X. CLOSE CORPORATION
A. Definition (Sec. 96;
Sec. 96. Definition and applicability of Title. - A close
corporation, within the meaning of this Code, is one whose articles of
incorporation provide that:
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(1) All the corporation's issued stock of all classes, exclusive of
treasury shares, shall be held of record by not more than a specified
number of persons, not exceeding twenty (20);
(2) all the issued stock of all classes shall be subject to one or
more specified restrictions on transfer permitted by this Title; and
(3) The corporation shall not list in any stock exchange or
make any public offering of any of its stock of any class.
Notwithstanding the foregoing, a corporation shall NOT be deemed a
close corporation when at least two-thirds (2/3) of its voting stock or voting
rights is owned or controlled by another corporation which is not a close
corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except
mining or oil companies, stock exchanges, banks, insurance companies,
public utilities, educational institutions and corporations declared to be
vested with public interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations:
Provided, That the provisions of other Titles of this Code shall apply
suppletorily except insofar as this Title otherwise provides.
-Manuel R. Dulay Enterprises v. CA, 225 SCRA 678 [1993];
Petitioner corporation is classified as a close corporation and
consequently a board resolution authorizing the sale or mortgage of the
subject property is not necessary to bind the corporation for the action of
its president. At any rate, a corporate action taken at a board meeting
without proper call or notice in a close corporation is deemed ratified by
the absent director unless the latter promptly files his written objection with
the secretary of the corporation after having knowledge of the meeting
which, in this case, petitioner Virgilio Dulay failed to do. Petitioners' claim
that the sale of the subject property by its president, Manuel Dulay, to
private respondents spouses Veloso is null and void as the alleged Board
Resolution No. 18 was passed without the knowledge and consent of the
other members of the board of directors cannot be sustained. The sale of
the subject property to private respondents by Manuel Dulay is valid and
binding.
-San Juan Structural and Steel Fabricators, Inc. v. CA, 296 SCRA 631,
645 [1998]).
155

he articles of incorporation of Motorich Sales Corporation does not
contain any provision stating that (1) the number of stockholders shall not
exceed 20, or (2) a preemption of shares is restricted in favor of any
stockholder or of the corporation, or (3) listing its stocks in any stock
exchange or making a public offering of such stocks is prohibited. From its
articles, it is clear that Respondent Motorich is not a close corporation.
Motorich does not become one either, just because Spouses Reynaldo
and Nenita Gruenberg owned 99.866% of its subscribed capital stock. The
"[m]ere ownership by a single stockholder or by another corporation of all
or nearly all of the capital stock of a corporation is not of itself sufficient
ground for disregarding the separate corporate personalities." So, too, a
narrow distribution of ownership does not, by itself, make a close
corporation.
B. Articles of Incorporation Requirements (Sec. 97)
Section 97. Articles of incorporation.
The articles of incorporation of a close corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as may be
stated therein, subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each
of whom may be voted for and elected solely by a particular class of
stock; and
3. For a greater quorum or voting requirements in meetings of
stockholders or directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders
of the corporation shall be deemed to be directors for the purpose of
applying the provisions of this Code; and
3. The stockholders of the corporation shall be subject to all
liabilities of directors.
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The articles of incorporation may likewise provide that all officers or
employees or that specified officers or employees shall be elected or
appointed by the stockholders, instead of by the board of directors
1. Pre-Emptive Rights (Sec. 102)
Section 102. Pre-emptive right in close corporations.
The pre-emptive right of stockholders in close corporations shall
extend to all stock to be issued, including reissuance of treasury
shares, whether for money, property or personal services, or in payment
of corporate debts, unless the articles of incorporation provide otherwise.
2. Amendment (Sec. 103)
Section 103. Amendment of articles of incorporation.
Any amendment to the articles of incorporation which seeks to
delete or remove any provision required by this Title to be contained in the
articles of incorporation or to reduce a quorum or voting requirement
stated in said articles of incorporation shall NOT be valid or effective
unless approved by the affirmative vote of at least two-thirds (2/3) of
the outstanding capital stock, whether with or without voting rights,
or of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing any of
the aforesaid provisions, at a meeting duly called for the purpose.
C. Restriction on Transfer of Shares (Secs. 98 and 99)
Section 98. Validity of restrictions on transfer of shares.
Restrictions on the right to transfer shares must appear in the
articles of incorporation and in the by-laws as well as in the certificate of
stock; otherwise, the same shall NOT be binding on any purchaser
thereof in good faith. Said restrictions shall not be more onerous than
granting the existing stockholders or the corporation the option to
purchase the shares of the transferring stockholder with such reasonable
terms, conditions or period stated therein. If upon the expiration of said
period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to
any third person.
156

Section 99. Effects of issuance or transfer of stock in breach
of qualifying conditions.
1. If stock of a close corporation is issued or transferred to any
person who is not entitled under any provision of the articles of
incorporation to be a holder of record of its stock, and if the certificate for
such stock conspicuously shows the qualifications of the persons entitled
to be holders of record thereof, such person is conclusively presumed to
have notice of the fact of his ineligibility to be a stockholder.
2. If the articles of incorporation of a close corporation states the
number of persons, not exceeding twenty (20), who are entitled to be
holders of record of its stock, and if the certificate for such stock
conspicuously states such number, and if the issuance or transfer of stock
to any person would cause the stock to be held by more than such
number of persons, the person to whom such stock is issued or
transferred is conclusively presumed to have notice of this fact.
3. If a stock certificate of any close corporation conspicuously
shows a restriction on transfer of stock of the corporation, the transferee
of the stock is conclusively presumed to have notice of the fact that he
has acquired stock in violation of the restriction, if such acquisition violates
the restriction.
4. Whenever any person to whom stock of a close corporation has
been issued or transferred has, or is conclusively presumed under this
section to have, notice either
(a) that he is a person not eligible to be a holder of stock of the
corporation, or
(b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons
permitted by its articles of incorporation to hold stock of the
corporation, or
(c) that the transfer of stock is in violation of a restriction on
transfer of stock, the corporation may, at its option, refuse to
register the transfer of stock in the name of the transferee.
5. The provisions of subsection (4) shall NOT be applicable if the
transfer of stock, though contrary to subsections (1), (2) or (3), has been
consented to by all the stockholders of the close corporation, or if the
close corporation has amended its articles of incorporation in accordance
with this Title.
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6. The term "transfer", as used in this section, is NOT limited to a
transfer for value.
7. The provisions of this section shall NOT impair any right which
the transferee may have to rescind the transfer or to recover under any
applicable warranty, express or implied.
D. Agreements by Stockholder (Secs. 100,101
Section 100. Agreements by stockholders.
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation and shall
continue to be valid and binding between and among such stockholders, if
such be their intent, to the extent that such agreements are not
inconsistent with the articles of incorporation, irrespective of where the
provisions of such agreements are contained, except those required by
this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing
and signed by the parties thereto, may provide that in exercising any
voting rights, the shares held by them shall be voted as therein provided,
or as they may agree, or as determined in accordance with a procedure
agreed upon by them.
3. NO provision in any written agreement signed by the
stockholders, relating to any phase of the corporate affairs, shall be
invalidated as between the parties on the ground that its effect is to make
them partners among themselves.
4. A written agreement among some or all of the stockholders in a
close corporation shall NOT be invalidated on the ground that it so relates
to the conduct of the business and affairs of the corporation as to restrict
or interfere with the discretion or powers of the board of directors:
Provided, That such agreement shall impose on the stockholders who are
parties thereto the liabilities for managerial acts imposed by this Code on
directors.
5. To the extent that the stockholders are actively engaged in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be held to strict fiduciary duties to
each other and among themselves. Said stockholders shall be
157
personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance.
Section 101. When board meeting is unnecessary or
improperly held.
Unless the by-laws provide otherwise, any action by the directors
of a close corporation without a meeting shall nevertheless be deemed
valid if:
1. Before or after such action is taken, written consent thereto is
signed by ALL the directors; or
2. ALL the stockholders have actual or implied knowledge of the
action and make NO prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the
express or implied acquiescence of ALL the stockholders; or
4. ALL the directors have express or implied knowledge of the
action in question and none of them makes prompt objection thereto in
writing. If a director's meeting is held without proper call or notice, an
action taken therein within the corporate powers is deemed ratified by a
director who failed to attend, unless he promptly files his written objection
with the secretary of the corporation after having knowledge thereof.
E. Deadlocks (Sec. 104)
Section 104. Deadlocks. - Notwithstanding any contrary
provision in the articles of incorporation or by-laws or agreement of
stockholders of a close corporation, if the directors or stockholders are so
divided respecting the management of the corporation's business and
affairs that the votes required for any corporate action CANNOT be
obtained, with the consequence that the business and affairs of the
corporation can no longer be conducted to the advantage of the
stockholders generally, the Securities and Exchange Commission, upon
written petition by any stockholder, shall have the power to arbitrate the
dispute. In the exercise of such power, the Commission shall have
authority to make such order as it deems appropriate, including an order:
(1) cancelling or altering any provision contained in the articles of
incorporation, by-laws, or any stockholder's agreement;
(2) cancelling, altering or enjoining any resolution or act of the
corporation or its board of directors, stockholders, or officers;
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(3) directing or prohibiting any act of the corporation or its board of
directors, stockholders, officers, or other persons party to the
action;
(4) requiring the purchase at their fair value of shares of any
stockholder, either by the corporation regardless of the availability
of unrestricted retained earnings in its books, or by the other
stockholders;
(5) appointing a provisional director;
(6) dissolving the corporation; or
(7) granting such other relief as the circumstances may warrant.
A provisional director shall be an impartial person who is
neither a stockholder nor a creditor of the corporation or of any subsidiary
or affiliate of the corporation, and whose further qualifications, if any, may
be determined by the Commission. A provisional director is NOT a
receiver of the corporation and does NOT have the title and powers of a
custodian or receiver. A provisional director shall have ALL the rights and
powers of a duly elected director of the corporation, including the right to
notice of and to vote at meetings of directors, until such time as he shall
be removed by order of the Commission or by all the stockholders. His
compensation shall be determined by agreement between him and the
corporation subject to approval of the Commission, which may fix his
compensation in the absence of agreement or in the event of
disagreement between the provisional director and the corporation
.
F. Withdrawal and Dissolution
Xl. NON-STOCK CORPORATIONS AND FOUNDATION
A. Theory on Non-Stock Corporation (Secs. 14(2), 43, 87, 88 and 94(5)
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
158
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)
Sec. 87. Definition. - For the purposes of this Code, a non-stock
corporation is one where no part of its income is distributable as
dividends to its members, trustees, or officers, subject to the provisions
of this Code on dissolution: Provided, That any profit which a non-stock
corporation may obtain as an incident to its operations shall, whenever
necessary or proper, be used for the furtherance of the purpose or
purposes for which the corporation was organized, subject to the
provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by
specific provisions of this Title. (n)
Sec. 88. Purposes. - Non-stock corporations may be formed or
organized for charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes, like
trade, industry, agricultural and like chambers, or any combination thereof,
subject to the special provisions of this Title governing particular classes
of non-stock corporations. (n)
Section 94. Rules of distribution.
In case dissolution of a non-stock corporation in accordance with
the provisions of this Code, its assets shall be applied and distributed as
follows
5. In any other case, assets may be distributed to such persons, societies,
organizations or corporations, whether or not organized for profit, as may
be specified in a plan of distribution adopted pursuant to this Chapter. (n)
-Coll. of Internal Revenue v. Club Filipino, Inc. de Cebu, 5 SCRA 321
[1962])
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The plain and ordinary meaning of a business is restricted to activities or
affairs where profit is the purpose or livelihood is the motive, and the term
business when used without qualification, should be construed in its plain
and ordinary meaning, restricted to activities for profit or livelihood.
3. ID.; CLUB FILIPINO INC. DE CEBU; NOT ENGAGED IN BAR AND
RESTAURANT. The Club Filipino Inc. de Cebu was organized to
develop and cultivate sports of all class and denomination, for the
healthful recreation and entertainment of its stockholders and members;
that upon its dissolution, its remaining assets after paying debts shall be
donated to a charitable Philippine Institution in Cebu; that it is operated
mainly with funds derived from membership fees and dues; that the Club's
bar and restaurant catered only to its members and their guests; that there
was in fact no cash dividend distribution to its stockholders and that
whatever was derived on retail from its bar and restaurant was used to
defray its overall overhead expenses and to improve its golf course (cost-
plus-expenses-basis), it stands to reason that the Club is not engaged in
the business of an operator of bar and restaurant.
- Tan vs. Sycip, supra.
In nonstock corporations, the voting rights attach to membership.
39 Members vote as persons, in accordance with the law and the bylaws
of the corporation. Each member shall be entitled to one vote unless so
limited, broadened, or denied in the articles of incorporation or bylaws. 40
We hold that when the principle for determining the quorum for stock
corporations is applied by analogy to nonstock corporations, only those
who are actual members with voting rights should be counted.
On the other hand, membership in and all rights arising from a
nonstock corporation are personal and non-transferable, unless the
articles of incorporation or the bylaws of the corporation provide
otherwise. In other words, the determination of whether or not "dead
members" are entitled to exercise their voting rights (through their
executor or administrator), depends on those articles of incorporation or
bylaws.
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B. What is a Foundation? (Secs. 30 and 34 (H), NIRC of 1997, Sec. 24,
Revenue Regulations No. 2; BIR-NEDA Regulations no. 1-81, as
amended)
C. Termination ot Membership Sec. 91
Section 91. Termination of membership.
Membership shall be terminated in the manner and for the
causes provided in the articles of incorporation or the by-laws.
Termination of membership shall have the effect of extinguishing ALL
rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws. (n)
- Calatagan Golf Club, Inc vs. Sixto Clemente Jr., G.R. No. 165443, April
16, 2009
It is plain that Calatagan had endeavored to install a clear and
comprehensive procedure to govern the payment of monthly dues, the
declaration of a member as delinquent, and the constitution of a lien on
the shares and its eventual public sale to answer for the member's debts.
Under Section 91 of the Corporation Code, membership in a non-stock
corporation "shall be terminated in the manner and for the causes
provided in the articles of incorporation or the by-laws". The By-law
provisions are elaborate in explaining the manner and the causes for the
termination of membership in Calatagan, through the execution on the lien
of the share. The Court is satisfied that the By-Laws, as written, affords
due protection to the member by assuring that the member should be
notified by the Secretary of the looming execution sale that would
terminate membership in the club. In addition, the By-Laws guarantees
that after the execution sale, the proceeds of the sale would be returned to
the former member after deducting the outstanding obligations. If followed
to the letter, the termination of membership under this procedure outlined
in the By-Laws would accord with substantial justice.
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- Valley Golf & Country Club, Inc vs. Rosa 0. Vda de Caram, G.R. No.
158805, April 16, 2009
However, there is a specific provision under the Title XI, on Non-Stock
Corporations of the Corporation Code dealing with termination of
membership. Section 91 of the Corporation Code provides:
SEC. 91. Termination of membership. Membership shall be
terminated in the manner and for the causes provided in the articles of
incorporation or the by-laws. Termination of membership shall have the
effect of extinguishing all rights of a member in the corporation or in its
property, unless otherwise provided in the articles of incorporation or the
by-laws.
Clearly, the right of a non-stock corporation such as Valley Golf to
expel a member through the forfeiture of the Golf Share may be
established in the by-laws alone, as is the situation in this case. Thus,
both the SEC and the appellate court are wrong in holding that the
establishment of a lien and the loss of the Golf Share consequent to the
enforcement of the lien should have been provided for in the articles of
incorporation.
Former SEC Chairperson, Rosario Lopez, in her commentaries on
the Corporation Code, explains the import of Section 91 in a manner
relevant to this case:
The prevailing rule is that the provisions of the articles of
incorporation or by-laws of termination of membership must be strictly
complied with and applied to the letter. Thus, an association whose
member fails to pay his membership due and annual due as required in
the by-laws, and which provides for the termination or suspension of
erring members as well as prohibits the latter from intervening in any
manner in the operational activities of the association, must be observed
because by-laws are self-imposed private laws binding on all members,
directors and officers of the corporation.
Section 94. Rules of distribution.
In case dissolution of a non-stock corporation in accordance with
the provisions of this Code, its assets shall be applied and distributed as
follows:
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 1. All liabilities and obligations of the corporation shall be paid,
satisfied and discharged, or adequate provision shall be made
therefore;
2. Assets held by the corporation upon a condition requiring
return, transfer or conveyance, and which condition occurs by
reason of the dissolution, shall be returned, transferred or
conveyed in accordance with such requirements;
3. Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational or similar purposes, but NOT held upon a
condition requiring return, transfer or conveyance by reason of the
dissolution, shall be transferred or conveyed to one or more
corporations, societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving
corporation according to a plan of distribution adopted pursuant to
this Chapter;
4. Assets other than those mentioned in the preceding
paragraphs, if any, shall be distributed in accordance with the
provisions of the articles of incorporation or the by-laws, to the
extent that the articles of incorporation or the by-laws, determine
the distributive rights of members, or any class or classes of
members, or provide for distribution; and
5. In any other case, assets may be distributed to such persons,
societies, organizations or corporations, whether or not organized
for profit, as may be specified in a plan of distribution adopted
pursuant to this Chapter. (n)
Section 95. Plan of distribution of assets.
A plan providing for the distribution of assets, not inconsistent with
the provisions of this Title, may be adopted by a non-stock corporation
in the process of dissolution in the following manner:
The board of trustees shall, by majority vote, adopt a resolution
recommending a plan of distribution and directing the submission thereof
to a vote at a regular or special meeting of members having voting rights.
Written notice setting forth the proposed plan of distribution or a summary
thereof and the date, time and place of such meeting shall be given to
each member entitled to vote, within the time and in the manner provided
in this Code for the giving of notice of meetings to members. Such plan of
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distribution shall be adopted upon approval of at least two-thirds (2/3)
of the members having voting rights present or represented by
proxy at such meeting. (n)
XII. FOREIGN CORPORATION
A. Definition (Sec. 123;
Section 123. Definition and rights of foreign corporations.
For the purposes of this Code, a foreign corporation is one
formed, organized or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations
to do business in its own country or state. It shall have the right to
transact business in the Philippines after it shall have obtained a license
to transact business in this country in accordance with this Code and a
certificate of authority from the appropriate government agency
Avon Insurance PLC v. Court of Appeals, 278 SCRA 312 [1997])
In Communication Materials and Design, Inc. et. al. vs. Court of
Appeals, G.R. No. 102223, August 22, 1996, it was observed that: "There
is no exact rule or governing principle as to what constitutes doing or
engaging in or transacting business. Indeed, such case must be judged in
the light of its peculiar circumstances, upon its peculiar facts and upon the
language of the statute applicable. The true test, however, seems to be
whether the foreign corporation is continuing the body or substance of the
business or enterprise for which it was organized. Article 44 of the
Omnibus Investments Code of 1987 defines the phrase to include:
'soliciting orders, purchases, service contracts, opening offices, whether
called 'liaison' offices or branches; appointing representatives or
distributors who are domiciled in the Philippines or who in any calendar
year stay in the Philippines for a period or periods totaling one hundred
eighty (180) days or more; participating in the management, supervision
or control of any domestic business firm, entity or corporation in the
Philippines, and any other act or acts that imply a continuity or commercial
dealings or arrangements and contemplate to that extent the performance
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of acts or works, or the exercise of some of the functions normally incident
to, and in progressive prosecution of, commercial gain or of the purpose
and object of the business organization.'" The term ordinarily implies a
continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of the
functions normally incident to and in progressive prosecution of the
purpose and object of its organization. A single act or transaction made in
the Philippines, however, could qualify a foreign corporation to be doing
business in the Philippines, if such singular act is not merely incidental or
casual, but indicates the foreign corporation's intention to do business in
the Philippines. HECTaA
A foreign corporation, is one which owes its existence to the laws
of another state, [Section 123, Corporation Code of the Philippines] and
generally, has no legal existence within the state in which it is foreign. In
Marshall Wells Co. vs. Elser, No. 22015, September 1, 1924, 46 Phil. 70, it
was held that corporations have no legal status beyond the bounds of the
sovereignty by which they are created. Nevertheless, it is widely accepted
that foreign corporations are, by reason of state comity, allowed to
transact business in other states and to sue in the courts of such fora. In
the Philippines foreign corporations are allowed such privileges, subject to
certain restrictions, arising from the state's sovereign right of regulation.
Before a foreign corporation can transact business in the country, it must
first obtain a license to transact business here [Section 125, 126,
Corporation Code of the Philippines] and secure the proper authorizations
under existing law. If a foreign corporation engages in business activities
without the necessary requirements, it opens itself to court actions against
it, but it shall not be allowed to maintain or intervene in an action, suit or
proceeding for its own account in any court or tribunal or agency in the
Philippines. [Section 133, id.]
The purpose of the law in requiring that foreign corporations doing
business in the country be licensed to do so, is to subject the foreign
corporations doing business in the Philippines to the jurisdiction of the
courts, otherwise, a foreign corporation illegally doing business here
because of its refusal or neglect to obtain the required license and
authority to do business may successfully though unfairly plead such
neglect or illegal act so as to avoid service and thereby impugn the
jurisdiction of the local courts. The same danger does not exist among
foreign corporations that are indubitably not doing business in the
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Philippines. Indeed, if a foreign corporation does not do business here,
there would be no reason for it to be subject to the State's regulation. As
we observed, in so far as the State is concerned, such foreign corporation
has no legal existence. Therefore, to subject such corporation to the
courts' jurisdiction would violate the essence of sovereignty.
B. Statutory Concept of "Doing Business" (Art. 44, Executive Order No.
226, Omnibus Investment Code; Sec. 3(d), R.A. No. 7042, Foreign
Investment Act of 1991;
Article 44. Definition of terms. As used in this Book, the term
"investment" shall mean equity participation in any enterprise formed,
organized or existing under the laws of the Philippines; and the phrase
"doing business" shall include soliciting orders, purchases, service
contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors who are
domiciled in the Philippines for a period or periods totalling one
hundred eighty (180) days or more; participating in the management,
supervision or control of any domestic business firm, entity or
corporation in the Philippines, and any other act or acts that imply a
continuity of commercial dealings or arrangements and contemplate
to that extent the performance of acts or works, or the exercise of
some of the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and object of the
business organization.
d. The phrase "doing business" shall include soliciting orders,
service contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a period or
periods totaling one hundred eighty [180] days or more; participating in
the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and any other act or acts that imply
a continuity of commercial dealings or arrangements and contemplate to
that extent the performance of acts or works, or the exercise of some of
the functions normally incident to, and in progressive prosecution of
commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business"
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shall NOT be deemed to include mere investment as a shareholder
by a foreign entity in domestic corporations duly registered to do
business, and/or the exercise of rights as such investor; nor having
a nominee director or officer to represent its interests in such
corporation; nor appointing a representative or distributor domiciled
in the Philippines which transacts business in its own name and for
its own account;
- Steelcase Inc. vs. Design International Selections, Inc. 670 SCRA 64
[2012]
The phrase "doing business" is clearly defined in Section 3 (d) of
R.A. No. 7042 (Foreign Investments Act of 1991), to wit:
d) The phrase "doing business" shall include soliciting orders,
service contracts, opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors domiciled in the
Philippines or who in any calendar year stay in the country for a period or
periods totalling one hundred eighty (180) days or more; participating in
the management, supervision or control of any domestic business, firm,
entity or corporation in the Philippines; and any other act or acts that imply
a continuity of commercial dealings or arrangements, and contemplate to
that extent the performance of acts or works, or the exercise of some of
the functions normally incident to, and in progressive prosecution of,
commercial gain or of the purpose and object of the business
organization: Provided, however, That the phrase "doing business" shall
not be deemed to include mere investment as a shareholder by a foreign
entity in domestic corporations duly registered to do business, and/or the
exercise of rights as such investor; nor having a nominee director or
officer to represent its interests in such corporation; nor appointing a
representative or distributor domiciled in the Philippines which transacts
business in its own name and for its own account.
This definition is supplemented by its Implementing Rules and
Regulations, Rule I, Section 1 (f) which elaborates on the meaning of the
same phrase:
f." Doing business" shall include soliciting orders, service
contracts, opening offices, whether liaison offices or branches; appointing
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representatives or distributors, operating under full control of the foreign
corporation, domiciled in the Philippines or who in any calendar year stay
in the country for a period totalling one hundred eighty [180] days or more;
participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings or arrangements, and
contemplate to that extent the performance of acts or works, or the
exercise of some of the functions normally incident to and in progressive
prosecution of commercial gain or of the purpose and object of the
business organization.
The following acts shall not be deemed "doing business" in the
Philippines:
1. Mere investment as a shareholder by a foreign entity in
domestic corporations duly registered to do business, and/or the exercise
of rights as such investor;
2. Having a nominee director or officer to represent its interest in
such corporation;
3. Appointing a representative or distributor domiciled in the
Philippines which transacts business in the representative's or distributor's
own name and account;
4. The publication of a general advertisement through any print or
broadcast media;
5. Maintaining a stock of goods in the Philippines solely for the
purpose of having the same processed by another entity in the
Philippines;
6. Consignment by a foreign entity of equipment with a local
company to be used in the processing of products or export; cEISAD
7. Collecting information in the Philippines; and
8. Performing services auxiliary to an existing isolated contract of
sale which are not on a continuing basis, such as installing in the
Philippines machinery it has manufactured or exported to the Philippines,
servicing the same, training domestic workers to operate it, and similar
incidental services.
- Cargill, Inc. vs. Intra Strata Assurance Corporation, 615 SCRA 304
[2010]
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The determination of whether a foreign corporation is doing business in
the Philippines must be based on the facts of each case.
- MR Holdings, Ltd. vs. Bafar, 380 SCRA 617 [2002])
The Court of Appeals ruled that petitioner has no legal capacity to
sue in the Philippine courts because it is a foreign corporation doing
business here without license. A review of this ruling does not pose much
complexity as the principles governing a foreign corporation's right to sue
in local courts have long been settled by our Corporation Law. These
principles may be condensed in three statements, to wit: a) if a foreign
corporation does business in the Philippines without a license, it cannot
sue before the Philippine courts; b) if a foreign corporation is not doing
business in the Philippines, it needs no license to sue before Philippine
courts on an isolated transaction or on a cause of action entirely
independent of any business transaction; and c) if a foreign corporation
does business in the Philippines with the required license, it can sue
before Philippine courts on any transaction. Apparently, it is not the
absence of the prescribed license but the "doing (of) business" in the
Philippines without such license which debars the foreign corporation from
access to our courts.
In the case at bar, the Court of Appeals categorized as "doing
business" petitioner's participation under the "Assignment Agreement" and
the "Deed of Assignment." This is simply untenable. The expression
"doing business" should not be given such a strict and literal construction
as to make it apply to any corporate dealing whatever. At this early stage
and with petitioner's acts or transactions limited to the assignment
contracts, it cannot be said that it had performed acts intended to continue
the business for which it was organized. It may not be amiss to point out
that the purpose or business for which petitioner was organized is not
discernible in the records. No effort was exerted by the Court of Appeals to
establish the nexus between petitioner's business and the acts supposed
to constitute "doing business. " Thus, whether the assignment contracts
were incidental to petitioner's business or were continuation thereof is
beyond determination. We cannot apply the case cited by the Court of
Appeals, Far East Int'l Import and Export Corp. vs. Nankai Kogyo Co.,
Ltd., which held that a single act may still constitute "doing business" if "it
is not merely incidental or casual, but is of such character as distinctly to
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indicate a purpose on the part of the foreign corporation to do other
business in the state." In said case, there was an express admission from
an official of the foreign corporation that he was sent to the Philippines to
look into the operation of mines, thereby revealing the foreign
corporation's desire to continue engaging in business here. But in the
case at bar, there is no evidence of similar desire or intent. Unarguably,
petitioner may, as the Court of Appeals suggested, decide to operate
Marcopper's mining business, but, of course, at this stage, that is a mere
speculation. Or it may decide to sell the credit secured by the mining
properties to an offshore investor, in which case the acts will still be
isolated transactions. To see through the present facts an intention on the
part of petitioner to start a series of business transaction is to rest on
assumptions or probabilities falling short of actual proof. Courts should
never base its judgments on a state of facts so inadequately developed
that it cannot be determined where inference ends and conjecture begins.
C. Resident Agent (Sec. 127 and 128)
Section 127. Who may be a resident agent.
A resident agent may be either an individual residing in the
Philippines or a domestic corporation lawfully transacting business
in the Philippines: Provided, That in the case of an individual, he must
be of good moral character and of sound financial standing. (n)
Section 128. Resident agent; service of process.
The Securities and Exchange Commission shall require as a
condition precedent to the issuance of the license to transact business in
the Philippines by any foreign corporation that such corporation file with
the Securities and Exchange Commission a written power of attorney
designating some person who must be a resident of the Philippines, on
whom any summons and other legal processes may be served in all
actions or other legal proceedings against such corporation, and
consenting that service upon such resident agent shall be admitted and
held as valid as if served upon the duly authorized officers of the foreign
corporation at its home office. Any such foreign corporation shall likewise
execute and file with the Securities and Exchange Commission an
agreement or stipulation, executed by the proper authorities of said
corporation, in form and substance as follows:
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 "The (name of foreign corporation) does hereby stipulate and
agree, in consideration of its being granted by the Securities and
Exchange Commission a license to transact business in the Philippines,
that if at any time said corporation shall cease to transact business in the
Philippines, or shall be WITHOUT any resident agent in the Philippines on
whom any summons or other legal processes may be served, then in any
action or proceeding arising out of any business or transaction which
occurred in the Philippines, service of any summons or other legal
process may be made upon the Securities and Exchange Commission
and that such service shall have the same force and effect as if made
upon the dulyauthorized officers of the corporation at its home office."
Whenever such service of summons or other process shall be
made upon the Securities and Exchange Commission, the Commission
shall, within ten (10) days thereafter, transmit by mail a copy of such
summons or other legal process to the corporation at its home or principal
office. The sending of such copy by the Commission shall be necessary
part of and shall complete such service. All expenses incurred by the
Commission for such service shall be paid in advance by the party at
whose instance the service is made. In case of a change of address of the
resident agent, it shall be his or its duty to immediately notify in writing the
Securities and Exchange Commission of the new address. (72a; and n)
- Expertravel & Tours, Inc. vs. CA, 459 SC RA 147 [2005];
While Atty. Aguinaldo is the resident agent of the respondent in the
Philippines, this does not mean that he is authorized to execute the
requisite certification against forum shopping. Under Section 127, in
relation to Section 128 of the Corporation Code, the authority of the
resident agent of a foreign corporation with license to do business in the
Philippines is to receive, for and in behalf of the foreign corporation,
services and other legal processes in all actions and other legal
proceedings against such corporation.
- H.B. Zachry Company International vs. CA, 232 SCRA 329 [1994]).
However, the enforcement of the preliminary attachment on 27
March 1990, although simultaneous with the service of the summons and
a copy of the complaint, did not bind Zachry because the service of the
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summons was not validly made. When a foreign corporation has
designated a person to receive service of summons pursuant to the
Corporation Code, that designation is exclusive and service of summons
on any other person is inefficacious. 49 The valid service of summons and
a copy of the amended complaint was only made upon it on 24 April 1990,
and it was only then that the trial court acquired jurisdiction over Zachry's
person. Accordingly, the levy on attachment made by the sheriff on 27
April 1990 was invalid.
D. Applicable Laws to Foreign Corporations (Sec. 129;
Section 129. Law applicable.
Any foreign corporation lawfully doing business in the Philippines
shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only as provide
for the creation, formation, organization or dissolution of corporations or
those which fix the relations, liabilities, responsibilities, or duties of
stockholders, members, or officers of corporations to each other or to the
corporation. (73a)
Grey vs. Insular Lumber Co., 67 Phil. 139 [1939]
The defendant was and is a corporation organized and existing
under the laws of the State of New York, licensed to engage in business in
the Philippines, with offices in the City of Manila, in Fabrica, Occidental
Negros, in New York and in Philadelphia. Under the law of New York, the
rights of a stockholder to examine the books and records of a corporation
organized under the laws of that State, consist in making a written request
to the treasurer or other fiscal officer thereof for a statement of its affairs,
under oath, embracing a particular account of all its assets and liabilities,
and the treasurer shall make such statement and deliver it to the person
making the request within thirty days thereafter. The plaintiff not being a
stockholder owning at least three per cent of the capital stock of the
defendant corporation, has no right to examine the books and records.
E. Amendment of Articles of Incorporation (Sec. 130)
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 Section 130. Amendments to articles of incorporation or by-
laws of foreign corporations.
Whenever the articles of incorporation or by-laws of a foreign
corporation authorized to transact business in the Philippines are
amended, such foreign corporation shall, within sixty (60) days after the
amendment becomes effective, file with the Securities and Exchange
Commission, and in the proper cases with the appropriate government
agency, a duly authenticated copy of the articles of incorporation or
by-laws, as amended, indicating clearly in capital letters or by
underscoring the change or changes made, duly certified by the
authorized official or officials of the country or state of incorporation. The
filing thereof shall not of itself enlarge or alter the purpose or purposes for
which such corporation is authorized to transact business in the
Philippines. (n)
F. Merger and Consolidation (Sec. 132; Art 51, Omnibus Investments
Code)
Section 132. Merger or consolidation involving a foreign
corporation licensed in the Philippines.
One or more foreign corporations authorized to transact business
in the Philippines may merge or consolidate with any domestic
corporation or corporations if such is permitted under Philippine laws and
by the law of its incorporation: Provided, That the requirements on merger
or consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in
the Philippines shall be a party to a merger or consolidation in its home
country or state as permitted by the law of its incorporation, such foreign
corporation shall, within sixty (60) days after such merger or consolidation
becomes effective, file with the Securities and Exchange Commission,
and in proper cases with the appropriate government agency, a copy of
the articles of merger or consolidation duly authenticated by the proper
official or officials of the country or state under the laws of which merger
or consolidation was effected: Provided, however, That if the absorbed
corporation is the foreign corporation doing business in the Philippines,
the latter shall at the same time file a petition for withdrawal of its license
in accordance with this Title. (n)
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Article 51. Mergers and Consolidations.
The provisions of this Book Two shall apply to any merger,
consolidation, syndicate or any other combination of firms, associations,
partnership or other forms of business organization that will result in
ownership or control by persons or entities that are NOT Philippine
nationals or have foreign equity participation, of more than forty per cent
(40%) of the outstanding capital of whatever organizations results from
the merger, consolidation, syndicate or other combination
G. Revocation of License (Secs. 134 and 135; Art. 50, Omnibus
Investments Code)
Section 134. Revocation of license.
Without prejudice to other grounds provided by special laws, the
license of a foreign corporation to transact business in the Philippines
may be revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by
this Code;
2. Failure to appoint and maintain a resident agent in the
Philippines as required by this Title;
3. Failure, after change of its resident agent or of his address, to
submit to the Securities and Exchange Commission a statement
of such change as required by this Title;
4. Failure to submit to the Securities and Exchange Commission
an authenticated copy of any amendment to its articles of
incorporation or by-laws or of any articles of merger or
consolidation within the time prescribed by this Title;
5. A misrepresentation of any material matter in any application,
report, affidavit or other document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts, assessments or
penalties, if any, lawfully due to the Philippine Government or any
of its agencies or political subdivisions;
7. Transacting business in the Philippines outside of the purpose
or purposes for which such corporation is authorized under its
license;
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 8. Transacting business in the Philippines as agent of or acting for
and in behalf of any foreign corporation or entity not duly licensed
to do business in the Philippines; or
9. Any other ground as would render it unfit to transact business in
the Philippines. (n)
Section 135. Issuance of certificate of revocation.
Upon the revocation of any such license to transact business in
the Philippines, the Securities and Exchange Commission shall issue a
corresponding certificate of revocation, furnishing a copy thereof to the
appropriate government agency in the proper cases. The Securities and
Exchange Commission shall also mail to the corporation at its registered
office in the Philippines a notice of such revocation accompanied by a
copy of the certificate of revocation. (n)
Article 50. Cause for Cancellation of Certificate of Authority
or Payment of Fine.
A violation of any of the requirements set forth in Article 49 or of
the terms and conditions which the Board may impose shall be sufficient
cause to cancel the certificate of authority issued pursuant to this Book
and/or subject firms to the payment of fines in accordance with the rules
and regulations issued by the Board: Provided, however, That aliens or
foreign firms, associations, partnerships, corporations or other forms of
business organization NOT organized or existing under the laws of the
Philippines which may have been lawfully licensed to do business in the
Philippines prior to the effectivity of R.A. 5455, shall, with respect to the
activities for which they were licensed and actually engaged in prior to the
effectivity of said Act, NOT be subject to the provisions of Article 48 and
49 but shall be subject to the reporting requirements prescribed by the
Board: Provided, further, That where the issuance of said license has
been irregular or contrary to law, any person adversely affected thereby
may file an action with the Regional Trial Court where said alien or foreign
business organization resides or has its principal office to cancel the said
license. In such cases, NO injunction shall issue without notice and
hearing; and appeals and other proceedings for review shall be filed
directly with the Supreme Court.
H. Withdrawal of Foreign Corporation (Sec. 136)
Corporation Law 2016: JVL & JSD
Section 136. Withdrawal of foreign corporations.
Subject to existing laws and regulations, a foreign corporation
licensed to transact business in the Philippines may be allowed to
withdraw from the Philippines by filing a petition for withdrawal of license.
NO certificate of withdrawal shall be issued by the Securities and
Exchange Commission unless all the following requirements are met;
1. All claims which have accrued in the Philippines have been
paid, compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully
due to the Philippine Government or any of its agencies or political
subdivisions have been paid; and
3. The petition for withdrawal of license has been published once
a week for three (3) consecutive weeks in a newspaper of general
circulation in the Philippines.
XIII. PENALTY PROVISIONS OF THE CODE
A. Penalty Clause for Violations of the Provisions of the Code (Sec. 144)
Section 144. Violations of the Code.
Violations of any of the provisions of this Code or its amendments
not otherwise specifically penalized therein shall be punished by a fine of
not less than one thousand (P1,000.00) pesos but not more than ten
thousand (P10,000.00) pesos or by imprisonment for not less than thirty
(30) days but not more than five (5) years, or both, in the discretion of the
court. If the violation is committed by a corporation, the same may, after
notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution
shall NOT preclude the institution of appropriate action against the
director, trustee or officer of the corporation responsible for said violation:
Provided, further, That nothing in this section shall be construed to repeal
the other causes for dissolution of a corporation provided in this Code.
(190 1/2 a)
B. Disqualification (Sec. 27)
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 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)
C. Specific application (Sec. 74)
Section 74. Books to be kept; stock transfer agent.
Every corporation shall keep and carefully preserve at its principal
office a record of all business transactions and minutes of all meetings of
stockholders or members, or of the board of directors or trustees, in which
shall be set forth in detail the time and place of holding the meeting, how
authorized, the notice given, whether the meeting was regular or special,
if special its object, those present and absent, and every act done or
ordered done at the meeting. Upon the demand of any director, trustee,
stockholder or member, the time when any director, trustee, stockholder
or member entered or left the meeting must be noted in the minutes; and
on a similar demand, the yeas and nays must be taken on any motion or
proposition, and a record thereof carefully made. The protest of any
director, trustee, stockholder or member on any action or proposed action
must be recorded in full on his demand.
The records of all business transactions of the corporation and the
minutes of any meetings shall be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable hours on
business days and he may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow
any director, trustees, stockholder or member of the corporation to
examine and copy excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of an
offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or
order of the board of directors or trustees, the liability under this section
for such action shall be imposed upon the directors or trustees who
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voted for such refusal: and Provided, further, That it shall be a defense
to any action under this section that the person demanding to examine
and copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination of
the records or minutes of such corporation or of any other corporation, or
was not acting in good faith or for a legitimate purpose in making his
demand.
Stock corporations must also keep a book to be known as the
"stock and transfer book", in which must be kept a record of all stocks
in the names of the stockholders alphabetically arranged; the installments
paid and unpaid on all stock for which subscription has been made, and
the date of payment of any installment; a statement of every alienation,
sale or transfer of stock made, the date thereof, and by and to whom
made; and such other entries as the by-laws may prescribe. The stock
and transfer book shall be kept in the principal office of the
corporation or in the office of its stock transfer agent and shall be
open for inspection by any director or stockholder of the corporation at
reasonable hours on business days.
NO stock transfer agent or one engaged principally in the
business of registering transfers of stocks in behalf of a stock corporation
shall be allowed to operate in the Philippines unless he secures a
license from the Securities and Exchange Commission and pays a
fee as may be fixed by the Commission, which shall be renewable
annually: Provided, That a stock corporation is NOT precluded from
performing or making transfer of its own stocks, in which case all the rules
and regulations imposed on stock transfer agents, except the payment of
a license fee herein provided, shall be applicable.
D. Violation of Section 133 by Foreign Corporations
Section 133. Doing business without a license.
NO foreign corporation transacting business in the
Philippines without a license, or its successors or assigns, shall be
permitted to maintain or intervene in any action, suit or proceeding
in any court or administrative agency of the Philippines; but such
corporation may be sued or proceeded against before Philippine courts or
administrative tribunals on any valid cause of action recognized under
Philippine laws
168

XIV. CORPORATE REHABILITATION
- Wonder Book Corporation vs. Philippine Bank of Communications, 676
SCRA 489 [2012]
Rehabilitation contemplates a continuance of corporate life and
activities in an effort to restore and reinstate the corporation to its former
position of successful operation and solvency. The purpose of
rehabilitation proceedings is to enable the company to gain a new lease
on life and thereby allow creditors to be paid their claims from its earnings.
The rehabilitation of a financially distressed corporation benefits its
employees, creditors, stockholders and, in a larger sense, the general
public.
Rehabilitation proceedings in our jurisdiction, much like the
bankruptcy laws of the United States, have equitable and rehabilitative
purposes. On one hand, they attempt to provide for the efficient and
equitable distribution of an insolvent debtor's remaining assets to its
creditors; and on the other, to provide debtors with a "fresh start" by
relieving them of the weight of their outstanding debts and permitting them
to reorganize their affairs. The rationale of Presidential Decree No. 902-A,
as amended, is to "effect a feasible and viable rehabilitation," by
preserving a floundering business as going concern, because the assets
of a business are often more valuable when so maintained than they
would be when liquidated.
Under Section 23, Rule 4 of the Interim Rules, a rehabilitation plan
may be approved if there is a showing that rehabilitation is feasible and
the opposition entered by the creditors holding a majority of the total
liabilities is unreasonable. In determining whether the objections to the
approval of a rehabilitation plan are reasonable or otherwise, the court has
the following to consider: (a) that the opposing creditors would receive
greater compensation under the plan than if the corporate assets would
be sold; (b) that the shareholders would lose their controlling interest as a
result of the plan; and (c) that the receiver has recommended approval.
Rehabilitation is therefore available to a corporation who, while
illiquid, has assets that can generate more cash if used in its daily
operations than sold. Its liquidity issues can be addressed by a practicable
business plan that will generate enough cash to sustain daily operations,
Corporation Law 2016: JVL & JSD
has a definite source of financing for its proper and full implementation,
and anchored on realistic assumptions and goals. This remedy should be
denied to corporations whose insolvency appears to be irreversible and
whose sole purpose is to delay the enforcement of any of the rights of the
creditors, which is rendered obvious by the following: (a) the absence of a
sound and workable business plan; (b) baseless and unexplained
assumptions, targets and goals; (c) speculative capital infusion or
complete lack thereof for the execution of the business plan; (d) cash flow
cannot sustain daily operations; and (e) negative net worth and the assets
are near full depreciation or fully depreciated.
Another reason for this Court's denial of Wonder Book's petition is
its failure to comply with Section 5 of the Interim Rules, which enumerates
the minimum requirements of an acceptable rehabilitation plan:
Sec. 5. Rehabilitation Plan. The rehabilitation plan shall include:
(a) the desired business targets or goals and the duration and coverage of
the rehabilitation; (b) the terms and conditions of such rehabilitation which
shall include the manner of its implementation, giving due regard to the
interests of secured creditors; (c) the material financial commitments to
support the rehabilitation plan; (d) the means for the execution of the
rehabilitation plan, which may include conversion of the debts or any
portion thereof to equity, restructuring of the debts, dacion en pago, or
sale of assets or of the controlling interest; (e) a liquidation analysis that
estimates the proportion of the claims that the creditors and shareholders
would receive if the debtor's properties were liquidated; and (f) such other
relevant information to enable a reasonable investor to make an informed
decision on the feasibility of the rehabilitation plan. ESIcaC
It is imperative for a distressed corporation seeking rehabilitation
to present "material financial commitments" as this is critical in
determining its resolve, determination, earnestness and good faith in
financing its proposed rehabilitation plan. As discussed above, Wonder
Book's "material financial commitments" are limited to converting all
deposits for future subscriptions to common stock and treating all its
payables to its officers and stockholders as trade payables. These,
unfortunately, do not qualify as sincere commitment and even betray
Wonder Book's intent to fund the implementation of its rehabilitation plan
using whatever cash it will generate during the reprieve provided by the
stay order and the moratorium on the principal and interest payments.
169
This scheme is certainly unfair as PBCOM or any of Wonder Book's
creditors cannot be compelled to finance Wonder Book's rehabilitation by
a delay in the payment of their claims or a considerable reduction in the
amounts thereof.
- San Jose Timber Corporation, et aL vs. SEC, et I., 667 SCRA 13 [2012]
"A successful rehabilitation usually depends on two factors: (1) a
positive change in the business fortunes of the debtor, and (2) the
willingness of the creditors and shareholders to arrive at a compromise
agreement on repayment burdens, extent of dilution, etc. The debtor must
demonstrate by convincing and compelling evidence that these
circumstances exist or are likely to exist by the time the debtor submits his
'revised or substitute rehabilitation plan for the final approval of the court.'"
Given the high standards that the Rules require, mere
unsupported assertions by the debtor that "the parties are close to an
agreement" or that "business is expected to pick up in the next several
quarters" are not sufficient. Circumstances that might demonstrate in a
convincing and compelling manner that the debtor could successfully be
rehabilitated include the following:
a) the business fortunes of the debtor have actually improved
since the petition was filed;
b) the general circumstances and forecast for the sector in which
the debtor is operating supports the likelihood that the debtor's business
will revive;
c) the debtor has taken concrete steps to improve its operating
efficiency;
d) the debtor has obtained legally binding investment
commitments from parties contingent on the approval of a rehabilitation
plan;
e) the debtor has successfully addressed other factors that would
increase the risk that the debtor's rehabilitation plan would fail;
f) the majority of the secured and unsecured creditors have
expressly demonstrated a preference that the debtor be rehabilitated
rather than liquidated and are willing to compromise on their claims to
reach that result;
g) the debtor's shareholders have expressed a willingness to dilute
their equity in connection with a debt equity swap.
Corporation Law 2016: JVL & JSD
- Veterans Philippines Scout Security Agency, Inc. vs. First Dominion
Prime Holdings. Inc., 679 SCRA 168 [2012]
An essential function of corporate rehabilitation is the mechanism
of suspension of all actions and claims against the distressed corporation
upon the due appointment of a management committee or rehabilitation
receiver. 25 Section 6 (c) of PD 902-A mandates that upon appointment of
a management committee, rehabilitation receiver, board, or body, all
actions for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board, or
body shall be suspended. The actions to be suspended cover all claims
against a distressed corporation whether for damages founded on a
breach of contract of carriage, labor cases, collection suits or any other
claims of pecuniary nature. Jurisprudence is settled that the suspension of
proceedings referred to in the law uniformly applies to "all actions for
claims" filed against the corporation, partnership or association under
management or receivership, without distinction, except only those
expenses incurred in the ordinary course of business. 26 The stay order is
effective on all creditors of the corporation without distinction, whether
secured or unsecured.
More importantly, Section 20 of the 2008 Rules of Procedure on
Corporate Rehabilitation provides: DcCASI
SEC. 20. Effects of Rehabilitation Plan. The approval of the
rehabilitation plan by the court shall result in the following:
(a) The plan and its provisions shall be binding upon the debtor
and all persons who may be affected thereby, including the creditors,
whether or not such persons have participated in the proceedings or
opposed the plan or whether or not their claims have been scheduled;
(b) The debtor shall comply with the provisions of the plan and
shall take all actions necessary to carry out the plan;
(c) Payments shall be made to the creditors in accordance with the
provisions of the plan;
(d) Contracts and other arrangements between the debtor and its
creditors shall be interpreted as continuing to apply to the extent that they
do not conflict with the provisions of the plan; and
170
 (e) Any compromises on amounts or rescheduling of timing of
payments by the debtor shall be binding on creditors regardless of
whether or not the plan is successfully implemented. (Emphasis ours.)
To stress, the rehabilitation plan, once approved, is binding upon the
debtor and all persons who may be affected by it, including the creditors,
whether such persons have or have not participated in the proceedings or
have opposed the plan or whether their claims have or have not been
scheduled. With the approval by the Rehabilitation Court of the plan for
the FDPHI Group of Companies, there is nothing left to be done but to
enforce the terms and schedule of payment as provided in the said plan.
- Express Investments 111 Private Ltd., et aL vs. Bayan
Telecommunications, Inc. 687 SCRA 50 [2012]
In order to effectively exercise such jurisdiction, Section 6 (c), PD 902-A
empowers the Regional Trial Court to appoint one or more receivers of the
property, real and personal, which is the subject of the pending action
before the Commission whenever necessary in order to preserve the
rights of the parties-litigants and/or protect the interest of the investing
public and creditors.
Under Section 6, Rule 4 of the Interim Rules, if the court finds the
petition to be sufficient in form and substance, it shall issue, not later than
five (5) days from the filing of the petition, an Order with the following
pertinent effects:
(a) appointing a Rehabilitation Receiver and fixing his bond;
(b) staying enforcement of all claims, whether for money or
otherwise and whether such enforcement is by court action or otherwise,
against the debtor, its guarantors and sureties not solidarily liable with the
debtor;
(c) prohibiting the debtor from selling, encumbering, transferring,
or disposing in any manner any of its properties except in the ordinary
course of business;
(d) prohibiting the debtor from making any payment of its liabilities
outstanding as at the date of filing of the petition; . . . (Emphasis supplied)
Corporation Law 2016: JVL & JSD
The stay order shall be effective from the date of its issuance until
the dismissal of the petition or the termination of the rehabilitation
proceedings. 61 Under the Interim Rules, the petition shall be dismissed if
no rehabilitation plan is approved by the court upon the lapse of 180 days
from the date of the initial hearing. The court may grant an extension
beyond this period only if it appears by convincing and compelling
evidence that the debtor may successfully be rehabilitated. In no instance,
however, shall the period for approving or disapproving a rehabilitation
plan exceed 18 months from the date of filing of the petition
- Town and Country Enterprises, Inc. vs. Quisumbing Jr., 682 SCRA 128
[2012]
Viewed in the foregoing light, the CA cannot be faulted for
upholding the RTC's grant of a writ of possession in favor of Metrobank on
11 January 2005. If the purchaser at the foreclosure sale, upon posting of
the requisite bond, is entitled to a writ of possession even during the
redemption period under Section 7 of Act 3135, as amended, it has been
consistently ruled that there is no reason to withhold said writ after the
expiration of the redemption period when no redemption is effected by the
mortgagor. Indeed, the rule is settled that the right of the purchaser to the
possession of the foreclosed property becomes absolute after the
redemption period, without a redemption being effected by the property
owner. Since the basis of this right to possession is the purchaser's
ownership of the property, the mere filing of an ex parte motion for the
issuance of the writ of possession would suffice, and no bond is required.
- Siochi Fishery Enterprises, Inc. vs. BPI, 659 SCRA 817 [2011]
As provided in the Interim Rules, the basic procedure is as follows:
1. The petition is filed with the appropriate Regional Trial Court;
2. If the petition is found to be sufficient in form and substance, the
trial court shall issue a Stay Order, which shall provide, among others, for
the appointment of a Rehabilitation Receiver; the fixing of the initial
hearing on the petition; a directive to the petitioner to publish the Order in
a newspaper of general circulation in the Philippines once a week for two
(2) consecutive weeks; and a directive to all creditors and all interested
171
parties (including the Securities and Exchange Commission) to file and
serve on the debtor a verified comment on or opposition to the petition,
with supporting affidavits and documents;
3. Publication of the Stay Order;
4. Initial hearing on any matter relating to the petition or on any
comment and/or opposition filed in connection therewith. If the trial court is
satisfied that there is merit in the petition, it shall give due course to the
petition;
5. Referral for evaluation of the rehabilitation plan to the
rehabilitation receiver who shall submit his recommendations to the court;
6. Modifications or revisions of the rehabilitation plan as
necessary;
7. Submission of final rehabilitation plan to the trial court for
approval;
8. Approval/disapproval of rehabilitation plan by the trial court
As an officer of the court and an expert, the rehabilitation receiver
plays an important role in corporate rehabilitation proceedings. In Pryce
Corporation v. Court of Appeals, 17 the Court held that, "the purpose of
the law in directing the appointment of receivers is to protect the interests
of the corporate investors and creditors." 18 Section 14 of the Interim
Rules of Procedure on Corporate Rehabilitation enumerates the powers
and functions of the rehabilitation receiver: (1) verify the accuracy of the
petition, including its annexes such as the schedule of debts and liabilities
and the inventory of assets submitted in support of the petition; (2) accept
and incorporate, when justified, amendments to the schedule of debts and
liabilities; (3) recommend to the court the disallowance of claims and
rejection of amendments to the schedule of debts and liabilities that lack
sufficient proof and justification; (4) submit to the court and make available
for review by the creditors a revised schedule of debts and liabilities; (5)
investigate the acts, conduct, properties, liabilities, and financial condition
of the debtor, the operation of its business and the desirability of the
continuance thereof, and any other matter relevant to the proceedings or
to the formulation of a rehabilitation plan; (6) examine under oath the
directors and officers of the debtor and any other witnesses that he may
deem appropriate; (7) make available to the creditors documents and
notices necessary for them to follow and participate in the proceedings;
(8) report to the court any fact ascertained by him pertaining to the causes
Corporation Law 2016: JVL & JSD
of the debtor's problems, fraud, preferences, dispositions, encumbrances,
misconduct, mismanagement, and irregularities committed by the
stockholders, directors, management, or any other person; (9) employ
such person or persons such as lawyers, accountants, appraisers, and
staff as are necessary in performing his functions and duties as
rehabilitation receiver; (10) monitor the operations of the debtor and to
immediately report to the court any material adverse change in the
debtor's business; (11) evaluate the existing assets and liabilities,
earnings and operations of the debtor; (12) determine and recommend to
the court the best way to salvage and protect the interests of the creditors,
stockholders, and the general public; (13) study the rehabilitation plan
proposed by the debtor or any rehabilitation plan submitted during the
proceedings, together with any comments made thereon; (14) prohibit and
report to the court any encumbrance, transfer, or disposition of the
debtor's property outside of the ordinary course of business or what is
allowed by the court; (15) prohibit and report to the court any payments
outside of the ordinary course of business; (16) have unlimited access to
the debtor's employees, premises, books, records, and financial
documents during business hours; (17) inspect, copy, photocopy, or
photograph any document, paper, book, account, or letter, whether in the
possession of the debtor or other persons; (18) gain entry into any
property for the purpose of inspecting, measuring, surveying, or
photographing it or any designated relevant object or operation thereon;
(19) take possession, control, and custody of the debtor's assets; (20)
notify the parties and the court as to contracts that the debtor has decided
to continue to perform or breach; (21) be notified of, and to attend all
meetings of the board of directors and stockholders of the debtor; (22)
recommend any modification of an approved rehabilitation plan as he may
deem appropriate; (23) bring to the attention of the court any material
change affecting the debtor's ability to meet the obligations under the
rehabilitation plan; (24) recommend the appointment of a management
committee in the cases provided for under Presidential Decree No. 902-A,
as amended; (25) recommend the termination of the proceedings and the
dissolution of the debtor if he determines that the continuance in business
of such entity is no longer feasible or profitable or no longer works to the
best interest of the stockholders, parties-litigants, creditors, or the general
public; and (26) apply to the court for any order or directive that he may
deem necessary or desirable to aid him in the exercise of his powers.
172

- Molina vs. Pacific Plans, Inc. 655 SCRA 356 [2011]
The Court's ruling in the more recent case of Castillo v. Uniwide
Warehouse Club, Inc. 14 is instructive, thus:
An essential function of corporate rehabilitation is the mechanism of
suspension of all actions and claims against the distressed corporation,
which operates upon the due appointment of a management committee or
rehabilitation receiver. The governing law concerning rehabilitation and
suspension of actions for claims against corporations is P.D. No. 902-A, as
amended. Section 6(c) of the law mandates that, upon appointment of a
management committee, rehabilitation receiver, board, or body, all actions
for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board, or
body shall be suspended. It materially provides:
Section 6 (c). . . .
. . . Provided, finally, that upon appointment of a management committee,
rehabilitation receiver, board or body, pursuant to this Decree, all actions
for claims against corporations, partnerships or associations under
management or receivership pending before any court, tribunal, board or
body, shall be suspended accordingly.
In Finasia Investments and Finance Corporation v. Court of
Appeals [G.R. No. 107002, October 7, 1994, 237 SCRA 446, 450], the
term "claim" has been construed to refer to debts or demands of a
pecuniary nature, or the assertion to have money paid. It was referred to,
in Arranza v. B.F. Homes, Inc., [389 Phil. 318], as an action involving
monetary considerations and in Philippine Airlines v. Kurangking [438 Phil.
375], the term was identified as the right to payment, whether or not it is
reduced to judgment, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, legal or equitable, and
secured or unsecured. Furthermore, the actions that were suspended
cover all claims against a distressed corporation whether for damages
founded on a breach of contract of carriage, labor cases, collection suits
or any other claims of a pecuniary nature. More importantly, the new rules
on corporate rehabilitation, as well as the interim rules, provide an all-
Corporation Law 2016: JVL & JSD
encompassing definition of the term and, thus, include all claims or
demands of whatever nature or character against a debtor or its property,
whether for money or otherwise. There is no doubt that petitioner's claim
in this case, arising as it does from his alleged illegal dismissal, is a claim
covered by the suspension order issued by the SEC, as it is one for
pecuniary consideration.
Jurisprudence is settled that the suspension of proceedings
referred to in the law uniformly applies to "all actions for claims" filed
against a corporation, partnership or association under management or
receivership, without distinction, except only those expenses incurred in
the ordinary course of business. In the oft-cited case of Rubberworld
(Phils.), Inc. v. NLRC [G.R. No. 126773, April 14, 1999, 305 SCRA 721],
the Court noted that aside from the given exception, the law is clear and
makes no distinction as to the claims that are suspended once a
management committee is created or a rehabilitation receiver is
appointed. Since the law makes no distinction or exemptions, neither
should this Court. Ubi lex non distinguit nec nos distinguere debemos.
Philippine Airlines, Inc. v. Zamora [G.R. No. 166996, February 6, 2007,
514 SCRA 584, 605] declares that the automatic suspension of an action
for claims against a corporation under a rehabilitation receiver or
management committee embraces all phases of the suit, that is, the entire
proceedings of an action or suit and not just the payment of claims.
The reason behind the imperative nature of a suspension or stay
order in relation to the creditors' claims cannot be downplayed, for indeed
the indiscriminate suspension of actions for claims intends to expedite the
rehabilitation of the distressed corporation by enabling the management
committee or the rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extrajudicial interference that might unduly
hinder or prevent the rescue of the debtor company. To allow such other
actions to continue would only add to the burden of the management
committee or rehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the corporation, instead of
being directed toward its restructuring and rehabilitation.
- BPI Family Savings Bank, Inc. vs. Pryce Gases, Inc., 653 SCRA 42
[2011]
173
 Section 5 of the Interim Rules on Corporate Rehabilitation
provides that "(t)he review of any order or decision of the court or an
appeal therefrom shall be in accordance with the Rules of Court . . . ."
Under A.M. No. 00-8-10-SC, a petition for corporate rehabilitation is
considered a special proceeding. 20 Thus, the period of appeal provided
in paragraph 19 (b) of the Interim Rules Relative to the Implementation of
Batas Pambansa Blg. 129 for special proceedings shall apply, 21 that is,
the period of appeal shall be 30 days since a record of appeal is required.
- JAPRL Development Corp. vs. Security Bank Corpo, 650 SCRA 645
[2011]
Indeed, Section 6 (b) of the Interim Rules of Procedure of Corporate
Rehabilitation which the appellate court cited in the earlier-quoted portion
of its decision, provides that a stay order does not apply to sureties who
are solidarily liable with the debtor. In Limson and Arollado's case, their
solidary liability with JAPRL is documented.
Liability of the Surety The liability of the Surety is solidary and
not contingent upon the pursuit by the Bank of whatever remedies it may
have against the Debtor or the collaterals/liens it may possess. If any of
the Guaranteed Obligation is not paid or performed on due date (at stated
maturity or by acceleration), the Surety shall, without need for any notice,
demand or any other act or deed, immediately become liable therefor and
the Surety shall pay and perform the same.
Limson and Arollado, as sureties, whose liability is solidary cannot,
therefore, claim protection from the rehabilitation court, they not being the
financially-distressed corporation that may be restored, not to mention that
the rehabilitation court has no jurisdiction over them. Article 1216 of the
Civil Code clearly is not on their side:
ART. 1216.The creditor may proceed against any one of the solidary
debtors or some or all of them simultaneously. The demand made against
any one of them shall not be an obstacle to those which may
subsequently be directed against the others, so long as the debt has not
been fully collected.
- Umale v. ASB Realty Corporation, 625 SCRA 215 [2011]
Corporation Law 2016: JVL & JSD
Corporate rehabilitation is defined as "the restoration of the debtor
to a position of successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and its creditors can
recover by way of the present value of payments projected in the plan
more if the corporation continues as a going concern than if it is
immediately liquidated." 56 It was first introduced in the Philippine legal
system through PD 902-A, as amended. 57 The intention of the law is "to
effect a feasible and viable rehabilitation by preserving a floundering
business as a going concern, because the assets of a business are often
more valuable when so maintained than they would be when liquidated."
58 This concept of preserving the corporation's business as a going
concern while it is undergoing rehabilitation is called debtor-in-possession
or debtor-in-place. This means that the debtor corporation (the corporation
undergoing rehabilitation), through its Board of Directors and corporate
officers, remains in control of its business and properties, subject only to
the monitoring of the appointed rehabilitation receiver. 59 The concept of
debtor-in-possession, is carried out more particularly in the SEC Rules,
the rule that is relevant to the instant case. 60 It states therein that the
interim rehabilitation receiver of the debtor corporation "does not take over
the control and management of the debtor corporation." 61 Likewise, the
rehabilitation receiver that will replace the interim receiver is tasked only to
monitor the successful implementation of the rehabilitation plan. 62 There
is nothing in the concept of corporate rehabilitation that would ipso facto
deprive 63 the Board of Directors and corporate officers of a debtor
corporation, such as ASB Realty, of control such that it can no longer
enforce its right to recover its property from an errant lessee.
To be sure, corporate rehabilitation imposes several restrictions on
the debtor corporation. The rules enumerate the prohibited corporate
actions and transactions 64 (most of which involve some kind of
disposition or encumbrance of the corporation's assets) during the
pendency of the rehabilitation proceedings but none of which touch on the
debtor corporation's right to sue. The implication therefore is that our
concept of rehabilitation does not restrict this particular power, save for the
caveat that all its actions are monitored closely by the receiver, who can
seek an annulment of any prohibited or anomalous transaction or
agreement entered into by the officers of the debtor corporation.
174
 Indeed, PD 902-A, as amended, provides that the receiver shall
have the powers enumerated under Rule 59 of the Rules of Court. But
Rule 59 is a rule of general application. It applies to different kinds of
receivers rehabilitation receivers, receivers of entities under
management, ordinary receivers, receivers in liquidation and for
different kinds of situations. While the SEC has the discretion 65 to
authorize the rehabilitation receiver, as the case may warrant, to exercise
the powers in Rule 59, the SEC's exercise of such discretion cannot
simply be assumed. There is no allegation whatsoever in this case that
the SEC gave ASB Realty's rehabilitation receiver the exclusive right to
sue.
- Asiatrust Development Bank vs. First Aikka Development, Inc., G.R. No.
179558, June 22, 2011
Rehabilitation proceedings in our jurisdiction have equitable
and rehabilitative purposes. On the one hand, they attempt to provide
for the efficient and equitable distribution of an insolvent debtor's
remaining assets to its creditors; and on the other, to provide debtors
with a "fresh start" by relieving them of the weight of their outstanding
debts and permitting them to reorganize their affairs. 55 The purpose
of rehabilitation proceedings is to enable the company to gain a new
Lease on life and thereby allow creditors to be paid their claims from
its earnings. The determination of the true and correct amount due
petitioner is important in assessing whether FADI may be successfully
rehabilitated. It is thus necessary that petitioner be given the
opportunity to be heard by the rehabilitation court. The court should
admit petitioner's comment on or opposition to FADI's petition for
rehabilitation and allow petitioner to participate in the rehabilitation
proceedings to determine if indeed FADI could maintain its corporate
existence. A remand of the case to the rehabilitation court is,
therefore, imperative. To be sure, the successful rehabilitation of a
distressed corporation will benefit its debtors, creditors, employees,
and the economy in general.
- Castillo vs. Uniwide Warehouse Club, Inc., 619 SSCRA 641 [2010]
Corporation Law 2016: JVL & JSD
Jurisprudence is settled that the suspension of proceedings referred to in
the law uniformly applies to "all actions for claims" filed against a
corporation, partnership or association under management or
receivership, without distinction, except only those expenses incurred in
the ordinary course of business. 22 In the oft-cited case of Rubberworld
(Phils.), Inc. v. NLRC, the Court noted that aside from the given exception,
the law is clear and makes no distinction as to the claims that are
suspended once a management committee is created or a rehabilitation
receiver is appointed. Since the law makes no distinction or exemptions,
neither should this Court. Ubi lex non distinguit nec nos distinguere
debemos. Philippine Airlines, Inc. v. Zamora declares that the automatic
suspension of an action for claims against a corporation under a
rehabilitation receiver or management committee embraces all phases of
the suit, that is, the entire proceedings of an action or suit and not just the
payment of claims.
The reason behind the imperative nature of a suspension or stay
order in relation to the creditors' claims cannot be downplayed, for indeed
the indiscriminate suspension of actions for claims intends to expedite the
rehabilitation of the distressed corporation by enabling the management
committee or the rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extrajudicial interference that might unduly
hinder or prevent the rescue of the debtor company. To allow such other
actions to continue would only add to the burden of the management
committee or rehabilitation receiver, whose time, effort and resources
would be wasted in defending claims against the corporation, instead of
being directed toward its restructuring and rehabilitation.
At this juncture, it must be conceded that the date when the claim
arose, or when the action was filed, has no bearing at all in deciding
whether the given action or claim is covered by the stay or suspension
order. What matters is that as long as the corporation is under a
management committee or a rehabilitation receiver, all actions for claims
against it, whether for money or otherwise, must yield to the greater
imperative of corporate revival, excepting only, as already mentioned,
claims for payment of obligations incurred by the corporation in the
ordinary course of business.
It is, thus, not difficult to see why the subject action for illegal
dismissal and damages against respondent corporation ought to have
been suspended at the first instance respondents submitted before the
175
Labor Arbiter their motion to suspend proceedings in the illegal dismissal
case. This, considering that at the time the labor case was filed on August
26, 2002, respondent corporation was undergoing proceedings for
rehabilitation and was later on declared to be in a state of suspension of
payments.
- Pacific Wide Realty and Development Corporation vs. Puerto Azul Land,
Inc., 605 SCRA 503 [2010]
The Interim Rules of Procedure on Corporate Rehabilitation is
silent on the enforcement of claims specifically against the properties of
accommodation mortgagors. It only covers the suspension, during the
pendency of the rehabilitation, of the enforcement of all claims against the
debtor, its guarantors and sureties not solidarily liable with the mortgagor.
Furthermore, the newly adopted Rules of Procedure on Corporate
Rehabilitation has a specific provision for this special arrangement among
a debtor, its creditor and its accommodation mortgagor. Section 7 (b),
Corporation Law 2016: JVL & JSD
Rule 3 of the said Rules explicitly allows the foreclosure by a creditor of a
property not belonging to a debtor under corporate rehabilitation, as it
provides:
SEC. 7. Stay Order. . . . (b) staying enforcement of all claims,
whether for money or otherwise and whether such enforcement is by court
action or otherwise, against the debtor, its guarantors and persons not
solidarily liable with the debtor; provided, that the stay order shall not
cover claims against letters of credit and similar security arrangements
issued by a third party to secure the payment of the debtor's obligations;
provided, further, that the stay order shall not cover foreclosure by a
creditor of property not belonging to a debtor under corporate
rehabilitation; provided, however, that where the owner of such property
sought to be foreclosed is also a guarantor or one who is not solidarily
liable, said owner shall be entitled to the benefit of excussion as such
guarantor.
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