2016

EBK|XU LAW

NIELGEM S. BEJA

[CORPORATION
LAW| FINALS]
Third year| XU Law| 2016| Dean R. Villanueva
NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
TITLE V BY LAWS
Section 46
Adoption of By-laws
By- Laws definition
- The rules of action adopted by a
corporation
- For its internal internal government and
- For the government of its SHs or members
- And those having the direction,
management and control of its affairs in
their relation to the corporation and as
among themselves.
- Including rules for routine matters such as
calling meetings and the like.
Power to Adopt By-laws
- It is expressly granted in Sec. 36(5) and 46
- But it also inherent upon a corporation
Note:
A statute under w/c a corporation is authorized to
make by-laws upon specifically named subjects
- There is an implied denial of authority to
make by-laws upon not named subjects
This is not allowed
Functions of By-laws
- They are supplemental to the AOI
- Provide details not important enough to be
stated in the AOI
- Define the rights and duties if the corporate
officers and D/T and SH/members
o With reference to the management
of the corporate affairs.
- Regulate the transactions of the business in
a particular way
- Source of authority for corporate officers
and agents
Until repealed or amended, a by-law is a continuing
rule.
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Necessity of adopting By-laws
Legal and Gr. No. 171995 practical necessity
After the existence of the corporation, it must
formally organize.
Until the enactment of the by-laws
- The corporation cannot act for the purposes
of its creation.
The first thing that a member should do is adopt the
by-laws.
Corporation Sole
Unlike ordinary corporations, corporation sole is
only governed by the RULES, REGULATIONS and
Discipline of its religious denomination.
Time and procedure for the adoption
General Rule: By-laws must be filed within 1 month
after the receipt of official notice of the issuance of
the COI.
But: it may be adopted and filed PRIOR TO
INCORPORATION with the AOI.
Remember: the BL will only be effective upon
issuance of SEC of a CERTIFICATION that they are
not inconsistent with the code.
Re. Special Corporations governed by Special Laws
SEC shall not accept their BL or any amendment
thereto unless accompanied by a certificate of the
APPROPRIATE GOVERNMENT AGENCY
- As a proof that it is in accordance with law.
Formal Requisites
- Such as filing of a certified copy of the BL
(SEC)
It is only for recording purposes.
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Note:
A corp. may adopt other rules and regulations
- Provided they are not contrary to the
provisions of the BL, AOI and Corporation
code.
Other rules and regulations do not need SEC
approval
- Unless they involve matters where the law
requires SEC approval
Effect of Failure to file by-laws
Failure to file on time
It will not result to automatic dissolution of the
Corp.
- It may only be subjected to possible
revocation of registration/
suspension/administrative fine
- Before anything else, there must be a
hearing to determine the appropriate
consequences for failure to file on time
- Sec. 20 : it may be considered as a DE
FACTO CORP.
Effectivity of BL
1. Must be construed in accordance to the
general rules of construction re. Contracts.
2. What must be Strictly construed:
- The disfranchisement of members since
they are penal in nature.
If under the BL:
A member whose accounts are suspended, cannot
use the facilities of or avail the privileges of a non-
stock organization, such member may still exercise his
right to vote.
He does not lose his membership.
Reason: An act of default which is made a cause for
expulsion or forfeiture unless it is expressly so
provided, but there must be a proper action by the
corporation expelling him. (SEC opinion)
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3. Applied procpectively
4. Becomes effective only upon the issuance
of Certification by SEC that it is not contrary
to law
- Hence, that is the only time when it must be
observed.
Note: Sec. 46 applies to Domestic Corporations only
- Foreign corps. Licensed to transact in PH:
o BL is governed by the law of their
incorporation.
o The act of SEC of granting a license
is a way of approving of its BL
Since one of the
requirements is a valid BL.
Hence, BL of a foreign corp.
is valid in PH.
Validity of BL
Elements of a Valid BL
1. Not contrary to law and the code
2. Not contrary to Moral and Public policy
3. Must not impair OBLICON
4. Must be general and uniform in their
operation and not directed against
particular individuals
(not discriminatory)
5. Consistent with the charter and AOI
6. Must be reasonable
Consistent with law
A BL provision that is contrary to law cannot attain
validity through acquiescence or on the basis of
long practice, nor give rise to any vested right.
Public Policy
Definition: the governing policy within the
community as embodied in its legislative and
judicial enactments which serve as a basis of
determining what act are to be regarded as
contrary to the public good.
Ex. invalid since contrary to Public policy:
Restrain trade by imposing unreasonable
restrictions on the right of SH to transfer his stocks.
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Must not impair Oblicon
BL must not be applied retrospectively when it can
cause impairment.
Must be general and not directed against a
particular person
Some instances:
An order of certain directors that one of the
members of the board be denied the right
to inspect the books, is invalid
A statute authorizing of a corporation to
pass a by-law for the sale of delinquent
stock for unpaid assessments authorizes a
by-law or resolution declaring a forfeiture
of the stock of a particular stockholder only,
is invalid
Must be consistent with the charter
1. A BL cannot enlarge the rights and powers
conferred by the charter
- Nor restrict the duties and liabilities
- In case it does, the charter will prevail.
2. A BL prohibiting acts w/in the powers
conferred by its charter
- Note however, it is not considered an ultra
vires act
3. When there is nothing in the AOI w/c
suggests power in the corporation to
control regulate or interfere with its SH in
the conduct of their separate individual
business, BL that assumes to do this are
void.
Must be reasonable
This a question of law rather than of fact.
- Where the reasonableness is just a mere
matter of judgement, and upon which
reasonable minds must necessarily defer,
the court would not interfere.
Note: in the absence of any legal prohibition or
overriding public powers, wide latitude may be
accorded to a corporation in adopting measures to
protect legitimate corporate interests.
- Provisions granting continuous
compensation to directors even after the
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termination of their employment for past
services rendered gratuitously is
unreasonable for to permit such,
o Would create an obligation
unknown to law
o Will result to misapplication of the
corporate funds
o Which will prejudice the SHs
Note: Reasonableness will not validate a BL made
by a corporation which it has no power to make
When the SHs alone are affected by the
unreasonableness of the BL, only the SH can attack
such
Binding effect of BL
1.As to the Corporation and its officers
- BL is the self-imposed private laws of a corp.
SUBORDINATE EMPLOYEES
Are not bound without actual knowledge of
the BL
Who is a subordinate employee?
An employee ranked below another employee in
terms of seniority or office hierarchy.
2. As to SHs or members
Gen. Rule : presumed to know the contents of the
BL
- By the mere fact of being a SH or member,
he is charged with notice of the BL
- The presumption is legal and conclusive
- The defense of no actual knowledge will not
warrant.
- Since, the BL is actually approved by the SH
4. As to third persons
General Law: they are not bound by the BL
Exception: Actual or Constructive Notice at the time
of the transaction in question was entered into.
Can a third person exclude the BL?
Ans: Yes, if expressly excluded.
But the BL enters into the contract if he
does not expressly exclude it.
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Note: the Corporation cannot set as a defense that
the BL could not be applied to third persons in
proper cases.
In cases when, they have informed the third person
of their BL or if the third person is actually aware of
such BL.
Exception: the SH/M may permit the D/T or other
officers to disregard the BL
Or the SH may ratify their actions.
When will waiver be equivalent to amendment of
the BL?

PMI Colleges v. NLRC Not valid: A BL provision allows the waiver of a

A corporate contract cannot be held invalid just
because the signatory thereon was not the
chairman of the board which allegedly the
corporations B.
provision of the BL by the vote of certain number of
SH
Note: a BL may only be amended in accordance
with Sec. 48

BL merely operates as internal rules. Section 47

Contents of BY-LAWS

Waiver of BL Place of meeting

General Rule: The person waiving must have Directors/Trustees : anywhere. Inside or out of
knowledge of what he is waiving. PH

BY THE CORP. SH/M : Always be held at the city

Maybe expressed or implied. or municipality where the
principal office of the
It may waive those not required by the charter or corporation is located or if
statute and which operate in favour of the practicable in the principal
corporation. office of the corporation.

Note: the fact that a corporation waives its own BL,
cannot be objected by a third person.
BY SH/MEMBERS
He can if it is he who is protected by the BL.
Hence, he can waive the provision/BL if the said
provision is for his own benefit.
NOTE:
If a corporation contracts or enters into a
transaction, disregarding its own BL
- There is a waiver of the BL
- Provided: the SH/MEMBERS assented to
such act/transaction.
The Directors/Trustees cannot waive the BL if it was
made by the SH for the protection of the
corporation
Quorum
The BL may set the required quorum.
Note: It cannot set a LESSER number required in
those cases which the law requires for the validity
of certain corporate acts.
- The minimum number of votes requires by
the code should not be diminished.
Proxies
The BL may provide for:
1. The form of such proxies
2. The manner of voting them subject to the
date provisions of Sec. 58
The Corporation may add other requirements.

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Qualifications of the directors
The qualifications must not lessen the minimum
requirements by law.
Disqualifications for a director
Also allowed to be stated in the BL
Note: the desired qualifications or disqualifications
must be clearly spelled without the necessity if
being subject to the judgement or determination of
the board.
Compensation to SH/Members
The BL can only provide for the Directors or
Members compensation and NOT FOR SH/MEM
Reason: SH/M do not render service for attendance
at corporate meetings but exercise rights personal
to themselves in the corporation.
Election and term of office of directors or trustees
The BL cannot change what the law requires.
Imposition of penalties or sanctions
The corporation has the power to do such
But it cannot enforce a penalty of forfeiture of
property or stocks for a defaulting member.
In the absence of any provision in the BL authorizing
the impositions of penalties, a violation of BL would
merely constitute in appropriate cases an
actionable wrong for which the ultimate remedy
resides in the court.
MANDAMUS: generally available to compel officers
of a corporation to perform the duties imposed on
them by the BL.
Issuance of certificates of stock
This is left to the hands of the corporation.
Note: the wide authority of the Corporation in to
regulate the transfer of its stocks does not
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empower it to restrict the right of a SH to transfer
his shares, but merely authorizes the adoption of
regulations as to the formalities and procedure to
be followed in affecting transfer.
Note: Sec. 47 is merely DIRECTORY
Failure of the corporation to make provisions for
the matters therein contained will not affect the
validity og the BL nor of the corporate act.
Section 48
Amendments to the BL
Section 48 provides the formalities to be followed in
making amendment or repeal/adoption of BL.
The BL may provide for greater number of votes.
Note: In all cases, amendment/adoption of BL can
only be done in a special or regular meeting.
It cannot be done in a REFERENDUM.
A meeting is necessary to give the SH/M
opportunity to decide on the amendment/adoption.
Delegation of Power
The power may be exercised by the SH/M directly
or indirectly.
It may delegate such to the D/T.
Necessity of a meeting: meeting is necessary in
delegating the power.
Implied repeal or amendment
A BL is impliedly repealed by a subsequent BL.
Waiver of BL provision
See SEC OPINION, OCT.10 1089
Revocation of delegated power of the board or
D/T
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Previous notice of proposed revocation at meeting

not necessary AOI BL
Charter/constitution of Mere rules and
BY LAWS RESOLUTION the corp. regulations
Permanent rule of Mere declaration of the Executed before the Usually after
action of the conduct of will of the corp. in a incorporation by the incorporation by the
corporate affairs given matter. incorporators SH/M
- It is a ministerial Condition precedent for Condition subsequent
act corporate existence
It is limited in its
operation
TITLE VI MEETINGS

Section 49
Not operative as BL: Kinds of Meetings
(Hornady v. Goodman)
Section 50
The election law adopted by a corporation as Regular and Special Meetings
mere rules on motion and not by procedure
specified in the BL for adoption of a BL, to Kinds of Meeting
meet a particular situation then existing,
without any intention to legislate for similar As to Stockholders and Members
future situation, is a RESOLUTION 1. Regular/those held annually
o On the date fixed in the By-law or
o Any date in the month of APRIL of
every year
This is determined by the BOD/BOT
Note: the delegation to D/T to amend or adopt BL is Purpose: Primarily for electing another set of
only TEMPORARY. directors or trustees.

It may be revoked anytime by the majority vote of 2. Special or those held at any time
the outstanding capital stock or of the members. deemed necessary or as provided in the
BL
The delegation cannot be embodied in a BL. It must
only be a SH/M RESOLUTION As to BOD/BOT

Necessity of SEC approval 1. Regular or those held by the board monthly,

Rules and regulation (resolutions) do not require unless the board provide otherwise
SEC approval. 2. Special or those held at any time upon the
call of the president or as provided by the
Except those matters w/c requires such. BL.

Resolution adopted as BL
Necessity of the MEETING
The resolution must be consistent with BL.
Note: the Corporate power is vested in the BOARD
My own interpretation: The resolution shall have the and/or the STOCKHOLDERS and MEMBERS as a
force of a BL if it consistent with the BL. Not that the BODY and NOT AS INDIVIDUALS
Resolution will become a BL.

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Meetings of SH/Members
Fundamental rule of Corporation: unless the
statute otherwise provides, SH/M can act only in
meetings properly convened.
- The written assent of to a matter requiring
action by them is not sufficient.
Meetings of Directors or Trustees
As agents of the corporation, they can only act as a
board and not individually. They must comply with
the requirements of the code such as the required
and prior notice.
Exceptions to the rule
Instances when meetings are no longer required
1. Written Assent by the SH/M is allowed
under Section 16
o For the amendment of the AOI
o Hence, SH/M does not need to
meet
2. When it is evident that the corporation will
be bound by the unanimous act or
agreement of its SH/M although expressed
elsewhere than at a formal meeting
3. Any of the cases mentioned in Sec. 101 and
those under section 23
Requisites for a valid meeting of the SH/M
1. Held at a proper place
2. Held at the stated date and time at the
appointed time or at a reasonable time
thereafter.
3. Called by the proper person
4. Prior Notice
5. Quorum
Can SH/M who failed to attend the meeting
question or ask to set aside the meeting?
Yes, provided that the requirements were not met.
Even if there was a quorum.
Provided further: There was no estoppel,
ratification or waiver on the part of the absent
SH/M
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Note:
When there is no AUTHORIZED PERSON in the
corporation can call for the meeting, a SH/M may
ask the SEC to compel the officers to call for a SH/M
meeting under reasonable grounds.
Section 51
Place and time of meetings of SH
Section 51 is MANDATORY
Shareholders can only hold their meetings on the
places mention by section 51:
1. In the city or municipality where the
principal office of the corporation is located
2. If practicable in the principal place of office
of the corporation
Section93. 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 93 is for MEMBERS of non-stock
corporations
Proper person to call the meeting
1. By the person authorized in the By-law
2. In the absence of such, by the Director or
trustee or by an officer entrusted with the
management of the corporation unless
otherwise provided by law.
3. Section 50: a SH/M may ask sec to compel
an officer to call a SH/M meeting.
Provided: there is no person authorized to
make the call or refused or failed to make a call
4. The Secretary or Director or trustee may
call the special meetings for the removal of
a director as provided in section 28.
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Notice of every meeting required.

Notice: WRITING informing the SH/M of the
meeting
Notice is required when stated by the law or by-
laws. Whether the meeting be regular or special.
Time to give the notice:
SH/M : 2 weeks prior to the regular meeting
1 week prior to the special meeting
Exception: Shorter period is required by the By-
laws.
Note: third persons cannot object in the ground
that no notice was given or it was defective
Requisites of notice of meeting
1. Issued by the proper person
2. Must be in writing
3. State the date, time and the place unless
otherwise provided in the BL
4. State the business to be transacted
5. Sent at a certain time required by law/by-
laws
6. Must comply with any other requirements
by the law.

Statement of purpose of the meeting Other requirements:

1. Sec.77(merger/consolidation)
The following are the purposes which he requires to A copy of the plan of merger or
be stated in the notice: consolidation must be attached
2. Section 118(voluntary dissolution)
1. Election of D/T The notice must be by publication,
2. Removal of the D/T in addition to written notice and
3. Filling of vacancies in the office of the D/T must be sent by registered mail or
4. Ratification of contract of corporation with personal delivery.
a D/T
5. Extension or reduction of corporate term Note:
6. Increase or decrease of capt. Stock Only SUBSTANTIAL compliance is required.
7. Creation, increase of bonded indebtedness If the General and Special Statutory provisions are
8. Sale or other dispositions of all or in conflict
substantially all of the corporate assets - The Special Statute shall apply for matter
9. Investment of the corp. funds in another cover by it
corporation or business for any other
purpose Construction: How the recipient
10. Declaration of stock dividends. businessman would understand.
11. Entering into a management contract A special meeting may not be considered
12. Amendment, repeal or adoption of BL business other than those listed in the
13. Fixing the issued price of no par value share notice of meeting unless there is a
14. Plan of merger or consolidation unanimous waiver.
15. Amendment of the AOI of a close
corporation Effect of failure to comply with the requisites of
16. Voluntary dissolution of the corporation the meeting:
when no creditors are affected
17. Voluntary dissolution where creditors are The meeting is still valid even if improperly held or
affected called, provided the following requisites are
18. Dissolution by shortening the corporate present:
term. 1. The proceeding and the transaction is NOT
ULTRA VIRES
These may be transacted during the annual SH/M 2. SH/M are present or duly represented.
meeting

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Note: Since the meeting is for the SH/M benefit if
the 2 requisites are present they impliedly waive
the irregularity
Union of Supervisors v. Secretary of Labor
Without the signature of the secretary of the
meeting, alleged minutes of the meeting taken by a
mere clerk has neither probative value nor credibility
Section 52
Quorum
Rule: Corporations are permitted to determine in
their by-laws the required quorum in meetings of
SH/M.
Note: The corporation cannot set a number lesser
than the required by the code or law
Any Number but at least two
A corporation may state in the by- laws a NUMBER
LESS THAN THE MAJORITY provided there are AT
LEAST TWO
My own interpretation: A lesser number of
majority is allowed if there are two or more
numbers each representing different categories or
class.
Example:
1. To meet a quorum A NUMBER LESSER
THAN the MAJORITY IS sufficient
2. But it must also provide that A MUCH
LESSER NUMBER THAN THE ABOVE is
required to adjourn the meeting.
Hence if only the presence of 1/2 of the outstanding
capital stock holders are required to constitute a
quorum, then only the vote representing 1/4 of the
present Shareholders in a meeting is required to
adjourn the meeting.
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When can a corporation create a Management
committee?
When there is an unsuccessful attempt by the
corporation or if it would be impossible for the
corporation to get the required quorum of the SH
necessary to transact business, the corporation may
petition the SEC for the appointment if a
management committee, board or body to
undertake the management of the corporation.
Who constitutes the Majority of the outstanding
capital stock and members?
Holders of the outstanding capital stock:
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.
Majority of the members in a non-stock
corporation:
The basis for determining the quorum is the total
number of registered members.
Only those who are actual living registered
members with voting rights.
Best evidence of who are Present members/sh-
Non-stock : THE MEMBERSHIP BOOK
Stock : stock and transfer book
Withdrawal after a quorum
Meaning of withdrawal: a SH/M withdraws/leaves
after a quorum has been declared. In such a case,
the meeting should be adjourned.
Exception: When the withdrawal was purposely
made to break the quorum.
Once a quorum is present, the affirmative vote of
the majority or any number required, is sufficient to
settle the question presented in the meeting.
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All the stockholders are bound to the decision, even Per diem Payment: connotes payment for daily
if there was a withdrawal of some stockholders, services.
which resulted to a number less than the required SH/M do not render services they exercise rights
quorum. personal to themselves.

Note: a Minority group cannot prevent the Matters in which the law requires minimum
corporate action by walking out. number of votes

Death of a Sh/M Note: in this table SH means outstanding capt.

Stock holders
Stock corporations : the SH may generally
transfer his shares. ACTS MIN. REQ. VOTES
The executor/administrator 1. Amend AOI Majority of D/T
duly appointed by the court 2/3 votes of SH/M
may take charge. He is also 2. Elect D/T Majority of the
entitled to vote. SH/members
3. Remove D/T 2/3 votes of SH/M
Until the settlement of the 4. Call a special meeting Majority of SH/M
estate of the deceased, the for the removal of a
stocks of the deceased shall D/T
be held by the executor or 5. Ratify a contract of a 2/3 of the SH/M
administrator. director/trustee of
officer with the
Non-Stock : Membership and all rights corporation
arising from non-stock 6. Extend or shorten Majority of the
corporations are PERSONAL Corp, Term D/T
AND NON-TRANSFERABLE. 2/3 votes of SH/M
7. Increase or decrease of Majority of the
Exception: Unless otherwise the Capt.Stock D/T
provided in the AOI or BL 2/3 votes of SH/M
8. Incure, create bonded Majority of the
Postponement of SH or members meeting indebtedness D/T
2/3 votes of SH/M
Change of the date of meeting fixed in the 9. Sell, lease all or Majority of the
by-laws is not allowed substantially all corp. D/T
assets 2/3 votes of SH/M
When is a postponement of a meeting to later date 10. Invest corp. funds to Majority of the
allowed? others D/T
2/3 votes of SH/M
- For valid reasons 11. Issue stock dividends Majority of the
But the meeting must be made within a reasonable QUORUM OF THE
time after the original fixed date.
BOD
And 2/3 votes of
SH/M
SH/M Compensation
The code does not provide a per diem Note: the
compensation for the SH/M for their attendance in approval of the
the meeting. SH is not required
in the issuance of
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other kinds of or by subsequent ratification, is REQUIRED FOR THE

dividends. TEMPORARY STOPPAGE OF THE OPERATIONS
12. Management contract Majority of the
D/T and Note: In all cases, if there is a tie, the issues or
outstanding proposition simply losses.
capt.stock/memb
er of both Section 53.
corporations. Regular and special meetings of directors or
trustees.
See Sec. 44 for
the exception to Time
this rule Regular Meetings shall be held monthly, unless
13. Adopt BL Majority of sh/m otherwise provided in the by laws
14. Amend or repeal, Majority of D/T Special meetings may be held at any time upon
adopt NEW BL and SH/M the call of the president or as provided in the by
15. Delegate to D/T the 2/3 SH/M laws
power to amend BL
16. Revoke the delegated Majority of SH/M Place
power to amend or Regular and Special Meetings may be held
adopt anywhere in or outside the Philippines, unless
17. Fix the issued price of A majority of the otherwise provided in the by laws
no par value shares quorum of the Teleconferencing and Video conferencing
BOD if authorized may be allowed under RA 8792 Electronic
in the AOI in the Commerce Act
absence of such
authority, by the Notice
majority of the Notice of Regular or Special Meetings
SHM o Shall state the date, time and place of
18. Merger/consolidation Majority of D/T meeting
2/3 votes of SH/M o Must be sent to every director or trustee at
of the constituent least one (1) day prior to the scheduled
corp. meeting, unless otherwise provided in the by
19. Dissolution Majority of D/T laws
2/3 votes of SH/M o May be waived, expressly or impliedly, by the
20. Adopt a plan of Majority of director or trustee
distribution of assets of Trustee
non-stock corp. 2/3 votes of GR: Notice of regular meeting must
Member be given
XPN: Notice of a regular meeting
need not be given IF the articles of
incorporation or by laws specify the time of
Lopez Realty v. Fontecha meeting
XPN to XPN: Notice of a regular
( Mentioned sa book pero wala ko kasabot HHAHAHA) meeting must be given, if the meeting is to
Sec. 52 be held at a place other than that stated in
the articles of incorporation or by laws
SEC OPINION:
The approval of the 2/3 of the total outstanding GR: Meetings held in absence of
capital stock either prior to the voting of the board some directors and without any notice to

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
them is illegal and may be questiond by any
objecting director or stockholder
XPNs:
1. Resolution is subsequently ratified by the
absent director expressly or impliedly
2. Rights have been acquired by innocent third
persons
Section 54.
Who shall preside at meetings.
GR: The president shall preside at
the meeting even if the chairman is present
XPN:
1. By laws provide otherwise
2. Stockholder may temporarily preside at a
meeting pending selection of a presiding
officer
Section 55.
Right to vote of pledgors, mortgagors, and
administrators.
The right to vote is inherent in and
incidental to the ownership of stock. Only
legal owners of shares have the right to
vote.
GR: The government may not vote
the shares and elect the members of the
board
XPN:
1. Where government shares are taken over
by private persons who registered them in
their own name
2. Where the shares acquired with public
funds somehow landed in private hands
Right to vote in a Stock corporation
A. Non Voting Shares may vote in certain cases
provided in Section 6
a. Merger and consolidation
b. Amendment of articles of incorporation
c. Amendment or adoption of by laws
d. Increase or decrease of capital stock
e. Incurrring, creating or increasing
indebtedness
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f. Investment of corporate funds in
another corporation
g. Dissolution
h. Sale, lease, exchange, mortgage,
purchase or other disposition of
substantially all corporate assets
B. Disqualified Shares are not considered
outstanding shares and not entitled to vote
C. Preferred and Redeemable Shares have right to
vote; they may also be deprived of right to vote,
unless otherwise provided in the code.
D. Delinquent shares are not entitled to vote
E. Treasury shares have no voting shirts
F. Fractional shares have no voting rights unless
they constitute at least one full share
G. Shares not fully paid which are not delinquent
are entitled to vote
Right to vote in a Non-Stock
corporation
Each member is entitled to one
vote, unless the right to vote is limited,
broadened or denied.
Manner of Voting
1. Directly
2. Indirectly, through representative
a. Proxy
b. Trustee under voting trust
agreement
c. Executors, administrators, receivers
or other legal representative duly
appointed by court
Representative Voting
A. Executors, administrators, receivers or other
legal representatives duly appointed by the
court may vote in behald of the stockholders or
members without need of any written proxy
B. Parents of Minor are joint legal guardians of the
property of the child, including shares, without
necessity of court appointment. In case of
disagreement, fathers decision prevails
C. Pledgee or Mortgagee of Stockholders Shares
have the right to attend and vote at meetings
only when expressly given such right in writing
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
by the pledgor or mortgagor because the latter
retains ownership over such shares.
Authorizzation must be recorded on the
corporate books by pledgor or mortgagor.
D. Officer or Agent of Corporation Owning Shares
may vote when the by laws of such corporation
or the board of directors allow it
On death of a stockholder, his administrator or
executor becomes vested with the legal title to
the stock and entitled to vote thereon
o Where no legal representative has been
appointed and no partition has been
executed, no person can vote on the shares
of the deceased since nobody can legally
represent his estate
Section 56.
Voting in case of joint ownership of stock.
GR: Shares owned jointly by two or
more persons requires the consent of all co-
owners in order to vote such stock
XPN: (Where no such such consent
required)
1. There is a written proxy executed by the
joint owners authorizing one or some of
them or any other person to vote for all
2. The shares are owned in an and/or
capacity; any one of the owners can vote on
said shares
Sec. 57. Voting right for treasury
shares. Treasury shares shall have no
voting right as long as such shares remain
in the Treasury.
Voting right for treasury shares.
Sec. 57 expressly denies any voting rights to
treasury shares as long as such stock
remains in the treasury.
They are not formally cancelled and are
therefore subject to reissue by the
corporation at some future time.
To give voting rights to treasury shares
could enable the directors to prolong their
stay in office against the wishes of the
holders of the majority of the stock.
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Such shares are also not entitled to
dividends.
The only right which a corporation has over
treasury shares is to reissue the same for a
valuable consideration.
In case of sale or reissue, treasury shares
regain whatever voting rights and dividends
to which they were originally entitled.
Sec. 58. Proxies.
Meaning of proxy
A proxy designates THE FORMAL WRITTEN
AUTHORITY given by the owner or holder of
the stock, who has a right to vote it, or by a
member, as PRINCIPAL, to another person,
as AGENT, to exercise the voting rights of
the former.
It is also used to apply to the HOLDER OF
THE AUTHORITY or the PERSON
AUTHORIZED by an absent stockholder or
member to vote for him at a stockholders
or members meeting.
It is also used to refer to the INSTRUMENT
which evidences the authority of the agent.
A proxy is thus a SPECIAL FORM OF
AGENCY.
The proxy holder is in the eye of the law an
AGENT and as such a FIDUCIARY.
Purpose and use of proxies
1. PRESENCE OF QUORUM IN MEETINGS The
system of proxy voting is not a mere
convenience or favor to the distant and
indifferent shareholders. It assures the
presence of a quorum in meetings of
stockholders of larger corporations.
Without this device, the inability of the
stockholders/members to attend in person
might make it impossible to secure the
quorum necessary to take corporate action.
2. EXERCISE OF RIGHT TO VOTE THOUGH
ABSENT Proxy voting enables those who
do not wish to attend a stockholders or
members meeting to protect their interest
by exercising their right to vote through a
representative.
3. VOTING AND MANAGEMENT CONTROL
Proxy voting is one of the devices of
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
securing control or management in the
corporation.
Voting by proxy
The right to vote by proxy is specifically
recognized:
1. in the election of the BOARD OF
DIRECTORS/TRUSTEES in Sec. 24
2. in voting in case of JOINT
OWNERSHIP OF STOCK in Sec. 56
3. in voting BY TRUSTEE under VOTING
TRUST AGREEMENTS in Sec. 59
4. in voting BY MEMBERS IN NON-
STOCK CORPORATIONS in Sec. 89
Voting by proxy is EXPRESSLY allowed by
Sections 55 (par.2) and 58.
Sec. 47(4) provides that a corporation may
provide in its by-laws the FORM FOR
PROXIES of members / stockholders and the
MANNER OF VOTING THEM
Voting by proxy is also recognized by
IMPLICATION under Sec. 51 (par 2.) when it
speaks of stockholders/members of the
corporation present or represented at the
meeting
The right to vote by proxy may also be
justified on principles of AGENCY (Art. 1876,
Civil Code)
The stockholder may deliver, in person or
by mail, his proxy vote directly to the
corporation.
The right to vote by proxy necessarily
includes the right to SOLICIT proxies. Thus,
the right to have access to the list of the
corporations stockholders or members is
needed to solicit proxies.
Voting by proxy is NOT allowed in BOARD
MEETINGS pursuant to Sec. 25
Who may be a proxy
Sec. 58 imposes NO LIMITATION as to the
persons who may be appointed as proxy.
Hence, a stockholder/member may appoint
any person he sees FIT TO REPRESENT HIM.
By-laws restricting his right in this respect
are likewise VOID.
Since a proxy ACTS FOR ANOTHER, he may
act as such although he himself is
disqualified to vote his shares. Thus, a
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stockholder disqualified to vote because his
stock has been declared delinquent may
vote the stock of his PRINCIPAL which is not
delinquent.
A stockholder/member who himself is not
entitled to vote cannot vote by proxy.
The SAME PERSON may act as proxy for
ONE or SEVERAL stockholders/members.
Directors/trustees CANNOT attend/vote by
proxy at BOARD MEETINGS but they may
ACT AS PROXIES in STOCKHOLDERS
MEETINGS.
Nature of proxies
Proxies shall be:
1. In writing
2. Signed by the stockholder or
member
Therefore, the appointment of proxy is
PURELY PERSONAL
To be valid, a proxy to vote stock must have
been GIVEN BY THE PERSON who is the
LEGAL OWNER OF THE STOCK ENTITLED TO
VOTE THE SAME at the time it is to be voted
A designated proxy may NOT further RE-
DESIGNATE ANOTHER under the same
proxy, UNLESS the stockholder/member
who executed the proxy gives his CONSENT
IN WRITING
An ALTERNATE PROXY can only act as proxy
in case of non-attendance of the other
designated proxy.
Limitations on proxies of
stockholders or members
1. Proxies must be in WRITING
SIGNED by the
STOCKHOLDER/MEMBER and
FILED before the scheduled meeting
with the CORPORATE SECRETARY
Therefore, ORAL PROXIES are NOT
VALID
2. A proxy is valid only for the MEETING for
which IT IS INTENDED, UNLESS otherwise
provided in the proxy.
The authority may be GENERAL or
LIMITED
3. A CONTINUING PROXY must be for a period
NOT exceeding 5 years at any one time.
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Otherwise, it shall NOT be valid and
effective AFTER such period.
Notes:
PD 902-A empowers the SEC to PASS UPON
the VALIDITY of the issuance and use of
proxies and voting trust agreements for
absent stockholders/members
A proxy SOLD for a consideration is
CONTRARY TO PUBLIC POLICY.
Form and execution of proxies
1. Generally, NO PARTICULAR FORM
REQUIRED
o In the absence of by-laws provision
to the contrary, no particular form
or words are necessary to
constitute a proxy.
o All that is necessary is that it shall
be in WRITING and SIGNED by the
stockholder or member (Sec. 58)
and shall show an INTENTION to
empower the person to whom it is
given to act as agent in voting the
stock so as to enable the election
officers to know who is authorized
o In the absence of a provision in the
AOI or by-laws, the board of
directors CANNOT prescribe the
form of proxies other than as
provided for under Sec. 58
o Unless expressly so provided, a
written proxy, even if not notarized
or is without documentary stamps
or is unattested by witnesses, will
suffice as long as it authorizes the
person to whom it is given to act as
agent for and in behalf of the
stockholder/member executing the
same.
o The proxy should be DATED. If a
duly accomplished and executed
proxy is indicated, the date of the
proxy shall be: the postmark / date
of dispatches indicated in the
election mail, or if not mailed, its
actual date of presentation.
o NEITHER is a proxy instrument
rendered INVALID by the fact that it
is UNDATED or the HOLDERs NAME
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is in BLANK or the authority was
written in ink of different color
from that used in the signature of
the proxy.
o If the name of the proxy is left in
BLANK, the corporation receiving
the proxy is at liberty to FILL IN ANY
NAME IT CHOOSES. By returning
the proxy form UNFILLED, a
stockholder / member is deemed to
have constituted the corporation
itself as proxy and therefore the
latter may fill it up pursuant to the
authority given by the
stockholder/member.
o To insure the presence of a
quorum, corporations usually
provide in the proxy form that in
case of the non-attendance of the
proxy named, the stockholder
authorizes the CHAIRMAN or ANY
OFFICER of the corporation to
exercise all the rights as the proxy
of the stockholder.
o For CORPORATE MEMBERS, a
BOARD RESOLUTION authorizing
the signatory to the proxy should
be submitted. Being a juridical
person, a corporation can only act
through its board of directors. In
case of a stock corporation, it must
adopt a resolution authorizing the
proxy and to execute it in a formal
corporate manner.
2. Regularity in execution PRESUMED
o There is presumption of regularity
in the execution of proxies
o They should be ACCEPTED if they
have the appearance of prima facie
authenticity in the absence of a
timely and valid challenge and are
SIGNED as the names appear in the
record of the corporation
o Rules & procedures relating to
execution of proxies should be
decided before each meeting.
Stockholders / members should be
informed of them for their
guidance.
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
o The trend in court decisions has
been toward UPHOLDING he ruling
of inspectors of election lacking
extraordinary circumstances.
Extent of authority of proxy
1. GENERAL PROXY
o Confers a general discretionary
power of attorney to:
a. Attend and vote at an
annual meeting with all the
powers the undersigned
would possess if personally
present
b. Vote for directors
c. Vote for all ORDINARY
MATTERS that may properly
come before a regular
meeting
o It has no authority to vote for:
a. FUNDAMENTAL CHANGES in
the CORPORATE CHARTER
b. OTHER UNUSUAL
TRANSACTIONS (e.g.,
merger/consolidation)
2. LIMITED PROXY
o Limits the power conferred
o It MAY:
a. RESTRICT the authority to
vote to SPECIFIED MATTERS
ONLY
b. Direct the MANNERin which
the vote shall be cast
Denial of right to vote by proxy in
the by-laws
1. IN STOCK CORPORATIONS the
appointment of proxy is purely personal
and an incident of ownership and therefore,
a by-laws provision prohibiting the use of
proxy by stockholders is CONTRARY TO LAW
and hence, NULL & VOID
2. IN NON-STOCK CORPORATIONS the right
to vote by proxy or even the right to vote
itself may be DENIED to members in the AOI
or by-laws (Sec. 89, pars. 1 & 2) as long as
the denial is NOT DISCRIMINATORY
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Restrictions on right to vote by
proxy in the by-laws
1. The by-laws of a stock corporation may
IMPOSE REASONABLE RESTRICTIONS on the
right to vote by proxy as long as the
restrictions do not conflict with the law or
deprive the stockholders of the right
thereby given them
Examples of reasonable restrictions
on the right to vote:
A deadline for the
submission of proxies
before the scheduled
meeting (Note: If there is
no deadline for the
submission of proxies
provided for in the by-laws,
the corporation may not fix
a deadline for their
submission; hence they
may be submitted any time
before the meeting)
No proxy shall be valid or
voted on after a certain
length of time from this
date
No person shall vote at any
meeting by virtue of any
proxy executed within a
certain period of time prior
to such meeting
No such proxy shall be used
at more than one annual
meeting of the corporation
2. Restrictions on the right to vote by proxy
shall be VOID only where they operate
unjustly, unreasonably and oppressively so
as to work the disenfranchisement of a
majority of the legal votes
Proxy given to 2 or more persons
1. Action of the majority
o A proxy in favor of several persons
is presumed by the action of the
majority to represent the givers
will.
o The dissenting minority of them
cannot withdraw and breakup the
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
quorum and meeting to effectuate
their dissent.
o It is customary in proxies to 3 or
more persons to authorize a
majority of those who attend or if
only one attends, then that one, to
exercise the power given him
o If it be given to 2 persons, they or
either of them are usually
authorized to exercise the power.
o Where a proxy is given to 3 persons
in one instrument, the 3 of them
must agree upon the vote and in
case of conflict, the rule of majority
of the 3 governs.
o A proxy may be revoked when it
runs to several proxies who cannot
agree on a vote.
2. Rule where all proxies undated
o Where the corporation receives
more than 1 proxy from the same
stockholder and all are undated,
the postmark/electronic dates shall
be considered
o If the proxies are mailed on the
same date, the one bearing the
LATEST TIME OF DAY indicated in
the postmark or LATEST TIME OF
DISPATCH appearing in the
electronic mail shall prevail
o If proxies are not mailed, then the
time of their ACTUAL
PRESENTATION is considered. That
which is PRESENTED LAST will be
recognized.
3. Number of shares to be represented by
each proxy
o If the stockholder intends to
designate several proxies, the
number of shares of stock to be
represented by each proxy shall be
specifically indicated in the proxy
form.
o If some of the proxy forms do not
indicate the number of shares, the
total shareholding of the
stockholder shall be tallied and the
balance thereof shall be allotted to
2016|Finals
the holder of the proxy form w/o
the number of shares
o If all are in blank, the stocks shall be
distributed EQUALLY among the
proxies. The number of persons to
be designated as proxies may be
LIMITED by the by-laws.
Revocation of proxies
1. Generally
o Proxies, even those with irrevocable
terms, have always been
considered as REVOCABLE unless
coupled with an interest
o Their revocation may be by:
a. Formal notice
b. Orally
c. Conduct (e.g., by
appearance of the
stockholder/member giving
the proxy; or the issuance of
a subsequent proxy; or the
sale of shares)
2. Last proxy given revokes all previous proxies
o The last proxy given is deemed a
revocation of ALL PREVIOUS proxies
o When 2 proxies are offered, then
the proxy that appears from the
evidence to have been LAST
EXECUTED will be accepted and
counted under the theory that the
latter, being the more recent proxy,
constitutes a revocation of the
former w/o the necessity of
informing the former attorney-in-
fact of the revocation of his
authority
o To prevent embarrassment on the
part of the first appointee, the
revocation should be
communicated to him
o Where a corporation receives more
than 1 proxy from the same
stockholders and they are all
undated, the postmark / electronic
dates or the time of their actual
presentment shall determine the
proxy to be counted
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

o Should there be no sufficient time o A proxy may be renewed for not

to verify the proxies, the corporate more than 5 years for each renewal
secretary must refer the matter to o It can be both specific and
the presiding officer whose continuing
decisions will be binding or to a
special committee of inspectors
Section 59
which is empowered to pass on the
Voting Trust Agreement
validity of proxies.
Voting Trust Agreement Definition:
Duration of proxy
Proxies expire either by their OWN
An agreement in writing whereby one or more
TERMS or at a STATUTORY TIME AFTER
stockholders transfer their shares to any person(s)
DATE
or corporation having authority to act as a trustee
1. Limited and specific proxy
for the purpose of vesting in such person(s) or
o It cannot be exceeded/extended
corporation as trustee(s) voting or other rights
o It cannot be implied
pertaining to the shares for a certain period, not
o If proxy is for a certain meeting, it
exceeding that fixed by the code and upon terms
can only be used at such meeting
and conditions stated in the agreement.
o If it is for a time stated, it can be
used at any meeting within the
Purpose:
period fixed not exceeding 5 years
at any one time
To confer upon the trustee the right to vote and
o Unless otherwise provided in the
other rights pertaining to the shares.
proxy, it shall be VALID only for the
meeting for which it is intended
Requisites of a voting trust agreement
2. Continuing proxy
o One which authorizes the holder
a. Notarization
thereof to vote for the absent
b. In writing
stockholder/member at any
c. Specific terms and conditions
meeting of stockholders/members
d. Certified copy filed with the SEC
for a FIXED OR INDEFINITE PERIOD
and Corporation
OF TIME
o If the proxy authorizes the holder to
What should a trustee do?
vote at any and all regular and
special meeting without provided
Shall execute and deliver to the transferor voting
any limitation with respect to the
trust certificates which shall be transferable in the
period of activity, it shall be valid
same manner and with the same effect as
only for 5 years from its date
certificate of stock.
o If the stockholder or member does
NOT revoke a continuing proxy or
Status of the parties
does NOT appear at any meeting
nor give another proxy to another
A. Trustee : he has the colourable fictitious
person, it shall CONTINUE TO BE
title for the sole purpose of voting upon
EFFECTIVE until its EXPIRATION
stocks
o As a matter of policy, the SEC is
against the use of continuing
Status of transferee stock
proxies without specific periods of
1. Retains the equitable or beneficial
time
ownership of the stock
3. Renewal of proxy

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

2. Retains the right of inspection of corporate
books
3. Retains right to receive dividends collected
by trustee
4. Retains right to recover his stock at the
expiration of trust
a. Causing its affairs to be managed in such a
way as they may think best to further the
ends of the corporation
b. To carry out a particular policy with a view
to promote the best interest of all the
stockholders

Exception: (hence, the agreement is not valid)

Who has the right to examine or inspect The consideration given, gives a private
agreement? benefit to the stockholders
1. Any stockholder
2. Transferor Powers and Rights of Voting Trustees
3. Trustee(s) 1. Right to vote and other rights pertaining to
the share
Right to transfer 2. Right to vote in person or by proxy
Any stockholder 3. Right of inspection of all corporate books
and records
4. Legal title holder or owner of the shares
By the end of the Agreement:
1. All rights granted in a voting trust Proxy Voting Trust
agreement shall automatically be expired at 1. No Legal Title to 1. Trustee
the end of the agreed period the shares acquires legal
2. The voting trust agreement and certificate title
of stock in the name of the trustee shall be 2. Revocable at any 2. Irrevocable at
deemed cancelled time definite period
3. New certificate of stock shall be reissued in 3. Can only act at 3.Can vote exercise
the name of the transferor the specified all the rights of the
stockholders or transferring
Exception: members stockholder
meeting
When it is expressly renewed 4. Votes only in the Votes even in the
absence of the presence of the
Note: A Voting trustee may vote even by proxy stockholder Stockholder
provided it is not prohibited in the agreement 5. Usually of Longer
shorter period or
Corporate Control devices duration
1. Management Control 6. Notarization not Required
It is determined by the votes of the required
stockholders 7. No right to Has the right to inspect
2. Voting Agreements inspect books
3. Voting Trust
4. Classification of Common Shares
5. Pyramiding

Validity: Purpose of combination and pooling of

agreements among Stockholders

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Title VII
Stocks and Stockholders
Section 60
Subscription Contract
Subscription
Is an offer to acquire a specified number of
unissued shares of an existing corporation.
How participation in a corporation acquired
1. Stock corporation, a person may become a
shareholder:
a. By subscription Contract with existing
corporation for the acquisition of
unissued shares
b. By purchase of treasury share
c. By transfer from a previous stockholder
of the outstanding shares or existing
subscription to shares
2. Non-stock Corporation
a. By a contract with
corporation
Note: the modes of entering into a contract with
the corporation may vary in accordance with the BL
or Charter.
What is a Warrant?
A type of security which entitles the holder the right
to subscribe to a predetermined number of issued
or existing shares in the future
Detachable: the warrant may be sold,
transferred or assigned to any person by
the warrant holder separate from and
independent of the corresponding
beneficiary securities
Kinds of Warrant
1. Subscription warrant : subscribe to a
predetermined number of issued shares
2. Covered warrant : Existing shares in the
future
2016|Finals
Subscription Contract
Subject Matter
Subscription can only be made upon stocks which
have never been issued.
Subscription to
a. Original issue of stocks or
b. Increase of capital
Form
- The law does not require it to be in writing
- Writing only for convenience
Absence of express Contract
- Still liable if:
o A person accepts a certificate of
stock from a corporation or who
acts as stockholder by participating
the in meetings or making payment
Note: In rural banks, all shareholders should be
citizens of the Philippines, or corporations or
associations who are qualified under PH laws.
Kinds of Subscription
1. Pre-incorporation Subscription
2. Post incorporation
3. Conditional Subscription
4. Absolute Subscription
5. Subscription with a special term
Pre-Incorporation
Before the incorporation
- It is a binding contract among subscribers
Different from subscription due to increase if capital
stock
o in here initial payment is explicitly
required.
Post Incorporation
- When does he become a subscriber?
o Upon the acceptance of the
corporation of a SHs offer
Even if he has not paid yet
Exp: When
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

1. the subscription May not be legally May be released, since

agreement states released by the Corporate creditors are
otherwise or corporation from the not privy to the
2. when there is a obligation to pay contract.
statutory or charter
provision These differences only apply in TREASURY SHARES
3. or an increase in
authorized capital
stock
Note:

Conditional Subscription Parol subscription: not within Statute of

- Subject to a condition Frauds
o May be a past event unknown
o Or future Exp: When the oral subscription is P500.00 or
o Or Uncertain event more and no partial performance has been
Which may or may not made
happen - In the absence of written note or
- He does not become a subscriber until the memorandum
condition happens. - WILL BE UNENFORCEABLE

Absolute Subscription
Not subject to any condition Difference among:
From the time the subscription is accepted, the a. Subsequent Subscription
subscriber becomes liable b. Pre-incorporation
c. Subscription to an increase capital stock
One with a Special Term *research
- Where a corporation agrees to do
something
- The fulfilment is not a condition precedent Stock Option
to the accrual of liability of the subscriber or
the acquisition of the rights of a stockholder A privileged granted to a party to subscribe to a
- It is an absolute subscription certain portion of the unissued capital stock of a
corporation
So what happens if the special term is not - Within a certain period and under the terms
complied? and conditions of the grant
- The SH cannot rescind - exercisable by the grantee at any time
- Remedy: Action for damages within the period granted.

Exp: (Rescission may be availed) SECs Policy

- If the term is extended by the parties as a The grant of the option shares at par for a
resolutory condition period of 3 years
- Only from the time the corporation starts
Subscription and Purchase of Stock commercial production
o after which the options are
Subscription Purchase required to pay a gradual yearly
Full payment is not Full payment required increase in price of the shares
necessary before he - Depending on what may be considered
becomes a subscriber reasonable

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Rules governing grant of stock
SECs approval must be acquired before a
corporation can grant or issue any stock option
1. The corporation must file a petition
a. Under oath
b. Signed by the President or any
official authorized by the BOD
SEC must be guided with the ff:
1. Stock options granted to stockholders
ratably in proportion to their shareholdings
may be allowed
2. S.O. granted to EE or officials who are not
members of the board may also be allowed
- After a review of the scheme
3. Those granted to those who are not SHs
- May be granted only upon showing that the
board has been duly authorized to grant
such
- By the charter or SHs resolution
o By voting or non-voting SHs
o Excluding treasury stocks
4. Those granted to directors or managing
groups and its officers
- Must be approved in a SHs meeting
- 2/3 votes including non-voting SHs
- Certification by the SECRETARY
o Must state the number of shares
represented in said meeting
o And the number of votes cast for or
against the grant of optional rights
5. Exercise of option
- Must be done w/in 3 years from approval
thereof
- Unless sooner terminated by SEC
- Extendable: Upon SECs approval
6. Transferrable
- UPON APPROVAL OF SEC
Note: The grant will be subjected to SECs
determination as to the grants reasonableness,
scheme, plan, compensation or consideration.
WHEN IS THE APPROVAL OF SEC NOT REQUIRED?
In international development financing institutions
2016|Finals
Provided:
1. The grant shall be approved by the majority
of the subscribed capital stock of the
corporation.
2. A certified Copy of the stock option plan of
agreement shall be submitted to the SEC
within 30 days from the date of execution
Liability of SHs to creditors on UNPAID
subscriptions
GR: Persons dealing with the corporation are
presumed to know that they can have recourse only
against the property of the corporation
-in case the Corporation cant pay
- The SHs cant be compelled to make good of the
deficiency
Trust Fund Doctrine
Stock subscriptions are in the nature of trust fund
- They must be unimpaired for the creditors
Hence, in case a SH fails to pay his subscription, the
creditors may demand payment
When will a creditors cause of action arise?
- After he has exhausted all other legal
remedies against the Corporation
EXP: Corporation is insolvent
Note: Subscribers liability for unpaid subscription
cannot be compensated or set-off with the value of
his shares nor can stock dividends declared be
applied as payment for the same
- NO creditor-debtor relationship between
SH and Corporation with respect to his
shares of Stock
- BUT the corporation may apply the
dividends for the unpaid balance of
delinquent stocks. (pero cash dividends ra
diba?)
Release of subscriber from Liability for Unpaid
Subscription
An unpaid subscription is an ASSET to which the
corporations creditors may look for payment
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

benefit of stockholders, members, creditors, and other persons in

When can a corporation release a Subscriber from interest. From and after any such conveyance by the corporation of
his unpaid obligations? its property in trust for the benefit of its stockholders, members,
creditors and others in interest, all interest which the corporation
1. Upon valuable consideration or had in the property terminates, the legal interest vests in the
2. Unanimous consent of the SHs trustees, and the beneficial interest in the stockholders, members,
creditors or other persons in interest.
3. Reduction of the Capital Stock
Upon the winding up of the corporate affairs, any asset distributable
4. Amount of Liability deducted from the value to any creditor or stockholder or member who is unknown or cannot
of Shares of SH with Appraisal Right be found shall be escheated to the city or municipality where such
assets are located.
5. Consent to the Subscription was Vitiated
Except by decrease of capital stock and as otherwise allowed by this
(Actually the subscriber is the one entitled Code, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts
to annul the contract) and liabilities.
Provided: it will be shown that the Creditors will not
be prejudiced Refund where proposed increase in capital stock
abandoned

Note: The approval of the SHs on the increase of the CS is

1. When Creditors are not prejudiced just an initial step in the process of legally effecting
- A contract of subscription is a contract such increase.
among the subscribers Other steps (not exclusive):
- In a sense it creates Estoppel a. Minimum amounts of Subscriptions
o A subscriber cannot withdraw b. Payments to carry out the increase
without the consent of all the c. Governments approval
others
2. SEC. 41: A corporation may purchase its If the corporations cannot proceed with the
own shares subsequent steps after the approval of the SHs and
- Even if it has unpaid subscriptions it appears that the corporation cannot hold
- Provided: they are paid out of the indefinitely or for an unreasonable time the
UNRESTRICTED RETAINED EARNINGS payment of subscriptions to the proposed increase,
- Even without the consent of SHs the BOD, in GF, may authorize the refund of the
3. The release of a subscriber is similar to same to the subscribers.
repurchase of a corp.s own shares. - Why the board and not the SH?
4. A subscription agreement cannot state the o All matters involving contracts are
payment shall be taken upon the dividends. decided by the board, since they
are the ones who represent the
Refund of Subscription Payments corporation

1. A subscriber who voluntarily remits an Section 61

amount in excess of that stated in the call Pre-incorporation subscription
- Is ESTOPPED from claiming such excess
- because once payment is accepted by the Pre-incorporation Subscription
corporation, it becomes part of the assets - Mandatory
- Any reduction to the asset constitutes a - 25/25 requirement
violation of Art. 122
Section 122. Corporate liquidation. - Every corporation whose charter Revocability of Pre-incorporation Subscription
expires by its own limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes is terminated in any contract
other manner, shall nevertheless be continued as a body corporate
for three (3) years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or Conditions:
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
1. All the subscribers agree or
purpose of continuing the business for which it was established. 2. When the corporation fails materialize
At any time during said three (3) years, the corporation is authorized
and empowered to convey all of its property to trustees for the
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
WHEN IRREVOCABLE
1. 6 Months from the date of subscription
2. After the submission of the AOI to the SEC
although beyond the 6 months period
Reason for Irrevocability
Prevents the subscriber from speculating on the
stocks of a proposed corporation
- Protects the corporation from irresponsible
subscribers
Effect of Filing the AOI
General rule: the period of irrevocability is only for
a limited time
EXP: After the AOI has been submitted the
subscription becomes irrevocable
Hence, in this period it can be revoked only in
accordance with law or in case of fraud.
Section 62
Consideration for Stocks
Sources of Corporate Capital
1. Funds furnished by SHs
2. Borrowings
3. Profits and Stock Dividends
Funds Furnished by SHs
Every corporation must issue stocks or equity
securities
- To persons who want to invest capital in it,
for money, property, or services.
Equity Securities: represent ownership
rights
- Which may vary on the kind of stocks
- This entitles the holder to participate in the
earnings of the Corporation
- Upon Dissolution, those assets which
remain after the corporate debts have been
paid
Other definitions of Equity Security
1. Stock (shares) that represents ownership of a
firm. Equity securities usually provide steady
income as dividends but may fluctuate significantly
2016|Finals
in their market value with the ups and downs in the
economic cycle and the fortunes of the issuing firm.
2. Right to subscribe for, or convert another security
(such as a bond) into, the common stock (ordinary
shares) of a firm.
Equity Capital: the capital contributed by the SHS
- In exchange of for shares of stock
Other meaning:
Capital (as stock or surplus earnings) that is free of
debt; especially : capital received for an interest in
the ownership of a business
Borrowings
Loans or advances from creditors.
- In such a case the Corporation receives a
DEBT SECURITY BOND
Corporate Bond: written promise by a
corporation to pay a definite sum of money
at a future date
o at a fixed interest
Debt securities are liabilities of the Issuer
- The convertibility feature of the bonds to
shares does not make them EQUITY
SECURITIES.
- Unless actually converted into sharers,
bonds cannot be considered as capital to
form part of the equity portion in the
balance sheet.
- The conversion, is more of an ISSUANCE OF
SHARES by offset of liabilities which
requires prior approval of the SEC
Profits and Stock Dividends
Effect of Declaration of dividends
To convert the surplus assets into a permanent
account forming part of its capital stock.
Power to issue stock
Express and inherent in every corporation
Issue is generally employed to indicate the
making of a SHARE CONTRACT
Share Contract
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

The transaction by which a person becomes the creditors of a corporation in the process of a bona fide
owner of shares and by which new shares contracts reorganization of such corporation made in good faith
are created and not for the purpose of avoiding the provisions of this
Act, either in exchange for the securities of such security
holders or claims of such creditors or partly for cash and
Note: A corporation can issue shares from the
partly in exchange for the securities or claims of such
unsubscribed portion of its capital stock before the security holders or creditors; or the issuance of
original subscriptions are fully paid. additional capital stock of a corporation sold or
distributed by it among its own stockholders exclusively,
Power to issue shares of stocks where no commission or other remuneration is paid or
- BOD given directly or indirectly in connection with the sale or
- No Shs approval required distribution of such increased capital stock.

Approval of SEC for issue of shares Note: authorized and unissued shares must first be
1. Issuance taken out of an increase capital registered with SEC or declared exempt from
stock registration by sec
- A Corporation may issue shares out of the - Before they can be issued.
remaining unissued shares provided that
such shares have already been registered Different Modes by which shares may be issued
with the SEC 1. By subscription
- Before and after incorporation
- A prior permit/license of the offering stock - To original unissued stocks
must be secured from the SEC 2. By sale of treasury stock after incorporation
for money property or service.
Note: NO license if required if: 3. By subscription to new issues of stock
1. The issuance is NOT PERMITTED in the - When all the original stock has been issued
AOI and the amount of the capital stock
- Hence the permit of the SEC will not defeat increased
the AOI 4. By making stock dividends
2. Or the issuance falls under the
exemptions under art. 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
Original Issue
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
When the stock first passes from the corporation to
extend to shares to be issued in compliance with laws requiring stock offerings or minimum the hands of the SH.
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.
Note: A stock cannot be sold below par or issued
Note: SHs are entitled to exercise their pre-emptive price at original issue
right to subscribe to proposed issuance of shares in
proportion to their existing shareholdings Consideration for the issue of stocks and bonds
May be issues in exchange for any or a combination
Issuance done in course of and as part of the of any two or more of the considerations
process of increasing capital stock enumerated in Sec. 62
- Exempt transaction
- Not subject to registration
See Revised Securities act Sec. 6 (a-4)
(4) The distribution by a corporation, actively engaged in
the business, authorized by its articles of incorporation,
of securities to its stockholders or other security holders
as a stock dividend or other distribution out of surplus; or
the issuance of securities to the security holder or other
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Limitations:
Sec 62
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;
Payment for shares must be ACTUALLY RECEIVED by
the corporation
The value thereof shall be initially determined by
the incorporators or the BOD
Subject to SECs approval
Hence, receivables cannot be treated as Cash
actually received.
- They may be treated as property as
property payment subject to verification by
SEC of its existence and collectability
- And the condition that the same shall be
held in ESCROW until actual payment is
made
Note: New Issues of Stock may include the
following:
1. Original Issue
2. Shares issued from the balance of an
existing authorized capital stock
3. Shares issued out of increase in Capt. Stock
4. Shares issued by way of dividends.
Sec 62
5. Amounts transferred from unrestricted retained
earnings to stated capital;
Declaration of dividend involves issuance of Stocks
directly paid from amounts transferred from
unrestricted retained earnings to stated capital.
2016|Finals
Since the restrained earnings have already been
applied as payment to the issuance of shares
covering the stock dividend declaration, the same
can no longer be reapplied as payment to
subsequent subscription rights
Other Limitations
1. They should be not issued in exchange for
promissory notes or future services
2. It cannot issue its stocks as a gratuity
- But it lawful to issue BONUS stock to
officers or EEs as incentives
- Or for services actually rendered
o In such case it is not Gratuitous
Amount of Consideration
Not less than par value or issued price
Exp: Treasury Shares
Provided: it is reasonable
Watered Stocks
Issued for considerations less than the par value or
issued price
Note: US dollars will be considered as payment in
property if not converted to Philippine Peso
Outstanding Shares as Payment
A corporation may issue its own stocks in exchange
for outstanding shares in case of reclassification or
conversion.
- Thus a holder of preferred shares with
CONVERSION privilege may give his
convertible share as consideration
Nature of Property which may be taken for stock
1. One which the corporation may lawfully
acquire
And hold in carrying its purpose
2. Must have pecuniary value capable of
ascertainment
3. Capable of being transferred
- Hence, only those which can be used in the
business of the corporation
- Those property needed for its operations
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Services as Consideration of Stocks
Provided: the transaction is in GF and NO fraud.
Note: the Services must be Rendered first before
the payment of stocks
- In case this happens, the CORPORATION is
not estopped from denying the services
constituted as payment of the stocks even
though it has received the benefits thereof.
Accommodation or service Extended by Director or
SH
- For procuring the loan
- By offering his property as collateral
- May be considered as Valid payment for
stocks
- This is similar to a GUARANTEE FEE
Fixing of Issued price for no par value shares
Mode :
1. By the BOD:
a. If the price is not fixed in the AOI
b. If authorized by the AOI/BL/SH in
the absence of the two.
2. Change in Value:
a. No Par values Cant be changed
since considered paid and non-
assessable
b. Par-value: the change must apply to
the unissued portion of the capital
Stock
Section 63
Certificate of stock and Transfer of Shares
Nature of Certificate of Stock
1. Written Instrument
2. Evidence of the holders interest and status
in the corporation
3. Not Essential to the existence of a share of
stock
4. A property but it has value separate and
distinct from the value of the shares
represented
2016|Finals
5. Not a negotiable instrument
Others:
1. It is a prima facie evidence that the holder is
a stockholder in the stated corporation.
2. Personal property
3. Issuance of bearer stock is not allowed
4. It may be transferred by indorsement
coupled by delivery
Non-negotiable
Since the holder takes it without prejudice to such
rights and defenses as the registered owners or
transferors creditor may have under the law except
insofar as such rights or defenses are subject to the
limitations imposed by the principles governing
estoppel.
Definition of NI (google): Written contract for the
payment of money, by its form intended as
substitute for money and intended to pass from
hand to hand to give the holder in due course the
right to hold the same and collect the sum due
Section 1. Form of negotiable instruments. - An
instrument to be negotiable must conform to the
following requirements:chanroblesvirtuallawlibrary
(a) It must be in writing and signed by the maker or
drawer;
(b) Must contain an unconditional promise or order to
pay a sum certain in money;
(c) Must be payable on demand, or at a fixed or
determinable future time;
(d) Must be payable to order or to bearer; and
(e) Where the instrument is addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty.
Issuance of Certificate of Stock
1. Signed by the President
2. VP
3. Countersigned by sec or asst. Sec.
4. Sealed with the corporate seal.
Note: additional requirements may be stated in the
AOI or BL
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
NO need of Publication
Nullification of shares of stocks and issuance of a
new certificate as replacement, when such is in
accordance with a COURT ORDER.
- The order is binding against any subsequent
purchaser of the outstanding certificate of
stock without notice of order.
Co-owners
The COS may be issued with the words and/or
- Both or either may transfer the COS
- The right to vote may be exercised by both
or all, or either
Spouses
Absolute community property: rules on co-
ownership will apply
Excluded property(shares) or marriage
settlement other than absolute:
The transfer between the spouses shall be
recorded in the stock and transfer book
- Only upon compliance with Sec 63.
As co-owners they shall be considered as 1
stockholder.
Delivery of the Certificate
Mode:
a. Actual or
b. Constructive
Failure to deliver:
Amounts to breach of contract
- Which gives rise to a right to rescind the
sale
Stock sold through a public instrument:
- Between the parties
o A formal contract of purchase and
sale set in a notarial document is
equivalent to actual delivery
Certificate retained by corporation
2016|Finals
GR: there is no issuance of Stock certificate where it
is never detached from the stock books
- Even if all the blanks are filled
- If the person named therein has no control
over the books of the corporation.
Exp: Issuance and delivery is not necessary when-
- The person sought to be held as SHs are
officers of the corporation
- And have custody of the stock books
- And can detach the cert. At any time.
Certificate returned to transferee after
cancellation and issuance of certificate
- This is a result of a sale of stock
- There has been a delivery in this case
- Notwithstanding the return of the cancelled
certificate to the transferor for his
indorsement and deliberate non-
indorsement
- Hence, no need to indorse the certificate.
REMEDIES| Refusal of Corp. to issue certificates
1. Action for specific performance of an
implied or express contract
2. Petition for Mandamus when appropriate
3. Damages when specific performance
cannot be granted
4. Rescind the contract and recover the
consideration paid (subscription contract)
British American v. Alto Surety and Insurance
Co.
A person cannot ask for the issuance of the
Certificate of stock when he has no
Subscription contract and when the
certificates has already been issued in the
name of an officer with whom he is in a joint
venture with.
Over Issuance of Shares
1. Void
2. The holder will NOT be a SH
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

3. An action may be maintained by the 3. Transferee must present the indorsed

corporation for the cancellation
4. But the corporation may be held liable for
damages
Unauthorized/forged Certificates
Remedy of the Corporation
a. An action for cancellation
b. Enjoin: the transfer, voting of the SH, or the
payment of dividends
certificate to the secretary
a. The secretary shall effect the
transfer in the corporate books
i. Issue a new stock
ii. Cancel the former
4. The transfer does not require SECs
approval
5. But the Corporation is required to register
its entire authorized capital stock to SEC
Note: A corporation has no power to cancel
certificates not in its possession

Right to transfer Fully paid shares

Rights of the Holder Absolute
1. If he had notice of the invalidity :NO RIGHT But may reasonably restricted by the corporation in
2. IF BONA FIDE HOLDER: the AOI, Agreement, BL
a. The stocks in the certificate is not
over issue The corporation must Sale of Subscription rights
make good of the certificate Different from sale of the shares, this only involves
Provided: the officer/agent who the sale of the RIGHT TO SUBSCRIBE
issued the stock has authority to do 1. Consent of the Corporation required
so a. In case of shares not fully paid
b. In a board resolution
Note: Certificates issued in fraud do not lawfully i. Since the sale will
give rights constitute novation
(substitution of a debtor)
In the case of a Bona Fide holder, the certificate is on the contract of
not validated, the corporation is only ESTOPPED subscription
from denying its validity (in case there is no over c. Acceptance of the new owner may
issue) be implied
d. A SH cannot transfer the entire
Requirement for transfer of Stock subscription unless fully paid
EXP: consent of the corporation
General
1. Indorsement then Is the consent of creditor required?
2. Delivery NO, BESIDES any dispositions of the corporation
prejudicial to the creditors can be set aside by
Others: reason of fraud.

1. When SH not in possession of the Restriction on transfer of Stock

Certificate
- By deed of assignment duly recorded in the Gen rule: Corporation has the power to regulate but
books of the corporation not restrict
2. To be valid against 3rd persons and
corporation 1. Restrictions must be in
- The transfer must be recorded in the stock AOI/BL/Agreement
and transfer book of the corporation

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

2. Must be stated in the certificate of
stock
3. Filipino Ownership
4. Right to first refusal
5. Suspension of transfer for a beneficial
purpose
6. Tender offer is required when they are
registered with SEC
Right to first Refusal
The SH must offer his stocks to the corporation first
or to existing SHs
- Before selling it to others
When not applicable: (right of first refusal)
1. When not stated in the AOI
2. Purpose of the transfer is merely to qualify
a nominee as director
3. A mere trustee cannot exercise the right
EXP: when the bona fide SH failed
to exercise the right, the trustee
may purchase it in his own right
In case of doubt in the restriction
- It shall be construed in favour of the
transferor
In the absence of delivery, the transferee is a mere
ASSIGNEE
- He cannot enjoy the status of a SH
Separate Instrument
Equivalent to indorsement
- Even in the absence of the certificate
-
Validity of Stock transfer
1. Between parties : indorsement and delivery
enough
a. Registration is not required as
between the parties
2. Against third persons and Corporation
- Must be recorded on the Corporate books
LIM v. CA
A bona fide transfer of shares not registered in
the books, is invalid
- Against a subsequent lawful
attachment or execution of said
shares
- WON the creditor had actual
knowledge/notice of said transfer

Option to purchase shares offered for Sale

Reasons for registration
Close Corporation
The option is valid 1. To enable the corporation to know who are
its SHs
Widely held corporation 2. Afford corporation to object or refuse its
Allowed, provided it is stated in the AOI consent to the transfer
And the option period is not too long a. In case it has a claim against the
stock to be transferred
1 MONTH is sufficient b. Or for any valid reason
3. Avoid fictitious or fraudulent transfers
Modes of Stock Transfer 4. Two Fold Reasons
a. For the transferee to exercise his
1. Indorsement and Delivery of Certificate rights
2. Transfer made in a separate instrument b. To inform the corporation of the
3. Judicial or Extrajudicial Settlement of the transfer of ownership
Estate 5. For benefit or protection of persons who
may deal with the corporation
Indorsement and Delivery
Duly Indorsed - > indorsed and delivered

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Corporations right to refuse registration
1. Secretarys duty to registration is ministerial
EXP: Secretary cannot be forced to register
when the CERTIFICATE is not prima facie
valid
2. When there has been a breach of the
restrictions imposed on transfers.
Remedy of SH in case Corporation refused
registration
1. Specific Performance
2. Mandamus
When is mandamus available?
Requisites:
1. Due application has been made
2. Application denied
3. No unpaid claims against the stock by the
corporation
4. Ordinary action for damages in adequate
5. An action in the nature of suit in equity to
secure a decree ordering the transfer is
inadequate
6. (in case of Transferee) Mandamus will lie if
the transferee seeking relief has performed
and complied with all the statutory
requirements for valid transfer
Administrative Mandamus
The proceeding is in SEC
- Problems re securing the COS
Civil remedies for SH when the CORP. is the
transferor
1. Specific performance w/ damages
2. Rescission w/ damages
Note: Only absolute transfer needs to be recorded
Effects of Unregistered transfer
1. Binding between the parties
2. Ineffective against Corporation
- But notice is equivalent to registration
3. Invalid against corporate creditors
4. Invalid as to all other persons interested
2016|Finals
Non- Transferability of unpaid Stock on
corporation books
But corp. cannot refuse registration when
indebtedness is not payable to Corporation
Note: jurisprudence->shares which may be
alienated are those covered by the COS
Section 64
Issuance of Stock Certificates
Only upon FULL payment
Partial Payments
Shall be deemed applied proportionately among the
number of shares
- Pro rata application of payment is not
allowed
Jurisprudence (contrary view) (SEC Opinion)
In the absence of the provisions in the BL, a
corporation may apply payments made by
subscribers on account of their subscriptions either:
1. Full payment for the corresponding number
of shares, the par value of which covered by
such payment
2. Or as payment pro rata to each and all the
entire number of shares subscribed for.
Note: these are alternative remedies
Once a remedy is chosen, it should be applied to
ALL SHs
Nature of relation of SHs to a Corporation
1. Based on Contract
2. Share is not indebtedness
- It is not a credit nor an evidence of
indebtedness
EXP: (Debtor-creditor relationship)
UNPAID SUBSCRIPTION , it being part of the
capital stock
3. Corporation own its property as a distinct
entity.
4. Implies TRUST RELATION
- When the SH is unknown
- T he corporation becomes the trustee
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
o Fiduciary duty : The corporation
must exhaust all available means to
look for the stockholder, and in
case it fails, it must continuously
hold the shares as trustee for the
owner thereof.
Rights of the heirs of deceased SHs:
- NO automatic transfer of shares
The following must be complied first
1. The shares must be distributed
2. The transfer of shares must be recorded
Equitable owners- heirs are such,before the actual
distribution.
Note: Only those who are recorded in the Corporate
books as owner may check or inspect the books
Rights of Dissenting Minority
GR:
1. In some cases, may demand appraisal and
payment of their stock
2. Bring actions
a. In their own names or
b. In the name of the Corporation
For that violations made against the
corporation
Actions by SHs/Members
Categories
1. Derivative Suit
2. Individual Actions
3. Representative or class actions
GR: Actions in behalf of the corporation is brought
through the BOD/T
Derivative Suit
Is an action brought by one or more SHs/Members
- In the name and in behalf of the
corporation
- To redress wrongs committed against it or
- To protect or vindicate corporate rights
2016|Finals
- Whenever the officials refuse to sue, or
they be the ones to be sued or hold control
of the corporation.
Note:
1. Nominal Party -> SH(s)
Real party -> Corporation
2. Not a bar: that the plaintiff was not
authorized to sue (Duuuuhhh!!!)
3. The corporation must be made a party to
the suit
- Whether defendant or plaintiff
- This is to bind the corporation
Nature of derivative Suit
1. A representative ACTION
- It is the action brought for the wrong done
against the corporation.
- The plaintiff is entitled for the
reimbursement of legal expenses.
2. Dual in composition:
a. Basic Cause of action and
Pertains to the corporation and on
which it might have been sued
b. Derivative Cause of Action.
The corporation cannot sue for its
own protection.
Note: A SHs right to institute a derivative suit is not
based on any express provision of the CODE or SEC.
- It is impliedly recognized when the said
laws make corporate directors or officers
liable for damages suffered by the
corporation and its SHs for violation of their
fiduciary duties.
Type of wrong contemplated for a Derivative Suit:
Indirect for SHs
By depleting the assets or using them in a
manner contrary to the AOI/purpose
Direct to the Corporation
Read: Chase v. Buencamino
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

Requisites for derivative suit:

1. Cause of Action in favour of the Corporation
2. SH/M must make a demand to sue
3. SH/M must be as such when the
objectionable acts were done and during
the filing and pendency of the action
Read: Gochan v. Young
Note:
1. A SH/M must exhaust all intra- corporate
remedies.
But non-exhaustion is not a ground for dismissal of
the suit (foot notes p. 578)
2. When a request upon the SHs as a body is
required:
a. Demand upon the Directors or
officers is excused
i. As when the people
complained of are the ones
controlling the
management
b. When the Subject matter complaint
of is within the immediate control
of the SHs
EXP of NO. 2: If the body has no adequate power to
remedy the wrong asserted by individual SHs
Interim rules on Intra-corporate Controversies
1. Plaintiff must be a SH/M at the time when
the complained action occurred.
2. Exhaust all remedies available in the
corporation/AOI/BL
3. NO Appraisal rights are available for the act
or acts complained of
4. The suit is not nuisance or harassment suit
3. The suit will conflict with the duty of the
management to sue for the protection of all
concerned
4. Multiplicity of suits
5. Confusion in ascertaining the effect of
partial recovery by an individual on the
damages recoverable by the corporation for
the same act.
Individual Suit
Action brought by an individual SH against the
Corporation for direct violation of his contractual
rights
Read: Rep v. Cuaderno
General Rubber v. Benedict
Derivative Individual
Injury is primarily and Injury is directly against
directly against the the SH/M
Corporation
Representative Suit
A suit for himself and all other SHs who are
similarly situated
- When a wrong is committed against a group
of SHs
a. The question of law is common to
all of them
b. Parties are so numerous that it is
impracticable to bring them all to
the court

EXPN: right of pre-emption cannot maintain a

representative suit. It is a personal one.
Reasons for not allowing direct individual suit

1. SHs has no title , legal or equitable to the Representative Suit Derivative Suit
corporate properties. Brought by one in his One brought by a person
- It will violate the separate corporate entity own behalf and behalf as a representative of
principle of all those similarly another ( Corporation)
2. Prior rights of creditors may be prejudiced. situated

Read: Evangelista v. Santos

Central Cooperative Exchange v. Enciso

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Liabilities of SHs
1. Unpaid Subscription
2. Interest on unpaid subscription
3. To creditors on unpaid subscription
4. On watered stocks
5. Dividends unlawfully paid
6. Failure to create corporation
Section 65
Liability of directors for watered stocks
Definition| Watered Stock
Stock issued not in exchange for its equivalent
either in cash, property, share, stock dividends, or
services.
It includes:
1. Issued without consideration
2. Issued as fully paid when the corporation
has received a lesser sum of money than its
par or issued value
3. Issued for a consideration other than actual
cash, such as property or services, the fair
valuation of which is lesser that its par or
issued value
4. Issued as stock dividend when there are no
sufficient retained earnings or surplus
Issuance of Watered Stock Prohibited
- The prohibition secures the equality among
subscribers and prevents discrimination
against those who have paid in full the par
or issued value of their shares.
Corporation
Issuance is ULTRA VIRES and illegal per se
Creditors
The liability attaches whether or not creditors have
relied on an over-valuation of corporate capital
SEC
Read : SEC v. Pimentel 90 Phil 702
2016|Finals
OSTENSIBLE CAPITALIZATION
Re Watered stock
- One who acquires stocks from a
corporation in exchange for property or
services at an over-valuation or at a
discount is laible to respond to creditors,
upon the principle that one giving credit to
a corporation is entitled to rely upon it s
ostensible capitalization as the basis for the
credit given.
Constructive fraud against Creditors
When a corporation issue watered stocks, it creates
ostensible capitalization
- This misleads subsequent creditors
- Hence, WON the issuance is in Gf/Bf
o Constructive fraud in GF
- Creditor may demand recovery, even if the
Corporation has no cause of action against
the SHs
Prohibition: On original issue only
- Subsequent transfer of stocks is already
SALE
Liability of Watered Stock
Read: Pascual v. Del Saz Orosco
Consenting Director and/ or officer
Liability is solidary with the participating SH
Note: FMV of the stock is determined at the time of
its issuance so that the subsequent increase in value
of property given as consideration will not eliminate
the water in the stock and relieve the director of
officer and SH from liability
Subscriber to whom watered stocks are
issued
a. Liable when called upon to
contribute
b. Liable for the purpose of adjusting
the rights of the SHs inter se
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

- Liability will not be extinguished by Rate of interest

transferring the stock to a bona fide 1. One stated in the BL
purchaser 2. 12% legal rate
Note: A creditor has no cause of action over the
holder of watered stocks unless there is a proof that Waiver of Interest
he was actually injured. Corporation may waive provided no creditors will
- As when he was still paid in full despite the be prejudiced.
presence of watered stock
Note: if interest is required in the BL, the BL must
be amended
Subsequent Transferee
Section 67
He occupies the same position as his Payment of Balance of Subscription
transferor
- With respect to the right to complain of an Remedies to enforce payment of Stock
issue of watered stock Subscription
- Estopped to complain if his transferor is
estopped. 1. Extrajudicial sale at public auction
- WON he purchased the stock in GF 2. Judicial Action
3. Collection from cash dividends and
Transferor or party to the fraud withholding of stock dividends
May be held liable or may be filed an action for
recovery against.
Read: Velasco v. Poizat
Suit by the State
The corporation may avail either of the first two
1. Quo Warranto remedies but never both
- When Guilty of ultra vires/illegal acts

2. Injunction Statutory sanctions on stock delinquency

- Not proper to enjoin issuance of watered
stock
o Here, mere private rights are
affected
- When available: If a threatened act of a
corporation will constitute a public
nuisance and prompt action is necessary to
prevent the injury to the public
Section 66
Interest on unpaid subscription
When liable
- Only if required in the BL or subscription
contract
EXP: Delinquent SH
1. Rights denied to holders
Delinquent SHs not be allowed to vote or be
voted
2. Right given to Corporatio n
Application of cash dividends to: the unpaid
balance plus cost and expenses
Application of stock dividends: withhold
until full payment
Payment of unpaid subscription or percentage
thereof
1. On the date specified in the contract of
subscription
2. In the absence of such, on the date stated
on the call made by the board

Effect of failure to pay:

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

1. It will become due and demandable A corporation cannot refuse a valid payment, even
2. The whole stocks shall be considered if paid earlier
delinquent - If payment was in excess, no refund can be
made since this will depreciate the assets of
What is a call? the corporation
A declaration officially made by a corporation
usually expressed in the form of a resolution of the Notice of Call
BOD requiring the payment of all or a certain A call without notice to the subscriber is practically
prescribed portion of a subscribers stock no call at all.
corporation.
Notice is a condition precedent to the right
What is assessment? of recovery
1. As to paid subscription In the absence of notice of call, nothing is
- The levy made upon the stock of a due and payable
corporation, generally for the purpose of EXP: waiver
correcting an impairment of the capital and
indicates the proportionate amount Section 68
required to be paid by each SH Delinquency Sale
2. As to unpaid subscription Procedure
- Commonly interchanged with call or 1. Resolution declaring the unpaid
instalment subscription payable
2. Notice of resolution to the SHs
Requisites for a valid call - Publication is not required
1. Manner prescribed by law a. Non-payment w/in 30 days
2. Made by the board All the stocks will be
3. Operate uniformly upon all SHs delinquent
Subsequent call is not
required for the declaration
of delinquency
Power of the Board to make call But: in case the sale was
1. As to the date of payment postponed, and will be
- BOD may at any time declare due and subjected to delinquency
payable unpaid subscription sale again, SEC 68 must be
- Subject to the limitation of the subscription followed for the notice of
contract delinquency
- It may call anytime if no date fixed 3. Resolution ordering sale of delinquent
stocks
Necessity and purpose of a call 4. Notice and publication of delinquent Sale
To fix the time of payment and percentage to be If the 60 day period for the sale is extended
paid - A new notice and publication must be made
5. Sale
When Call is not necessary - In cash
1. Corporation is insolvent - The dividends earned shall belong to the SH
2. Subscriber is insolvent unless there was an agreement beforehand
3. Fixed date has been set for payment that it shall inure to the highest bidder

Strict compliance is required

37
NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

Highest Bidder thereof is lost, unless the possessor has acquired

- Offering to pay the full amount of the the ownership by prescription for a less period,
balance on the subscription together with according to articles 1132, and without prejudice to
the accrued interest, if any the provisions of articles 559, 1505, and 1133.

Right to reject the highest bid Section 70

- The BOD has the power to reject Court Action to recover unpaid subscription
- In public sale, there is no offer to sell, but
an offer to purchase for those interested Judicial Remedy
- This is an intra-corporate dispute
Purchase of delinquent stock by the corporation - There must be a prior call
- No call, no action
- In the absence of bidders or highest bidder
- Shall be treated as treasury shares Prescriptive period
- It shall be deemed fully paid Written Contract 10 years
- The subscriber is released from his liability Verbal 6 years

Forfeiture of delinquent stock not authorized Shall run upon demand

Section 69 Section 71
When sale may be questioned Effects of Delinquency

Recovery of Stocks unlawfully sold Section 72

Rights of unpaid shares
Grounds
1. Irregularity or defect in the notice of sale Rights of Unpaid Shares
2. Irregularity or defect in the sale itself of the Before delinquency
delinquent stock - Still have all the rights
- Full payment is not required to be SH
Requirements to maintain the action
1. The party seeking to maintain such action, EXP:
must pay first or tender to the party holding
the stock When it is subject to suspensive condition of full
- The sum for which the same was sold payment
- With interest from the date of sale at the - Subscriber is not entitled to the rights of a
legal rate SH until full payment
2. Such action is commenced by filing a
complaint w/in 6 months from the date of When payment is other than CASH
sale - SEC approval is required
- See Sec. 62
When right of redemption is not given? IDK hahah
After delinquency
- No right to vote
Section 69 only applies to delinquent shares - No right to be voted
Hence, in all other kinds of shares Art. 1140 shall
apply De leon Note: Read Baltazar v. Lingayen Gulf
ARTICLE 1140. Actions to recover movables shall Electric and see Sec. 64 Note 33
prescribe eight years from the time the possession

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Section 73
Lost or destroyed Certificate
Notice of loss
Mandatory
Substantial compliance is required
Issue as to the replacement of a loss certificate is
intra-corporate
GR: Expenses shall be borne by the registered
owner
EXP: Fault is attributed to the corporation
When publication may be dispensed with (SEC 73
not applicable)
- Sec. 73 is not required in case when no
certificate was ever issued
- When loss is due to the fault/negligence of
the corporation
- When the corporation voluntarily replaced
it
- When there is a bond/ indemnity is given
- Certain that the certificate will no reappear
Legaspi Towers 300 Inc. v. Amelia P. Muer
Facts:
Pursuant to the BL of Legaspi Towers, herein
petitioners
1. Palanca
2. Imai
3. Domingo
4. Vicente
Incumbet BOD
Set the ANNUAL meeting for the years 2004-
2005 at April 2, 2004 at the lobby of the legaspi
towers 300 Inc.
5,723 who are entitled to vote
1,358 of which were supposed to vote thru
proxies
The quorum was 2,836 (50% plus 1)
The Comm. On elections however found out that
some if not most of the proxy votes are irregular
at its face
For lack of time to authenticate , they adjourned
the meeting for lack of quorum
2016|Finals
However, during the said meeting, the herein
respondents, unit owners/shareholders objected
to the adjournment
And they pushed through the election
Thereby electing them (respondents)
1. Muer as President
2. Tanchoco- VP In
3. Tankiang-VP EX
4. Panganiban SEC
5. Agbayani Asst. SEC
6. Yasuma- Treasurer
7. Caguioa- Asst. Tres
8. Salandanan Auditor
Petitioners filed a complaint for the Declaration of
Nullity of Elections with prayers for the Issuance
of TRO and Writ of Preliminary Injunction and
Damages against the Respondent with the RTC
Before the respondents could file an answer, the
petitioners amended their complaint ( no mention
as to what amendment)
And before the respondents could answer to the
said amendment, A motion to admit SECOND
Amendment was filed again by the petitioners
SECOND AMENDMENT: Legaspi Towers 300
Inc. was added as a party-plaintiff
RTC: TRO granted for 72 hours from taking over
the management or to maintain a status quo
The TRO was not meant for the Current BOD(
respondents) to stop from takingover
management since they had actually assumed
into office. The status quo meant that the
RESPONDENTS should continue to manage the
affairs but the court shall monitor all income
earned and expenses incurred by the
corporation, this is to avoid stoppage or any
interference in the affairs of the corporation
Respondents Answer :
o The meeting was lawfully conducted
o They presented the report of a Atty.
Patricio who is from SEC
Re the act of adjournment
That they objected
But the objection was
disregarded
They continued the meeting
Counting all the proxies,
hence, there was a quorum
the respondent objected on the second
amendment on the ground that the inclusion of
the corporation as a party was without their
authority
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
But during the Pre-trial: motion to admit the
second amendment was denied
CA: Dismissed the appeal for lack of merit
o That the suit was to nullify the election
held and to enforce their individual right
to vote.
o Right to vote is a personal right of A sh
o It can only be enforced thru direct action
o Hence, legaspi cannot be impleaded as
plaintiff
Issue:
1. WON THE PETITIONERS have a right to bring
an action in behalf of the Corp.
2. WON a derivative suit will prosper
Ruling:
PETITIONERS CLAIM:
1. The CA had a wrong impression that the action
instituted was just a Derivative suit
2. That the inclusion of the Corporation as a party-
plaintiff was intended as a direct action by the
corporation acting through them the petitioners
3. They are acting as reconstituted BOD
4. Since the election was invalid , hence, under
their by-laws, they reconstituted themselves in a
hold-over capacity
5. That the action was also about their right to vote
but it is mainly involves the right of the condo
corp. to be managed and run by duly- elected
BOD
SC:
Unmeritorious
The 2nd amendment was is meant to be a
derivative suit
Since in their arguments
o This is no different from and may in fact be
considered as a DERIVATIVE SUIT
instituted by an individual stockholder
against those controlling the corporation but
is being instituted in the name of and for the
benefit of the corporation whose right/s are
being violated.
Derivative Individual
In cases of mismanagement where Denied the right of
the wrongful acts are committed by inspection
the directors or trustees themselves
A wrong to the corporation itself Wrong was done
personally and not to
the other SHs
2016|Finals
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.
Derivative: the relief prayed for must be for the benefit of
the Corporation
The requisites for a derivative suit are as follows:
a) the party bringing 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.
Present CASE: petitioners, as members of the Board of
Directors of the condominium corporation before the
election in question, filed a complaint against the newly-
elected members of the Board of Directors for the years
2004-2005, questioning the validity of the election held on
April 2, 2004, as it was allegedly marred by lack of
quorum, and praying for the nullification of the said
election
Petitioners are the injured party, whose rights to
vote and to be voted upon were directly affected
by the election of the new set of board of
directors.
The party-in-interest are the petitioners as
stockholders, who wield such right to vote.
The cause of action devolves on petitioners, not
40
NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
the condominium corporation, which did not have
the right to vote.
The suit is a DIRECT ACTION by the Petitioners
and not of the corporation
Hence, the derivative suit is improper
The stockholders 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,[22] which is not the issue in
this case.
The action to declare the 2004-2005 has become
moot and academic since there was already a
2005-2006 election.
TITLE VIII
CORPORATE BOOKS AND RECORD
Section 74
Books to be kept; stock transfer agent.
How or what should be in the record books of a
corporation:
1. A record of all business transaction
2. Minutes of all the meetings of SH/M
3. Minutes of all the meetings of D/T
4. Stock and Transfer book, in the case of
stock corps.
(additional according to SEC)
5. Books of account and stock transfer books
6. List of SH/M
7. Financial Records
8. And those required under special laws
All of these books must be kept at the:
a. Principal office of the corporation
b. Stock and Transfer book may be
kept at the principal office of the
corporation or at the office of the
Transfer Agent
Note: the books must be kept even after dissolution
until there has been liquidation.
2016|Finals
Note: without the Signature of the board of
Secretary, the alleged minutes of the meeting, have
no probative value or credibility
Minutes meaning
- Brief statement of what transpired during
the meeting and at the meeting of the
Executive committee
Clearing House
An agent of Stock exchange and its members
Transfer Agent
An arm or agent of an issuer corporation listed on
the exchange and its members.
- Handles for a corporation all matters
pertaining to the transfer by SHs or
bondholders of their securities to other
persons
- Keeps the current stock and transfer book
- Keeps the Stockholder ledger
- Prepares the list of SHs for the use of the
corporation whenever needed for the
payment of dividends
- Issues stock warrants
- May Distribute the warrants, dividends etc.
What is a 'Transfer Agent' (investopedia)
A transfer agent is a trust company, bank or
similar financial institution assigned by
a corporation to maintain records of investors
and account balances. The transfer agent records
transactions, cancels and issues certificates,
processes investor mailings and deals with other
investor problems (e.g., lost or stolen certificates). A
transfer agent works closely with a registrar to
ensure that investors receive interest payments and
dividends when they are due and to send monthly
investment statements to mutual fund
shareholders.
Additional duties of a transfer agent
RSA 40-5 requires every transfer agent to make and
retain for a period of 5 years the following books
and records relating to the transfer agent activities:
1. Its rules and procedures
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
2. Policy of financial institution and bond
coverage
3. Exception reports filed with the SEC
4. Reports to the issuers for whom the firm
acts as transfer agent
5. Annual report on SEC
Note: Transfer agent must make all of its books and
records upon request of an authorized
representative of SEC
- Failure to such will lead to the immediate
suspension of the agents registration
- The suspension will continue until the
records become available to SEC
The Stock Ledger
Allows you to keep an accurate record of stock
transactions for your corporation, and is an
essential element of a corporate records book.
- A stock ledger is generally included as part
of a corporate records kit, and should be
maintained in the corporate records book.
- Any transaction regarding shares of your
corporation, whether initial issuance of
shares or any subsequent transfer, must be
entered in the stock ledger.
- The stock ledger is also referred to as
a stock transfer ledger or a corporate stock
ledger.
Contents of a stock ledger (according to google)
1. Stock certificate number;
2. Shareholder name;
3. Full address of shareholder;
4. Number of shares;
5. Class of shares;
6. Date of purchase;
7. Consideration (monetary value).
Entries to be made in Stock and Transfer book
- Refers generally to shares which may be
alienated
- They are those covered by COS
GR: only those recorded are considered SHs
2016|Finals
Failure to make entry
Fault of the Corporation
- When the Corporation fails to record the
transfer despite the fact that the
Transferor/Transferee has done all the
things required
- The Stockholder shall not be liable to
creditors
SH is unknown or cannot be located
- A trust relation is impliedly created
- Between the corporation and unknown SH
- The Stocks/COS shall be named to the
Corporation as a TRUSTEE
- This set-up shall continue until the SH is
located/known
Applicability of RULES on EVIDENCE on Books and
records and entries therein
GR: records of the private corporations are Private
documents
Admissibility
- Admissible against or in favour of the
Corporation
- Best evidence of corporate acts and
proceedings or of the matters recorded
therein
- Stock and transfer book is the best
evidence of the stock ownership and voting
rights for purposes of dividend payment
Probative Value
GR: Minutes of the meeting not conclusive even
against the Corporation
- Prima Facie Evidence of the matters
recorded therein
- Parol or extrinsic evidence may be admitted
to supply omissions in the records or
explain ambiguities.
Note: Corporations are not bound by false and
simulated entries on their records unless, knowing
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
them to be such, they have neglected to correct
them
- And some innocent third persons have
relied thereon and have been prejudiced
Resort to other documents
- The stock and transfer book cannot be used
as the sole basis for determining the
quorum as it does not reflect the totality of
shares which have been subscribed
Read: Lanuza v. CA 454 Scra 54
Persons given the right to inspect corporate books
1.
D/T/SH/M
2.
Voting Trust Certificate Holder
3.
SH of s Sequestered Company
4.
Beneficial Owners of Shares
o Provided his interest is clearly
established
o Including: Pledgees or judgment
debtor
Remedies and sanctions for enforcement of right
1. Mandamus or Damages
- Refusal to the right to inspect
o The Secretary shall be a party to the
case
o He is customarily charged with the
custody of all documents and
records of the corporation against
whom personal orders of the court
will be made
2. Civil and Criminal Liability
- Any officer or agent refuses to allow any
D/T/SH/M to examine the records or
minutes shall be liable for damages
- Shall be liable under 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
2016|Finals
shall be construed to repeal the other causes for dissolution of
a corporation provided in this Code.
When will the Directors/Trustees be liable for such?
- Refusal is pursuant to a resolution or order
of the BOD/T
Basis and purpose of right to inspect corporate
books
1. Beneficial ownership of corporate assets
- SH/M have the right to be fully informed as
to the condition of the corporation
- Necessity of Self-protection
2. Protection of SH and general public from
mismanagement, fraud, and other wrongful
acts
- Protect the minority
- Protect the public from monopolies,
unlawful combinations and unreasonable
exactions from corporations.
Section 142. Confidential nature of examination results. - All
interrogatories propounded by the Securities and Exchange
Commission and the answers thereto, as well as the results of
any examination made by the Commission or by any other
official authorized by law to make an examination of the
operations, books and records of any corporation, shall be kept
strictly confidential, except insofar as the law may require the
same to be made public or where such interrogatories, answers
or results are necessary to be presented as evidence before any
court.
Right of Inspection not absolute
1. Purpose of Inspection
- Must be exercised with respect to a SHs
interest or for some purpose germane
thereto
2. Ground for denial of right
a. That the person asking has
improperly used information
secured through any prior
examination of records or minutes
of such corporation
b. Not acting in GF or not for a
legitimate purpose
Requisites for existence of probable cause to file
criminal case, as to the right to inspect corporate
books
(In order for SEC 144 to apply)
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
1. A D/T/SH/M has made a prior demand in
writing for the copy or excerpts from the
corporations records
2. There was refusal to allow the inspection
3. The D/T shall be liable if the refusal was due
to a resolution of the board
4. There must be a proof of existence of the
grounds for the refusal of the right
Books of Foreign Corporation
The current rule is not applicable for corporations
created outside the laws or jurisdiction of the PH
Law
Exceptions to the right of inspection
1. Trade Secrets
2. Certified copies of minutes- no absolute
right for such
Place of inspection
- In the principal place of office
- The records cannot be taken outside the
office
Reasonable regulations for inspection
- By-laws
Extent of right to inspect
1. As to copies, abstract and memoranda
2. May be exercised personally or thru an
agent or representative
3. To all pertinent books, papers, etc.
Right of SH to demand a list of SHs
A corporation has no express duty to release a copy
of a list of its SHs and their subscription upon the
request of a SH.
However, in case a list is indeed given upon request,
the corporation is not liable.
Right of SH to demand a detailed auditing of
business operations
2016|Finals
- The code is silent to such
Power of Courts
- The court no authority to command by way
of mandamus, the corporation to make an
audit
- But has the power to allow a reasonable
time for the inspection of the books and
records
Liability for expenses of audit
Read: Dreyfuss and sons v. Benson
It should be shouldered by the applicant
EXP: unless ordered by the court, that he be paid or
the Corporation must shoulder or give a share
Power of SEC
- A SH may demand a detailed auditing of the
corporations business
o If he likes to ascertain the value of
his liquidation dividend
- He may file a petition or complaint with the
SEC
o Upon discovery of probable
anomalies or irregularities in the
management of the corporation
o In such a case, the SEC may order
an audit and examination of the
corporate books if there is a clear
showing that the same is necessary
Right of a SH to examine books of corporations
subsidiary
Right recognized
In cases where the legal fiction of distinct corporate
entities may be disregarded
- Writ of mandamus may be granted
Note: Foreign Subsidiary wholly owned by a holding
company and, therefore, under its control, the SH of
a parent corporation may inspect the books of the
corporation as extending to books and records of
such wholly owned subsidiary which are in the
parent corporations possession and control
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Right Refused
- When a subsidiary company is not subject
to the control of the parent company, even
if the Parent company owns majority of the
formers majority of stocks.
Section 75
Rights to financial Statement
Contents of the Financial Statement
1. Balance Sheet as of the end of the taxable
year
2. Profit and loss statement for said year
a. Showing reasonable detail if its
assets and liabilities
b. Result of its operations
3. It must be duly signed and certified by an
independent CPA
EXP: If the paid-up capital of a stock
corporation is less than 50k
The certification under oath
of a treasurer or any
responsible officer of the
corporation is sufficient
4. A copy of the balance sheet and related
profit and loss statement must be given to
SEC
a. They are open for public inspection
w/in a reasonable time and
business day
Duty of the board to present annual financial
report
The report re the preceding year must be given in
the annual SHs meeting
Contents of the report
1. The accompanying supplementary notes
explaining the financial data
2. Corporations performance and other
activities
3. Prospects/plans
4. Auditors report
o w/c a two paragraph declaration of
an independent CPA
2016|Finals
SEC: the following corporations are required to
submit to SEC annual audited financial statements:
1. Stock Corporations with paid-up capital
stock each of 5ok or more
2. Non-stock corporations with total assets
each of 500k or more or with gross annual
receipts of 100k or more
3. Branch officers of stock of foreign
corporations with assigned capital each of
50k or more
4. Branch officers of non-stock corporations
with total assets each of 500k or more
5. Representative offices of foreign
corporations with total assets each of 500k
or more
Duty of companys External Auditor:
1. Conduct an independent examination of the
companys financial statement and
supporting documents pursuant to
prescribed auditing standard and practices
Note: A company should neither allow nor require
its external auditor to prepare its financial
statement and/or any of its supporting documents.
Balance Sheet
- Represents data related to the financial
condition of a business as of a specific
period of time
- If the total assets of a corporation exceed
liabilities
o The excess of the assets belong to
the SH
o Such excess represents the SHs
equity
o And it is the form of a capital
invested in stock and surplus
(retained earnings)
Net Asset Value
Indicates the amount of assets exceeding the
liabilities as different from total assets which
includes liabilities
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

TITLE XI PROVIDED IN ALL CASES: THE end or purpose of

NON-STOCK CORPORATION such is N OT for the distribution of profits

Sec. 87 Powers necessary for the furtherance of purposes

Definition - Pon wers merely useful are not implied
Sec. 88 o If they are not essential re the
Purposes nature and object of incorporation
Note: Fund-raising activities in most cases is neither
necessary nor incidental to the furtherance of
Non-stock Corporation Definition objectives.
- Sec. 87 is the definition of an Ordinary Non- - Hence: AOI must be amended or it must be
stock Corporation stated therein

Note: Political purpose is not part of the purposes How to determine actual purpose or object
mentioned under Sec. 88. The SEC may reject any The objective stated in the AOI and BY-LAWS
AOI if the purpose of the corporation is to engage in - The corporate form is not controlling
election campaign or partisan political activity. - Nor the commercial aspect

Power to make profits and engage in business Read: CIR v. Club Filipino

GR: NS Corp. is not empowered to engage in Note: A NS corporation cannot be converted into a
business with the object of making income or Stock corporation by mere amendment of the AOI
profits directly or indirectly

EXPN: Incidental profits obtained from its

RULES APPLICABLE ONLY TO NS CORP
operations
CHAPTER 1 : MEMBERS
Note:
Sec. 89
1. It cannot distribute dividends
Members
2. Whenever necessary or proper such profits
Sec. 90
shall be used for the furtherance of the
Non-transferability of membership
purpose(s) for which the corporation was
Sec. 91
organized
Termination of Membership
GR: A NS corp. cannot lawfully engage in any
CHAPTER 2: TRUSTESS AND OFFICERS
business activity for profit
- Because it will be contrary to its non-profit
Sec. 92
nature.
Election and Term of trustees
EXPN: it is necessary to carry out the purpose(s) of
Sec. 93
the corporation.
Place of Meeting
Note: NS Corp. may invest its accumulated funds for
CHAPTER 3: Distribution of Assets in Non-stock
profit purposes
Corporations
- Hence, it may subscribe to the capital stock
of a corporation or invest in commercial
Sec. 94
papers
Rules for distribution
o But such power shall part of the AOI
Sec. 95
or else it will be ultra vires
Plan of distribution of assets

46
NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Prohibition against distribution of Dividends
- No pecuniary benefit shall inure in favour of
the members
o Although the members may avail
of, or derive other forms of
assistance from the corporation
o Hence, a resolution giving grocery
items is not allowed
Non- Profit Character
- NS cannot engage in business with the
object of making profits
Note: NON-distribution of earnings or profits by
way of dividends, is NOT CONCLUSIVE
- Hence, commissary privileges are not
allowed
o Ex.
purchase of items at
reduced prices
Refund of capital at the end
of the membership or
dissolution of the
corporation
Read: USEAEA v. USEA 1981
Right to vote
- The BL may set rules ( limitations/expansion
of such right)
- AOI/BL may provide WON proxies are
allowed
- Each member is entitled only to one vote
o Unless cumulative voting is
authorized in the AOI/BL
- Voting by mail or other similar means may
be authorized
o But such must be specifically stated
in the BL
Governing Boards
- Such may be created
- Provided it is allowed in the AOI/BL
2016|Finals
Note:
1. No. Of Trustees that must be members-
May be more than 15
2. No. Of incorporating trustees-
Not more than 15
Term of Office
GR: Firs elected Trustees are staggered with a 1
year interval
EXPN: Unless otherwise provided in the AOI/BL
Note: Although staggered terms are allowed the
rules on election (Sec. 24) and vacancy (Sec. 29)
must be applied
Trustees subsequently elected
Term: 3 consecutive years
- It may be limited to one year (Sec.23)
Note:
Founders Share under Sec. 7 is also applicable in
accordance of Sec. 87 par. 2
Meetings
GR: Board meetings may be held anywhere inside or
outside the Philippines
Note: When the BL provides for the holding of
members meeting at the principal office of a non-
stock corporation conformably with the General
rules in accordance with SEC.51
- Meetings cannot take place anywhere else
- EXPN: there is an amendment
If not place was set: Cannot do it outside the place
where the principal place is located
The authority to transfer the place of members
meetings outside the place where the principal
office is located must be expressly granted by the
BL.
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Dissolution
- The assets hall be distributed in accordance
with Sec. 94 or Sec. 95
- It is not allowed to distribute any assets of
the corporation or any incidental income or
profit made by the corporation during its
EXISTENCE
- NS CORP. cannot be converted to a Stock
corp. by mere amendment
o There must be A DISSOLUTION
FIRST
o Conversion by mere amendment is
tantamount to distribution of
assets/income of the corporation to
its members
In as much as members
become automatic SHs
o This scheme defrauds the public
especially those who have given
support/donations
Membership
Manner or mode of Acquisition
- Can only be acquired in accordance with the
BL
- Transfer by virtue of inheritance is not
allowed
Approval of admission of new members
See Sec. 23
Mode
- Not uniform, depends upon the corporation
- Provided in the BL
Note: members may be adopted even before the
adoption of corporate BL
Notwithstanding a provision in its AOI that
additional members may be accepted pursuant to
the BL of the corporation
Amendment of BL
- Membership fee cannot be increased by a
mere resolution
2016|Finals
Nature of Membership Rights
- All rights arising therefrom are NON-
TRANSFERABLE
o Unless otherwise provided in the BL
Power of the Court
Read: Chinese YMCA of Phil. Islands v. Ching
Termination of membership
Only those provided in the BL
Expulsion: must be based on just and reasonable
grounds
- After notice and hearing
- w/o waiver he is entitled to due process
- otherwise he may claim damages
Payment of dues and other assessments
Dues (meaning): obligations payable at recurring
intervals for maintenance of an organization
Assessment (meaning): implies burden imposed in
invictum(invincible) and a single act
Funa v. MECO
Issue: WON MECO is a GOCC hence subject to COAs
audit
Doctrine: it is a non-stock corp but still subject to
COAs audit .
Determining factor whether a corporation is private
or gocc is the CREATION OF THE CORPORATION
- MECO was created under the Corporation
Code, hence, it is a PRIVATE NON-STOCK
CORPORATION
But it is still subject to COAs audit because it
represents the government and serves as the one
responsible for collecting fees for the benefit of the
government
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
TITLE XII
CLOSE CORPORATION
Section 96
Definition and applicability of Title
Definition
A corporation in which the stock is held in a few
hands, or in few families, and which stock is not at
all or only rarely dealt in buying and selling.
One which the directors and officers have the
power to fill the vacancies in their own numbers,
without allowing to the general body of
stockholders and any choice or vote in their election
Peculiarity of a close corporation
1. Identity between stock ownership and
active management
- All the outstanding stocks is owned by the
persons who are active in the management
and conduct of the business.
- Hence, the public does not own any stocks
2. Essentially an incorporated partnership
- The stockholders consider each other as
partners
- But the law treats them as a corporation
Meaning of Close corporation according to the
code
(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.
All of these features must concur
2016|Finals
Need for special rules for close corporations
Note: A close corporation is also described as a
Corporation de jure and Partnership de facto
A CC is essentially an Incorporated Partnership
A close corporation is organized primarily for the
purpose of assuring limited liability to all the
participants
- The very objective of CC form is to enjoy the
advantages of corporate organization
o Ex: limitation of personal Liability at
the same time to retain internally
the partnership form of doing
business
Flexible standard operation procedure with respect
to matters of internal organization
- This is described as PYRAMIDAL in form
BASE: SHs, directors constituting the policy making
body and managing the companys affairs and the
officers executing policies already formulated
Sec Opinion:
While a corporation with more than 20 SHs due to
subsequent transfers may no longer be classified as
a close corporation
- The same will not be treated as a publicly
held corporation
o If the corporation has no intention
of going public and
o provided that the subsequent
transfers of shares have the prior
approval of the SEC
o and the offering is of limited
character
Dean R.
1. Limited Liability C...(03/06/17)
- It can be ran like a partnership or
corporation
2. Specify what kind of interest
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Section 97
Articles of Incorporation
Permissible provisions in the AOI
1. Classifications of Directors into one
or more classes
2. Quorum and voting requirements
3. Management of the corporation by
the SHs
4. Election or appointment of officers
directly by the SHs
Classification of Directors into classes
- This is not allowed in widely-held or
ordinary corporations
Quorum and voting requirements
The AOI of CC may provide for quorum and voting
requirements in meetings of SHs or directors
greater than those provided in the Corp. Code.
Management of the Corporation by the SHs
- Where the AOI provide that the business of
the corporation shall be managed by the
SHs themselves rather than by a BOD
- Then the SHS shall be deemed to be the
directors with all the liabilities imposed by
the code on directors
Note: in ordinary corporations, the management or
conduct of the business affairs thereof is entrusted
to the BOD and cannot be turned over to the SH
except for a few specified matters concerning its
internal affairs
Election or appointment of officers directly by the
SHs
- AOI may also provide that all certain
specified officers or EEs shall be elected or
appointed directly
- In ordinary stock corporations, corporate
officers are elected by a majority of all the
members of the board of directors
2016|Finals
Note: SHs in a close corporation are very much like
members in a partnership
- They owe to one another the same duty of
utmost good faith and diligence that
partners owe one another
Section 98
Validity of Restrictions on transfer of shares
Restrictions on transfer of shares
Conditions for validity:
1. The restrictions must appear in the AOI, BL
and Certificate of stock
- Otherwise, it shall not be binding
2. They should not be more onerous than
granting the existing SHs or the Corporation
the option to purchase the shares of
transferring of SH
NOTE:
- it is invalid to set the purchase price to be
very much lower than the FMV
- It is also invalid to prohibit against transfer
of stock without prior consent of the board
Right of first refusal
The SH who wants to sell his shares to third persons
- Must offer it first either to the corporation
or the other SHs
- Usually under the same terms and
conditions
- If no one exercises the option,
o The transferring SH may sell his
shares to third persons
PERIOD to exercise the option
- SEC opinion : 1 month is deemed sufficient
for the SHs or for the corporation to signify
their desire
Need for stock transfer restrictions in close
corporations
1. Prevent changes in the control of the
corporation
2. Maintain delectus personae
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Scope of restrictions
- It should not be enlarged by implication
Transfers Covered must be stated in the AOI
Transferees Covered
Appointees Covered
Section 99
Issuance or Transfer of Stock of a close corporation
in breach of qualifying conditions
GR: Nos. 1, 2 and 3 of Section 99
- The transferee is conclusively presumed to
have notice of the restriction or condition
- Hence he is not allowed to prove the lack of
notice
o Even if such is true
Note: the corporation can never be compelled to
register the transfer
- But it may voluntarily do so
EXP: The transfer will be binding upon the
corporation when it has been consented by all the
SHs or they have amended the AOI
Note: transfer includes donation
- Breach of the restrictions does not
prejudice the rights of the transferee
provided by law
Section 100
Agreements by Stockholder
1. Pre- incorporation Agreement
Shall be valid if such is their intent even after
incorporation (this refers to SHs agreement in
general
- Provided it is not inconsistent with the AOI
2. Pooling and voting agreements in particular
3. Any Agreement of the SHs shall not be
invalidated on the ground that they shall be
PARTNERS among themselves
Note: the SHs of a Close corporation actively
engaged in the management of a close corporation
shall be personally liable for CORPORATE TORTS
2016|Finals
- Unless the corporation has obtained
reasonably adequate liability insurance
Note: A president of a Close Corporation who
actually manages the business is considered an
EMPLOYER
- Hence, he may be held jointly and severally
liable for the obligations of the corporation
to its illegally dismissed employees
Corporate tort (according to the De Leon, no definite
meaning)
Section 101
When board meeting is unnecessary or improperly
held
Unless provided by the BL, the following are valid
even without a meeting:
1. Before or after such action is taken, written
consent thereto is assigned by all the
directors or
2. All of the SHS have actual or implied
knowledge of the action and make no
prompt objection thereto in writing or
- Ratification cannot take place where the action
taken at a meeting held without proper call or
notice is beyond the corporate powers
(See Sec. 45)
3. The directors are accustomed to take
informal action with the express or implied
acquiescence of all the SHs 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
Note: If a directors meeting is held without proper
call or notice
- An action taken therein within the
corporate power
o Is deemed ratified by a director
who failed to attend
o Unless he promptly files his written
objection with the secretary of the
corporation after having knowledge
thereof
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
- This is different from Section 53, where an
oral objection is sufficient
Section 102
Pre-emptive right in close corporation
- This extends to ALL stock to be issued
- Whether common or preferred
- Including treasury shares
o As long as they remain in the
treasury
o They really have the status of
unissued authorized shares to
issue(reissue is the more proper
term) at some future time
Hence, pre-emptive right is a matter of right on the
part of the SH
EXCEPT: when limited or curtailed by the articles of
incorporation
- Exceptions under Sec. 39 not applicable
Section 103
Amendment of AOI
The amendment must be proved by the SHs in a
meeting called for the purpose
- Mere written assent not enough (Different
form Sec. 16)
- Applicable See Sec. 96
Section 104
Deadlocks
Arbitration of intra- corporate deadlocks by the
SEC
How to resolve DEADLOCK in the management
- SEC arbitration upon written petition by any
SH
Note: Such authority of SEC cannot be avoided by
any agreement or provision in the AOI
- The SEC may order Dissolution if it will be
beneficial for the SH or may provisional or
additional M/T/D
2016|Finals
Dissolution in case of Deadlock
Section 104 and other statutes provide for the
dissolution of a corporation in case of Deadlock
- This is available to EVENLY DIVIDED BOARD
- Not available to uneven board
o EXP: when the ODD MAN is a
DUMMY
Note:
Where dissolution in case of deadlock is proper or
more beneficial -
Equity Partnership
- small corporations being really partnerships
between two or three people
- Who contribute their capital, skills,
experience, labor, should be treated by the
court of equity as partnerships in many
respects
Compared to a large corporation or who has a
chance of becoming a large one, an equity
partnership has a lesser chance of improvement
Section 105
Withdrawal of Stockholder or dissolution of
Corporation
Right of a SH to withdraw/dissolve the
corporation
Right to WITHDRAW
- may be exercised for any reason
- Provided the corporation has sufficient
assets to cover its debts and liabilities
exclusive of capital stock
Right to have the corporation dissolved
- Exercised by filing a written petition to SEC
- It must be founded on a legal ground
TITLE XIII
SPECIAL CORPORATIONS
CHAPTER 1- EDUCATIONAL CORPORATIONS
Section 106
Incorporation
Educational Corporation defined
- Stock/non-stock corporation
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

- Organized to provide facilities for teaching o Unless otherwise provide in the

or instructions.
Laws applicable
Governed primarily by special laws
Suppletorily by the general provisions of the
corporation code
Section 107
Prerequisites to incorporation
Incorporation
Re Educational Institution:
- Educational Institutions other than those
established by religious groups and mission
boards
1. Shall be owned solely by PH citizens
2. or corporations or associations , 60% of
the capital stock of which owned by PH
citizens
AOI/BL
- Trustees subsequently elected shall have a
term of 5 years
- Trustees elected to fill vacancies occurring
before the expiration of a particular term,
shall hold office only for the unexpired
period
- Majority shall constitute a quorum
- Powers and authority shall be defined on
the BL subject to the provisions of
SECTION 23
2. Stock Educational Corporations
Governed by the rules of Stock corporations
re the number and terms of Director
RELIGIOUS CORPORATIONS
Section 109
Classes of Corporation
Section 110
Corporation Sole

NOTE: Section 111

- NS educational institution is not allowed to AOI
convert to a NON-PROFIT educational
foundation Section 112
o When is the conversion allowed? Submission of the AOI
Amend the AOI and BL
And specify the sources and Section 113
application of funds in the Acquisition and Alienation of Property
amendment
- But a STOCK corporation may be converted Section 114
to a non-profit education foundation Filling of Vacancies

Section 115
Section 108 Dissolution
Board of Trustees
Section 116
Board of Trustees or directors Religious Societies
1. NS Educational Corp
a. Trustees : Definition of Religious Corporation
not less than 5 - Composed entirely of spiritual persons
nor more than 15 - And which is organized for the furtherance
- it must be in multiple of 5(mandatory) of a religion or for perpetuating the rights
- TERM of office shall be staggered with 1 of the church or for the administration of
year interval (mandatory) church or religious work or property

53
NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Corporation Sole
Component|Purpose|power to hold and transmit
property
- Corporation sole if a special form of
corporation usually associated with the
clergy
- Introduced into common law due to
necessity
- The unhappy freak of English law
- It consist of one person only
- In this legal fiction, church properties is
passed upon death by operation of law
- But not to his heirs but to his successor in
office
- The corporation sole is created not just to
hold but also to transmit
- MERE Administrator or properties of the
church
- IT HAS NO NATIONALITY
Cannot be considered as an alien
In determining the percentage requirement
- The nationality of the constituents of the
diocese and not the nationality of the actual
incumbent of the parish must be taken into
consideration
TITLE XIV
DISSOLUTION
Section 117
Methods of Dissolution
Meaning of Dissolution
This signifies the extinguishment of its franchise to
be a corporation
And the termination of its corporate existence
Power to dissolve corporation
2016|Finals
GR: the life of a corporation may be extinguished
only by the act or with the approval of the
sovereign power by which it was established
- Being a creation of the state it may only be
dissolved with the consent of the state
EXP: when the law allows it and in instances when
the SH/M do it without judicial proceedings
De Jure Dissolution
- Dissolution in law adjudged and determined
by judicial sentence or brought about by an
act of or with the consent of the sovereign
power
- Or which results from the expiration of the
charter period of corporate life
De facto Dissolution
- One takes place in substance
- When the corporation by reason of
insolvency, cessation of business, or
otherwise, suspends all its operations
o And may proceed to liquidation
o But the franchise still remains
Note: the mere fact that the corporation has quit
doing business does not necessarily constitute even
a de facto dissolution
Two legal steps in corporate dissolution
1. Termination of corporate existence
- At least as far as the right to go on doing
ordinary business is concerned
2. Winding up of its affairs
- Payment of debts
- Distribution of assets among SH/Ms and
other persons interested
Note: after the formal dissolution, any of its SHs
may form another corporation which will engage in
the same line of business even if it is done during
the liquidation period
Methods/causes of corporate dissolution
Voluntary
1. By the vote of the BOD/T
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
- And the SH/Ms where no creditors are
affected
2. By judgement of SEC after hearing the
petition for voluntary dissolution where
creditors are affected
3. By amending the AOI to shorten the
corporate term
4. In case of corporation sole, by submitting to
the SEC a verified declaration of dissolution
approval
Involuntary
1. By expiration of the term provided for in
the original AOI
2. By legislative enactment
3. By failure to formally organize and
commence the transaction of its business
within 2 years from the date of
incorporation
4. By order of SEC
Note: Methods are exclusive
Section 118
Voluntary dissolution where no creditors are
affected
Voluntary dissolution
Compliance with legal requirements
Note: a mere resolution for dissolution is not
sufficient
When corporation deemed dissolved
If the dissolution is effected by the SEC
- It shall be deemed dissolved upon the
issuance of CERTIFICATE OF DISSOLUTION
Voluntary dissolution where creditors are affected
- Judgement rendering the dissolution
By amending the AOI
- Approval of the amendment by the SEC
Shortened term
2016|Finals
- Expiration of the term
Corporation Sole
- verified declaration of dissolution
If no dissolution papers are filed
GR: when no papers are submitted with the SEC
claiming dissolution voluntary, it is still deemed
legally existing
- even if it has ceased its operations
EXP: Dissolution by judicial decree and the court
order has not been submitted to SEC
Corporation Sole
Section 115
Voluntary Dissolution where no creditors are
affected
How effected
1. Vote by the BOD/T
2. Resolution duly adopted by the SH/Ms
3. Even non-voting shares may vote
4. Publication requirement
Note: in SEC 118, a private corporation may be
dissolved voluntarily without the necessity of going
to the SEC or Court for dissolution
- When it does not affect any creditor
Issuance of Certificate of dissolution
- SEC is required
- CORP. SOLE : the verified declaration of
dissolution must be approved by SEC
Sale of Assets in anticipation of voluntary
dissolution
Section 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or substantially all of its property and assets,
including its goodwill, upon such terms and conditions and for such consideration,
which may be money, stocks, bonds or other instruments for the payment of
money or other property or consideration, as its board of directors or trustees
may deem expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock, or in case
of non-stock corporation, by the vote of at least to two-thirds (2/3) of the
members, in a 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
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

dissenting stockholder may exercise his appraisal right under the conditions
provided in this Code.
Distribution of Corporate assets Prohibited
Note: creditors enjoy the preference in the
distribution of assets before the SHs are finally
entitled to return of their investments

A corporation can validly liquidate its debt prior to Dissolution by legislative enactment
its dissolution
Reserved power of congress to dissolve
But it cannot distribute any of its assets or property corporations
except upon lawful dissolution and after payment of
all its debts and liabilities This is subject to the limitation of the constitutional
- It cannot distribute until the issuance of right of the non-impairment of obligations of
CERTIFICATE OF DISSOLUTION contract

Right of minority SHs to oppose dissolution Franchise of Public Utilities

- Reserved under the constitution
GR: the court will not interfere o Neither shall any such franchise or
right be granted except under the
EXP: When the dissolution is in BF or the dissolution condition that it shall be subject to
was superinduced by fraud or undue influence amendment, alteration, or repeal
- Whe it is to unjustly oppress the minority by the congress when the common
The right of SHs to voluntary dissolve the good so requires
corporation by vote of a prescribed percentage
thereof is not absolute Limitations to power
1. Consti: the amendment/alteration/repeal of
Section 119 the corporate franchise of a public utility
Voluntary Dissolution where creditors are affected shall be made only when common good so
requires
Section 120 2. Sec 145 of the Code
Dissolution by shortening corporate term Section 145. Amendment or repeal. - No right or
remedy in favor of or against any corporation, its
Dissolution by shortening of term stockholders, members, directors, trustees, or
officers, nor any liability incurred by any such
- The AOI must be amended corporation, stockholders, members, directors,
- It must be approved by SEC trustees, or officers, shall be removed or impaired
- Upon approval and expiration of the term either by the subsequent dissolution of said
o No further action or proceeding is corporation or by any subsequent amendment or
required for its dissolution repeal of this Code or of any part thereof.
3. Should not impair OBLICON
Publication of notice of dissolution
An affidavit of publication of dissolution of the Inherent power of Congress to amend or repeal
corporation must be executed by the publisher of laws
the print medium

- It cannot be dispensed with by alleging that

the same is not required in Section 120
- The publication serves as a protection of
the rights of existing creditors
Dissolution by failure to formally organize and
commence transaction of business
Cessation of corporate powers (deemed dissolved
Sec 22)

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
- Failure to organize and commence the
transaction of its business or the
construction of its works within two years
from the date of its incorporation
Note: the attempted completion of the organization
after such time is ineffective and will not give rise to
a de facto corporation
- However there is no automatic dissolution
until lawfully declared by SEC
o After due notice and hearing
o But the effect of declaration will
retroact to the time the corporation
should be deemed dissolved
Collateral Attack of dissolved corporation
- If dissolved in accordance with Section 22
- In any private suit
Subsequent continuous incorporation
- For 5 years
- A ground for suspension/revocation of
registration
- See Sec 22
Effect of Change of name on Corporate Existence
- Mere change of name would not result to
dissolution
Effect of insolvency/bankruptcy on corporate
existence
Insolvency
- the inability or failure to pay debts as they
become due
- in Bankruptcy cases, it is considered as the
o condition where the total liabilities
exceed the total assets available for
their settlement
Note: possession of assets is necessary to the
creation of a stock corporation
- the loss of its properties does not affect its
existence
- the appointment of a receiver does not ipso
facto (on the very fact or on this fact alone)
2016|Finals
produce its dissolution nor bar the exercise
of corporate rights
Effect of alienation of all assets on corporate
existence
Practical or de facto Dissolution
A legal dissolution of a corporation may result from
the transfer of sale of all its properties and assets
- as where it virtually amounts to a surrender
of the corporate charter
- with the consent of the state
A transfer of ALL property of a corporation
whatever is the legal effect on the life of the
corporation may be, is generally for practical
purposes
- a dissolution, particularly when the
corporation is insolvent or nearly so
- an conveys its entire property with a view
of going out of business
State of suspended animation
- even if there is a de facto or practical
dissolution
- when the corporation can still repurchase
the properties disposed or other property
and resume business
- the corporation may still exist without
property
- hence, there is a state of suspended
animation
Ground for Voluntary dissolution
- See Sec 40
- Sec. 118 to 119
Effect of death etc. of SH/M on corporate
existence
Stock Corporations
- Dissolution by death of all the members of
the corporation cannot apply to business
corporation
- The shares are passed by assignment etc.
- A Corporation has a right of succession
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Non-stock
- May leave the corporation incapable of
continuing itself
Effect of Want of officers on corporate existence
- Does not dissolve the corporation
Effect of Concentration of stock on corporate
existence
- Does not ipso facto dissolve the corporation
- But the purchase by one of all the shares of
a corporation may operate as a dissolution
of the corporation
o To the extent that in such event, it
suspends the exercise of the rights
under the franchise
o Until the owner transfers stocks in
GF so as to maintain an
organization under the statute
Note: the owner may always assign his shares, while
he still holding the legal or beneficial ownership
Section 121
Involuntary Dissolution
By order of SEC
All actions filed before the SEC must be prosecuted
and defended by in the name of real party-in-
interest
1. Violation by a corporation
See Sec. 144
2. Deadlocks in a close Corporation
3. Mismanagement
See Sec 105
4. Suspension/revocation of cert. Of
registration
See Sec. 6 and Sec 144
Sec Opinion: (other grounds for suspension or
revocation)
1. Failure to formally organize/2 yrs/5 yrs. -
Sec. 22
2. Failure to file BL within the prescribed
period
3. Failure to file or register their financial
statements, gen. Info. Sheets, stock and
transfer book or membership book
2016|Finals
- The SEC shall send the corporation and the
controlling SH a SHOW-CAUSE-ORDER
- See SEC QUARTERLY BULLETIN 90 NO.3
1994
NON-USER
1. CONTINUOUS INORPERATION for 5
years
MISUSER
1. Fraud in procuring its certificate of
registration
2. Serious misrepresentation as to what the
Corp. can do or doing to the prejudice of or
damage the general public
3. Refusal to comply with SECs lawful orders
Dissolution by quo Warranto proceedings
Read REP v. Security Credit and Acceptance
Corporation 1967
Right of Minority to sue for dissolution
1. Where there is no redress or remedy
available to them
2. When the violation does not warrant a quo
warranto
- As when the State is not interested
- Because the complaint is strictly a matter
among the SHs
Effects of Dissolution
1. Transfer of Legal title to Corporate Property
To the SHs
- They then become co-owners
2. Continuation of corporate business
GR: corp. ceases to be a body corporate
But it may operate as an ORDINARY
ASSOCIATION- to continue to undertake the
purposes for which it was organized
o But it has no juridical personality
Note: any of the SHs may re-incorporate or form
another corporation to engage in the same line of
business
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
- By complying with the registration
requirements of the code
Creation of a new corporation
SHs are allowed to convey their shareholdings
toward to creation of a new corporation to continue
the business of the old
- Winding up is the sole activity of a dissolved
corporation that does not intend to
incorporate a new
But SHs are not prohibited to negotiate and
transfer asserts of the dissolved corporation(see Sec
40) to a new corporation
Read Chung Ka Bio v. IAC 163 Scra 534 (1998)
Reincorporation of a dissolved Corporation
Read Rebolido v. CA 170 Scra 800 (1989)
Continuation of the body corporate
- Dissolution does not by itself imply
extinction of the rights and liabilities of the
corporation
- Nor of its owners or creditors
- The corp. continues a body corporate for 3
years for purposes of winding-up and
liquidation
o It may even hold an election
o But only for that purpose
Section 122
Corporate Liquidation
Liquidation
Means the winding up of the affairs of the
corporation
- By reducing its assets in money, settling
with creditors and apportioning the amount
of profit and loss
- Adjusting all debts and claims
- Collecting that is all due to the corporation
Nature of Liquidation
- Not a partition of community property
- But a transfer or conveyance of the title of
its assets to the individual SH
Modes
1. Liquidation by the corporation itself
2016|Finals
2. By duly appointed receiver
3. By trustee to the corporation had conveyed
the corporate assets
Liquidation by the corporation itself
- Period of 3 years
- Claims by and against the corporation
becomes unenforceable after the 3 year
period
Read Buenaflor v. Camarines Sur Industry corp.
108 Phil 472 (1960)
Extension of period
Gr: not allowed
But a creditor who has a pending action or when
the corporation has a pending suit filed
- May prevent the abatement
- By asking the proper court for the
appointment of the receiver or trustee
within the winding up period
- The trustee may sue or be sued beyond the
3 year period
o When there is no time limit within
which the trustee must finish the
liquidation
Note: A counsel who prosecuted and defended the
interest of a dissolved corporation may be
considered a trustee with respect to the matter in
litigation
And the BOD may be permitted to complete the
liquidation by continuing as trustees by legal
implication
Read Gelano v. CA 1981
Clemente v. CA 1995
Reburiano v. CA
Action against Liquidators/Sh
Dissolution does not extinguish the debts of the
corporation
See Sec145
Approval of Sec not Required
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Authority of HOLD Over officers
- They have the authority to wind-up or
liquidate
- The disposition of the remaining
undistributed assets must necessarily
continue after such period
Liquidation by Reciever
Who will appoint?
Authority
- Ministerial officer only
- It is limited to what the statue has granted
- The appointment suspends the authority of
a corporation and its D/T/O over its
property and effects
- It is equivalent to an injunction to restrain
the corporations officers from
intermeddling with the property of the
corporation in any way
Status
He acts for the court, SH, crediotrs
For all the parties
- Rep of the corporation
Stay of pending actions
PD 902-A
Allocations of claims against the corporation under
management or receivership pending before any
court, tribunal or body shall be suspended
accordingly
Read Rubberworld v. NLRC 2000
Equality among creditors
Subject to the rules on preference of credit
Read Alemars Sibal and Sons inc. v. Elbinias 1990
Alemars Sibal and Sons Inc. v. NLRC 2000
Duration of Receivership
Indefinite except if specifically limited
- He may act beyond the period
Appointment of receivership
2016|Finals
Discretionary
A receiver may also be appointed even if there is no
dissolution
- When there has been a final and executor
judgement against the corporation which is
in unstable financial condition
- Or to protect the right of the minority
Receivership is the last remedy
- Must not be resorted to unless there is no
other remedy available
Liquidation by a trustee
Conveyance of Corporate Property
- By a resolution by SH/M made within the 3
year period
Effect of Conveyance
- Trustee : Legal owner
- Creditors/SH etc. : beneficial owner
Period
- Until liquidation is terminated
- Even after the 3 year period
Read Reburiano v. CA 1999
National Abaca & other Fiber Corp. v. Pore 1961
When NO receiver or trustee is appointed
After dissolution
Even after the 3 year period
1. The BOD/T may be permitted to continue as
a trustee
- By legal implication to complete the
liquidation
2. If no board, those who have pecuniary
interest in the assets
3. The only Surviving director or SH
Subject to no. 2 in case the survivor dies
and another survivor replaces him
4. The counsel who prosecuted or defended
the interest of the corporation
Read Clemente v. CA 1995
Premier Development banks v. Flores 2008
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Distribution of Corporate Assets
GR: Except by decrease of its capital stock ( Sec
38) and otherwise provided by the code ( sec
8,9,41, 43, 104-par 1(4) and 105)
- No corporation shall distribute its assets
except upon lawful dissolution and after
payment of the debts and liabilities
- In accordance with the trust fund doctrine
Distribution in exchange of Stock
- Property contributed to the corporation
exchange of shares of stock and forming
part of the assets of the corporation cannot
be withdrawn by the subscriber
- But only by the approval of the board and
SHs
- But assignment is not prohibited
Distribution in pursuance of liquidation
the purpose of the liquidation, as well as
the distribution of the assets of the
corporation, is to transfer their title from
the corporation to the stockholders in
proportion to their shareholdings, and
this is in effect the purpose which they seek
to obtain from the Register of Deeds of
Manila, that transfer cannot be effected
without the corresponding deed of
conveyance from the corporation to the
stockholders. It is, therefore, fair and logical
to consider the certificate of liquidation as
one in the nature of a transfer or
conveyance. (SH of Guanzon & Sons Inc. v.
RD)
By the act of SH
- Provided the creditors are paid and no one
is prejudiced
Priority of Application of Assets
Note: this is only important when the assets are
not sufficient
2016|Finals
1. In case of insolvency, the corporate
creditors
a. Secured creditors are preferred
b. Unsecured
ARTICLE 2246. Those credits which enjoy preference with respect
to specific movables, exclude all others to the extent of the value
of the personal property to which the preference refers.
ARTICLE 2247. If there are two or more credits with respect to the same
specific movable property, they shall be satisfied pro rata, after the
payment of duties, taxes and fees due the State or any subdivision
thereof. (1926a)
ARTICLE 2248. Those credits which enjoy preference in relation to
specific real property or real rights, exclude all others to the extent of
the value of the immovable or real right to which the preference refers.
ARTICLE 2249. If there are two or more credits with respect to the same
specific real property or real rights, they shall be satisfied pro rata, after
the payment of the taxes and assessments upon the immovable
property or real right. (1927a)
ARTICLE 2250. The excess, if any, after the payment of the credits which
enjoy preference with respect to specific property, real or personal,
shall be added to the free property which the debtor may have, for the
payment of the other credits. (1928a)
2. SH/M/D/O
- Who are also creditors as a result of
legitimate or proper loan or claim
3. REMAINDER- distributed among the SH/M
in proportion to their shareholdings or
interest
- In the absence of any provision to the
contrary
o Preferred (preferred re the surplus
of proceeds of the assets)
Note: the amount of capital refund that a Sh may
get in case if liquidation will depend upon the
financial condition at that time
In case, after payment to SH, unpaid debts debts
shall appear the SH are liable to pay the debts to
the extent of the value of the assets received by
them
Note: the distributive shares of the assets of the
corporation upon its dissolution are available for
general distribution among the whole class of SHs
Reason: upon the dissolution of the
corporation the asset become the trust
fund with the title of the SHs becoming
equitable right to distributive share therein
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
- The SHs are not mere creditors as to the
liquidating dividends
o The money actually belongs to
them severally in equity
o Therefore not available for general
distribution
Liquidation need not be approved by SEC
REFUND of SH of their investment
With Stock corporations are dissolved, the assets
are first applied to the payment of their obligations
and the balance shall be used as refund to SH the
amount they invested
Shares with par value
GR: Refund shall only be the amount equal to the
PAR VALUE of each of the shares which they hold
- Even if they have paid more than the par
value when they acquired the shares
EXP: when the AOI/BL/Certificate provides for the
amount of the refund
No par value
The amount they have paid to the corporation for
the shares
- If received at the different prices and time
o Then the amount depends the price
of each
EXP: AOI provision to the contrary
Shares acquired from prior SH
The amount ORIGINAL SH could have been entitled
TITLE XV
FOREIGN CORPORATION
Definition (General)
It is a corporation created by or under the laws of
another state or country
- In the incorporating state it is called a
DOMESTIC CORPORATION
2016|Finals
Jurisdiction
GR: A foreign corporation can have no legal
existence or status beyond the bounds of the state
or sovereignty by which it is created or incorporated
and organized
EXP:
1. Another state consented
2. Subject to restriction that another state
may impose
Consent Doctrine
Expressed or implied
- A foreign corporation can exercise none of
the functions and privileges conferred by its
charter in another state except by the
COMITY and CONSENT of such state or
country
Imposed restrictions and conditions
The state in extending to foreign corporations the
privilege of doing business may impress such
privilege with whatever conditions and restrictions
it deems fit to impose.
Objectives of regulation of foreign corporation
1. To place them on an equality with domestic
corporations
2. To subject them to inspection so that their
condition may be known
3. To protect the residents of the state doing
business with them by subjecting them
License and Certificate of authority required of
foreign corporation
Foreign corporations are not permitted to
transact or do business in PH until they have
secured a
1. license for that purpose from SEC
2. Certificate of Authority from the
appropriate Government Agency
But the absence of such license/certificate does
not mean that the foreign corporation is a
juridical person
When may a FC even without a license?
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

When the FC sues on an isolated transaction 3. But, while a corporation with a 60% Filipino
equity ownership may be considered a
Nationality of corporations with Foreign equity Filipino corporation
- It is not allowed to enter into a joint
Determination of nationality venture agreement with corporations or
partnerships
1. Incorporation Test (See PH Constitution)
- The nationality of a corporation is that of
the state of incorporation regardless of the Note:
nationality of its SHs 1. Preferred stocks without voting rights are
considered in the computation
2. Control test - Unless the law covering the type of business
- Depends on the nationality of the to be undertaken provides otherwise
controlling SHs 2. Filipino Citizens who reacquired Filipino
Citizenship under RA 9225
Control Test Guidelines - Their Shares are considered Filipino
Investments
60 % of the Capital of the corporation must be
owned by Filipino citizens to be considered a Purpose of the 60% requirement
PHILIPPINE CORPORATION
To ensure that corporations and association
Example: allowed to operate a public utility should be
controlled by Filipino Citizens
If there are 100,000 capital stocks and 60% of such
is owned by Filipino Citizen Determining Board Seats allowable for foreign
- All of such share shall be recorded is Filipino corporations
owned
Constitution:
If less than 60%, as when only 50% is owned by The allowable foreign investment in a public utility
Filipinos is only up to the extent of 40% of the outstanding
- Only 50,000 shares will be registered as capital stock and foreign participation in the
Filipino owned governing body shall be limited to their
- And the other 50,000 shall be registered as proportionate share in the capital
owned by aliens Determination of required Filipino interest in a
corporation for purposes of land ownership

Basis of computation of 60-40 percentage Constitution:

requirement
1. The basis the total outstanding capital stock
- Irrespective of the amount of the par value
of the shares
2. Once it is established that the corporation is
a Filipino Corp., it is no longer necessary to
conduct any further inquiry as to the
ownership of the shareholders
- Since the entire company is considered a
Filipino entity
Save in cases of hereditary succession, private lands
may be transferred to corporations provided they
are qualified to acquire or hold lands of public
domain
Corporations allowed to acquire private lands:
60 % of the capital stock are owned by Filipinos
Determination of required Filipino Interest in a
corporation for purposes of land ownership

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva 2016|Finals

- Private lands may be transferred to Section 128

corporations provided they are qualified to
acquire or hold lands of public domain
o Requirements
1. 60 % of the capital stock
belongs to the Philippines
2. There must be beneficial
ownership and not just
control over the
corporation
3. A Philippine national is
qualified to own land
Note: if the foreign shareholding exceeds 40%
- It is not the Foreign Shareholding which is
affected
- But the capacity to own land of the
corporation
Who is a PHILIPPINE NATIONAL?
According to the Foreign Investment Act-
1. Citizen of the Philippines
2. A domestic partnership or association
wholly owned by citizens of the PH
3. A corporation organized under the laws of
the PH of which at least 60% of the capital
stock outstanding and entitled to vote is
owned and held by Filipino Citizens
4. Or A corporation organized abroad and
registered as doing business on the
Philippines under the Corporation code of
which 100% of the Capital stock
outstanding and entitled to vote is wholly
owned by Filipinos or
5. Trustee of 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 National
Section 124
Application to existing foreign Corporation
Section 125
Application for License
Section 126
Issuance of a license
Resident Agent; Service of process
Application for and issuance of License
Requirements
1. Submission of the required documents
a. Certified copy of its AOI
i. With translation to an
official language of PH if
necessary
b. Application for a license which
shall be under oath
i. Which must specially
set forth the matters
enumerated by law
ii. Unless already stated in
the AOI
2. Accompanying documents to
application
a. Duly executed certificate under
oath by the authorized official
or officials of the jurisdiction of
its incorporation
Attesting to the fact that
the laws of the country or
state of the applicant allow
Filipino Citizens and
corporations to do business
therein
And the applicant is an
existing Corporation of
good standing
With the translation of the
certificate in English under
oath of the translator if it is
in a foreign language
b. A sworn statement of the
president or any authorized
officer of the corporation
Showing to the satisfaction
of the SEC and other
government agency in
proper cases that the
applicant is solvent and in
sound financial condition

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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
And setting forth its assets
and liabilities of the
previous year
c. A certificate of Authority from
the appropriate government
authority whenever required by
law
d. A written power of attorney
designating a resident agent on
whom summons and other
legal processes against the
corporation may be served
And a written agreement or
stipulation consenting that
such service shall be served
upon SEC if at any time it
shall cease to transact
business in the Philippines
Or shall be w/o any resident
agent.
Rule and regulation Implementing RA 7042
A foreign Corporation is required to submit the
following documents to secure a license
1. Name verification slip
2. Certified copy of board resolution
authorizing the establishment of an office in
the PH
a. Designating the resident agent
b. In the absence summons shall be
served to SEC
3. Financial statements for the immediately
preceding year
4. Certified copies f the AOI/partnership
5. Proof of inward remittance such as bank
certificate of inward remittance of credit
advises
6. And other documents required by SEC
Issuance of license
Registration of a foreign corporation with SEC
requires that the same is doing business in the PH
- hence, a firm name belonging to a foreign
corporation cannot be registered in PH for
the purpose of precluding the possibility of
any group capitalizing on said firm name in
the Philippines
2016|Finals
The commission may exempt foreign corporations
from its licensing requirements upon appropriate
application for exemption to promote equity,
justice, and national interest.
- Thus it may determine on a case to case
basis whether a particular or limited
undertaking of a foreign corporation
constitute an act of doing business or
transacting business in the Philippines
(SEC OPINION)
Conditions subsequent to issuance of license
The corporation may continue as long as it retains
the authority to act as a corporation under the laws
of the state of its incorporation
EXP: when such license is sooner surrendered,
revoked, suspended or annulled in accordance with
the Code or Special laws
Additional
a. It shall transact only for the
purpose(s) for which it is authorized
under its license
b. Within 60 days after the issuance of
the license
The licensee (except
banking or foreign
corporations) shall deposit
with SEC Securities in the
actual market value of at
least 100k
For the benefit of
present and future
creditors in PH
c. Within 6 months after each fiscal
year of the license
o It shall deposit additional securities
equivalent in actual market value to
2% of the amount by which the
licensees gross income for that
fiscal year exceeds five million
Such deposit will be
increased if the actual
market value of the
securities has decreased by
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
at least 10% at the time
they were deposited
Cases| FOREIGN CORPORATION
CARGILL INC. V. INTRA STRATA ASSURANCE
CORPORATION
Facts:
Cargill is a corporation organized under the laws
of the State of Delaware
NMC executed a contract on 1989 whereby NMC
agreed to sell Cargill 20k to 40k metric tons of
molasses
The contract provides that Cargill will open a
letter of Credit with BPI
In the red clause of the Letters of Credi- NMC
was allowed to draw up to $500k representing
the minimum price of the contract upon
presentation of some documents
Red Clause (google)
The red clause letter of credit is a specific type of letter of
credit in which a buyer extends an unsecured loan to a
seller. Red Clause Letters of Credit permit documentary
credit beneficiaries to receive funds for any merchandise
outlined in the letter of credit
These letters are commonly used by beneficiaries who act
as purchasing agents for buyers in another country.
The contract was amended for three times
On the third amendment NMC was required to
put up a performance bond equivalent to
$451,500
The bond was to guarantee NMCs performance
to deliver the molasses during the prescribed
shipment periods
In compliance of such, INTRA STRATA issued a
performance bond worth $11.2K to guarantee
NMCs delivers of the 10.5k tons of molasses
And Intra also issued a surety bond worth $9.9K
to guarantee the repayment of the downpayment
as provided in the contract
But NMC was only able to deliver 219 metric tons
of molasses
2016|Finals
Hence, Cargill sent demand letters to respondent
claiming payment under the performance and
surety bonds
NMC refused to pay
Hence, CARGILL filed a complaint for sum of
money against NMC and Intra
Cargill and NMC entered into a compromise
agreement w/c the trial court approved
NMC however again failed to comply with the
agreement
Hence, Cargill proceeded with the case
RTC: Intra Strata and NMC are solidarily liable to pay
Cargill P16.9M
CA: Cargill has no capacity to file a suit since it is a
foreign corporation doing business in the Philippines
without a License. That the purchase of molasses is in
pursuance of its basic business and not a mere isolatrd
and incidental transaction
Issue(s):
1. WON Cargill is doing or transacting business in
the PH
2. WON Intra is estopped from invoking the defense
that petitioner has no legal capacity to sue in PH
Ruling:
Doing Business in the Philippines and Capacity
to Sue
Sec. 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.
Section 1 of Republic Act No. 5455 (RA 5455),[14] provides
that:
x x x the phrase doing business shall include
5. soliciting orders,
6. purchases,
7. service contracts,
8. opening offices, whether called liaison
offices or branches;
9. appointing representatives or
distributors who are domiciled in the
Philippines or
10. who in any calendar year stay in the
Philippines for a period or
periods totalling one hundred eighty
days or more;
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
11. participating in the management,
supervision or control of any domestic
business firm, entity or corporation in
the Philippines;
12. 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,
13. or the exercise of some of the
functions normally incident to,
14. and in progressive prosecution of,
commercial gain or of the purpose
and object of the business
organization.
The determination of whether a foreign
corporation is doing business in the Philippines
must be based on the facts of each case.
What must be proved by the respondent?
That Cargills business activities in the Philippines were
not just casual or occasional
- But so systematic and regular to manifest
continuity and permanence of activity to
constitute doing business in the Philippines
Cargill and NMC amended their contract three times to
give a chance to NMC to deliver to petitioner the
molasses, considering that NMC already received the
minimum price of the contract. There is no showing that
the transactions between petitioner and NMC signify the
intent of petitioner to establish a continuous business or
extend its operations in the Philippines.
The Implementing Rules and Regulations of RA 7042 provide under Section
1(f), Rule I, that doing business does not include the following acts:
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 interests 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 for export;
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.
2016|Finals
Activities within Philippine jurisdiction that do not
create earnings or profits to the foreign
corporation do not constitute doing business in
the Philippines
the contract between petitioner and NMC
involved the purchase of molasses by petitioner
from NMC. It was NMC, the domestic
corporation, which derived income from the
transaction and not petitioner. To constitute doing
business, the activity undertaken in the
Philippines should involve profit-
making.[20] Besides, under Section 3(d) of RA
7042, soliciting purchases has been deleted from
the enumeration of acts or activities which
constitute doing business.
Other factors which support the finding that
petitioner is not doing business in the Philippines
are:
(1) petitioner does not have an office in
the Philippines;
(2) petitioner imports products from the
Philippines through its non-exclusive local broker,
whose authority to act on behalf of petitioner is
limited to soliciting purchases of products from
suppliers engaged in the sugar trade in the
Philippines; and
(3) the local broker is an independent
contractor and not an agent of petitioner.
To be doing or transacting business in the
Philippines for purposes of Section 133 of the
Corporation Code, the foreign corporation
must actually transact business in the
Philippines, that is, perform specific business
transactions within the Philippine territory on a
continuing basis in its own name and for its own
account. Actual transaction of business within the
Philippine territory is an essential requisite for
the Philippines to to acquire jurisdiction over a
foreign corporation and thus require the foreign
corporation to secure a Philippine business
license.
Held: CAs decision reversed. RTCs decision
reinstated
Global Business Holdings Inc. v. Surecomp
Software
Facts:
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
Surecomp is a foreign corporation organized
under the laws of Netherlands
1999 Surecomp entered into a software license
agreement with ABC for the use of its IMES
System in the Banks computer system for a
period of 20 years
2000 ABC merged with petitioner Global with
Global as the surviving corporation
When global took over ABC, it found that the
system was unworkable for its operations
It informed Surecomp of its decision to
discontinue with the agreement to stop further
payments thereon
For Globals failure to pay, Surecomp filed a
complaint for breach of contract with damages
before the RTC
In its complaint, Surecomp alleged that it is a
foreign corporation not doing business in the
Philippines and is suing on an isolated
transaction
Global filed a motion to dismiss on the ff grounds:
15. Surecomp had no capacity to sue
because it was doing business in the
Philippines w/o a license
16. That the claim on which the action was
founded was unenforceable under the
Intellectual property code of the
Philippines
RTC: Denied Globals motions to dismiss
CA: Affirmed
Issue(s):
WON Global is estopped for questioning Surecomps
capacity to sue
RULING:
GLOBAL IS ESTOPPED from challenging Surecomps
capacity to sue
In order to subject a foreign corporation doing business in
the country to the jurisdiction of our courts,
1. it must acquire a license from the Securities and
Exchange Commission and
2. appoint an agent for service of process
EXP: Estoppel
A foreign corporation doing business in
the Philippines without license may sue in Philippine
2016|Finals
courts a Filipino citizen or a Philippine entity that had
contracted with and benefited from it.
A party is estopped from challenging the personality
of a corporation after having acknowledged the same
by entering into a contract with it.
The principle is applied to prevent a person
contracting with a foreign corporation from later
taking advantage of its noncompliance with the
statutes, chiefly in cases where such person has
received the benefits of the contract
Due to Globals merger with ABC and because it is the
surviving corporation, it is as if it was the one which
entered into contract with Surecomp. In the merger of two
existing corporations, one of the corporations survives and
continues the business, while the other is dissolved, and
all its rights, properties, and liabilities are acquired by the
surviving corporation.
Steel case Inc. v. Design International Selections
FACTS:
Steel case is corporation existing under the laws
of Michigan
It was engaged in the manufacture of office
furniture with dealers worldwide
Respondent Design International Selections
(DISI) is a corporation existing under Philippine
laws
Steel and DISI entered into a dealership
agreement
Whereby DISI was granted the right to market,
sell etc. Steels products in the Philippines
After some years it was terminated with neither
party admitting any fault
Steelcase filed a complaint for sum of money
against DISI
Steel alleged that DISI had an unpaid account
worth $600k
RTC: dismissed the complaint
CA: Affirmed RTC
Issue(s):
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NIELGEM SABAY BEJA|Corporation Law Notes|Dean R. Villanueva
1. WON Steel is doing business in the Philippines
w/o a license
2. WON DISI is estopped from challenging the
steelcases legal capacity to sue
Ruling:
1. STEEL CASE is an UNLICENSED FC NOT
DOING BUSINESS IN PH
Foreign Investment Act Sec 3(d)
That the phrase doing business shall not be deemed
to include
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. nor having a nominee director or officer to
represent its interests in such corporation;
3. nor appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own
account;
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;
2016|Finals
6. Consignment by a foreign entity of
equipment with a local company to be used
in the processing of products for export;
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. (Emphases supplied)
the appointment of a distributor in the Philippines
is not sufficient to constitute doing business
- unless it is under the full control of the foreign
corporation
In the case at bar, DISI is independently owned
by BANTUG
DISI also distribute products aside those from
Steel
DISI and STEEL had a buy and sell agreement
2. DISI is estopped from challenging Steelcases
capacity to sue
Entering into a dealership agreement with
Steelcase charged DISI with the knowledge that
Steelcase was not licensed to engage in
business activities in the Philippines.
By acknowledging the corporate entity of
Steelcase and entering into a dealership
agreement with it and even benefiting from it,
DISI is estopped from questioning Steelcases
existence and capacity to sue.
To put it in another way, a party is estopped to
challenge the personality of a corporation after
having acknowledged the same by entering into
a contract with it
Ruling: CA reversed
Steels complaint reinstated and remanded to RTC for
appropriate action
69