Professional Documents
Culture Documents
PRE-BAR NOTES
CORPORATION CODE
Personal property of ATTY. R. C. LADIA
2.0110
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CORPORATE NAME (Sec. 18) "No corporate name shall be allowed by the SEC if
tl1e proposed name is identical or deceptively or confusingly similar to any existing
corporation or ru1y other name already protected by law, or is patently deceptive,
confusing or contrruy to law."
Intent of law- to avoid confusion, deception or fraud.
PHILIPPS EXPORT B.V. vs C.A. (1992) - Actual confusion need not be shown, it
suffices that confusion is probably or likely to occur.
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1. He assents (a) to patently unlawful act of the corporation, or (b) 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;
He consents to the issuance of watered stocks or who, having knowledge thereof
does not forthwith file his written objections with the corpmate secretary;
3. He agrees to hold himself personally and solidarity with the corporation; or,
4. He is made, by specific provision of law, to personally answer for his corporate
action. Eg. B.P. 22 and Trust Receipt Law. (MAM Realty Devt. Corp. vs. NLRC
reiterated in Tramat Mercantile vs. C.A. supra)
Other matters which may involve a violation of the duty of loyalty of a director would
be where he deals or transacts business with his own corporation where he may either be
a self-dealing director or an interlocking director.
A self-dealing director is one who enters or tansacts business with his own
corporation. While and interlocking director is a director of a corporation which
transacts business with another orporation of which he is also a director. Contacts of
self-dealing directors arc generally voidable at the option of the corporation but they are
valid per se if all of the four (4) conditions set forth in Section 32 are present:
I. The presence of the director/trustee in the board meeting approving the contract
was not necessary to constltute a quonun;
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2. The vote of such director/trustee in the board meeting approving the contract was
not necessary for the approval of the contTact;
3. The contract is fair and reasonable under the circumstances; and,
- In the case of an ot1iccr, there was a previous authorization from the board of
directors.
If any of the first two (2) conditions is absent it is voidable and thus subject to
ratification by at least two-thirds of the outstanding capital stock at a meeting called for
that purpose provided that full disclosure of the adverse interest of the director involved
is made and provided, finally, that the contract is fair and reasonable.
The contract of an interlocking director, on the other hand is generally valid. Sec.
34 provides that ''except in cases of fraud, and provided the contract is fair and
reasonable, 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/s is merely nominal, the provisions of the preceding section insofar as the
latter corporation is concerned shall apply. Stocld1oldings in excess of 20% is
substantial for the purpose of interlocking directors. Thus, if such is the case the contract
becomes voidable.
TERM OF OFFICE \
Sec. 23 -- shall hold office for one year until their successors are duly elected and
qualitied in accordance with law.
In VALLE VERDE COUNTRY CLUB vs. AFRICA (Sept 4, 2009) the High Court
construed this provision lo mean that the term shall be for one year only (only as a
general rule since non -stock can be 3 years, and, educational corps 5 years) Their term
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expires one year after election to the office. The term is fixed by law. As may be
compared to tenure which represents the duration which the incumbent actually held or
holds office. Term is defined as the time during which the officer may claim to hold
oftice as a matter of right, and fixes the interval after which the several incumbents
shall succeed one another. The term of office is not affected by the hold over. The term
is fixed by statute and it does not change simply because the office may have become
vacant, nor the incumbent holds otTice beyond the end of the te1m due to the fact that a
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successor has not been eleted and/or has failed to qualify. Tenure may be of a sho1ter or
longer duration, eg, resignation before the term expires, or acts in a hold-over capacity.
NB. Detective & Prot6ctive Bmeau vs. Claribel - until their successors have been
.dulj elected and qualified in accordance with law.
REMOVAL OF DIRECTORS/TRUSTEES
A director/trustee may be removed/ousted tiom office with or without cause by at
least 2/3 of the outstanding capital stock or members in cases of non-stock corporations.
Provided, that removal without cause shall not deprive the minority stockholders or
members of the right of representation to which they may be entitled under Secti011 24
of the Code. (Sec.28) Only the stocld1olders/members can remove directors/trustees
elected by them. (Raniel vs. Jochico, March 2007) They can not be removed/ousted by
their fellow directors/trustees or officers.
May the vacancy created by virtue of removal/ouster be filled up by the Board of
Directors/Trustees themselves, if still constituting a quorum? -NO. Only the
stockholders/members can iill up a vacancy created by vi1tue of a removal or expiration
of term. Section 29 provides that "any vacancy occurring in the board of
directors/trustees other tluw by removal by the stockholders or members or by
expiration of term, may be tilled by the vote of at least a majority of the remaining
directors/trustees, if still constituting a quorum."
May the remaining members of the Board of Directors, if still constituting a quorum,
till up a vacancy created by the resignation of a hold-over director? No. VALLE
VERDE COUNTRY CLUB vs. AFRICA supra- TERM is fixed by law. Ordinarilly,
one (1) year until their successors have been elected and qualified in accordance with
law. The hold-over period that time from the lapse of one ( 1 ) year from a member's
election to the Board and until his successor's election and qualification- is not part of
the director's original term of oftice., nor i it a new term; the hold-over period, however
constitutes part of tenure. Corollary, when an incumbent member of the Board of
Director continues to serve in a hold-over capacity, it implies that the office has a fixed
term, which has expired, and the incumbe, nt is holding the succeeding term. The hold
over period is not to be considered as part of his term which had expired.
NB. The Board, if still constituting a, quorum may fill up a vacancy in the office
except by removal or expiration of term.,
COMPENSATION OF DIRECTORS/TRUSTEES
Directors/Trustees arc not, generally, entitled to compensation under section 30 of
the Code, except for reasonable per diem. They may be granted compensation, however,
if a) there is a by-law provision allowing or granting the same; b) if there is a grant by
the stockholders owning or representing at least a majority of the outstanding capital
stock; or, c) If they render unusua1 or extra-ordinary service.
Section 30 also provides a ceiling of the compensation of directors to the effect that it
shall not exceed ten (10%) percent of the net income before tax of the corporation during
the preceding year.
NOTE the 1997 case of WESTERN INSTITUTE OF TECH. vs. SALAS,
278SCRA216. The words as such directors in Section 30 so as to generally deny the
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directors of compensation "is not without any significance for it delimits the scope of
the prohibition to compensation given them for services performed purely in their
capacity as directors or trttstees. The unambiguous interpretation is that they may receive
coqpensation (even without any grant or authority from the stockholders or by a by-law
provision) when they render services in a capacity other than.as directors/trustees."
Thus, if they are acting other than as such directors like a president, chairman,
secretary or treasurer, they may receive compensation by a mere grant of the Board of
Directors. Likewise, the ceiling of I 0% will not apply if the compensation granted them
is in a capacity other than as such directors. (N.B. that the words as such directors
tmder section 30 is used two times. First, on the denial of compensation of directors, as
such, and the ceiling of I 0%)
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breach of duty must proximately cause the injury or uniust loss com])lained of The
absence of any one of these elements prevents piercing the veil of corporate fiction .
subject to two limitations-- \1) li1nitations imposed by law or the Constitution; and, b) as
the lawful transaction of its business may reasonably require. NB - the early case of
A. D. Santos vs. Luneta Motors - transportation business by water and by land are two
different lines of business thus, LMC cannot validly acquire Certiticate of Public
Conveniece for the operation of taxi cabs - it is not as the lawful transaction of its
business reasonably require.
Power to deny Pre-emptive Righ t (Sec. 39) --Pre-emptive right is the right of existing
stockholders to subscribe to all issues or disposition of shares of any class so as to
maintain their respective proportionate interest in the corporation, ie, voting and dividend
rights. Stockholders may not exercise this right in tluee (3) instances- a) If denied by
the m-ticles of incorporation or any amendment thereto; b) those issued i n compliance
with laws requiring stock offerings or minimum ownership by the public; and, c) those
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issued in good faith with the approval of the stockholders representing 2/3 of the
outst andin g capital stock e[ther (i) in exchange of property needed for corporate purpose
or (ii) in payment of previously incurred indebtedness.
N.fl. the law as it stands now uses the phrase "all issues or disposition of shares of any
class" - Benito vs. SEC, 123SCRA722 and the subsequent case of Dee vs. SEC,
199SCRA241 excluded from the coverage of the right of pre-emption originally
unsubscribed p01iion of the original authorized capital stock. But, the wordings of the law
is now clear and specitic - "all issues or disposition of shares of any class."
N.B. The preemptive right of a stockholder in a close corporation is absolute. "It shall
extend to all stock to be issued, including reissuance of treasury shares, whether for
money, property, or in payment of corporate debts, unless the articles of incorporation
provide otherwise."(Sec. I 02) N.B. Further, that in ordinary corporations, it can not be
exercised if issued in compliance with laws requiring stock offerings or minimum
ownership of the public will not apply to a close corporation. It can not be a close
corporation if it vested with public interest and it can not make any public offering of
any of its stock of any class.
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Code; e) in case of deadlocks in a close corporation under section I 04 where the proper
forum may compel a stockholder to transfer his share to the corporation irrespective of
the existence of unrestricted retained earnings and, f) to acquire the shares of a
wit]adrawing s tockholder in a close corporation under section 105 of the Code.
Save and except letter d), e) and f) the law imposes a limitation that in order that the
corporation can reacquire its own shares it must have u nrestricted retained earnings or
surplus profits .
Power to invest funds in another corporation or for any other purpose. (Sec. 42) It
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may do so with the concurrence/vote of at least 2/3 of the outstanding capital stock or 2/3
of the members in case it is a non-stock corporation. Approval/consent of the
stockholders will not be rcq LLired for its validity if it is necessary to carry out its primary
purpose. (Dela Rama vs. Ma-ao Sugar Central, 27 SCRA247) or it will aid in its primary
purpose. (Gokongwci vs. SEC, 89SCRA369) N.B. the law requires
stockholders' /members' approval only if the investment is in another corporation or
business or pmpose other than the primary purpose.
By-laws. - Sec. 46 of the Code requires every corporation registered under its provision
it must adopt and file its by-laws with the Securities and Exchange Commission within a
period of within one ( 1) month, from the date of its registration, if not filed
simultaneously with the articles of incorporation. The law uses the word must, for that
purpose.
What is the effect of non-adoption/filing of by-laws within the period required by law?
Will it result to the automatic dissolution of the corporation? NO - despite the use of
the word must, the High Comi has ruled in LOYOLA GRAND VILLAS
HOMEOWNERS' ASSN. vs. C.A., 276SCRA681, that the word must is not always
imperative. The tendency is to interpret the word as a reasonable constmction of the
statute in which it is used, will demand or require. The deliberations of the legislature
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would show tht bit was 1ot their intentions to make it imperative. Taken as whole, and
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tmder the pnnc1ple that tle best interpreter is the statute itscH; Bee. 4Ci reveals tile intent
of the legislature to attach a directory and not mandatory meaning to the word. Although
the. Corporation Code requires the filing of by-laws, it does not expressly provide for the
consequences of non-tiling the same within the period provided for in Sec. 46. However,
such omission has been rectified by Presidential Decree 902-A which grants the SEC the
power to l) suspend, or revoke, after proper notice and hearing, (among others) for
failure to file by-laws within the required period. Failure to file/adopt by-laws would not,
thus, result to the automatic dissolution of the corporation.
NB- Section 144 -
CONSIDERATION FOR ISSUANCE OF SHARES- (Sec. 62)- Shares of stock can not
be issued for a consideration Jess than its par or issue value. NB - how no par value
shares issue price is determined a) AI, or b) BOD pursuant to an authority granted them
by the AI, or, majority of the outstanding capital stock. If they are issue below the par or
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issued value they are COl\Sidered as watered stocks. Watered stocks, are therefore
shares of stocks issued by the corporation as fully paid up when in fact the full value
thereof has not been paid or promised to be paid.
NO;fE - the basis of determining whether there is stock watering is the par o r issued
value and not the fair market or book value. There is thus no stock watering if they are
issued not below their par or issued value even if it is substantially below the fair market
or book value.
Liability of Directors/Officers Issuing Watered Stock - (Sec. 65) - Those voting or
consenting to the issuance or those having knowledge thereof but does not interpose their
written objections with the corporate secretary are solidarily liable with the stocld1older
concerned to the corporation and its creditors for the difference between the par value or
issue value and the amount for which they are issued. Thus, even passive
directors/officers may be held liable if they had knowledge of the issuance but did not
interpose their objection thereto.
NB - Is the stockholder to whom the watered stocks are issued solidarily liable with
the responsible corporate directors/officers? Yes - if they are par value shares pursuant to
sec 65. But No if they are no-par value shares because the Code provides that no-par
value shares, once issued, are deemed fully paid and non-assessable. (sec. 6) .
NB -Are non-voting shares included in determining compliance with the
Nationalization Laws? - No - The Constitutional provision reserving to Philippine
nationals the operation of public utilities or to corporations with at least 60% of the
capital stock outstanding refers only to share4s with voting rights. Citing the Omnibus
Investment Code of 1 981, Omnibus Investment Code of 1 987 and the Foreign Investment
Act, said 3 special laws all carry the definition of a Philippine national as a citizen of the
Philippines, or domestic partnership or corporations organized under the laws of the
Philippines of which at least sixty (60%) percent of the capital stock and entitled to vote,
is owned and held by such citizens of the Philippines. (Heirs of Gamboa vs. Teves, Oct.
9, 2 0 12.) NB- only preferred and redeemable shares may be denied the right to vote, thus
the articles of incorporation cannot provide that common shares are denied the right to
vote. BUT, they may be effectively denied the right to vote --founders' shares (sec 7)
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of the stock certiricate is l)Ot su1Ticieqt to eiiect a valid transfer. (Embassy Farms vs. c.
A., 188 SCRA 492). On the other hand, delivery alone, without endorsement is an
ineffective mode of transferring shares. (Razon vs. LA. C., 207 SCRA 204)
, ec. 63, uses the word may be transferred by endorsement coupled with the delivery
of the stock certificate such that in Rural Bank of Salinas vs. C .A., 21 OSCRA510, it was
ruled that a duly notarized deed is also an etiective mode of transferring shares. This is
because in U y Piaco vs. Me Micking, the High Court ruled that a transfer, set in a
notarized deed is equivalent to the delivery of the thing itself.
NOTE, however, the decision of the Supreme Court in RURAL BANK OF LIPA vs.
C.A., 366SCRA188, that when a certificate of stock had already been issued, a mere
notarized deed of transfer will not sutTice for a valid transfer of shares of stock. It must be
coupled with the delivery of the indorsed stock certificate.
NOTE, further, that even without a delivery/endorsement of the stock certificate
transfer may be valid and effective if the transferor is in estoppel. (Tan vs. SEC,
206SCRA740)
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remains the ownr of the shr s pending sale at public auction. And, he may remain as
such stockholder d. not all of h1s shares are acquired by the winning bidder .
Are the employees of the absorbed corporation in a merger also absorbed by the
surviving/absorbing corporation? No. (BANK OF THE PHILIPPINE ISLANDS vs. BPI
EMPLOYEES UNION, Aug. 10,201 0)
In legal parlance, human beings are never embraced by the term "assets and
liabilities." The Corporation Code does not mandate the absorption of the employees of
the non-smviving corporation by the surviving corporation in case of a merger.
"The Articles of Merger and Plan of Merger dated April 7, 2000, did not contain any
specific stipulation with respect to the employment contracts of existing persom1el of the
non-surviving entity which is FEBTC. Unl \ke the Voluntary Arbitrator, this Court cmmot
uphold the reasoning that the general stipulation regarding transfer of FEBTC assets and
liabilities to BPI as set forth in the Aliicles, of Merger necessarily includes the transfer of
all FEBTC employees into the employ of BPI x x x. Even if it is so, it does not follow
that the employees should not be subject to the terms and conditions of employment
obtaining in the surviving corporation. / The rule is that unless expressly assumed, labor
contracts and CBA's are not enforceable against a transferee of an enterprise, labor
contracts being in personam thus binding only between the parties. x x x it would have
been a different matter if there was an express stipulation in the A1iicles of Merger that
as a condition for the merger, BPI wa being. required to assume all employment
contracts of all existing FEBTC employees with conformity of the employees. In the
absence of such a provision, then BPI clearly had the business management decision as to
whether or not to employ FEBTC employees. FEBTC employees likewise reatained the
prerogative to allow themselves to be absorbed or not; otherwise that would be
tantmnount to involuntary servitude." 1
NB- MR- Oct 1 1 ,2011
"It is more in keeping with the dictates of social justice and state policy of according
fi.tll protection to labor to deem employment contracts as automatically assumed byb the
surviving corporation in a merger, even in the absence of an express stipulation in the
.
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articles of merger or the merger plan. x x x "However, nothing in this Resolution shall
impair the right of an employer to terminate the employment of the absorbed employees
for a lawful or authorized cause or the right of such an employee to resign, retire or
Oth$:rwise sever his employment before or after the merger, subject to existing contractual
obligations."
SME Bank vs. De Guzman (Oct 8,20 1 3 ) - 'There are two types of corporate
acquisitions: asset sale and stock sales. In asset sales, the corporate entity sells all or
substantially all of its assets to another entity. In stock sales, the individual or
corporate shareholders sell a controlling block of stock to new or existing
stockholders. In asset sales, the rule is that the seller in good faith is authorized to
dismiss the affected employees, but is liable for the payment of separation pay under
the law. The buyer in good faith, on the other hand, is not obliged to absorb the
employees affected by the sale, nor is it liable for the payment of their claims. The
most that it may do, for reasons of social j ustice and public policy, is to give
preference to the qualified separated personnel of the selling firm.
In contrast with asset sales, in which the assets of the selling corporation are
transferred to another entity, the transaction in stock sales takes place at the
shareholder level. Because the corporation possesses a personality separate and
distinct from that of its stockholders, a shift in the composition of its shareholders will
not affect its existence and continuity. Thus, notwithstanding the stock sale, the
corporation continues to be the employer of its people and continues to be liable for
the payment of their just claims. Furthermore, the corporation or its new majority
shareholders are not entitled to lawfully dismiss corporate employees ansent a j ust or
authorized cause."
APPRAISAL RIGHT (Scc.81) is a right granted to dissenting/objecting stockholders
on certain corporate or business decisions and to demand the payment of the fair value of
his shares.
The right of appraisal is not at all times available. It may be exercised only in the
instances provided for by law. Under Sec. 8 1 , the instances when it may be exercised are:
I . In case any amendment to the articles of incorporation has the effect of changing
or restricting the rights of any stock.IJ.older or class of shares, or of authorizing
preferences in any respect SLJperior to tnose outstanding shares of any class, or of
extending or shortening the term of corpor&te 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 cases of merger or consolidation.
It may also be exercised by a dissenting .stockholder in cases of
4. Investment of funds in another corporation or business other than the primary
purpose under Sec. 42.
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N.B. A stockholder in a close co rporation, as may be compared to stockholders of any
other stock corporation may, for any reason, compel the corporation to purchase his
shares at their fair value. Effectively granting him absolute right of appraisal if not denied
by the articles of incorporation, provided only that the corporation has sufficient assets
to cover its debts and liabilities exclusive of capital. (Sec. l 05)
WHAT IS THE EFFECT OF THE EXERCISE OF APPRAISAL RIGHT (Sec 83)
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"From the time of dem<;tnd for payment of the fair value of a stockholders'
shares until
either the abandonment ofthe corporate action involved
or the pmchase of the said shar
b the corporation, all rights accruing to such share
s, including voting and divide
.ngpts, shall be .suspended x x x Provided, that if the stockholder
:
is not paid the value of
h1s shares W!lhm .>0 days after the award, his voting and
diyidend rights shall be
immediately restored."
N.B. Distinction of rights of delinquent stockl1older vs. stockl1older exercisin
g appraisal
nght - The delinquent stockl1older is entitled to receive dividends in accordance
with
Sec. 43 whereas, the stockl1older exercising his appraisal right is not entitled to any of
It, unless he is not paid the FMV of his shares within 30 days from the award. Both,
however, have no voting rights.
NO -
A transferee of shares in non-stock corporation may be a stockholder but not
necessarily a member of the same. CEBU COUNTRY CLUB vs. ELIZAGAQUE,
January 2008 A non-stock corporation can set its own criteria/standards in the
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admission of its members. But, while it may have the right to approve or disapprove an
application for proprietary membership, the right should not be exercised arbitrarily.
PLACE OF MEETING - By-laws may validly provide that meetings may be held
anywhere in the Phil. If none then the sa11le as any other stock corporation under sec. 5 1
since the provisions governing stock corporations, when pertinent will also apply to non
stock corp.
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this ''itle m d, (3) the coq1oration shall not list in any stock exchan
: : ge or make any
pubhe offcrm . g of any o f 1\S stock of m1y class."
The aforsaid three (3) provisions must be contai
ned in the articles of incorporation,
_
oth4!rw1sc, Jt cm1 not legally. be considered as a close corporation.
If such be the case
the provisions governing ordinmy/regular stock corporations
of the Code.
will .apply m1d not Title XV
The following can not be organized as a close corporation: 1) mining
or oil
compa 1es; 2) stoc ( exchanges; 3) banks; 4) insurance companies; 5) public utilities;
6)
educatwnal msl!tutwns; and, 7) corporations declmed to be vested with public interest.
Title XII arc special provisions applicable only to close corporations, and, as a matter of
comparison between the close cmvoration and the ordinm-y/regulm cmvorations the
following actual and possible distinctions may be had:
1. The number of stockholders in a close corporation m-e specified persons md
cannot exceed twenty whereas in ordinary corporations they are not specified md there is
no limitation as to the number;
2. To the extent that the m'ticles of incorporation em provide that mmagement of the
corporation shall be vested with the stockholders rather thm by a bom-d of directors w1der
Sec. 97, the number of corporate managers or bomd can effectively be more thm1 15
whereas in the ordinary corporation it can not exceed 15 subj ect to certain exceptions;
3 . All of its shares of stock of any class m-e subj ect to one or more specified
restrictions on transfer of shares while in the ordinmy corporation, generally, there m-e
no restrictions;
4. Shares of stock of a close corporationcan not be listed in the stock exchange or
offered forsale to the public while there is no such restriction in ordinm-y corporations;
5. Stockholders of a close corporation can take an active pmt in the management of
the corporate affairs by vesting managernent unto them (Sec. 97) while in ordinary
corporations, management is lodged in the Board of Directors;
6. Those active in management in a close cmvoration are personally liable for
corporate tort unless the corporation has obtained m adequate liability insurm1ce
(Sec. I 00, pm 5) while directors of ordinary corporations m-e liable only if they have acted
fraudulently, in bad faith or gross negligence;
7. Directors in a close corporation can validly act even without a meeting (Sec.
100) while directors of an ordinary corporation must, as a mle, act as a body at a duly
held md constituted meeting;
8. Agreements between stockholders of a close cmvoration regarding the operations
and affairs of the corporation can be validl y made (Sec. 1 00) which will have no binding
force and effect in ordinmy corporations since stocld1olders' agreement em not limit the
discretion of the Board in the management of the corporate affairs.
9. The a11icles of incorporation of a close corporation may provide that all ofticers md
even employees shall be elected or appointed by the stockholders (Sec. 97) whereas
they m-e elected/appointed by the 'Board of Directors in ordinm-y stock corporations;
10. The articles of incorporation of a close cmvoration may provide for a greater
quorum and voting requirements in meetings of stockholders m1d directors (Sec. 97,
pm-3) whereas, in the case of ordinary stock corporations, while the articles or by-laws
may provide for a greater quorum and voting requirement in directors' meetings under
Sec. 25, those for stockholders' meetings cannot be altered;
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11. The pe-emptive rights of the stockholder in a close corporation is absolute as it
.
mcludes all 1ssues Without exception (Sec. 102) while in an ordinary corporation, it may
be denied under Sec. 3 9;
p. A stockholder of a close corporation can withdraw therefiom and compel the
corporation to pay the value of his shares for any reason with tbe limitation only that
the corporation has sufficient assets to cover its debts and liabilities exclusive of capital,
while in the case of ordinary stock corporations, tbey may do so only in the exercise of
appraisal right under Sec. 8 1 , or unless they sell their shares to another person;
13. The proper forum may interfere in the management of the corporate affairs in a
close corporation in cases of deadlocks under Sec. 104 and may even order tbe
dissolution, among others, of the corporation even if the stockholders and/or directors are
acting in good faith whereas, generally, the courts can not interfere with the business
judgment of the directors/stockholders;
14. A transferee of shares of stock in a close corporation cannot compel the
corporation to register in its books such transfers if it breaches the qualifYing conditions
provided in the articles of incorporation (Sec. 99), whereas in ordinary corporations it is
generally a ministerial duty of the corporation to register transfers of shares, and if
refused without good cause, it may be compelled to do so by mandamus;
15. Any stockholder in a close corporation may petition the proper forum for
corporate dissolution on grounds, among others, provided for in Sec. 1 05 (Note; Even
dishonesty is a ground for the dissolution of a close corporation) whereas, dissolution
may be had only in ordinary corporations, on grounds provided by the Corporation Code
and P.D. 902-A, as amended.
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cre ton of a ne:V corporation to continue the business of the old. Winding up is the sole
actiVIty of a dissolved corporation that docs not intend to incorporate anew. If it
does, however, it is not unlawful for the old Board of Directors to negotiate and transfer
the J!SSets of the dissolved corporation to the new corporation intended to be created as
long as the stockholders have given their consent."
N.B. further that the 3 year period of liquidation will not apply if the liquidation is
undertaken by an assignee, trustee, receiver/liquidator appointed by the
corporation/proper forum. If the corporation or proper fonun appoints one. This is so
because the appointment of a trustee, assignee, receive!" of liquidator would result to the
trustee or assignee to his becoming the legal owner of the prope1iies or rights conveyed
by the corporation, for the benefit of the stockholders and creditors alike, and he may
thus sue or be sued even beyond the 3 year period provided for by law. (Sumera vs.
Valencia, 67Phil. 72 1 , National Abaca vs. Pore, 2SCRA989, Board of Liquidators vs.
Kalaw, 20 SCRA 987)
The 3 year period of liquidation/winding up will apply only if the dissolved
corporation itself, tluough its Board of Directors, undertake tl1e same.
FOREIGN CORPORATIONS
Is a corporation registered under Philippine Jaws, the stockholders of which consist
solely of foreigners, a foreign corporation? NO - Sec. 123 - Definition of foreign
corporation a foreign corporation is one formed, organized or existing under any laws
war and for purposes of national security of the state, the "control test" would apply in
determining the corporate nationality, i.e., tl1e citizenship of the controlling stockholders
determines tl1e nationality of the corporatiqn. Note also - "control test" vis grandfather
rule.
The control test also applies for purposes of determining compliance with
nationalization laws - NAIUU NICKEL MINING vs. REDMONT MINES t ve L
722SCRA, April 2 1 , 20 1 4 "Shares belonging to corporations or pminerships at least
60% of the capital of which is owned by Filipino citizen shall be considered Philippine
national" BUT (Grandfather Rule) "if the percentage of Filipino ownership in the
corporation or partnership is less than 60%, only tl1e mm1ber of shares corresponding to
such percentage shall be coLmted as Philipgine nationality."
Thus, if 100,000 shares me registered in the name of a corporation or partnership at
least 60% of the capital stock or capital respectively, of which belong to Filipino
citizens, all the shares shall be recorded as owned by Filipinos. But, if Jess than 60%, or
say, 50% of the capital stock or capital of the corporation or partnership, respectively,
belongs to Filipino citizens, only 50,000 shares shall be recorded as belonging to aliens."
MR- Jan 28, 20 1 5 - a corporation that complies with the 60-40 Filipino to foreign
equity requirement can be considered a Filipino corporation if there js no doubt as
to who has the beneficial ownc1s.hip and control of the corporation. In that instance,
there is no need for a dissection or fmiher inquiry on the ownership of tl1e. corporate
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shareholders in both the investing and investee corporation or the application of the
Grandfather Rule. As a qorollary rule, even ifthe 60-40 Filipino to foreign equity ratio
IS apparently met by the subject or investec corporation, a resort to the Grandfathe
r
Rule is necessary if doubt exists as to the locus of the beneficial ownership and
control. In this case, a further investigation as to the nationality of the personalities with
the beneficial ownership and control of the corporate shareholders in both the investing
and investee corporation is necessary.
Under Sec. 1 3 3 of the Code - No foreign corporation transacting business in the
Philippines without a license x x x shall be permitted to maintain or intervene in any
action, suit or proceeding in any court or administrative agency of the Philippines x x x"
RULE From the foregoing, "it is not the lack of required license but doing business
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without a license which bars a foreign corporation from access to our courts."
(Universal Shipping vs. I.A.C., \ 88SCRA170)
What constitutes doing or transacting business so as to bar a foreign corporation from
access to our courts if it does so without the requisite license? - The term, doing or
transacting business implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or works, or the performance of acts
or works or the exercise of some of the f1.mctions normally incident to, and in the
progressive prosecution of the purpose and object of its organization. (Agilent
Technologies vs. Integrated Silicon, April, 2004) Thus, it has been laid to rest that a
foreign corporation can sue or gain access to Philippine courts or administrative agencies
if the act involved is: a) an isolated transaction or the corporation is not seeking to
enforce any legal or contractual rights arising from, or growing out of any business
transaction which it has transacted in the Philippines; (Western Equipment vs. Reyes and
Universal Products vs. C. A., 1 3 0 SCRA 1 06); b) if the purpose of the suit is to protect its
corporate name, trade mark, reputation or goodwill (General Garments vs. Director, .. ...._, c.o"v
4 1 SCRA 50, Converse Rubber vs. Universal Products 1 47SCRA 1 55, Puma vs. I.A.C.,
1 5 8 SCRA233); c) where it is based on a vioh1tion of the Revised Penal Code (Le
Chemise Lacoste ve. Fernandez, 1 29SCRA877); d) or it is merely defending a suit filed
against it (Time vs. Reyes, 3 9 SCRA 303); e) or where the pmty is estopped to challenge
the personality of the corporation by merely entering into a contract/trmisaction with it.
(Communication Materials and Design vs. C.A., 260 SCRA 673).
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b) Controversies arising out if intra-corporate or partnership relations, between and
among stockholders,, members or associates, between any or all of
t11em and the
corporatwn, pm1nersh1p or association to which they are stockh
olders members or
associates, respectvely; and between such corporation, pmtnership ;r associa
tion
and the state msotar arc 1t concerns their individual frm1chise or right to exist
as
such entity;
c) Controversies in the election or appointment of directors, trustees, officers or
managers of such corporations, partnerships or associations;
d) Petitions of corporations, partnerships or associations to be declmed in a state of
suspension of payments in cases where the corporation, partnership or association
possesses sufficient property to cover its debts but foresees the possibility of
meeting tl1em when they respectively fall due or in cases where the corporation,
pmincrship or association has no suIicient assets to cover its liabilities but is
under the management of a Rehabilitation Receiver or Mm1agement Committee
created pursuant to the Decree.
What is intra-corporate controversy to place the case within the exclusive jurisdiction
of the Special Cmmnercial Court? Two requisites must concur - I) There must be an
intra-corporate relationship, and, 2) The controversy must arise out of that
relationship.
SPEED DISTRIBUTING CORP. vs. C.A., 425SCRA6 1 :
"To determine whether a case involves an intra-corporate controversy, and it is to be
heard by the Special Commercial Courts, two clements must concur; (a) the status of the
relationship of the parties; (2) the nature of the question that is the subject of the
controversy. The tirst element requires the existence of intra-corporate relationship
between the pmties i.e., between and among stocld1olders/members/partners and/or
associates; between them and the corporation, partnership or association, m1d between
them and the State insofar as it concerns tl1eir individual frm1chises. The second element
requires that the dispute among the pmiies be intrinsically connected with the
regulation of the corporation. If the nature of the controversy involves matters that are
purely civil in character, necessarily, the case does not involve m1 intra-corporate
controversy." r"YN>"-" " ' " c. u"WS-
While tl1ere is a seeming inconsistency in the ruling of the High Court in Rivera vs
Florendo, 1 1 4SCRA643 and Abejo vs de Ia Cruz, 149SCRA653, the same may be
reconciled.
In the Rivera case, the alleged vendor of the shares of stock in question did not indorsed
m1d in fact refused to indorse the stock ce;iificate covering the shares allegedly sold to
the purchaser. There was no compliance with the law (63 of the Code) to make the
transfer valid and effective so as to consider the trm1sferee a stockholder. The vendor
likewise specifically resisted the transfer in the books of the corporation. The SC ruled
that since the transferee is not yet a stockholder of record, there is no intra-corporate
controversy to place the case within the specialized jmisdiction of the Special
Commercial Cmui and may thus be filed and heard in the ordinmy/regular court.
The Abejo case, on the other hand, substm1tially complied with the provisions of the
law regarding the transfer of shares. The certificate of stock was duly endorsed and
delivered to the transferee m1d the corporation was notified of the transfer but refused
registration thereof. The transferee, therefore, has effectively become a stocld1o!der for
21
there is nothing left tor him to do to make the transfer valid and effective. The provisions
of section 63 were duly complied with so as to make the corporation's duly of
recordation purely ministeri:;tl. The case falls within the ambit of section S (b) of the PD.
As sych as a stocld1older, jurisdiction vests with the Special Commercial Court and, the
enforcement of one's right as stocld1older would necessarily include the right to have his
shares recorded and/or transferred in the Stock and Transfer Book upon and after due
compliance of section 63. That is, he has, technically and legally, become a stockholder
to place the case under the definition of intra-corporate controversy under section 5 (b).
22
wasted or destroyed; thar the business of the corporation is being diverted from the
'
purpose for which it is organized; and, that there is serious paraly.tation of its
operations." "In the absence of a strong showing of an imminent danger of dissipation,
los:j, or destruction of the assets or other properties of a corporation and paralysis of its
business operations, the mere apprehension of future misconduct based upon prior
mismanagement will not authorize the appointment of a management
conunittee/receiver." (SY CHIM vs. SY SlY HO & SONS, 480 SCRA206)
securities listed for trading on an exchange or with assets in excess of Php50Million and
having 200 or more stocld1olders, at least 200 of which are holding at least 100 shares of
a class of equity securities or which has sold a class of equity securities or which has sold
a class of equity securities to the public pursuant to a registration statement in compliance
with section 12, shall have at least 2 independent directors or such independent directors
shall constitute at lest 20% of the members of the Bomd, whichever is lesser/
Who is an independent director? - a person other thm1 an officer or employee of the
corporation, its parents or subsidiaries, or m1y other individual having a relationship with
the corporation, which would interfere with the exercise of independent judgment in
carrying out the responsibilities of a director. Apart from his fees and shareholdings
(which should not be more that 2% of the outstanding stock under the Rules of the SEC)
is independent of management and free from any business or other relationship which
could, or could reasonably perceived to materially interfere with his exercise of
independent judgment in carrying out his responsibilities as a director of the corporation.
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