REVIEWER CORPORATION

Prof. G. Dee

CALLUENG
2ND SEM. 2015-2016

NOTE: SEVERAL DIGESTS TAKEN FROM B2015, A2016, E2016

 CORPORATION | PROF. G. DEE | CALLUENG

Chapter 1 Introduction 4. POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR

INCIDENT TO ITS EXISTENCE: a corporation, being merely a creature of the law, can
Role of Corporation in Modern Business
exercise only such powers as the law may choose to grant it, either expressly or
• COMBINATION OF RESOURCES: Permits the combination of funds from various
impliedly (c.f. powers of a natural person, who can do anything as long as he
sources to raise the big capital needed for large business and industrial
violates no law or rights)
enterprises, which one or two persons may find difficult to finance
• LIMITATION OF INVESTOR’S LIABILITY: Investor’s gain is by limiting his liability
Laws Governing Philippine Corporations
to the amount of investment
1. CORPORATION CODE OF THE PHILIPPINES: May 1, 1980 – applies to all private
NOTE: Limited on how much you committed
corporations in general
2. Special laws for special kinds of corporations – e.g. Insurance Code, General
Limited Liability Doctrine: Stockholders have no claim on corporate property as
Banking Act, Investment Company Act
owners, but mere expectancy or inchoate right to the same upon dissolution of
3. Special charters – GOCC
the corporation after all corporate creditors have been paid. Such right is
In cases of all these special and government-owned corporations, the Corporation
limited only to their equity interest. Although a stockholder’s interest in the
Code would have suppletory effect, in so far as the provisions thereof may be
corporation may be attached by his personal creditor, corporate property cannot
applicable, and are not inconsistent with such special laws.
be used to satisfy his claim.

Trust Fund Doctrine: Trust Fund Doctrine means that the capital stock, Choice of Business Organization
properties and other assets of a corporation are regarded as equity in trust for 1. INDIVIDUAL PROPRIETORSHIP– one-man business where the owner is at the
the payment of corporate creditors. Stated simply, the trust fund doctrine states same time the worker
that all funds received by the corporation in payment of the shares of stock shall Disadvantage:
be held in trust for the corporate creditors and other stockholders of the - Unlimited personal liability for all the debts and obligations of the business.
corporation. Under such doctrine no fund shall be used to buy back the issued - Limited risk, limited capital.
shares of stock except only in instances specifically allowed by the Corporation - Difficult expansion
Code. - Death stops business

Resulting to: 2. PARTNERSHIP - two or more persons bind themselves to contribute money, or
• Industry growth industry to a common fund, with the intention of dividing the profits among
• Employment opportunities themselves (Art. 1767, CC)
• Development of technical and managerial skill
PARTNERSHIP CORPORATION
Personally liable for debts of the Stockholders are not personally
Definition and Attributes of a Corporation partnership which assets cannot liable to corporate creditors beyond
Sec. 2. Corporation defined. - A corporation is an artificial being created by satisfy the amount which they have
operation of law, having the right of succession and the powers, attributes and contributed or promised to contribute
properties expressly authorized by law or incident to its existence. to the corporate capital (limited
liability doctrine)
Four Attributes of a Corporation: Minimum of two persons to form Minimum of five incorporators
1. ARTIFICIAL BEING: juridical person capable of having rights as well as Mere agreement of the parties gives Only upon issuance of the certificate
obligations, with a personality separate and distinct from its members or rise to personality of incorporation by the SEC that it
stockholders acquires such juridical personality
- Stockholders are not personally liable for corporate obligations and cannot be All the owners of a partnership Management is centralized in the
held liable to third persons who have claims against the corporation beyond their actively participate in the BOD which has the exclusive power to
management act for and bind the corporation
agreed contribution to the corporate capital.
Any change of membership or in the Right of succession and its legal
- Corporations are not liable for the personal obligations of its stockholders
members affects its existence existence is not affected by death
Needs consent of all partners to Stockholder may transfer his shares
2. CREATED BY OPERATION OF LAW: Mere consent of the parties is not sufficient, transfer its partnership right to a third in the corporation, without the
but rather, the State must give its consent either in the form of a special law or a person consent of his co-stockholders (GR)
general enabling act (Corporation Code) Voluntary dissolution allowed No voluntary dissolution except by
Corporation’s right to exist = primary franchise 2/3 votes of stockholders and a State
Government corporations are created by special law called charter act

3. RIGHT OF SUCCESSION: its continued existence during the term stated in its
articles of incorporation cannot be affected by any change in the members or
stockholders, whether this change be the consequence of death insolvency or any
other incapacity or transfer of shares by a stockholder to a third person
- SUCCESSION solves the problem of continuity. If not a corporation, death
dissolves the business. In corporation, death does not dissolve business
- Citizenship: Aliens cannot own land but can own shares of corporation that can
own land.
- Some industries require citizenship requirements
- Wage bracket also depends on employment in these industries
- Mitigation of risks of the industry
- On a geographic standpoint – minimum wage / COLA
Note: The life of the corporation is limited to the period of time stated in the AOI not
exceeding 50 years from the date of incorporation, unless sooner dissolved or
unless said period is extended
3. CLOSE CORPORATION – exclusive organization, strangers not welcome
- a de facto partnership with a corporate shell
- all or most of the stockholders are active in the corporate business either as
directors, officers, or other key men in management
- stockholders active in management are made personally liable for corporate
torts, unless it has obtained reasonably adequate insurance
Sec. 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1)
All the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
exceeding twenty (20); (2) all the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by this Title; and (3) The
corporation shall not list in any stock exchange or make any public offering of
any of its stock of any class. Notwithstanding the foregoing, a corporation shall
not be deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation which is not
a close corporation within the meaning of this Code.

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Any corporation may be incorporated as a close corporation, except mining or
oil companies, stock exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to be vested with public
interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided,
That the provisions of other Titles of this Code shall apply suppletorily except
insofar as this Title otherwise provides.
4. LIMITED PARTNERSHIP – between a corporation and partnership.
- must have at least one member, a general partner, who is willing to answer
personally for the debts of the partnership should the latter’s assets prove
insufficient to pay them
5. JOINT VENTURE – form of partnership formed for some temporary purpose or for
a single transaction. A corporation may join a joint venture but cannot join a
partnership.
6. BUSINESS TRUST – vesting of title to the assets of a business enterprise in
trustees, who act as representatives thereof, for the benefit of others called the
beneficiaries or cestui que trust
- no juridical personality because there is no law creating it
Government Regulation of Corporations
1. Legislature – justified by the police power of the state and the fact that they owe
their existence to it
2. SEC – body charged with the enforcement of all laws affecting corporations
(admin body)
- SEC is no longer a quasi-judicial body. The Securities and Regulations Act places
the jurisdiction with the RTC as a special commercial court.
- Treat the cases as SEC = RTC as a special commercial Court
Sec. 3, PD 902-A as amended by PD 1758 – The Commission shall have
absolute jurisdiction, supervision and control over all corporations,
partnerships or associations, who are the grantees of primary franchises
and/or license or permit issued by the government, to operate in the
Philippines; and in the exercise of its authority, it shall have the power to enlist
the aid and support of and to deputize all enforcement agencies of the
government, civil or military as well as any private institution, corporation, firm,
association or person.
SEC (RTC as special commercial court) has original and exclusive jurisdiction to
hear and decide cases listed in Sec. 5 of PD 902-A
Sec. 5, PD 902-A – In addition to the regulatory and adjudicative functions of
the Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
a. Devices or scheme employed by or any acts, of the board of directors,
business associates, its officers or partners, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public
and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.
b. Controversies arising out of intra-corporate or partnership relations, between
and among stockholders, members of associates; between any or all of them
and the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation,
partnership or association and the state insofar as It concerns their individual
franchise or right to exist as such entity;
c. Controversies in the election or appointments of directors, trustees, officers
or managers of such corporations, partnership or associations.
d. Petitions of corporations, partnerships or associations to be declared in the
suspension of payments in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities, but is under the
management of a Rehabilitation Receiver or Management Committee created
pursuant to this Decree. (as added by PD 1758)
- Hearings are conducted by the SEC or Commissioner or by such other bodies,
boards, committees or any officer created or designated by it for the purpose
- Appealed to SEC sitting en banc within thirty days after receipt by the appellant
of notice of such decision
CORPORATION | PROF. G. DEE | CALLUENG
- Appealed to the CA by petition for review
RTC has no jurisdiction to review the orders of the SEC
- Implied in the Securities Code is the term “public” in Sec 5.a means there should
be more than 19 people
Union Glass v SEC (1983)
Facts: Pioneer Glass was indebted to DBP and secured mortgage its assets. When
Pioneer Glass suffered loss, it executed a dacion en pago with DBP. DBP then
leased and later sold the assets to Union Glass. Hofilena, a stockholder of Pioneer
Glass, filed a complaint in the SEC wanting to declare the dacion en pago null and
void. It included Union Glass in its COA. Union Glass moved to dismiss on the
ground that SEC has no jurisdiction over the subject matter.
Held: There is no intra-corporate relation between Union Glass and DBP or
Hofilena. In order that the SEC can take cognizance of a case, the controversy must
pertain to any of the following relationships: [a] between the corporation,
partnership or association and the public; [b] between the corporation, partnership
or association and its stockholders, partners, members, or officers; [c] between the
corporation, partnership or association and the state in so far as its franchise,
permit or license to operate is concerned; and [d] among the stockholders,
partners or associates themselves.
Note: “between the corporation, partnership or association and the public” – not
included in Sec. 5, PD 902-A
Abejo v Dela Cruz (1987)
Facts: The Spouses Abejo, principal stockholder of Pocketbell, sold their shares as
well as 63,000 share in the name of Braga to Telectronics. After the sale,
Telectronics requested the corporate secretary to register and transfer to its name
the shares. The secretary refused leading to a series of cases, first filed by Abejos
in the SEC for mandamus to compel the secretary to enter the sale in the record,
and second by Braga praying for the rescission and annulment of the sale.
Held: As held in Philex Mining v Reyes, an intra-corporate controversy is one which
arises between a stockholder and the corporation. There is no distinction,
qualification, nor any exemption whatsoever. The provision is broad and covers all
kinds of controversies between stockholders and corporations. The dispute is
between and among the principal stockholders of the corporation Pocket Bell due
to the refusal of the corporate secretary, backed up by his parents as erstwhile
majority shareholders, to perform his "ministerial duty" to record the transfers of
the corporation's controlling (56%) shares of stock. The dispute at bar is an intra-
corporate controversy between and among stockholders jurisdiction of which is
vested with the SEC.
Effect of Corporation Code on Existing Corporations
Sec. 148. Applicability to existing corporations. - All corporations lawfully
existing and doing business in the Philippines on the date of the effectivity of
this Code and heretofore authorized, licensed or registered by the Securities
and Exchange Commission, shall be deemed to have been authorized, licensed
or registered under the provisions of this Code, subject to the terms and
conditions of its license, and shall be governed by the provisions hereof:
Provided, That if any such corporation is affected by the new requirements of
this Code, said corporation shall, unless otherwise herein provided, be given a
period of not more than two (2) years from the effectivity of this Code within
which to comply with the same. (n)
Sec 76. This Act or any part thereof may be amended or repealed at any time
by the legislative authority, and any or all corporations created by virtue of this
Act may be dissolved by legislative enactment. No right or remedy in favor of or
accrued against any corporation, its stockholders or officers, shall be removed
or impaired either by the subsequent dissolution of said corporation or by any
subsequent amendment or repeal of this Act or of any part or portion thereof
- Sec. 148 must be understood to be subject to the accrued or vested rights of the
existing corporation, its stockholders as well as third parties (Sec. 76)
- Although a corporation organized under the Corporation Law is now governed by
the provisions of the Corporation Code, any rights accrued or liabilities incurred
prior to the effectivity of the latter in favor of or against such corporation, its
stockholders or members must be respected.
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- However, any additional requirements imposed by the Code must be complied
with within 2 years from its effectivity.
Magalad v Premiere Financing Corporation (1992)
Facts: Premiere Financing induced Magalad to invest in the money market.
However, when Magalad presented the checks Premiere issued, it was dishonored.
PFC also refused to replace the checks with cash. Magalad filed a suit in the RTC
for damages. PFC countered that it is the SEC that has an exclusive and original
jurisdiction over the dispute.
Held: SEC has jurisdiction. Under Sec. 3 in conjunction with Sec. 5, the SEC has
absolute jurisdiction, supervision and control over all corporations permitted to
operate in the Philippines. It is also granted original and exclusive jurisdiction to
hear and decide cases involving devises or schemes employed by the BOD,
associates, officers or partners amounting to fraud and misrepresentation which
may be detrimental to the public or to the stockholders, partners, members of
associations or organizations registered with the Commission.
The fact that PFC’s authority to engage in financing already expired will not have
the effect of divesting the SEC of its original and exclusive jurisdiction. The
expanded jurisdiction of the SEC was conceived primarily to protect the interest of
the investing public.
Note: In suspension of payment, the corporation files it and not third persons
Chapter II Classification of Private Corporations
Stock and Non-Stock Corporations
Sec. 3. Classes of corporations. - Corporations formed or organized under this
Code may be stock or non-stock corporations. Corporations which have capital
stock divided into shares and are authorized to distribute to the holders of such
shares dividends or allotments of the surplus profits on the basis of the shares
held are stock corporations. All other corporations are non-stock corporations.
(3a)
Sec. 87. Definition. - For the purposes of this Code, a non-stock corporation is
one where no part of its income is distributable as dividends to its members,
trustees, or officers, subject to the provisions of this Code on dissolution:
Provided, That any profit which a non-stock corporation may obtain as an
incident to its operations shall, whenever necessary or proper, be used for the
furtherance of the purpose or purposes for which the corporation was
organized, subject to the provisions of this Title.
The provisions governing stock corporation, when pertinent, shall be applicable
to non-stock corporations, except as may be covered by specific provisions of
this Title. (n)
Sec. 88. Purposes. - Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to the
special provisions of this Title governing particular classes of non-stock
corporations. (n)
Elements of a Stock Corporation:
1. It must have capital stock divided into shares, and
2. It must be authorized to distribute to its shareholders dividends out of its surplus
profits
Purpose of a corporation: Make profits for its shareholders
Note: Stock and non-stock are misnomers. Not all non-stock corporations are
corporations without shares of stock. Not all corporations with stock are stock
corporations.
STOCK NON-STOCK
Purpose is profits for its shareholders Exists for purposes other than profit
Profits are distributed to Profits are for furtherance of its
shareholders purposes
Composed of stockholders Composed of members
CORPORATION | PROF. G. DEE | CALLUENG
Main difference between a stock and non-stock corporations are WON you can
distribute profit.
GR: A business corporation should organize as a stock corporation
XPN: When the needs is different from a stock corporation, organize as a non-stock
corporation
Rules:
1. In matters not covered by the special provisions, those governing stock
corporations would still be applicable to non-stock corporations
2. Educational corporations may either be stock or non-stock
3. Religious corporations are either corporations sole or aggregate, but always
non-stock
4. Banks and close corporations are always stock corporations
CIR v Club Filipino Inc. de Cebu (1963), J. Paredes
Facts: Club Filipino is a domestic corporation. Neither in its articles or by-laws is
there a provision relative to dividends and their distribution. A BIR agent
discovered that the Club has never paid percentage tax on the gross receipts of its
bar and restaurant the Club had owned. The Club was subsequently assessed for
percentage tax on the said bar and restaurant. This was opposed by the Club.
Held: Club Filipino was not engaged in business of bar and restaurant. It is a non-
stock corporation. What is determinative of whether or not the Club is engaged in
business [or is a stock corporation] is its object or purpose, as stated in its articles
and by-laws. The fact that the Club earned profit or had its capital stock divided
into shares does not make it a stock corporation which exists for purposes of profit.
It must have authority to distribute to shareholders dividends or allotments of
surplus profit.
Note: CIR v Club Filipino is still good law.
- For drafting purposes, if article contains that no part of income will be distributed,
this is a non-stock corporation. YOU HAVE TO SPECIFY THIS SO THAT BIR WILL NOT
GO AFTER YOUR CORP.
- BIR Ruling that F&B outlets are subject to VAT, the argument that it is a non-stock
corporation is moot and academic
Manuel R. Dulay Enterprises v CA (1993)
Facts: MDE owns Dulay Apartment. Manuel Dulay, president of MDE sold Dulay
Aparments to Veloso, with a right to repurchase for two years. Veloso, without the
knowledge of Dulay, mortgaged the property to Torres which was eventually
foreclosed and sold to Torres. MDE filed an action for cancellation of the sale and
the new TCT issued in favor of Torres. MDE argues that Board Resolution which
authorized the sale of the subject property was resolved without the approval of all
the members of the BOD and said resolution was prepared by a person not
designates as secretary.
Held: (See Sec. 101, Corporation Code) Dulay Inc. is classified as a close
corporation and consequently a board resolution authorizing the sale or mortgage
is not necessary to bind the corporation for the action of its president. At any rate,
corporate action taken at a board meeting without proper call or notice in a close
corporation is deemed ratified by the absent director unless the latter promptly
files his written objection with the secretary of the corporation after having
knowledge of the meeting which, in this case, Virgilio Dulay failed to do.
Note: Ponente cited a hodgepodge of corporation principles. He should have went
to the definition of a close corporation because not all corporations with members
having same surname are close corporations
Sec. 4. Corporations created by special laws or charters. – Corporations
created by special laws or charters shall be governed primarily by the provisions
of the special law or charter creating them or applicable to them,
supplemented by the provisions of this Code, insofar as they are applicable.
Art. XII, Sec. 16. The Congress shall not, except by general law, provide for the
formation, organization or regulation of private corporations. Government-
owned or controlled corporations may be created or established by special
charters in the interest of the common good and subject to the test of economic
viability
NDC v Philippine Veterans Bank; (1990)
Facts: Philippine Veterans Bank was a creditor of Agrix Marketing. During the
existence of the mortgage, Agrix went bankrupt. Veterans Bank filed a claim as well
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as foreclosed the mortgage extrajudicially. New Agrix Inc and the NDC filed a
petition with the RTC invoking Sec. 4 (1) of PD 1717 which extinguished all
mortgages and other liens attached to the credits of Agrix
Held: The new corporation, being neither owned nor controlled by the Government,
should have been created only by general and not special law. New Agrix is entirely
private and should have been organized under the Corporation Law in accordance
with Sec. 4, Art. XIV, 1973 Constitution. NDC does not control nor own New Agrix
as it merely extended a loan to the corporation. While it would manage the
corporation, NDC is obliged to report to Agrix’s BOD. After payment of the loan, the
said board can then appoint its own management. The stocks of the new
corporation are to be issued to the old investors and stockholders of AGRIX upon
proof of their claims against the abolished corporation. They shall then be the
owners of the new corporation.
Under the FRIA, mortgages are respected but not enforced. This has same effect as
cancellation. FRIA has cram down effect, such that both secured and unsecured
creditors are placed in the same boat. The mortgage will become effective when
the corporation is beyond rehabilitation.
Pioneer Insurance v CA (1989)
Facts: Lim allegedly proposed to Bormaheco, Cervantes and Maglana to create a
corporation, to which they contributed funds for the purchase of airplanes and
spare parts. Lim reneged on their agreement so CA ordered Lim to reimburse the
funds to Bormaheco et.al. Lim argued that a de facto partnership was created upon
failure to incorporate
Held: A de facto partnership was not created. While it is ordinarily held that persons
who attempt, but fail, to form a corporation and who carry on business under the
corporate name occupy a position of partners inter se, such a relation does not
necessarily exist. Persons cannot be made to assume the relation of partners, as
between themselves, when their purpose is that no partnership shall exist, and it
should be implied only when necessary to do justice between the parties
You do not imply that there is a partnership. In fact, those three are not partners
but creditors. This, though, should not happen now.
Corporation Sole
Sec. 110. Corporation Sole. – For the purpose of administering and managing,
as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church.
- An incorporated office held by only one person.
- Only religious corporation can be a corporation sole; all other corporations must
be corporations aggregate (at least five persons)
- Formed for the convenience it affords to religious sects in the administration of
church properties and funds
Parent and Subsidiary Corporation; Holding Companies; Affiliate
Corporations
SUBSIDIARY CORPORATION is one in which control, usually in the form of
ownership of majority of its shares, is in another corporation, called the PARENT
CORPORATION
PARENT CORPORATION’s control is in its power to elect the subsidiary directors
thus controlling its management policies
HOLDING COMPANY is a parent company whose sole function is to hold the shares
of other corporations which it controls
INVESTMENT COMPANY holds shares in other corporations not for the purpose of
controlling them but merely to invest therein
AFFILIATES or SISTER CORPORATIONS are corporations which are subject to
common control and operated as part of a system
Chapter III – Formation/Organization
CORPORATION | PROF. G. DEE | CALLUENG
Who may form a corporation?
Sec. 5. Corporators and incorporators, stockholders and members. -
Corporators are those who compose a corporation, whether as stockholders or
as members. Incorporators are those stockholders or members mentioned in
the articles of incorporation as originally forming and composing the
corporation and who are signatories thereof.
Corporators in a stock corporation are called stockholders or shareholders.
Corporators in a non-stock corporation are called members. (4a)
INCORPORATORS: SHs or members mentioned in the AOI as originally forming and
composing the corporation and who are signatories thereof
CORPORATORS: all SHs or members, whether incorporators or those joining the
corporation after incorporation
- Every incorporator must be a stockholder
Section 10. Number and qualifications of incorporators. - Any number of
natural persons not less than five (5) but not more than fifteen (15), all of legal
age and a majority of whom are residents of the Philippines, may form a private
corporation for any lawful purpose or purposes. Each of the incorporators of s
stock corporation must own or be a subscriber to at least one (1) share of the
capital stock of the corporation. (6a)
1. Must be natural persons
- But partnerships and other corporations can be stockholders in another
corporation as long as they are not incorporators thereof (El Hogar case)
2. At least five (5) incorporators, but not more than 15
- At least 5 incorporators must sign the AOI
- One-man corporations: owner can still incorporate by giving nominal ownership
of one share of stock each to four other persons (legal)
3. Residence requirement; citizenship requirement only in certain areas
- No general requirement of RP citizenship
- Some areas of industry and business are limited/reserved for Filipino citizens
- Public utilities, Retail trade, Banks, Investment houses, Savings and
loan associations, Schools, Other areas Congress may by law provide
- Where more than 40% of outstanding capital is to be owned or controlled by
aliens: written authorization must first be sought with the BOI before registration
with the SEC
4. Restrictions on stock ownership of closely-knit groups
- Sensitive areas where ownership by a close-knit group may be detrimental to the
public interest
- Ex. Banks—no bank may be licensed to operate if equity of one person or persons
related to each other within the 3rd degree of consanguinity/affinity exceed 20% of
bank voting stock
Sec. 140. Stock ownership in certain corporations. - Pursuant to the duties
specified by Article XIV of the Constitution, the National Economic and
Development Authority shall, from time to time, make a determination of
whether the corporate vehicle has been used by any corporation or by business
or industry to frustrate the provisions thereof or of applicable laws, and shall
submit to the Batasang Pambansa, whenever deemed necessary, a report of
its findings, including recommendations for their prevention or correction.
Maximum limits may be set by the Batasang Pambansa for stockholdings in
corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals
related to each other by consanguinity or affinity or by close business interests,
or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restraint or trade, or to implement national
economic policies declared in laws, rules and regulations designed to promote
the general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, businesses or
industries to be declared vested with a public interest and in formulating
proposals for limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the
extent of Filipino ownership, the labor intensity of the activity, the export
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potential, as well as other factors which are germane to the realization and
promotion of business and industry.
Corporation Code allows close corporations to provide in their AOI for
qualifications of owning or holding stocks therein.
Sec. 97. Articles of incorporation. - The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section;
-- x X x --
Steps in Formation of Corporation
1. Promotional stage
PROMOTER is one who brings together persons who become interested in
enterprise, aids in procuring subscriptions and sets in motion the machinery which
leads to the formulation of the corporation
Revised Securities Act, Sec. 2. (r) "Promoter" includes (1) any person who,
acting alone or in conjunction with one or more other persons, directly or
indirectly, takes initiative in founding and organizing the business or enterprise
of an issuer; or (2) any person who, in connection with the founding and
organizing of the business of an issuer, directly or indirectly, receives in
consideration of services or property or both services or property ten (10%) per
centum or more of any class of securities of the issuer or ten (10%) per centum
or more of the proceeds from the sale of any class of such securities. However,
a person who receives such securities or proceeds either solely as underwriting
commissions or solely as consideration of property shall not be deemed a
promoter within the meaning of this paragraph if such person does not
otherwise take part in founding and organizing the enterprise.
Requirements before incorporation:
a. At least 25% authorized capital stock should be subscribed
b. at least 25% of subscribed stock is paid-in
If initial capital requirements cannot be met, then promoters have to “promote” the
business so other persons could invest.
2. Articles of Incorporation; drafting
AOI constitute the charter of the corporation. It is the contract between the
corporation and its SHs as well as the agreement among SHs
- AOI does not become binding unless they have been filed with the registered by
the SEC
Sec. 14. Contents of the articles of incorporation. - All corporations organized
under this Code shall file with the Securities and Exchange Commission articles
of incorporation in any of the official languages duly signed and acknowledged
by all of the incorporators, containing substantially the following matters,
except as otherwise prescribed by this Code or by special law:
1. The name of the corporation;
2. The specific purpose or purposes for which the corporation is being
incorporated. Where a corporation has more than one stated purpose, the
articles of incorporation shall state which is the primary purpose and which
is/are the secondary purpose or purposes: Provided, That a non-stock
corporation may not include a purpose which would change or contradict its
nature as such;
3. The place where the principal office of the corporation is to be located, which
must be within the Philippines;
4. The term for which the corporation is to exist;
5. The names, nationalities and residences of the incorporators;
6. The number of directors or trustees, which shall not be less than five (5) nor
more than fifteen (15);
7. The names, nationalities and residences of persons who shall act as
directors or trustees until the first regular directors or trustees are duly elected
and qualified in accordance with this Code;
8. If it be a stock corporation, the amount of its authorized capital stock in
lawful money of the Philippines, the number of shares into which it is divided,
and in case the share are par value shares, the par value of each, the names,
CORPORATION | PROF. G. DEE | CALLUENG
nationalities and residences of the original subscribers, and the amount
subscribed and paid by each on his subscription, and if some or all of the
shares are without par value, such fact must be stated;
9. If it be a non-stock corporation, the amount of its capital, the names,
nationalities and residences of the contributors and the amount contributed by
each; and
10. Such other matters as are not inconsistent with law and which the
incorporators may deem necessary and convenient.
The Securities and Exchange Commission shall not accept the articles of
incorporation of any stock corporation unless accompanied by a sworn
statement of the Treasurer elected by the subscribers showing that at least
twenty-five (25%) percent of the authorized capital stock of the corporation has
been subscribed, and at least twenty-five (25%) of the total subscription has
been fully paid to him in actual cash and/or in property the fair valuation of
which is equal to at least twenty-five (25%) percent of the said subscription,
such paid-up capital being not less than five thousand (P5,000.00) pesos.
Sec. 15. Forms of Articles of Incorporation. - Unless otherwise prescribed by
special law, articles of incorporation of all domestic corporations shall comply
substantially with the following form:
ARTICLES OF INCORPORATION OF
__________________________
(Name of Corporation)
KNOW ALL MEN BY THESE PRESENTS:
The undersigned incorporators, all of legal age and a majority of whom are
residents of the Philippines, have this day voluntarily agreed to form a (stock)
(non-stock) corporation under the laws of the Republic of the Philippines;
AND WE HEREBY CERTIFY:
FIRST: That the name of said corporation shall be
"_____________________, INC. or CORPORATION";
SECOND: That the purpose or purposes for which such corporation is
incorporated are: (If there is more than one purpose, indicate primary and
secondary purposes);
THIRD: That the principal office of the corporation is located in the
City/Municipality of ________________________, Province of
_______________________, Philippines;
FOURTH: That the term for which said corporation is to exist is
_____________ years from and after the date of issuance of the certificate of
incorporation;
FIFTH: That the names, nationalities and residences of the incorporators of the
corporation are as follows:
NAME NATIONALITY RESIDENCE
_______________ ___________________ ___________________
_______________ ___________________ ___________________
_______________ ___________________ ___________________
_______________ ___________________ ___________________
_______________ ___________________ ___________________
SIXTH: That the number of directors or trustees of the corporation shall be
_______; and the names, nationalities and residences of the first directors or
trustees of the corporation are as follows:
NAME NATIONALITY RESIDENCE
_______________ ___________________ ___________________
_______________ ___________________ ___________________
_______________ ___________________ ___________________
_______________ ___________________ ___________________
_______________ ___________________ ___________________
SEVENTH: That the authorized capital stock of the corporation is
______________________ (P___________) PESOS in lawful money of the
Philippines, divided into __________ shares with the par value of
____________________ (P_____________) Pesos per share.
(In case all the share are without par value):
That the capital stock of the corporation is ______________ shares without
par value. (In case some shares have par value and some are without par value):
That the capital stock of said corporation consists of _____________ shares
of which ______________ shares are of the par value of
5
 CORPORATION | PROF. G. DEE | CALLUENG

_________________ (P____________) PESOS each, and of which by __________________ with Res. Cert. No. ___________ issued at
_________________ shares are without par value. _______________________ on ____________, 19 ______
NOTARY PUBLIC
EIGHTH: That at least twenty five (25%) per cent of the authorized capital stock My commission expires on
above stated has been subscribed as follows: _________, 19 _____
Name of Subscriber Nationality No of Shares Amount Doc. No. _________;
Subscribed Subscribed
Page No. _________;
_________________ __________ ____________ ____________
Book No. ________;
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________ Series of 19____ (7a)
_________________ __________ ____________ ____________
_________________ __________ ____________ ____________ Contents of AOI
NINTH: That the above-named subscribers have paid at least twenty-five (25%) 1. Corporate name
percent of the total subscription as follows: Sec. 18. Corporate Name. No corporate name may be allowed by the SEC if the
Name of Subscriber Amount Subscribed Total Paid-In proposed name is identical or deceptively or confusingly similar to that of any
_________________ ___________________ _______________ existing corporation or to any other name already protected by law or is patently
_________________ ___________________ _______________ deceptive, confusing or contrary to existing laws. When a change in the
_________________ ___________________ _______________ corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.
_________________ ___________________ _______________
_________________ ___________________ _______________
- It is through the name that the corporation can sue and be sued and perform all
(Modify Nos. 8 and 9 if shares are with no par value. In case the corporation is
legal acts
non-stock, Nos. 7, 8 and 9 of the above articles may be modified accordingly,
- A corporation should transact business only in its corporate name
and it is sufficient if the articles state the amount of capital or money
- The policy underlying the prohibition in Sec. 18 against the registration of a
contributed or donated by specified persons, stating the names, nationalities
corporate name which is “identical or deceptively or confusingly similar” is the
and residences of the contributors or donors and the respective amount given
avoidance of fraud upon the public which would have occasion to deal with the
by each.)
entity concerned, the evasion of legal obligations and duties, and the reduction of
TENTH: That _____________________ has been elected by the subscribers
difficulties of administration and supervision over corporations. (Lyceum v. CA)
as Treasurer of the Corporation to act as such until his successor is duly elected
and qualified in accordance with the by-laws, and that as such Treasurer, he
Change of corporate name:
has been authorized to receive for and in the name and for the benefit of the
1. Amendment of AOI and
corporation, all subscription (or fees) or contributions or donations paid or
2. Filing of the amendment with the SEC
given by the subscribers or members.
The mere approval by the stockholders of the amendment of the AOI changing the
ELEVENTH: (Corporations which will engage in any business or activity reserved
corporate name does not automatically change the name of the corporation as of
for Filipino citizens shall provide the following):
that date.
"No transfer of stock or interest which shall reduce the ownership of Filipino
citizens to less than the required percentage of the capital stock as provided
Philips Export BV v CA (1992), J. Melencio-Herrera
by existing laws shall be allowed or permitted to be recorded in the proper
Facts: Philips of Netherlands filed an action with the SEC to delete the name Philips
books of the corporation and this restriction shall be indicated in all stock
from the corporate name of Standard Philips Company. Standard refuses and
certificates issued by the corporation."
Philips sought an injunction to enjoin Standards from the use of the name Philips.
IN WITNESS WHEREOF, we have hereunto signed these Articles of
Held: To come under the application of Sec. 18 of the Corporation Code, 2
Incorporation, this __________ day of ________________, 19 ______ in
requisites must be proven:
the City/Municipality of ____________________, Province of
a. Corporation has a prior right over the use of the name, and;
________________________, Republic of the Philippines.
b. Proposed name is either: 1. Identical, or 2. Deceptively or confusingly similar to
that of any existing corporation or to any other name already protected by law; or
_______________________ _______________________
3. Patently deceptive, confusing or contrary to existing law.
_______________________ _______________________
The right to the exclusive use of a corporate name with freedom from infringement
________________________________
by similarity is determined by priority of adoption. In this case, Philips Electrical
(Names and signatures of the incorporators)
was incorporated in 1956 while Standard was only incorporated 26 years later
SIGNED IN THE PRESENCE OF:
_______________________ _______________________
In determining the second requisite, the test is whether the similarity is such as to
(Notarial Acknowledgment)
mislead a person using ordinary care and discrimination. In so doing, the Court
TREASURER'S AFFIDAVIT
must look to the record as well as the names themselves. While proof of actual
REPUBLIC OF THE PHILIPPINES )
confusion need not be shown, it suffices that confusion is probably or likely to
CITY/MUNICIPALITY OF ) S.S.
occur. In this case, Philips is the dominant word in the companies affiliated with
PROVINCE OF )
the principal corporation. Standard’s primary purpose to “buy, trade… electrical
I, ____________________, being duly sworn, depose and say:
wiring, devices, electrical component..” shows that it has the intent to ride on the
That I have been elected by the subscribers of the corporation as Treasurer
popularity of the established brand.
thereof, to act as such until my successor has been duly elected and qualified
in accordance with the by-laws of the corporation, and that as such Treasurer,
As a general rule, parties organizing a corporation must choose a name at their
I hereby certify under oath that at least 25% of the authorized capital stock of
peril and the use of a name similar to one adopted by another corporation, whether
the corporation has been subscribed and at least 25% of the total subscription
a business or a non-business or non-profit organization if misleading and likely to
has been paid, and received by me, in cash or property, in the amount of not
injure it in the exercise of its corporate functions, regardless of intent, may be
less than P5,000.00, in accordance with the Corporation Code.
prevented by the corporation having the prior right, by a suit for injunction against
____________________
the new corporation to prevent the use of the name.
(Signature of Treasurer)
SUBSCRIBED AND SWORN to before me, a Notary Public, for and in the
Lyceum of the Phils. v CA (1993), J. Feliciano
City/Municipality of ___________________ Province of
Facts: Lyceum of the Philippines instituted proceedings before the SEC to compel
_____________________, this _______ day of ___________, 19 _____;
the other schools with Lyceum (Lyceum of Aparri, Lyceum of Tuao, etc.) which are
also educational institutions, to delete the word “Lyceum” from their corporate
6

names and permanently to enjoin them from using “Lyceum” as part of their
respective names.
Held: While all the entities all carry the word “lyceum,” confusion and deception
were precluded by the appending of geographic names to the word “lyceum.”
The doctrine of secondary meaning means that a word or phrase originally
incapable of exclusive appropriation with reference to an article on the market,
because geographical or otherwise descriptive, might nevertheless have been used
so long and so exclusively by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the word or phrase has come to
mean that the article was his product. Lyceum failed to present evidence which
sufficiently proved that the word Lyceum has indeed acquired a secondary meaning
in favor of the institution.
PC Javier and Sons v CA. (2005),
Facts: PC Javier applied with First Summa Savings and Mortgage Bank (Later on
renamed as PAIC Savings and Mortgage Bank) for a loan accommodation worth P
1.5M under the Industrial Guarantee Loan Fund program. PC Javier is arguing that
it should have been given formal notice that the bank changed its name before it
could have continued with its installments.
Held: First Summa and PAIC are one and the same bank to which PC Javier is
indebted. A change in the new corporate name does not make a new corporation,
whether affected by a special or general law. It has no effect on the identity of the
corporation, on its property, its rights, or its obligations. A corporation, upon a
change of name, is not a new corporation; neither is it the successor of the original
corporation. Its character is in no respect changed.
Philippine First Insurance Company v. Hartigan et al
Facts: Yek Tong Lin, an insurance corporation, signed as co- maker together with
Hartigan, a promissory note for P5,000 in favor of ChinaBank. It agreed to act as
co-maker because of the indemnity agreement signed by Hartigan, with 2 others,
in favour of [PFIC/Yek Tong Lin]. Because of the PN, ChinaBank delivered the
money to Hartigan but the latter failed to pay it in full. In the meantime, Yek Tong
Lin amended its Articles of Incorporation and changed its name to Phil. First
Insurance Co. (PFIC). Subsequently, it filed a complaint against Hartigan for a sum
of money. Hartigan argued that there was no privity of contract between her and
PFIC (because Yek Tong Lin and PFIC are not one and the same), and so PFIC had
no cause of action against her.
Held: A corporation may change its name by merely amending its charter in the
manner prescribed by law. Actions brought by a corporation after it has changed
its name should be brought under the new name although for the enforcement of
rights existing at the time the change was made.
2. Purpose clause
Confers as well as limits the powers which a corporation may exercise
- Sec 45: corporate powers:
a. Expressly granted by law and the AOI
b. Incidental to conferred powers
c. Reasonably necessary to accomplish its purposes and incidental to its existence
- Must specify primary and secondary purposes; secondary purpose need not be
related to the main purpose
Three reasons for requiring a purpose clause in the AOI:
1. So that a prospective SH contemplating an investment shall know within what
lines of business his money is to be risked
2. So that management may know within what lines of business it is authorized to
act
3. So that anyone who deals with the corporation may ascertain w/n a contract or
transaction is within the general authority of management
Sec 14(2): a corporation can have as many purposes as it may wish to include in
its AOI, subject to the following conditions:
1. The AOI must specify the primary purpose and which are the secondary purposes
(need not be related)
2. For corporations governed by special laws or covered by special provisions in the
Code: can have only ONE purpose peculiar to them and no other (ex educational
corporations cannot engage in export and import)
3. Purpose(s) must be lawful
CORPORATION | PROF. G. DEE | CALLUENG
Sec. 17. Grounds when articles of incorporation or amendment may be rejected
or disapproved. The SEC may reject the AOI or disapprove any amendment
thereto if the same is not in compliance with the requirements of this Code:
Provided, that the Commission shall give the incorporators reasonable time
within which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
xxx
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations
xxx
- NEDA has the power to refuse or deny the application for registration of any
corporation if not consistent with the declared national economic policies
- A corporation cannot be formed for the purpose of practicing a profession
Non-stock corporations:
Sec. 88. Purposes. - Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry,
agricultural and like chambers, or any combination thereof, subject to the
special provisions of this Title governing particular classes of non-stock
corporations. (n)
3. Place of Principal office of the corporation
- Establishes residence of the corporation
Requirements:
1. Must be within the Philippines
2. Specify city or town where located
4. Term of existence
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation unless sooner dissolved or unless
said period is extended. The corporate term as originally stated in the articles
of incorporation may be extended for periods not exceeding fifty (50) years in
any single instance by an amendment of the articles of incorporation, in
accordance with this Code; Provided, That no extension can be made earlier
than five (5) years prior to the original or subsequent expiry date(s) unless there
are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission. (6)
GR: Not to exceed 50 years from date of incorporation
Extendible for a period not exceeding 50 years by amendment to AOI
GR on extension: No extension made earlier than 5 years before original or
subsequent expiry date
XPN: Justifiable Reasons
5. Incorporators and Directors; number and qualifications
- AOI must give names, nationalities, and residencies of the incorporators, and
directors or trustees who will act as such until the first regular directors/trustees
are elected
- AOI must also name the treasurer chosen by the pre-incorporation subscribers
DIRECTORS used in reference for stock corporations
TRUSTEES for non-stock corporations
GR: Number of directors: not less than 5, not more than 15
XPN:
1. For non-stock: can exceed 15 trustees
2. Merger of banks: total number of directors of the merged banks (may exceed 15)
3. Educational non-stock: multiples of 5
Stock Requirements:
Sec. 23. Par. 2 The board of directors or trustees.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the
books of the corporation. Any director who ceases to be the owner of at least
7

one (1) share of the capital stock of the corporation of which he is a director
shall thereby cease to be a director. Trustees of non-stock corporations must
be members thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
- Aliens may be directors, but only in such number proportional to their allowable
participation in the capital of an entity
6. Capital Stock; Subscription; Payment
CAPITAL STOCK is the amount fixed in the articles of incorporation to be subscribed
and paid in or secured to be paid in by the shareholders, at the organization of the
corporation or afterwards
>> AUTHORIZED CAPITAL STOCK = Par value x Number of shares
OUTSTANDING CAPITAL STOCK is the total shares of stock issued to subscribers or
SHs, whether or not fully or partially paid except treasury shares
SUBSCRIBED CAPITAL STOCK is portion of capital stock subscribed (i.e. procured
to be paid) whether or not fully paid
Sec. 60. Subscription contract. - Any contract for the acquisition of unissued
stock in an existing corporation or a corporation still to be formed shall be
deemed a subscription within the meaning of this Title, notwithstanding the
fact that the parties refer to it as a purchase or some other contract. (n)
Sec. 61. Pre-incorporation subscription. - A subscription for shares of stock of
a corporation still to be formed shall be irrevocable for a period of at least six
(6) months from the date of subscription, unless all of the other subscribers
consent to the revocation, or unless the incorporation of said corporation fails
to materialize within said period or within a longer period as may be stipulated
in the contract of subscription: Provided, That no pre-incorporation
subscription may be revoked after the submission of the articles of
incorporation to the Securities and Exchange Commission. (n)
SUBSCRIPTION is mutual agreement of the subscribers to take and pay for the
stock of a corporation
PRE-INCORPORATION SUBSCRIPTION: amount which each incorporator or SH
agrees to contribute to a proposed corporation
- Embodied in an agreement which takes and pays for the original unissued
shares of a corporation formed or to be formed (Delpher)
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval
by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred upon
it by the articles of incorporation or the by-laws, or in the absence thereof, by
the stockholders representing at least a majority of the outstanding capital
stock at a meeting duly called for the purpose. (5 and 16)
PAR VALUE SHARE appears in the stock certificate specifying the amount in pesos
as the nominal value of the shares appearing in the certificate of stock
- Must be stated in the AOI
CORPORATION | PROF. G. DEE | CALLUENG
- Cannot be issued at less than stipulated par value
- Can only be changed by amendment in the AOI
GR1: Shares of stock may not be issued for a consideration less than P5
GR2: Shares of stock shall not be issued for a consideration lower than par
XPN: Treasury shares, so long as price is reasonable (Sec. 9)
Consideration for no par value shares issued is the issued value, to be fixed in the
ff ways:
1. AOI
2. By the BOD when authorized by the AOI or BLs
3. SHs representing at least a majority of outstanding capital stock
Issuance of no par value must be reflected in the AOI
- Consideration cannot be less than issued value—cannot be less than 5 pesos
AOI MUST SHOW
1. The names, nationalities, and residencies of the original subscribers,
2. The amount subscribed, and
3. How much is paid thereon
Except as may be otherwise provided by special law, stock corporations shall not
be required to have a minimum authorized capital stock, subject Sec. 13
Sec.12. Minimum capital stock required of stock corporations. Stock
corporations incorporated under this Code shall not be required to have any
minimum authorized capital stock except as otherwise specifically provided for
by the special law, and subject to the provisions of the following section
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital
stock as stated in the articles of incorporation must be subscribed at the time
of incorporation, and at least twenty-five (25%) per cent of the total
subscription must be paid upon subscription, the balance to be payable on a
date or dates fixed in the contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital be less
than five Thousand (P5,000.00) pesos. (n)
Requirements for Incorporation
1. A corporation should have at least a minimum paid-up capital of PHP 5,000
2. At least 25% of the authorized capital stock in the AOI must be subscribed at the
time of incorporation
3. At least 25% of the total subscription must be paid upon subscription
4. Treasurer must make a sworn statement that these minimum requirements of
subscription and payment have been complied
5. Paid-up capital at time of incorporation must be in cash deposited in a bank or
property
7. Other matters
AOI may include other matters not inconsistent with law, such as:
- classes of shares into which shares of stock have been divided
- Preferences of and restrictions on any class
- Denial of voting rights on certain shares or pre-emptive right of SHs
- Prohibition against transfer of stock which would reduce ownership to less than
required minimum for wholly or partially nationalized businesses/industries
8. Close corporations
TITLE XII - CLOSE CORPORATIONS
Sec. 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1)
All the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
exceeding twenty (20); (2) all the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by this Title; and (3)
The corporation shall not list in any stock exchange or make any public offering
of any of its stock of any class. Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation when at least two-thirds (2/3) of its
8

voting stock or voting rights is owned or controlled by another corporation
which is not a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or
oil companies, stock exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to be vested with public
interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided,
That the provisions of other Titles of this Code shall apply suppletorily except
insofar as this Title otherwise provides.
Sec. 97. Articles of incorporation. - The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
The articles of incorporation may likewise provide that all officers or employees
or that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
- Code allows a close corporation to provide in its AOI special provisions which
would exclude it from the operation of some of the requirements and prohibition
imposed on corporations in general, and in effect make it an “incorporated
partnership” (Sec 97)
3. Filing of articles; payment of fees
- AOI and treasurer’s affidavit filed with the SEC and corresponding fees paid
- Failure to file AOI will prevent due incorporation and will not give rise to juridical
personality and will not even be a de facto corporation
4. Examination of articles; approval or rejection by SEC
Sec. 17. Grounds when articles of incorporation or amendment may be rejected
or disapproved. The SEC may reject the AOI or disapprove any amendment
thereto if the same is not in compliance with the requirements of this Code:
Provided, that the Commission shall give the incorporators reasonable time
within which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer’s Affidavit concerning the amount of capital stock
subscribed and/or paid is false;
4. That the required percentage of ownership of the capital stock to be owned
by citizens of the Philippines has not been complied with as required by existing
laws of the Constitution
No articles of incorporation or amendment to articles of incorporation of banks,
banking and quasi-banking institutions, building and loan associations, trust
companies, public utilities, educational institutions, and other corporations
governed by special laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of the appropriate
government agency to the effect that such articles or amendment is in
accordance with law. (n)
CORPORATION | PROF. G. DEE | CALLUENG
- Upon receipt the SEC shall examine the AOI to determine conformity with law. If
not, SEC must give the incorporators reasonable time within which to correct or
modify objectionable portions
- SEC may, after consultation with BOI and NEDA, reject or deny registration if not
consistent with the declared national economic policies
- SEC decision appealable to CA
5. Issuance of certificate of incorporation
Sec. 19. Commencement of corporate existence. - A private corporation
formed or organized under this Code commences to have corporate existence
and juridical personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate of incorporation
under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic
and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law. (n)
The corporation must formally organize and commence the transaction of its
business or the construction of its works within two years from the date of its
incorporation, otherwise its corporate powers shall cease and it shall be deemed
dissolved (Sec. 22)
Amendment of AOI
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed
by this Code or by special law, and for legitimate purposes, any provision or
matter stated in the articles of incorporation may be amended by a majority
vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at
least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Such articles, as amended
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of
the directors or trustees stating the fact that said amendment or amendments
have been duly approved by the required vote of the stockholders or members,
shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if not
acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.
AMENDMENT of AOI BY
a. majority vote of the Board of Directors AND…
b. WRITTEN ASSENT or VOTE of SHs representing at least 2/3 of OCS or 2/3
members of non-stock entitled to vote
c. Without prejudice to appraisal right of dissenting SH
d. Unless otherwise provided in the Code or special law
Defectively incorporated entities
De jure corporation
- As long as the mandatory requirements for incorporation are substantially
complied with, a corporation de jure will be formed
- A de jure corporation’s due incorporation cannot be successfully attacked even in
quo warranto proceedings
De facto corporations
Sec. 20. De facto corporations. - The due incorporation of any corporation
claiming in good faith to be a corporation under this Code, and its right to
exercise corporate powers, shall not be inquired into collaterally in any private
suit to which such corporation may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto proceeding.
Requisites:
1. There must be an apparently valid statute
2. There has been colorable compliance with the legal requirements in GF
3. There has been use of corporate powers i.e. transaction of business in some way
as if it were a corporation
9

NO COLATERAL ATTACK ON DE FACTO CORPORATION; ONLY QUO WARRANTO
PROCEEDING BY STATE:
1. Due incorporation of any corporation claiming in good faith to be a corporation
2. Right to exercise corporate powers
- Where requirements for a de jure or de facto corporation are not present, then the
associates may be held liable as partners for obligations of the alleged corporation
- unless estoppel can apply (Sec 21)
1. Use of corporate powers
- A slight evidence of conducting business is deemed sufficient
- It is not necessary that the dealings between the parties should be on a corporate
basis
- Ex. Buying a lot and constructing and leasing a building will constitute sufficient
user of corporate powers
2. Law subsequently declared void
GR: there can be no de facto corporation under a statute subsequently declared
unconstitutional
XPN: where the corporation in GF did all that is required under the statute to form
a valid corporation
Municipality of Malabang v Benito.
Facts: The Municipality of Malabang filed an action for prohibition to nullify EO
386, the EO which created the municipality of Balabagan. Malabang argues that
EO 386 is invalid because the President does not have the power to create
municipalities, given that Sec.68 of the Admin. Code giving him such power is
unconstitutional. Respondent mayor of Balabagan claim Pelaez does not apply to
this case because Balabagan is a de facto corporation. As such, its existence
cannot be collaterally attacked (as what is being done in this case).
Held: Balabagan is neither a de facto nor a de jure corporation. The true basis for
denying to a corporation de facto status is the absence of any legislative act giving
life to its creation. An unconstitutional act is not a law; it confers no rights, it
imposes no duties, it affords no protection, it creates no office. EO 386 thus
created no office, although acts done by the office are not exactly a nullity. The EO
is as inoperative legally as though it were never passed, an operative fact which
cannot justly be ignored.
But a corporation created under a statute declared void is given life by other valid
acts or in the constitution itself. The color of authority requisite to the organization
of a de facto municipal corporation may be: (1) an unconstitutional law, upheld for
a time or not yet declared void, provided a warrant for its creation is found in some
other valid law or recognition of its existence by the general laws or the constitution.
(2) there can be no de facto municipal corporation unless either directly or
potentially such a de jure corporation is authorized by some legislative fiat (3) there
can be no color of authority in an unconstitutional statute alone, the invalidity of
which is apparent on its face (4) there can be no de facto corporation created to
take the place of an existing de jure corporation.
3. Substantial or colorable compliance
Unless certificate of incorporation has been issued, there can be no de facto
corporation (Hall v. Piccio)
While in the process of incorporation, there can be no substantial nor colorable
compliance, and thus no de facto corporation (Cagayan Fishing v Sandiko)
Harrill v Davis.
Facts: Mann, F. Davis, R. Davis and Knight agreed to take specified shares in a
$10,000 enterprise for the purpose of building a cotton gin and carrying on the
business of buying, ginning and selling cotton, and to organize a corporation for
this purpose. They transacted a business with the Western Investment Company
consisting of the purchase of lumber, materials and labor for their buildings, and
of dealing in cotton with it. They remained indebted to it over $5000, of which
$4700 was incurred prior to the date when they first filed articles of incorporations.
During all this time, they treated themselves, and the plaintiff treated them, as a
corporation.
Held: GR: Parties who associate themselves together and conduct a business for
profit under a name adopted or used by them for that purpose are liable as partners
for the debts they incur under that name.
CORPORATION | PROF. G. DEE | CALLUENG
- This governs if the name used be that of a supposed corporation which the
associates have attempted but failed to organize according to law.
- But a compliance by such associates with the statutes authorizing them to
become a corporation exempts them from other individual liability than that
prescribed by such laws for debts incurred after they become a corporation
to authorized to do business as such.
XPN:
1. Where such associates procure a charter or file articles of incorporation
under a general enabling act, secure thereby the color of a corporation,
believe they are such, and use the supposed franchise of their corporation
and 3rd parties deal with them as a corporation, they become a de facto
corporation, which exempts them from individual liability to such parties,
although there are defects in their incorporation.
2. Projectors of a corporation to be organized who inform 3rd parties that
they are contracting for such a corporation and assure them that the
obligations incurred will become the obligations of the future corporation
may escape individual liability to such 3rd parties for obligations thus
incurred for services necessary to effect the corporate organization and for
machinery and other property necessary to the commencement of the
contemplated business of the corporation, where corporation is
subsequently organized, takes the benefit of such contracts, and assumes
the obligations
Hall v Piccio (1950)
Facts: Arnold Hall and Bradley Hall (petitioners) and Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella (respondents), signed the article of
incorporation of the Far Eastern Lumber and Commercial Co., Inc.(FELC) to engage
in a general lumber business as general contractors, operators and managers, etc.
The said articles of incorporation were filed in the SEC for the issuance of the
corresponding certificate of incorporation. The respondents filed before the CFI of
Leyte a civil case seeking dissolution of FELC, allegedly an unregistered
partnership, due to dissension among the members, mismanagement and fraud by
the managers and heavy financial losses. CFI Judge Piccio ordered the dissolution
of the company. The Halls filed a petition to set aside all the proceedings in the civil
case in the CFI.
Held: (1) All the parties are informed that the SEC has not issued corresponding
certificate of incorporation. The complaining associates have not represented to
the others that they were incorporated any more than the latter had made similar
representations to them. And as nobody was led to believe anything to his prejudice
and damage, the principle of estoppel does not apply. (2) It is also not a de facto
corporation. Not having obtained the certificate of incorporation, the Far Eastern
Lumber may not in good faith claim to be a corporation. Unless there has been an
evident attempt to comply with the law, the claim to be a corporation under this act
could not be made in good faith.
Corporation by Estoppel
Sec. 21. Corporation by estoppel. - All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided, however, That when any such ostensible corporation
is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no corporation.
(n)
- In corporation by estoppel, a party is precluded or estopped from denying
corporate existence
APPLIES TO:
1. Third party: A 3rd person who dealt with an unincorporated association as a
corporation may be precluded from denying its corporate existence if sued by the
alleged corporation, even if he did not know about the defective incorporation
2. Alleged corporation: When a 3rd person entered into a contract with an
association which represented itself a corporation, the association will be
estopped from denying its corporate personality if sued by the 3rd party
10

- When business associates fraudulently misrepresent the existence of a
corporation, and a 3rd party contracts without knowledge of the defective
incorporation, the 3rd person may sue the associates as general partners
- If the business associates and the 3rd person in the above example had no
knowledge of the defective incorporation, then the 3rd person cannot hold the
associates liable as partners (i.e. personally liable)
- Estoppel also applies even in a case where the alleged corporation did not deal
with the plaintiff suing on a tort
De Facto and Estoppel:
De facto Estoppel
Where all the requisites of a de facto If any of the requisites are absent,
corporation are present, then the then the estoppel doctrine may be
defectively formed corporation will applied only if any of the parties is
have the status of a de jure estopped from defending.
corporation in all cases brought by or
against it, except only as to the State
in a direct proceeding
ABC v Standard Products (1924)
Facts: Asia Banking sought to recover payment due from Standard Products
Corporation. Standard Products insist that since Asia Banking failed to prove the
corporate existence of the parties, Standard should not be liable.
Held: In the absence of fraud, a person who contracted with an association in such
a way as to recognize and admit its legal existence as a corporate body is thereby
estopped to deny its corporate existence in any action leading out of such contract
or dealing, unless its existence is attacked for causes arising since making the
contract or other dealings relied on as an estoppel. Standard already recognized
the corporate existence of Asia Bank by making a promissory note in its favor and
making partial payments, and is thus estopped from denying its corporate
existence.
Cranson v Int’l Business Machines.
Facts: Cranson was the officer of a corporation and transacted, on behalf of the
corporation, with IBM for the purchase of 8 typewriters. However the attorney failed
to file the incorporation papers so at the time the typewriters were bought, the
iorporation was not yet effective. The corporation failed to pay the balance. IBM
sues Cranson in his personal capacity for the balance alleging that since there was
a defectively incorporated association, Cranson is personally liable.
Held: The doctrine of de facto corporations applies only on (1) existence of a law
authorizing incorporation (2) effort in good faith to incorporate (3) actual user or
exercise of corporate powers. The doctrine of estoppel to deny corporate existence
is generally employed where the person seeking to hold the officer personally liable
has contracted or otherwise dealt with the association in such a manner as to
recognize and in effect admit its existence as a corporate body. Where there is a
concurrence of the three elements necessary for the application of the de facto
corporation doctrine, there exists an entity which is a corporation de jure against
all persons but the state. On the other hand, the estoppel theory is applied only to
the facts of each particular case and may be invoked even where there is no
corporation de facto. Accordingly, even though one or more of the requisites of a
de facto corporation are absent, this factor does not preclude the application of
the estoppel doctrine in a proper case, such as the one at bar. I.B.M. having dealt
with the Bureau as if it were a corporation and relied on its credit rather than that
of Cranson, is estopped to assert that the Bureau was not incorporated at the time
the typewriters were purchased. Where one has recognized the corporate existence
of an association, he is estopped to assert the contrary with respect to a claim
arising out of such dealings.
Salvatierra v Garlitos, et. al. (1958)
Facts: Salvatierra entered into a contract of lease with Philippine Fibers Producers
Co. Inc. represented by Segundino Refuerzo as president. Philippine Fibers did not
comply with their obligations so Salvatierra filed a case for accounting, rescission
and damages against Philippine Fibers and Refuerzo. Salvatierra won and a writ of
execution was issued for the properties of Phil Fibers. But Phil Fibers did not have
properties so the sheriff attached Refuerzo’s properties instead. Refuerzo
objected. It was later found out that Phil Fibers was not a registered corporation
with SEC.
Held: As a general rule, a person who contracted or dealt with an association in
such a way as to recognize its existence as a corporate body is estopped from
CORPORATION | PROF. G. DEE | CALLUENG
denying the same in an action arising out of such dealing… but this doctrine may
not be held to be applicable where fraud takes a part in the transaction. In this
case, Salvaterria’s charge that she was unaware that Philippine Fibers had no
juridical personality and the lack of denial or confirmation of Ruferzo led to the
conclusion that Salvaterria was really made to believe that such corporation was
duly organized in accordance with law.
Chaing Kai Shek School v CA (1989)
Facts: Fausta Oh was told that she had no assignment for the next semester. Oh
sued CKS. CKS filed MTD on ground that it could not be sued, the complaint was
amended to implead certain officials of the school and made them solidarily liable.
Held: School may be sued. The school is governed by Act 2706 as amended by CA
180. Having recognized by the government, it was under obligation to incorporate
under the Corporation Law within 90 days from recognition. Although in existence
since 1932, it had never made any attempt to incorporate, and thus cannot invoke
its own noncompliance with the law to immunize it from Oh’s complaint. Having
contracted with Oh for 32 years while representing itself as possessed of juridical
personality, the school is now estopped from denying such personality. According
to Art. 1431 of the CC, through estoppel, an admission, representation is rendered
conclusive upon the person making it and cannot be denied or disapproved as
against the person relying on it.
Lozano v delos Santos (1997)
Facts: Two presidents of jeepney associations decided to consolidate their
respective associations and form one association. They agreed to elect one set of
officers who shall be given the sole authority to collect the daily dues from the
members of the consolidated association. Both ran for presidency and Lozano won.
Anda alleged fraud and refused to recognize the results of the collection. Anda
continued to collect dues despite demands to desist. Lozano filed suit in RTC to
restrain Anda from collecting dues. Anda alleges jurisdiction stating that it is an
intracorporate suit and should be lodged in the SEC
Held: SEC has no jurisdiction. The jurisdiction of the SEC is determined by two
elements: (1) status or relationship of the parties, which must arise out of
intracorporate or partnership relations between the parties (2) nature of the
question which is the subject of the controversy, which requires that the dispute be
intrinsically connected with the regulation of the corporation/association or deal
with the internal affairs of the corporation. There is no intracorporate dispute
between the parties in this case, because it arose out of their plan to consolidate
their associations, which is still a proposal and has not yet been approved by the
SEC nor has the articles been submitted. Consolidation only becomes effective not
upon mere agreement of the members but only upon issuance of the certificate of
consolidation by the SEC. Thus the KAMAJDA and the SAMAJODA are two separate
entities, and the dispute of the parties in the case is not within any of the
associations mentioned. It is between members of separate and distinct
associations.
The doctrine of incorporation by estoppel is also not applicable, which is founded
on principles of equity and is designed to prevent injustice and unfairness. It
applies when persons assume to form corporations and exercise corporate
functions and enter into business relations with third persons. Where there is no
third person involved and the conflict arises only among those assuming the form
of a corporation and who have knowledge that it is not incorporated, there is no
corporation by estoppel.
Lim Tong Lim v Phil. Fishing Gear Industries, Inc (1999)
Facts: Antonio Chua and Peter Yao entered into a contract in behalf of Ocean Quest
Fishing Corporation for the purchase of fishing nets from Philippine Fishing Gear,
Inc. Chua and Yao claimed that they were engaged in business venture with Lim
who was not a signatory to the contract. Chua et.al failed to pay the fishing nets.
Philippine Fishing Gear filed a collection against Chua et.al because it turned out
that Ocean Quest Fishing Corporation is a non-existent corporation.
Held: The doctrine of corporation by estoppel may apply to the alleged corporation
and to a third party. In the first instance, an unincorporated association, which
represented itself to be a corporation, will be estopped from denying its corporate
capacity in a suit against it by a third person who relied in good faith on such a
representation. It cannot allege lack of personality to be sued to evade its
responsibility for a contract it entered into and by virtue of which it received
advantages and benefits. On the other hand, a third party who, knowing an
association to be unincorporated, nonetheless treated it as a corporation and
11

received benefits from it, may be barred from denying its corporate existence in a
suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts they impliedly assented to.
In this case, Lim benefited from the use of the nets found in the boat which was
earlier proven to be an asset of the partnership. Having reaped the benefits of the
contract entered into by persons with whom he previously had an existing
relationship, he is deemed part of said association by the scope of the doctrine of
corporation by estoppel
Int’l Express Travel v CA (2000)
Facts: International Express Travel secured the airline tickets for the trips of the
athletes and officials of the Philippine Football Federation for the SEA Games and
other trips, amounting to PHP 449,654.83. The Federation paid approximately
PHP 32K while its president, Henri Kahn issued a personal check for PH50K.
International Express sued Henri Kahn in his personal capacity and as president of
the Federation and impleaded the Federation as an alternative defendant.
Held: Before the corporation may acquire juridical personality, the State must give
its consent either in a special law or a general enabling act. Although the
Federation derives its existence from RA 3135 or the Charter of the Phil Amateur
Athletic Association and PD 604 which recognized the juridical existence of
national sports associations, such corporate status does not automatically take
effect by the mere passage of the laws. Such entity must first be recognized by the
accrediting organization (PAAF and the Department of Youth and Sports
Development.
Any person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and becomes personally liable for contract
entered into or for other acts performed as such agent. Kahn is presumed to have
known about the corporate (non)-existence of the Federation. The doctrine of
corporation by estoppel does not apply in this case. The application of the doctrine
applies to a third party only when he tries to escape liabilities on a contract from
which he has benefited on the irrelevant ground of defective incorporation. In this
case, International Express is not trying to escape liability but rather is the one
claiming from the contract.
Loyola Grand Villas Homeowners South Association Inc v CA (1997)
Facts: Upon incorporation, Loyola did not file its corporate by-laws. When the
officers of the Loyola tried to register its by-laws, they failed to do so as there were
two other organizations within the subdivision (the North and South). When the
president of Loyola inquired about the status of Loyola, it was informed that it had
been automatically dissolved for two reasons: failure to submit its by-laws within
the period required by the Corporation Code and there was non-user of corporate
charter because HIGC did not receive any report on the association’s activities
Held: Sec 46 requiring filing of bylaws reveals the legislative intent to attach a
directory, not a mandatory, meaning of the word “must.” The failure to file by-laws
within the required period is only a ground for suspension or revocation of the
certificate of registration of corporations. Non-filing of by-laws will not result in
automatic dissolution of the corporation. The failure to exercise the power will be
ascribed to mere non-action and will not render void any acts of the corporation
which are otherwise valid. There can also be no automatic dissolution without
notice and compliance with the requirements of due process. The Court also
stressed that substantial compliance are mere conditions subsequent and not
prerequisites for acquisition of corporate responsibility.
Internal Organization of Corporation
In order to be organized properly, the following must be done:
1. Approval of by-laws,
2. Election of directors, and
3. Election of officers
1. By-laws
- By-laws are the product of the agreement of the SH or members and establish the
rules for the internal government of the corporation
- It is subordinate to the AOI as well as the Corporation Code and related statutes
and should not be inconsistent with any of these; otherwise, no binding effect
- By-laws should provide for the officers which the corporation will have, specifying
their qualifications as well as their functions.
- Law requires at least three officers: President, Secretary and Treasurer. The by-
laws may provide for additional officers
CORPORATION | PROF. G. DEE | CALLUENG
Requisites of by-laws:
(1) By-law provisions cannot contravene law
(2) By-law provisions cannot contravene the AOI
(3) By-laws must be reasonable and cannot discriminate
TITLE V - BY LAWS
Sec. 46. Adoption of by-laws. - Every corporation formed under this Code must,
within one (1) month after receipt of official notice of the issuance of its
certificate of incorporation by the Securities and Exchange Commission, adopt
a code of by-laws for its government not inconsistent with this Code. For the
adoption of by-laws by the corporation the affirmative vote of the stockholders
representing at least a majority of the outstanding capital stock, or of at least
a majority of the members in case of non-stock corporations, shall be
necessary. The by-laws shall be signed by the stockholders or members voting
for them and shall be kept in the principal office of the corporation, subject to
the inspection of the stockholders or members during office hours. A copy
thereof, duly certified to by a majority of the directors or trustees countersigned
by the secretary of the corporation, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles of
incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be
adopted and filed prior to incorporation; in such case, such by-laws shall be
approved and signed by all the incorporators and submitted to the Securities
and Exchange Commission, together with the articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities
and Exchange Commission of a certification that the by-laws are not
inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws
or any amendment thereto of any bank, banking institution, building and loan
association, trust company, insurance company, public utility, educational
institution or other special corporations governed by special laws, unless
accompanied by a certificate of the appropriate government agency to the
effect that such by-laws or amendments are in accordance with law. (20a)
WHEN:
1. Prior to the incorporation, the by-laws must be approved by all the incorporators
and must be submitted to the SEC with the articles of incorporation; or
2. Within one month after receipt of notice of issuance of its certificate of
incorporation. The vote required in this case is at least a majority of the outstanding
capital stock, or in case of non-stock corporations, at least a majority of members
EFFECTIVITY: In all cases, by-laws shall be effective only upon issuance by the SEC
of a certification that they are not inconsistent with the Code.
- This also applies to amendments of the by-laws
On third persons:
1. Contracts entered into without strict compliance with the by-laws may, due to
long acquiescence and usage, be binding on the corporation, which may be
deemed to have waived such compliance.
2. Since by-laws operate merely as internal rules among the SHs, they cannot affect
or prejudice third persons who deal with the corporation, unless they have
knowledge
Sec. 47. Contents of by-laws. - Subject to the provisions of the Constitution,
this Code, other special laws, and the articles of incorporation, a private
corporation may provide in its by-laws for:
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special meetings
of the stockholders or members;
Sec. 36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
-- x X x --
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend
or repeal the same in accordance with this Code
-- x X x –
12

3. The required quorum in meetings of stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders and members and the manner of voting
them;
5. The qualifications, duties and compensation of directors or trustees, officers
and employees;
6. The time for holding the annual election of directors of trustees and the mode
or manner of giving notice thereof;
7. The manner of election or appointment and the term of office of all officers
other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock certificates;
and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs. (21a)
- Although the by-laws may provide for the time, place and manner of calling and
conducting a director’s meeting, it can provide only for the time and manner of
calling and conducting stockholder’s meeting
- GR: although the power to adopt by-laws is an inherent right, the by-laws cannot
contravene the law
- Validity or reasonableness of the by-laws is a question of law
Other matters that may be included in by-laws:
a. designation of time when voting rights may be exercised by SH of record (24)
b. providing for additional officers (25)
c. provisions for compensation of directors (30)
d. creation of an executive committee (35)
e. date of annual meeting or provisions for a special meeting of SHs/members (50
& 53)
f. quorum on meetings of SHs/members (52)
g. providing for presiding officer at meetings of directors/trustees and of
SHs/members (54)
h. procedure for issuance of stock certificates (63)
i. providing for interest on unpaid subscriptions (66)
j. entries to be made in stock and transfer book (74)
k. providing for meetings of members outside the principal office (24)
Other matters that may be included in either the AOI or the by-laws:
a. cumulative voting in non-stock corporations
b. higher quorum for valid board meeting
c. limiting, broadening or denial of right to vote and voting by proxy, for non-stock
corporations
d. transferability of membership in non-stock corps
e. termination of membership in non-stock corps
f. manner of election and term of office of trustees and officers in non-stock corps
g. manner of distribution of assets in non-stock corps upon dissolution
h. staggered board in educational institutions
Matters that must appear in BOTH AOI and BLs:
a. restrictions on right to transfer shares in close corporations (98)
Matters that CANNOT be in the by-laws:
a. classification of shares and preferences to preferred shares
b. founders shares
c. redeemable shares
d. purposes of the corporation
e. corporate term of existence
f. capitalization of stock corporations
g. corporate name
h. denial of pre-emptive rights
Amendments to By-Laws
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non-stock corporation,
at a regular or special meeting duly called for the purpose, may amend or
CORPORATION | PROF. G. DEE | CALLUENG
repeal any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees to amend or repeal any by-laws
or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority
of the members in non-stock corporations, shall so vote at a regular or special
meeting.
Whenever any amendment or new by-laws are adopted, such amendment or
new by-laws shall be attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees, shall be filed with the
Securities and Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code. (22a and 23a)
Who can amend by-laws:
- owners of at least a majority of outstanding capital stock or members of non-stock
corporation
- 2/3 of outstanding capital stock or members may delegate to the board the power
to amend or repeal by-laws
- only then can the board amend by majority vote
Fleischer v Botica Nolasco. (1925)
Facts: Gonzales, a stockholder, sold his share to Fleischer. The company wants to
buy it from Fleischer, invoking its by-laws, wherein it is stated that the company has
the preferential right to buy from Gonzales his shares. Fleischer refused and asked
the secretary to register the shares in his name. The company refused.
Held: As a general rule, the by-laws of a corporation are valid if they are reasonable
and calculated to carry into effect the objects of the corporation, and are not
contradictory to the general policy of the laws of the land. The corporation, in the
absence of such a power, cannot ordinarily inquire into or pass upon the legality of
the transaction by which its stock passes from one person to another, nor can it
question the consideration upon which a sale is based. A by-law cannot take away
or abridge the substantial rights of a stockholder. Under a statute authorizing by-
laws for a transfer of stock, a corporation can do no more than prescribe a general
mode of transfer on the corporate books and cannot justify an unreasonable
restriction upon the right of sale
Gov’t of Phils. V El Hogar (1927)
Facts: El Hogar held title to real property for a period exceeding five years after the
property was bought in a foreclosure sale. This is prohibited in Sec13(5) of the
Corporation Law. The Government of the Philippine Islands filed a quo warranto
action against El Hogar to be excluded from all corporate rights and privileges and
effecting a final dissolution of the corporation on the basis of the 17 COA.
4th COA: That the by-laws of the association stating that, “the board of directors by
the vote of an absolute majority of its members is empowered to cancel shares and
to return the balance to the owner by reason of their conduct or any other motive or
liquidation” is in direct conflict with Sec. 187 of the Corporation Law which
provides that the board of directors shall not have the power to force the surrender
and withdrawal of unmatured stock except in case of liquidation or forfeiture of
stock for delinquency was without merit.
Held: While the by-law was a patent nullity, there is no provision of law making it a
misdemeanor to incorporate an invalid provision in the by-laws of a corporation;
and if there were such, the hazards incident to corporate effort would be largely
increased.
5th COA: Art. 61 of El Hogar’s by-laws which states that “attendance in person or by
proxy by shareholders owning one-half plus one of the shareholders shall be
necessary to constitute a quorum for the election of directors” is contrary to Sec.
31 of the Corporation Law which provides that owners of the majority of the
subscribed capital stock entitled to vote must be present either in person or by
proxy at all elections of directors.
13

Held: No fault can be imputed to the corporation on account of the failure of the
shareholders to attend the annual meetings and their non-attendance in meetings
is doubtless to be interpreted in part as expressing their satisfaction of the way in
which things have been conducted. Mere failure of a corporation to elect officers
does not terminate the terms of existing officers nor dissolve the corporation. The
general rule is to allow the officer to holdover until his successor is duly qualified.
6th COA: That the directors of El Hogar, instead of receiving nominal pay or serving
without pay, have been receiving large compensation, varying in amount from time
to time, out of respondents’ profits was held to be without merit.
Held: With the growth of the corporation, the amount paid as compensation to the
directors has increased beyond what would probably be necessary is a matter that
cannot be corrected in this action. Nor can it properly be made a basis for depriving
respondent of its franchise or enjoining it from compliance with the provisions of
its own by- laws. If a mistake has been made, the remedy is to lie rather in publicity
and competition.
8th COA. That Art. 70 of El Hogar’s by-laws, requiring persons elected as board of
directors to be holders of shares of the paid up value of P5,000 which shall be held
as security, is objectionable since a poor member or wage earner cannot serve as
a director irrespective of other qualifications
Held: Corporation Law expressly gives the power to the corporation to provide in its
by-laws for the qualification of its directors and the requirement of security from
them for the proper discharge of the duties of their office in the manner prescribed
in Art. 70 is highly prudent and in conformity with good practice.
1. Election of directors and officers; commencement of business
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of
a corporation. - If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years
from the date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall
be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation. (19a)
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
- “formally organize” includes not only adoption of by-laws but also the
establishment of the Board of Directors which will administer the affairs of the
corporation and exercise its powers
- The initial board can perform the functions of a regular board until the date of the
election of directors, unless the stockholders or members decide to hold an
election earlier
- Once elected, the directors must complete the organization of the corporation by
electing the officers
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the
books of the corporation. Any director who ceases to be the owner of at least
one (1) share of the capital stock of the corporation of which he is a director
shall thereby cease to be a director. Trustees of non-stock corporations must
be members thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
Sec. 24. Election of directors or trustees. - At all elections of directors or
trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled
CORPORATION | PROF. G. DEE | CALLUENG
to vote. The election must be by ballot if requested by any voting stockholder or
member. In stock corporations, every stockholder entitled to vote shall have the
right to vote in person or by proxy the number of shares of stock standing, at the
time fixed in the by-laws, in his own name on the stock books of the corporation,
or where the by-laws are silent, at the time of the election; and said stockholder
may vote such number of shares for as many persons as there are directors to
be elected or he may cumulate said shares and give one candidate as many
votes as the number of directors to be elected multiplied by the number of his
shares shall equal, or he may distribute them on the same principle among as
many candidates as he shall see fit: Provided, That the total number of votes
cast by him shall not exceed the number of shares owned by him as shown in
the books of the corporation multiplied by the whole number of directors to be
elected: Provided, however, That no delinquent stock shall be voted. Unless
otherwise provided in the articles of incorporation or in the by-laws, members
of corporations which have no capital stock may cast as many votes as there
are trustees to be elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes shall be declared
elected. Any meeting of the stockholders or members called for an election may
adjourn from day to day or from time to time but not sine die or indefinitely if,
for any reason, no election is held, or if there not present or represented by
proxy, at the meeting, the owners of a majority of the outstanding capital stock,
or if there be no capital stock, a majority of the member entitled to vote.
Sec. 25. Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a president,
who shall be a director, a treasurer who may or may not be a director, a
secretary who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more positions
may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time.
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the articles
of incorporation or the by-laws provide for a greater majority, a majority of the
number of directors or trustees as fixed in the articles of incorporation shall
constitute a quorum for the transaction of corporate business, and every
decision of at least a majority of the directors or trustees present at a meeting
at which there is a quorum shall be valid as a corporate act, except for the
election of officers which shall require the vote of a majority of all the members
of the board.
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
Sec. 27. Disqualification of directors, trustees or officers. No person convicted
by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code, committed within five (5)
years prior to the date of his election or appointment, shall qualify as a director,
trustee or officer of any corporation
3. Annual financial statements
Once organized, a corporation is required to keep proper accounting records and
to file financial statements with the SEC annually
Chapter IV. The Corporate Entity
Theory of Corporate Entity: Its Effects
Sec. 19. Commencement of corporate existence. - A private corporation
formed or organized under this Code commences to have corporate existence
and juridical personality and is deemed incorporated from the date the
Securities and Exchange Commission issues a certificate of incorporation
under its official seal; and thereupon the incorporators,
stockholders/members and their successors shall constitute a body politic
and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein, unless said period is extended or the
corporation is sooner dissolved in accordance with law. (n)
Stockholder:
1. No claim on the corporation as owners; only an expectancy or inchoate right to
the same should any of it remain upon the dissolution of the corporation after all
corporate creditors have been paid
2. Cannot bring an action for replevin to recover property of the corporation
14

3. Stockholder’s property cannot be levied upon for an obligation of the
corporation
4. Stockholder’s creditor cannot use corporate property to satisfy claim, may only
attach SH's personal interest in the corporation
5. Cannot assail the legality of warrants and seizures of corporate property
Corporation:
1. No interest in the individual property of its stockholders, unless transferred to
the corporation
2. No personality to bring an action for and in behalf of its SHs or members for the
purpose of recovering property which belongs to their SHs in their personal
capacities
3. Entitled to immunity against unreasonable searches and seizure
4. Civilly liable for torts in the same manner as a natural person
Stockholders of F. Guanzon and Sons, Inc. v Register of Deeds (1962)
Facts: Five stockholders of F Guanzon and Sons executed a certificate of
liquidation of the assets of the corporation and that they have distributed among
themselves in proportion to their shareholdings, as liquidating dividends, the
assets of said corporation, including real properties located in Manila.
Held: A corporation is a juridical person distinct from the members composing it.
Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. The stockholder is not
a co-owner or tenant in common of the corporate property. The act of liquidation
made by the stockholders of F. Guanzon and Sons of the assets is a transfer or
conveyance of title of its assets to the individual stockholders. It is not a partition
of community property.
Caram v. CA (1987)
Facts: A certain Barretto initiated the incorporation of Filipinas Orient Airways
(FOA). Barretto and Garcia contracted with a third party, Alberto Arellano, for the
latter to prepare a project study for the feasibility of creating a corporation like FOA.
On the basis of said project study, Fermin Caram, Jr. and Rosa Caram agreed to be
incorporators of FOA. Later however, Arellano filed a collection suit against FOA,
Barretto, Garcia and the Carams. Arellano claims that he was not paid for his work
on the project study. CA rendered judgment in favor of Arellano, and ordered the
defendants to jointly and severally pay Arellano.
Held: There was no showing that FOA was a fictitious corporation and did not have
a separate juridical personality to justify making the petitioners as principal
stockholders responsible for its obligations. As a bona fide corporation, FOA
should alone be liable for its corporate acts as duly authorized by its officers and
directors. Caram did not contract such services, it was only the results of such
services that Barretto and Garcia presented to them and which persuaded them to
invest in the airline. Thus, Caram is not liable.
Palay, Inc. v Clave (1983)
Facts: Palay, Inc., through its president, Onstott, executed in favor of Dumpit, a
contract to sell a parcel of land owned by the corporation. Par 6 of the contract
provided for automatic extrajudicial rescission upon default in payment of any
monthly installment. Almost 6 years later, Dumpit offered to update all his overdue
accounts with interest, and seeking its written consent to the assignment of his
rights to a certain Dizon. Palay informed Dumpit that his contract to sell had long
been rescinded pursuant to Par 6, and that the lot had been resold. Dumpit filed a
letter complaint with the NHA for reconveyance with an alternative prayer for
refund. NHA, finding the rescission void in the absence of either judicial or notarial
demand, ordered Palay Inc and Onstott, as President, to jointly and severally
refund immediately the amount paid by Dumpit.
Held: A corporation is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other legal entity to
which it may be related. As a general rule, a corporation may not be made to answer
for acts or liabilities of its stockholders or those of the legal entities to which it may
be connected and vice versa.
However, the veil of corporate fiction may be pierced when it is used as a shield to
further an end subversive of justice; or for purposes that could not have been
intended by the law that created it; or to defeat public convenience, justify wrong,
protect fraud, or defend crime; or to perpetuate fraud or confuse legitimate issues;
or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or
business conduit for the sole benefit of the stockholders.
CORPORATION | PROF. G. DEE | CALLUENG
In this case, there were no badges of fraud on Palay’s part. They mistakenly relied
on Par 6 when it rescinded the contract to sell extrajudicially and had sold it to a
third person.
No sufficient proof exists on record that Onstott used the corporation to defraud
Dumput. He cannot, therefore, be made personally liable just because he
"appears to be the controlling stockholder". Mere ownership by a single
stockholder or by another corporation is not of itself sufficient ground for
disregarding the separate corporate personality.
J.G. Summit Holdings v CA (2005)
Facts: JG Summit is questioning the right of first refusal of Kawasaki, a Japanese
corporation, which owns shares in a Philippine Corporation. It submits that such
right, which was eventually converted into a right to top the bid in the bidding
process that occurred to sell the government’s shares in the said Philippine
corporation, would allow the Japanese corporation to acquire more than the
allowable 40% equity allowed by law for corporations that own land.
Held: The right itself does not violate the constitutional limit and that in any case,
if the Japanese corporation’s shareholdings increase beyond 40%, it would only
disqualify the corporation from owning land. The corporation and its stockholders
are separate juridical entities. In this vein, the right of first refusal over shares
pertains to the shareholders whereas the capacity to own land pertains to the
corporation. Hence, the fact that PHILSECO owns land cannot deprive stockholders
of their right of first refusal. No law disqualifies a person from purchasing shares in
a landholding corporation even if the latter will exceed the allowed foreign equity,
what the law disqualifies is the corporation from owning land.
Tramat Merantile, Inc. v CA (1994)
Facts: Melchor de la Cuesta, doing business under the name "Farmers
Machineries," sold to Tramat one (1) unit HINOMOTO TRACTOR. David Ong,
Tramat's president and manager, issued a check for payment. Tramat, in turn, sold
the tractor, together with an attached lawn mower fabricated by it, to the NAWASA.
NAWASA refused to pay Tramat after discovering that, aside from some stated
defects of the attached lawn mower, the engine (sold by de la Cuesta) was a
reconditioned unit. David Ong, in turn, caused a "stop payment" of the check. De
la Cuesta filed an action for the recovery of payment from Tramat and Ong. Ong
denies liability because the questioned transaction was between de la Cuesta and
Tramat Mercantile, Inc., and not with Ong in his personal capacity.
Held: Personal liability of a corporate director, trustee or officer along (although
not necessarily) with the corporation may so validly attach, as a rule, only when:
1. He assents
a. to a patently unlawful act of the corporation, or
b. for bad faith, or gross negligence in directing its affairs, or
c. for conflict of interest, resulting in damages to the corporation, its
stockholders or other persons
2. He consents to the issuance of watered stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto
3. He agrees to hold himself personally and solidarily liable with the corporation;
or
4. He is made, by a specific provision of law, to personally answer for his corporate
action
In this case, there is no indication that Ong could be held personally accountable
under any of the abovementioned cases.
Marvel Bldg. Corporation v David (1954)
Facts: This action was brought by stockholders of Marvel Building Corporation to
enjoin the CIR from selling in public auction various properties registered in the
name of the corporation. The properties were seized and distrained by the CIR to
collect war profit taxes assessed against Maria B. Castro. Plaintiffs allege that the
properties (lands and buildings) belong to the corporation while the CIR claims that
Maria Castro is the true and sole owner of all the subscribed stock of Marvel
Building Corporation, including those appearing to have been subscribed and paid
for by other members, and consequently Castro is the true and exclusive owner of
the properties seized.
Held: The existence of endorsed certificates discovered by internal revenue agents
between 1948 and 1949 in the possession of the Secretary Treasurer of a
supposed corporation; the fact that 25 certificates were signed by its president for
no justifiable reason; the fact that its principal stockholder had made enormous
profits and had a motive to hide them to evade taxes; that the other subscribers
had no incomes of sufficient magnitude to justify their big subscriptions; that the
subscriptions were not receipted for and deposited by the treasurer in the
15

corporation but were kept by Castro herself, that the SHs or directors never
appeared to have ever met to discuss the business of the corporation; that Castro
advanced big sums of money to the corporation without any previous arrangement
or accounting and that the books of accounts were kept as if they belonged to
Castro alone point to no other conclusion that Castro was the sole and exclusive
owner of the shares and that they were only her dummies
Palacio et. al v Fely Transportation Company (1962)
Facts: Isabelo Calingasan owned a jeep for hire driven by his employee, Carillo.
Carillo hit a child causing serious injuries. Carillo was convicted but cannot pay
damages. Calingasan subsequently sold his jeep to Fely Transportation Co. which
was organized by him, his wife and children.
Held: Isabelo Calingasan and Fely Transportation may be regarded as one and the
same person. The defendant corporation does not have a personality separate and
distinct from its members when to allow to do so would be to sanction the use of
the fiction of corporate entity as a shield to further an end subversive of justice. In
this case, the main purpose of Isabelo in forming the corporation was to evade his
subsidiary civil liability resulting from the conviction of his driver Carillo. The
incorporators of Fely Transportation are Isabelo, his wife, his son and his two
daughters.
Also, substitution of the defendant corporation can take place as Isabelo is the real
party in interest.
NAMARCO v. Associated Finance Company (1967)
Facts: ASSOCIATED, a domestic corporation, through the President, appellee
Francisco Sycip, entered into an agreement to exchange sugar with NAMARCO,
represented by its General Manager, Benjamin Estrella. ASSOCIATED failed to
deliver the refined sugar agreed upon. NAMARCO filed present action
Held: Evidence on record shows that Sycip owned Php60,000.00 worth of shares
and his wife owns Php20,000.00. That the par value of the subscribed capital
stock of ASSOCIATED was Php 105,000.00. As a matter of fact, in the course of
Sycip’s testimony, he referred to himself as the one who contracted or transacted
the business in his personal capacity, and asserted that the exchange agreement
was his personal contract; and that ASSOCIATED at the time was already insolvent.
Sycip cannot not seek refuge behind the general principle that a corporation has a
personality distinct and separate from that of its stockholders and that the latter
are not personally liable for the corporate obligations. When the corporation is the
mere alter ego of a person, then the corporate fiction may be disregarded; the same
being true when the corporation is controlled, and its affairs are so conducted as
to make it merely an instrumentality, agency or conduit of another.
Tan Boon v. Jarencio (1988)
Facts: Anchor sold on credit to private respondent Graphic Publishing, Inc. paper
products. Graphic failed to pay any installment and Tan filed a case for sum of
money. A writ of execution was issued by Judge Jarencio. The sheriff levied upon
one unit printing machine found in the premises of Graphic. However, Philippine
American Drug Company (PADCO) informed the sheriff that the machine was its
property, advising the sheriff to cease and desist from carrying out the scheduled
auction sale. The sheriff proceeded with the sale with Tan Boon was the highest
bidder. PADCO filed a Motion to Nullify Sale on Execution (With Injunction)
Held: A corporation is a legal entity distinct and separate from the members and
stockholders who compose it is recognized and respected in all cases which are
within reason and the law. But this separate and distinct personality is a mere
fiction created by law for convenience and to promote justice. Accordingly, this
separate personality of the corporation may be disregarded, or the veil of corporate
fiction pierced, in cases where it is used as a cloak or cover for fraud or illegality, or
to work an injustice, or where necessary to achieve equity or when necessary for the
protection of creditors. Corporations are composed of natural persons and the
legal fiction of a separate corporate personality is not a shield for the commission
of injustice and inequity.
Evidence shows that PADCO was never engaged in the printing business; that the
BOD and the officers of Graphic and PADCO were the same; and that PADCO holds
50% of the shares of stock of Graphic. PADCO’s own evidence shows that the
machine in question had been in the premises of Graphic since May 1965, long
before PADCO even acquired its alleged title on July 11, 1966 from Capitol
Publishing. That the said machine was allegedly leased by PADCO to GRAPHIC on
January 24, 1966, even before PADCO purchased it from Capital Publishing on July
11, 1966, only serves to show that PADCO's claim of ownership over the printing
machine is not only farce and sham but also unbelievable.
CORPORATION | PROF. G. DEE | CALLUENG
Magsaysay-Labrador v CA (1989)
Facts: Adelaida Rodriguez-Magsaysay brought suit against Artemio Panganiban,
SUBIC and Filipinas Manufacturer’s Bank, and the Register of Deeds of Zambales
alleging that the “Pequena Island” was acquired thru conjugal funds; hence, the
annotation on the TCT stating that the land was acquired thru Genaro’s separate
capital and the subsequent transfer by Genaro in favor of SUBIC is null and void
because her consent was not given. Genaro’s sisters intervened alleging that
Genaro conveyed to them ½ of his shareholdings in SUBIC and as assignees of
41% of the outstanding shares of SUBIC, they have a substantial and legal interest
in the suit.
Held: The sisters have no interest. While a share of stock represents a proportionate
or aliquot interest in the property of the corporation, it does not vest the owner
thereof with any legal right or title to any of the property, his interest in the
corporate property being equitable or beneficial in nature. Shareholders are in no
legal sense the owners of corporate property, which is owned by the corporation as
a distinct legal person.
Disregarding Corporate Entity
Theory of Piercing of Corporate Veil
GR: A corporation will be looked upon as a legal entity until sufficient reason to the
contrary appears
XPN: When the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons
- The privilege of being treated as an entity distinct and separate from the
stockholders is confined to legitimate uses and is subject to equitable limitations
to prevent its being exercised for fraudulent, unfair or illegal purpose.
- If evidence of any such purpose is present, the courts will “pierce the veil of
corporate entity” and disregard the corporate fiction
Effect of disregarding the corporate fiction: SHs will be held personally liable for
the acts and contracts of the corporation whose existence, at least for the purpose
of the particular situation involved, is ignored.
De Facto Doctrine v. Piercing of Corporate Veil
De Facto Doctrine Piercing of Corporate Veil
Presumed that the corporation is de Questions the use of the privileges
jure or even de facto and therefore, which attach to the corporate entity.
not subject to collateral attack There is a refusal to allow corporation
to use the corporate privilege for a
particular purpose
Denial of corporate existence No denial of corporate existence
Classification of piercing cases:
1. To commit FRAUD or justify a wrong, or defend a crime (Villa Rey, Palay, Concept
Builders)
a. There must be a fraud or evil motive in the affected transaction; mere proof of
control of the corporation—by itself—would not justify piercing
b, Main action should seek for the enforcement of pecuniary claims
c. Corporate entity was used in the perpetration of the fraud or in the justification
of wrong or to escape personal liability
2. As an ALTER EGO, business conduit of another person or entity, or mere farce to
defeat public convenience (La Campana, Marvel, Liddell, Koppel, Indophil)
- by not respecting the separate personality, others who deal with the
corporation are not also expected to be bound by the separate personality of the
corporation, and may treat the interests of the controlling SH/officer/director
and the corporation as the same
- piercing alter ego may prevail even when no pecuniary claims are sought to be
enforced
d. since only the medium by which the business enterprise is changed, then the
veil may be pierced to allow the business creditors to recover from whoever has
actual control
3. Necessary to achieve EQUITY or justice
Indo Phil Textile Mills v. Calica (1992)
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Facts: Petitioner Union is a legitimate labor organization duly registered with the
DOLE and the exclusive bargaining agent of all the rank-and-file employees of
respondent Indophil Textile Mills, Inc. Indophil Acrylic Manufacturing Corporation
was formed and registered with the SEC. It became operational and hired workers
based on its own standards and criteria. Its workers unionized and a duly certified
CBA was executed. A year later, the petitioner Union contended that Acrylic is part
of the Indophil bargaining unit claiming that the plant facilities built and set up by
Acrylic should be considered as an extension or an expansion of the facilities of
respondent company pursuant to Sec. 1(c), Art. I of the CBA
Held: Under the doctrine of piercing the veil of corporate entity, when valid grounds
exist, the legal fiction that a corporation has a juridical personality separate and
distinct from its members or stockholders may be disregarded. In such cases, the
corporation will be considered as a mere association of persons. The members or
stockholders of the corporation will be considered as the corporation — liability will
attach directly to the officers and stockholders. The doctrine applies when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud,
or defend crime, or when it is made as a shield to confuse the legitimate issues, or
where a corporation is the mere alter ego or business conduit of a person, or where
the corporation is so organized and controlled and its affairs are so conducted as
to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.
In this case, the fact that the businesses of private respondent and Acrylic are
related, that some of the employees of the private respondent are the same
persons manning and providing for auxilliary services to the units of Acrylic, and
that the physical plants, offices and facilities are situated in the same compound,
these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.
Jacinto v. CA (1991)
Facts: Roberto Jacinto is the President and General Manager of Inland Industries
Inc and also a substantial stockholder. Metrobank sent goods that were covered
by 3 Letters of Credit and paid for under the Bills of Exchange. These were all
delivered to Inland Industries through Roberto Jacinto who signed for and in behalf
of Inland and agreed to the terms and conditions of 3 separate trust receipts
covering the same. In his defense, he states that he signed the instruments in his
official capacity as president of Inland, which has a juridical personality separate
and distinct from its officers and stockholders. Metrobank asserts that Inland
Industries is just a mere alter ego of Jacinto while his wife Hedy owns a majority of
its shares of stock.
Held: While on the face of the complaint there is no specific allegation that the
corporation is a mere alter ego of Jacinto, subsequent developments from the
stipulation of facts up to the presentation of evidence and the examination of
witnesses show that Metrobank sought to prove that Jacinto and Inland are one
and the same.
The Court should pierce the corporate veil on the following evidence:
1. Testimony of Jacinto admitting that he and his wife own 52% of the shares of
stock. That he signed the trust receipts in his official capacity is but a clever ruse
and convenient ploy to thwart his personal liability.
2. In his direct testimony, he declared that it is actually Bienvenida Catabas who
was the President while Aurora Heresa is the Chairman of the Board. He also
admitted he owned 52% of the shares of stock. This circumstance leads to doubt
as to why Catabas and Heresa would not be holding their positions.
3. Stipulation of facts show that Jacinto acted in his capacity as President/General
Manager and that all goods covered by the 3 Letters of Credit and paid for under
the Bills of Exchange were delivered to and received by Inland Industries through
Jacinto who signed for and in behalf of Inland
Concept Builders v NLRC (1996)
Facts: Concept Builders Inc. (CBI) lost an illegal dismissal case filed by its
employees. Several writs of execution were issued, the last one was not enforced
as all employees in CBI’s premises claimed that they were employees of Hydro
Pipes Philippines Inc (HPPI). And when levy was made on personal properties in the
premises, security guards prevented them from removing such properties. The
sheriff recommended a “break-open order”. However Dennis Cuyegkeng (VP of
HPPI) filed a third party claim with the LA alleging that HPPI owned the properties
sought to be levied on.
Held: Some probative factors help justify the application of the doctrine of piercing
the corporate veil such as:
1. Stock ownership by one or common ownership of both corps.
2. Identity of directors and officers
3. Manner of keeping the corporate books and records
CORPORATION | PROF. G. DEE | CALLUENG
4. Method of conducting business.
The instrumentality rule which courts have applied to disregard the separate
judicial personality of corporations is as follows: “Where one corporation is so
organized and controlled and its affairs are conducted so that it is, in fact, a mere
instrumentality or adjunct of the other, the fiction of the corporate entity of the
‘instrumentality’ may be disregarded. […]”
The test in determining the applicability of the doctrine is:
1. Control – complete domination of finances, policies and practices that the
controlled corporation has no separate mind.
2. Control is used to commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty, or dishonest and unjust acts in contravention
of plaintiff’s rights.
3. The breach of duty is the proximate cause of the injury.
The absence of one of these elements prevents “piercing the corporate veil”.
In this case, it is noted that although CBI claims to have ceased operations on April
1986, it filed a GIS on May 1987, the same day that HPPI filed a GIS. Both bore
the same address. The GIS was filed by the same person who was corporate
secretary for both Corps. Both also had the same President, the same BOD and the
same corporate officers, with substantially the same subscribers. Clearly petitioner
ceased operations to evade the payment of backwages, with HPPI as a mere
conduit to avoid the financial liability attached to the corporation.
Claparols v CIR (1975)
Facts: Found guilty of union busting and of illegally dismissing the respondent
workers, petitioners were ordered to reinstate the former with backwages from date
of dismissal to reinstatement. Claparols opposed execution of the judgment as
well as the order directing the court examiner to compute the bonuses aside from
backwages. They contended that the company had ceased to operate and
therefore, the workers are entitled to backwages for three months only. Workers
contended that the company was succeeded by another company which is
controlled by the same stockholders.
Held: Claparols Steel and Nail Plant was succeeded by the Claparols Steel
Corporation the next day. The latter was a continuation and successor of the first
entity, and its emergence was skillfully timed to avoid the financial liability that
already attached to its predecessor. Both were owned and controlled by Claparol
and there was no break in the succession and continuity of the same business. 90%
of the subscribed shares of the second corporation was owned by Claparols himself
and all the assets of the dissolved steel corporation were turned over to the second
corporation.
When the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud or defend crime, the law will regard the corporation as an association
of persons or in the case of two corporations, will merge them into one.
Villa Rey Transit v Ferrer (1968)
Facts: Villarama sold its CPCs to Pantranco with a stipulation that he will not
operate a TPU in competition with Pantranco for 10 years. However, Villarama
incorporated Villa Rey and bought CPCs in competition with Pantranco
Held: VILLARAMA has been too much involved in the affairs of the CORPORATION
to altogether negate the claim that he was only a part-time general manager, as
insisted. The CORPORATION is his alter ego.
The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected. However,
when the fiction is urged as a means of perpetrating a fraud or an illegal act or as
a vehicle for the evasion of an existing obligation, the corporate veil will be lifted,
and the law will recognize the corporation as a mere aggregation of individuals. The
restrictive clause in the contract entered into by VILLARAMA and PANTRANCO is
also enforceable and binding against the CORPORATION. A seller or promissor may
not make use of a corporate entity as a means of evading the obligation of his
covenant.
Secosa v Heirs of Erwin Suarez Francisco (2004)
Facts: DWPS truck driven by the company driver overtook another truck and ended
up killing the motorcycle rider in front of the latter truck. The heirs sued DWPS and
the company president Sy for damages.
17

Held: The veil of corporate fiction treats as separate and distinct the affairs of a
corporation and its officers and stockholders. There are, however, instances in
which the corporate veil should be pierced:
- When the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an association
of persons.
- In the interest of justice in such cases as fraud that may work inequities among
members of the corporation internally, involving no rights of the public or third
persons.
In both instances, there must have been fraud and proof thereof. The wrongdoing
must be clearly and convincingly established; it cannot be presumed.
There is no showing of the presence of any grounds stated that will justify the
piercing of the veil of corporate fiction. The truck was registered in the name of
DWPS and not of SY. SECOSA is an employee of DWPS and not of SY. Taken
collectively, these point toward SY’s exclusion from liability arising from the death
of ERWIN.
Yu v NLRC (1995)
Facts: Fernando, Eduardo, Roque, and Rodrigo were EEs of Tanduay Distillery Inc.
who were terminated due to retrenchment. They filed for illegal dismissal
Subsequently, Twin Ace Holdings, Inc. bought TDI’s assets, and continued business
in the name of TD. LA ruled that the retrenchment is illegal and ordering TDI to
reinstate the EMPLOYEES and pay backwages and separation benefits. Upon
motion for execution, NLRC issued a Writ of Execution against TDI, YOUNG, and YU
to immediately reinstate the EMPLOYEES.
Held: The doctrine of piercing the veil of corporate entity applies when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud,
defend crime, or where a corporation is the mere alter ego or business conduit of a
person. To avail of this doctrine, the wrongdoing must be clearly and convincingly
established; it cannot be presumed.
YU and YOUNG work for Twin Ace Holdings, Inc., part of the Allied Bank Group,
although it conducts business under the name TANDUAY DISTILLERS – an obvious
device to capitalize on the goodwill which Tanduay Rum has built over the years. It
is clear, however, that Twin Ace/TANDUAY DISTILLERS, on one hand, and TDI, on
the other, are distinct and separate corporations. There is nothing to suggest that
TDI owners have any common relationship with the Allied Bank Group which runs
TANDUAY DISTILLERS. Another consideration is that the buyer limited itself to
purchasing assets and machinery. Twin Ace did not take over the corporate
personality of TDI although they manufacture the same product
Cease v CA (1979)
Facts: Forrest Cease, together with five other American citizens, organized the
Tiaong Milling and Plantation Company. All the other original incorporators were
eventually bought out by Forrest together with his five children and one Bonifacia
Terante also considered a family member. Forrest died and his shares were
disposed of by extrajudicial partition among the children. Two (CHILDREN A)
wanted an actual division but the three other children and Bonifacia (CHILDREN B)
wanted reincorporation. The latter proceeded to incorporate themselves into the FL
Cease Plantation Company which was registered with the SEC. CHILDREN A
initiated a special proceeding for the settlement of the estate of Forrest and
thereafter filed a civil case against CHILDREN B asking that Tiaong Milling be
declared identical to FL Cease and that its properties be divided among the
children.
Held: The separate and distinct personality of a corporation is merely a fiction
created by law for convenience and to promote the ends of justice. Thus, it may not
be used or invoked for ends subversive of the policy and purpose behind its creation
or which could not have been intended by law to which it owes its being.
In effect, the notion of corporate entity will be pierced or disregarded, and the
corporation will be treated merely as an association of persons or, where there are
two corporations, they will be merged as one, the one being merely regarded as
part or the instrumentality of the other.
In this case, it is necessary to pierce the corporate veil. In the course of its existence
to avoid delay and ultimately deprive and defraud CHILDREN A of their
successional rights to the estate of their father, Tiaong Milling developed into a
close family corporation. Forrest retained the majority stocks and the management
of its affairs. Throughout the years, he distributed nominal shares to his children.
Definitely, only the members of the family benefited from the Corporation. The
accounts of the corporation and of the family appears to be indistinguishable and
apparently joined together. Its operation is merged with those of the majority
stockholders, the latter using the former as his instrumentality and for the exclusive
benefits of his family.
CORPORATION | PROF. G. DEE | CALLUENG
Delpher Trades Corporation v. CA
Facts: Delfin and Pelagia leased their Valenzuela lot to Construction Components
Int’l Inc. with a right of first refusal. CCII, with the siblings’ consent, assigned its
rights and obligations under the lease contract to HYDRO Popes Phils., Inc. Then,
Delfin and Pelagia and DELPHER Trades Corp. executed a deed of exchange,
whereby the Valenzuela lot was exchanged for 2,500 shares of no-par stock in
DELPHER. HYDRO filed an action for reconveyance of the Valenzuela lot.
Held: There was no transfer of actual ownership. The Pacheco family merely
changed their ownership from one form to another, and it remained in the same
hands. After incorporation, one becomes a stockholder by subscription or
purchasing stock directly from the corporation or from the individual owners
thereof. In this case, the Pachecos became owners of the corporation by
subscription, which is an agreement to take and pay for original unissued shares
of a corporation formed or to be formed. It is significant in this case that the
Pachecos took no par value shares in exchange for the properties. A no-par value
share does not purport to represent any stated proportionate interest in the capital
stock measured by value, but only an aliquot part of the whole number of shares of
the issuing corporation. The capital stock of a corporation issuing only no-par
shares is not set forth by a stated amount of money, but is expressed to be divided
into a stated number of shares. This indicates that a shareholder of say 100 shares
is an aliquot sharer in the assets of the corporation, no matter what the value of the
shares are. By ownership of 2500 shares, the Pachecos have control over Delpher,
which makes it a business conduit of the Pachecos. What they really did was to
invest their properties and change the nature of their ownership from
unincorporated to incorporated form by organizing Delpher to take control of the
properties and save on inheritance taxes. As they are still the owners, Hydro has no
basis for its claim of RFR under the lease contract.
Parent-Subsidiary Relationship
GR: If used to perform legitimate functions, a subsidiary’s separate existence may
be respected and the liability of the parent corporation as well as the subsidiary
will be confined to those arising in their respective business
XPN: The courts will step in to prevent abuses of the separate entity privilege and
in proper cases “pierce the veil of corporate entity” and regard the two corporations
as one.
Garnett v Southern Railway Company
Facts: Garrett is a wheel molder employed by Lenoir. Garret sued Southern for
Workmen's Compensation. He contends that since Southern acquired the entire
capital stock of Lenoir and so completely dominated it that it was merely an
instrumentality or subsidiary of Southern, he is considered an employee of
Southern
Held: There are certain circumstances which if present in the proper combination,
would render the subsidiary an instrumentality:
1. parent owns all or most of the capital stock
2. parent and subsidiary have common directors or officers
3. parent finances the subsidiary
4. parent subscribes to all the capital stock of the subsidiary or causes its
incorporation
5. subsidiary has grossly inadequate capital stock
6. parent pays salaries and other expenses or loses of subsidiary
7. subsidiary has substantially no business except with the parent or no assets
except those conveyed to parent
8. subsidiary is described as a department in the books of the parent
9. parent uses property of the subsidiary
10. directors of the subsidiary do not act independently but take orders from the
parent
11. formal legal requirements of the subsidiary are not met
Since only two of the 11 indicia occur (2 & 4), Lenoir is not a subsidiary but a
separate corporation.
Jardine Davies v JRB Realty, Inc. (2005)
Facts: JRB Realty contracted Aircon for 2 sets of air conditioning equipment. The
units did not meet the desired temperature and Aircon undertook to replace them.
JRB Realty sued Aircon and Jardine Davies among others for specific performance.
Aircon ceased operations.
18

Held: While it is true that Aircon is a subsidiary of the petitioner, it does not
necessarily follow that Aircon’s corporate legal existence can just be disregarded.
A subsidiary has an independent and separate juridical personality, distinct from
that of its parent company; hence, any claim or suit against the latter does not bind
the former, and vice versa. In applying the doctrine, the following requisites must
be established: (1) control, not merely majority or complete stock control; (2) such
control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest acts
in contravention of plaintiff’s legal rights; and (3) the aforesaid control and breach
of duty must proximately cause the injury or unjust loss complained of. The
existence of interlocking directors, corporate officers and shareholders is not
enough justification to pierce the veil of corporate fiction in the absence of fraud or
other public policy considerations. To warrant resort to this extraordinary remedy
(piercing the veil), there must be proof that the corporation is being used as a cloak
or cover for fraud or illegality, or to work injustice. It has to be done with caution –
the wrongdoing must be clearly and convincingly established.
Koppel v Yatco (1946)
Facts: KPI is a corporation organized in the PH while Koppel US is a US corporation
owning 99.5% of the shares of stock of KPI. CIR assessed KPI of a merchants’ sales
tax because KPI is allegedly a subsidiary of Koppel US.
Held: Where it appears that two business enterprises are owned, conducted and
controlled by the same parties, both law and equity will, when necessary to protect
the rights of third persons, disregard the legal fiction that two corporations are
distinct entities, and treat them as identical. In this case, far from disclosing a real
separation between the two entities, particularly in regard to the transactions in
question, the evidence reveals such commingling and interlacing of their activities
as to render even incomprehensible certain accounting operations between them,
except upon the basis that the Philippine corporation was to all intents and
purposes a mere subsidiary, branch, or agency of the American parent entity.
Liddell v CIR (1961)
Facts: Liddell & Co was engaged in importing and retailing cars and trucks. Frank
Liddell owned 98% of the stocks. Later Liddell Motors Inc was organized to do
retailing for Liddell & Co. Frank’s wife owned almost all of that corporation’s
stocks. Since then, Liddell & Co paid sales tax on the basis of its sales to Liddell
Motors. But the CIR considered the sales by Liddell Motors to the public as the
basis for the original sales tax.
Held: Frank Liddell owned both corporations as his wife could not have had the
money to pay her subscriptions. Under the proven facts alone, Liddel Motors was
the medium created by Liddel & Co to reduce its tax liability. A taxpayer has the
legal right to decrease, by means which the law permits, the amount of what
otherwise would be his taxes or altogether avoid them; but a dummy corporation
serving no business purposes other than as a blind, will be disregarded. A taxpayer
may gain advantage of doing business thru a corporation if he pleases, but the
revenue officers in the proper cases may disregard the separate corporate entity
where it serves but as a shield for tax evasion and treat the person who actually may
take the benefits of the transaction as the person accordingly taxable.
Mere ownership by a single stockholder or by another corporation of all or nearly
all capital stocks of the corporation is not by itself a sufficient ground for
disregarding the separate corporate personality. Substantial ownership in the
capital stock of a corporation entitling the shareholder a significant vote in the
corporate affairs allows them no standing or claims pertaining to corporate affairs.
Where a corporation is a dummy and serves no business purpose and is intended
only as a blind, the corporate fiction may be ignored.
La Campana Coffee Factory v Kaisahan (1953)
Facts: Kaisahan, a labor union which were affiliated workers in La Campana
Gaugau and La Campana Coffee Factory, two separate entities but one
management, presented demands for higher wages and more privileges and
benefits in connection with their work. On the theory that the laborers presenting
the demands were only the ones working in the coffee factory, company filed a MTD
claiming that as they were only 14 of them in the coffee factory, CIR has no
jurisdiction to decide the case.
Held: La Campana Gaugau Packing and La Campana Coffee Factory Co. Inc., are
operating under one single management, that is, as one business though with two
trade names. A subsidiary or auxiliary corporation which is created by a parent
corporation merely as an agency for the latter may sometimes be regarded as
identical with the parent corporation, especially if the stockholders or officers of
CORPORATION | PROF. G. DEE | CALLUENG
the two corporations are substantially the same or their system of operation
unified. When a corporation and the individual or individuals owning all its stocks
and assets is treated as identical, the corporate entity being disregarded where
used as a cloak or cover for fraud or illegality.
WPM International Trading v Labayen (2014)
Facts: Labayen instituted a complaint for damages against WPM and Manlapaz as
Labayen was adjudged liable for a contract that she entered into for and in behalf
of WPM and Manlapaz, to which she should be entitled to reimbursement.
Manlapaz argues that since WPM has a separate and distinct personality,
Manlapaz cannot be made liable for Labayen’s claim.
Held: The doctrine of piercing the corporate veil applies only in three instances: a.
when the separate and distinct corporate personality defeats public convenience,
as when the corporate fiction is used as a vehicle for the evasion of an existing
obligation; b. in fraud cases, or when the corporate entity is used to justify a wrong,
protect a fraud or defend a crime; or is used in alter ego cases. Where a corporation
is essentially a farce, since it is a mere alter ego or business conduit of a person or
where the corporation is so organized and controlled, and its affairs so conducted
as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation.
The alter ego theory requires three elements:
1. Control, not mere majority or complete stock control, but complete domination,
not only of finances but of policy and business practice in respect to the transaction
attacked so that the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own.
2. Such control must have been used by the defendant to commit fraud or wrong,
to perpetuate the violation of a statutory or other positive legal duty, or dishonest
and unjust act in contravention of plaintiff’s legal right; and
3. The aforesaid control and breach of duty must have proximately caused the injury
or unjust loss complained of.
The absence of any of these elements prevents piercing the corporate veil.
There is no control to speak of. The control necessary to invoke the instrumentality
or alter ego rule is not majority or even complete stock control but such domination
of finances, policies and practices that the controlled corporation has, so to speak,
no separate mind, will or existence of its own and is a but a conduit for its principal.
The control must be shown to have been exercised at the time the acts complained
of took place. Moreover, the control and breach of duty must proximately cause the
injury or unjust loss for which the complainant is made.
Tantongco v. Kaisahan ng mga Manggagawa (1959)
Facts: Ramon Tantongco, the owner and manager of the starch factory and the
person in charge of the coffee factory died. When the CIR directed the
management of the company or the administrator of the estate to reinstate the
dismissed laborers with backwages, the management did not obey the CIR’s order.
The union filed a petition to hold the respondents in contempt. Ricardo Tantongco,
the administrator, argues that when the SC pierced the corporate veil and held that
La Compania Starch and Coffee Factory and its owner were one, this means that
with the death of Ramon, the La Campana entities also ceased to exist.
Held: The piercing of the corporate veil was applied to avoid the technicality
advanced to defeat the jurisdiction of the CIR. In determining whether or not the
CIR had jurisdiction, the number of workers in both entities had to be considered
since they were managed by the same persons and the workers were used
interchangeably. However, the Court still believes that although the family of
Ramon was practically the owner of both the coffee factory and starch factory,
nevertheless, these entities are separate from the personality of Ramon. Moreover,
petitioner is estopped from claiming that the two entities and Ramon are one. He
is deemed to have admitted the existence of the two entities in several documents
presented before the court.
Cruz v Dalisay (1987)
Facts: Dalisay, sheriff, garnished Cruz’s cash deposit at Philtrust bank even when
the writ was addressed to Qualitrans Limousine Service. Dalisay’s defense is that
Cruz is the president and owner of the corporation
Held: As a legal entity, a corporation has a personality distinct and separate from
its individual stockholders or members. The mere fact that one is president of a
corporation does not render the property he owns or possesses the property of the
corporation, since the president as individual, and the corporation are separate
entities.
19

NASECO Guards Association-PEMA v National Service Corporation (2010)
Facts: NASECO is a wholly-owned subsidiary of the PNB. Its union then filed a ULP
against the company to which the CA awarded monetary awards in favor of the
union. NASECO contends that PNB should be held liable to shoulder the CBA
benefits awarded to them by virtue of it being a company having full financial,
managerial and functional control over NASECO as its subsidiary.
Held: There is no reason to pierce to corporate veil of NASECO and go beyond its
legal personality. Control does not mean that the controlled corporation is a mere
instrumentality or business conduit of the mother company. Even control over the
financial and operations concerns of a subsidiary company does not by itself call
for disregarding its corporate fiction. There must be a perpetuation of fraud behind
the control in order to justify the piercing the veil of corporate fiction. Such
fraudulent intent is lacking in this case.
Pacific Rehouse Corporation v CA (2014)
Facts: After failing to satisfy the writ of execution against E-Securities, Pacific
Rehouse tried to go after its parent company, Export Industry Bank. The RTC issued
an alias writ against the latter, on the basis of the alter ego doctrine, which called
for a ‘piercing of the corporate veil’ between E-Securities and EIB.
Held: The court must first and foremost acquire jurisdiction over the parties; and
only then would the parties be allowed to present evidence for and/or against the
piercing the veil of corporate fiction. If the court has no jurisdiction over the
corporation, it follows that the court has no business in piercing its veil of corporate
fiction because such action offends the corporation’s right to due process
Moreover, E-securities is not the mere alter ego of Export Industry bank. To justify
treating the sole stockholder or holding company as responsible, it is not enough
that the subsidiary is so organized and controlled as to make it “merely an
instrumentality, conduit or adjunct” of its stockholders. It must further appear that
to recognize their separate entities would aid in the consummation of a wrong.
Ownership of another corporation per se, without proof of actuality of the other
conditions are insufficient to establish an alter ego relationship. The existence of
interlocking directors, corporate officers and shareholders is not enough
justification to pierce the veil of corporate fiction in the absence of fraud or other
public policy considerations.
Kukan International Corporation v Reyes (2010)
Facts: During the execution of a judgment against Kukan Inc, the sheriff levied the
personal properties found at the office of Kukan, Inc. Claiming it owned the
properties levied, Kukan International Corporation (KIC) filed an Affidavit of Third
Party Claim. Morales filed an Omnibus Motion praying to apply the principle of
piercing the veil of corporate entity. He alleged that Kankun, Inc. and KIC are one
and the same corporation.
Held: The principle of piercing the veil of corporate fiction and the resulting
treatment of the two related corporations as one and the same juridical person with
respect to a given transaction is basically applied to determine established
liability. It is not available to confer on the court a jurisdiction it has not acquired
in the first place, over a party not impleaded in a case. A corporation not impleaded
in a suit cannot be subject to the court’s process of piercing the veil of its corporate
fiction. This is so because the doctrine of piercing the veil of corporate fiction
comes to play only during the trial of the case after the court has already acquired
jurisdiction over the corporation.
The implication of the above comment is twofold: (1) The court must first acquire
jurisdiction over the corporation or corporations involved before its or their
separate personalities are disregarded; and (2) the doctrine of piercing the veil of
corporate entity can only be raised during a full-blown trial over a cause of action
commenced involving parties duly brought under the authority of the court by way
of service of summons or what passes as such service
Piercing of corporate veil is improper when the party was only impleaded in a mere
motion. There must be a full-blown trial.
Kukan Inc. and Kukan International are two separate entities. When the Court
pierced the veil of corporate fiction of two corporations, there must be a confluence
of the following factors:
1. A first corporation is dissolved
2. The assets of the first corporation is transferred to a second corporation to avoid
a financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons such that the
second corporation should be considered as a continuation and successor of the
first corporation
CORPORATION | PROF. G. DEE | CALLUENG
PNB v Hydro Resources Contractors Corporation (2013)
Facts: DBP and PNB acquired all the assets of MMIC and resumed the defunct
business by organizing NMIC. DBP and PNB owned majority of the shares of NMIC
and the directors of the latter were either from DBP or PNB. NMIC engaged the
services of Hercon (subsequently merged with HRCC) but has unpaid balance.
HRCC filed a complaint against NMIC, DBP and PNB as solidary debtors.
Held: Three elements of alter ego test: 1) control of the corporation by
stockholder/parent; 2) fraud or fundamental unfairness imposed; and 3)
harm/damage caused to plaintiff by the fraudulent or unfair act. In this case, the
three elements of alter ego test were not met.
- Control: Nothing in the records show that the corporate finances, policies and
practices of NMIC were dominated by DBP and PNB in such a way that NMIC could
be considered to have no separate mind, will, or existence of its own.
- Fraud: There is no evidence that the juridical personality of NMIC was used by DBP
and PNB to commit fraud or do a wrong against HRCC
- Harm: In the absence of control and fraud, no harm could be said to have been
caused by DBP and PNB to HRCC.
Macaset v. Co, Jr. (2013)
Facts: Abante Tonite was impleaded as a defendant in a case for damages filed
against its reporters. Abante Tonite alleged that it cannot be impleaded as a
defendant as it is neither a natural or juridical person.
Held: Abante Tonite is a corporation by estoppel. Those from the public who would
suffer any damage from the publication of articles in the pages of its tabloids
should not be left without recourse. The editorial box of the daily tabloid disclosed
that although Monica Publishing Corporation published the tabloid on a daily
basis, nothing in the box indicated that Monica Publishing Corporation had owned
Abante Tonite.
Aboitiz Equity Ventures Inc. v. Chiongbian (2014)
Facts: Aboitiz Shipping and CAGLI entered into an agreement where Aboitiz would
transfer their shipping assets to WLI in exchange for WLI’s shares of stock. WLI, in
turn, would run their merged shipping businesses and henceforth, would be known
as WG&A. In 2002, the Chiongbian (CAGLI) and Gothong families decided to leave
WG&A and sell their interest to Aboitiz family. Aboitiz became a stockholder of
WG&A and later renamed it Aboitiz Transport Shipping Corporation. CAGLI
resumed making demands for inventories, and demanded to AEV as well as
another company related to Chiongbian for assets. CAGLI then filed applications
for arbitration against Chiongbian, ATSC, ASC and AEV.
Held: A corporation has a personality separate and distinct from that of its
individual stockholders. A stockholder does not automatically assume the
liabilities of the corporation of which he is a stockholder.
AEV, as a stockholder, retained a personality separate and distinct from WLI/
WG&A / ATSC. AEV is not personally liable for the obligations of the corporation
whose stocks it held. Moreover, the Share Purchase Agreement does not contain
any stipulation which makes AEV assume ATSC’s obligations.
Livesey v. Binswanger (2014)
Facts: In his alias writ of execution, Livesey alleged that CBB and Bingswanger are
one and the same. Invoking the doctrine of piercing of corporate veil, Livesey
prayed that an alias writ of execution be issued against Binswanger, Keith Elliot,
CBB's fofrmer President and now Binswanger's President and CEO
Held: There is an indubitable link between CBB's closure and Binswanger's
incorporation. CBB ceased to exist only in name; it reemerged in the person of
Binswanger for an urgent purpose - to avoid payment by CBB of the last two
installments of its monetary obligation to Livesey, as well as its other financial
liabilities.
Heirs of Fe Tan Uy v International Exchange Bank (2013)
Facts: iBank filed a complaint for sum of money on against Hammer, Chua, Uy, and
Goldkey before RTC. RTC concluded that Goldkey and Hammer were one and the
same entity and held Uy liable.
Held: Before a director or officer of a corporation can be held personally liable for
corporate obligations, the following requisites must concur:
1. the complainant must allege in the complaint that the director or officer
assented to patently unlawful acts of the corporation, or that the officer was guilty
of gross negligence or bad faith; and
20

2. the complainant must clearly and convincingly prove such unlawful acts,
negligence or bad faith.
In this case it was not alleged, much less proven, that Uy committed an act as an
officer of Hammer that would permit the piercing of corporate veil. What the
complaint stated was that she acted as surety of Hammer.
Probative factors indicated in Concept Builders are unquestionably present in the
case of Goldkey and Hammer. Goldkey is an alter ego of Hammer.
Medical Plaza v Cullen (2013)
Facts: A complaint for damages was filed by Cullen against Medical Plaza and
MLHI Corporation alleging that despite payment of association dues, Medical
Plaza thru its corporate secretary demanded payment for alleged unpaid dues.
Held: An intra-corporate controversy is one which pertains to any of the following
relationships: (1) between the corporation, partnership or association and the
public; (2) between the corporation, partnership or association and the State
insofar as its franchise, permit or license to operate is concerned; (3) between the
corporation, partnership or association and its stockholders, partners, members or
officers; and (4) among the stockholders, partners or associates themselves. Thus,
under the relationship test, the existence of any of the above intra-corporate
relations makes the case intra-corporate.
Under the nature of the controversy test, "the controversy must not only be rooted
in the existence of an intra-corporate relationship, but must as well pertain to the
enforcement of the parties' correlative rights and obligations under the
Corporation Code and the internal and intra-corporate regulatory rules of the
corporation." In other words, jurisdiction should be determined by considering
both the relationship of the parties as well as the nature of the question involved.
Applying the two tests, the case involves intra-corporate controversy. It obviously
arose from the intra-corporate relations between the parties, and the questions
involved pertain to their rights and obligations under the Corporation Code and
matters relating to the regulation of the corporation. An examination of the
allegations made by respondent in his complaint shows that the case principally
dwells on the propriety of the assessment made by petitioner against respondent
as well as the validity of petitioner's act in preventing respondent from
participating in the election of the corporation's Board of Directors.
Nationality of Corporation
DOMESTIC CORPORATION is one organized under the Philippine laws and is
governed by such laws
FOREIGN CORPORATION is one organized under laws other than those of the
Philippines and is governed by the law of its creation, and can operate only in the
territory of the State under whose laws it was formed
GR: A foreign corporation may, however, be licensed to do business in the
Philippines, in which case it will be governed by Philippine laws
XPN: Law of the state where it was formed govern –
a. creation, formation, organization
b. dissolution
c. those which fix the relations, liabilities, and responsibilities of the
stockholders or officers to each or to the corporation
Just because you’re 100% doesn’t mean you’re already a Philippine national. You
need a branch license
- FILIPINO = 100% + license
Sec. 15, par. 11. No transfer of stock or interest which will reduce the
ownership of Filipino citizens to less than the required percentage of the capital
stock as provided by existing laws shall be allowed or permitted to be recorded
in the proper books of the corporation and this restriction shall be indicated in
all the stock certificates issued by the corporation
Domestic Corporations with Nationality Requirements
INDUSTRY CAPITAL REQUIREMENT
- Retail Trade 100% Filipino ownership
- Rural Banks
- Mass Media
- Interisland shipping industry 75% Filipino ownership
- Producer, manufacturer, seller of
articles for Government
- Banks [except Rural Banks] 70% voting stock Filipino ownership [but
may be reduced to 60%]
CORPORATION | PROF. G. DEE | CALLUENG
- Advertising 70% Filipino ownership
- Pawnshop business
- Public utilities 60% capital stock Filipino ownership
- Corporations engaged in
exploration, exploitation and
utilization of natural resources
- Educational institutions not
established by religious orders
and mission boards,
- Public service corporations
- Coastwise shipping
- Common carrier
- Mining
- Agriculture
- In times of war
Gamboa v Teves (2011)
The term "capital" in Sec. 11, Article XII of the 1987 Constitution refers only to
shares of stock entitled to vote in the election of directors, and thus in the present
case only to common shares, and not to the total outstanding capital stock
[common and non-voting preferred shares].
Compliance with the required Filipino ownership of a corporation shall be
determined on the basis of outstanding capital stock whether fully paid or not, but
only such stocks which are generally entitled to vote are considered.
For stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine citizens or Philippine nationals
Gamboa v Teves (2012)
The term “capital” is not limited to voting shares since the constitutional
requirement of at least 60 % Filipino ownership applies not only to voting control
of the corporation, but also to the beneficial ownership of the corporation. It is
therefore imperative that such requirement apply uniformly and across the board
to all classes of shares, regardless of nomenclature and category, comprising the
capital of a corporation.
Preferred shares, denied the right to vote in the election of directors, are anyway
still entitled to vote on the eight specific corporate matters under Sec. 6. of the
Corporation Code.
Thus, the 60-40 ownership requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-voting,
preferred voting or any other class of shares.
(NOTE: CONFUSING – MR Denied but different doctrine from 2011 Gamboa)
Not sure if sir said that 60-40 according to all classes of shares is obiter.
UPDATE: 2012 Gamboa not practiced but for purposes of bar, answer 60/40 according
to all classes of shares.
Narra Nickel Mining v Redmont Consolidated Mines Corporation (2014)
There are two cases in determining the nationality of the Investee Corporation.
The first case is the ‘liberal rule’: shares belonging to corporations or partnerships
at least 60% of the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality.’ Under the liberal Control Test, there is no need to
further trace the ownership of the 60% (or more) Filipino stockholdings of the
Investing Corporation since a corporation which is at least 60% Filipino-owned is
considered as Filipino.
The second case is the Strict Rule or the Grandfather Rule Proper: If the percentage
of Filipino ownership in the corporation or partnership is less than 60%, only the
number of shares corresponding to such percentage shall be counted as of
Philippine nationality.” Under the Strict Rule or Grandfather Rule Proper, the
combined totals in the Investing Corporation and the Investee Corporation must be
traced (i.e., “grandfathered”) to determine the total percentage of Filipino
ownership.
It would be ludicrous to limit the application of the said word only to the instances
where the stockholdings of non-Filipino stockholders are more than 40% of the
total stockholdings in a corporation. The corporations interested in circumventing
our laws would clearly strive to have “60% Filipino Ownership” at face value. It
would be senseless for these applying corporations to state in their respective
21
 CORPORATION | PROF. G. DEE | CALLUENG

articles of incorporation that they have less than 60% Filipino stockholders since b. Filipino Equity of Grandfather × Shares of Filipino Father held in Son
the applications will be denied instantly. Thus, various corporate schemes and c. Add individual Filipino shares held in Son
layerings are utilized to circumvent the application of the Constitution. 4. Use grandfather rule in foreign participation in son
The “control test” is still the prevailing mode of determining whether or not a a. Foreign Equity of Grandfather × Shares of Filipino Father in Son
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987 b. Add individual foreign shares held in Son
Constitution, entitled to undertake the exploration, development and utilization of
the natural resources of the Philippines. However, when in the mind of the Court Ex: Supposedly Filipino ABC holds 59.97% of XYZ, while foreign DEF owns 39.98%
there is doubt, based on the attendant facts and circumstances of the case, in the shares of it. Filipino individuals hold .03%. Foreign individuals hold remaining
60-40 Filipino-foreign equity ownership in the corporation, then it may apply the .02%.
“grandfather rule.” In turn, Filipino corporation GHI owns 66.63% of ABC while the same foreign DEF
owns 33.31%. Other Filipino individuals hold .04%, while foreign individuals hold
The Grandfather Rule applies only when the 60-40 Filipino-foreign equity remaining .02%
ownership is in doubt [i.e. in cases where the joint venture corporation with Filipino
and foreign stockholders with less than 60% Filipino stockholdings (or 59%) Solution:
invests in another joint venture corporation which is either 60-40% Filipino-alien
GHI (Filipino)
or 59% less Filipino. Stated differently, where the 60-40 Filipino-foreign equity 66.63%
ownership is not in doubt, the Grandfather Rule will not apply.
DEF (Foreign)
Gamboa: Voting and summation of Voting and non-voting ABC (Filipino)
33.31%
59.97%
Narra Nickel Mining v Redmont Consolidated Mines Corporation (2015) Other Filipino
.04%
The Control Test can be, as it has been, applied jointly with the Grandfather Rule to DEF (Foreign)
determine the observance of foreign ownership restriction in nationalized 39.98%
Other Foreign
economic activities. The Control Test and the Grandfather Rule are not, as it were, XYZ (son)
.02%
incompatible ownership-determinant methods that can only be applied alternative Other Filipino
0.03%
to each other. Rather, these methods can, if appropriate, be used cumulatively in
the determination of the ownership and control of corporations engaged in fully or Other Foreign
partly nationalized activities. 0.02%
The Grandfather Rule, standing alone, should not be used to determine the Filipino
Filipino participation in XYZ:
ownership and control in a corporation, as it could result in an otherwise foreign
(66.63% + .04%) x (59.97%) = 39,98%
corporation rendered qualified to perform nationalized or partly nationalized
+ .03%
activities. Hence, it is only when the Control Test is first complied with that the
40.01%
Grandfather Rule may be applied. Put in another manner, if the subject
corporation’s Filipino equity falls below the threshold 60%, the corporation is
Foreign Participation in XYZ:
immediately considered foreign-owned, in which case, the need to resort to the
(33.31% + .02%) x (59.97%) = 19.99%
Grandfather Rule disappears.
+ 39.98% + .02% = 40.00%
On the other hand, a corporation that complies with the 60-40 Filipino to foreign
59.99%
equity requirement can be considered a Filipino corporation if there is no doubt as
to who has the “beneficial ownership” and “control” of the corporation. In that
Note: You don’t apply grandfather rule in a foreign corporation
instance, there is no need for a dissection or further inquiry on the ownership of the
corporate shareholders in both the investing and investee corporation or the
application of the Grandfather Rule. As a corollary rule, even if the 60-40 Filipino
to foreign equity ratio is apparently met by the subject or investee corporation, a
resort to the Grandfather Rule is necessary if doubt exists as to the locus of the Chapter V. Promoter’s Contracts prior to Incorporation
“beneficial ownership” and “control.” In this case (where based on the
incorporation papers, the Filipino-Owned corporation subscribed to 60% of the Liability of Corporation for Promoter’s Contracts:
capital while the foreign corporation subscribed to 40% but the subscription of the PROMOTER may, in the process of forming the corporation, enter into contracts on
former is only nominally paid-up and such corporation entered into a financial behalf of the proposed corporation.
assistance agreement with the foreign-owned corporation), a further investigation Since the contracts are entered into prior to the corporation’s existence, WHO IS
as to the nationality of the personalities with the beneficial ownership and control LIABLE on these contracts?
of the corporate shareholders in both the investing and investee corporations is - The corporation may make the contracts its own and may become bound on such
necessary. contracts if, after incorporation, it adopts or ratifies the same, or accepts its
benefits with knowledge of the terms thereof. Such adoption of ratification need
Sir’s Note: When you compute nationality, you compute on total outstanding – not be by express resolution of the board and may be implied from the acts of
disregard voting / non-voting responsible officers of the corporation.
Control test only applies when nationality of Filipino is 60% or less. - But a corporation cannot adopt only the part of the contract which may be
beneficial or desirable and discard that which is burdensome.
When to apply Grandfather Rule:
1. When the Filipino ownership requirement is higher than 60% Corporate Rights under Promoters’ Contracts
2. If Fil investor (grandfather) controls less than 60% of the parent corporation (first - Upon adoption or ratification of pre-incorporation contracts, the corporation
layered corporation) becomes liable thereon. It also acquires rights thereunder.
3. Even if requirement is 60%, but there is doubt on the Filipino ownership - The fact of bringing an action on the contract has been held to constitute sufficient
- being used to circumvent the law adoption or ratification, to give the corporation a cause of action.

How to Compute for Nationality in Grandfather Rule:
1. Count shares based on ownership of shares subscribed
2. Use control test. If passed but conditions for grandfather rule applied
3. Use grandfather rule in Filipino participation in son
a. Trace Baby Corporation’s ownership to the grandfather
Personal Liability of Promoter on Pre-Incorporation Contracts
Three possible situations which may be intended by the promoter and the other
party to a pre-incorporation contract:
1. The promoter may take a continuing offer on behalf of the corporation, which if
accepted after incorporation, will become a contract
22

- Promoter does not assume any personal liability, whether or not the offer is
accepted by the corporation
2. The promoter may make a contract at the time binding himself, with the
understanding that if the corporation, once formed, accepts or adopts the contract,
he will be relieved of all responsibilities; or
3. The promoter may bind himself personally and assume the responsibility of
looking to the proposed corporation, when formed for reimbursement.
Unless either of the first two situations was agreed upon by the parties, expressly
or impliedly, the third situation will be PRESUMED to exist.
GR: In the absence of any express or implied agreement to the contrary, a promoter
is personally liable for contracts made by him on behalf of the proposed
corporation.
- The fact that the corporation when formed has adopted or ratified the contract
does not release him from responsibility, unless a novation was intended.
McArthur v Times Printing
Facts: Nimocks, promoter, made a contract with McArthur, in behalf of the
contemplated company, for his services as advertising solicitor for one year
starting October 1st, the date at which it was expected that the company would be
organized. The corporation (Times) was not organized until October 16th, but the
publication of the paper was commenced by the promoters on October 1st, at
which date McArthur, in pursuance of his arrangement with Nimocks, discharged
his duties as advertising solicitor for the paper. After the organization of Times,
McArthur remained as advertising solicitor until discharged in April 1890.
McArthur filed a suit against Times to recover damages for breach of contract.
Held: While a corporation is not bound by engagements made on its behalf by its
promoters before its organization, it may, after it is organized, make such
engagements its contracts by adopting them as its own; and this it may do in the
same manner as it might make similar original contracts. It is not a requisite that
such adoption or acceptance be expressed. It may be inferred from acts or
acquiescence on the part of the corporation, or its authorized agents, as any similar
original contracts might be shown. Times’ board of directors never took any formal
action with reference to the contract made in its behalf by Nimocks, BUT all of the
stockholders, directors, and officers of the corporation knew of this contract at the
time of its organization, or were informed of it soon afterwards, and none of them
objected to or repudiated it, but, on the contrary, retained McArthur without any
other or new contract as to his services.
This did not go against the Statute of Frauds. There cannot, in law, be a ratification
of a contract which could not have been made binding on the ratifier at the time it
was made, because the ratifier was not then in existence. What is called
“adoption,” in such cases, is, in legal effect, the making of a contract of the date
of the adoption, and not as of some former date. The contract in this case was not
within the statute of frauds.
Thus, where a corporation by acquiescence adopts as its own a contract made by
its promoter before organization, the act of adopting is not a ratification, which
relates back to the date of the contract by the promoter, but is the making of a
contract as of the date of the adoption, so that, though the contract made by the
promoter was, by its terms, not to be performed within one year, it is not within the
statute of frauds, if it be performed within one year from the date of its adoption.
Cagayan Fishing v Sandiko (1937)
Facts: Manuel Tabora is the registered owner of 4 parcels of land in Cagayan. He
executed 3 mortgages over the land as a security for the loans he acquired from
these persons. He later sold the land for one peso to Cagayan Fishing, which was
under the process of incorporation. Cagayan Fishing filed its AOI with the Bureau
of Commerce and Industry. A year after, the company sold to Sandiko the four
parcels of land. When Sandiko failed to pay, Cagayan Fishing sued Sandiko
Held: The sale is invalid because the company was not yet incorporated when it
entered into the contract of sale with Tabora hence it could not have sold the
property to Sadiko. But before a corporation may be said to be lawfully organized,
many things have to be done. Among other things, the law requires the filing of
articles of incorporation. Although there is a presumption that all the requirements
of law have been complied with, in this case, Cagayan Fishing was not yet
incorporated when it entered into/the contract of sale. The contract itself referred
to the plaintiff as "una sociedad en vias de incrporacion." It was not even a de
facto corporation at the time. Not being in legal existence then, it did not possess
juridical capacity to enter into the contract.
CORPORATION | PROF. G. DEE | CALLUENG
A corporation, until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract, unless so
authorized by the charter. Until organized as authorized by the charter there is not
a corporation, nor does it possess franchises or faculties for it or others to exercise,
until it acquires a complete existence."
Builders Duralle v Dunn (1929)
Facts: SAMUELS intended to organize a corporation engaged in the business of
manufacturing duntiles. He transacted business with an agent of DUNN
Manufacturing Co.. The agent insisted that SAMUELS place the order for the
machinery first before organizing the corporation. SAMUELS entered into a
contract with DUNN in which DUNN will provide the machinery for making duntile
and supply a service man to operate the machinery. It was SAMUELS who paid for
the machinery. After the contract was executed, BUILDERS’ Duntile Co. was
organized as a corporation and commenced the manufacturing of duntiles. The
duntiles turned out to be of inferior quality. BUILDERS filed an action against DUNN
to recover on the contract executed by SAMUELS.
Held: The power of a corporation to adopt the contracts of its promoter is limited to
contracts that the corporation would be authorized to make after its organization.
Builders can sue Dunn. Although there was no formal assignment of the contract
to BUILDERS, it performed acts which were an adoption of the contract entered into
by SAMUELS. When the corporation was organized, the incoporators of BUILDERS
took over the operations of the business and ratified all contracts that have been
done on its behalf. SAMUELS was given stock to the amount of his expenditures.
Rizal Light v PSC and Morong Electric (1968)
Facts: MORONG Electric filed an application for a CPCN with the PSC on Sept. 10,
1962. RIZAL LIGHT filed a motion with the PSC asking for the dismissal of
MORONG’s application on the ground that MORONG had no legal personality when
it filed its application because the SEC issued its certificate of incorporation only
on Oct. 17, 1962. RIZAL claims that since a franchise is a contract, at least two
competent parties are necessary to its execution. MORONG had no legal
personality when it filed its application. Thus, the franchise granted to it on May 6,
1962 when it was not yet in existence is void. MORONG claims that it had capacity
to apply for a franchise because it was a de facto corporation.
Held: The grant of a franchise to a corporation prior to its organization does not
affect the validity of the grant but does not take effect until such corporation is
finally organized. Here, MORONG did not have legal personality at the time it filed
its application with the PSC. However, MORONG’s subsequent incorporation and
its acceptance of the franchise, not only perfected a contract but also cured the
deficiency in the application of MORONG.
Quaker Hill v Parr (1961)
Facts: Quaker Hill, a New York corporation acting through a local agent, made a
sale to a Denver Nursery, Inc. a corporation to be formed. The Denver Memorial
Nursery, Inc. was never formed. Because of name confusion, this corporation was
called Mountain View Nurseries, Inc.. Quaker Hill later accepted Mountain View
Nurseries after formation of the latter. The contract imposed no obligation on
defendants to form the corporation nor did it name them as obligors on the note or
as promisees in the contract.
Held: Generally, promoters are personally liable on their contracts, though made
on behalf of a corporation to be formed. A well-recognized exception to this general
rule, however, is that if the contract is made on behalf of the corporation and the
other party agrees to look to the corporation and not to the promoters for payment,
the promoters incur no personal liability. No personal liability on the part of the
promoters in this case, as it was clearly established the intent on the part of the
plaintiff to contract with the corporation and not with the individual defendants.
Compensation of Promoters
1. Share in corporate earnings as future stockholders
2. Compensation for their services
Is the corporation liable to pay the promoter’s compensation?
GR: Corporation is not liable to pay such compensation because this would be an
imposition on innocent investors.
- The promoter is deemed as having given his service on the chance of his being
able to get a reward from the corporation after it is formed.
XPN: A corporation may become liable to pay such compensation after it is formed:
a. if it expressly promises to do so; or
23

b. Where the promoters’ services are performed partly before and partly after
incorporation, and the corporation takes the benefits thereof. The corporation
becomes liable not only for those rendered after, but also for those rendered before
the incorporation
Sec. 7 of the Securities Act authorizes a promotion fee if it is provided for in the
registration statement of the securities involved. The amount of such fees will
depend principally on the effort exerted, the difficulties encountered and the
expenses incurred in promoting and organizing the corporation.
Compensation may be in:
a. cash
b. shares of stock – the fair value of the services should at least be equal to the par
or issued value of the shares
Fiduciary Relationship between Corporation and Promoter
- The promoters of the corporation are mainly responsible for its financing and
organization and as such, are under duty to exercise good faith and fairness in all
their acts and transactions.
- When a promoter takes options or title to property in his name but for the benefit
of the corporation, he should not, in passing title to the corporation make secret
profits at the expense of the corporation.
- If he does, he will have to account for all such profits to the corporation when
formed.
Old Dominion Copper Mining and Smelting Co. v Bigelow
Facts: Bigelow and his associate, Lewisohn, framed a scheme for the capitalization
of plaintiff corporation, of which they are promoters, for $3.75M. They sold their
properties (intrinsically worth $1M with market value not exceeding $2M) to
plaintiff for $3.25M, while at the same time acting as trustees for the latter in their
capacity as directors, in order to obtain 130,000 of 150,000 shares of the
corporation. Plaintiff corporation, founding their action on breach of trust, seeks to
recover the secret profit derived by Bigelow from such transaction
Held: A promoter stands in a fiduciary relation to the corporation in which he is
interested, and he is charged with all the duties of good faith which attach to other
trusts. Persons who act as promoters of a corporation do not necessarily cease to
be such when the corporation is organized to do business. So long as there are
prospective original subscribers for stock and the promoters and those concerting
with them remain in control of the corporation, the corporation is in a position to
be deceived. In this case, the fiduciary position of Bigelow and Lewisohn towards
the company does not mean that they stood in such a relation only to the directors
and signatories at the time they made the transactions in question. It means that
they stood in a fiduciary relation to the future allottees of shares – to the persons
who were invited to come and take up the shares of the company
Chapter VI. Corporate Powers
General Powers of Corporations
Sec. 36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
1. To sue and be sued in its corporate name;
2. Of succession by its corporate name for the period of time stated in the
articles of incorporation and the certificate of incorporation;
3. To adopt and use a corporate seal;
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
5. To adopt by-laws, not contrary to law, morals, or public policy, and to amend
or repeal the same in accordance with this Code;
6. In case of stock corporations, to issue or sell stocks to subscribers and to
sell treasury stocks in accordance with the provisions of this Code; and to admit
members to the corporation if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other corporations as provided in
this Code;
9. To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: Provided,
CORPORATION | PROF. G. DEE | CALLUENG
That no corporation, domestic or foreign, shall give donations in aid of any
political party or candidate or for purposes of partisan political activity;
10. To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees; and
11. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation.
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall
possess or exercise any corporate powers except those conferred by this Code
or by its articles of incorporation and except such as are necessary or incidental
to the exercise of the powers so conferred. (n)
Classification of Corporate Powers:
1. Expressed by law
2. Necessary to the exercise of the express or incidental powers
3. Incidental to its existence
Two General Restrictions on the Power of any Corporation to Purchase and Hold
Properties, whether real or personal:
1. Such property must be reasonable and necessarily required by the transaction
of its lawful business, and
2. Such power be subject to the limitations prescribed by law and the Constitution
Constitutional Restrictions:
1. A corporation cannot acquire available public lands, except by lease of not more
than 1000 has.
2. Exploration, development, exploitation or utilization of the natural resources are
limited to citizens and corporations at least 60% of the capital of which is owned
by citizens, and only in a joint venture with the State
Restrictions in Special Laws
1. General Banking Act limits the right of any corporation to own shares of stock in
a single bank to 30% of the latter’s voting stocks
2. Insurance Code limits the power of an insurance company to purchase and hold
real property to the lot and building thereon in which the company conducts and
carries on its business
- XPN: Life insurance companies can acquire property to construct housing projects
or for the production of income, provided that the investment does not exceed
prescribed percentage of assets
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
The general powers granted by Sec. 36 are to be exercised by the BoD, unless
otherwise provided by the Code.
Specific Powers
Sec. 37. Power to extend or shorten corporate term. - A private corporation may
extend or shorten its term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or trustees and ratified at
a meeting by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the members in case
of non-stock corporations. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right under the conditions
provided in this code. (n)
Sec. 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital
stock or incur, create or increase any bonded indebtedness unless approved by
a majority vote of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating
24

or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence
as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance by
the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That
the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time
of the filing of the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual cash to
the corporation or that there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%) percent of the subscription:
Provided, further, That no decrease of the capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase
the same, with the approval by a majority vote of the board of trustees and of at
least two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of incorporation or an
amendment thereto: Provided, That such pre-emptive right shall not extend to
shares to be issued in compliance with laws requiring stock offerings or
minimum stock ownership by the public; or to shares to be issued in good faith
with the approval of the stockholders representing two-thirds (2/3) of the
outstanding capital stock, in exchange for property needed for corporate
purposes or in payment of a previously contracted debt.
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors
or trustees may deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or member's meeting duly called for
CORPORATION | PROF. G. DEE | CALLUENG
the purpose. Written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it
was incorporated.
After such authorization or approval by the stockholders or members, the board
of directors or trustees may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of property and assets,
subject to the rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business of
said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by this section. (28
1/2a)
Sec. 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares
to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code. (n)
Sec. 42. Power to invest corporate funds in another corporation or business or
for any other purpose. - Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or by at least two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary. (17 1/2a)
Sec. 43. Power to declare dividends. - The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval
of stockholders representing not less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet
been secured; or (3) when it can be clearly shown that such retention is
25

necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies. (n)
Sec. 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock, or
by at least a majority of the members in the case of a non-stock corporation, of
both the managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the
managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3) of
the total outstanding capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any one
term.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially all
of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however, That
such service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered
into for such periods as may be provided by the pertinent laws or regulations.
(n)
On acquisition of shares or securities of another corporation:
As long as the stock bought by the corporation are those of another corporation
engaged in a business which is allied or important to the business of the first
corporation, the act should be within powers of such corporation.
GR: When the other corporation’s business is alien to its purposes, such an
investment would be ultra vires
XPN: the articles of incorporation are first amended to include the power to acquire
shares in another corporation.
The power of a corporation to invest in another business should not be interpreted
to mean that a corporation can enter into a partnership contract.
- In a partnership, each partner can bind the partnership by a contract in the
ordinary course of business. This runs counter to the legal rule that the corporation
can act only through its board of directors, or through persons authorized by such
board.
- A corporation can enter into a joint venture with another person, partnership or
corporation as long as the venture is within its express or implied purpose.
Implied powers
Sec. 36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
xxx
11. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation.
Sec. 45. Ultra vires acts of corporations. - No corporation under this Code shall
possess or exercise any corporate powers .. except such as are necessary or
incidental to the exercise of the powers so conferred. (n)
A corporation is presumed to act within its powers and when a contract is not on its
face necessarily beyond its authority it will, in the absence of proof to the contrary,
presumed to be valid.
The Ultra Vires Doctrine
Where the acts are clearly beyond the powers of the corporation, the legal
consequences are:
1. On the corporation itself – The corporation may be dissolved under a quo
warranto proceeding instituted by the Solicitor General. (Rule 66.2)
CORPORATION | PROF. G. DEE | CALLUENG
- SC has been reluctant to impose penalty of dissolution and in most cases, merely
enjoined the further commission of the ultra vires acts.
- PD 902-A: The SEC may suspend or revoke the certificate of registration of any
corporation on any of the grounds provided by existing law, which would include
the commission of ultra vires act.
2. On the immediate parties to the ultra vires contract –
a. Where the contract has been fully executed on both sides: The parties will be left
as they are and no resolution or rescission of the contract will be granted to deprive
either party of what he has acquired under it. Neither party can ask for specific
performance
b. Where one party has performed his part and the other has not: The latter, having
benefited from the former’s performance, is estopped from claiming that the
contract is ultra vires and the contract will be enforced, provided it is not illegal
3. On the rights of the stockholders – A stockholder may bring either an individual
or derivative suit to enjoin a threatened ultra vires act or contract.
- If the contract or act has already been performed: a derivative suit of damages
against the directors may be filed, but their liability will depend on whether they
acted in good faith and with reasonable diligence in entering into the contracts. An
honest mistake committed in the exercise of their business judgment will not give
rise to liability
- Where the suit against a corporation is based on tort, it cannot set up the defense
of ultra vires against the injured party who had no knowledge that the corporation
was engaging in an act not expressly or impliedly in its purpose clause
Note: A transaction which is merely ultra vires and not malum in se or malum
prohibitum although it may be made by the state a basis for the forfeiture of the
corporate charter or the dissolution of the corporation, is, if performed by one party,
not void as between the parties to all intents and purposes, and that an action may
be brought directly upon the transaction and relief had according to its terms."
GR: Ultra vires acts may become binding by the ratification of all the stockholders
XPN: Third parties are prejudiced thereby, or the act is illegal
RP v Acoje Mining (1963)
Facts: Acoje Mining Co. requested the opening of a post, telegraph, and money
order offices to be set up in its mining camp in Sta. Cruz, Zambales for the benefit
of its employees and their families. The Director of Posts replied that the request
will be granted upon compliance with the specific requirements which the company
agreed. Acejo’s Board of Directors passed a resolution accepting full responsibility
for all cash received by the Postmaster. One day, the postmaster went on a 3-day
leave and never returned. It was found that the postmaster had a shortage of PHP
13,867. The government filed complaint against Acoje for the recovery of the
amount. Acoje denied liability and contended that the resolution of the board of
directors making it responsible for the acts of the postmaster was ultra vires since
the company had no authority to act on a matter which may render it liable as a
guarantor
Held: Acoje was liable. While as a rule an ultra vires act is one committed outside
the object for which a corporation is created as defined by the law of its
organization and beyond the powers conferred upon it by law, there are certain
corporate acts that may be performed outside the scope of the powers expressly
conferred if they are necessary to promote the interest or welfare of the corporation.
Here, the establishment of the local post office is a reasonable and proper adjunct
to the conduct of the business of Acejo. Such post office is a vital improvement in
the living condition of its employees and laborers who came to settle in its mining
camp which is far removed from postal facilities or means of communication
accorded to people living in cities.
Even if the resolution is ultra vires, such cannot be considered void for it was not in
contravention of law, customs, public order, or public policy. Ultra vires act should
be distinguished from illegal act for the former is merely voidable which may be
enforced by performance, ratification, or estoppel, while the latter is void and
cannot be validated. Being merely voidable, ultra vires acts can be enforced or
validated if there are equitable grounds for taking such action. Where the ultra vires
transaction has been executed by the other party and the corporation has received
the benefit of it, the law interposes an estoppel, and will not permit the validity of
the transaction or contract to be questioned. In the present case, the resolution
should be approved on the ground of estoppel.
26

Carlos v Mindoro Sugar (1932)
Facts: The Board of Directors of the Philippine Trust Company (PTC) adopted a
resolution authorizing its president, among other things: to purchase the bonds the
Mindoro Sugar Company (MSC) was about to issue, to resell them and to guarantee
to the Philippine National Bank the payment of the indebtedness to said bank by
the MSC. Upon presentation of the coupons, PTC paid Carlos the stipulated
interest from the date of their maturity then it stopped payments. This is an action
by Carlos to recover the value of 4 bonds due and unpaid interest thereon, issued
by the MSC and placed in trust with the PTC.
Held: It is not ultra vires for a corporation to enter into contracts of guaranty or
suretyship where it does so in the legitimate furtherance of its purposes and
business. And it is well settled that where a corporation acquires commercial paper
or bonds in the legitimate transaction of its business it may sell them, and in
furtherance of such a sale it may, in order to make them the more readily
marketable, indorse or guarantee their payment. PTC, although secondarily
engaged in banking, was primarily organized as a trust corporation with full power
to acquire personal property such as the bonds in question according to both the
Corporation Law and its by-laws and Articles. That being thus authorized to acquire
the bonds, it was given implied power to guarantee them in order to place them
upon the market under better, more advantageous conditions, and secure the
profit derived from their sale.
Even in the supposition that the PTC did not acquire the bonds in question, but only
guaranteed them, the guarantee of these bonds would still be valid and the said
corporation would still be bound to pay Carlos since it is already estopped from
denying the validity of its guarantee.
Republic v El Hogar
Facts: El Hogar purchased 1,413 sqm of land in City of Manila. It demolished the
50 y.o. structure on the land and built a 5-story reinforced concrete building. El
Hogar only used 324 sqm of floor space for its own offices (10%) and rented the
remaining 3, 175 sqm to other persons and entities. The Government argues that
the acquisition, construction of the new office building, and subsequent renting to
third persons are ultra vires acts on part of El Hogar
Held: NOT ultra vires. Under Sec. 13 (5) of the Corporation Law, every corporation
has the power to purchase, hold, lease such real property as the transaction of the
lawful business of the corporation may reasonably and necessary require. As to the
land: When El Hogar acquired the property in 1916, its business had developed
and its future prospects justified the director in acquiring the lot in a financial
district. 1,413 sqm was not in excess of its reasonable requirements. As to the
building: Since the lot was lawfully acquired by El Hogar, as owner, it is entitled to
the full beneficial use thereof. An intention to discriminate between owners (others
vs. a corporation) is not lightly to be imputed to the legislature. There is nothing in
the Constitution, charter of the association or statutes placing any limitation upon
the character of a building which a corporation may erect in which to conduct its
business. A corporation expects its business to grow and expand from time to time
and it would be short-sighted not to make a provision for future expansions.
Facts: El Hogar is engaging in activities foreign to the purposes for which the
corporation was created and not reasonably necessary to its legitimate ends such
as: Administration of offices in the El Hogar building not used by El Hogar and
renting out such offices to the public; administration and management of
properties belonging to delinquent shareholders of the association; administration
and management of some parcels of improved real estate in MNL not under
mortgage to it but owned by shareholders. Services rendered: renting of the same,
payment of taxes, repairs for upkeep and collecting rent for a commission of 0.5%-
5%
Held: Only the third activity is unauthorized by law. Administration of property in
this manner is more befitting to the business of a real estate agent or trust company
than to the business of a building and loan association. Corporations only possess
such express powers as are actually conferred and such implied powers as are
reasonably necessary to the exercise of the express powers. The management and
administration of the property of the shareholders of the corporation is not
expressly authorized by law, and these activities are not necessary to the exercise
of any of the granted powers. The corporation has clearly extended itself beyond
the legitimate range of its powers. But it does not result that the dissolution of the
CORPORATION | PROF. G. DEE | CALLUENG
corporation is in order, and it will merely be enjoined from further activities of this
sort.
Facts: The corporation has been giving to Melian – its promoter/founder – under
the provisions of its by-laws 5% of the yearly net profits and will continue to do so
for the full 50 year period of its term, and under which Melian has received a total
sum of P615, 843. This amount is unconscionable, excessive and out of proportion
to the services and is incompatible with the spirit and purpose of building and loan
association.
Held: The corporation and Melian entered into a written agreement whereby Melian
would undertake to pay for his own account, all the expenses incurred in the
organization of the corporation and lend P6,000 for meeting initial expenses of the
corporation (like rent, office supplies). It is not alleged that the making of this
contract was ultra vires nor is it alleged that it was vitiated by fraud. There is no
doubt that a corporation has the power to contract for services rendered and to be
rendered by a promoter in connection with organizing and maintain the
corporation.
Facts: Articles 70 and 76 of its by-laws are contrary to law since they only permit
the election or appointment to the board of directors of persons owning P5,000
worth of paid-up shares (as a condition precedent to eligibility to the board) – as a
result, a poor-member or wage earner cannot serve as a director irrespective of
other qualifications.
Held: The law expressly gives the power to the corporation to provide in its by-laws
for the qualifications of directors – the requirement of security (P5,000 shares)
from them for the proper discharge of the duties of their office is highly prudent
and in conformity with good practice. Art. 76 which prohibits directors from making
loans to themselves is designed to prevent looting of the corporation by
unscrupulous directors.
Facts: It pursued a policy of depreciating at a rate of 10% p.a. the value of real
properties acquired by it at sales – a rate which is excessive.
Held: The corporation has the power to allow some depreciation and the board of
directors possesses discretion in this matter. There is no positive law prohibiting
association from writing off a reasonable amount for depreciation of its assets to
determine its real profit. The court cannot undertake to control the discretion of the
board of directors about such an administrative matter. If there is a criticism as to
this practice of depreciation, then the legislature should supply the remedy by
defining the limit of depreciation.
Facts: It maintained out of its profits an unnecessarily large reserve fund classified
into general and special reserve fund instead of distributing its profits among its
members; and it has a policy of paying an annual dividend of 10% regardless of
losses suffered or profits incurred.
Held: The Corporation law does not expressly grant this power but it is to be
implied. Commercial enterprises encounter periods when earnings fall below
average and a prudent manager would make provision for such contingencies.
Contingent funds are merely insurance against possible loss. If reserves
complained of become excessive then the remedy is in the hands of Legislature.
As to the dividends: fluctuations in dividend rates are highly detrimental to any
fiscal institution while uniformity in payments of dividends, continued over long
periods, supplies the surest of foundation of public confidence.
Facts: It has made loans which, to the knowledge of the association’s officers, were
intended to be used by borrowers for other purposes than building of homes and
thus have illegally departed from its charter. Some were used to improve
agricultural properties consisting of coconut groves, sugar land, and rice land;
some for city property or unimproved city lots.
Held: Extending loan of their money to investor or dealer in real estate is not an
abuse of their power but only a natural and proper expansion along healthy and
legitimate lines. […] there is no duty or obligation on part of the association to
inquire for what purpose the loan is obtained…
27

National Power Corp v Vera (1989)
Facts: Sea Lion, an expired contract holder of NPC’s stevedoring services, filed for
prohibition and mandamus against NPC because the latter did not renew its
contract and it actually took over its own stevedoring services. The lower court
ordered NPC to either renew the contract or conduct a public bidding since NPC’s
charter did not empower it to engage in stevedoring and arrastre services.
Held: In determining WON an NPC act falls within the purview of the above
provision, the Court must decide WON a logical and necessary relation exists
between the act questioned and the corporate purpose expressed in the NPC
charter. For if that act is one which is lawful in itself and not otherwise prohibited,
and is done for the purpose of serving corporate ends, and reasonably contributes
to the promotion of those ends in a substantial and not in a remote and fanciful
sense, it may be fairly considered within the corporation's charter powers. In this
case, NPC was actually empowered by its charter to unload coal shipments into the
NPC pier for its eventual conveyance to the power plant, which are incidental and
indispensable to the operation of the plant.
Madrigal v Zamora
Facts: Madrigal Central Office Employees Union sought for the renewal of its CBA
demanding a wage increase, allowance, and other economic benefits. Madrigal,
instead, reduced its capital stock twice and ask that it may reorganize itself as it
was not doing financially well. Union filed for an illegal lockout complaint. Madrigal
argues that it experienced losses as profits it earned were in the nature of dividends
"declared on its shareholdings in other companies in the earning of which the
employees had no participation whatsoever." "Cash dividends," according to it,
"are the absolute property of the stockholders and cannot be made available for
disposition if only to meet the employees' economic demands.
Held: Madrigal’s capital reduction efforts were a subterfuge or deception to
camouflage the fact that it had been making profits, and consequently, to justify
the mass layoff in its employee ranks, especially of union members. It is incorrect
to say that such profits - in the form of dividends - are beyond the reach of
Madrigal’s creditors since Madrigal had received them as compensation for its
management services in favor of the companies it managed as a shareholder
thereof.
As such shareholder, the dividends paid to it were its own money, which may then
be available for wage increments. It is not a case of a corporation distributing
dividends in favor of its stockholders, in which case, such dividends would be the
absolute property of the stockholders and hence, out of reach by creditors of the
corporation. Here, Madrigal was acting as stockholder itself, hence the right to a
share in such dividends, by way of salary increases, may not be denied its
employees.
Pirovano v Dela Rama (1954)
Facts: This case involves a donation of life insurance proceeds made by the
Company in favor of the minor children of its late President and General Manager,
Enrico Pirovano. The minor children seek the enforcement of the Board Resolutions
granting the donation. The Company argues that such Resolutions were ultra vires.
Alternatively, if the Resolutions are valid, payment has not yet become due and
demandable.
Held: The donation was within the powers of the corporation as expressly provided
in its charter: to deal with moneys not immediately required when they were given
away. Moreover, the company had previously made donations to other persons.
There was no distinction between the current donation and these earlier acts of
generosity, some motivated by moral or political interest.
Granting arguendo that the donation is ultra vires, it cannot be invalidated as it
represents not only the act of the Board of Directors but of the stockholders, as
expressly ratified in a RESOLUTION duly approved by the latter. By this ratification,
any infirmity has been obliterated especially as the donation has been executed
and consummated, and any creditors affected had expressly given their conformity.
On the nature of ultra vires acts, these may be either
(a) one performed merely outside the scope of the powers granted by the Articles
(ultra vires); or
(b) one which is contrary to law, or violative of any principle which will void any
contract whether done individually or collectively (illegal).
Illegal acts cannot serve as basis of a court action while ultra vires acts are voidable
and may be binding and enforceable when ratified by the stockholders.
It is not contended that the donation is illegal, or contrary to any express provision
of the Articles, or prejudicial to the creditors. Hence, the donation even if ultra vires
CORPORATION | PROF. G. DEE | CALLUENG
is not void, and if voidable, its infirmity has been cured by ratification and
subsequent acts of the COMPANY.
Harden v Benguet (1933)
Facts: A contract, formally authorized by the management of Benguet and Balatoc
was executed, the principal features of which were that Benguet was (1) to proceed
with the development and construct a milling plant for the Balatoc mine, (2) to
erect an appropriate power plant, and (3) to receive from the treasurer of Balatoc
shares of a par value of P600,000. Harden filed a complaint arguing that it is
unlawful for the Benguet Company to hold any interest in a mining corporation and
that the contract by which the interest here in question was acquired must be
annulled, with the consequent obliteration of the certificate issued to the Benguet
Company and the corresponding enrichment of the shareholders of the Balatoc
Company.
Held: The Corporation Code states that If the violation is committed by a
corporation, the same shall, upon such violation being proved be dissolved by quo
warranto proceedings instituted by the Attorney-General or by any provincial fiscal
by order of said Attorney-General. Harden cannot maintain an action against
Benguet. Moreover, Benguet, as a corporation, may exercise every act of ownership
over (such lands); it may sue in ejectment or unlawful detainer and it may demand
specific performance. It has an absolute title against all the world except the State
after a proper proceeding is begun in a court of law. x x x The Attorney General is
the exclusive officer in whom is confided the right to initiate proceedings for
escheat or attack the right of a corporation to hold land.
Stonehill v Diokno
Facts: Stonehill sought to declare 42 search warrants null and void as contravening
the Constitution and the Rules of Court. The documents, papers and things seized
may be split into two major groups, namely: (a) those found and seized in the
offices of the aforementioned corporations and (b) those found seized in the
residences of the petitioners therein.
Held Petitioners herein have no cause of action to assail the legality of the
contested warrants and of the seizures made in pursuance thereof, for the simple
reason that said corporations have their respective personalities, separate and
distinct from the personality of herein petitioners, regardless of the amount of
shares of stock or of the interest of each of them in said corporations, and whatever
the offices they hold therein may be. Indeed, it is well settled that the legality of a
seizure can be contested only by the party whose rights have been impaired
thereby, and that the objection to an unlawful search and seizure is
purely personal and cannot be availed of by third parties. Consequently,
petitioners herein may not validly object to the use in evidence against them of the
documents, papers and things seized from the offices and premises of the
corporations adverted to above, since the right to object to the admission of said
papers in evidence belongs exclusively to the corporations, to whom the seized
effects belong, and may not be invoked by the corporate officers in proceedings
against them in their individual capacity
Bache & Co v Ruiz
Facts: Ruiz was hearing a certain case when Revenue Examiner De Leon and his
witness went to the CFI with their documents. Judge instructed his Deputy Clerk to
take the depositions on De Leon and Logronio and afterwards, Judge asked Logroni
to take the oath and warned him that if his deposition was found to be false he
would be charged of perjury. Judge signed the application for search warrant which
was used to seize the boxes of documents from Bache & Co. Bache & Co. contends
that the seized documents should not be used as evidence to enforce a tax
assessment. CIR argues that as a corporation, it is not entitled to protection
against unreasonable search and seizure
Held: A corporation is, after all, but an association of individuals under an assumed
name and with a distinct legal entity. In organizing itself as a collective body it
waives no constitutional immunities appropriate to such body. Its property cannot
be taken without compensation. It can only be proceeded against by due process
of law, and is protected, under the 14th Amendment, against unlawful
discrimination
In the Stonehill case only the officers of the various corporations in whose offices
documents, papers and effects were searched and seized were the petitioners. In
the case at bar, the corporation to whom the seized documents belong, and whose
rights have thereby been impaired, is itself a petitioner. On that score, petitioner
corporation here stands on a different footing from the corporations in Stonehill.
28

On moral damages:
GR: A corporation is not entitled moral damages because it does not have any
feelings.
XPN: Civil Code did not distinguish between natural and juridical persons on moral
damages for libel charges
Mambulao Lumber v PNB
Facts: PNB foreclosed mortgages of Mambulao after it defaulted payment.
Mambulao alleges the validity of the foreclosure of the chattel mortgage, the venue
of the foreclosure sale, as well as the payment of attorney’s fees stating that the
foreclosure of the real mortgages extinguished loan obligation. Mambulao also
asks for moral damages
Held: An artificial person like a corporation cannot experience physical sufferings,
mental anguish, fright, serious anxiety, wounded feelings, moral shock or social
humiliation which are the basis of moral damages. However, a corporation may
have a good reputation which, if besmirched, may also be a ground for the award
of moral damages. (obiter accdg to ABSCBN case)
This is not applicable in this case, not only because Mambulao had already ceased
in its business operation at the time of the foreclosure sale of the chattels, but also
for the reason that whatever adverse effect the foreclosure sale of the chattels
could have upon its reputation or business standing would undoubtedly be the
same whether the sale was conducted at Jose Panganiban. Camarines Norte, or in
Manila which is the place agreed upon by the parties in the mortgage contract.
LBC Express v CA (1994)
Facts: Carloto, President of Rural Bank of Labason, filed an action for damages,
both in his personal capacity and with Rural Bank as one of his plaintiffs after
failing to receive the PHP 1000 cashback sent to him by his sister thru LBC.
Held: Moral damages are granted in recompense for physical suffering, mental
anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation. A corporation, being an artificial person and having
existence only in legal contemplation, has no feelings, no emotions, no sense;
therefore, it cannot experience physical suffering and mental anguish. Mental
suffering can only be experienced by one having a nervous system and it flows from
real ills, sorrows, and all griefs of life—all of which cannot be suffered by the
corporation.
ABS-CBN Broadcasting v CA
Facts: ABS-CBN and VIVA executed a Film Exhibition Agreement whereby the latter
gave the former an exclusive right to exhibit 24 VIVA Films for TV telecast. Later,
VIVA, through Vincent del Rosario, offered ABS-CBN a list of 3 film packages (36
titles) from which the latter may exercise its right of first refusal under their
agreement. ABS-CBN ticked off 10 titles therefrom. Del Rosario offered ABS-CBN
airing rights over a package of 104 movies for P60 million. In April, 1992, Del
Rosario, and Eugenio Lopez of ABS-CBN, met at a restaurant to discuss the
package proposal. According to Lopez, however, what they agreed upon was ABS-
CBN's exclusive film rights to 14 films for P36 million. Del Rosario denied the
same. He insisted that the discussion was on VIVA's offer of 104 films for P60
million, to which ABS-CBN later made a counter proposal but rejected by VIVA's
Board of Directors. Hence, VIVA later granted RBS the exclusive right to air the 104
VIVA films, including the 14 films supposedly granted to ABS-CBN. ABS-CBN then
filed a complaint for specific performance with prayer for injunction.
Held: The agreement in the restaurant between Mr. Lopez and Del Rosario was not
a binding agreement. It is as it should be because corporate power to enter into a
contract is lodged in the Board of Directors. (Sec. 23, Corporation Code). Without
such board approval by the Viva board, whatever agreement Lopez and Del Rosario
arrived at could not ripen into a valid contract binding upon Viva.
Also, the award of moral damages cannot be granted in favor of a corporation
because, being an artificial person and having existence only in legal
contemplation, it has no feelings, no emotions, no senses. It cannot, therefore,
experience physical suffering and mental anguish which can be experienced only
by one having a nervous system.
Filipinas Broadcasting Network v Ago Medical and Educational Center
Facts: Ago Medical (AMEC) filed a libel charges against Filipinas Broadcasting
(FBNI) after the latter broadcasted in its show, Expose, that AMEC is a dumping
ground garbage of moral and physical misfits.
CORPORATION | PROF. G. DEE | CALLUENG
Held: AMEC's claim for moral damages falls under item 7 of Article 2219 of the
Civil Code. This provision expressly authorizes the recovery of moral damages in
cases of libel, slander or any other form of defamation. Article 2219(7) does not
qualify whether the plaintiff is a natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain for libel or any other form of
defamation and claim for moral damages.
Chapter VII Control and Management of Corporation
Allocation of Control
Three levels of control
1. Board of Directors / Trustees – governing body of a corporation responsible for
corporate policies and the general management of the business and affairs of the
corporation
- exercise almost all corporate powers, lays down all corporate business policies
and is responsible for the efficiency of management
NOTE: Non-stock corporations generally call their board – board of trustees but
Sec. 138 provides that non-stock corporations, educational and religious
corporations may designate their governing boards by any other name
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified. (28a)
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the
books of the corporation. Any director who ceases to be the owner of at least
one (1) share of the capital stock of the corporation of which he is a director
shall thereby cease to be a director. Trustees of non-stock corporations must
be members thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
Sec. 108. Board of trustees. - Trustees of educational institutions organized as
non-stock corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the
board of trustees of incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify themselves that the term of
office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a
particular term, shall hold office only for the unexpired period. Trustees elected
thereafter to fill vacancies caused by expiration of term shall hold office for five
(5) years. A majority of the trustees shall constitute a quorum for the transaction
of business. The powers and authority of trustees shall be defined in the by-
laws.
For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations. (169a)
GR: SHs or members have no right to interfere with the board’s exercise of its
powers and functions
XPN: Provided by law such as in removal of director, amendment of AOI and other
major changes
- SHs’ or members’ resolutions dealing with matters other than the exceptions are
not legally effective nor binding on the board, and may be treated as merely
advisory or may be disregarded
- In the case where the BOD fails to observe the reasonable degree of care and
vigilance while the surrounding circumstances reasonably impose, the corporation
may be held liable on tort and may be liable to pay damages caused to third
persons.
- It is also liable whenever a tortious act is committed by an officer or agent who
acts under direction or authority from the board
1. Board must act as a body in a meeting
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 CORPORATION | PROF. G. DEE | CALLUENG

Sec. 25. Corporate officers, quorum. - Immediately after their election, the XPN: An individual director or trustee may expressly or impliedly waive such
directors of a corporation must formally organize by the election of a president, requirement
who shall be a director, a treasurer who may or may not be a director, a
secretary who shall be a resident and citizen of the Philippines, and such other b. Place of meeting
officers as may be provided for in the by-laws. Any two (2) or more positions GR: Anywhere even outside the Philippines
may be held concurrently by the same person, except that no one shall act as XPN: By-laws stipulate limitations
president and secretary or as president and treasurer at the same time.
c. Quorum and Vote
The directors or trustees and officers to be elected shall perform the duties
enjoined on them by law and the by-laws of the corporation. Unless the articles QUORUM VOTE
of incorporation or the by-laws provide for a greater majority, a majority of the General majority (50%+1) Majority of the directors or
number of directors or trustees as fixed in the articles of incorporation shall of the number of directors trustees present at a
Valid Corporate
constitute a quorum for the transaction of corporate business, and every or trustees, unless AOI or meeting where there is
Act
decision of at least a majority of the directors or trustees present at a meeting by-laws provide for a quorum
at which there is a quorum shall be valid as a corporate act, except for the greater majority
election of officers which shall require the vote of a majority of all the members Election of Presence of ALL directors Majority of all the members
of the board. officers or trustees of the board
Directors or trustees cannot attend or vote by proxy at board meetings. (33a)
A director must be personally present in order to be counted in the quorum. He
A corporation is bound by a contract of an unauthorized officer where cannot be represented by a proxy. Proxies can only participate in the discussion
1. the majority of the directors know of it and
2. take advantage of the benefits thereof d. Agenda
Notice of meeting must contain purpose and other matters to be taken up
GR: A third person who acts in good faith cannot be prejudiced by the fact that the Extraordinary matters not mentioned in the notice cannot be validly acted upon
directors did not act in accordance with the requirements of the law, if such third against the objection of a director
person was led to believe or had the right to presume, under the circumstances,
that the act involved was duly authorized by the board. GR: Other matters are only that which are routine and ordinary; significant matters
- SHs or dissenting director can question the validity of any irregular act done by must be expressly stated in the agenda
the board where the requirements of law have not been complied with AND hold XPN: If all directors are present and agree to take extraordinary matters up
the persons responsible for such irregularity liable for any damage suffered by the
corporation as a result thereof e. Presiding Officer
GR: President of the corporation shall preside at all meetings of the directors or
2. Requirements of meeting trustees as well as SHs or members
Sec. 53. Regular and special meetings of directors or trustees. - Regular XPN: Unless by-laws otherwise provide
meetings of the board of directors or trustees of every corporation shall be held
monthly, unless the by-laws provide otherwise. 3. Close Corporations
Sec. 97. Articles of incorporation. - The articles of incorporation of a close
Special meetings of the board of directors or trustees may be held at any time corporation may provide:
upon the call of the president or as provided in the by-laws. 1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
Meetings of directors or trustees of corporations may be held anywhere in or subject to the provisions of the following section;
outside of the Philippines, unless the by-laws provide otherwise. Notice of 2. For a classification of directors into one or more classes, each of whom may
regular or special meetings stating the date, time and place of the meeting be voted for and elected solely by a particular class of stock; and
must be sent to every director or trustee at least one (1) day prior to the 3. For a greater quorum or voting requirements in meetings of stockholders or
scheduled meeting, unless otherwise provided by the by-laws. A director or directors than those provided in this Code.
trustee may waive this requirement, either expressly or impliedly. (n)
The articles of incorporation of a close corporation may provide that the
Sec. 54. Who shall preside at meetings. - The president shall preside at all business of the corporation shall be managed by the stockholders of the
meetings of the directors or trustee as well as of the stockholders or members, corporation rather than by a board of directors. So long as this provision
unless the by-laws provide otherwise. (n) continues in effect:
1. No meeting of stockholders need be called to elect directors;
Types of Meetings: 2. Unless the context clearly requires otherwise, the stockholders of the
1. Regular – monthly except when by-laws provide corporation shall be deemed to be directors for the purpose of applying the
2. Special – held any time upon the call of president or as provided in the by-laws provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
GR: A board meeting must be properly called in accordance with the law, otherwise directors.
it will not be valid and any action taken therein may be questioned by an objecting
The articles of incorporation may likewise provide that all officers or employees
director or a stockholder, without prejudice however to any right which may have
or that specified officers or employees shall be elected or appointed by the
been acquired by an innocent third person stockholders, instead of by the board of directors.
a. Notice Sec. 101. When board meeting is unnecessary or improperly held. - Unless the
- By-laws may provide for different or additional requirements regarding notice, by-laws provide otherwise, any action by the directors of a close corporation
date and place of board meetings BUT without a meeting shall nevertheless be deemed valid if:
- Board should meet at least once a month 1. Before or after such action is taken, written consent thereto is signed by all
- Notice of any meeting is required and by-laws cannot do away altogether with this the directors; or
requirement 2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or
GR: A director who does not receive the required notice may question the validity 3. The directors are accustomed to take informal action with the express or
of the meeting and of any matter taken therein, without prejudice to the rights of a implied acquiescence of all the stockholders; or
third person who had notice of such irregularity 4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.

30

If a director's meeting is held without proper call or notice, an action taken
therein within the corporate powers is deemed ratified by a director who failed
to attend, unless he promptly files his written objection with the secretary of the
corporation after having knowledge thereof.
- Where innocent third persons are concerned, the corporation—close or
otherwise—should be bound in instances where estoppel or ratification is shown
- Where the close corporation has no board of directors, then the stockholders will
be treated as directors, and shall take charge of management, with the
corresponding duties and responsibilities as such directors.
- In such case, the requirements with respect to meetings of directors would apply
to meetings of stockholders
Ramirez v Orientalist Co and Fernandez (1918)
Facts: Fernandez, as treasurer of The Orientalist Company (a Philippine corporation
maintaining a movie theatre) entered into a contract with Ramirez, who was in the
business of marketing films and distributing films, involving the “ Éclair” and
“Milano” films. Oriental failed to pay. Ramirez filed suit against the company and
Fernandez. The company alleged that Fernandez, in signing, had no authority to
bind the company
Held: The treasurer has authority to bind the company Section 28 of the
Corporation Law states that corporate power shall be exercised, and all corporate
business conducted by the board of directors; The authority of the subordinate
agent of a corporation often depends upon the course of dealings which the
company or its director have sanctioned. It may be established sometimes without
reference to official record of the proceedings of the board, by proof of the usage
which the company had permitted to grow up in business, and of the acquiescence
of the board charged with the duty of supervising and controlling the company's
business.
Lopez v Ericta (1972)
Facts: Dr. Blanco was appointed to the position of ad interim Dean of the UP
College of Education, subject to the approval of the BOR. When voting to elect her
permanently, the BOR voted: 5 for; 3 against; 4 abstentions. After such, the BOR
just agreed to suspend action on the matter, in effect, terminating the ad interim
appointment of Dr. Blanco. An OIC Dean was instated, and so Dr. Blanco filed a
case before the CFI to declare her as Dean
Held: SC ruled against Blanco. An abstention is counted as an affirmative
vote insofar as it may be construed as an acquiescence in the action of those who
vote affirmatively. This manner of counting is obviously based on what is deemed
to be a presumption as to the intent of the one abstaining, namely, to acquiesce in
the action of those who vote affirmatively, but which presumption, being merely
prima facie, would not hold in the face of clear evidence to the contrary. It is
pertinent, therefore, to inquire into the facts and circumstances.
In this case, the members of the Committee to whom the matter was assigned only
abstained because of an understanding that UP President Lopez would ask Dr.
Blanco to withdraw her appointment, instead of the Committee having to
recommend that Dr. Blanco not be appointed, so as not to cause embarrassment
to anybody.
Expert Travel & Tours Inc. v CA (2005)
Facts: KAL filed a complaint against Expert Travel Tours through its resident agent
Atty. Aguinaldo. Expert Travel moved to dismiss arguing that Atty. Aguinaldo was
not authorized to execute the verification and certificate of non-forum shopping.
KAL opposed the motion and stated that Atty. Aguinaldo was its resident agent in
the Philippines and registered as such with the SEC as required by the Corporation
Code. Atty. Aguinaldo likewise claimed to be KAL’s corporate secretary (but the ID
of Aguinaldo showed he was the lawyer of KAL.)
Atty. Aguinaldo claimed he was authorized to file the complaint through a board
resolution approved during a special meeting held on June 25, 1999.
Held: Atty. Aguinaldo is not authorized to execute the verification and certificate of
non-forum shopping. For corporations, the CNFS may be executed by a natural
person specifically authorized for the purpose (either by corporate by laws or
specific act of the board of directors), including its retained counsel, who has
personal knowledge of the facts required to be established by the documents. This
is because unlike natural persons, corporations may perform physical actions only
through properly delegated individuals; namely, its officers and/or agents. The
corporation has no powers except those expressly conferred on it by the
Corporation Code and those that are implied by or are incidental to its existence.
In turn, a corporation exercises said powers through its board of directors and/or
CORPORATION | PROF. G. DEE | CALLUENG
its duly- authorized officers and agents. However, there was no board resolution
executed in this case. Said board resolution was purportedly approved during a
Board of Directors’ teleconference which he and the General Manager attended.
Said teleconference was not alleged in the complaint and was belatedly raised
during the hearing. KAL also does not have a written copy of the Resolution
because no records of board resolutions approved during the teleconference were
kept.
Under the Section 127, in relation to Section 128 of the Corporation Code, a
resident agent’s authority is only to receive, for and in behalf of a foreign
corporation, services and other legal processes and all actions and proceedings
against said corporation. It does not authorize him to execute a CNFS because a
resident agent may not be aware of actions initiated by the principal. While a
resident agent may be aware of actions filed against his principal (a foreign
corporation doing business in the Philippines), such resident may not be aware of
actions initiated by its principal, whether in the Philippines against a domestic
corporation or private individual, or in the country where such corporation was
organized and registered, against a Philippine registered corporation or a Filipino
citizen.
Citibank v Chua (1993)
Facts: Sps. Velez sued Citibank for specific performance. In the pre-trial
conference, counsel for Citibank appeared, presenting a special power of attorney
executed by Citibank officer Florencia Tarriela in favor of Citibank's counsel, the
J.P. Garcia & Associates, to represent and bind Citibank at the pre-trial conference
of the case at bar. Sps. Velez moved to declare Citibank as in default on the ground
that the special power of attorney was not executed by the Board of Directors of
Citibank
Held: As a general rule, all corporate powers are to be exercised by the board of
directors, exceptions are made where the Code provides otherwise. Corporate
powers may be directly conferred upon corporate officers or agents by statute, the
articles of incorporation, the by-laws or by resolution or other act of the board of
directors. In addition, an officer who is not a director may also appoint other agents
when so authorized by the by-laws or by the board of directors. Such are referred to
as express powers. There are also powers incidental to express powers conferred.
It is a fundamental principle in the law of agency that every delegation of authority,
whether general or special, carries with it, unless the contrary be expressed,
implied authority to do all of those acts, naturally and ordinarily done in such cases,
which are reasonably necessary and proper to be done in order to carry into effect
the main authority conferred.
Since the by-laws are a source of authority for corporate officers and agents of the
corporation, a resolution of the Board of Directors of Citibank appointing an
attorney in fact to represent and bind it during the pre-trial conference of the case
at bar is not necessary because its by-laws allow its officers, the Executing Officer
and the Secretary Pro-Tem, to execute a power of attorney to a designated bank
officer, William W. Ferguson in this case, clothing him with authority to direct and
manage corporate affairs.
Prime White Cement v IAC (1993)
Facts: Prime White and Te entered into a dealership agreement where Prime White
will supply Te 20,000 bags of cement monthly in exchange for an exclusive
dealership with Prime White. When Te asked for the performance of the agreement,
Prime White wrote that it can only supply 8,000 bags for every three months. Te
sued for damages.
Held: Te was guilty of disloyalty to the corporation and cannot recover. As a general
rule, all corporate powers shall be exercised by the Board of Directors, except as
otherwise provided by law. The Board may expressly delegate specific powers to
its President or any of its officers. In the absence of such express delegation, a
contract entered into by its President, on behalf of the corporation, may still bind
the corporation if the board should ratify the same expressly or impliedly. Implied
ratification may take various forms — like silence or acquiescence; by acts showing
approval or adoption of the contract; or by acceptance and retention of benefits
flowing therefrom. Furthermore, even in the absence of express or implied
authority by ratification, the President as such may, as a general rule, bind the
corporation by a contract in the ordinary course of business, provided the same is
reasonable under the circumstances.
The situation is quite different where a director or officer is dealing with his own
corporation. In this case Te was not an ordinary stockholder; he was a member of
the Board of Directors and Auditor of the corporation as well. He was what is often
referred to as a "self-dealing" director.
A director holds a position of trust; he owes a duty of loyalty to his corporation. In
case his interests conflict with those of the corporation, he cannot sacrifice the
latter to his own advantage and benefit.
On the other hand, a director's contract with his corporation is not in all instances
void or voidable. If the contract is fair and reasonable under the circumstances, it
31

may be ratified by the stockholders provided a full disclosure of his adverse interest
is made.
Section 32 of the Corporation Code provides: Dealings of directors, trustees or
officers with the corporation. — A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such corporation,
unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting in which the
contract was approved was not necessary to constitute a quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the approval of the
contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been previously
authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding paragraph is absent,
in the case of a contract with a director or trustee, such contract may be ratified by
the vote of the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or of two-thirds (2/3) of the members in a meeting called
for the purpose: Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances."
Boyer-Roxas v CA (1992)
Facts: Heirs of Eugenia V. Roxas, Inc., prayed for the ejectment of Boyer-Roxas et
al from buildings inside the Hidden Valley Springs Resort allegedly owned by the
corporation. Boyer-Roxas alleged that their occupancy came with the blessing of
Eufrocino Roxas, the deceased husband of the decedent Eugenia V. Roxas.
Eufrocino was majority and controlling stockholder of the corporation who actively
managed its affairs while he was alive. The BOD did not object to such
arrangement.
Held: The corporation transacts its business only through its officers or agents.
Whatever authority these officers or agents may have is derived from the board of
directors or other governing body unless conferred by the charter of the
corporation. An officer's power as an agent of the corporation must be sought from
the statute, charter, by-laws or in a delegation of authority to such officer, from the
acts of the board of directors, formally expressed or implied from a habit or custom
of doing business.
In this case, Eufrocino V. Roxas who then controlled the management of the
corporation, being the majority stockholder, consented to the petitioners' stay
within the properties. Specifically, Eufrocino Roxas gave his consent to the
conversion of the recreation hall to a residential house, now occupied by petitioner
Guillermo Roxas. The Board of Directors did not object to the actions of Eufrocino
Roxas. Boyer-Roxas were allowed to stay within the questioned properties until
August 27, 1983, when the Board of Directors approved a Resolution ejecting the
petitioners
There is nothing irregular in the adoption of the Resolution by the Board of
Directors. Boyer-Roxas’s stay within the questioned properties was merely by
tolerance of the corporation in deference to the wishes of Eufrocino, who during his
lifetime, controlled and managed the corporation. Eufrocino's actions could not
have bound the corporation forever. Boyer-Roxas have not cited any provision of
the corporation by-laws or any resolution or act of the Board of Directors which
authorized Eufrocino Roxas to allow them to stay within the company premises
forever. In the absence of any existing contract between Boyer-Roxas and the
corporation, the corporation may elect to eject Boyer-Roxas at any time it wishes
for the benefit and interest of the corporation.
EPG Construction v CA (1993)
Facts: EPG and UP entered into a contract for the construction of the UP Law
Library Building which included a provision that EPG shall repair at his own cost
and expenses… all the work covered under the contract and change orders that
may prove defective except maintenance works. Sometime in July, 1983, UP
complained to EPG that 6 air-conditioning units on the third floor of the building
were not cooling properly. EPG agreed to shoulder the expenses for their repair,
including labor and materials, However, the repair was never undertaken. UP then
contracted with another company, which repaired the defects for P190,000.00. UP
later sued EPG and its president, Emmanuel P. de Guzman when EPG failed to pay
for the repair.
Held: A corporation is invested by law with a personality separate and distinct from
those of the persons composing it as well as from that of any other entity to which
it may be related. Mere ownership by a single stockholder or by another
corporation of all or nearly all of the capital stock of a corporation is not of itself
sufficient ground for disregarding the separate corporate personality. The general
manager of a corporation therefore should not be made personally answerable for
CORPORATION | PROF. G. DEE | CALLUENG
the payment of the employee's backwages unless he had acted maliciously or in
bad faith in terminating the services of the employee.
That exception is not applicable in the case at bar, because it has not been proved
that De Guzman acted maliciously or in bad faith when, as President of EPG, he
sought to protect its interests and resisted UP's claims. Whatever damage was
caused to UP as a result of his acts is the sole responsibility of EPG even though De
Guzman was its principal officer and controlling stockholder.
Benguet Electric Cooperative v NLRC (1992)
Facts: Peter Cosalan, General manager of BENECO, received notices from the COA
of irregularities in the utilization of funds. Cosalan initiated implementation of the
remedial measures recommended by the COA. The members of the Board of
Beneco reacted by adopting a series of resolutions which stripped Cosalan of the
privileges as a General Manager and then suspended him. When Cosalan asked for
his compensation, Beneco denied the request. Cosalan filed a complaint in the
NLRC challenging the legality of the Board resolutions.
Held: The Board members and officers of a corporation who purport to act for and
in behalf of the corporation, keep within the lawful scope of their authority in so
acting, and act in good faith, do not become liable, whether civilly or otherwise, for
the consequences of their acts. Those acts, when they are such a nature and are
done under such circumstances, are properly attributed to the corporation alone
and no personal liability is incurred by such officers and Board members. However,
board members may be held liable for damages under the foregoing circumstance
under Section 4 and 31 of the Corporation Code which reads as follows:
"Sec. 31. Liability of directors, trustees or officers. — Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the affairs
of the corporation or acquire any personal or pecuniary interest in conflict with their
duty as such directors or trustees shall be jointly liable and severally for all
damages resulting therefrom suffered by the corporation, its stockholders or
members and other persons . . ." Section 4 of the Corporation Code renders the
provisions of that Code applicable in a supplementary manner to all corporations,
including those with special or individual charters so long as those provisions are
not inconsistent with such charters. There is no provision in P.D. No. 269, as
amended, that would exclude expressly or by necessary implication the
applicability of Section 31 of the Corporation Code in respect of members of the
boards of directors of electric cooperatives.
In this case, the record showed strong indications that Board members had illegally
suspended and dismissed Cosalan precisely because he was trying to remedy the
financial irregularities and violations of NEA regulations which the COA had
brought to the attention of Beneco.
Secondly, that Board members were guilty of "gross negligence or bad faith in
directing the affairs of the corporation" in enacting the series of resolutions noted
earlier indefinitely suspending and dismissing respondent Cosalan from the
position of General Manager of Beneco. The Board members, in doing so, acted
beyond the scope of their authority as such Board members. The dismissal of an
officer or employee in bad faith, without lawful cause and without procedural due
process, is an act that is contra legem. It cannot be supposed that members of
boards of directors derive any authority to violate the express mandates of law or
the clear legal rights of their officers and employees by simply purporting to act for
the corporation they control.
Woodchild Holdings v Roxas Electric and Construction Company (2004)
Facts: The BOD of Roxas Electric and Construction Company, Inc. approved a
Resolution authorizing the corporation, through its president, Roberto ROXAS, to
sell Lot No. 1 “at a price and under such terms and conditions which he deemed
most reasonable and advantageous to the corporation” and “to execute, sign and
deliver the pertinent sales documents and receive the proceeds of the sale for and
on behalf of the company”. He sold the lot to Woodchild and also agrees to give a
right of way from Sumulong Highway to the property. WHI demanded that the RECCI
sell a portion of the lot for the grant of right of way, otherwise the appropriate action
would be filed against it. RECCI rejected the demand of WHI. WHI filed this
complaint.
Held: Generally, the acts of the corporate officers within the scope of their authority
are binding on the corporation. However, under Article 1910 of the New Civil Code,
acts done by such officers beyond the scope of their authority cannot bind the
corporation unless it has ratified such acts expressly or tacitly, or is estopped from
denying them. Thus, contracts entered into by corporate officers beyond the scope
of authority are unenforceable against the corporation unless ratified by the
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corporation. Also, persons dealing with an assumed agency, whether the assumed
agency be a general or special one, are bound at their peril, if they would hold the
principal liable, to ascertain not only the fact of agency but also the nature and
extent of authority, and in case either is controverted, the burden of proof is upon
them to establish it.
In this case, Roxas was not specifically authorized under the said resolution to
grant a right of way or to agree to sell to the petitioner a portion thereof. The
authority of Roxas, under the resolution, to the lot did not include the authority to
sell a portion of the adjacent lot, or to create or convey real rights thereon. Neither
may such authority be implied from the authority granted to Roxas to sell the lot
“on such terms and conditions which he deems most reasonable and
advantageous
No apparent authority. Apparent authority can arise from two instances: First, the
principal may knowingly permit the agent to hold himself out as having such
authority, and in this way, principal is estopped to claim that the agent does not
have such authority; the principal may so clothe the agent with the indicia of
authority as to lead a reasonably prudent person to believe that he actually has
such authority.
2. Officers – execute the policies laid down by the board, but in practice often have
wide latitude in determining the course of business operations
Corporate Officers and Agents
Sec. 25. Corporate officers, quorum. - Immediately after their election, the
directors of a corporation must formally organize by the election of a president,
who shall be a director, a treasurer who may or may not be a director, a
secretary who shall be a resident and citizen of the Philippines, and such other
officers as may be provided for in the by-laws. Any two (2) or more positions
may be held concurrently by the same person, except that no one shall act as
president and secretary or as president and treasurer at the same time…
- The authority of officers to bind the corporation is usually not considered inherent
in their office, but is derived from law, by-laws, or delegation from the board, either
expressly or impliedly by habit, custom or acquiescence in the general course of
business.
- Rule of agency is binding, as officers are agents of the corporation
3 OFFICERS WHICH A CORPORATION MUST HAVE:
1. President - presides over all meetings of the BOD or trustees as well as all
meetings of stockholders or members
- an act of his doing in the ordinary course of business is presumably within the
scope of his authority, unless the contrary is proven
- impliedly vested by the board with board powers, usually through long
acquiescence to the exercise of such powers
2. Treasurer – must be appointed at the time of the drafting of the AOI since the law
requires his affidavit to attest the fact of compliance with the required pre-
incorporation subscription
- receive and keep the funds of the corporation, and to disburse them in
accordance with the authority given by him by the board or by the properly
authorized officers.
3. Secretary – keeps the corporate records and has custody thereof
- ministerial duties and cannot bind the corporation by contract.
- needs to be a resident and citizen of the Philippines
PRESIDENT SECRETARY TREASURER
Director YES NO NO
requirement
Citizenship NO YES NO**
requirement*
Residency NO YES NO**
requirement
Prohibited Secretary or President President
concurrent Treasurer
positions
*In business or industries which are partially or totally reserved for Filipino citizens,
no alien may be elected as an officer, although the law permits aliens in the BOD
in a number proportional to the alien equity allowed in the particular business or
industry concerned
Other officers:
CORPORATION | PROF. G. DEE | CALLUENG
- Vice President – no inherent power to bind the corporation
- takes over when president is absent or when his office becomes vacant
- can be named GM
-General Manager – take care of the day-to-day affairs of the corporation
- Other agents
Yu Chuck v Kong Li Po (1924)
Facts: In 1919 one C.C. Chen or T.C. Chen was appointed general business
manager of the newspaper Ko Ling Po. He entered into an agreement with Yu Chuck
by which Yu Chuck bound themselves to do the necessary printing for the
newspaper. Under this agreement, Yu Chuck worked for Ko Ling Po from January 1,
1920, until January 31, 1921, when they were discharged by the new manager, Tan
Tian Hong. The letter of dismissal stated no special reasons for the discharge. Yu
Chuck filed a complaint stating that their contract of employment was for a term of
three years from the first day of January, 1920
HELD: Chen, as general manager of Ko Ling Po, had implied authority to bind Ko
Ling Po by a reasonable and usual contract of employment with Yu Chuck. However,
the contract here in question can be so considered. Not only is the term of
employment unusually long, but the conditions are otherwise so onerous to Ko Ling
Po that the possibility of the corporation becoming insolvent is expressly
contemplated in the same contract.
The general rule is that the power to bind a corporation by contract lies with its
board of directors or trustees, but this power may either expressly or impliedly be
delegated to other officers or agents of the corporation, and it is well settled that
except where the authority of employing servants and agents is expressly vested in
the board of directors or trustees, an officer or agent who has general control and
management of the corporation's business, or a specific part thereof, may bind the
corporation by the employment of such agents and employees as are usual and
necessary in the conduct of such business. But the contracts of employment must
be reasonable.
Lapulapu Foundation Inc v CA (2004)
Facts: Elias Q. Tan, then President of Lapulapu Foundation, Inc., obtained loans
from Allied Bank covered by promissory notes. Foundation denied incurring
indebtedness from Allied alleging that the loans were obtained by Tan in his
personal capacity, for his own use and benefit and on the strength of the personal
information he furnished the Bank.
Held: The Foundation cannot hide behind the corporate veil. Per its Secretary's
Certificate, the Foundation had given its President, Tan, ostensible and apparent
authority to inter alia deal with Allied Bank. Accordingly, the Foundation is
estopped from questioning Tan's authority to obtain the subject loans from the
respondent Bank. It is a familiar doctrine that if a corporation knowingly permits
one of its officers, or any other agent, to act within the scope of an apparent
authority, it holds him out to the public as possessing the power to do those acts;
and thus, the corporation will, as against anyone who has in good faith dealt with
it through such agent, be estopped from denying the agent's authority.
Board of Liquidators v Heirs of Kalaw (1967)
Facts: Kalaw as General Manager of NACOCO entered into contracts for the sale of
copra without prior approval of the board as required in the by-laws of NACOCO.
After a series of typhoons wreaked havoc on the copra producing regions, NACOCO
wasn’t able to fulfill their contracts. The buyers sued NACOCO for breach of contract
which NACOCO settled. NACOCO sued Kalaw and other directors for the settlement
paid alleging negligence and bad faith in entering into the contracts without prior
board approval.
Held: A corporate officer "intrusted with the general management and control of
its business, has implied authority to make any contract or do any other act which
is necessary or appropriate to the conduct of the ordinary business of the
corporation. As such officer, "he may, without any special authority from the Board
of Directors perform all acts of an ordinary nature, which by usage or necessity are
incident to his office, and may bind the corporation by contracts in matters arising
in the usual course of business.
"Ratification by a corporation of an unauthorized act or contract by its officers or
others relates back to the time of the act or contract ratified, and is equivalent to
original authority;" and that " [t]he corporation and the other party to the
transaction are in precisely the same position as if the act or contract had been
authorized at the time." Ratification cleanses the contract from all its defects from
the moment it was constituted."
33

GM Kalaw and the other directors are not liable considering that the Board ratified
the acts of GM Kalaw and entering into these contracts was an already accepted
practice considering the peculiar nature of copra trading where he movement of
the market requires that sales agreements be entered into, even though the goods
are not yet in the hands of the seller. Also, the act of the Board in not doing anything
is considered a ratification of the unauthorized act. By corporate confirmation, the
contracts executed by Kalaw are purged of whatever vice or defect they may have.
Advance Papers v Arma Traders (2013)
Facts: Arma Traders purchased on credit notebooks and other paper products from
Advance Paper. Upon the representation of Tan (President) and Uy (Treasurer),
Arma Traders also obtained loans from Advance Paper. As payment, Arma Traders
issued postdated checks which defaulted upon presentment. Advance Papers
argue that Arma Traders led them to believe that Tan and Uy had the authority to
obtain loans since Arma Traders left the active and sole management of the
company to Tan and Uy since 1984.
Held: The doctrine of apparent authority provides that a corporation will be
estopped from denying the agent's authority if it knowingly permits one of its
officers or any other agent to act within the scope of an apparent authority, and it
holds him out to the public as possessing the power to do those acts. The doctrine
of apparent authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a result of the
exercise of reasonable prudence. Moreover, the agent's acts or conduct must have
produced a change of position to the third party's detriment.
Under Sec. 23 of the Corporation Code, the power and responsibility to decide
whether the corporation should enter into a contract that will bind the corporation
is lodged in the board, subject to the articles of incorporation, bylaws, or relevant
provisions of law. However, the board of directors may validly delegate some of its
functions and powers to officers, committees or agents. The authority of such
individuals to bind the corporation is generally derived from law, corporate bylaws
or authorization from the board, either expressly or impliedly by habit, custom or
acquiescence in the general course of business.
A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred
upon him, and this includes powers as, in the usual course of the particular
business, are incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually pertaining to the
particular officer or agent, and such apparent powers as the corporation has
caused person dealing with the officer or agent to believe that it has conferred.
Apparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent authority
to act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, within or beyond
the scope of his ordinary powers. It requires presentation of evidence of similar
act(s) executed either in its favor or in favor of other parties.
In the absence of a charter or bylaw provision to the contrary, the president is
presumed to have the authority to act within the domain of the general objectives
of its business and within the scope of his or her usual duties."
In the present petition, Arma Traders is liable to pay the loans due to the lack of
board resolution authorizing Tan and Uy to obtain the loans. To begin with, Arma
Traders' Articles of Incorporation provides that the corporation may borrow or raise
money to meet the financial requirements of its business by the issuance of bonds,
promissory notes and other evidence of indebtedness. Likewise, it states that Tan
and Uy are not just ordinary corporate officers and authorized bank signatories
because they are also Arma Traders' incorporators along with Ng and Ting, and
Pedro Chao. Furthermore, the respondents, through Ng who is Arma Traders'
corporate secretary, incorporator, stockholder and director, testified that the sole
management of Arma Traders was left to Tan and Uy and that he and the other
officers never dealt with the business and management of Arma Traders for 14
years. He also confirmed that since 1984 up to the filing of the complaint against
Arma Traders, its stockholders and board of directors never had its meeting.
Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing them to
transact with third persons without the necessary written authority from its non-
performing board of directors. Arma Traders failed to take precautions to prevent
its own corporate officers from abusing their powers. Because of its own laxity in
its business dealings, Arma Traders is now estopped from denying Tan and Uy's
authority to obtain loan from Advance Paper.
CORPORATION | PROF. G. DEE | CALLUENG
Cosare v Broadcom Asia (2014)
Facts: Cosare is a stockholder and also the AVP for Sales of the company. When he
was dismissed by Broadcom on the ground of misconduct, he filed an illegal
dismissal case against Broadcom. Broadcom argue that this is an incorporate
dispute and thus RTC not LA has jurisdiction.
Held: When the dispute involves a charge of illegal dismissal, the action may fall
under the jurisdiction of the LAs upon whose jurisdiction falls termination disputes
and claims arising from -er -ee relations. Since Cosare as a stockholder and officer
of Broadcom at that time, this is not an intra-corporate dispute.
Corporate officers are those officers in the corporation who are given that character
by the Corporation Code (President, Secretary, Treasurer) or by the by-laws. An
office is created by the charter of the corporation and the officer is elected by the
directors and SHs. There are two circumstances which must concur in order for an
individual to be considered a corporate officer, namely: the creation of the position
is under the charter or by-laws; and the election of the officer by directors or
stockholders. It is only when the officer claiming to have been illegally dismissed
is classified as such officer that the issue is deemed an intra-corporate dispute
which falls within RTC jurisdiction. Here, Broadcom failed to establish that the
position of AVP for Sales was created by virtue of an act of Broadcom's board and
that Cosare was elected or appointed. An enabling clause in a corporation's by-
laws empowering its Board to create additional officers, even with the subsequent
passage of a board resolution cannot make such position a corporate office.
Amending the by-laws first is needed to create a corporate office.
Grace Christian v CA (1997)
Facts: Grace Christian High School is an educational institution at Grace Village,
while Grace Village Association is an organization of lot and/or building owners,
lessees and residents at Grace Village. In 1975, a committee of the board of
directors of the Association prepared a draft of an amendment to the 1968 by-laws
of the Association which provides that Grace Christian representative is a
permanent director of the association. The draft was never presented to the general
membership for approval. Nevertheless, from 1975 to 1990, Grace Christian was
given a permanent seat on the board of directors. However, in 1990, the
Association’s committee on election informed the principal of Grace Christian that
all directors should be elected by members of the Association and that making the
school representative as a permanent director of the association should be
reexamined. The school filed a case to compel the BOD to recognize its right to a
permanent seat in the board.
Held: The provision is be contrary to law. BOD must be elected from among the
stockholders or members. The unelected members of the BOD sit only as ex officio
members (ie. By virtue of and for as long as they hold a particular office.) In the
case of Grace, there is no reason at all for its representative to be given a seat in
the board. Nor does the school claim a right to such seat by virtue of an office held.
Neither can it attain validity through acquiescence because, if it is contrary to law,
it is beyond the power of the members of the association to waive its invalidity.
Adopting the provision in question is to no avail because no provision of the by-
laws can be adopted if it is contrary to law. Toleration is not ratification.
Zamboanga Transportation v Bachrach Motors (1928)
Facts: Zamboanga and Bachrach have business relations for years, with
Zamboanga purchasing trucks, automobiles, and accessories from Bachrach,
payable in installments. Such purchases had been secured by chattel mortgages
over the goods purchased. In 1925, Zamboanga had a balance due on the
purchase price of White trucks, and such balance was secured by 2 chattel
mortgages. Subsequently, because Zamboanga was experiencing financial
difficulties, Bachrach asked that it execute additional securities. Hence,
Zamboanga, represented by Erquiaga, the president, general manager, auditor
and attorney of the Corporation, executed a New Mortgage. This was subject to the
approval of the Board of Directors. Later, Bachrach registered said New Mortgage,
despite the absence of approval by the Board of Zamboanga. The Board later
rejected the mortgage and found out that Bachrach already registered it without
the Board’s consent. It also found out that Erquiaga already made 2 payments
without the knowledge of the Board. Bachrach later filed a complaint against
Zamboanga (effectively a foreclosure of the new mortgage). Zamboanga was
arguing that such New Mortgage was not valid because of the lack of approval of
its Board of Directors.
Held: The SC disagreed and held that the New Mortgage is VALID and EFFECTIVE.
Where the chief officers of the corporation are in reality its owners, holding nearly
all of its stock, and are permitted to manage the business by the directors, who are
34

only interested nominally or to a small extent, and are controlled entirely by the
officers, the acts of such officers are binding on the corporation.
When the president of a corporation, who is one of the principal stockholders and
at the same time, its general manager, auditor, attorney or legal adviser, is
empowered by its by-laws to enter into chattel mortgage contracts, subject to the
approval of the BOD, and enters into such contracts with the tacit approval of two
other members of the BOD, one of whom is also a principal shareholder, both of
whom, together with the president, form a majority, and said corporation takes
advantage of the benefits afforded by said contract, such acts are equivalent to an
implied ratification of said contract by the board of directors and binds the
corporation even if not formally approved by said board of directors as required by
the by-laws of the aforesaid corporation.
3. Board Committees
Sec. 35. Executive Committee. The by-laws of a corporation may create an
executive committee, composed of not less than three members of the board,
to be appointed by the board. Said committee may act, by majority vote of all
its members, on such specific matters within the competence of the board, as
may be delegated to it in the by-laws or on a majority vote of the board, except
with respect to: (1) approval of any action for which shareholders' approval is
also required; (2) the filing of vacancies in the board; (3) the amendment or
repeal of by-laws or the adoption of new by-laws; (4) the amendment or repeal
of any resolution of the board which by its express terms is not so amendable
or repealable; and (5) a distribution of cash dividends to the shareholders.
As long as the board clearly specifies and limits the functions delegated, and the
delegation does not in effect constitute an abdication by the board of the powers
and responsibilities vested in it by law, such delegation by will be valid
- Delegation should be on specific matters and not a blanket or general one.
4. Stockholders or members - have residual power over fundamental corporate
changes, like amendments of the AOI
Stockholder’s meeting:
Stockholders’ or members’ approval is usually expressed in a meeting duly called
for that purpose. It may be regular or special
*Note: Special meetings would usually be necessary in those instances where the
Code requires stockholder’s action or approval, like amendment of by-laws,
increase of capital stock, removal of directors,
Requirements of stockholders’ or members’ meeting and of voting
a. Notice
Sec. 50. Regular and special meetings of stockholders or members. Regular
meetings of stockholders or members shall be held annually on a date fixed in
the by-laws, or if not so fixed, on any date in April of every year as determined
by the board of directors or trustees: Provided, That written notice of regular
meetings shall be sent to all stockholders or members of record at least two (2)
weeks prior to the meeting, unless a different period is required by the by-laws.
Special meetings of stockholders or members shall be held at any time deemed
necessary or as provided in the by-laws: Provided, however, That at least one
(1) week written notice shall be sent to all stockholders or members, unless
otherwise provided in the by-laws.
Notice of any meeting may be waived, expressly or impliedly, by any stockholder
or member.
Whenever, for any cause, there is no person authorized to call a meeting, the
Secretaries and Exchange Commission, upon petition of a stockholder or
member on a showing of good cause therefor, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the
corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least a majority
of the stockholders or members present have been chosen one of their number
as presiding officer.
- Failure to give notice would render any resolution made therein voidable at the
instance of an absent stockholder who was not notified at the meeting.
- Should a stockholder or member attend the meeting despite want of notice, he
will be deemed to have impliedly waived the requirement
- Notice should specify time, place and purpose
Board of SMB Directors v Tan (1959)
CORPORATION | PROF. G. DEE | CALLUENG
Facts: Plaintiffs commenced a suit with the CFI to declare null and void the election
of the BOD of SWSLAI and to direct the BOD to call for another election. The CFI
ruled in favor of plaintiffs. In compliance therewith, on March 26, the Election
Committee set a meeting of the members of SWSLAI for March 28 at 5:30pm to
elect new BOD members. Plaintiffs contested the composition of the Elecom and
notice of the meeting, alleging that the latter violated the by-laws of SWSLAI
requiring a 5-day notice. CFI ordered the March 28 meeting cancelled and created
a committee of 3 composed of a person appointed by a court and a representative
each of the plaintiffs and defendants to call, conduct and supervise the new
election.
Held: The 2-day notice violated the by-laws requiring a 5-day prior notice to the
members and that the creation of the committee was proper. In a proper
proceeding, a court of equity may direct the holding of a stockholders’ meeting
under the control of a special master, and the action taken at such meeting will not
be set aside because of a wrongful use of the court’s interlocutory decree, where
not brought to the attention of the court prior to the meeting. A court of equity may,
on showing of good reason, appoint a master to conduct and supervise an election
of directors when it appears that a fair election cannot make directors contrary to
statute and public policy with respect to the conduct of such election.
b. Place of meeting
Sec. 51. Place and time of meetings of stockholders or members. -
Stockholders' or members' meetings, whether regular or special, shall be held
in the city or municipality where the principal office of the corporation is
located, and if practicable in the principal office of the corporation: Provided,
That Metro Manila shall, for purposes of this section, be considered a city or
municipality.
Notice of meetings shall be in writing, and the time and place thereof stated
therein.
All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the
stockholders or members of the corporation are present or duly represented at
the meeting.
Although the Sec. 51 covers members’ meetings, the Code has a special provision
for non-stock corporations which must prevail over Sec. 51
Sec. 93. Place of meetings. - The by-laws may provide that the members of a
non-stock corporation may hold their regular or special meetings at any place
even outside the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the date, time
and place of the meeting: and Provided, further, That the place of meeting shall
be within the Philippines.
c. Quorum
Sec. 52. Quorum in meetings. - Unless otherwise provided for in this Code or in
the by-laws, a quorum shall consist of the stockholders representing a majority
of the outstanding capital stock or a majority of the members in the case of non-
stock corporations.
GR: Majority of the outstanding capital stock or majority of members, in case of
non-stock
XPN: When provided by Code or by-laws*
*By-laws may provide a greater or lesser number of quorum
- Stockholders need not be present, but may be represented by proxies, whose vote
will be as effective as if they were personally present
Sec. 58. Proxies. Stockholders and members may vote in person or by proxy in
all meetings of stockholders or members. Proxies shall be in writing, signed by
the stockholder or member and filed before the scheduled meeting with the
corporate secretary. Unless otherwise provided in the proxy, it shall be valid
only for the meeting for which it is intended. No proxy shall be valid and effective
for a period longer than five (5) years at any one time.
d. Vote
STOCK CORPORATIONS NON-STOCK CORPORATIONS
Majority of the shares Majority of the members present
- XPN: When required by Code - XPN: when Code or by-laws provide
35

Based on the number of shares One member = one vote
represented - based on member and not shares
held
Note: Code allows the AOI of a close corporation to provide for a quorum as well as
voting requirement in stockholders meeting than that provided in Sec. 52
Sec. 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.
TREASURY SHARES – previously issued and fully paid for but which have been
reacquired by the corporation by purchase, donation, redemption or other lawful
means.
Sec. 9. Treasury shares. – Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation, or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board
UNPAID SHARES covered by a subscription agreement can vote as long as they
have not become delinquent in the payment
Sec. 89. Right to vote. - The right of the members of any class or classes to vote
may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws. Unless so limited, broadened or denied, each
member, regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of incorporation or the by-laws, a
member may vote by proxy in accordance with the provisions of this Code. (n)
Voting by mail or other similar means by members of non-stock corporations
may be authorized by the by-laws of non-stock corporations with the approval
of, and under such conditions which may be prescribed by, the Securities and
Exchange Commission.
Where the shares are owned by two or more persons, the manner of voting the same
shall be:
Sec, 56.Voting in case of joint ownership of stock. - In case of shares of stock
owned jointly by two or more persons, in order to vote the same, the consent of
all the co-owners shall be necessary, unless there is a written proxy, signed by
all the co-owners, authorizing one or some of them or any other person to vote
such share or shares: Provided, That when the shares are owned in an "and/or"
capacity by the holders thereof, any one of the joint owners can vote said shares
or appoint a proxy therefor.
With respect to pledged shares and those registered in the name of deceased or
incapacitated persons:
Sec. 55. Right to vote of pledgors, mortgagors, and administrators. - In case of
pledged or mortgaged shares in stock corporations, the pledgor or mortgagor
shall have the right to attend and vote at meetings of stockholders, unless the
pledgee or mortgagee is expressly given by the pledgor or mortgagor such right
in writing which is recorded on the appropriate corporate books. (n)
Executors, administrators, receivers, and other legal representatives duly
appointed by the court may attend and vote in behalf of the stockholders or
members without need of any written proxy.
The Code now allows a waiver of right to vote in case of preferred and redeemable
shares. And there must be one class of shares with complete voting rights.
The right to vote of members of non-stock corporations may be limited, broadened
or denied to the extent specified by the articles or by-laws.
Non-voting stocks may still vote in certain instances specified by the Code all of
which involve major changes in the corporation.
Sec. 6. Classification of shares. - The shares of stock of stock corporations may
be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided,
CORPORATION | PROF. G. DEE | CALLUENG
further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have a
par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other
share. Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
e. Where all stockholders are present
Sec. 51. Place and time of meetings of stockholders or members.
Par. 3 All proceedings had and any business transacted at any meeting of the
stockholders or members, if within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held or called, provided all the
stockholders or members of the corporation are present or duly represented at
the meeting.
GR: Meeting is void when it is improperly called or held and any matter taken up
there would be voidable at the instance of an absent or objecting stockholder
XPN: 1. Objecting stockholder has waived the irregularity or
2. All members or stockholders are present, either personally or by duly
designated representatives
f. Where no meeting is called
Sec. 50. Regular and special meetings of stockholders or members. Par. 3.
Whenever, for any cause, there is no person authorized to call a meeting, the
Secretaries and Exchange Commission, upon petition of a stockholder or
member on a showing of good cause therefor, may issue an order to the
petitioning stockholder or member directing him to call a meeting of the
corporation by giving proper notice required by this Code or by the by-laws. The
petitioning stockholder or member shall preside thereat until at least a majority
of the stockholders or members present have been chosen one of their number
as presiding officer.
Ponce v Encarnacion (1953)
36

Facts: Gapol filed a petition praying for an order directing him to call a meeting of
the stockholders of the corporation and to preside at such meeting. Two days later,
without notice to the board of directors, the court granted the motion.
Held: On the showing of good cause, the court may authorize a stockholder to call
a meeting and preside thereat until the majority stockholders representing a
majority of the stock present and permitted to be voted shall have chosen one
among them to preside. The requirement that “on the showing of good case
therefore,” the court may grant to a stockholder the authority to call such meeting
and to preside thereat does not mean that the petition must be set for hearing with
notice served upon the board of directors. The court found good cause to be
existing because the chairman had failed, neglected or refused to perform his duty.
The order of the court may be granted ex-parte, similar to provisional reliefs.
Instances when stockholders’ or members’ action is necessary
1. Election of Directors or trustees
Sec. 24. Election of directors or trustees. - At all elections of directors or
trustees, there must be present, either in person or by representative
authorized to act by written proxy, the owners of a majority of the outstanding
capital stock, or if there be no capital stock, a majority of the members entitled
to vote. The election must be by ballot if requested by any voting stockholder or
member. In stock corporations, every stockholder entitled to vote shall have the
right to vote in person or by proxy the number of shares of stock standing, at the
time fixed in the by-laws, in his own name on the stock books of the corporation,
or where the by-laws are silent, at the time of the election; and said stockholder
may vote such number of shares for as many persons as there are directors to
be elected or he may cumulate said shares and give one candidate as many
votes as the number of directors to be elected multiplied by the number of his
shares shall equal, or he may distribute them on the same principle among as
many candidates as he shall see fit: Provided, That the total number of votes
cast by him shall not exceed the number of shares owned by him as shown in
the books of the corporation multiplied by the whole number of directors to be
elected: Provided, however, That no delinquent stock shall be voted. Unless
otherwise provided in the articles of incorporation or in the by-laws, members
of corporations which have no capital stock may cast as many votes as there
are trustees to be elected but may not cast more than one vote for one
candidate. Candidates receiving the highest number of votes shall be declared
elected. Any meeting of the stockholders or members called for an election may
adjourn from day to day or from time to time but not sine die or indefinitely if,
for any reason, no election is held, or if there not present or represented by
proxy, at the meeting, the owners of a majority of the outstanding capital stock,
or if there be no capital stock, a majority of the member entitled to vote.
Sec. 92. Election and term of trustees. - Unless otherwise provided in the
articles of incorporation or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in number as may be fixed
in their articles of incorporation or by-laws, shall, as soon as organized, so
classify themselves that the term of office of one-third (1/3) of their number
shall expire every year; and subsequent elections of trustees comprising one-
third (1/3) of the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees thereafter elected to fill
vacancies occurring before the expiration of a particular term shall hold office
only for the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws,
officers of a non-stock corporation may be directly elected by the members.
Sec. 93. Place of meetings. - The by-laws may provide that the members of a
non-stock corporation may hold their regular or special meetings at any place
even outside the place where the principal office of the corporation is located:
Provided, That proper notice is sent to all members indicating the date, time
and place of the meeting: and Provided, further, That the place of meeting shall
be within the Philippines.
QUORUM: Majority or outstanding capital stock or members,
VOTES = shares owned * directors elected
MANNER OF VOTING: Viva voce or hand raising, except when a ballot is requested
1. STRAIGHT VOTING: Every stockholder may vote such number of shares for as
many persons as there are directors
CORPORATION | PROF. G. DEE | CALLUENG
2. CUMULATIVE VOTING FOR ONE CANDIDATE: give candidate as many votes as the
number of directors to be elected multiplied by the number of his shares shall
equal.
3. CUMULATIVE VOTING BY DISTRIBUTION: cumulate his shares by multiplying the
number of his shares by the number of directors to be elected and distribute the
same among as many candidates as he shall see fit.
Formula for cumulative voting
Number of shares required = x
𝑥=
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑎𝑛𝑑𝑖𝑛𝑔
+1
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑡𝑜 𝑏𝑒 𝐸𝑙𝑒𝑐𝑡𝑒𝑑+1
𝑆ℎ𝑎𝑟𝑒𝑠 𝑅𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑒𝑑 𝑎𝑡 𝑀𝑒𝑒𝑡𝑖𝑛𝑔∗ 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑡𝑜 𝑏𝑒 𝑒𝑙𝑒𝑐𝑡𝑒𝑑
𝑥= +1
𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑡𝑜 𝑏𝑒 𝐸𝑙𝑒𝑐𝑡𝑒𝑑+1
𝑣𝑜𝑡𝑒𝑠 𝑡𝑜 𝑒𝑙𝑒𝑐𝑡 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑛𝑜. 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 = 𝑥×𝑇𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑡𝑜 𝑏𝑒 𝑒𝑙𝑒𝑐𝑡𝑒𝑑
STOCK CORPORATIONS - Mandatory
- By-laws can provide that a stockholder can vote only such shares as are registered
in his name on the books of the corporation at the time of the election
- Where by-laws are silent, the basis for voting must be the number of shares
registered in the name of the voter at the time of the election
NON-STOCK CORPORATIONS – no right to cumulative voting except when AOI or
by-laws provide
CLOSE CORPORATIONS
Sec. 97. Articles of Incorporation. The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
The articles of incorporation may likewise provide that all officers or employees
or that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
Qualifications and Disqualifications of Directors
Sec. 23. The board of directors or trustees. - Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall be
exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year until their
successors are elected and qualified.
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director, which share shall stand in his name on the
books of the corporation. Any director who ceases to be the owner of at least
one (1) share of the capital stock of the corporation of which he is a director
shall thereby cease to be a director. Trustees of non-stock corporations must
be members thereof. A majority of the directors or trustees of all corporations
organized under this Code must be residents of the Philippines.
Qualifications
1. Owns at least one share, which should be registered in his name on the books of
the corporation
2. Majority of the directors or trustees must be residents of the Philippines
37

3. No citizenship requirement unless specified by law
Disqualification:
Sec. 27. Disqualification of directors, trustees or officers. No person convicted
by final judgment of an offense punishable by imprisonment for a period
exceeding six (6) years, or a violation of this Code, committed within five (5)
years prior to the date of his election or appointment, shall qualify as a director,
trustee or officer of any corporation
Detective & Protective Bureau v Cloribel (1968)
Facts: Detective & Protective Bureau filed a complaint, asking, among others, for
a preliminary injunction, against its managing director, Fausto Alberto, alleging
that the Board of Directors has elected Jose de la Rosa as his replacement.
Held: Under Section 30, Corporation Law, “Every director must own in his own right
at least one share of the capital stock of the stock corporation of which he is a
director, which stock shall stand in his name on the books of the corporation.”
There is no record showing that Jose de la Rosa owned a share of stock in the
corporation. If he did not own any share of stock, he could not be a director.
Term of Director or Trustee: 1 year
- A corporation must hold an election annually, but until such election is held and
a new set of directors is duly elected and qualified, the incumbent directors or
trustees hold over as such even after the term is over
Sec. 92. Election and term of trustees. - Unless otherwise provided in the
articles of incorporation or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in number as may be fixed
in their articles of incorporation or by-laws, shall, as soon as organized, so
classify themselves that the term of office of one-third (1/3) of their number
shall expire every year; and subsequent elections of trustees comprising one-
third (1/3) of the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees thereafter elected to fill
vacancies occurring before the expiration of a particular term shall hold office
only for the unexpired period.
No person shall be elected as trustee unless he is a member of the corporation.
Unless otherwise provided in the articles of incorporation or the by-laws,
officers of a non-stock corporation may be directly elected by the members.
Sec. 108. Board of trustees. - Trustees of educational institutions organized as
non-stock corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the
board of trustees of incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify themselves that the term of
office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a
particular term, shall hold office only for the unexpired period. Trustees elected
thereafter to fill vacancies caused by expiration of term shall hold office for five
(5) years. A majority of the trustees shall constitute a quorum for the transaction
of business. The powers and authority of trustees shall be defined in the by-
laws.
For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations.
STOCK CORPORATION NON-STOCK CORPORATION
Number 5-15 GR: May be more than 15
XPN: Educational – 5- 15, in
multiples of five
Term of 1 year GR: 3 years
directors / XPN: Educational – 5 years or
trustees when AOI or by-laws provide
otherwise
Expiration 1 year GR: 1/3 of number shall
of term expire every year
XPN: Educational – 1/5 shall
expire every eyar
By-laws By-laws cannot change the By-laws can shorten or extend
term term
Vacancies in the Board:
Sec. 29. Vacancies in the office of director or trustee. - Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders
CORPORATION | PROF. G. DEE | CALLUENG
or members or by expiration of term, may be filled by the vote of at least a
majority of the remaining directors or trustees, if still constituting a quorum;
otherwise, said vacancies must be filled by the stockholders in a regular or
special meeting called for that purpose. A director or trustee so elected to fill a
vacancy shall be elected only or the unexpired term of his predecessor in office.
Any directorship or trusteeship to be filled by reason of an increase in the
number of directors or trustees shall be filled only by an election at a regular or
at a special meeting of stockholders or members duly called for the purpose,
or in the same meeting authorizing the increase of directors or trustees if so
stated in the notice of the meeting
Vacancies may occur in the board by death, resignation, removal, expiration of
term, or abandonment of office. Resignation may be made orally or in writing
Filling of vacancies in the office of director or trustee
STOCKHOLDERS DIRECTORS
vacancy results from the removal by if still constituting a quorum, at least
stockholders or members or the majority of them are empowered to fill
expiration of term any vacancy in the board other than
removal by stockholders or by
expiration of term.
No quorum in BOD, vacancy occurs
other than by removal or by expiration
of term, such as death, resignation,
abandonment or disqualification
vacancy is created by reason of an
increase in number of directors as a
result of the amendment of AOI
2. Removal of Directors
GR: Only the stockholders or members have the power to remove the directors or
trustees elected by them
Sec. 28. Removal of directors or trustees. - Any director or trustee of a
corporation may be removed from office by a vote of the stockholders holding
or representing at least two-thirds (2/3) of the outstanding capital stock, or if
the corporation be a non-stock corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided, That such removal shall take
place either at a regular meeting of the corporation or at a special meeting
called for the purpose, and in either case, after previous notice to stockholders
or members of the corporation of the intention to propose such removal at the
meeting. A special meeting of the stockholders or members of a corporation for
the purpose of removal of directors or trustees, or any of them, must be called
by the secretary on order of the president or on the written demand of the
stockholders representing or holding at least a majority of the outstanding
capital stock, or, if it be a non-stock corporation, on the written demand of a
majority of the members entitled to vote. Should the secretary fail or refuse to
call the special meeting upon such demand or fail or refuse to give the notice,
or if there is no secretary, the call for the meeting may be addressed directly to
the stockholders or members by any stockholder or member of the corporation
signing the demand. Notice of the time and place of such meeting, as well as
of the intention to propose such removal, must be given by publication or by
written notice prescribed in this Code. Removal may be with or without cause:
Provided, That removal without cause may not be used to deprive minority
stockholders or members of the right of representation to which they may be
entitled under Section 24 of this Code.
The vacancy which may be created by removal may be filled:
1. by the SHs in the same meeting where the removal is effected, without further
notice or
2. at any meeting called for the purpose, after the required 1 week notice required
was given, unless by-laws provide
- Remaining members of the board cannot fill up vacancy (see Sec 29)
Roxas v Dela Rosa (1928)
Facts: A Voting Trust was formed controlling a majority of the stocks of Binalabagan
Estate, Inc. The trustees wanted to oust the incumbent Board of Directors even if
their 1-year term has not yet expired. The trustees then caused the Corporate
Secretary to issue a notice calling for a special general meeting for the purpose of,
among others, electing a new board. A member of the incumbent Board filed an
injunction suit seeking to enjoin the calling of said meeting.
38

Held: It was within the CFI’s jurisdiction to issue said order in order to forestall the
calling of a meeting to elect a new set of directors which was legally infirm to begin
with. Directors of a corporation can only be removed from office by a vote of the
stockholders representing at least 2/3 of the subscribed capital stock entitled to
vote. Vacancies in the board, when they exist, can be filled by mere majority vote.
When action is to be taken at a special meeting to remove the directors, such
purpose shall be indicated in the call.
Angeles v Santos (1937)
Facts: The plaintiffs here are the minority stockholders of the Paranaque Rice Mill,
Inc. and the defendants are the majority stockholders. The plaintiffs filed a
complaint averring that Santos, the president of the corporation, has been
disposing of the income and properties of the corporation for his own benefit
without authority form the board of directors and to the prejudice of the
stockholders. Pursuant to such complaint, TC appointed a receiver for the
corporation. Santos assailed the appointment of the receivership and their removal
as board of directors.
Held: Where a majority of the board of directors wastes or dissipates the funds of
the corporation or fraudulently disposes of its properties, or performs ultra vires
acts, the court in the exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the minority
members of the board of directors, for and in behalf of the corporation , to prevent
waste and dissipation and the commission of the illegal acts and otherwise
redress the injuries of the minority stockholders against wrong doing of the majority
T It is now unnecessary to remove the directors with the appointment of a receiver.
The Corporation Law does not confer expressly upon the courts the power to remove
a director of a corporation. There are abundant authorities, however, which hold
that if the court has acquired jurisdiction to appoint a receiver because of
mismanagement of the directors. These directors may be removed and other
appointed in their place by the court in the exercise of its equity jurisdiction
Campbell v Loew’s Inc (1957)
Facts: Two factions are fighting for control of the corporation (Vogel faction vs.
Tomlinson faction). President Vogel called for a special stockholder’s meeting to
remove 2 incumbent Tomlinson directors for cause, fill existing directorship
vacancies, and to increase the total number of directors. The notice for
stockholder’s meeting was accompanied by a letter from President giving the
reasons for the ouster of the 2 directors, as well as a proxy form to be signed by the
stockholder giving their vote for the removal of said directors.
Held: The court held that the President can call the special meeting. The
stockholders can remove directors for ‘cause’. The charges, if true, constitute
‘cause’ for ouster. However, the votes for ouster attained by proxy solicitation are
invalidated because the 2 directors were not given an opportunity to be heard.
Stockholders have the power to remove a director for a cause. This power must be
implied when we consider that otherwise a director who is guilty of the worst sort of
violation of his duty could nevertheless remain on the board.
Matters for stockholder consideration need not be conducted with the formality of
judicial proceedings. However, where a procedure adopted to remove a director for
cause is invalid on its face, a stockholder can attack such matters before the
meeting.
Directors that are to be ousted for cause have the right to be heard and present
their side to the stockholders before the vote to oust them occurs.
3. Fundamental Changes
In the ff. basic changes in the corporation, although action is usually initiated by
the board, their decision is not final, and approval of the SH would be necessary:
(1) Amendment of AOI
(2) Increase and decrease of capital stock
(3) Incurring, creating or increasing bonded indebtedness
(4) Sale, lease, mortgage or other disposition of substantially all corporate assets
(5) Investment of funds in another business or corporation or for a purpose other
than the primary purpose for which the corporation was organized
(6) Adoption, amendment and repeal of by-laws
(7) Merger and consolidation
(8) Dissolution
- In all these cases, even non-voting stocks WILL BE entitled to vote
- Vote of SH representing 2/3 of the outstanding capital stock is necessary to
approve any of these changes, with the exception of adoption and amendment of
by-laws (majority sufficient)
CORPORATION | PROF. G. DEE | CALLUENG
- SEC requires reason for such change
Amendment of AOI
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed
by this Code or by special law, and for legitimate purposes, any provision or
matter stated in the articles of incorporation may be amended by a majority
vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at
least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Such articles, as amended
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of
the directors or trustees stating the fact that said amendment or amendments
have been duly approved by the required vote of the stockholders or members,
shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if not
acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.
Note: no requirement of a SH meeting. All that is needed is “written assent”
Cf. Sec 37, 38, 39, 42, 43, 44 which all require meeting
Meeting required on close corporations:
Sec. 103. Amendment of articles of incorporation. - Any amendment to the
articles of incorporation which seeks to delete or remove any provision required
by this Title to be contained in the articles of incorporation or to reduce a
quorum or voting requirement stated in said articles of incorporation shall not
be valid or effective unless approved by the affirmative vote of at least two-
thirds (2/3) of the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for the purpose.
Sale or other disposition of all or substantially all of the assets
Sec 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors
or trustees may deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it
was incorporated.
After such authorization or approval by the stockholders or members, the board
of directors or trustees may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of property and assets,
subject to the rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business of
said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by this section.
39

Investment in another business or corporation
Sec. 42. Power to invest corporate funds in another corporation or business or
for any other purpose. - Subject to the provisions of this Code, a private
corporation may invest its funds in any other corporation or business or for any
purpose other than the primary purpose for which it was organized when
approved by a majority of the board of directors or trustees and ratified by the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or by at least two thirds (2/3) of the members in the case of non-stock
corporations, at a stockholder's or member's meeting duly called for the
purpose. Written notice of the proposed investment and the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder shall have appraisal right as
provided in this Code: Provided, however, That where the investment by the
corporation is reasonably necessary to accomplish its primary purpose as
stated in the articles of incorporation, the approval of the stockholders or
members shall not be necessary.
Sec. 36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
xxx
7. To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject to
the limitations prescribed by law and the Constitution;
xxx
11. To exercise such other powers as may be essential or necessary to carry out
its purpose or purposes as stated in the articles of incorporation.
- Sec. 36 expressly limits investment to one which may be reasonably and
necessarily required by the lawful business of the corporation
- Any other kind of investment is ultra vires UNLESS AOI allows it
De La Rama et al. vs. Ma-ao Sugar Central (1969)
Facts: Ma-ao Sugar subscribed for 3M worth of capital stock of Philippine Fiber.
There was no board resolution authorizing the investment when the stocks were
being paid. But, after payment, a subsequent board resolution was passed
authorizing the same. Certain stockholders filed a case contending that a board
resolution approving the transaction was essential to the validity of the purchase.
Ma-ao Sugar contended that it had the power to enter into a contract that was in
connection with its purpose.
Held: SC in favor of Ma-ao Sugar. A private corporation, in order to accomplish its
purpose as stated in its articles of incorporation, and subject to the limitations
imposed by the Corporation Law, has the power to acquire, hold, mortgage, pledge
or dispose of shares, bonds, securities and other evidences of indebtedness of any
domestic or foreign corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of the stockholders, but when the purchase
of shares of another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary.
Gokongwei v SEC (1979)
Facts: Gokongwei, Jr. is a stockholder of SMC and he filed a petition with the SEC
for the declaration of nullity of the by-laws etc. against the majority members of the
Board of Directors and SMC. He contends that the amendment of the by-laws was
based on the 1961 authorization and so, the Board acted without authority in
amending the by-laws in 1976. He also contends that the 1961 authorization was
already used in 1962 and 1963 and that the amendment deprived him of his right
to vote and be voted upon as a stockholder (because it disqualified competitors
from nomination and election in the Board of Directors of SMC), thus the amended
by-laws were null and void.
Held: The Supreme Court said that the amendments were valid.
1. Where the reasonableness of a by-law is a mere matter of judgment, and one
upon which reasonable minds must necessarily differ, a court would not be
warranted in substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have exercised their authority.
2. No vested right of stockholder to be elected director. Any person “who buys stock
in a corporation does so with the knowledge that its affairs are dominated by a
majority of the stockholders and that he impliedly contracts that the will of the
CORPORATION | PROF. G. DEE | CALLUENG
majority shall govern in all matters within the limits of the act of incorporation and
lawfully enacted by-laws and not forbidden by law.” To this extent, therefore, the
stockholder may be considered to have parted with his personal right or privilege
to regulate the disposition of his property, which he has invested in the capital
stock of the corporation, and surrendered it to the will of the majority of his fellow
incorporators.
3. As agents entrusted with the management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary relation, and in this sense, the
relation is one of trust. It springs from the fact that directors have the control and
guidance of corporate affairs and property and hence of the property interests of
the stockholders.
4. An amendment to the corporation by-law, which renders a stockholder ineligible
to be director, if he be also director in a corporation whose business is in
competition with that of the other corporation, has been sustained as valid. This is
based upon the principle that where the director is so employed in the service of a
rival company, he cannot serve both, but must betray one or the other.
The doctrine of “corporate opportunity” is precisely a recognition by the courts that
the fiduciary standards could not be upheld where the fiduciary was acting for two
entities with competing interests.
5. Also, the constitution and the law prohibit combinations in restraint or trade or
unfair competition, making the by-law disqualifying a competitor company from
being a director of SMC, reasonable.
6. However, while the by-law is valid, it does not necessarily follow that Gokongwei
is ipso facto disqualified. As trustees of the corporation and of the stockholders, it
is the responsibility of directors to act with fairness to stockholders.
7. The inspection of the books must be germane to the interest of the stockholder,
and has to be proper and lawful in character and not inimical to the interest of the
corporation
8. When the investment is necessary to accomplish its purpose or purposes as
stated in the AOI, the approval of the SHs is not necessary.
Mergers and Consolidation
Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote
of each of the board of directors or trustees of the constituent corporations of
the plan of merger or consolidation, the same shall be submitted for approval
by the stockholders or members of each of such corporations at separate
corporate meetings duly called for the purpose. Notice of such meetings shall
be given to all stockholders or members of the respective corporations, at least
two (2) weeks prior to the date of the meeting, either personally or by registered
mail. Said notice shall state the purpose of the meeting and shall include a
copy or a summary of the plan of merger or consolidation. The affirmative vote
of stockholders representing at least two-thirds (2/3) of the outstanding
capital stock of each corporation in the case of stock corporations or at least
two-thirds (2/3) of the members in the case of non-stock corporations shall be
necessary for the approval of such plan. Any dissenting stockholder in stock
corporations may exercise his appraisal right in accordance with the Code:
Provided, That if after the approval by the stockholders of such plan, the board
of directors decides to abandon the plan, the appraisal right shall be
extinguished. Any amendment to the plan of merger or consolidation may be
made, provided such amendment is approved by majority vote of the respective
boards of directors or trustees of all the constituent corporations and ratified
by the affirmative vote of stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or of two-thirds (2/3) of the members of each of
the constituent corporations. Such plan, together with any amendment, shall
be considered as the agreement of merger or consolidation.
MERGER: union of 2 or more corporations by virtue of which one of them absorbs
the others
- The juridical personalities of all such corporations are extinguished, except only
that of the absorbing corporation
CONSOLIDATION: a union of 2 or more corporations with the formation of a new
single corporation, extinguishing all the constituent corporations in the process
- Since both these unions involve organic changes in the corporations affected, the
consent of the SH of all such corporations is indispensable
Appraisal Right
- stockholder who dissented and voted against the proposed corporate action may
choose to get out of the corporation by demanding payment of the fair value of his
shares
40

Sec. 81. Instances of appraisal right. - Any stockholder of a corporation shall
have the right to dissent and demand payment of the fair value of his shares in
the following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares
of any class, or of extending or shortening the term of corporate existence;
2. In case of sale, lease, exchange, transfer, mortgage, pledge or other
disposition of all or substantially all of the corporate property and assets as
provided in the Code; and
3. In case of merger or consolidation.
*Fourth: Investment in another business or corporation.
Sec. 82. How right is exercised. - The appraisal right may be exercised by any
stockholder who shall have voted against the proposed corporate action, by
making a written demand on the corporation within thirty (30) days after the
date on which the vote was taken for payment of the fair value of his shares:
Provided, That failure to make the demand within such period shall be deemed
a waiver of the appraisal right. If the proposed corporate action is implemented
or affected, the corporation shall pay to such stockholder, upon surrender of
the certificate or certificates of stock representing his shares, the fair value
thereof as of the day prior to the date on which the vote was taken, excluding
any appreciation or depreciation in anticipation of such corporate action.
If within a period of sixty (60) days from the date the corporate action was
approved by the stockholders, the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall be determined and
appraised by three (3) disinterested persons, one of whom shall be named by
the stockholder, another by the corporation, and the third by the two thus
chosen. The findings of the majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty (30) days after such award
is made: Provided, That no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted retained earnings in its
books to cover such payment: and Provided, further, That upon payment by the
corporation of the agreed or awarded price, the stockholder shall forthwith
transfer his shares to the corporation.
- If SH was absent in the meeting or if he abstained, then he does NOT have the
appraisal right
- Fair value CANNOT include any appreciation in the value of the stocks as a result
of the approved corporate action
- One very important condition is attached to the right to get payment: THERE
SHOULD BE UNRESTRICTED RETAINED EARNINGS TO COVER IT for the protection
of remaining SHs and other creditors
- After payment of shares, there must be sufficient assets left to pay creditors and
to cover the par or issued value of the remaining stocks
- If there are legal or contractual restrictions on any portion of the remaining assets,
then such portion must be excluded from the amount which can be used for
payment
- Once the payment is made, the withdrawing SH must transfer his shares to the
corporation and they will become TREASURY SHARES which may later be resold by
the corporation at such price which the board may decide to fix
Sec. 83. Effect of demand and termination of right. - From the time of demand
for payment of the fair value of a stockholder's shares until either the
abandonment of the corporate action involved or the purchase of the said
shares by the corporation, all rights accruing to such shares, including voting
and dividend rights, shall be suspended in accordance with the provisions of
this Code, except the right of such stockholder to receive payment of the fair
value thereof: Provided, That if the dissenting stockholder is not paid the value
of his shares within 30 days after the award, his voting and dividend rights shall
immediately be restored.
Sec. 84. When right to payment ceases. - No demand for payment under this
Title may be withdrawn unless the corporation consents thereto. If, however,
such demand for payment is withdrawn with the consent of the corporation, or
if the proposed corporate action is abandoned or rescinded by the corporation
or disapproved by the Securities and Exchange Commission where such
approval is necessary, or if the Securities and Exchange Commission
determines that such stockholder is not entitled to the appraisal right, then the
right of said stockholder to be paid the fair value of his shares shall cease, his
CORPORATION | PROF. G. DEE | CALLUENG
status as a stockholder shall thereupon be restored, and all dividend
distributions which would have accrued on his shares shall be paid to him.
Should the corporation refuse or fail to pay the fair market value of the shares
within thirty days of the award, the stockholder is restored to all his rights ipso
facto.
Sec. 86. Notation on certificates; rights of transferee. - Within ten (10) days
after demanding payment for his shares, a dissenting stockholder shall submit
the certificates of stock representing his shares to the corporation for notation
thereon that such shares are dissenting shares. His failure to do so shall, at the
option of the corporation, terminate his rights under this Title. If shares
represented by the certificates bearing such notation are transferred, and the
certificates consequently canceled, the rights of the transferor as a dissenting
stockholder under this Title shall cease and the transferee shall have all the
rights of a regular stockholder; and all dividend distributions which would have
accrued on such shares shall be paid to the transferee.
A stockholder of a close corporation can get back from the corporation his
investment before dissolution.
Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition
and without prejudice to other rights and remedies available to a stockholder
under this Title, any stockholder of a close corporation may, for any reason,
compel the said corporation to purchase his shares at their fair value, which
shall not be less than their par or issued value, when the corporation has
sufficient assets in its books to cover its debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission, compel the dissolution of
such corporation whenever any of acts of the directors, officers or those in
control of the corporation is illegal, or fraudulent, or dishonest, or oppressive
or unfairly prejudicial to the corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.
Increase and Decrease of Capital Stock, Creation or increase of Bonded
Indebtedness
Sec. 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital
stock or incur, create or increase any bonded indebtedness unless approved by
a majority vote of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence
as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally. A certificate in
duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
41

after approval by the Securities and Exchange Commission and the issuance by
the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That
the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time
of the filing of the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual cash to
the corporation or that there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%) percent of the subscription:
Provided, further, That no decrease of the capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase
the same, with the approval by a majority vote of the board of trustees and of at
least two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
Adoption, Amendment and Repeal of By-laws
Sec. 48. Amendments to by-laws. - The board of directors or trustees, by a
majority vote thereof, and the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of a non-stock corporation,
at a regular or special meeting duly called for the purpose, may amend or repeal
any by-laws or adopt new by-laws. The owners of two-thirds (2/3) of the
outstanding capital stock or two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or trustees the power to
amend or repeal any by-laws or adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees to amend or repeal any by-laws
or adopt new by-laws shall be considered as revoked whenever stockholders
owning or representing a majority of the outstanding capital stock or a majority
of the members in non-stock corporations, shall so vote at a regular or special
meeting.
Whenever any amendment or new by-laws are adopted, such amendment or
new by-laws shall be attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under oath by the corporate
secretary and a majority of the directors or trustees, shall be filed with the
Securities and Exchange Commission the same to be attached to the original
articles of incorporation and original by-laws.
The amended or new by-laws shall only be effective upon the issuance by the
Securities and Exchange Commission of a certification that the same are not
inconsistent with this Code.
- Power to amend by-laws may be delegated to the BOD by 2/3 vote
- but revocation of authority (delegation) requires only a majority vote
4. Other instances requiring stockholder’s action
Declaration of STOCK Dividends
Sec. 43. Power to declare dividends. - The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval
of stockholders representing not less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet
been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies. (n)
Management Contracts
Sec. 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
CORPORATION | PROF. G. DEE | CALLUENG
stockholders owning at least the majority of the outstanding capital stock, or
by at least a majority of the members in the case of a non-stock corporation, of
both the managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the
managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3) of
the total outstanding capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any one
term.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially all
of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however, That
such service contracts or operating agreements which relate to the exploration,
development, exploitation or utilization of natural resources may be entered
into for such periods as may be provided by the pertinent laws or regulations.
MANAGEMENT CONTRACTS – one entered into between 2 corporations by virtue of
which one agrees that its corporate affairs will be managed by the other
SHs or members of BOTH corporations must approve the contract
Fixing Consideration for no-par shares
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation equal
to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated capital;
and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval
by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred upon
it by the articles of incorporation or the by-laws, or in the absence thereof, by
the stockholders representing at least a majority of the outstanding capital
stock at a meeting duly called for the purpose.
Fixing Compensation of Directors
Sec. 30. Compensation of directors - In the absence of any provision in the by-
laws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per diems: Provided,
however, that any such compensation (other than per diems) may be granted
to directors by the vote of the stock holders representing at least a majority of
the outstanding capital stock at a regular or special stockholder’s meeting. In
no case shall the total yearly compensation of directors, as such directors,
exceed ten (10%) of the net income before income tax of the corporation during
the preceding year.
5. Deadlocks in Close Corporations
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation,
if the directors or stockholders are so divided respecting the management of
the corporation's business and affairs that the votes required for any corporate
action cannot be obtained, with the consequence that the business and affairs
42

of the corporation can no longer be conducted to the advantage of the
stockholders generally, the Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to arbitrate the dispute. In the
exercise of such power, the Commission shall have authority to make such
order as it deems appropriate, including an order: (1) canceling or altering any
provision contained in the articles of incorporation, by-laws, or any
stockholder's agreement; (2) canceling, altering or enjoining any resolution or
act of the corporation or its board of directors, stockholders, or officers; (3)
directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action; (4) requiring the
purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its
books, or by the other stockholders; (5) appointing a provisional director; (6)
dissolving the corporation; or (7) granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder
nor a creditor of the corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any, may be determined by the
Commission. A provisional director is not a receiver of the corporation and does
not have the title and powers of a custodian or receiver. A provisional director
shall have all the rights and powers of a duly elected director of the corporation,
including the right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement between
him and the corporation subject to approval of the Commission, which may fix
his compensation in the absence of agreement or in the event of disagreement
between the provisional director and the corporation.
The provisional director may break the deadlock in the board by casting the
deciding vote. In effect, he will be representing the SEC in the decisions of the
board
Devices Affecting Control
GR. The extent of control would be proportional to the number of shares a
stockholder owns
1. Proxy Device
- person duly authorized by a stockholder to vote in his behalf in a stockholder’s
meeting or
- document which evidences the authority
PROXY – agent for a special purpose, thus agency applies
Sec. 58. Proxies. - Stockholders and members may vote in person or by proxy
in all meetings of stockholders or members. Proxies shall in writing, signed by
the stockholder or member and filed before the scheduled meeting with the
corporate secretary. Unless otherwise provided in the proxy, it shall be valid
only for the meeting for which it is intended. No proxy shall be valid and effective
for a period longer than five (5) years at any one time.
Failure to comply with these requirements will render the proxy void and ineffective
A vote or presence in a meeting which is counted on the basis of such a void proxy
may result in the invalidation of any action decided in such meeting, unless the
number of shares required for quorum or voting is otherwise present
GR: A stockholder cannot be deprived of the right to proxy by any by-law
XPN: Code allows a waiver of such right in non-stock corporations, provided
allowance of waiver is made in the AOI or by-law
- By-laws may impose reasonable CONDITIONS in the form and manner of voting
by proxy
General and Limited Proxy
GENERAL PROXY – has power to vote for directors and on all ordinary matters which
may properly be taken in the meeting
- does not include power to vote for amendment to the AOI or other unusual specific
actions
LIMITED PROXY – restricts authority to vote to specified matters only and may direct
the vote to be cast in a certain way
Period
Proxy may fix the period during which it may be used
- Cannot exceed five years
CORPORATION | PROF. G. DEE | CALLUENG
- Renewable for not more than 5 years for each renewal
- Where the proxy does not fix any period, then it expires after the meeting for which
it was given
Revocability of Proxy
GR: Proxy is revocable even before the period fixed
XPN: Proxy coupled with an interest – irrevocable for the period fixed
In re: Giant Portland Cement (1941)
Facts: Petitioners seek to annul the votes cast by proxies of several owners on
record of shares of stock of Giant Portland Cement on account of such shares being
sold before the stockholder’s meeting, albeit not recorded in the company books.
They allege that the votes cast should be nullified, and hence the declared winners
be also annulled.
Held: The right to vote has always been incident to its legal ownership. As between
the transferor and transferee, the legal title passes to the latter. But between the
corporation and the transferee, this is not true. The limited contract restrictions,
relating to stock transfers, are for the benefit of the corporation, and to enable it to
ascertain from its records who its members or stockholders are. So far as the
corporation is concerned, the record owner is to be regarded as the real owner of
the stock, along with the right to vote personally or by proxy.
From a legal POV, there is no privity of contract between the corporation and the
transferee of the stock, and the latter is not a member of the organization until the
transaction is recorded. The legal rights transfer only from that time, thus the record
owner still has the right to vote.
STATE ex. rel. EVERETT TRUST & SAVINGS BANKS v. PACIFIC WAXED PAPER CO.,
et. al. (1945)
Facts: Jordan owned capital stock in Paine-Mitchell Co. and one preferred share in
Pacific Waxed Paper Co. Engle was the owner of stocks in Pacific. Paine-Mitchell
owned stocks of Pacific. The combined shares of Engle and Paine-Mitchell were
more than majority of all issued stocks. In 1931, Engle and Paine-Mitchell entered
into an agreement granting 25 years of reciprocal exclusive right and option to
purchase stocks in Pacific should one of them decide to sell. In 1932, Engle, Paine-
Mitchell and Jordan entered into an agreement of mutual irrevocable proxy entitled
to vote in stocks in Pacific if either dies. Jordan died and Everett became his
executor. Everett caused the voluntary dissolution of Paine-Mitchell. As a result,
the stocks of Paine-Mitchell were transferred to the estate of Jordan. Everett sought
to vote at a stockholders’ meeting of Pacific but was denied because of the proxy
held by Engle. Everett questioned the irrevocable proxy and said it was revocable
and that it was invalid for being contrary to a law which took effect in 1933.
Held: The general rule is that a proxy given by a stockholder to vote his corporate
stock at a meeting of stockholders of a corporation is revocable by him even though
the proxy by its terms is expressly made irrevocable. The exceptions are: (1) Where
the authority or power is coupled with an interest; and (2) Where the authority is
given as part of a security or is necessary to effectuate such a security. It is a power
coupled with interest if it is a power or authority to do an act, accompanied by or
connected with an interest in the subject or things itself upon which the power is to
be exercised, the power and interest being united in the same person. The authority
is given as part of a security or is necessary to effectuate such a security if the
interest of the agent is something more than an interest yet something less than an
estate. This is to protect the money and advanced or obligations incurred by the
agent.
ALEJANDRINO V. DE LEON (1943)
Facts: Alejandrino was not elected as member of the board of directors during the
elections, however, had he been allowed to use the proxies given to him by 18
stockholders, he would have won. He was not allowed to use them because the 18
stockholders obtained loans from Pambul where the contract of loan has a
provision stating that the rights to vote the shares are irrevocably granted to
Pambul during the existence of the loan. Alejandrino assails the said provision for
being contrary to morals and public policy.
Held: The court held that the provision is valid. The right to vote a share is a mere
property right which can be alienated. The right of stockholder to vote his shares is
inherent in and incidental to his ownership of the stock. It is but a private right of
property. There is nothing sacrosanct and inalienable in it. What seems to us
immoral, unfair and contrary to public policy would be to allow the owner of shares
of stock to borrow money on them by pledging them and giving the pledges an
43

irrevocable proxy to vote them so long as the loan is unpaid, and then revoke the
proxy without paying the loan.
To vote at a meeting of the stockholders of a private corporation is, unlike a political
franchise, but an exercise of the right of ownership involving no public interest. To
call the transfer of such right coupled with interest “bribery” is to distort the
meaning of that word. It can no more be called bribery than the payment by the
purchaser of the price of the goods bought by him may be considered a bribe to the
seller.
2. Voting Trusts
Trust agreement whereby a SH transfer his shares to a trustee who will exercise his
voting rights
- Under this arrangement, the SH remains the beneficial or equitable owner of the
share, but legal ownership is transferred to the trustee
- Essence: the real ownership of the shares is separated from the voting rights, the
usual aim is to ensure the retention of incumbent directors and remove from the
SH the power to change to management for the duration of the trust
- During such period, IRREVOCABLE for as long as there is no fraud/misconduct
Sec. 59. Voting trusts. - One or more stockholders of a stock corporation may
create a voting trust for the purpose of conferring upon a trustee or trustees the
right to vote and other rights pertaining to the shares for a period not exceeding
five (5) years at any time: Provided, That in the case of a voting trust specifically
required as a condition in a loan agreement, said voting trust may be for a
period exceeding five (5) years but shall automatically expire upon full payment
of the loan. A voting trust agreement must be in writing and notarized, and shall
specify the terms and conditions thereof. A certified copy of such agreement
shall be filed with the corporation and with the Securities and Exchange
Commission; otherwise, said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement shall
be canceled and new ones shall be issued in the name of the trustee or trustees
stating that they are issued pursuant to said agreement. In the books of the
corporation, it shall be noted that the transfer in the name of the trustee or
trustees is made pursuant to said voting trust agreement.
The trustee or trustees shall execute and deliver to the transferors voting trust
certificates, which shall be transferable in the same manner and with the same
effect as certificates of stock.
The voting trust agreement filed with the corporation shall be subject to
examination by any stockholder of the corporation in the same manner as any
other corporate book or record: Provided, That both the transferor and the
trustee or trustees may exercise the right of inspection of all corporate books
and records in accordance with the provisions of this Code.
Any other stockholder may transfer his shares to the same trustee or trustees
upon the terms and conditions stated in the voting trust agreement, and
thereupon shall be bound by all the provisions of said agreement.
No voting trust agreement shall be entered into for the purpose of
circumventing the law against monopolies and illegal combinations in restraint
of trade or used for purposes of fraud.
Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the name of the trustee or
trustees shall thereby be deemed canceled and new certificates of stock shall
be reissued in the name of the transferors.
The voting trustee or trustees may vote by proxy unless the agreement provides
otherwise.
Requisites:
(1) Must be in writing and notarized
(2) Certified copy must be filed with the corporation + SEC
(3) Must not be for a period longer than 5 years, although may be renewed each
time for not more than 5 years
(4) The cert. of stocks must be cancelled; new ones issued to the trustee stating
therein that they were issued in pursuance of the VTA
(5) Transfer must be entered on the corporation books with a similar statement
(6) Trustee should issue voting trust Certificates in favor of the transferring SH
(7) The voting trust should not be for an illegal purpose
SEC has the power to pass upon the validity of VTA for absent stockholders or
members
- A trustee can now be qualified to be a director
- No VTA may be kept secret, nor can it be exclusive
CORPORATION | PROF. G. DEE | CALLUENG
EVERETT v. ASIAN BANKING CORP (1926)
Facts: Clifford, Teal and Robinson were the principal stockholders of Teal and
Company (the Company), a domestic corporation involved in merchandising of
automobiles. It had done its banking business almost exclusively thru the Asian
Banking Corp (the Bank). The Bank, through its manager, represented to the
Company and that for the protection both of the Bank and the Company it was
advisable that it should temporarily obtain control of the management and affairs
of the Company. Thus, they signed a "Voting Trust Agreement" which transferred
the stocks of the plaintiffs to the Bank. The Bank replaced the Board of the
company and all its officers with its own officers, and started running the Company
to further its own interest, and ignoring that of the Company’s. The new directors
assigned by the Bank also allegedly incorporated Philippine Motors Corporation,
and allegedly transferred all the Company’s assets to the latter.
Held: As a general rule, shareholders cannot ordinarily sue in equity to redress
wrongs done to the corporation, but that the action must be brought by the Board
of Directors. However, this rule admits of exceptions. In this case, the complaint
alleged and the demurrer admitted that Teal & Company is under the complete
control of the BOD, the principal defendants. In these circumstances, it is obvious
that a demand upon the Board of Directors to institute action and prosecute the
same effectively would have been useless, and the law does not require litigants to
perform useless acts.
Mackin v. Nicollet Hotel (1928)
Facts: Nicollet Hotel, Inc. desired to erect a new hotel building, and was need in
funds for such purpose. To raise funds, NHI proposed to issue and sell bonds, sell
part of its preferred capital stock, and take out a loan. To induce third parties to
purchase such bonds and the preferred capital stock, the stockholders have
offered to transfer their shares of common stock in NHI to voting trustees under a
voting trust agreement.
Mackin and Cooper are owners of trust certificates of common stock of NHI. They
brought a case to have the court declare the voting trust agreement void. They
argue that it has denied them of their rights as common stockholders.
Held: Voting trust agreements are valid and binding, if they (1) are based upon a
sufficient consideration, (2) Do not contravene public policy or a positive
prohibitory statute, (3) Do not sound in fraud or wrong against the stockholders
It is the object of the agreement which furnishes the test, and not the form. Where
the trust is voluntarily created as a condition precedent to a loan to protect those
who have furnished the money that has put the life into a corporation, the
agreement is valid.
NIDC v Aquino (1988)
Facts: Batjak executed a 1st mortgage in favor of PNB on all its properties in
Misamis Occidental and Leyte while its plant in Davao was mortgaged to Manila
Bank which instituted foreclosure proceedings but aborted upon payment of
P2.4M by NIDC. In exchange, the oil mill in Davao was mortgaged to NIDC, wholly-
owned subsidiary of PNB. Then, a Voting Trust Agreement which was for a period of
5 years was executed in favor of NIDC by stockholders representing 60% of the
outstanding shares of the corporation. PNB instituted extrajudicial foreclosure of
2 oil mills while oil mill in Davao was extrajudicially foreclosed by NIDC. 3 years
later, Batjak wrote a letter to NIDC requesting turn-over and transfer of all its
assets, properties, management and operation due to the non-renewal of the
Voting Trust Agreement.
Held: Under the Voting trust agreement, what was to be returned by NIDC as trustee
to Batjak's stockholders, upon the termination of the agreement, are the
certificates of shares of stock belonging to Batjak's stockholders, not the
properties or assets of Batjak itself which were never delivered, in the first place to
NIDC, under the terms of said Voting Trust Agreement. In any event, a voting trust
transfers only voting or other rights pertaining to the shares subject of the
agreement or control over the stock as provided for by Section 59, Paragraph 1 of
the Corporation Code
3. Pooling and Voting Agreements
- Agreement between two or more stockholders to vote their shares the same way
- VALID as long as they do not limit the discretion of the board of directors in the
management of the corporate affairs, or work any fraud against the stockholders
not parties to contract
- Unlike VTA, it does NOT involve a transfer of stocks but is merely a private
agreement between 2 or more SH to vote the same way
44

- With respect to close corporations:
Sec. 100. Agreements by stockholders. –
1. Agreements by and among stockholders executed before the formation and
organization of a close corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent that
such agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are contained, except
those required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights, the shares
held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to
any phase of the corporate affairs, shall be invalidated as between the parties
on the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation as to restrict or interfere
with the discretion or powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management
or operation of the business and affairs of a close corporation, the stockholders
shall be held to strict fiduciary duties to each other and among themselves.
Said stockholders shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability insurance.
Ringling v Ringling Bros (1946)
Facts: Edith Conway Ringling, and Aubrey B. Haley were stockholders of a
corporation. They executed a ‘Memorandum of Agreement’ between them, which
provided, among other things, that in their exercising of their voting rights as
stockholders in the corporation, they will act jointly, in accordance with such
agreement as they may reach.
The Agreement provided further that if they fail to agree on how to vote, the
question in disagreement shall be submitted for arbitration to an arbitrator whose
decision shall be binding upon them.
During the annual stockholders' and directors' meetings, Audrey B. Haley, through
her proxies, refused to follow the instructions of the arbitrator: First, she refused to
follow the instructions given by Loos that the stock be voted for an adjournment.
Second, she refused to follow the directive of the Arbitrator that the stock of the
two parties should be voted for five named nominees for directors. Mrs. Haley
instead voted all her shares for the election of Aubrey B. Haley and James A. Haley.
Edith Conway Ringling now contests the validity of the election of directors and
officers of the defendant corporation which took place at its 1946 meeting. She
alleges that the voting pursuant thereto was not held in accordance with the
Agreement between the parties.
Held: It is not a voting trust agreement, but a pooling agreement. A voting trust as
commonly understood is a device whereby two or more persons owning stock with
voting powers, divorce the voting rights thereof from the ownership, retaining to all
intents and purposes the latter in themselves and transferring the former to
trustees in whom the voting rights of all the depositors in the trust are pooled. The
Agreement is actually a variation of the well-known stock pooling agreement and
as such is to be distinguished from a voting trust.
First, it must be emphasized that voting trustees have continuous voting control for
the period of time stipulated in the agreement of trust. Here, the right of the
arbitrator to direct the vote is limited to those particular cases where a
stockholder's vote is called for and the parties cannot agree.
Second, in a voting trust as generally understood, the trustees in the very first
instance determine policy and implement it by their votes. Here, the parties desired
that they should have the initial choice to determine policy in so far as it was
determined by the vote of their shares; a third party identified as an arbitrator
should only resolve a conflict.
On whether the stock pooling agreement is valid:
Generally, agreements and combinations to vote stock or control corporate action
and policy are valid, PROVIDED they seek without fraud to accomplish only what
the parties might do as stockholders and do not attempt it by illegal proxies, trusts,
or other means in contravention of law.
CORPORATION | PROF. G. DEE | CALLUENG
On the effect of a further refusal of a party to the agreement to follow the arbitrator:
When a party or her representative refuses to comply with the direction of the
arbitrator, while he is properly acting under its provisions, the court believes that
the agreement constitutes the willing party to the agreement an implied agent
possessing the irrevocable proxy of the recalcitrant party for the purpose of casting
the particular vote. Here an implied agency based on an irrevocable proxy is fully
justified to implement the agreement without doing violence of its terms.
EK Buck Retail Store v Harkert (1954)
Facts: Walter Harkert entered into a Stockholders Control Agreement with Earl
Buck wherein Buck would cancel Harkert’s debt and pay cash into Harkert Houses
in return for 40% of its stocks and Buck, although owning only 40% of the
Corporation can nominate and elect 2 out of the 4 Board of Directors of the
Corporation. After the Harkert Houses was saved from its financial problems,
Harkert doesn’t want to honor the contract by insisting to vote for the board of
directors based on the shares owned in the corporation (Harkert owns 60% while
Buck owns 40%) and not based on the control agreement (they each can nominate
2 directors each).
Held: A stockholder owning a majority of the stock of a corporation may lawfully
contract with another stockholder to vote his stock for certain persons as directors
in order to secure additional funds for the corporation when such agreement is
reasonable, intended to be for the benefit of the corporation, and does no injury
other than the contemplated detriment to the contracting stockholders.
Stockholders control agreements are not invalid per se. If they are based on a
sufficient consideration between the contracting Stockholders they are valid and
binding if they do not contravene any express Constitutional or statutory provision
or contemplate any fraud, oppression, or wrong against creditors or other
Stockholders, or other illegal object
One who has received the benefit of a provision in a stockholders control
agreement for a long period of time, which provision was for his sole benefit, is
estopped to deny the validity of the provision as a basis for voiding the whole
agreement.
Clark v Dodge (1936)
Facts: The corporations involved manufactured medicinal preparations by secret
formulae. Clark owned 25% while Dodge 75% of each corporation. Dodge and
Clark had an agreement wherein Clark would share the knowledge with Dodge’s
son, and that Dodge would (1) personally or through a trustee, vote so that Clark
could continue as director of Bell, and (2) continue to be its Gen.Manager and (3)
Clark would receive ¼ of the net income of the corporations by salary or dividends
and (4) no unreasonable salaries be paid to other officers or agents. Clark agreed
to disclose the formula to the son, and that if he dies he would bequeath the stocks
to the wife and children of Dodge. The complaint alleged that Dodge failed to use
his stock control to continue Clark as director and manager, and prevented him
from receiving his proportion of the income by hiring incompetent persons at
excessive salaries.
Held: Agreement is valid. If the enforcement of a particular contract damages
nobody - not even, in any perceptible degree, the public - one sees no reason for
holding it illegal.
Where the directors are the sole stockholders, there seems to be no objection to
enforcing an agreement among them to vote for certain people as officers. So,
where the public was not affected, the parties in interest might, by their original
agreement of incorporation, limit their respective rights and powers, even where
there was conflicting statutory standard.
4. Cumulative Voting
Formula to determine the minimum number of votes needed to elect one director:
Number of shares required = x
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑎𝑛𝑑𝑖𝑛𝑔
𝑥= +1
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑡𝑜 𝑏𝑒 𝐸𝑙𝑒𝑐𝑡𝑒𝑑+1
𝑆ℎ𝑎𝑟𝑒𝑠 𝑅𝑒𝑝𝑟𝑒𝑠𝑒𝑛𝑡𝑒𝑑 𝑎𝑡 𝑀𝑒𝑒𝑡𝑖𝑛𝑔∗ 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑡𝑜 𝑏𝑒 𝑒𝑙𝑒𝑐𝑡𝑒𝑑
𝑥= +1
𝑇𝑜𝑡𝑎𝑙 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝐷𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑡𝑜 𝑏𝑒 𝐸𝑙𝑒𝑐𝑡𝑒𝑑+1
𝑣𝑜𝑡𝑒𝑠 𝑡𝑜 𝑒𝑙𝑒𝑐𝑡 𝑑𝑒𝑠𝑖𝑟𝑒𝑑 𝑛𝑜. 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 = 𝑥×𝑇𝑜𝑡𝑎𝑙 𝑛𝑜. 𝑜𝑓 𝑑𝑖𝑟𝑒𝑐𝑡𝑜𝑟𝑠 𝑡𝑜 𝑏𝑒 𝑒𝑙𝑒𝑐𝑡𝑒𝑑
5. Classification of Shares
Sec. 6. Classification of shares. - The shares of stock of stock corporations may
be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be stated
45

in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have a
par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other
share. Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
Sec. 8. Redeemable shares. Redeemable shares may be issued by the
corporation when expressly so provided in the articles of incorporation. They
may be purchased or taken up by the corporation upon the expiration of a fixed
period, regardless of the existence of unrestricted retained earnings in the
books of the corporation, and upon such other terms and conditions stated in
the articles of incorporation, which terms and conditions must also be stated
in the certificate of stock representing shares.
Sec. 9. Treasury shares. – Treasury shares are shares of stock which have been
issued and fully paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation, or through some other lawful
means. Such shares may again be disposed of for a reasonable price fixed by
the board
If shares are classified into common voting and preferred non-voting, the
management of corporate affairs will be controlled by whoever owns the majority
of the common voting shares, which majority may in fact be only a minority of the
total number of shares, both voting and non-voting
Gottschalk v Avalon Realty (1946)
Facts: Avalon Realty was reorganized when it experienced financial difficulties.
Under the reorganization, each first mortgage bondholder received a new 5% first
mortgage bond in the amount of ½ the principal. He received first preferred stock
for the balance of the principal plus interest due his old bond. General creditors
received second preferred stock. The ownership of the common stock was not
changed, but it was placed in a voting trust composed of four members, 3 of whom
CORPORATION | PROF. G. DEE | CALLUENG
were to be elected by the bondholders, and the other by the holders of the common
stock. It was stipulated that the first preferred stock shall have the right to vote
whenever default shall exist in the payment of dividends for any year after July 1,
1951. Second preferred stock shall be entitled to a preference of dividends and
division of assets. It shall have the right to vote after default in the payment of
dividends for any two years after July 1, 1951.
Held: The corporate articles deny to the first and second preferred stockholders the
right to vote prior to the happening of the specified contingencies. The provision
that such stock may vote upon the happening of such contingencies clearly implies
that it may not vote until the contingencies occur. Any other interpretation of the
language would render it superfluous and without meaning.
A denial may exist expressly or by necessary implication. A denial may exist under
an express provision even though the denial may not be express. Such is the
situation in this case. We agree that unless a denial is clearly manifested, it should
not be given effect, but where, as here, it is clear, it should be given effect even
though it is not express.
6. Restriction on Transfer of Shares
The most common restriction on transfer of shares is one which gives a first option
to other stockholders and/or the corporation to acquire the shares of a stockholder
who wishes to sell them
- Sec. 96 of the Code on close corporations: a corporation cannot qualify for the
special treatments accorded by it to close corporation unless transfer of its stocks
is subject to one or more restrictions allowed by law
7. Prescribing qualifications for directors; founders’ shares
- A by-law provision that only stockholders with a stated minimum number of shares
fully paid up may be elected as directors is valid
- As long as the qualifications imposed are reasonable and not meant to unjustly
or unfairly deprive the minority of their rightful representation in the BOD, such
provisions are within the power of the majority of the SHs to provide in the by-laws
- Qualification that only holders of founders’ shares may qualify for directorship is
valid
- FOUNDER SHARES are those which were originally owned by those who founded
the corporation
Sec. 7. Founders' shares. - Founders' shares classified as such in the articles
of incorporation may be given certain rights and privileges not enjoyed by the
owners of other stocks, provided that where the exclusive right to vote and be
voted for in the election of directors is granted, it must be for a limited period
not to exceed five (5) years subject to the approval of the Securities and
Exchange Commission. The five-year period shall commence from the date of
the aforesaid approval by the Securities and Exchange Commission
GR: Non-voting shares shall be limited to preferred and redeemable shares
XPN: Founder’s shares in Sec. 7
8. Management Contracts
Sec. 44. Power to enter into management contract. - No corporation shall
conclude a management contract with another corporation unless such
contract shall have been approved by the board of directors and by
stockholders owning at least the majority of the outstanding capital stock, or
by at least a majority of the members in the case of a non-stock corporation, of
both the managing and the managed corporation, at a meeting duly called for
the purpose: Provided, That (1) where a stockholder or stockholders
representing the same interest of both the managing and the managed
corporations own or control more than one-third (1/3) of the total outstanding
capital stock entitled to vote of the managing corporation; or (2) where a
majority of the members of the board of directors of the managing corporation
also constitute a majority of the members of the board of directors of the
managed corporation, then the management contract must be approved by the
stockholders of the managed corporation owning at least two-thirds (2/3) of
the total outstanding capital stock entitled to vote, or by at least two-thirds
(2/3) of the members in the case of a non-stock corporation. No management
contract shall be entered into for a period longer than five years for any one
term.
The provisions of the next preceding paragraph shall apply to any contract
whereby a corporation undertakes to manage or operate all or substantially all
of the business of another corporation, whether such contracts are called
service contracts, operating agreements or otherwise: Provided, however, That
such service contracts or operating agreements which relate to the exploration,
46

development, exploitation or utilization of natural resources may be entered
into for such periods as may be provided by the pertinent laws or regulations.
In the absence of express language to that effect, Sec. 44 should not be interpreted
as an exception to Sec. 23 which lays down the GR which is all corporate powers
are to be exercised by the board.
- MANAGEMENT CONTRACT is a contract to manage the day-to-day affairs of the
corporation just like a general manager does.
- BASIS: lease of services therefore cannot be terminated at will but only in
accordance with contract
Sherman & Ellis v Indiana Mutual (1930)
Facts: IMC, a casualty insurance company, and E&S agreed that E&S will manage
IMC for a fee by supplying IMC an underwriting and executive management in the
person of its president or such other officer as it may from time to time designate
for a 20 year period. IMC shall elect the officer furnished by E&S for its underwriting
manager who shall have general supervision and charge of the underwriting affairs
of the corporation. IMC terminated the agreement before the end of such 20 year
period. E&S sought specific performance of the contract with damages.
Held: Corporations may, at least for a limited period, delegate to a stranger certain
duties usually performed by the officers. It is equally well settled that there are
duties, the performance of which may not be indefinitely delegated to outsiders.
The Board of Directors shall have the general control and management of the
business of the corporation. In this case, nothing of importance was left for the
board of directors but unimportant, ministerial duties. Such an agreement shows
that E&S was not merely a soliciting agent of IMC. It contemplated the substitution
of E&S for the officers of IMC. If there is a conflict of opinion between the board
and E&S, E&S would control. The agreement transcends the spirit and theory upon
which corporate franchises are based, and is void.
9. Unusual Voting and Quorum Requirements
Sec. 97. Articles of Incorporation. The articles of incorporation of a close
corporation may provide:
xxx
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
Benintendi v Kenton Hotel (1945)
Facts: Two men who owned all the stock of a domestic business corporation made
an agreement to vote for and later did vote for and adopt at a stockholder’s meeting
the by-laws of the corporation, namely: (1) that no resolution of stockholders
should be adopted except by unanimous vote of stockholders, (2) that the election
of directors would have to be by unanimous vote of the stockholders, (3) that no
resolution of the directors should be adopted except by unanimous vote of the
directors, and (4) the by-laws should be amended only by unanimous vote of
stockholders.
Held: The by-laws of a corporation cannot be in contravention of legal principles,
whether they be expressly stated in statutes or as held in common law. Under
corporation law, a quorum is the requirement, not unanimity. Requiring a different
standard would run in contravention to the will of the Legislature. Only fourth by-
law is valid. This does not seem to be specifically or impliedly forbidden by statute.
Nor is there any public interest or policy involved.
Fua Cun v Summers (1923)
Facts: Chua Soco partially paid for his subscribed 500 shares of stock from CBC
and was issued a receipt. He then executed a PN in favor of Fua Cun and as security,
mortgaged such shares to the latter. Fua Cun informed CBC. In the meantime,
Chua Soco became indebted to CBC so the latter had his shares of stock attached.
Who has the better right to the shares?
Held: Fua Cun. First, a corporation has no lien upon the shares of the SHs for any
indebtedness to the corporation. Fua Cun’s rights consist in an equity of 500
shares and upon payment of the unpaid portion, he becomes entitled to the
issuance of the certificate for 500 shares in his favor. As against Fua Cun’s rights,
that CBC has no lien is further affirmed by the fact that CBC was given notice of Fua
Cun’s transaction prior to its attachment of the shares.
Baltazar v Lingayen Gulf (1965)
Facts: Minority Stockholders (Baltazar Group) contests the resolutions made by the
Majority Stockholders (Ungson Group): 1. declaring watered down stocks of no
CORPORATION | PROF. G. DEE | CALLUENG
value, 2. payments already made shall be applied to interests first before capital
and declaring those fully paid shares issued w/o interest to be cancelled, 3.
delinquent shares’ voting rights shall be suspended until delinquency has been
fully paid
Held: Section 37 of the Corporation Law provides: No certificate of stock shall be
issued to a subscriber as fully paid up until the full par value thereof, or the full
subscription in the case of no par stock, has been paid by him to the corporation.
Subscribed shares not fully paid up may be voted provided no subscription is
unpaid and delinquent.
The present law requires as a condition before a shareholder can vote his shares,
that his full subscription be paid in the case of no par value stock; and in case of
stock corporation with par value, the stockholder can vote the shares fully paid by
him only, irrespective of the unpaid delinquent shares. Thus, in the case of par
value shares, upon payment of its par value, even if there remains unpaid
subscription, the stockholder can already vote. Therefore, its call for suspension of
voting rights can only apply to those who have not fully paid the par value of their
shares.
Nava v Peers Marketing (1976)
Facts: Po paid only 25% of his subscription to Peers Marketing. He sold the shares
to Nava. Nava filed mandamus to compel the corporation to register under his
name the shares.
Held: The transfer made by Po to Nava is not the "alienation, sale, or transfer of
stock" that is supposed to be recorded in the stock and transfer book, as
contemplated in section 52 of the Corporation Law. As a rule, the shares which may
be alienated are those which are covered by certificates of stock. There should be
compliance with the mode of transfer prescribed by law. No stock certificate was
issued to Po. Without stock certificate, which is the evidence of ownership of
corporate stock, the assignment of corporate shares is effective only between the
parties to the transaction. The delivery of the stock certificate, which represents the
shares to be alienated, is essential for the protection of both the corporation and
its stockholders
Chapter VIII. Duties of Directors and Controlling Stockholders
DIRECTORS – act as a body in the formulation of all corporate policies and exercise
all powers of management, to the exclusion of stockholders
- they are fiduciaries - expected to serve the corporation with reasonable diligence
and skill and with utmost loyalty to its interests.
3-FOLD DUTY TO THE CORPORATION:
1. Diligence
2. Loyalty
3. Obedient
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
wilfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons.
When a director, trustee or officer attempts to acquire or acquires, in violation
of his duty, any interest adverse to the corporation in respect of any matter
which has been reposed in him in confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he shall be liable as a trustee for
the corporation and must account for the profits which otherwise would have
accrued to the corporation. (n)
The duty of obedience imposes on the directors the obligation to act only within the
corporate powers, under the penalty for damages, unless they acted in good faith
and due diligence
- Liability may still arise if they have not observed due diligence or have been
disloyal to the corporation
Duty of Diligence; Business Judgment Rule
DIRECTORS undertake that they possess at least ordinary knowledge and skill and
that they will use them in the discharge of their functions as such
- Directors can be held liable not only for willful dishonesty but also for negligence
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- Although they are not expected to interfere with day-to-day administrative details
of the business of the corporation, they should keep themselves sufficiently
informed about the general condition of the business, and to some extent, of the
manner in which it is being conducted, so that they may become aware of the
difficulties and the problems that must be met and solved.
Business judgment rule:
GR: Contracts intra vires entered into by the board of directors are binding upon
the corporation, and that the courts will not interfere unless such contracts are so
unconscionable
- The degree of care and diligence required is usually that which men prompted by
self-interest, generally exercise in their own affairs
Otis & Co. v Pennsylvania R Co. (1945)
Facts: Stockholder Otis filed a derivative action against Pennsylvania Railroad Co.,
its officers and directors, and the Pennsylvania, Ohio and Detroit Railroad Co. and
its officers and directors. Pennsylvania Ohio is a subsidiary of Pennsylvania
Railroad. PRC sold to Kuhn, Loeb and Co bonds owned by Pennsylvania Ohio. Otis
alleges that there was negligence on the part of the directors for their refusal to
deal with any other investment house other than Kuhn, Loeb & Co.
Held: The directors of a corporation are required to exercise reasonable and
ordinary care, skill and diligence in conducting its business, and the failure to
observe this standard of care imposes liability on a defaulting director, that is, the
care, skill and diligence which is the ordinary prudent man would exercise in similar
circumstances.
There is no conflict between the business judgment rule and negligence. Courts will
not interfere with the internal management of corporations, and will not substitute
its judgment for that of the officers and directors. A director cannot close his eyes
to what is going on about him in the conduct of the business of the corporation and
have it said that he is exercising business judgment. Courts have properly decided
to give directors a wide latitude in the management of the affairs of a corporation
provided always that judgment and that means an honest, unbiased judgment, is
reasonably exercised by them
Montelibano v Bacolod-Murcia Milling Co. (1962)
Facts: Board of Directors of Bacolod Murcia Milling Co., Inc adopted a resolution
granting further concessions to the planters over and above those contained in the
Amended Milling Contract. Montelibano contends that three Negros sugar centrals
had already granted increased participation to their planters, and that under
paragraph 9 of said resolution, the company had become obligated to grant similar
concessions to Montelibano. Bacolod Murcia contend that the resolution was
without consideration and is made beyond the powers of the corporate directors to
adopt.
Held: Resolution was valid as it was supported by the same consideration
underlying the main amended milling contract. The directors of the company had
authority to modify the proposed terms of the Amended Milling Contract for the
purpose of making its terms more acceptable to the other contracting parties. The
test to be applied is whether the act in question is in direct and immediate
furtherance of the corporation’s business, fairly incident to the express powers and
reasonably necessary to their exercise.
As to WON the resolution was passed in good faith, the Court ruled that questions
of policy or of management are left solely to the honest decision of officers and
directors of a corporation, and that the court is without authority to substitute its
judgment of the board of directors; the board is the business manager of the
corporation, and so long as it acts in good faith, its orders are not reviewable by the
courts
PSE v CA (1997)
Facts: Puerto Azul land Inc sought to offer its shares to the public in order to raise
funds. Before the PSE could act upon PALI’s application, the Board of Governors of
the PSE received a letter from the heirs of Ferdinand Marcos claiming that
President Marcos owned certain properties forming part of the beach hotel and
complex PALI claims to own. PSE did not grant PALI’s application but SEC ordered
the PSE to allow PALI to be listed in the stock market
Held: As to its corporate and management decisions, the state will generally not
interfere with the same. Questions of policy and of management are left to the
decision of the officers and directors of a corporation, and the courts are without
authority to substitute their judgment for the judgment of the BOD. The board is the
business manager of the corporation, and so long as it acts in good faith, its orders
CORPORATION | PROF. G. DEE | CALLUENG
are not reviewable by the courts. Thus, notwithstanding the regulatory power of the
SEC over the PSE, and the resultant authority to reverse the PSE’s decision in
matters of application for listing in the market, the SEC may exercise such power
only if the PSE’s judgment is attended by bad faith. Bad faith does not simply
connote bad judgment or negligence but imports a dishonest purpose or some
moral obliquity and conscious doing of wrong. It means a breach of a known duty
through some motive or interest of ill will, partaking of the nature of fraud.
Litwin v. Allen (1940)
Facts: The defendants are directors and the estates of deceased directors of
Guaranty Trust Company of New York (Guaranty Trust) and its wholly owned
subsidiary, now in liquidation, Guaranty Company of New York (Guaranty
Company), together with members of the banking firm of J. P. Morgan & Co. 4
transactions were the basis for the actions:
Facts: The purchase by certain individual defendants from J. P. Morgan & Co. about
January 30, 1929, of Alleghany Corporation common stock at $20 a share and the
profits made by those defendants as a result thereof.
Held: Directors are liable for negligence in the performance of their duties. Not
being insurers, directors are not liable for errors of judgment or for mistakes while
acting with reasonable skill and prudence. The determination of whether a director
has discharged his duty, whether or not he has been negligent, depends upon the
facts and circumstances of a particular case, the kind of corporation involved, its
size and financial resources, the magnitude of the transaction, and the immediacy
of the problem presented. A director is called upon ‘to bestow the care and skill’
which the situation demands. In order to determine whether transactions approved
by a director subject him to liability for negligence, we must ‘look at the facts as
they exist at the time of their occurrence, not aided or enlightened by those which
subsequently take place.
In this case, they are not liable. The offer to the individual defendants was made
only after the Guaranty Company’s commitment on the 500,000 shares purchase
was fixed. The offer was made independent of the offer to Guaranty Company and
in their capacity as investors and not as directors or fiduciaries of Guaranty
Company. Guaranty Company did not want the stock of Alleghany Corporation.
Guaranty Company bought none of it. The Company was employed for a
commission to retail 500,000 shares which it did not want for its own purposes at
all.
Facts: Participation by the Trust Company or the Guaranty Company, or both in a
purchase of Missouri Pacific convertible debenture bonds at par and interest, with
an option to the seller, Alleghany Corporation, to repurchase them at the same
price within six months. The plaintiffs claim that a loss of approximately
$2,250,000 was sustained in this transaction.
Held: Directors (and other participants) are liable in this transaction because the
entire arrangement was so improvident, so risky, so unusual and unnecessary as to
be contrary to fundamental conceptions of prudent banking practice. A bank
director when appointed or elected takes oath that he will, so far as the duty
devolves on him ‘diligently and honestly administer the affairs of the bank or trust
company.’ Honesty alone does not suffice; the honesty of the directors in this case
is unquestioned. But there must be more than honesty—there must be diligence,
and that means care and prudence, as well. This transaction, it has been said, was
unusual; it was unique, yet there is nothing in the record to indicate that the advice
of counsel was sought. It is not surprising that a precedent cannot be found dealing
with such a situation.
A director is not liable for loss or damage other than what was proximately caused
by his own acts or omissions in breach of his duty. Therefore, defendants are only
liable for the loss attributable to the improper repurchase option itself, and this
option ceased to be the motivating cause of the loss within a reasonable time after
April 16, 1931.
Facts: Participation by the Trust Company to the extent of $11,000,000 in a
$39,500,000 loan to Vaness Company and Cleveland Terminals Building
Company, which were Van Sweringen enterprises; and the carrying and handling of
this loan during the four and one-half year term thereof through defaults in interest,
depreciation of collateral and the release of collateral. The loss claimed by the
plaintiffs to have been sustained by the Trust Company in this transaction is over
$9,250,000.
Held: Directors of a banking institution are entrusted with the management of the
affairs of the bank, and if, in the course of management, they make a decision for
48

which there is reasonable basis, in good faith, with respect to a loan in which they
have no personal interest, as the result of their independent judgment and
uninfluenced by any consideration other than what they honestly believe to be for
the welfare and the best interests of their bank, it is not the function of the court to
say that it would have acted differently, and to charge directors for loss that occurs.
In this case, all of the evidence in the record shows that the Van Sweringen note
was set up by the Guaranty Company officers with study and care with provisions
for the maintenance of $15,000,000 segregated assets.
Facts: The auction sale of the collateral under the loan, which took place
September 30, 1935.
Held: The evidence is uncontradicted that the decision to sell the collateral at
public auction and the arrangements for the protective bids at the auction were the
result of open discussion among the eight participants in the loan at a series of
meetings called for the purpose and that the course of conduct actually followed
with respect to the auction was freely acquiesced in by all eight participants in the
loan
Walker v Man
Facts: The litigation is by the trustee in bankruptcy of Frederick Southack and Alwyn
Ball Jr and seeks to recover claims from defendants as former directors of the
bankrupt corporation for dereliction of duty and mismanagement of conduct in the
bankrupt’s affairs. The complaint alleges that directors mismanaged its affairs and
acquiesced in wrongdoing of others is a COA under the general corporation law.
Held: The fact that one of the defendants was not a director during the time of the
wrongful acts were done does not relieve him where he took no steps to preserve
credit of corporation and to recover sums illegally paid out as dividends after he
became director. He may be liable for the declaration of unlawful dividends for it is
shown that he approved, ratified and acquiesced in the illegal activities of those
who were managing the affairs of the corporation. Ratification in this case, may be
implied through his acquiescence instead of expressed by positive and distinct
action or language. A director may not shut off liability by shutting off his sight and
hearing. It is his duty to know what is transpiring. The company’s stockholders,
creditors and the public have a right to rely upon the performance by him of the
duties of a director.
A further allegation of the complaint charging them with mismanagement in
connection with the affairs of a hotel corporation in which the bankrupt company
was interested is sufficient to hold the directors personally liable if the allegation
be proved, that the project was undertaken without any competent or adequate
investigation and without any reasonable or proper regard to the financial
obligation of the corporation by virtue of its guaranteeing of the existing contracts
for the erection of the hotel
Steinberg v. Velasco (1929)
Facts: The BoD issued resolutions which: (a) approved unlawful purchases of stock
of the corporation from its SH; and (b) issued dividends to its SHs. This was done
at a time when the debts of the corporation outweighed the assets of the
corporation.
Held: Such acts affected the financial condition of the corporation in a negative
manner. The directors did not act in good faith and were grossly ignorant of their
duties.
Directors are not liable for losses resulting to the corporation from want of
knowledge on their part; or for mistakes of judgment, provided they were honest,
and provided they are fairly within the scope of the powers and discretion confided
to the managing body. But the acceptance of the office of a director of a
corporation implies a competent knowledge of the duties assumed, and directors
cannot excuse imprudence on the ground of their ignorance or inexperience; and if
they commit an error of judgment through mere recklessness or want of ordinary
prudence or skill, they may be held liable for the consequences. A director is bound
not only to exercise proper care and diligence, but ordinary skill and judgment. As
he is bound to exercise ordinary skill and judgment, he cannot set up that he did
not possess them. Creditors of a corporation have the right to assume that so long
as there are outstanding debts and liabilities, the board of directors will not use
the assets of the corporation to purchase its own stock, and that it will not declare
dividends to stockholders when the corporation is insolvent.
In this case, directors were held personally liable for causing the corporation to
purchase their own shares and declaring dividends, which because of such failure
to take into consideration of worthless receivables, worked to the detriment of the
creditors. The directors did not act with diligence in taking the word of their
CORPORATION | PROF. G. DEE | CALLUENG
chairman and not making an informed decision based on the facts then available
to them and on not relying on other documents available to them
Barnes v. Andrews (1924)
Facts: A year after Liberty’s organization, Andrews took office as a director, and
served until he resigned on June 21, 1920. During his incumbency, the board of
directors only met twice. He attended the first and missed the second because of
his mother’s death. Andrews was a friend of the president, who had induced him as
the largest stockholder to become a director. His only attention to the affairs of
Liberty consisted of talks with the president as they met from time to time. A force
of officers and employees was hired at substantial salaries. Starter parts were
made in quantity but delays were experienced in the production of starters as a
whole. Due to the running charges, the funds of Liberty were steadily depleted. The
theory of Barnes was that Andrews had failed to give adequate attention to the
affairs of Liberty, which had been conducted incompetently and without regard to
the waste in salaries during the period before production was possible.
Held: Andrews cannot be charged with neglect in attending meetings, as there were
only two during his incumbency. His liability must depend upon his failure, in
general, to keep advised of the conduct of the corporate affairs. While directors are
collectively the managers of the company, they are not expected to interfere
individually in the actual conduct of its affairs. To do so would disturb the authority
of the officers and destroy their individual responsibility, without which no proper
discipline is possible. To the directors must be left the initiative and the immediate
direction of the business. They have an individual duty to keep themselves informed
in some detail. It is this duty that Andrews failed to adequately perform.
However, Barnes must go further than to show that Andrews should have been more
active in his duties. Barnes must show that, had Andrews done his full duty, he
could have made Liberty prosper, or at least could have broken its fall. Barnes has
not made any effort to show any of these. Andrews is not subject to the burden of
proving that the loss would have happened whether he had done his duty or not.
Directors are not specialists, like lawyers or doctors. They must have good sense,
and perhaps an acquaintance with affairs. But they need not have any technical
talent. They are general advisers of the business.
Pool v Pool (1945)
Facts: Robert Pool (Stockholder and Secretary) filed a suit against Stephen Pool
(VP and director) to recover the amount which Robert, as stockholder was
compelled to pay on federal surtax against the S.D. Pool Realty Company. This was
because the directors failed to distribute earnings of the corporation.
Held: The directors were not liable. The directors were only required to exercise
reasonable care and diligence and act in good faith and with that judgment and
discretion which ordinarily prudent men exercise under similar circumstances.
In the case at bar, the corporation employed a CPA and also had the advice of a
lawyer in the conduct of its legal affairs and they had the right to rely on the advice
of these people to look after the legal and technical matters. The directors did not
know that these dividends should be distributed before March 15 to avoid the
surtax. Robert admits he never advised the defendants to distribute before March
15 notwithstanding that he was a stockholder and had as much at stake as any of
the defendants.
Foster v Bowen (1942)
Facts: Bowen, a lawyer, is the president and director of Fitchburg and Leominster
Street Railway Company. The company owns and operates an amusement resort,
Whalon Park. The park has a roller skating rink which is being leased by the
company’s treasurer and manager, Cushing with the approval of then president
Baker. At a director’s meeting, Bowen, now president, commented that the lease
was illegal but Cushing claimed that the lease had been going on since Baker’s
time and that Baker knew about it and that he will give up the lease after the current
term. Bowen asked the directors what they wished to do. No one made any
suggestion and the passed on to consideration of the next business. Eventually,
Cushing was ousted as director and officer. This case is brought by the minority
stockholders in behalf of all stockholders who want to recover losses which were
allegedly sustained by the company because of Bowen’s breach of his fiduciary
duty as director and president.
Held: Bowen not liable for the sums received by Cushing from his lease after
Bowen’s discovery on January 20, 1937. Directors of a business corporation in the
absence of positive statutory enactment are not responsible for errors of judgment
provided they act honestly. Bowen’s delay from January 20 to May 14 is of no
material consequence. When only Bowen and Cushing were dealing prior to the
49

directors’ meeting, there was an agreement that Cushing should make
improvements to the rink which he actually performed. Further, the income had
greatly increased in the 3 years preceding May 14. There is no absolute prohibition
of dealings between a corporation and its officers, if proper safeguards are
observed to insure that those acting for the corporation are themselves
disinterested and the utmost good faith is exercised. So far as the records prove, it
may have been a reasonable exercise of judgment to take no action during the
directors’ meeting. Further, it could have been interpreted that they ratified that
lease.
Bowen cannot also be held liable for the loss of benefit under two fidelity bonds
which were allegedly to indemnify the company against loss of money or other
personal property such as the improper conduct of Cushing. The Court held that the
acts of Cushing do not fall within those “insured” by the bonds and Cushing seems
to have acted in good faith.
Lowell, Hoit & Co. v Detig et al. (1943)
Facts: Detig et al. were directors in a farmers cooperative grain company which
operated an elevator under the corporate name Steward Cooperative Grain
Company. Lowell Hoit & Co. entered into a lease agreement with the Grain
Company through Hermann, the manager. Under the agreement, Lowell became
the lessee of certain bins in the elevator for storage of grain. It was alleged that, of
the 12,000 bushels of oats stored in the bins, the Grain Company shipped and sold
9,081 bushels without the knowledge or consent of Lowell, and that it failed to
account for the proceeds. Lowell filed this action against Hermann and Detig et al.
to recover for the alleged willful conversion of the grains.
Held: Directors, although authorized and justified in committing the details of the
conduct of the corporate business to subordinate officers, are not justified in
withdrawing their supervision and control of corporate affairs. They cannot divest
themselves of the duty of general supervision and control by committing this duty
to a subordinate officer. By reason of necessity, it becomes proper that directors
entrust to subordinate and executive officers the discretionary powers which
usually and ordinarily appertain to the immediate management of the particular
business.
In this case, it does not appear that the directors did not exercise care and
prudence in their selection of Hermann and that they sought to divest themselves
of a general supervision of the conduct of the business. It also does not appear that
they had any knowledge of or had acquiesced in a continuous or repeated course
of conduct of the part of Hermann.
Courts will treat directors with more leniency with respect to a single isolated act
of fraud on the part of a subordinate officer or agent, than where the practice
appears to have been so habitually and openly committed a to have been easily
detected upon proper supervision. Here, there was a single act secreted by the
subordinate officer from the directors with no corporate record to come before
them reflecting such transaction.
For a director to be held liable for the acts of subordinate officers, he must
participate therein, be guilty of lack of ordinary and reasonable supervision, or be
guilty of lack of ordinary care in the selection of such officer.
As to the liability of a director for a tort committed by a corporation, the test is
whether the director authorized or participated in the alleged wrongful act. The
mere fact that a person is a director in a corporation does not necessarily render
him liable for the torts of the corporation or its agents.’
Bates v Dresser (1920)
Facts: Coleman (THIEF), entered the service of the bank as messenger in
September, 1903. In January, 1904, he was promoted to be bookkeeper and kept
the deposit ledger. In 1904 and 1905 there were some small shortages in the
accounts of three successive tellers that were not accounted for, and the last of
them, Cutting, was asked by Dresser to resign on that ground. Before doing so he
told Dresser that someone had taken the money and that if he might be allowed to
stay he would set a trap and catch the man, but Dresser did not care to do that and
thought that there was nothing wrong. After firing Cutting, Coleman acted
temporarily as a teller where he took the money directly. In November 1907,
Coleman ceased to have charge of the cash, so he invented another way to swindle
cash from the bank. When the bank closed, he was able to steal $310,143.
Held: DIRECTORS NOT LIABLE. The directors’ confidence seemed warranted by the
semiannual examinations by the Government examiner and they were encouraged
in their belief that all was well by the president, whose responsibility, as executive
officer; interest, as large stockholder and depositor; and knowledge, from long
daily presence in the bank, were greater than theirs. They were not bound by virtue
of the office gratuitously assumed by them to call in the pass books and compare
CORPORATION | PROF. G. DEE | CALLUENG
them with the ledger, and until the event showed the possibility they hardly could
have seen that their failure to look at the ledger opened a way to fraud
DRESSER AS PRESIDENT IS LIABLE. The position of the president is different.
Practically he was the master of the situation. He was daily at the bank for hours;
he had the deposit ledger in his hands at times and might have had it at any time.
In accepting the presidency Dresser must be taken to have contemplated
responsibility for losses to the bank, whatever they were, if chargeable to his fault.
Those that happened were chargeable to his fault, after he had warnings that
should have led to steps that would have made fraud impossible, even though the
precise form that the fraud would take hardly could have been foreseen
Fiduciary Duties; Conflict of Interest
- In case of conflict of his interest with those of the corporation, he cannot sacrifice
the latter without incurring liability for his disloyal act.
CONFLICT OF INTERESTS SCENARIOS
1. Self-dealing director – a director may gain undue advantage over his corporation
when he enters into a contract with the latter
- subject to the temptation of putting his interests above those of the corporation,
and exert his influence to obtain board approval of the contract, although it may
not be for the best interest of the corporation
Sec. 32. Dealings of directors, trustees or officers with the corporation – A
contract of the corporation with one or more of its directors or trustees or
officers is voidable, at the option of such corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in the board meeting in which
the contract was approved was not necessary to constitute a quorum for such
meeting;
2. That the vote of such director or trustee was not necessary for the approval
of the contract;
3. That the contract is fair and reasonable under the circumstances; and
4. That in the case of an officer, the contract with the officer has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding paragraph is
absent, in the case of a contract with a director or trustee, such contract may
be ratified by a vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of two-thirds (2/3) of the members in a
meeting called for the purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at such meeting: Provided,
however, That the contract is fair and reasonable under the circumstances
- All conditions of Sec 32 must be present
- Provision also applies to officers, who may or may not be at the same time, a
director or trustee
- Contract of self-dealing director is voidable at the option of the corporation,
regardless of WON the corporation has suffered any damages
- If there are any damages, the director or trustee guilty of violating the above
provision will be liable for all such damages suffered not only by the corporation,
but also by its stockholders, members and other persons
- RATIFICATION by stockholders makes possible a contract beneficial to the
corporation, in a situation where a majority of the directors or trustees may have
some interest in such contract
- The Code requires the vote of 2/3 of the outstanding capital stock, which means
that even the shares of the interested director may be counted
- there must be full disclosure of the adverse interest and the contract must be fair
and reasonable
- Although a director may not have voted, if the other members of the board are
under his dominating influence, he will still be considered as a participating or self-
dealing director covered by the above provision
- Neither can the director’s duty be avoided by resignation
- ENLIGHTENED MINORITY position – although the interested director participated
in the approval of the contract between him and his corporation, the latter cannot
avoid it unless it is unfair.
- Burden of proving fairness lies with the director, the contract being presumed
unfair until he proves otherwise
Palting v San Jose Petroleum Inc (1966)
50

Facts: San Jose Petroleum, Inc., organized and existing in the Republic of Panama,
filed with the SEC a sworn registration statement for the registration and licensing
for sale of Voting Trust Certificates in the Phils. representing 2,000 shares of its
capital stock of a par value of $0.35 per share, at P1.00 per share. The entire
proceeds of the sale would be used exclusively to finance the operations of San
Jose Oil Company, Inc., a domestic mining corporation. While the application was
pending, San Jose Petroleum filed an amended Statement for registration of the
sale in the Phils. of its shares of capital stock, which was increased from
2,000,000 to 5,000,000, at a reduced price of P0.70 per share from P1.00 per
share. At this time, the par value of the shares has also been reduced from $0.35
to $0.01 per share. Pedro R. Palting and others, allegedly prospective investors in
the shares of San Jose Petroleum, filed with the SEC an opposition to the
registration on the grounds that:The tie-up between the issuer, San Jose
Petroleum, a Panamanian corp., and San Jose Oil, a domestic corp., violates the
1935 Constitution, the Corporation Law, and the Petroleum Act of 1949; The issuer
has not been licensed to transact business in the Philippines; The sale of the shares
is fraudulent, and works or tends to work fraud upon Philippine purchasers; and
The issuer as an enterprise, as well as its business, is based upon unsound
business principles.
San Jose Petroleum claimed that it was a “business enterprise” enjoying parity
rights with respect to mineral resources in the Philippines under the Ordinance
appended to the Constitution, which may be exercised pursuant to the Laurel-
Langley Agreement, only through a corporation organized under Philippine laws.
SEC denied the opposition and granted the registration and licensed the sale in
the Phils. of 5M shares of the capital stock of San Jose Petroleum.
Held: Any person (who may not be “aggrieved” or “interested” within the legal
acceptation of the word) is allowed or permitted to file an opposition to the
registration of securities for sale in the Philippines. In this case, Palting et al have
standing. Also, some of its AOI1 provisions are contrary to law. The directors and
officers of the company can do anything, short of actual fraud, with the affairs of
the corporation even to benefit themselves directly or other persons or entities in
which they are interested, and with immunity because of the advanced
condonation or relief from responsibility. This and the other provision which
authorizes the election of non-stockholders as directors, completely disassociate
the stockholders from the government and management of the business in which
they have invested.
Mead v EC McCullough (1911)
Facts: Charles Mead and defendants E.C. McCullough, Thomas Hartigan, Frank
Green and Frederick Hilbert organized the Philippine Engineering and Construction
Company, the incorporators being the only stockholders and also the directors of
said company, with general ordinary powers. The directors held a meeting and
elected Mead as general manager. After nine months, Mead resigned as to accept
the position of engineer of the Canton and Shanghai Railway Company. Shortly
after Mead left for China, the defendants entered into a contract with the defendant
McCullough where the contract and all the rights and interests of the company in
the same were assigned to McCullough. The contract referred to was known as the
wrecking contract with the naval authorities. Mead now contests the assignment of
the assets to McCullough generally on the following grounds: - The board of
directors only have ordinary powers; The authorization made by the
three directors to allow the sale of company assets to McCullough constitutes an
act of agency which is invalid as there was no express authority given; No resolution
affecting administration of the affairs of PECC should be binding upon the
corporation unless the unanimous consent of the entire board was first obtained.
Held: When the sale or transfer took place, there were present four directors, all of
whom gave their consent to that sale or transfer. Mead was then absent and his
express consent to make this transfer was not obtained. He was, before leaving,
one of the directors in this corporation, and although he had resigned as a
manager, he had not resigned as a director. However, the new position which he
accepted in China was incompatible with the position as a director in the PECC.
1 AOI of San Jose Petroleum are noteworthy:
- The directors of the Company need not be shareholders;
- In the meetings of the BOD, any director may be represented and may vote through a
proxy who also need not be a director or stockholder; and
- No contract or transaction between the corporation and any other association or
partnership will be affected, except in case of fraud, by the fact that any of the directors
or officers of the corporation is interested in, or is a director or officer of, such other
association or partnership; and that no such contract or transaction of the corporation
CORPORATION | PROF. G. DEE | CALLUENG
These facts are sufficient to constitute an abandoning or vacating of his position as
director in said corporation. Consequently, the transfer or sale of the corporation’s
assets to one of its members was made by the unanimous consent of all the
directors in the corporation at that time.
Generally speaking, the voice of majority of the stockholders is the law of the
corporation, but there are exceptions to this rule. There must necessarily be a limit
upon the power of the majority. Without such a limit, the will of the majority would
be absolute and irresistible and might easily degenerate into an arbitrary tyranny.
Based on several doctrines, the Court settled that:
First: A private corporation, which owes no special duty to the public and which has
not been given the right of eminent domain, has the absolute right and power as
against the whole world except the state, to sell and dispose of all its property;
Second: The BOD has this power, without reference to the assent or authority of the
stockholders, when the corporation is in failing circumstances or is insolvent or
when it can no longer continue the business with profit, and when it is regarded as
an imperative necessity;
Third: That a majority of the stockholders or directors, even against the protest of
the minority, have this power where, from any cause, the business is a failure and
the best interest of the corporation and all the stockholders require it.
May officers or directors of the corporation purchase corporate property?
While a corporation remains solvent, there is no reason why a director or officer, by
the authority of a majority of the stockholders or board of managers, may not deal
with the corporation, loan it money or buy property from it, in like manner as a
stranger. So long as a purely private corporation remains solvent, its directors or
agents or trustees for the stockholders. They owe no duties or obligations to others.
But once the corporation becomes insolvent, its directors are trustees of all the
creditors, whether they are members of the corporation or not, and must manage
its property and assets with strict regard to their interest; If they are themselves
creditors while the insolvent corporation is under their management, they will not
be permitted to secure to themselves by purchasing the corporate property or
otherwise any personal advantage over the other creditors.
Nevertheless, a director or officer may in good faith and for an adequate
consideration purchase from a majority of the directors or stockholders the
property even of an insolvent corporation, and a sale thus made to him is valid and
binding upon the minority. The sale or transfer of the corporate property, in this
case, was made by three directors who were at the same time, a majority of the
stockholders. If a majority of the stockholders have a clear and a better right to sell
the corporate property than a majority of the directors, then it can be said that a
majority of the stockholders made this sale or transfer to McCullough
Piccard v Sperry Corporation (1943)
Facts: This is a derivative stockholders’ suit brought by minority SH of Sperry
Corporation. Sperry demanded from Cowdin $193,000 which Cowdin received
from Field Glore and Co. as a 50% participation in the profit realized by Field out
of an agreement between Field and Sperry which Cowdin negotiated on behalf of
Sperry. At the time of Cowdin’s negotiation – Cowdin was a director and employee
Sperry and at the same time president and principal SH of Standard Capital Co.
Sperry’s issue is WON Cowdin made a sufficient disclosure of his arrangement with
Field Glore and Company at the meeting of the Sperry board of directors which
authorized the agreement with Field Glore. In any event, a settlement agreement
was reached between the parties and Sperry was paid $101,407.05 for the release
of its claim against Cowdin and Standard. Sperry’s Board of Directors approved the
settlement. Now, the minority SH are assailing this release of Cowdin.
Held: The settlement was valid. The mere fact that the transaction was between the
corporation and one of its directors does not avail to rob the release of its
effectiveness.
With regard to the approval of the board, it was not proved that negligence
attended the making of the contract with Field.
shall be affected by the fact that any director or officer of the corporation is a party to or
has an interest in, such contract or transaction, or has in anyway connected with such
other person or persons, firm, association or partnership; and finally
- That any person who may become director or officer shall be relieved from all
responsibility for which they may otherwise be liable by reason of any contract entered
into with the corporation, whether it be for his benefit or for the benefit of any other
person, firm, association or partnership in which he may be interested.
51

Morgan, as a stockholder of Standard and director of Sperry can be counted to
determine the existence of the quorum because the company’s charter allows it so.
Also, mere stock ownership does not make Morgan an interested director.
2. Fixing compensation of directors and officers
Sec. 30. Compensation of directors - In the absence of any provision in the by-
laws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per diems: Provided,
however, that any such compensation (other than per diems) may be granted
to directors by the vote of the stock holders representing at least a majority of
the outstanding capital stock at a regular or special stockholder’s meeting. In
no case shall the total yearly compensation of directors, as such directors,
exceed ten (10%) of the net income before income tax of the corporation during
the preceding year.
GR: DIRECTORS as such are not entitled to compensation for performing services
ordinarily attached to their office
XPN: AOI or by-laws expressly provide or
Contract is expressly made in advance
- Assuming the compensation is intended, only the stockholders and not the
directors themselves may fix the amount thereof.
- Any stockholders’ resolution to grant such compensation can only refer to future
and not to past services
Sec.87 Definition. – xxx
The provisions governing stock corporations, when pertinent, shall be
applicable to non-stock corporations, except as may be covered by specific
provisions of the Title.
- Directors can receive compensation other than per diems only if the by-laws fix
the same or in the absence thereof, approval of majority of SHs
- Sec 30 allows directors to fix the amount of their own per diems; technically is
self-dealing but allowed by express provision of law
- But the per diems must be REASONABLE
- Total amount of compensation—including per diems—must not exceed 10% of the
corporation’s net income before taxes
- The rules regarding compensation of directors are not applicable to an officer who
is not a director, for then he would in effect be an employee of the corporation and
would be entitled to compensation, unless otherwise agreed
- Rule does not apply to a case where the director, upon request of the BOD, renders
services outside his usual duties, unless such circumstances as may imply a
promise to pay compensation.
- As to corporate officers and employees not directors: may consist not only of
salaries but also bonuses, stock options, and other profit-sharing schemes
- As to the president: Code is silent, but SC held that he is expected to serve without
salary, and that the per diems paid were sufficient compensation for services
(Lingayen Gulf v Baltazar)
- SEC: stock option plans of widely-held corporations
- must be subject to full disclosure before they can publicly sell their securities
- must be approved by SHs representing 2/3 of SUBSCRIBED capital stock
- amount set aside must not be more than 20% of the subscribed capital stock
Government v El Hogar (supra)
Fact (6th COA) The directors, instead of serving without pay or for nominal salaries,
have been receiving relatively large compensations out of the profits in accordance
with Art. 92 of its by-laws providing that 5% of the annual profits shall be devoted
to the compensation of the directors according to their attendance at the meetings.
Atty. Gen. argues that 5% of the profits is excessive and prejudicial to the interests
of the shareholders at large.
Held:The power to fix compensation is left to the corporation, to be determined in
its by-laws – the justice and propriety of said by-law is a proper matter for the
shareholders. If the amount paid has increased in such a proportion as is beyond
what is necessary to secure adequate service, then the remedy is in the
shareholders who have the power to amend the by-laws.
Barretto v La Previsora Filipina (1932)
Facts: Alberto Barretto, Jose de Amusategui, and Jose Barretto, who had been
directors of the corporation from its incorporation up to the month of March, 1929,
sought to recover from La Previsora, a mutual building and loan association, 1%
per plaintiff of the net profits of said corporation for the year 1929, under and in
CORPORATION | PROF. G. DEE | CALLUENG
accordance with the following amendment to the by-laws of the corporation, which
was made at a general meeting of the stockholders thereof on February 23, 1929
Held: SC does not agree. The authority conferred upon corporations in the law
refers only to providing compensation for the future services of directors, officers,
and employees thereof after the adoption of the by-law or other provision in relation
thereto, and cannot in any sense be held to authorize the giving, as in this case, of
continuous compensation to particular directors after their employment has
terminated for past services rendered gratuitously by them to the corporation. To
permit the transaction involved in this case would be to create an obligation
unknown to the law, and to countenance a misapplication of the funds of the
defendant building and loan association to the prejudice of the substantial right of
its shareholders.
Also, the article which they rely upon is merely a by-law provision adopted by the
stockholders of the corporation, without any action having been taken in relation
thereto by its board of directors. The law is settled that contracts between a
corporation and third persons must be made by or under the authority of its board
of directors and not by its stockholders. Hence, the action of the stockholders in
such matters is only advisory and not in any wise binding on the corporation.
Note: Corporation Code now allows retirement plan to be set up as long as it is fair
and reasonable.
Central Cooperative Exchange v Tibe (1970)
Facts: As a member of the Central Cooperative’s board of directors, Concordio Tibe,
Sr. drew and collected from CCE cash advances. Tibe had also drawn several sums,
representing commutable per diems for attending meetings of the Board of
Directors in Manila, per diems and transportation expenses for FACOMA
visitations, representation expenses and commutable discretionary funds. All
these sums were disbursed with the approval of general manager, treasurer and
auditor of CCE.
Held: The resolutions of the Board of Directors under which respondent Tibe drew
and collected the sums of money are contrary to the By-Laws of the federation and,
therefore, are not within the power of the board of directors to enact. The By-Laws,
in the aforequoted Section 8, explicitly reserved unto the stockholders the power
to determine the compensation of members of the board of directors, and the
stockholders did restrict such compensation to "actual transportation expenses
plus the per diems of P30.00 and actual expenses while waiting."
Even without the express reservation of said power, the directors are not entitled to
compensation, for it is settled that directors of corporations presumptively serve
without compensation and in the absence of an express agreement or a resolution
in relation thereto, no claim can be asserted therefor
Fogelson v American Woolen Co (1948)
Facts: The Board of Directors of American Woolen Company, Inc proposed a
“Retirement Income Plan" for the corporation's salaried employees. The plan is to
be administered by means of a pension trust and it is proposed to pay into this trust
at once to fund that part of the pensions based on past services of employees. The
President, Mr. Pendleton, will be eligible for retirement on June 1, 1949 (1.5 yrs
after the plan is intended to take effect), and under the plan will thereafter be
entitled to receive an annual pension of $54,220 for life. Two (2) stockholders of
American Woolen Company, Inc., brought this action against the corporation and
4 of its directors to enjoin them from putting into effect a proposed "Retirement
Income Plan" for the corporation's salaried employees, alleging that the purpose
of funding past service benefits by a single payment is to insure that the President
will receive such pension free from any future business hazards;
Held: The case was remanded for trial for the following reasons:
Courts are properly reluctant to interfere with the business judgment of corporate
directors; they do so only if there has been so clear an abuse of discretion as to
amount to legal waste. In this case, plaintiffs need to prove that the real purpose
as alleged. Therefore, a triable issue of fact exists as to whether the directors did
exercise their honest business judgment or were motivated by the alleged purpose
of favoring the president. This cannot be tried out on affidavits.
A retirement plan which provides a very large pension to an officer who has served
to within one year of the retirement age without any expectation of receiving a
pension, would seem analogous to a gift or bonus, the size of which may raise a
justiciable inquiry as to whether it amounts to spoliation or waste of corporate
property. The tenable reasons for the adoption of a retirement plan are that it serves
as an inducement to competent personnel to accept employment and retain it until
the retirement age, and also accords with present day notions of justice to
52
 CORPORATION | PROF. G. DEE | CALLUENG

superannuated employees. Whether it will be possible upon Mr. Pendleton's foregoing insiders as defined in this subsection, with knowledge that the
retirement to obtain the services of an equally competent president without person from whom he learns the fact is such an insider.
promising him a retirement pension which might amount to as much as $54,000 a (c) A fact is "of special significance" if (a) in addition to being material it would
year also has a bearing on the reasonableness of the retirement plan. Since the be likely, on being made generally available, to affect the market price of a
size of a bonus may raise a justiciable inquiry as to whether it amounts to waste, security to a significant extent, or (b) a reasonable person would consider it
the Court cannot say that providing a pension of such amount is an exercise of especially important under the circumstances in determining his course of
proper business judgment. The affidavits are also silent as to the necessity of action in the light of such factors as the degree of its specificity, the extent of
its difference from information generally available previously, and its nature
promising any such sum in order to obtain equally efficient service in the future.
and reliability.
(d) This section shall apply to an insider as defined in subsection (b) (3) hereof
Kerbs v California Eastern Airways (1952) only to the extent that he knows a fact of special significance by virtue of his
Facts: The corporation applied for bankruptcy proceedings but was able to being an insider.
recuperate its losses and obtain substantial profits. The board then approved stock
option and profit sharing agreements wherein 5/8 of the approving directors were Sec. 53, RSA. Validity of Contracts.
beneficiaries of the same. (b) Every contract made in violation of any provision of this Act or of any rule or
Held: The stock option plan is void. Generally, stockholder’s ratification of voidable regulation thereunder, and every contract, including any contract for listing a
acts of directors is effective for all purposes unless the action of the directors security on an exchange heretofore or hereafter made, the performance of
constituted a gift of corporate assets to themselves or was ultra vires, illegal or which involves the violation of, or the continuance of any relationship or
fraudulent. While a majority of the stockholders in a special meeting called for that practice in violation of, any provision of this Act, or any rule or regulation
purposed ratified and cured any voidable defect in the action of the Board, the thereunder, shall be void:
Court still found the stock option plan deficient (1) As regards the rights of any person who, in violation of any such provision,
First, sufficient consideration to the corporation to validate a plan depends upon rule or regulation, shall have made or engaged in the performance of any such
the facts and circumstances of the case. This may include retention of services of contract; and
(2) As regards the rights of any person who, not being a party to such contract,
an employee, or the gaining of the services of a new employee, provided there is a
shall have acquired any right thereunder with actual knowledge of the facts by
reasonable relationship between the value of the services to be rendered by the reason of which the making or performance of such contract was in violation of
employee and the value of the options granted as an inducement or corporation. In any such provision, rule or regulation.
this case it is not reasonably calculated to insure that the employees will receive
the contemplated benefits. SEC 30 SEC 36
Second, the options may be exercised in toto immediately upon their issuance and - broader provision - covers a specific situation only, ie.
may be exercised within a 6-month period after the termination of the project. The - Covers all acts of unfair use of inside The purchase and sale or sale and
plan accordingly, do not of themselves insure the benefit of retaining the services information, and all such acts are purchase by a director or officer of any
of the employee to whom the option is granted will inure to the corporation considered unlawful equity security of the corporation with
which he is connected if both
3. Using inside information – Their fiduciary position prohibits them from using any transaction take place within a period
such information to benefit themselves or any competitor corporation in which they of less than six months.
may have a more substantial interest. Does not mention the effect of this act the liability of the guilty director or
of disloyalty on the guilty director or officer is to the corporation and not to
Sec. 36, RSA. Directors, officers and Principal Stockholders. – a. xxx. For the officer, except to say that the act is anyone else
purpose of preventing the unfair use of information which may have been unlawful (See Sec 53 for effects)
obtained by such beneficial owner, director, or officer by reason of his - There is inside information if it is not Loss and prejudice to the corporation
relationship to the issuer, any profit realized by him from any purchase and generally available to others and is is not a requirement for liability, the
sale, or any sale and purchase, of any equity security of such issuer within any acquired corporation has a COA as long as
period of less than six months, unless such security was acquired in good faith - There is unfair use if the information there is unfair use of inside
in connection with a debt previously contracted, shall inure to and be withheld is of such materiality that a information
recoverable by the issuer, irrespective of any intention of holding the security reasonable person would consider it
purchased or of not repurchasing the security sold for a period exceeding six a factor in determining whether he
months. Suit to recover such profit may be instituted in any court of competent should sell his stocks or buy more
jurisdiction by the issuer, or by the owner of any security of the issuer in the Mere fact that the purchase and sale, No presumption of disloyalty as the
name and in behalf of the issuer if the issuer shall fail or refuse to bring such or sale and purchase occur within the acts complained of constitute the
suit within sixty days after request or shall fail diligently to prosecute the same six-month period will give rise to the very basis of the action
thereafter; but no such suit shall be brought more than two years after the date presumption of unfair use of inside - BOP by complainant
such profit was realized. This subsection shall not be construed to cover any information'
transaction where such beneficial owner was not such both at the time of the - BOP on the part of the director or
purchase and sale, or the sale and purchase, of the security involved, or any officer
transaction or transactions which the Commission by rules and regulations may If in conflict with 36, must give way to Any matter not covered by 36 will be
exempt as not comprehended within the purpose of this subsection. 36 supplanted by 30

*Beneficial owner means one who directly or indirectly owns more than ten
percent of any class of any equity security registered under the RSA
Sec. 30, RSA. Insider's duty to disclose when trading. — (a) It shall be unlawful
for an insider to sell or buy a security of the issuer, if he knows a fact of special
significance with respect to the issuer or the security that is not generally
available, unless (1) the insider proves that the fact is generally available or (2)
if the other party to the transaction (or his agent) is identified, (a) the insider
proves that the other party knows it, or (b) that other party in fact knows it from
the insider or otherwise.
(b) "Insider" means (1) the issuer, (2) a director or officer of, or a person
controlling, controlled by, or under common control with, the issuer, (3) a
person whose relationship or former relationship to the issuer gives or gave him
access to a fact of special significance about the issuer or the security that is
not generally available, or (4) a person who learns such a fact from any of the
All contracts which fall under 30 and 36b are void, only as to the rights of the guilty
director or officer
- Innocent party can rightfully enforce the contract as to him, but if prejudiced, may
recover what he has paid or delivered
- Secs. 30 and 36 of the RSA only covers transactions on the stock exchange
- As far as the corporation is concerned, the same acts can possibly be covered by
the general provisions of Sec. 30 of the Corporation Code
- As to the individual stockholder, the traditional view is that a director holds a
fiduciary relationship to the corporation but not to the individual stockholders.
- XPN: Special facts doctrine where a director may be accountable directly to the
SH where the special facts surrounding the transaction give rise to the obligation
to disclose his identity or the inside information he possesses
Strong et al v Gutierrez Repide (1909)

53

Facts: Government wanted to buy the friar lands, a large portion of which was
owned by Ph Sugar. Repide, a majority shareholder in Ph Sugars, was chief
negotater in the sale with the government. Sale eventually pushed through, raising
the value of Ph Sugar’s stock. Prior to the consummation of the sale, Repide bought
shares of stock in Ph Sugar from Mrs. Strong thru her agent Jones, but did not reveal
his identity to Jones. As a result, the stocks were sold to him at 1/10 their worth,
considering the subsequent sale to the government. Mrs. Strong brought suit
against Repide for return of the shares, on grounds of fraud.
Held: GENERAL RULE ordinary relations between directors and shareholders in
business corporations are not of such a fiduciary nature as to make it the duty of a
director to disclose to a shareholder the general knowledge he may possess
regarding the value of the shares of the company before he purchases any from a
shareholder.
EXCEPTION: special facts make the duty exist; a director could not then purchase
from the shareholder without informing the latter of the facts which affect their
value.
Exception applies in this case. Repide was not just a director of a company; as
majority shareholder in Ph Sugars and chief negotiator in the sale of the friar lands
to the Government, he knew the exact condition of the negotiations and their
probable effect on the value of the shares of stock. Under the circumstances, there
was a legal obligation on his part to make disclosures to Jones.
Taylor v Wright (1945)
Facts: Taylor, 5th largest stockholder of CAC, filed a case for damages against
CAC’s majority stockholders and directors for the latter’s act of buying her shares
at a lesser price than its actual value and doing such purchase without disclosing
their identity as directors.
Held: There are three rules concerning WON directors and officers of a company
owe any duty at all to SHs in relation to transactions whereby officers and directors
buy for themselves shares of stock from stockholders
1. Majority rule- directors and officers owe no fiduciary duty at all to stockholders
but may deal with them at arm’s length. No duty of disclosure of facts known to the
director or officer exists. Nondisclosure does not constitute fraud. A director is a
fiduciary with respect to the corporation as an entity, and not to the stockholders
as individuals. In dealings with or for the corporation, the director is exercising a
corporate function and is subject to the usual fiduciary duty to disclose all material
facts; but that in personal dealings with stockholders, he is not exercising a
corporate function and is free to deal with them at arm’s length.
2. Minority rule- recognizes the director’s obligation to the stockholders
individually as well as collectively, and refuses to permit him to profit at the latter’s
expense by the use of information obtained as a result of his official position and
duties. Such a duty exists because the stockholders have placed the directors in a
strategic position where they can secure first-hand knowledge of important
developments, and where they can make it appear that the shares are much less
valuable than they really are.
3. Special facts doctrine- where special circumstances or facts are present which
make it inequitable for the director to withhold information from the stockholder,
the duty to disclose arises and concealment is fraud.
In this case, the special facts doctrine is applied. The appellants owed Taylor a duty
and violated that duty to her damage. They actively and successfully concealed
their identity as purchasers. The appellants, by reason of their position as directors
had full knowledge of the actual value of the stock.
Gokongwei v SEC (1979) (supra)
Doctrine: No stockholder has vested right to be elected director (be member of
BoD). Moreover, a corporation could, as a measure of self-protection, disqualify a
competitor from nomination and election to its Board of Directors.
Note: dispositive states that case has no doctrinal value (?)
4. Seizing corporate opportunity
- Duty to refrain from usurping a business opportunity rightly belonging to the
corporation
Sec. 34. Disloyalty of a director. - Where a director, by virtue of his office,
acquires for himself a business opportunity which should belong to the
corporation, thereby obtaining profits to the prejudice of such corporation, he
must account to the latter for all such profits by refunding the same, unless his
act has been ratified by a vote of the stockholders owning or representing at
least two-thirds (2/3) of the outstanding capital stock. This provision shall be
CORPORATION | PROF. G. DEE | CALLUENG
applicable, notwithstanding the fact that the director risked his own funds in
the venture.
- If the transaction, considering all the circumstances surrounding it, is one which
the corporation has the right to appropriate, it is the specific duty of a director not
to seize it for himself. Should he do so, he must account fo all the profits he obtains,
even if he used his personal funds.
- Ratification by SHs representing 2/3 of the outstanding capital stock cures the
effect of disloyalty
- Officers on the other hand, may be held liable under par. 2 of Sec. 31
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. When a director, trustee or officer
attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.
Singer v Carlisle (1940)
Facts: United, which is engaged in the business of underwriting securities, is a
competitor of JP Morgan et al. United acquired substantial blocks of voting stock
of various holding and operating companies which have obtained funds by the
issuance of securities. JP MORGAN et al. became underwriters of the issued
securities, and acquired the underwriting business of these companies. United was
not offered the opportunity of acquiring the same benefits which accrued to JP
Morgan et al. These transactions effectively excluded United as a competitor of JP
Morgan et al. in the underwriting business. Plaintiffs alleged that the defendant-
directors and officers of United, acting in concert with JP Morgan et al., willfully
deprived United of the opportunity to compete in the underwriting business and
thus, as stockholders, filed a derivative suit against the officers and directors of
United.
Held: The directors and officers of United have the duty of acquiring for United as
much of the underwriting business as possible and ensure that it would be
profitable for United. A director occupies a fiduciary relation towards the minority
stockholders and is charged with the duty of exercising a high degree of good faith
and diligence in the protection of such minority interests.
However, the allegations in the complaint were insufficient to charge defendants
with a breach of this duty. There was no allegation as to what securities were issued
and that such securities might have been acquired by United as underwriter. The
complaint should state the specific transactions involving the directors and officers
of United which indicate that they refused to acquire for United the underwriting
businesses which were acquired by JP Morgan et al.
Directorship in two competing corporations does in itself constitute a breach of a
director’s duty to act in the interest of his corporation. There is a breach when a
business opportunity arises placing the director in the position of serving two
competing corporations, and such director, dominated by one of the corporations,
neglects his duty to the other.
Irving Trust Co. v Deutsch (1934)
Facts: The plaintiff is a trustee in bankruptcy of a Delaware Corporation, Sonora
Products Corporation of America, formerly Acoustic Products Company. In March
1928, it was essential for Acoustic to acquire rights to manufacture under basic
patents in the radio art, and it was believed that such rights might be acquired
through the De Forest Radio Company, which was then in recievership. The board
of directors of Acoustic issued a resolution instructing the president, Deutsch to
endeavour to obtain the necessary funds to enable Acoustic to carry out its
obligations in the event of its final acceptance of De Forest’s offer. Deutsch
thereafter reported his inability to procure the necessary funds, and announced
that several individuals were desirous of accepting said proposition on their own
behalf and were willing to make arrangements so as to extend to Acoustic the
benefits contemplated by the acquisition of the stock. Thereupon, a resolution was
adopted approving Mr. BIddles acceptance on behalf Acoustic. Mr. Deutsch
telegraphed Mr. Biddle of this action, with the explanation that it was understood
54

by the directors that, if Acoustic could not finance the purchase when time for
payment came, the directors would individually acquire the stock.
Held: Resolution was not valid. Directors cannot take over corporate contract for
their own profit just because of corporation's financial inability to perform
contract.
The defendants’ argument that the rule that fiduciaries should not be permitted to
assume a position which their individual interests might be in conflict with those of
the corporation can have no application where the corporation is unable to
undertake the venture, is not convincing. If directors are permitted to justify their
conduct on such a theory, there will be a temptation to refrain from exerting their
strongest efforts on behalf of the corporation since, if it does not meet the
obligations, an opportunity to profit will be open to them personally.
Note: Rationale of Sec. 34
5. Interlocking Directors – occupies such a position in two corporations dealing
with each other
Sec. 33. Contracts between corporations with interlocking directors. - Except
in cases of fraud, and provided the contract is fair and reasonable under the
circumstances, a contract between two or more corporations having
interlocking directors shall not be invalidated on that ground alone: Provided,
That if the interest of the interlocking director in one corporation is substantial
and his interest in the other corporation or corporations is merely nominal, he
shall be subject to the provisions of the preceding section insofar as the latter
corporation or corporations are concerned. Stockholdings exceeding twenty
(20%) percent of the outstanding capital stock shall be considered substantial
for purposes of interlocking directors
- burden is on the corporation which seeks to uphold the contract
- An interlocking director may in effect be a self-dealing director where his interest
in one corporation is merely nominal, and his interest in the corporation is greater
than 20% of its outstanding capital stock
Globe Woolen Co. v Utica Gas & Electric Co (1918)
Facts: Globe Woolen Co. (“GLOBE WOOLEN”) is a corporation engaged in the
manufacture of worsteds and woolens. It owned two mills in the city of Utica.
Defendant Utica Gas & Electric Co. (“UTICA GAS”) generates and sells electricity
for light and power in the city of Utica. Both corporations have John F. Maynard
(“MAYNARD”) as a shareholder: for Globe Woolen, Maynard has been its chief
stockholder, president, and a member of its board of directors; for Utica Gas,
Maynard served as a director and chairman of its executive committee. Globe
Woolen and Utica Gas executed two contracts for the supply of electricity to the
worsted and woolen mills owned by the former which were initially run by steam.
Maynard, acting as the chairman of the Utica Gas and accompanied by Greenidge,
presented the contract before its executive committee. When asked by another
director whether the contract would be profitable for Utica Gas, Greenidge replied
in the affirmative while Maynard kept silent. A resolution was passed but Maynard
was excused from voting. It quickly appeared that the contracts entered into were
losing contracts. Due to the continuous loss, Utica Gas had to rescind the contract
Globe Woolen then filed an action for specific performance against Utica Gas to
compel the latter to comply with the contracts. Utica Gas answered that the
contracts should be voided for having been made under the dominating influence
of a common director, that their terms are unfair, and their consequences
oppressive.
Held: A constant duty rests on a trustee to seek no harsh advantage to the
detriment of his trust, but rather to protest and renounce if through the blindness
of those who treat with him he gains what is unfair.
The contracts are rightfully annulled at the election of the defendant. It was made
under a dominating influence of Maynard, the dual director. He dealt with a
subordinate in all stages of the preliminary treaty and the negotiation and signing
of the contract was accomplished with a subordinate. The letters were not even
actually presented before the executive committee. Its subsequent ratifications
were just formalities.
By refusing to participate in the voting, Maynard abandoned his duty as trustee to
have a constant and unqualified fidelity to the corporation. A trustee may refuse to
participate, while others act, if all is equitable and fair – such, however, is not the
case here. He should have warned and denounced improvidence or oppression that
may have been latent or lurking beneath the surface of the transaction, but known
to him through his expertise.
CORPORATION | PROF. G. DEE | CALLUENG
Close Corporations
- When the stockholders of a close corporation choose to manage the corporation
themselves instead of having a BOD, the law treats them as directors with all the
powers as well as duties and liabilities attached to a director’s position.
Sec. 97. Articles of Incorporation. The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be called to elect directors;
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
The articles of incorporation may likewise provide that all officers or employees
or that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
Sec. 100. Agreements by stockholders. – xxx
5. To the extent that the stockholders are actively engaged in the management
or operations of the business and affairs of a close corporation, the
stockholders shall be held to strict fiduciary duties to each other and among
themselves. Said stockholders shall be personally liable for corporate torts
unless the corporation has obtained reasonably adequate liability insurance
- makes the stockholders personally liable for corporate torts, unlike the director
of other corporations who is liable for such torts only if he has been negligent in the
performance of his duties.
- SHs would be jointly and severally liable with the corporation
Duty of Controlling Interest
- A majority shareholder is subject to the duty of good faith when he acts by voting
at a stockholder’s meeting with respect to a matter in which he has personal
interest.
- This may occur when he votes to ratify voidable action by the directors, or where
the transaction is one for which a stockholders’ vote is necessary, like merger,
dissolution or sale of all the corporate assets
- Persons enjoying management control hold it on behalf of the corporation’s
stockholders, and therefor may not regard it as their own personal property to
dispose as they wish
GR: A controlling stockholder may dispose of his stock at any time and at such price
as he chooses.
- However, a controlling stockholder may not pervert these prerogatives by
transferring office to persons who are known or should be known as intending to
raid the corporate treasury or otherwise improperly benefit themselves.
Insuranshares Corporation v Northern Fiscal (1940)
Facts: Before 1937, 27% of INSURANSHARES was owned by some of the
defendants, including three Philadelphia Banks (and their agent in the Board,
HEPBURN). They are referred to as the “MANAGEMENT group. In 1937, the
MANAGEMENT group transferred control of the corporation to the BOSTON group,
through the sale of the shares of the MANAGEMENT group. Along with the transfer
went the power to sell, exchange, or transfer all of the securities in the corporation’s
portfolio, as well as access to and physical possession of them.
Having acquired control of INSURANSHARES, the BOSTON group looted the
corporation of its valuable assets through the successive resignations of the
Management directors, and followed by the election of a new member nominated
by the BOSTON group.
55

INSURANSHARES brought this suit for against the BOSTON and MANAGEMENT
groups—its former officers, directors, and particular stockholders—to recover for
damages arising from the “sale of control” of the corporation to a group that would
strip it of its assets.
Held: The sale was a sale of control. The BOSTON group was interested only in one
thing: to have a free hand with the corporation’s stock portfolio for a few weeks. The
MANAGEMENT group, in turn, was primarily interested in getting as much money
as possible.
Those who control a corporation—either through majority stock ownership,
ownership of a large block less than majority, office-holding, management
contracts, or otherwise—owe some duty to the corporation in respect of the transfer
of control to outsiders. These persons may not be oblivious to the interests of
others. These persons may be made liable when owners of control are under a duty
not to transfer the control to outsiders if the circumstances of the proposed transfer
are suspicious and such as to put a prudent man on his guard. Such a duty would
require them to conduct a reasonable adequate investigation. They also have the
duty of active vigilance and inquiry.
If the circumstances (1) put the seller on notice, (2) no investigation as to the
means of the purchase, and the aims and responsibility of the purchasers is made,
and (3) harm follows, then liability also follows.
Here, the sellers are liable. HEPBURN and the banks, as persons holding a
controlling interest should have been on guard. There were sufficient
circumstances showing that the BOSTON group were acquiring the control of
INSURANSHARES by improper means and for an improper purpose. Despite these,
the BOSTON group (2) did not conduct an investigation. They only made two casual
inquiries as to who the purchasers were, despite the fact that the Philadelphia
banks had enough resources to conduct an investigation.
Duty to Creditors
GR: Directors cannot be personally liable to corporate creditors for general
inefficient management of a solvent corporation. Remedy is against the
corporation itself.
XPN: When the corporation has become insolvent, the directors will be deemed
trustees of the creditors and should manage its assets with strict regard to the
latter’s interest
- If directors are creditors, they will not be permitted to secure to themselves a
personal advantage over other creditors
- Under the Sec. 31, should they willfully and knowingly assent to patently unlawful
acts of the corporation or are guilty of gross negligence or bad faith in directing the
affairs of the corporation, they become jointly and severally liable not only for the
damages caused to the corporation but also those suffered by third persons
individually including creditors.
- Sec. 65 also imposes liability on a director who consents to or having knowledge
thereof, fails to object in writing to the issuance of stock for less than the par or
issued value of the same.
Chapter IX. The Right of Inspection
1. RIGHT OF INSPECTION: Basis of Right
As the beneficial owners of the business, the stockholders have the right to know
not only the financial condition of the corporation, but also how the corporate
affairs are being managed by their elected directors, so that if thy find the
conditions unsatisfactory, they may be able to take the necessary measures to
protect their investment.
- beneficial ownership
- protect the minority stockholders from the power of the majoirty
Right of inspection: PREVENTIVE AND REMEDIAL
PREVENTIVE because it may to a limited extent serve as a deterrent to an ill-
intentioned management to know that its acts may be scrutinized
REMEDIAL because a dissatisfied stockholder may resort to the right of inspection
as a preliminary step to seeking more direct remedies against abuses committed
by management
Records covered
Sec. 74. Books to be kept; stock transfer agent. - Every corporation shall, at its
principal office, keep and carefully preserve a record of all business
transactions, and minutes of all meetings of stockholders or members, or of the
board of directors or trustees, in which shall be set forth in detail the time and
place of holding the meeting, how authorized, the notice given, whether the
CORPORATION | PROF. G. DEE | CALLUENG
meeting was regular or special, if special its object, those present and absent,
and every act done or ordered done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time when any director, trustee,
stockholder or member entered or left the meeting must be noted in the
minutes; and on a similar demand, the yeas and nays must be taken on any
motion or proposition, and a record thereof carefully made. The protest of any
director, trustee, stockholder or member on any action or proposed action must
be recorded in full on his demand.
The records of all business transactions of the corporation and the minutes of
any meetings shall be open to inspection by any director, trustee, stockholder
or member of the corporation at reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said records or minutes, at his
expense.
Any officer or agent of the corporation who shall refuse to allow any director,
trustees, stockholder or member of the corporation to examine and copy
excerpts from its records or minutes, in accordance with the provisions of this
Code, shall be liable to such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144 of this Code: Provided,
That if such refusal is made pursuant to a resolution or order of the board of
directors or trustees, the liability under this section for such action shall be
imposed upon the directors or trustees who voted for such refusal: and
Provided, further, That it shall be a defense to any action under this section that
the person demanding to examine and copy excerpts from the corporation's
records and minutes has improperly used any information secured through any
prior examination of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose in
making his demand.
Stock corporations must also keep a book to be known as the "stock and
transfer book", in which must be kept a record of all stocks in the names of the
stockholders alphabetically arranged; the installments paid and unpaid on all
stock for which subscription has been made, and the date of payment of any
installment; a statement of every alienation, sale or transfer of stock made, the
date thereof, and by and to whom made; and such other entries as the by-laws
may prescribe. The stock and transfer book shall be kept in the principal office
of the corporation or in the office of its stock transfer agent and shall be open
for inspection by any director or stockholder of the corporation at reasonable
hours on business days. No stock transfer agent or one engaged principally in
the business of registering transfers of stocks in behalf of a stock corporation
shall be allowed to operate in the Philippines unless he secures a license from
the Securities and Exchange Commission and pays a fee as may be fixed by the
Commission, which shall be renewable annually: Provided, That a stock
corporation is not precluded from performing or making transfer of its own
stocks, in which case all the rules and regulations imposed on stock transfer
agents, except the payment of a license fee herein provided, shall be
applicable. (51a and 32a; B. P. No. 268.)
a. RECORDS OF ALL BUSINESS TRANSACTIONS include book of inventories and
balances, a journal, a ledger, a book for copies of letters and telegrams, financial
statements, ITRs, vouchers and receipts, contracts and all papers pertaining to
such contracts, as well as VTAs.
-BYLAWS are expressly required by Code to be open to inspection of SHs and
members during office hours
- No similar provision is made as to AOI because it is filed in SEC
- GR: SEC records are open to examination by persons with legitimate interest
XPN: Specified confidential papers
- Banking corporations have a limit: No one can have access to the records of
depositors, except upon written consent of the depositor or in cases of
impeachment, upon order of competent court in cases of bribery or dereliction of
duty of public officials, or in cases where the money deposited or invested is the
subject matter of litigation (Secrecy of Bank Deposits Act)
- Stockholder may make copies, extracts, and memoranda of such records
b. MINUTES OF DIRECTORS’ MEETINGS would inform the stockholder of all policies
laid down by the BOD, including the objections of the dissenting director
- Until the minutes have been approved, no stockholder has a right to a copy of the
minutes
c. STOCK AND TRANSFER BOOK would yield the names of all stockholders and may
be helpful where a stockholder wants to solicit proxies for a forthcoming election
- A stockholder cannot demand that he be furnished with such list, but he should
instead, directly examine the books of the corporation.
56

d. MINUTES OF ALL MEETINGS OF STOCKHOLDERS OR MEMBERS
2. RIGHT TO A COPY OF THE MOST RECENT FINANCIAL STATEMENTS
Sec. 75. Right to financial statements. - Within ten (10) days from receipt of a
written request of any stockholder or member, the corporation shall furnish to
him its most recent financial statement, which shall include a balance sheet as
of the end of the last taxable year and a profit or loss statement for said taxable
year, showing in reasonable detail its assets and liabilities and the result of its
operations.
At the regular meeting of stockholders or members, the board of directors or
trustees shall present to such stockholders or members a financial report of the
operations of the corporation for the preceding year, which shall include
financial statements, duly signed and certified by an independent certified
public accountant.
However, if the paid-up capital of the corporation is less than P50,000.00, the
financial statements may be certified under oath by the treasurer or any
responsible officer of the corporation. (n)
EXTENT AND LIMITATIONS ON RIGHT
1. TIME AND PLACE – only at reasonable hours on business days (throughout the
year)
- right should not impede the efficient operations of the corporation
- place: corporation shall keep its records as well as its stock and transfer book in
the principal office of the corporation.
2. PURPOSE – it should be material
- purpose is presumed to be a proper one and the corporation cannot refuse to
grant him the right on its mere belief that his motive is improper
- refusal may open its guilty officers or directors to DAMAGES
- DEFENSE: stockholder was not acting in good faith, nor for a legitimate purpose
in making his demand
- BOP that the purpose is improper or illegal is on the corporation and its officers
- legitimate or proper purpose – one which is germane to the interest of the
stockholder as such and not contrary to the interests of the corporation.
Who may exercise right?
- director, trustee, stockholder or member, either personally or through an agent
- in cases of VTA, both the voting trustee as well as the transferor have the right of
inspection.
Note that the transferor is the beneficial owner of the shares and should have as
much right to seek information to protect his investment
- WON stockholder of a parent corporation has the right to examine the books of a
subsidiary corporation depends on WON the two corporations have been operated
as legally separate and independent entities. If so, there is no right of inspection.
Remedies available if inspection refused:
REMEDIES PARTY-DEFENDANT
Writ of mandamus corporation, but the secretary and president may be
joined
- secretary is customarily charged with the custody of
the documents and records of the corporation against
whom personal orders of the court would be made
Injunction
Damages officer or agent of the corporation who refused
Penal offense under Officer or agent of the corporation who refused
Code (Criminal - corporation itself will not necessarily be liable
liability) - If such refusal is pursuant to a resolution of the BOD,
- fine and/or the liability shall be imposed upon the directors who
imprisonment voted for such refusal
W.G. Philpotts v Philippine Manufacturing Co. and FN Berry (1919)
Facts: Philpotts seeks to obtain a writ of mandamus to compel the corporation to
permit him, in person or by some authorized agent or attorney, to inspect and
examine the records of the business transacted by the company. He impleaded
both company and secretary as defendant
Held: The propriety of naming the secretary of the corporation as a co-defendant
cannot be questioned, since such official is customarily charged with the custody
of all documents, correspondence, and records of a corporation, and he is
presumably the person against whom the personal orders of the court would be
CORPORATION | PROF. G. DEE | CALLUENG
made effective in case the relief sought should be granted. An action brought by a
stockholder against the corporation for a direct violation of his contractual rights
Moreover, the right of inspection given to a stockholder can be exercised either by
himself or by any proper representative or attorney-in-fact, and either with or
without the attendance of the stockholder
Pardo v Hercules Lumber Co., et. al (1924)
Facts: Ferrer as secretary refused to permit Pardo, as stockholder, or his agent to
inspect the records and business transactions of Hercules at times desired by
Pardo. Hercules argues that in their by-laws, books of the corporation may be
examined upon the days which the BOD shall annually fix. A resolution was issued
stating that the books should be at their disposition only from 15th to 25th of March
for examination, in appropriate hours.
Held: The general right of inspection may not be lawfully abridged to the extent
attempted in this resolution. Officials may deny inspection when sought at unusual
hours or under other improper conditions, but neither the executive officers nor
BOD have the power to deprive a stockholder of the right altogether.
When the statute declares that the right of inspection can be exercised “at
reasonable hours”, this means at reasonable hours on business days throughout
the year, and not merely some arbitrary period of a few days chosen by the directors
Gonzales v PNB (1983)
Facts: Gonzales filed a mandamus to compel PNB to allow him to look into the
books and records of PNB in order to satisfy himself as to the truth of the published
reports of transactions covering a purchase of sugar central, and financing the
Cebu-Mactan Bridge, as well as the construction of Passi Sugar Mills. To be able
to secure standing, Gonzales purchased one share of stock from Cong. Montano
Held: It is now expressly required as a condition for such examination that the one
requesting it must not have been guilty of using improperly any information secured
through a prior examination, and that the person asking for such examination must
be acting in good faith and for a legitimate purpose in making his demand.
Gonzales has not set forth the reasons and the purposes for which he desires such
inspection, except to satisfy himself as to the truth of published reports regarding
certain transactions entered by the bank. The circumstances under which he
acquired one share of stock in the bank purposely to exercise the right of inspection
do not argue in favor of his good faith and proper motivation. His obvious purpose
was to arm himself with materials which he can use against PNB for acts done by
PNB when Gonzales was not a stockholder
Veraguth v Isabela Sugar (1932)
Facts: Director Veraguth telegraphed the secretary of the company, asking the
secretary to forward in the shortest possible time a certified copy of the resolution
of the BOD concerning the payment against the Isabela Sugar Company. Secretary
answered stating that since the minutes in question had not been signed by the
directors present, a certified copy could not be furnished.
Held: Directors of a corporation have the unqualified right to inspect the books and
records of the corporation at all times. A director or stockholder can make copies,
abstracts and memoranda of documents, books and papers as an incident to the
right of inspection, but cannot, without an order of the court, be permitted to take
books from the office of the corporation. A director or stockholder does not have
any absolute right to secure certified copies of the minutes of the corporation, until
these minutes have been written up and approved by the directors.
Gokongwei v SEC (1979)
The stockholders' right of inspection of the corporation's books and records is
based upon their ownership of the assets and property of the corporation. It is an
incident of ownership of the corporate property, whether this ownership or interest
be termed an equitable ownership, a beneficial ownership, or quasi-ownership. It
is predicated upon the necessity of self-protection.
The right of inspection has to be germane to the petitioner's interest as a
stockholder, and has to be proper and lawful in character and not inimical to the
interest of the corporation. It must be exercised in good faith, for specific and
honest purpose, and not to gratify curiosity, or for speculative or vexatious
purposes.
On application for mandamus to enforce the right to examine the books of a
corporation, it is proper for the court to inquire into and consider the stockholder's
good faith and his purpose and motives in seeking inspection. The right given by
the statute is not absolute and may be refused when the information is not sought
in good faith or is used to the detriment of the corporation.
57
 CORPORATION | PROF. G. DEE | CALLUENG

While the right of a stockholder to examine the books and records of a corporation only be maintained against corporate officers or any other persons acting on behalf
for a lawful purpose is a matter of law, the right of such stockholder to examine the of such corporation.
books and records of a wholly-owned subsidiary of the corporation in which he is a
stockholder is a different thing. Where a foreign subsidiary is wholly owned by Chapter X. Derivative Suits
respondent corporation and, therefore, under its control, it would be in accord with NATURE AND BASIS OF DERIVATIVE SUTI; DISTINGUISHED FROM INDIVIDUAL AND
equity, good faith and fair dealing to construe the statutory right of a stockholder REPRESENTATIVE SUIT
to inspect the books and records of the corporation as extending to books and INDIVIDUAL CLASS DERIVATIVE
records of such wholly owned subsidiary which are in respondent corporation's Definition An action Wrong is
possession and control. brought by a committed
stockholder against a group
Slay v Polonia Publishing Co (1930) against the of stockholders
It is to be assumed that the request is made for a proper purpose, that the corporation for who are
stockholder is acting in good faith and seeking thereby, to protect his own interest a direct similarly
or that of the corporation. His request, therefore, need not be accompanied by any violation of his situated
contractual
statement of his purpose.
rights
It does not follow, however, that the courts will compel the inspection of the books
Injured party Stockholder Group of Corporation itself
under all circumstances. In issuing the writ of mandamus, the court will exercise personally stockholders (party-in-interest),
sound discretion and grant the right under proper safeguards to protect the interest indirectly to the
of all concerned. The writ should not be granted for speculative purpose, or to aid stockholder
a blackmailer, but it may not be denied to a stockholder who seeks the information (nominal party)
for a legitimate purpose. Defendant Corporation Corporation - may be the
officers or
Klein v Scranton Life Ins. Co. (1940) directors
Facts: Klein desired to ascertain the value of his shares and also to copy a list of Example of Denial of right Preferred Mismanagement
the shareholders in order that he might solicit proxies for voting at the annual injury to inspection, stockholders’ of directors
meeting of the corporation. Officers refused to make extracts from the books. He right to vote, right is violated
was only allowed to inspect the general and stock ledgers but he was not permitted right to share in
to make nay notes of what he saw. dividends
Held: The books and records of a corporation are the common property of all
stockholders, and they have a right to inspect such books and records at DERIVATIVE SUIT – one brought by one or more stockholders or members in
reasonable times and for a definite purpose. Where examination of corporation’s the name and on behalf of the corporation to redress wrongs committed
books is sought for proper purposes, it is not necessary for a stockholder to aver against it or to protect or vindicate corporate rights, whenever the officials of
mismanagement or fraud to obtain his right to inspect. Moreover, with the aid of a the corporation refuse to sue, or are the ones to be sued or hold control of the
disinterested expert, the stockholder might make such extracts as were reasonably corporation.
required in the preparation of the bill he purposed to bring. - suing stockholder is a nominal party with the corporation as a real party-in-
interest
Yujuico v Quiambao (2014)
Facts: Yujuico, incoming president of STRADEC, filed a criminal case against REQUIREMENTS RELATING TO DERIVATIVE SUIT
Quiambao, outgoing president of STRADEC, on the ground that Quiambao refused 1. Exhaustion of corporate remedies within the corporation
to turn over the company records of Stradec to Yujuico. Yujuico based his action on 2. Standing to sue: SH must have been a stockholder at the time the
his right to inspection under Sec. 74. transaction or act complained of took place, or in the case of a stockholder,
Held: Section 144 of the Corporation Code can be made to apply to violations of
the shares must have devolved upon him since by operation of law, unless
the right of a stockholder to inspect the stock and transfer book of a corporation
such transaction or act continues and is injurious to the stockholder
under Section 74 (4) given the already unequivocal intent of the legislature to
penalize violations of a parallel right, i.e., the right of a stockholder or member to
3. Any benefit recovered by the stockholder or member as a result of the
examine the other records and minutes of a corporation under Section 74 (2). bringing of a derivative suit, whether by final judgment, judicial compromise
Certainly, all the rights guaranteed to corporators under Section 74 of the or extrajudicial settlement must be accounted for to the corporation, who is
Corporation Code are mandatory for the corporation to respect. All such rights are the real party in interest
just the same underpinned by the same policy consideration of keeping public 4. If the suit is successful, the plaintiff is entitled to reimbursement from the
confidence in the corporate vehicle thru an assurance of transparency in the corporation for the reasonable expenses of litigation, including attorney’s fees
corporation's operations.
However, this case will not prosper because Yujuico et al. do not establish that Section 1, Rule 8 of the Interim Rules imposes the following requirements
Quiambao et al. were acting on behalf of STRADEC. Quite the contrary, the scenario for derivative suits:
painted by the complaint is that Quiambao et al are merely outgoing officers of (1) [The person filing the suit must be] a stockholder or member at the time
STRADEC who, for some reason, withheld and refused to turn-over the company the acts or transactions subject of the action occurred and the time the
records of STRADEC; that it is Yujuico et al who are actually acting on behalf of action was filed;
STRADEC; and that STRADEC is actually merely trying to recover custody of the (2) [He must have] exerted all reasonable efforts, and alleges the
withheld records. same with particularity in the complaint, to exhaust all remedies available
In other words, Yujuico et al are not actually invoking their right to inspect the under the articles of incorporation, by-laws, laws or rules governing the
records and the stock and transfer book of STRADEC under the second and fourth corporation or partnership to obtain the relief he desires;
paragraphs of Section 74. What they seek to enforce is the proprietary right of (3) No appraisal rights are available for the act or acts complained of; and
STRADEC to be in possession of such records and book. Such right, though (4) The suit is not a nuisance or harrassment suit.
certainly legally enforceable by other means, cannot be enforced by a criminal
prosecution based on a violation of the second and fourth paragraphs of Section Section 1 (b), Interim Rules :
74. b) Prohibition against nuisance and harassment suits. — Nuisance and
A criminal action based on the violation of a stockholder's right to examine or harassment suits are prohibited. In determining whether a suit is a
inspect the corporate records and the stock and transfer book of a corporation nuisance or harassment suit, the court shall consider, among others, the
under the second and fourth paragraphs of Section 74 of the Corporation Code can following:

58

(1) The extent of the shareholding or interest of the initiating stockholder
or member;
(2) Subject matter of the suit;
(3) Legal and factual basis of the complaint;
(4) Availability of appraisal rights for the act or acts complained of; and
(5) Prejudice or damage to the corporation, partnership, or association in
relation to the relief sought.
In case of nuisance or harassment suits, the court may, motu proprio or
upon motion, forthwith dismiss the case.
DERIVATIVE SUITS AND BUSINESS JUDGMENT RULE:
The decision of the board not to sue a third person is an exercise of business
judgment, which under ordinary circumstances, no court will be willing to
interfere.
Unless equitable basis for intervention be shown, an individual stockholder
has no more right to challenge by a derivative suit a decision of the board no
to sue a third person than to so challenge any other decision of the board
JURISDICTION:
GR: SEC (RTC sitting as a commercial court)
XPN: involves third persons
Pascual v Orozco (1911)
Facts: Candido Pascual owns 10 shares of Banco Espanol-Filipino. He acquired
these shares on November 13, 1903. The lower court granted demurrer of evidence
on two COA:
1st COA: Fraud committed by defendants-directors from 1903 to 1907 when they
allegedly deducted their respective compensation from the gross income instead
of from the net profits of the bank, thereby defrauding the bank and its
stockholders of P20,000/year.
2nd COA: Defendants' and appellees' immediate predecessors in office in this
bank during the years 1899, 1900, 1901, and 1902, committed the same
illegality as to their compensation. The lower court sustained the demurrer as to
the first and second causes of action on the ground that in actions of this character
Pascual must aver in his complaint that he was the owner of stock in the
corporation at the time of the occurrences.
Held: The ownership of the stock at the time of the transaction is a fact essential to
the maintenance of the suit. Unless that fact exists no cause of action exists. The
requirement that it be pleaded is procedural; The necessity of the existence of the
facts in order to give" rise to the right of action is substantive.
Demurrer to the first COA should not have been granted. Pascual has a COA being
a shareholder at the time the violation happened, except the first six months of the
year 1903. If the directors took their salaries at the close of that year or at any time
after September 13, Pascual would then have had an interest and, on the theory
that he was a stockholder, could have questioned the legality of the defendants'
right to take such salary, inasmuch as his dividends would be directly affected
The second COA should be granted demurrer. He was not a stockholder during any
of the time in question in this second cause of action. As a general proposition, the
purchaser of stock in a corporation is not allowed to attack the acts and
management of the company prior to the acquisition of his stock; otherwise we
might have a case where stock duly represented in a corporation consented to and
participated in bad management and waste, and after reaping the benefits from
such transaction, could be easily passed into the hands of a subsequent purchaser,
who could make his harvest by appearing and contesting the very acts and
conducts which his vendor had consented to
Evangelista v Santos (1950)
Facts: Evangelista et al. are minority stockholders of the Vitali Lumber
Company, Inc.. They allege that Santos, as the president, manager, and
treasurer, through fault, neglect, and abandonment allowed its lumber
concession to lapse and its properties and assets, to disappear, thus
causing the complete ruin of the corporation and total depreciation of its
stocks. The complaint therefore prays for judgment requiring Santos: (2)
to pay Evangelista et al the value of their respective participation in said
assets on the basis of the value of the stocks held by each of them
Held: The complaint shows that the action is for damages resulting from
mismanagement of the affairs and assets of the corporation by its
principal officer, it being alleged that defendant's maladministration has
CORPORATION | PROF. G. DEE | CALLUENG
brought about the ruin of the corporation and the consequent loss of
value of its stocks. The injury complained of is thus primarily to the
corporation, so that the suit for the damages claimed should be by the
corporation rather than by the stockholders.
But while it is to the corporation that the action should pertain in cases of
this nature, however, if the officers of the corporation, who are the ones
called upon to protect their rights, refuse to sue, or where a demand upon
them to file the necessary suit would be futile because they are the very
ones to be sued or because they hold the controlling interest in the
corporation, then in that case any one of the stockholders is allowed to
bring suit. In that case, it is the corporation itself and not the stockholder
that is the real party in interest, so that such damages as may be
recovered shall pertain to the corporation. It is a derivative suit brought
by a stockholder as the nominal party plaintiff for the benefit of the
corporation, which is the real party in interest
In the present case, the stockholders have brought the action not for the
benefit of the corporation but for their own benefit, since they ask that
the defendant make good the losses occasioned by his mismanagement
and pay to them the value of their respective participation in the
corporate assets on the basis of their respective holdings. Clearly, this
cannot be done until all corporate debts, if there be any, are paid and the
existence of the corporation terminated by the limitation of its charter or
by lawful dissolution. It results that plaintiffs' complaint shows no cause
of action in their favor so that the lower court did not err in dismissing the
complaint on that ground.
Liken v Shaffer (1946)
Facts: (Liken et.al.), who are stockholders in the Shores-Mueller
Company, claim that the individual defendants were, in 1933, officers and
directors of the company, and some of them were also voting stock
trustees of a large amount of stock in the corporation. The plaintiffs allege
while the defendants were in control of the Shores-Mueller Company
they received in behalf of that company the sum of $32,450 in settlement
of a fire insurance loss and that the defendants had failed to account for
it and while they were in control of the Shores-Mueller Company, reduced
the inventory and accounts and bills receivable in a large amount without
reducing the obligations of the Shores-Mueller Company in a comparable
amount. Defendants filed an MTD on the ground of res judicata citing
previously adjudicated cases
Held: A judgment for a defendant or defendants in a stockholder's
derivative suit operates as a bar in favor of such defendant or defendants
on the same claim or cause of action in a subsequent stockholder's
derivative suit by other stockholders. Stockholder's derivative suits
cannot be multiplied by each and every stockholder bringing an action or
suit as he may feel aggrieved. The one suit is for all. But, in order for a
judgment in a stockholder's derivative suit to be res judicata, the action
must not have been instituted through fraud and collusion with the
alleged wrongdoers.
The general rule is that a judgment in a stockholder's derivative suit is not
ordinarily res judicata as to a right of action that a stockholder may have
in his individual capacity. It is also the general rule that ordinarily a suitor
suing in his individual capacity is not barred by an adjudication in an action
to which he was not a party.
Case No. 9458 was a stockholder's derivative suit. The claim which was
asserted against the defendants, Van Vechten Shaffer and the Shores
Company in that action in behalf of the Shores-Mueller Company, is the
same claim now being asserted against them in the same manner in the
present action. In case No. 9458 there was adjudication in favor of Van
Vechten Shaffer and the Shores Company which stands unreversed. Case
no. 9458 bars the present action.
Keenan v Eshleman
Facts: Complainants, as stockholders of Sanitary Company America,
assert that Keenan et al. are guilty of conduct amounting in law to fraud:
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they used their control of the two corporations to exact from Sanitary
double compensation for the same service. Lower Court ruled in favor of
the stockholders. Keenan argues that recovery granted by the lower court
should have been limited to stockholders who have not acquiesced or
ratified the wrongful acts
Held: A derivative action’s benefits necessarily result to all of the SH even
when some of them have been wrongdoer, or have acquiesced or ratified
the acts. In working out rights of parties in actions such as this, it is better
to preserve the fiction of corporate entity. Bill/suit was filed on behalf of
the corporation in redress of a wrong done to the corporation. The
complaint and defences are to be considered as though brought by
corporation itself.
To say that amount recoverable should be reduced to compensate only
the dissenting SH would essentially convert the action from one asserting
corporate claim to a suit seeking for individual redress – to do so would
lose the sight of the justification of the action that is the claim against the
officers was part of the corporate assets. It would effectively destroy the
efficacy of the action.
Otis & Co. v Pennsylvania (supra)
Derivative suit is neither ancillary to nor dependent upon the judgment as to the
order. Questions on breach of fiduciary duty are not ancillary to nor dependent
upon the judgment as to the order, Otis has properly sought to enforce its rights in
this action.
Republic Bank v Cuaderno (1967)
Facts: Damaso Perez, a stockholder of the Republic Bank instituted a
derivative suit for and in behalf of said Bank, against Miguel Cuaderno,
Bienvenido Dizon, the Board of Directors of the Republic Bank, and the
Monetary Board of the Central Bank of the Philippines.
Paragraph 6 of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the
following: 6. That the relator herein filed the present derivative suit
without any further demand on the Board of Directors of the Republic
Bank for the reason that such formal demand to institute the present
complaint would be a futile formality since the members of the board are
personally chosen by defendant Pablo Roman himself." Damaso Perez
had complained to the Monetary Board of the Central Bank against
certain frauds allegedly committed by defendant Pablo Roman, in that
being chairman of the Board of Directors of the Republic Bank, and of its
Executive Loan Committee. Republic Bank argues that the action is
improper because the plaintiff was not authorized by the corporation to
bring suit in its behalf
Held: An individual stockholder is permitted to institute a derivative or
representative suit on behalf of the corporation wherein he holds stock,
in order to protect or vindicate corporate rights, whenever the officials of
the corporation refuse to sue, or are the ones to be sued or hold the
control of the corporation. In such actions, the suing stockholder is
regarded as a nominal party, with the corporation as the real party in
interest Cuaderno's action here is precisely in conformity with these
principles. He is neither alleging nor vindicating his own individual interest
or prejudice, but the interest of the Republic Bank and the damage caused
to it.
The action he brought is a derivative one, expressly manifested to be for
and in behalf of the Republic Bank, because it was futile to demand action
by the corporation, since its Directors were nominees and creatures of
defendant Pablo Roman. The frauds charged by plaintiff are frauds against
the Bank that redounded to its prejudice. Any such authority could not be
expected as the suit is aimed to nullify the action taken by the manager
and the board of directors of the Republic Bank; and any demand for
intra-corporate remedy would be futile, as expressly pleaded in the
complaint. These circumstances permit a stockholder to bring a derivative
suit.
Reyes v Tan (1961)
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Facts: Stockholder Justiniani filed this case alleging that several purchases
aggregating $289,678.86 were made in New York for raw materials such
as greige cloth, rayon and grey goods for the textile mill and shipped to
the
Philippines, which shipment were found out to consist not of raw
materials but already finished products, such as, West Point khaki, rayon
suiting materials dyed in the piece, finished rayon taffeta in cubes, cotton
eyelets, etc., for which reasons the Central Bank of the Philippines
stopped all dollar allocations for raw materials for the corporation which
necessarily led to the paralyzation of the operation of the textile mill and
its business
Held: Where corporate directors are guilty of a breach of trust — not of
mere error of judgment or abuse of discretion — and intracorporate
remedy is futile or useless, a stockholder may institute a suit in behalf of
himself and other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong inflicted directly upon the corporation
and indirectly upon the stockholders. The importation of textiles instead
of raw materials, as well as the failure of the Board of Directors to take
action against those directly responsible for the misuse of dollar
allocations constitute fraud, or consent thereto on the part of the
directors. Therefore, a breach of trust was committed which justified the
derivative suit by a minority stockholder on behalf of the corporation.
Chase v CFI Manila (1966)
Facts: Chase, a minority stockholder of AMPARTS, filed a derivative suit
in the Court of First Instance of Manila against Dr. Victor Buencamino, Sr.,
Victor Buencamino, Jr., Dolores A. Buencamino and Julio B. Francia, Jr.,
majority stockholders and corporate directors of AMPARTS charging them
with breach of trust; praying for their removal as directors and, if
necessary, for the dissolution and liquidation of said corporation.
Attached to the complaint was an application for the appointment of a
receiver of AMPARTS. RTC ruled in favor of Chase, but instead of granting
the appointment of receiver, RTC Judge Gatmaitan gave veto power to
Chase, which is appealable to court. AMPARTS director questions such
decision
Held: Where corporate directors are guilty of a breach of trust and intra-
corporate remedy is futile, the minority stockholders may resort to the
courts for appropriate relief and, incidentally, ask for the appointment of
a receiver for the protection of their rights. In such case, however, the
appointment of a receiver is a matter addressed to the sound discretion
of the court, and it has been frequently held that such discretion to
appoint a receiver who would take over the administration of the
corporate business should be exercised with great caution and only when
the necessity therefor is clear.
Upon the facts of the case, and considering the precautionary measures
adopted by the respondent court for the protection of petitioner's rights
and interest in AMPARTS, there can be no way of ruling that court had
committed a grave abuse of discretion in issuing the orders complained
of.
Holmes v Camp
Fact: Holmes et al. filed a representative (i.e. derivative) suit. The
defendants are executors of Dwight A. Jones, until his death the vice-
president of the DOE and an officer/director of the St. Joseph Company.
DOE was the beneficial owner of a large number of shares of St. Joseph.
The shares were in the name of Jones et al. The complaint alleged that
Jones et al., having secret knowledge of the high value of St. Joseph’s
stock and its impending declaration of large dividends, conspired together
to buy from DOE its shares in St. Joseph, thereby committing a fraud on
DOE.
The plaintiffs were once stockholders of DOE, but later, almost all of them
exchanged this stock and became stockholders of St. Joseph only, which
they now own. Of the plaintiffs, only Holmes now owns a stock in DOE
[the subsidiary].
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Held: In a representative action (i.e. derivative suit), the plaintiff is
allowed to maintain the action, notwithstanding his lack of direct interest,
solely to set the machinery of justice in motion and to prevent a complete
failure of justice. This action is an invention of equity. The stockholder is
merely an instigator. The cause of action is that of the corporation, and
recovery is in favor of the corporation. These said, a stockholder of a
holding company may maintain a derivative suit for the benefit of the
subsidiary company, because it is indirectly for the advantage of the
holding company. His stock interest in the holding company is sufficient
for him not to be a “mere officious and impertinent intermeddler.”
Gamboa v Victoriano (1979)
Facts: Loupe et al filed a complaint to nullify the sale of unissued 823
shares of stock to Gamboa on the ground that such sale violated Loupe's
pre-emptive rights and was made without the approval of the board of
directors representing 2/3 of the outstanding capital stock. After the
issuance of an injunction, three of the defendants entered into a
compromise agreement waiving their rights over the questioned shares
of stock in favor of Loupe. The agreement, however, provided that the
same shall not be considered as a waiver or abandonment of Lopue’s
claim against the other defendants. Gamboa thereafter, moved to dismiss
on the ground that Loupe’s cause of action had been abandoned, and that
they are estopped from prosecuting the case since they have in effect,
acknowledged the validity of the issuances of the disputed shares. They
further contend that the proper remedy must be a derivative’s suit
against the petitioners in the name of the corporation in order to secure
a binding relief after exhausting all the possible remedies available within
the corporation.
Held: An individual stockholder is permitted to institute a derivative suit
on behalf of the corporation wherein he holds stock in order to protect or
vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the
corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest. In the
case at bar, however, the plaintiffs are alleging and vindicating their own
individual interests or prejudice, and not that of the corporation. At any
rate, it is yet too early in the proceedings since the issues have not been
joined.
San Miguel v Kahn (1989)
Facts: De los Angeles, a representative of PCGG, in SMC, filed a derivative
suit in behalf of SMC, against 10 of its directors. His complaint is with
regard to the issue of the validity of the assumption by SMC of the
indebtedness of its subsidiary, Neptunia, for the benefit of certain of its
officers and stockholders. Kahn et al, alleges that De los Angeles does not
have standing to sue, and a derivative suit is not proper
Held: The requisites of 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 the intra-corporate remedies, i.e he has made
a demand on the BOD for the appropriate relief but the latter has failed
or refused to heed his plea
c. The COA actually devolves on the corporation, the wrong doing or harm
having been, or being caused to the corporation and not to the particular
stockholder bringing suit.
The bona fide ownership by a stockholder of stock in his own right suffices
to invest him with standing to bring a derivative action for the benefit of
the corporation. The number of his shares is immaterial since he is not
suing in his own behalf, or for the protection or vindication of his own
particular right, or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the corporation.
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Villamor Jr. v Umale (2014)
Facts: PPC acquired option to lease portions of Mid-Pasig’s property. Its
BOD issued a resolution waiving all its rights, interests, and participation
in the option to lease contract in favor of Villamor, without any
consideration. Balmores filed a suit alleging fraud on the part of the
directors detrimental to the interest of the stockholders. CA ruled in favor
of Balmores and characterized it as a derivative suit
Held: No, not a derivative suit as Balmores failed to implead PPC as a
party. Rule 8, Section 1 of the Interim Rules of Procedure for Intra-
Corporate Controversies (Interim Rules) provides the five (5) requisites for
filing derivative suits:
SECTION 1. Derivative action. — A stockholder or member may bring an
action in the name of a corporation or association, as the case may be,
provided, that:
(1) He was a stockholder or member at the time the acts or transactions
subject of the action occurred and at the time the action was filed;
(2) He exerted all reasonable efforts, and alleges the same with
particularity in the complaint, to exhaust all remedies available under the
articles of incorporation, by-laws, laws or rules governing the corporation
or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
In case of nuisance or harassment suit, the court shall forthwith dismiss
the case.
- The fifth requisite for filing derivative suits, while not included in the
enumeration, is implied in the first paragraph of Rule 8, Section 1 of the
Interim Rules: The action brought by the stockholder or member must be
"in the name of [the] corporation or association. . . ."
- The minority shareholder who is suing for and on behalf of the
corporation must allege in his complaint before the proper forum that he
is suing on a derivative COA on behalf of the corporation and all other
shareholders similarly situated who wish to join [him]." It is important
that the corporation be made a party to the case.
Ang v Ang (2013)
Facts: SMBI’s current stockholders are Juanito, Anecita, Jeannevie,
Roberto and Rachel Ang. Nancy, the sister of Juanito and Roberto agreed
to extend a loan to settle obligations of SMBI and other corporations
owned by the Ang family. When Nancy wrote to collect the loan, Roberto
and Rachel answered that they will not pay because they have not
contracted a loan. Juanito filed a derivative suit alleging that Roberto and
Rachel’s refusal to pay half of the loan is detrimental to the financial
viability of the company.
Doctrine: Not a derivative suit but a nuisance or harassment suit. A
stockholder's right to institute a derivative suit is not based on any express
provision of the Corporation Code, or even the Securities Regulation
Code, but is impliedly recognized when the said laws make corporate
directors or officers liable for damages suffered by the corporation and its
stockholders for violation of their fiduciary duties. In effect, the suit is an
action for specific performance of an obligation, owed by the corporation
to the stockholders, to assist its rights of action when the corporation has
been put in default by the wrongful refusal of the directors or
management to adopt suitable measures for its protection.
The Complaint failed to show how the acts of Rachel and Roberto resulted
in any detriment to SMBI. The loan was not a corporate obligation, but a
personal debt of the Ang brothers and their spouses. The Complaint also
failed to allege that all available corporate remedies under the articles of
incorporation, by-laws, laws or rules governing the corporation were
exhausted, as required under the Interim Rules.
Cua v. Tan (2009)
Facts: Respondents, as minority stockholders, assail the resolutions of the
Board for being fraudulent and in breach of trust through a derivative suit.
One of the resolutions involve a property-for-share exchange with
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another company to acquire said company. Other groups of minority
stockholders subsequently filed derivative suits alleging same COA.
Held: A derivative suit and an individual and class suits are mutually
exclusive. The right of action and recovery belongs to either the
shareholders (direct action) or the corporation (derivative action)."
On appraisal rights: the availability or unavailability of appraisal rights
should be objectively based on the subject matter of the complaint, i.e.,
the specific act or acts performed by the board of directors, without
regard to the subjective conclusion of the minority stockholder instituting
the derivative suit that such act constituted mismanagement,
misrepresentation, fraud, or bad faith. The property-for-shares exchange
between PRCI and JTH, involving as it did substantially all of the properties
and assets of PRCI, qualified as one of the instances when dissenting
stockholders, such as respondents Miguel, et al., could have exercised
their appraisal rights.
With the corporation as the real party-in-interest and the indispensable
party, any ruling in one of the derivative suits should already bind the
corporation as res judicata in the other.
Chapter XI. Financing the Corporation
Three main sources of Capital:
1. Contributions of its stockholders
2. Loans or advances by creditors
3. Profits which the corporation may earn
The first two is called EQUITY INVESTMENT. The third one is DEBT
FINANCING, when profits, instead of being distributed as cash dividends,
are capitalized to increase the capital of the corporation.
SHORT TERM FINANCIAL INSTRUMENTS – borrowings which may involve
large amounts of money, but the funds raised are usually for immediate
corporate needs which the present cash position of the corporation
cannot meet, but which it expects to be able to repay within a short
period.
Capital Structure
SECURITIES are instruments which represent relatively long-term
investment in the corporation.
Two classes of securities:
1. Shares of stock
2. Debt securities
Securities may also be classified as:
1. senior securities – those with prior but limited claim upon corporate
earnings such as: debt securities, preferred stock
2. Equity securities – which have the residual interest in such earnings
such as: common stock and participating preferred stock
Characteristics of securities as forms of investment
1. Right to an early claim on the income of the enterprise before other
security holders receive any payments
2. Right to the residual income, however large, after others have been
paid promised amounts
3. Right to vote on personnel and policy of the corporation
Capital and Capital Stock Distinguished:
CAPITAL STOCK is the amount fixed, usually by the corporate charter, to
be subscribed and paid in or secured to be paid in by the shareholders of
the corporation, either in money or property, labor or services at the
organization of the corporation or afterwards, and upon which it is to
conduct its operations.
LEGAL or STATED CAPITAL is the aggregate par or issued value of the
subscribed capital stock which sets the minimum limit of corporate assets
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that should be retained by the corporation as protection to creditors. Its
amount, as a rule, may not be withdrawn by, nor distributed to the
shareholders
CAPITAL is the actual property of the corporation, including cash, real and
personal property.
Shares of stock
Sec. 6. Classification of shares. - The shares of stock of stock corporations may
be divided into classes or series of shares, or both, any of which classes or
series of shares may have such rights, privileges or restrictions as may be stated
in the articles of incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as "preferred" or
"redeemable" shares, unless otherwise provided in this Code: Provided,
further, That there shall always be a class or series of shares which have
complete voting rights. Any or all of the shares or series of shares may have a
par value or have no par value as may be provided for in the articles of
incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be
permitted to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in
the distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the
articles of incorporation which are not violative of the provisions of this Code:
Provided, That preferred shares of stock may be issued only with a stated par
value. The board of directors, where authorized in the articles of incorporation,
may fix the terms and conditions of preferred shares of stock or any series
thereof: Provided, That such terms and conditions shall be effective upon the
filing of a certificate thereof with the Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and
non-assessable and the holder of such shares shall not be liable to the
corporation or to its creditors in respect thereto: Provided; That shares without
par value may not be issued for a consideration less than the value of five
(P5.00) pesos per share: Provided, further, That the entire consideration
received by the corporation for its no-par value shares shall be treated as
capital and shall not be available for distribution as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.
Except as otherwise provided in the articles of incorporation and stated in the
certificate of stock, each share shall be equal in all respects to every other
share. Where the articles of incorporation provide for non-voting shares in the
cases allowed by this Code, the holders of such shares shall nevertheless be
entitled to vote on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in
accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary
to approve a particular corporate act as provided in this Code shall be deemed
to refer only to stocks with voting rights.
SHARE OF STOCK are units into which the capital stock is divided. It
represents the interest of the holder thereof to participate in the
management of the corporation, to share proportionally in the profits of
the business, and upon liquidation, to obtain an aliquot part of the
corporate assets after all debts have been paid.
CERTIFICATE OF STOCK evidences the interest of the shareholder in the
corporation
Minimum limit on issuing shares of stocks: There be a class with complete
voting rights.
Classification of shares:
1. COMMON STOCKS are those which entitle the owner of such stocks to
an equal pro rata division of profits, if there be any, one stockholder
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having no advantage, priority or presence over any other stockholder in
the same class
- usually vested with exclusive right to vote and have the residuary rights
to the profits and the net assets upon liquidation, after the preferences
have been complied with
2. PREFERRED STOCKS entitles the holder to some preference either in
dividends or in distribution of assets upon liquidation or both or to some
other preferences not inconsistent with Code
Two limitations:
a. They can be issued only with a stated par value
b. The preferences must be stated both in the articles of
incorporation and in the certificate of stock, otherwise each share
shall be in all respects equal to every other share.
- The Code allows the AOI to authorize the BOD to fix the terms and
conditions of the preferred stocks, provided that these shall become
effective only upon the filing of certificate with SEC
2.a. Preference as to dividends – A preferred stockholder may have the
privilege of being paid first before any dividend is paid to the common
stocks. The amount of this preference is stated in his contract, usually in
a fixed percentage of the par value of his stocks
- Participating and non-participating: It is participating when, after
getting their fixed dividend preference, they share with the common
stocks the rest of the dividends
- Cumulative and non-cumulative: Cumulative means that if in any
given year or years, no dividends are declared, the arrears for such
year or years have to be made up in subsequent years before any
dividends can be paid to common stocks. In the absence of any
express stipulation, preferred stocks are deemed to be cumulative.
- Non cumulative dividends are those where express provisions are
found in the preferred share contract making dividends thereon
depend upon the existence of the profits for the year
- Discretionary dividend type – The terms of the preferred share
contract may be such that the right of the stockholder to get
dividends in a particular year would depend on the discretion of the
BoD
- Mandatory dividend type – Contract imposes a positive duty on the
directors to declare preferred dividends every year that profits are
earned
- Earned cumulative dividend credit type – Contract gives right to
arrears in dividends where there were profits earned during the
years when dividends were not declared. Contract merely postpones
the receipt of dividends earned to a later date
2.b. Preference as to voting rights – Preferred stocks are by contract
usually denied the right to vote. Unless this is clearly withheld, a preferred
stockholder would have the right to vote, since it is incident to stock
ownership.
Sir: Preferred shares is equity. In law – in insolvency – creditors are
preferred. But in accounting, sometimes, Preferred shares are debt
Ellingwood v Wolf’s Head Oil (1944)
Facts: When the preferred stockholders and the common stockholders
met at the annual meeting, the corporation was in default in respect to
declaration and payment of dividends in the amount of two years’
dividends on the preferred stock. The Court is called upon to determine
the voting rights of the two classes of stocks
Held: A certificate of incorporation may contain any provision with
respect to the stock to be issued by the corporation, and the voting rights
to be exercised by said stock that is agreed upon by the stockholders,
provided that the provision is not against public policy. The rights of the
stockholders are contract rights, and it is necessary to look to the
certificate of incorporation to ascertain the rights.
CORPORATION | PROF. G. DEE | CALLUENG
2.c. Preference upon liquidation –In the absence of any provision granting
preference to stockholders, he participates pro rate with the common
stockholders, since each share is presumed to be in all respects equal to
every other share.
Hay v Hay. (1951)
Facts: Article VI of the article of incorporation was amended to contain
the provision in question:
(d) In the event of any liquidation, dissolution or winding up the
Corporation the holders of the preferred stock shall be entitled to be paid
in full the par value thereof, and all accrued unpaid dividends thereon
before any sum shall be paid to or any assets distributed among the
holders of the common stock, but after payment to the holders of the
preferred stock of the amount payable to then as hereinabove provided,
the remaining assets and the funds of the Corporation shall be paid to and
distributed among the holders of the common stock.
Appelant takes the position that the phrase ‘all accrued unpaid dividends’
means that before there can be a dividend there must be surplus profits,
and that, since none ever existed, the right to such dividends, never
accrued and therefore are non payable.
Held: The contract stating the rights of the preferred stockholders has a
double aspect. The provision touching annual dividend at the specified
rate payable quarterly out of the surplus or net profits of the corporation,
was founded on the theory and hope of a prosperous business… But there
was also a provision designed to govern rights in the event of business
disaster resulting in a voluntary or compulsory winding up of affairs and
dissolution of the corporation. In that situation the preferred
stockholders were to be entitled to receive in full both the principal
amount of their shares and the unpaid dividend accrued thereon.
Generally speaking, there can be no ‘dividends’ until they are declared
and voted by the authorized representatives of a corporation. It is
manifest that no dividends rightly could be declared by a corporation in
financial distress, destitute of surplus or net profits. However, it is plain
from the agreement of association and articles of organization in the case
at bar that the words of preference were designed to be operative under
precisely those conditions of adversity. The words ‘unpaid’ and ‘accrued’
modify the word ‘dividends’ and alter what would otherwise be the force
of the word if it stood alone. The words in combination express the idea
that the dividends, if not regularly paid out of available earnings, may
assessed or stored up, whether earned or not earned, at the regular
dividend dates and attach to the shares of such stock until conditions arise
when they may be declared and paid.
Note on preferred stockholder: Although a preferred stockholder may
enjoy preferences over stockholders, he is an equity holder and not a
creditor of the corporation. He can only get back his investments only
upon the liquidation of the corporation, provided that there are enough
assets left after paying all creditors
3. PAR and NO PAR SHARES – the par value of a share is fixed in the articles
of incorporation and is the minimum issue price of such share. This value
must be stated in the certificate of stock, which cannot be issued until the
subscriber has paid his subscription in full
No-par shares are those whose issued price is not stated in the certificate,
but which may be fixed in the articles of incorporation, or by the BOD
when authorized by the AOI or by the by-laws or in the absence thereof,
by the shareholders themselves
- The following are the limitations on the issuance of no-par stock:
a. Once issued, they are deemed fully paid and therefore non-assessable
b. Consideration for their issuance cannot be less than five pesos
c. The entire consideration for their issuance constitutes capital, hence no
part of it is available for distribution as dividends
d. They cannot be issued as preferred stocks
e. They cannot be issued by banks, trust companies, insurance companies,
public utilities, and building and loan associations and
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f. The articles of incorporation must state the fact that the corporation
issues no-par shares as well as the number of such shares
4. TREASURY SHARES
Sec. 9. Treasury shares. – Treasury shares are shares of stock which
have been issued and fully paid for, but subsequently reacquired by
the issuing corporation by purchase, redemption, donation, or
through some other lawful means. Such shares may again be disposed
of for a reasonable price fixed by the board
When treasury shares are reissued, they can be sold at any
reasonable price, even less than par, because they have previously
been fully paid.
5. REDEEMABLE SHARES
Sec. 8. Redeemable shares. Redeemable shares may be issued by the
corporation when expressly so provided in the articles of
incorporation. They may be purchased or taken up by the corporation
upon the expiration of a fixed period, regardless of the existence of
unrestricted retained earnings in the books of the corporation, and
upon such other terms and conditions stated in the articles of
incorporation, which terms and conditions must also be stated in the
certificate of stock representing shares.
- The redemption privilege is usually given only to preferred stocks,
although it is not unknown in common stocks. It is also a common feature
of debt securities like bonds and debentures.
- It ordinarily takes the form of an option on the part of the corporation
to purchase the shares or bonds usually at the bar or face value thereof
plus a specified premium
6. FOUNDERS’ SHARES
Sec. 7. Founders' shares. - Founders' shares classified as such in the
articles of incorporation may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided that where the
exclusive right to vote and be voted for in the election of directors is
granted, it must be for a limited period not to exceed five (5) years
subject to the approval of the Securities and Exchange Commission.
The five-year period shall commence from the date of the aforesaid
approval by the Securities and Exchange Commission
Nature of Subscription Contract
How to become a stockholder in a corporation:
1. by subscription to shares before or after incorporation
2. acquisition of already issued shares from an existing stockholder
SUBSCRIPTION is a contract for the acquisition of unissued stock of a
corporation whether existing or still to be formed, and is in effect the
contribution or promised contribution of a person to the capital of a
corporation.
Sec. 60. Subscription contract. - Any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase
or some other contract. (n)
Once a subscription contract is perfected, the stockholder becomes a
debtor to the corporation and may be liable to pay unpaid portion upon
call by the BoD
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall
pay to the corporation interest on all unpaid subscriptions from the
date of subscription, if so required by, and at the rate of interest fixed
in the by-laws. If no rate of interest is fixed in the by-laws, such rate
shall be deemed to be the legal rate. (37)
Note: no interest is payable unless the by-laws so provide.
CORPORATION | PROF. G. DEE | CALLUENG
Garcia v, Lim Chu Sing (1934)
Facts: Lim Chu Sing is a stockholder of Mercantile Bank of China. As a
guarantor of Lim Cuan Sing’s debt, the bank compensated the
indebtedness of P9,105.17 with the sum of P10,000 representing the
value of his shares of stock with Mercantile Bank of China
Held: A share of stock or certificate of share of stock is not an
indebtedness to the owner nor evidence of indebtedness, and therefore,
it is not a credit. Stockholders are not creditors of a corporation. The
prevailing doctrine in American courts is that the capital stock of a
corporation is a trust fund to be used more particularly for the security of
creditors of the corporation who deal with it on credit of its capital stock.
The shares of a banking corporation do not constitute an indebtedness of
the corporation to the stockholder and, therefore, the latter is not a
creditor of the former for such shares. The indebtedness of a shareholder
to a banking corporation cannot be compensated with the amount of his
shares therein, there being no relation of creditor and debtor with respect
to such shares
Pre-incorporation subscription
Sec. 13. Amount of capital stock to be subscribed and paid for the
purposes of incorporation. - At least twenty-five percent (25%) of the
authorized capital stock as stated in the articles of incorporation must
be subscribed at the time of incorporation, and at least twenty-five
(25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the
contract of subscription without need of call, or in the absence of a
fixed date or dates, upon call for payment by the board of directors:
Provided, however, That in no case shall the paid-up capital be less
than five Thousand (P5,000.00) pesos. (n)
Sec. 61. Pre-incorporation subscription. - A subscription for shares of
stock of a corporation still to be formed shall be irrevocable for a
period of at least six (6) months from the date of subscription, unless
all of the other subscribers consent to the revocation, or unless the
incorporation of said corporation fails to materialize within said period
or within a longer period as may be stipulated in the contract of
subscription: Provided, That no pre-incorporation subscription may be
revoked after the submission of the articles of incorporation to the
Securities and Exchange Commission. (n)
Utah Hotel v Madsen (1913)
Facts: Madsen entered into a subscription agreement with Utah Hotel
Co. which provided that in consideration of 1 dollar to each by the other
subscribers paid, he subscribed to the payments of his subscription
payable in sums not to exceed 10% of the amount subscribed in any one
month. Madsen agreed to take 50 shares of the capital stock. He was duly
notified of the amount due but he failed and refused to pay the amount
he agreed to pay.
Held: A pre-incorporation subscription agreement is valid if it is
sufficiently specific in its terms and makes it clear as to what parties agree
to do and the amount that each subscriber agrees to take. The statute
does not require, nor would it be always practical to state the names of
all prospective stockholders nor the exact amount each one will
ultimately take. Stockholders have the power to regulate the manner of
making subscriptions to its capital stock through the by-laws or by express
contract. Since it may be done by express contract, it may be entered into
even before the corporation is organized and the agreement is enforced
if in fact the corporation is organized.
Wallace v. Eclipse Pocahontas (1919)
Facts: J.S. Wallace was the owner of an option of lease over a tract of 600
acres of coal in McDowell county while Perkins, Griffith, O’Keefe, and
Weller (“defendant promoters”) are the promoters for Eclipse
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Pocahontas. A contract was entered into between Wallace and defendant
promoters whereby the former assigned to the latter the option of lease
over the land subject to the conditions that the defendants will: (1)
advance the necessary money to pay the purchase price for the lease
($2500); (2) fully equip the property for the operation of coal; and, (3)
upon operation and organization, give one-fifth interest in the property
fully paid up and fifty shares of stock of the defendant corporation to
Wallace. Only Wallace complied with his obligation in the contract, and
only five shares of the agreed 50 shares of stock. Defendants denied the
allegations and invoked the lack of authority of Griffith and Perkins (who
signed the contract with Wallace) to bind all of them in the contract.
Held: Promoters of a corporation not yet organized, especially when their
contracts are made for and on behalf of the corporation, are regarded as
the agents of the corporation, and such contract become binding upon
them as well as upon the corporation after organization and acceptance
thereof by it. Here, the corporation accepted the contract by taking
advantage of the benefits it granted. Hence, it cannot plead ignorance of
the terms and conditions – in particular, its obligations - under the
contract.
Wallace’s position was that of a subscriber to the capital stock of the
corporation because he had paid subscription to the capital stock. His
contract was to sell and convey or cause to be conveyed to the
corporation the leasehold and to accept in payment fully paid up stock to
the value of the property when fully equipped for mining and producing
coal. Being entitled to this amount of stock easily ascertainable when the
equipment was completed, he became entitled to the stock. One who has
paid his subscription to the capital stock of the corporation may compel
the issuance of proper certificates therefor through legal processes.
Post-incorporation Subscription
Sec. 60. Subscription contract. - Any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be
formed shall be deemed a subscription within the meaning of this
Title, notwithstanding the fact that the parties refer to it as a purchase
or some other contract. (n)
Since anyone who acquires unissued shares is a subscriber, he enjoys all
the rights of a subscriber regardless of whether or not he has fully paid
for his subscription, unless of course, he has become delinquent in his
payments.
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not
fully paid which are not delinquent shall have all the rights of a
stockholder. (n)
On the other hand, since he is debtor to the corporation, the subscriber
remains liable to pay the balance of his subscription price even if the
corporation should subsequently become insolvent
Bayla v. Silang Traffic Co., Inc. (1942)
Facts: Bayla et al. are shareholders of Silang Traffic Co., Inc. They had
bought their shares from the corporation on specified terms and
conditions under an “Agreement for Installment Sale of Shares in the
‘Silang Traffic Company, Inc.” a resolution was approved by Silang’s board
of directors which had the effect of rescinding the “Agreement” contracts
entered into by the corporation with Bayla et al. Because of the rescission,
Bayla et al. filed this action for the recovery of the sum of money they had
already paid pursuant to the installment agreement. Corporation averred
that: (1) the August 1 Resolution is inapplicable to Bayla et al. because on
the said date, Bayla et al.’s subscribed shares of stock had already
automatically reverted to the corporation and the installments paid by
them had already been forfeited; and (2) the said resolution was revoked
and canceled by a subsequent August 22, 1937 Resolution.
Held: The “Agreement” is a contract of sale and not a contract of
subscription. A subscription is the mutual agreement of the subscribers to
take and pay for the stock of a corporation, while a purchase is an
CORPORATION | PROF. G. DEE | CALLUENG
independent agreement between the individual and the corporation to
buy shares of stock from it at a stipulated price. The provisions calling for
unpaid subscription and assessment of stocks do not apply to purchases
of stocks. Likewise, the rule that the corporation has no legal capacity to
release an original subscriber to its capital stock from the obligation to
pay for his shares is inapplicable to contracts of purchase of shares. Being
a contract of sale, its rescission by the agreement of the parties as
embodied in August 1 Resolution is valid. Said rescission was made for the
good of the corporation and in order to terminate the then pending civil
cases involving the validity of the shares in question. Bayla et al. impliedly
agreed to that rescission by demanding for the refunds of the amounts
they had paid. Consequently, the attempted revocation of rescission by a
subsequent August 22, 1937 Resolution was invalid because it was not
agreed to by Bayla et al.
There is no automatic forfeiture of the installments paid and the reversion
of the shares of stock to the corporation upon failure to pay any of the
installment. The contract did not expressly provide that failure of the
purchaser to pay any installment would give rise to forfeiture and
reversion without the necessity of demand from the seller. Article 1100
of the Civil Code provided only two instances when demand is not needed
before an obligor is declared in default, namely: (1) the obligation or the
law expressly provides that demand shall not be necessary in order that
default may arise, or (2) it appears from the nature and circumstances of
the obligation that the designation of the time for the performance of the
obligation was the principal inducement to the creation of the obligation.
Neither is present in the instant case.
The Pre-emptive Right to Shares
Basis of Right; Common Law Rule.
The pre-emptive right is the option privilege of an existing stockholder to
subscribe to a proportionate part of shares subsequently issued by the
corporation, before the same can be disposed of in favor of others.
- Historically, the justification for the preemptive right emphasized most
the protection of the right to vote, followed by the right to dividends and
to participate in the corporate assets upon dissolution, more attention
has been directed to the economic aspect of the pre-emptive right, which
some refer to as right to invest capital.
Sec. 39. Power to deny pre-emptive right. - All stockholders of a stock
corporation shall enjoy pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to their respective
shareholdings, unless such right is denied by the articles of
incorporation or an amendment thereto: Provided, That such pre-
emptive right shall not extend to shares to be issued in compliance
with laws requiring stock offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with the approval of the
stockholders representing two-thirds (2/3) of the outstanding capital
stock, in exchange for property needed for corporate purposes or in
payment of a previously contracted debt.
- The law includes all issues or disposition of shares of any class.
ISSUES - new shares issued in pursuance of an increase of capital stock
DISPOSITIONS - the issue of previously unissued shares which form part
of the existing authorized capital stock, as well as treasury shares
Pre-emptive right in close corporations.
Sec. 102. Pre-emptive right in close corporations. – The pre-emptive
right of stockholders in close corporations shall extend to all stock to
be issued, including reissuance of treasury shares, whether for money,
property or personal services, or in payment of corporate debts, unless
the articles of incorporation provide otherwise.
In a close corporation, the exceptions mentioned in Sec. 39 are not
applicable.
The first exception (shares issued in compliance with laws requiring stock
offerings or minimum stock ownership by the public,) by its nature cannot
apply to close corporations.
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The pre-emptive right of stockholders in close corporations is broadened
to include all issues, without exception, unless otherwise denied or
limited by the AOI.
Waiver of pre-emptive right
Any prior waiver or denial of the pre-emptive right should appear in the
AOI, and not merely in an ordinary waiver agreement.
- A waiver through an amendment to the articles would need only a 2/3
vote of the outstanding capital stock, and would bind not only the other
1/3 who may have dissented, but also all subsequent stockholders.
Datu Tagorano Benito v SEC (1983)
Facts: Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of
increase of its capital stock from P200,000.00 to P1,000,000.00. It was
shown in said certificate that P191,560.00 worth of shares were
represented in the stockholders' meeting held on November 25, 1975 at
which time the increase was approved. P110,980.00 worth of shares were
subsequently issued by the corporation from the unissued portion of the
authorized capital stock of P200,000.00. Of the increased capital stock of
P1,000,000.00, P160,000.00 worth of shares were subscribed by Mrs.
Fatima A. Ramos, Mrs. Tarhata A. Lucman and Mrs. Moki-in Alonto. Datu
filed with the SEC a petition alleging that: the additional issue (worth
P110,980.00) of previously subscribed shares of the corporation was
made in violation of his pre-emptive right to said additional issue
Held: The questioned issuance of the unsubscribed portion of the capital
stock worth P110,980.00 is ' not invalid even assuming that it was made
without notice to the stockholders. As a general rule, pre-emptive right is
recognized only with respect to new issue of shares, and not with respect
to additional issues of originally authorized shares. This is on the theory
that when a corporation at its inception offers its first shares, it is
presumed to have offered all of those which it is authorized to issue. An
original subscriber is deemed to have taken his shares knowing that they
form a definite proportionate part of the whole number of authorized
shares. When the shares left unsubscribed are later re-offered, he cannot
therefore claim a dilution of interest.
When the issue is in breach of trust:
Even if the pre-emptive right does not exist, either because the issue
comes within the exceptions in Sec. 39 or because it is denied or limited
in the AOI, an issue of shares may still be objectionable if the directors
have acted in breach of trust and their primary purpose is to perpetuate
or shift control of the corporation, or to “freeze out” the minority interest
Remedies when right violated
1. injunction against the issue
2. mandamus to allow him to exercise the right
3. The SEC or the Court, as the case may be, may even order the
cancellation of the shares, provided that no innocent third parties are
prejudiced.
- As a rule, the suit must be individual and not derivative, because the
wrong is done not to the corporation but to the stockholders individually.
- A derivative suit may only be proper where the plaintiff claimed not only
the violation of his pre-emptive right but also that such violation resulted
in waste and management of the corporate assets, or in giving fraudulent
directors control of the corporation.
Stokes v Continental Trust Co.
Facts: A stockholder wants to subscribe to a proportional increase of his
existing shares. However the company disapproved of the same and sold
the increased capital stocks to another corporation who offered a higher
price than its issued par value. The petitioner then instituted this case to
CORPORATION | PROF. G. DEE | CALLUENG
compel the corporation to issue the said shares to him for the par value
he originally paid
Held: A stockholder has an inherent right to a proportionate share of a
new stock issued for money only and not to purchase property or to effect
consolidation. He can either:
1. Waive this right but he cannot be deprived of it without his consent.
2. Buy the same at a fixed price at or above its par value
Prior to the shareholders’ meeting, the petitioner already communicated
to the corporation that he is willing to acquire and pay for additional
shares in proportion to his existing shares. By increasing the capital stocks
from $500,000 to $1,000,000, effectively the voting power of the
petitioner is reduced by ½. This constitutes a deprivation of his right to
property as it has adverse effects in terms of the exercise of his voting
rights as a shareholder. When the corporation refused to honor his
request to purchase the additional shares, he is deprived of his legal right.
There was no waiver of right. He demanded his share of the new stock at
par value ($100 and not $450 as offered by B&C). He attended the
meeting and protested the sale of the shares to B&C.
The proper computation should be based on the actual loss which is the
difference between the market value on the day of the sale ($550) and
the price fixed by the shareholders had he been allowed to purchase
($450) them. This is because the shareholders by a majority vote can fix
the purchase price of the stocks.
Thom v Baltimore Trust Co (1930)
Facts: At a meeting of stockholders of the Baltimore Trust Co. (BTC), a plan
of merger National Union Bank (NUB) of Maryland was approved by more
than 2/3 of its outstanding shares. According to the merger, BTC would
issue 15,000 shares of its stock at $112 per share for the purpose of
acquiring 10,000 of NUB stock at $168 per share, subject to the condition
that at least 70% of the NUB stock could be delivered upon the agreed
terms. The requisite increase of BTC’s stock was authorized by a charter
amended duly adopted by its stockholders: “Upon any increased issue of
stock, the stockholder shall have the pro rata preferential right to
subscribe therefore at such price and on such terms as the board of
directors may in each instance fix. In the event of the issue of any
additional stock of the company for the purpose of accomplishing the
merger with or acquiring any other bank or trust company or other
property, the directors may issue said stock without preferential
subscription rights to such extent and on such terms as the board may in
each instance deem proper.” Plaintiff stockholders of BTC voted and
protested against the merger and the use of the proposed new shares for
the exchange of NUB shares, which involved disregard of their preemptive
right.
Held: As a general rule, independently of the charters, the stockholders
have a preferential right to purchase new issues of its shares, to the
proportional extent of their respective interests in the capital stock then
outstanding, when the privilege can be exercised consistently with the
object of the disposition of the additional stock. An exception is that in
transactions involving the acquisition of property by corporations in
exchange for shares of their stock, the determining consideration to the
owners of the property may be the advantage of sharing as stockholders
in the profits of the corporation with which they are contracting.
In this case, every stockholder of NUB, for each of his shares of stock of
the same, would receive 1 ½ shares of BTC. It would not be feasible to
consummate a transfer based upon such consideration if the preemptive
right would be enforceable with respect to the new issue of stock
regardless of the object of its disposition.
Fuller v. Krogh (1962)
Facts: FULLER and KROGH are shareholders of CORMIER Industrial Corp.
CORMIER’s board of directors is composed of FULLER as president,
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FULLER’s wife as vice-president, and KROGH as secretary-treasurer.
FULLER and KROGH owned shares in equal amounts. CORMIER suffered
financial difficulties and was unable to pay the debts it incurred in the
construction of the building. Consequently, the construction of the
building stopped. KROGH financed the construction personally and acted
as general contractor since he was financially sound and owned
companies engaged in selling construction materials. CORMIER issued
shares in partial satisfaction of its debt to KROGH. FULLER filed an action
praying for an order permitting FULLER to purchase sufficient unissued
stock of CORMIER to equalize the number of shares held by him and
KROGH.
Held: Pre-emptive rights may be exercised in cases of shares issued in
payment of a debt. Pre-emptive rights may be exercised when the stocks
issued represents an increase in the authorized capitalization of the
corporation and previously authorized but unissued stock. The right is
subject to the following limitations:
- Articles of incorporation may limit or deny the right.
- The exercise of the right must be consistent with the objective which the
stock increase is intended to accomplish. When the stock is to be issued
for money needed for corporate purposes, the right may be exercised.
- When the corporation has a great need for a particular property or
service and the issuance of stock is the only practical and feasible method
by which the corporation can acquire it for the best interest of the
shareholders, pre-emptive rights may be denied.
In this case, there is no agreement to exchange property or services for
stock or that CORMIER could only secure such material or services (i.e.
services of KROGH as contractor) on the basis of the stock. Pre-emptive
rights may be exercised when shares are issued in payment of a debt.
Fuller, however, has waived his pre-emptive rights. He had knowledge of
the issuance of the shares and the reason therefor. At the time the shares
were issued, Fuller and his wife made up a majority of the directors of
CORMIER, the other being KROGH. As president of the corporation, it was
him who signed the certificates of stock and he had the duty of offering
the shares to himself as a shareholder.
Dunlay v Avenue M. Garage & Repair Co., Inc. (1930)
Facts: The board of directors of AVENUE Garage & Repair Co., Inc.
adopted a resolution that 50 of the 76 shares be issued to one Graham in
payment of a debt owing to the latter. BOD then issued the remaining 26
shares to AGENO to meet other indebtedness of AVENUE. As of these
issuances, the AGENO faction was still short of a majority of the shares.
MONTALBINE, a director of AVENUE and sister of AGENO, subsequently
acquired the 50 shares of Graham. AGENO purchased the shares of one
May, a shareholder of AVENUE. With these acquisitions, the AGENO
faction had a majority of the shares which gave it control over the board
of directors of AVENUE.
DUNLAY filed an action to compel AGENO and MONTALBINE to return to
AVENUE the 76 shares of its capital stock. DUNLAY claimed that directors
of a corporation cannot purchase unissued capital stock without affording
to shareholders the right to participate in the purchase of such remaining
issued capital stock.
Held: If the issue of the unissued authorized capital stock is reasonably
necessary to raise money to be used in the business of the corporation
rather than for expansion of the business beyond reasonable limits, the
shareholders have no right to keep their proportional part of the original
stock (i.e. exercise their pre-emptive rights). Directors may not issue
unissued shares to themselves for the purpose of converting their
minority shareholdings to majority. To do otherwise would constitute a
breach of the fiduciary duty of directors to its shareholders.
The court found that the disputed shares were issued for full value and in
good faith to discharge the debt to Graham, to raise money to meet
corporate obligations, and to enable the corporation to carry on its
business. The issuance of shares to AGENO did not give his faction control
CORPORATION | PROF. G. DEE | CALLUENG
over the corporation and such control was obtained by legitimate means
when the shares were purchased from Graham and May
Ross Transport Inc. et al v Crothers (1946)
Facts: A total of 1,035 shares were originally subscribed consisting,
among others, of 50 shares subscribed by Williams, 100 shares by his son,
200 shares by his wife, 25 shares by Ross, and 200 shares by Gervase and
Jean SINCLAIR. After the death of Gervase Sinclair, CHARLES and
EDMUND Crothers purchased the Sinclair stock, 200 shares, at $20 and
5% interest from the date of issuance. On Aug 26, 1942, the stock
complained of was issued at the set price of $20 per share to the wife and
daughters of Williams and to Ross, totaling 365 shares in all, and
increasing the outstanding stock to 1,400 shares. As a result of these
purchases, Williams and Ross now held 740 shares and therefore had the
controlling interest of the company.
The Crothers brothers allege that the stock sales of Aug 26 was void
because it deprived them and the other original stockholders of their pre-
emptive rights to purchase a proportionate amount of the remaining
shares, and in selling to themselves and their nominees, Williams and
Ross have abused their trust as officers and directors.
Held: Generally, existing stockholders are the owners of the business, and
are entitled to have that ownership continued in the same proportion.
Therefore, when additional stock is issued, those already having shares
are to have the first right to buy the new stock in proportion to their
holdings. EXCEPTION: Pre-emptive rights do not exist where the stock
about to be issued is part of the original issue.
EXCEPTION TO THE EXCEPTION: Where conditions have changed since the
original issue
It was unnecessary to decide this point considering that the directors
involved in the case sold shares to themselves, and thereby gained an
advantage, both in value and voting power. Williams and Ross, who were
operating the company, knew on Aug 26, 1942, that they were about to
receive large sums of dividends in addition to the salaries they were
getting. The benefit of those dividends would not only increase the value
of the stock, but the first two would pay back all the subscribers had
invested, leaving nay future earnings and distributions pure profit
Directors, as trustees, are not allowed to become a purchaser either
directly or indirectly at his own sale. Such a transaction is entirely voidable
at the option of the party interested. When the shares are issued in favor
of directors, the burden is on them to prove not only good faith, but also
equity of the transaction. Williams and Ross failed to overcome such
burden. They have not shown that the company needed the money so
badly and was in such a financial condition that the company needed the
additional stock to themselves was the only way the money could be
obtained.
No laches, waiver, ratification, or estoppel on the part of the Crothers
brothers. The mere fact that Edmund voted for a resolution of
approbation of the operation of the corporation does not imply that a
waiver of his rights in respect to the stock transaction or a ratification of
it.
As to Charles who voted for a declaration of a dividend on all 1,400 shares
– This was an ordinary dividend resolution and could hardly be held to be
a ratification of the issuance of any particular share of stock.
Debt Securities
Form of borrowings
PROMISSORY NOTES are evidences of long term loans obtained by the
coronation from a bank or other financial institution
Bonds and Debentures
Sec. 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital
stock or incur, create or increase any bonded indebtedness unless approved by
a majority vote of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating
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or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence
as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally.
A certificate in duplicate must be signed by a majority of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders' meeting, setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance by
the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That
the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time
of the filing of the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual cash to
the corporation or that there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%) percent of the subscription:
Provided, further, That no decrease of the capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase
the same, with the approval by a majority vote of the board of trustees and of at
least two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
DEBT SECURITIES are a series of instruments representing units of
indebtedness and regarded as one entire debt. They are issued in bearer
form, although provision is often made for registration in the owner
names
BONDS are secured by a mortgage or pledge of corporate property
DEBENTURES are issued on the general credit of the corporation. They are
not secured by any collateral and are not bonded indebtedness in the true
sense. It does not need approval of the stockholders
INTEREST DIVIDENDS
Debt securities Stocks
Payable WON corporation makes Payable only when there are
profits profits
Fixed charge which the Only when the business is
corporation cannot avoid or prosperous
postpone
BONDS AND DEBENTURES STOCKS
Payable on a specified date to get Only upon dissolution of the
back investments corporation and liquidation of its
CORPORATION | PROF. G. DEE | CALLUENG
assets, only when there are
assets left
Convertible Securities; stock options
CONVERTIBLE SECURITIES – when the contract gives him the privilege to
exchange his class of securities with another class
- oftentimes redeemable , but the conversion privilege continues after
notice of redemption is given until the date fixed for actual redemption
STOCK OPTION WARRANTS – options to purchase stocks in the
corporation at a specified price not lower than par, exercisable by the
grantee at any time within a specified period
- SEC rule: require the prior approval before granting of any stock option.
If granted to non-stockholders, and to directors, officers, or managing
groups, stock holders owning at least 2/3 of the OCS must give their
approval. The SEC shall then determine the reasonableness of the stock
option plan
Meritt-Chapman v New York Trust Co
Facts: Stock purchase warrants were issued by Meritt-Chapman in bearer
form. Each warrant certifies that the bearer is entitled to purchase full-
paid and non-assessable shares of common stock of the corporation,
without par value, at the price of $30 upon surrender of such warrant at
the office of the respondent accompanied by the payment of the
purchase price.
By resolution of its directors, petitioner declared a stock dividend of 40%
per share of no par common stock on each legally issued and outstanding
share of common stock in the hands of the public. It also directed the
officers to give warrant holders outstanding under the trust deed
A controversy then arose between the corporation and the trustee as to
the rights of warrant holders. The corporation contends that a holder
must exercise his warrant before Sept. 15, 1950 to share in the dividend.
New York Trust Co contends that the corporation must deposit with the
trustee stock certificates in an amount equal to 40% of the stock
certificates now on deposit with the trustee, and that whenever a warrant
holder may elect to exercise his warrant, he will be entitled to receive 1.4
shares upon payment of the “basic purchase prince” for one share.
Held: There is no need for warrant holders to exercise the warrants before
the time specified. A stock dividend does not change the proportional
interest of each shareholder in the corporate enterprise. It changes only
the evidence which represents the interest. It is a mere watering of
outstanding shares. If the corporation were at liberty to declare stock
dividends without any provision for warrant holders, the percentage of
interest in the common stock capital which the holders would acquire, if
they thereafter purchase the shares subject to warrants, could be
reduced to the point of extinction.
While injustice could be avoided by reducing the price paid for each share
purchased under the warrants, the privilege of the warrant holders to
acquire a definite proportional interest in the common capital stock
would be lost without provision protecting such.
• This is the purpose of Sec. 7, Art. III. It recognized the possibility
that a stock dividend may be declared and paid on outstanding shares
before the warrants had been exercised. In that event, stock certificates
representing that proportion of the dividend shares which the shares
subject to the warrants bore to all the common shares would be
deposited with the trustee who would then deliver the shares without
additional consideration.
Hybrid Securities
INCOME BOND – interest is dependent on earnings and which may be
senior to stocks but subordinate to other indebtedness.
- difficult to determine whether a hybrid security is a bond or preferred
stock, which is crucial for tax purposes
John Kelly Co. v CIR (note: not discussed by sir)
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Facts: (Kelley Case) The corporation sold 20 year debenture bearer bonds
with a non-cumulative interest of 8%, conditioned on the sufficiency of
net income. It also allowed a swap of preferred shares (with 6%
cumulative guaranteed dividends) for these debentures
(Talbot Mills Case) The stockholders of the corp. swapped 4/5 of their
stocks for 25 year notes which ensured that interest ranging from 2-10%
would be paid to the holders annually. Dividends could not be paid until
all the interest on the notes were satisfied.
Held: Kelley case is interest. Talbot Mills is dividend. in the Kelley case,
there were “indica of indebtedness” such as the fact that there was a sale
of debentures as well as an exchange of debentures for preferred stock,
the debentures being assignable without need for a transfer of stock, a
promise to pay a certain amount if earned. In Talbot mills, the fluctuating
annual payments with a two percent minimum, and the limitation of the
issue of notes only to those in exchange of stock are characteristics that
distinguish Talbot from Kelley. There is no one characteristic, not even the
exclusion from management, which can be said to be decisive in the
determination of whether obligations are investments or debts. So called
stock certificates may be authorized by corporations which are really
debts. So too can promises to pay be executed which have incidents of
stock.
Jordan Co. v Allen (note: not discussed by sir)
Facts: The original charter of Jordan Co. provided for a form of obligation
called a “Debenture Stock”. Certificates of the Debenture Stock were
later issued, with the by-laws prescribing the form of the certificate. The
certificates conformed substantially with the provisions set forth in the
charter, with one very significant exception: whereas the charter provided
that the holders of debenture stock should rank pari passu with general
creditors upon dissolution, the certificate as set out in the by-laws (and as
subsequently issued to the holders thereof) provided that upon
dissolution the holders of debenture stock should rank after the general
creditors, equally with each other and prior to the holders of common
stock. “Interest” was paid on the debenture stocks regularly; during each
of the taxable years ending December 31 of 1940-1944, JORDAN Co.
deducted the sums as interest paid on outstanding obligations. These
deductions were disallowed by the Commissioner of Internal Revenue on
the grounds that they were payments of dividends rather than payments
of interest; deficiency assessments based on such denial were then made.
Held: If the evidence taken as a whole shows a relation of debtor and
creditor, the payments made on account of that relation will be interest,
no matter how called. If, on the other hand, the evidence shows a
stockholding relation, the payments made will be dividends, equally no
matter how called.
Certain factors have been considered significant in arriving at the true
nature of these securities: Treatment by the parties; Maturity date and
right to enforce collection; Rank on dissolutions; Uniform rate of interest
payable or income payable only out of profits; and Participation in
management and the right to vote.
As seen in the three most significant factors, the issues here involved were
cumulative preferred stock, and not bonds or obligations.
Here, the holders of the Debenture Stock ranked ahead of the other
stockholders but were inferior to general creditors. When the right to
share in the assets of the corporation, in case of dissolution, is subject to
the rights of creditors, there is a strong presumption of a stockholding
relation. Provisions exist for the payment of “interest” at a prescribed rate
only out of profits – provisions that are usually included in preferred stock
certificates and are rarely incidents of true obligations.
It has also been repeatedly held that the existence of a fixed maturity date
for the principal sum, together with a right to enforce payment of said
sum as a debt in case of default, is the most significant/essential feature
of a debtor-creditor relationship. No such maturity date exists here; no
time was set forth in the certificate, charter, or by-laws at which holders
could demand payment of the principal sum.
CORPORATION | PROF. G. DEE | CALLUENG
The Trust Indenture
A bond issue will usually involve three parties:
1. the debtor-corporation
2. The creditor bond-holder
3. The trustee
- The bond itself will embody the promise to pay, but the rights of the
parties are defined in the trust indenture executed between the
corporation and a trustee as representative of all the bondholders
Aladdin Hotel Co. v Bloom (note: not discussed by sir)
Facts: The Aladdin Hotel Company executed and delivered a series of 647
bonds aggregating in principal amount the sum of $250,000.00. To secure
payment of said bond issued the Hotel Company executed its deed of
trust by which it mortgaged certain real estate owned by it in Kansas City,
Missouri. The bonds and deed of trust contained provision empowering
the bondholders of not less than two-thirds principal amount of the
bonds, by agreement with the Hotel Company to modify and extend the
date of payment of said bonds provided such extension affected all bonds
alike. Josephine Loeb Bloom, owner of some said bonds, filed a class
action suit seeking equitable relief. Bloom alleged that the defendants
entered into an agreement with the Hotel Company June 1, 1948 to
extend the maturity date of said bonds from September 1, 1948 to
September 1, 1958. The purported changes were made on application of
the Hotel Company and with the consent of the holders of two-thirds in
principal value of the outstanding bonds. No notice of said application for
change in the due date of the bonds was given to the mortgage
bondholders and that plaintiff did not consent nor agree to the
modification. Bloom contended that the modifications were invalid
because it was not made in good faith and were not for the equal benefit
of all bondholders but were made corruptly for the benefit of the
defendants and such modification deprived plaintiff and the other
mortgage bondholders of their rights and property.
Held: There is no question that the provision in the trust deed and bonds
(empowering the bondholders of not less than two-thirds principal
amount of the bonds, by agreement with the Hotel Company to modify
and extend the date of payment ) was a legal provision which violated no
principle of public policy nor private right. Their rights must be
determined by their contract and not by an equitable doctrine. The
contract made no provision for notice. It required only that such
application have the approval of those holding 2/3 or more in face value
of the bonds. Notice to the other bondholders could have served no
possible purpose. • If any equities in favor of the bondholders were
infringed by reason of the modifications of the provision of the trust deed
while these bonds were owned and in possession of plaintiff's grantors,
any equitable right of action accrued would have accrued to them and not
to plaintiff. Plaintiff, by securing an assignment of the bonds, did not
acquire whatever equitable right of action had vested in her assignors.
Chapter XII Consideration for Issuance of Shares
Form of Consideration
Sec. 62. Consideration for stocks. - Stocks shall not be issued for a
consideration less than the par or issued price thereof. Consideration for the
issuance of stock may be any or a combination of any two or more of the
following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;
3. Labor performed for or services actually rendered to the corporation;
4. Previously incurred indebtedness of the corporation;
5. Amounts transferred from unrestricted retained earnings to stated
capital; and
6. Outstanding shares exchanged for stocks in the event of reclassification or
conversion.
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Where the consideration is other than actual cash, or consists of intangible
property such as patents of copyrights, the valuation thereof shall initially be
determined by the incorporators or the board of directors, subject to approval
by the Securities and Exchange Commission.
Shares of stock shall not be issued in exchange for promissory notes or future
service.
The same considerations provided for in this section, insofar as they may be
applicable, may be used for the issuance of bonds by the corporation.
The issued price of no-par value shares may be fixed in the articles of
incorporation or by the board of directors pursuant to authority conferred upon
it by the articles of incorporation or the by-laws, or in the absence thereof, by
the stockholders representing at least a majority of the outstanding capital
stock at a meeting duly called for the purpose. (5 and 16)
- Consideration need not be paid in full at the time of the issuance, the
unpaid portion is a debt and must be paid by the subscriber at a later date
- If the consideration is in property, its fair value must be equal to at least
the par or issued value of the shares.
- When a business has become going concern, profits earned by it may be
capitalized to form part of its authorized capital stock instead of
distributing them among the stockholders
- STOCK DIVIDENDS – shares of stock which will be issued in place of cash
dividends and distributed pro rata among the existing stockholders
- PNs and future services are not allowable consideration because their
realization is not certain. (Therefore, stocks cannot substitute monetary
salaries of employees)
Liability on Watered Stock
Sec. 65. Liability of directors for watered stocks. - Any director or officer of a
corporation consenting to the issuance of stocks for a consideration less than
its par or issued value or for a consideration in any form other than cash, valued
in excess of its fair value, or who, having knowledge thereof, does not forthwith
express his objection in
writing and file the same with the corporate secretary, shall be solidarily liable
with the stockholder concerned to the corporation and its creditors for the
difference between the fair value received at the time of issuance of the stock
and the par or issued value of the same. (n)
Note: Read along with Sec. 62. The only time when watered stocks will arise is when
the consideration is other than cash. Sec 62 provides that if consideration is not
cash, SEC needs to approve it. Once you get the approval, there is no reason for
you to be held liable for sale of water stock
WATER STOCKS are those which are issued as fully paid up in consideration of
property at an overvaluation.
- Whenever shares are issued as fully paid up, but no consideration is actually paid
in any form, or the consideration is inadequate, because it is not equal to the par
or issued value of the shares, the shareholder is liable to the corporation and its
creditors for the unpaid portion of the consideration
BONUS SHARES are those which are issued gratuitously
DISCOUNT SHARES are those issued as fully paid up in consideration for cash at
less than par
Basis for liability of stockholders to the corporation as well as to its creditors for
watered stocks issued to them
1. Trust fund theory – capital stock of a corporation as a trust fund for the payment
of its debts and as a substitute for the lack of personal liability of the stockholders
for such debts
2. fraud or misrepresentation theory – liability is based on the false representation
to creditors that the par value has been paid or agreed to be paid in full. Only
creditors subsequent to the issuance of the watered stocks and without notice are
protected by this theory.
- Sec 65 however, does not make any distinction as to creditors, thus, liability will
be to all creditors, whether they become such prior or subsequent to the issuance
of the watered stock
- Even no par stocks can be watered stocks where they are issued for less than their
issued value as fixed by the corporation in accordance with law
Triplex Shoe Co v Rice & Hutchins, Inc. (1930)
Facts: Triplex Shoe Co. was incorporated in 1919. During the 1st meeting of
directors, the ff. were elected: (Pres) Albert Dillman, (VP and Sec) Elmer Solly, and
CORPORATION | PROF. G. DEE | CALLUENG
(Treas) Louis Dillman. The Board also made a resolution providing that the 3
aforementioned officers shall receive C/S in consideration of their services.
Subsequently, Solly transferred his shares to the 2 Dillmans as consideration of
the services rendered in organizing the Company and in consideration of other
services to be rendered in the premises and for actively managing the Company.
The rest of the stocks were issued to various persons.
In 1921, the corporation held a special meeting and came up with a resolution
authorizing an amendment to the certificate of incorporation, which was adopted
The amended certificate provides: P/S: 2,375 shares with par value of $100 =
$237,500, C/S: 175 shares without any par value
And sole voting power resides in holders of C/S
In 1921, Rice & Hutchins, Inc. purchased 259 P/S and was given 83 C/S as bonus
on the basis of 1C/S for every 3 P/S. In 1929, an annual meeting of stockholders
was held which resulted in the election of 2 sets of officers: “A” Ticket, supported
by Rich & Hutchins; and “B” Ticket supported by the Dillman faction.
Held: Triplex has no authority from the State to issue no-par C/S. Under Sec.4(a)
Delaware Corporation Law, “Such capital stock without nominal or par value,
whether common or preferred, may be issued by the corporation […] for such
consideration as may be fixed […] by the BOD[…] or by the consent of the holders
of 2/3 of each class of stock then outstanding[.]” In this case, the certificate of
incorporation did not confer upon the BOD authority to fix the consideration for no
par value stock; so only the stockholders could have fixed the consideration, BUT
they did not. The logical conclusion, in view of the violation of the statute, is that
the issued no-par C/S are void.
Also, the consideration for the shares of the Dillmans and Solly, i.e. services, was
not of such as the law contemplates and requires. The services do not appear to be
essentially different or greater than the services ordinarily rendered in the
promotion and organization of a corporation. But even if they were in part of a
quality that might constitute proper consideration they consisted of services
rendered and to be rendered. It is admitted that services to be rendered in the
future are not lawful consideration for the issuance of stock, and it is not possible
to tell from the evidence what proportion of the consideration was services
rendered. It is fair to assume that the greater part of the consideration of this
character, because very little of it consisted of services actually rendered.
Since the issued no-par C/S are void, holders thereof are not entitled to vote. P/S
holders, as the only remaining legal stockholders, are the ones who are entitled to
vote.
McCarty v Langdeau (1960)
Facts: McCarty was able to acquire shares in ELIC through a contract stating that
the balance due is to be evidenced by a note. In an action to recover from him what
he owed the corporation, he alleged that the contract was void since it violated a
constitutional provision prohibiting the issuance of stocks for consideration other
than money, property, or labor
Held: Constitution of Texas only prohibits “issuance of stock” until fully paid for. So
if a note is given for stock but will not be issued until note is paid, then the contract
is valid and not illegal.
Furthermore, there is no declaration in the constitutional provision that a
transaction in which something other than money, property, or labor is received in
payment for the corporation’s stock, shall be utterly void. It prohibits such a
transaction and therefore makes it unlawful, but that is as far as it goes. Thus, if a
security be accepted in payment for the stock, such as a subscriber’s note, which
is not property for such a purpose, the Constitution does not say that either the note
or the stock issued for it, shall be void—the acceptance of the note as payment for
the stock and the issuance of the stock are only interdicted.
The constitutional provision was not intended as a shield for the stockholder who
has not paid for his stock. It was not framed for his benefit. It was aimed against
his acquiring stock except upon lawful payment. It was designed for the protection
of the corporation and its creditors. It emphasizes the stockholder's obligation to
make full and lawful payment in accord with its mandate, rather than furnishes him
a defense when he has failed in that obligation. Its purpose is to give integrity to
the corporation's capital.
Rhode v Dock-Hop Company (1920)
Facts: Rhode, a creditor of Dock-Hop, seeks judgment against the latter’s
stockholders, alleging that the shares issued to them purported to be fully paid,
but were actually not so. They may thus be liable to creditors, to the extent of the
unpaid balance of their shares’ par value.
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Held: When stockholders receive watered stock, they are liable to creditors for the
unpaid value thereof. However, it carved out an exception in this case, such that
when one receives watered stock unaware of its true character, even a creditor in a
suit cannot compel him to pay anything more on such stock. Here, they were
unaware that their shares were actually not yet fully paid upon issuance, and could
not be said to have agreed to be liable for the corporation’s obligations when they
purchased their stock
Bing Crosby Minute Maid Corporation v Eaton (1956)
Facts: In consideration for Eaton’s transfer of business, the corporation sold and
issued not more than 4,500 shares of $10 par value stock to Eaton. When Bring
Crosby Minute Maid Corporation, a creditor, recovered a judgment against the
corporation for $21,246.42. Bing Crosby filed an action against Eaton, allegedly
as holder of watered-down stock in the corporation, for the recovery of some
$15,000 of the judgment the former recovered from the corporation which remains
unsatisfied.
Held: Eaton is not liable. The liability of a holder of watered stock has been based
on one of two theories: the misrepresentation theory or the statutory obligation
theory. Under the misrepresentation theory, the courts view the issue of watered
stock as a MISREPRESENTATION of the corporation's capital. Creditors who rely
on this misrepresentation are entitled to recover the ‘water’ from the holders of the
watered shares.
Under the statutory obligation theory the holder of watered stock is held
responsible to creditors whether or not they have relied on an overvaluation of
corporate capital.
In this case, there was no misrepresentation. Bing Crosby believed that the capital
amounted only to $25,000 and that the only financial statement of the corporation
that he had seen disclosed a capital account of less than $33,000. These
admissions show that BCMM did not rely on any misrepresentation arising from the
watered stock.
Bing Crosby relies on Sec. 1110 of the Corporations Code, enacted in 1931, which
provides:
"The value of the consideration to be received by a corporation for the issue of
shares having par value shall be at least equal to the par value thereof, except that:
(a) A corporation may issue par value shares, as fully paid up, at less than par, if
the board of directors determines that such shares cannot be sold at par. ..."
The Court ruled that the statute does not expressly impose an obligation to
creditors. Considering the decisions prior to 1931 applying the misrepresentation
theory, the lack of such clear language expressly imposing such obligation shows
a legislative intent to sustain the misrepresentation theory.
How Payment of Shares Enforced
Any unpaid balance would then be a debt owed by the subscriber to the corporation
for which he may be liable to pay interest.
He may not be released from such obligation to pay the unpaid balance, unless it
is with the consent of all the stockholders, without prejudice to creditors and upon
adequate consideration. (Lingayen Gulf v Baltazar)
- A corporation may however, enter into a bona fide compromise with a subscriber
who is unable to pay his shares which he has surrendered to the corporation.
Two alternatives for the enforcement of subscription contracts:
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
1. Sale of the delinquent stocks
incorporation. - At least twenty-five percent (25%) of the authorized capital
stock as stated in the articles of incorporation must be subscribed at the time
of incorporation, and at least twenty-five (25%) per cent of the total
subscription must be paid upon subscription, the balance to be payable on a
date or dates fixed in the contract of subscription without need of call, or in the
absence of a fixed date or dates, upon call for payment by the board of
directors: Provided, however, That in no case shall the paid-up capital be less
than five Thousand (P5,000.00) pesos. (n)
Sec. 67. Payment of balance of subscription. - Subject to the provisions of the
contract of subscription, the board of directors of any stock corporation may at
any time declare due and payable to the corporation unpaid subscriptions to
the capital stock and may collect the same or such percentage thereof, in either
case with accrued interest, if any, as it may deem necessary.
Payment of any unpaid subscription or any percentage thereof, together with
the interest accrued, if any, shall be made on the date specified in the contract
CORPORATION | PROF. G. DEE | CALLUENG
of subscription or on the date stated in the call made by the board. Failure to
pay on such date shall render the entire balance due and payable and shall
make the stockholder liable for interest at the legal rate on such balance,
unless a different rate of interest is provided in the by-laws, computed from
such date until full payment. If within thirty (30) days from the said date no
payment is made, all stocks covered by said subscription shall thereupon
become delinquent and shall be subject to sale as hereinafter provided, unless
the board of directors orders otherwise. (38)
Sec. 68. Delinquency sale. - The board of directors may, by resolution, order
the sale of delinquent stock and shall specifically state the amount due on each
subscription plus all accrued interest, and the date, time and place of the sale
which shall not be less than thirty (30) days nor more than sixty (60) days from
the date the stocks become delinquent.
Notice of said sale, with a copy of the resolution, shall be sent to every
delinquent stockholder either personally or by registered mail. The same shall
furthermore be published once a week for two (2) consecutive weeks in a
newspaper of general circulation in the province or city where the principal
office of the corporation is located.
Unless the delinquent stockholder pays to the corporation, on or before the
date specified for the sale of the delinquent stock, the balance due on his
subscription, plus accrued interest, costs of advertisement and expenses of
sale, or unless the board of directors otherwise orders, said delinquent stock
shall be sold at public auction to such bidder who shall offer to pay the full
amount of the balance on the subscription together with accrued interest, costs
of advertisement and expenses of sale, for the smallest number of shares or
fraction of a share. The stock so purchased shall be transferred to such
purchaser in the books of the corporation and a certificate for such stock shall
be issued in his favor. The remaining shares, if any, shall be credited in favor of
the delinquent stockholder who shall likewise be entitled to the issuance of a
certificate of stock covering such shares.
Should there be no bidder at the public auction who offers to pay the full
amount of the balance on the subscription together with accrued interest, costs
of advertisement and expenses of sale, for the smallest number of shares or
fraction of a share, the corporation may, subject to the provisions of this Code,
bid for the same, and the total amount due shall be credited as paid in full in
the books of the corporation. Title to all the shares of stock covered by the
subscription shall be vested in the corporation as treasury shares and may be
disposed of by said corporation in accordance with the provisions of this Code.
Sec. 69. When sale may be questioned. - No action to recover delinquent stock
sold can be sustained upon the ground of irregularity or defect in the notice of
sale, or in the sale itself of the delinquent stock, unless the party seeking to
maintain such action first pays
or tenders to the party holding the stock the sum for which the same was sold,
with interest from the date of sale at the legal rate; and no such action shall be
maintained unless it is commenced by the filing of a complaint within six (6)
months from the date of sale. (47a)
Sec. 70. Court action to recover unpaid subscription. - Nothing in this Code
shall prevent the corporation from collecting by action in a court of proper
jurisdiction the amount due on any unpaid subscription, with accrued interest,
costs and expenses. (49a)
Requisites:
a. Applicable only to sale of stocks for unpaid subscriptions and such right
cannot be used to satisfy other indebtedness of the stockholder to the
corporation
b. CALL by the board
- If the amount of subscription is payable in installments and any installment
is not paid on the agreed date, the entire balance, even without any demand
or call, becomes automatically due and demandable, with liability for
interest. Until such agreed date arrives, no demand or call for payment may
be validly made by the board
- If the contract does not specify the date or dates of payment, the BOD may
at any time declare all or any part of the subscription due and payable.
- This is discretionary and cannot be made ministerial by the by-laws
- Once a call was made, it must operate uniformly on all stockholders in order
to prevent favoritism or oppression
71

c. The call should specify not only the amount or percentage payable, but also
the date when it must be paid. Should payment not be made on the date
stated in the call, the whole balance of the subscription becomes due and
payable
d. If the balance is not paid within thirty days from the date specified in the
contract or the date stated in the call, as the case may be, all stocks covered
by the subscription, and not only a proportional number thereof, becomes
automatically delinquent and may be sold by the corporation at a delinquent
sale
e. Notice of sale, together with a copy of the resolution ordering the sale,
must be given to every delinquent stockholder, followed by a publication
thereof for at least two weeks prior to the sale.
Lacking any of these requirements, the sale would be voidable at the instance of
the delinquent stockholder, provided that he brings an action within six months
from the sale and tenders payment to the purchaser the sum for which the stocks
were sold, with interest
- Should the corporation itself acquire the delinquent shares because there are no
bidders at the auction sale, they become treasury shares which may be
subsequently disposed of by the corporation at such reasonable price as the BOD
may fix
2. Court action
Where court action is the remedy, a valid call would also be a pre-requisite to
liability
XPN:
a. the subscription contract specifies a date of payment or
b. corporation has become insolvent, in which case, all unpaid subscription
becomes payable and recoverable in a court action by the assignee in insolvency
for the benefit of creditors
DEFENSE OF A STOCKHOLDER
1. Subscription was induced by fraudulent misrepresentation provided he is not
barred by ratification or guilty of laches
Velasco v Poizat (1918)
Facts: Poizat subscribed to 20 shares but only paid for 5 shares of the Philippine
Chemical Product Co. The Board of Directors made a call for payment through a
resolution but Poizat refused to pay. The Corporation became insolvent. Assignee
in insolvency sued Poizat for the value of the unpaid subscription
Held: Poizat is still liable. Section 36 of the Corporation Law clearly recognizes that
a stock subscription is subsisting liability from the time the subscription is made.
The subscriber is as much bound to pay the amount of the share subscribed by him
as he would be to pay any other debt, and the right of the company to demand
payment is no less incontestable.
There are two remedies for the enforcement of stock subscriptions:
a. Permitting the corporation to put up the unpaid stock for sale and dispose of it
for the account of the delinquent subscriber under section 38 to 48 of the
Corporation Law; or
b. By action in court, under section 49
It is generally accepted doctrine that the statutory right to sell the subscriber's
stock is merely a remedy in addition to that which proceeds by action in court; and
it has been held that the ordinary legal remedy by action exists even though no
express mention thereof is made in the statute.
When the corporation becomes insolvent, with proceedings instituted by creditors
to wind up and distribute its assets, no call or assessment is necessary before the
institution of suits to collect unpaid balance on subscription
Lingayen Gulf Electric Power Company v Baltazar (1953)
Facts: Ireneo Baltazar was a stockholder of Lingayen Gulf. He had an unpaid
balance on his subscription amounting to P18,500. In July 1946, the SH had a
meeting wherein they adopted a resolution calling for payment of all unpaid
subscriptions. Letters were sent to Baltazar reminding him of his unpaid balance
and of the due dates for payment of such. Subsequently, almost a year after the
due date fixed by the SH in the SH meeting, the company’s BOD adopted a
resolution, declaring null and void the SH resolution of July 1946. The BOD, in said
resolution, also made a call for payment of the unpaid subscriptions, including that
of Baltazar’s. Despite this, Baltazar still failed to pay. Later, the company’s legal
CORPORATION | PROF. G. DEE | CALLUENG
counsel sent a letter by registered mail to Baltazar, demanding payment. Because
of his failure to pay, an action to collect payment was filed against Baltazar. During
trial, the parties agreed that the BOD’s call for payment was not published in a
newspaper of general circulation, as required by the Corporation Law. In the trial
court, one of Baltazar’s arguments was that the action was premature because
there was no valid call. The trial court agreed with Baltazar and dismissed the case,
on the ground, among others, that the call for payment were not published. It also
said that the SH resolution, allegedly relieving Baltazar from liability, was null and
void because it was not approved by ALL stockholders. The Supreme Court agreed
with the lower court and affirmed the dismissal.
Held: Under the Corporation Law, notice of call for payment for unpaid subscribed
stock must be published, except when the corporation is insolvent, in which case,
payment is immediately demandable. Section 40 is MANDATORY as regards
publication, using the word "must". The reasons for the mandatory provision are
(a) to assure notice to all subscribers, and (b) to assure equality and uniformity in
the assessment on stockholders. Also, release from payment of unpaid
subscriptions must be made by all the stockholders
Subject to certain exceptions, the GENERAL RULE is that a valid and binding
subscription for stock of a corporation cannot be cancelled so as to release the
subscriber from liability thereon without the consent of all the stockholders or
subscribers.
EXCEPTIONS:
a) Where it is given pursuant to a bona fide compromise
b) Or to set off a debt due from the corporation
In this case, the release claimed by Baltazar does not fall under the exception
above referred to, because it was not given pursuant to a bona fide compromise,
or to set off a debt due from the corporation, and there was no consideration for it.
Miranda v Tarlac Rice Mill (1932)
Facts: Alberto Miranda executed a subscription agreement obligating himself to
pay P10,000 as subscribed capital to the Tarlac Rice Mill Company in 5 annual
installments. Before all the installments became due, Miranda assigned his
property to the corporation in lieu of paying in cash and authorized the officers of
the company to mortgage the land as security to solicit loans for P10,000.
Pursuant to this agreement, the officers of the company mortgaged the land for
P10,000 at the time when not all of the subscription installments are due. When
the company defaulted, Miranda himself arranged for an extension of payment and
subsequently sold the land under pacto de retro. The company ceased its
operations even before the last two subscription installments became due. When
Miranda died, his administratrix sought to recover the subscription paid by
Miranda based on 3 arguments: (1) the officers of the company exceeded their
authority in mortgaging the land for P10,000 even if only P3,000 was due at that
time from Miranda based on the subscription agreement (2) even when the
subsequent installments became due, Miranda was not bound to pay them
because the company ceased their operations (3) the company did not compel the
other stockholders to pay their subscription.
Held: The SC ruled that the amounts paid by Miranda cannot be recovered
anymore. The fact that a stockholder agreed to pay his subscription installments
on certain fixed dates did not prevent him from authorizing the officers as his
attorneys-in-fact to pay his subscription earlier than the dates fixed in the
subscription agreement.
The board of directors of every corporation may at any time declare unpaid
subscriptions to be due and payable to the corporation and may collect the same
with interest as it may deem necessary. This power of the directors is absolute and
cannot be limited by the subscription contract, but this does not mean that the
directors may not rely on the subscription contract if they see fit to do so. No call or
demand is necessary when a subscription is payable. In such cases it is the duty of
the subscriber to pay the subscription or installment as soon as it is due, without
any call or demand, and, if he fails to do so, an action may be brought at any time.
The fact that the corporation has ceased to do business or the fact that the other
stockholders have not been required to pay for their shares does not justify ordering
the corporation to return the subscriptions paid in by another stockholder. If the
directors have failed to perform their duty with respect to the other stockholders,
the law provides a remedy therefor.
De Silva v Aboitiz & Company (1923)
Fact: This case originates from a suit by Arnaldo De Silva to enjoin Aboitiz’ sale of
De Silva’s unpaid shares. De Silva subscribed for 650 Aboitiz shares (P500 ea.)
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but was unable to pay for 450 shares. The Corporate Secretary notified De Silva
through a letter that the Board of Directors issued a resolution declaring the unpaid
subscriptions due and payable on May 31, and that unpaid subscriptions after May
31 would be declared delinquent and advertised for sale at a public auction. After
non-payment and advertisement, De Silva sued with the Cebu CFI to enjoin the
sale. Injunction was granted by the CFI. Aboitiz sought a demurrer predicated on
the lack of cause of action. The CFI found for Aboitiz, dismissing De Silva’s suit. The
SC upheld the CFI, finding that the by-law article cited by De Silva merely provided
a remedy to the corporation to pursue against an unpaid share. The decision to
pursue this remedy or those granted to corporations by the 1906 Corporation Law
is within the discretion of the Board of Directors, as an exercise of discretionary
power by the corporation as an artificial being.
Held: The phrase "Provided, however, that from this seventy per cent [of net profit
after annual liquidation] dividend the board of directors may deduct such amount
as it may deem fit for the payment, etc." can only be interpreted to mean that the
board of directors has the discretion to apply that part of the profit in a certain way.
Original pronouncement in Velasco v. Poizat: “The first and most special remedy
given by the statute consists in permitting the corporation to put the unpaid stock
for sale and dispose of it for the account of the delinquent subscriber. In this case
the provisions of sections 38 to 48, inclusive, of the Corporation Law are applicable
and must be followed. The other remedy is by action in court concerning which we
find in section 49 the following provision: ‘Nothing in this Act prevent the directors
from collecting, by action in any court of proper jurisdiction, the amount due on any
unpaid subscription, together with accrued interest and costs and expenses
incurred.’”
Restatement of Velasco v. Poizat: If the Board does not use the power granted it by
Art. 46, it has 2 other remedies:
1) Sale of the unpaid stock (§38-48 of the 1906 Corporation Law)
2) Court action to collect amounts due (§49, 1906 Corporation Law)
The Board's decision to pursue sale of unpaid shares is a remedy granted to it by
the Corporation Law; in effect the exercise of discretionary power by the
corporation as an artificial being created by law.
The exercise of the discretionary powers to take action on unpaid stocks (apply the
profits, sell, or sue in court) is with the corporation through the Board of directors.
No right is vested in the stockholders.
National Exchange Co., Inc. v Dexter (1928)
Facts: The National Exchange Co. instituted in the CFI an action to recover from
Dexter a balance of P15,000, the par value of 150 shares of stock of CS Salmon,
which constitutes half of his total subscription, evidenced in writing in this form: “I
hereby subscribe for 300 shares of the capital stock of C.S. Salmon and Company,
payable from the first dividends declared on any and all shares of said company
owned by me at the time dividends are declared, until the full amount of this
subscription has been paid.” The issue is whether the stipulation in the
subscription has the effect of relieving the subscriber from personal liability in an
action to recover the value of the shares. The SC affirmed the CFI in ruling that such
stipulation is illegal for it obligates the subscriber to pay nothing for the shares
except as dividends may accrue upon the stock. In the contingency that dividends
are not paid, there is no liability at all. This is a discrimination in favor of the
particular subscriber.
Held: The prohibition against the issuance of shares by corporations except for
actual cash to the par value of the stock or its full equivalent in property is
enshrined in both the organic and statutory law of the Philippine Islands.
Lawmakers used language directly suited to secure absolute equality among
stockholders with respect to their liability upon stock subscriptions. If it is unlawful
to issue stock otherwise than as stated, the stipulation in this case, in a stock
subscription is illegal, for it obligates the subscriber to pay nothing for the shares
except as dividends may accrue upon the stock. In the contingency that dividends
are not paid, there is no liability at all. This is a discrimination in favor of the
particular subscriber, hence the stipulation is unlawful.
Lumanlan v Cura (1934)
Facts: Lumanlan has only paid P1500 of his P15,000 worth subscription of Dizon’s
stocks. Dizon’s receiver sued Lumanlan for the deficiency with advances.
Held: Subscriptions to the capital of a corporation constitute fund to which
creditors have a right to look for satisfaction of their claims and that the assignee
CORPORATION | PROF. G. DEE | CALLUENG
in insolvency can maintain an action upon any unpaid stock subscription in order
to realize assets for payment of its debts.
Effect of Delinquency
Once stocks have become delinquent due to non-payment, the holder loses all his
rights as a stockholder (he can’t even be counted as part of the quorum)
XPN: right to dividends
- Dividends will not be paid to him, but will be applied to the unpaid balance of his
subscription plus costs and expenses
Sec. 71. Effect of delinquency. - No delinquent stock shall be voted for be
entitled to vote or to representation at any stockholder's meeting, nor shall the
holder thereof be entitled to any of the rights of a stockholder except the right
to dividends in accordance with the provisions of this Code, until and unless he
pays the amount due on his subscription with accrued interest, and the costs
and expenses of advertisement, if any. (50a)
Rights and Obligations of Holders of Unpaid but Non-Delinquent Stock
RIGHTS OBLIGATIONS
Maintains all the privileges of Liable to pay interest on the unpaid
stockholder, including right to vote balance, if obligation is imposed in
and right to dividends the by-laws
No transfer of shares. The transfer of
shares would be valid between the
parties, but cannot affect the
corporation
- Even if the corporation agrees, it
cannot issue a certificate of stock in
favor of such transferee until he has
paid the full amount of the
subscription taken by his transferor
Sec. 72. Rights of unpaid shares. - Holders of subscribed shares not fully paid
which are not delinquent shall have all the rights of a stockholder. (n)
Sec. 66. Interest on unpaid subscriptions. - Subscribers for stock shall
pay to the corporation interest on all unpaid subscriptions from the
date of subscription, if so required by, and at the rate of interest fixed
in the by-laws. If no rate of interest is fixed in the by-laws, such rate
shall be deemed to be the legal rate. (37)
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates endorsed by
the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing the names
of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation. (35)
Sec. 64. Issuance of stock certificates. - No certificate of stock shall be issued
to a subscriber until the full amount of his subscription together with interest
and expenses (in case of delinquent shares), if any is due, has been paid. (37)
Fua Cun v Summers (1923)
Facts: Chua Soco subscribed to 500 shares of stock in China Banking. He made a
downpayment equalt to half the purchase price. Eventually, Chua Soco executed a
promissory note in favor of Fua Cun. The loan was secured by an endorsement of
the receipt given for the shares of stock, and by a chattel mortgage on the said
shares. However, Chua Soco also had debts to the bank, which caused the bank to
have the shares of stock attached.
The lower court held that by virtue of the payment of half the purchase price, Chua
Soco owned and subsequently transferred 250 shares, instead of the entire 500.
The SC ruled that Chua Soco transferred an equity in the 500 shares of stock.
Held: An equity in shares of stock may be assigned and that the assignment is valid
as between the parties and as to persons whom notice is brought home.
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 CORPORATION | PROF. G. DEE | CALLUENG

amount may
Baltazar v Lingayen Gulf (1965) correspond
Facts: The Ungson Group of Lingayen Gulf passed resolutions to the effect that (1) Upon Call Stockholder Stockholder Stockholder
those with unpaid delinquent shares, based on the subscriptions, are not entitled is delinquent is only is delinquent
on all shares delinquent on all shares
to vote in the 1955 BOD election, and (2) the previous payments will be applied on the shares
first to the accrued interest on unpaid subscriptions, then, to the value of the unpaid / not
shares. The Baltazar Group filed a complaint to nullify the resolutions. The TC fully paid
approved an amicable settlement entitling the Baltazar Group to vote in the Example: PHP 2000 / PHP 2000
meantime. The SC ruled that (1) based on the phraseology of Section 37, 100 shares 100 shares = will be
Corporation Law, the stockholders may vote their paid shares even when they have at PHP 100 PHP 20 applied to 20
unpaid subscriptions, and (2) the application of payments to interest before the par value. deemed paid shares. Since
A pays 2000 to each share 20 shares are
principal does not apply in this case.
fully paid up
Held: Section 37, Corporation Law makes payment of the “par value” as
prerequisite for the issuance of certificates of par value stocks, and makes Issuance of Certificate
payment of the “full subscription” as prerequisite for the issuance of certificates of CERTIFICATE OF STOCK is not a condition precedent to the acquisition of the rights
no par value stocks. Stated in another way, the present law requires as a condition and status of a stockholder.
before a shareholder can vote his shares, that his full subscription be paid in the - it is only the BEST EVIDENCE of the status of a stockholder and is convenient for
case of no par value stock; and in case of stock corporation with par value, the purposes of transfer, either by way of collateral or by absolute sale
stockholder can vote the shares fully paid by him only, irrespective of the unpaid - only issued once there is payment of full amount of the subscription and interest,
delinquent shares. if any is due
Nava v Peers Marketing Corporation (1976) Lost or Destroyed Certificates
Facts: Teofilo Po subscribed to 80 shares of Peers Marketing Corp at P100 per
Sec. 73. Lost or destroyed certificates. - The following procedure shall be
share or a total par value of P8,000. No certificate of stock was issued to him or to followed for the issuance by a corporation of new certificates of stock in lieu of
any other subscriber/stockholder. Twenty of these shares were sold to Nava, the those which have been lost, stolen or destroyed:
Petitioner. In the deed of sale, Po represented himself as “the absolute and 1. The registered owner of a certificate of stock in a corporation or his legal
registered owner of 20 shares” of the Corporation. Nava thus sought from the representative shall file with the corporation an affidavit in triplicate setting
officers of the corporation to register the sale in the corporate books, but it was forth, if possible, the circumstances as to how the certificate was lost, stolen or
denied as Po had not fully paid the amount of his subscription. The corporation destroyed, the number of shares represented by such certificate, the serial
said that Po was delinquent in the payment of the balance due on the entire number of the certificate and the name of the corporation which issued the
subscription, and that the corporation had a claim on the entire subscription, same. He shall also submit such other information and evidence which he may
including the 20 shares sold to Nava. Thus, Nava filed a mandamus case against deem necessary;
the corporation in the CFI of Negros Occidental to compel the officers to register 2. After verifying the affidavit and other information and evidence with the
the 20 shares in Nava’s name in the corporation’s transfer book. The CFI dismissed books of the corporation, said corporation shall publish a notice in a
newspaper of general circulation published in the place where the corporation
the petition. Thus, Nava filed an appeal before the SC. The SC dismissed the action
has its principal office, once a week for three (3) consecutive weeks at the
for mandamus.
expense of the registered owner of the certificate of stock which has been lost,
Held: The transfer made by Po to Nava is not the “alienation, sale or transfer of stolen or destroyed. The notice shall state the name of said corporation, the
stock” that is supposed to be recorded in the stock and transfer book as name of the registered owner and the serial number of said certificate, and the
contemplated by the law. As a rule, the shares which may be alienated are those number of
which are covered by certificates of stock. shares represented by such certificate, and that after the expiration of one (1)
Without the stock certificate, which is the evidence of ownership of corporate stock, year from the date of the last publication, if no contest has been presented to
the assignment is effective only between the parties to the transaction. The delivery said corporation regarding said certificate of stock, the right to make such
of the stock certificate, which represents the shares to be alienated, is essential for contest shall be barred and said corporation shall cancel in its books the
the protection of both the corporation and its stockholders. Under the facts of this certificate of stock which has been lost, stolen or destroyed and issue in lieu
case, the corporation has no clear legal duty to register the 20 shares in Nava’s thereof new certificate of stock, unless the registered owner files a bond or
name. As to Nava’s contention that a certificate of stock may be issued for the other security in lieu thereof as may be required, effective for a period of one
shares which have already been paid for although the entire subscription has not (1) year, for such amount and in such form and with such sureties as may be
satisfactory to the board of directors, in which case a new certificate may be
yet been fully paid, said argument is not supported by law or jurisprudence.
issued even before the expiration of the one (1) year period provided herein:
Provided, That if a contest has been presented to said corporation or if an
Note: Last three cases were all decided before the Corporation Code action is pending in court regarding the ownership of said certificate of stock
Fua Cun Lingayen Nava Corporation which has been lost, stolen or destroyed, the issuance of the new certificate of
Code stock in lieu thereof shall be suspended until the final decision by the court
Subscription Contract of Contract of Reinforced Reinforced regarding the ownership of said certificate of stock which has been lost, stolen
contract subscription subscription Fua Cun Fua Cun or destroyed.
is indivisible, is divisible Except in case of fraud, bad faith, or negligence on the part of the corporation
in the and its officers, no action may be brought against any corporation which shall
absence of
have issued certificate of stock in lieu of those lost, stolen or destroyed
any
agreement to
pursuant to the procedure above-described. (R. A. 201a)
the contrary.
Effect of Partial Corporation No Chapter XIII Dividends and Purchase by Corporation of its own shares
Partial payment issues corporation DIVIDEND is the portion of corporate profits which is set aside for distribution to
Payment does not certificates can issue a the stockholders in proportion to their subscription to capital stock of the
entitle the to stocks certificate of corporation
stockholder considered stock until
to the fully paid, the
issuance of a even if full subscriber Form of Dividends
certificate for subscription has paid his 1. Cash – most common form
a number of had not been subscription 2. Property
shares to paid in fill SCRIP – certificate issued to stockholders in lieu of cash dividends, entitling them
which the to a certain amount at some future date

74

3. Stock – distribution to the stockholders of the company’s own stock. Corporate
profits or earnings are transferred to capital stock and shares of stock representing
the increase in capitalization are distributed.
- Unless there are available unissued shares of the corporation, stock dividends
cannot be declared without first increasing the capital stock. New shares are
issued to the stockholders in proportion to their interest
- mere evidence of an increase in shares owned, but it represents no income
- considered civil fruits belonging to usufructuary and not the naked owner
FRACTIONAL SHARE WARRANTS – issued instead of fractional shares
Nielson & Co. Inc v Lepanto
Facts: Lepanto and Nielson entered into a management contract wherein Nielson
was to manage the mining properties of Lepanto and Nielson would receive 10%
of any dividends declared and paid, when and as paid, Nielson should be paid 10%
of the stock dividends declared by Lepanto during the period of extension of the
contract. SC, in its first decision, ordered Lepanto to deliver to Nielson fruits and
stock dividends that accrued to it. On mr, SC reversed itself.
Held: The consideration for which shares of stock may be issued are: (1) cash; (2)
property; and (3) undistributed profits. Shares of stock are given the special name
"stock dividends" only if they are issued in lieu of undistributed profits. If shares
of stocks are issued in exchange of cash or property then those shares do not fall
under the category of "stock dividends". It is the shares of stock that are originally
issued by the corporation and forming part of the capital that can be exchanged for
cash or services rendered, or property; Those shares of stock may be issued to a
person who is not a stockholder, or to a person already a stockholder in exchange
for services rendered or for cash or property. But a share of stock coming from stock
dividends declared cannot be issued to one who is not a stockholder of a
corporation.
A "stock dividend" is a distribution of the shares of stock of the corporation among
the stockholders as dividends. A stock dividend of a corporation is a dividend paid
in shares of stock instead of cash, and is properly payable only out of surplus
profits. When a corporation issues stock dividends, it shows that the corporation's
accumulated profits have been capitalized instead of distributed to the
stockholders or retained as surplus available for distribution, in money or kind,
should opportunity offer.
Under Section 16 of the Corporation Law stock dividends can not be issued to a
person who is not a stockholder in payment of services rendered. A corporation may
legally issue shares of stock in consideration of services rendered to it by a person
not a stockholder, or in payment of its indebtedness. A share of stock issued to pay
for services rendered is equivalent to a stock issued in exchange of property,
because services is equivalent to property. However, it is the shares of stock that
are originally issued by the corporation and forming part of the capital that can be
exchanged for cash or services rendered, or property. A share of stock coming from
stock dividends declared cannot be issued to one who is not a stockholder of a
corporation.
Source of Dividends
Sec. 43. Power to declare dividends. - The board of directors of a stock
corporation may declare dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in stock to all stockholders on
the basis of outstanding stock held by them: Provided, That any cash dividends
due on delinquent stock shall first be applied to the unpaid balance on the
subscription plus costs and expenses, while stock dividends shall be withheld
from the delinquent stockholder until his unpaid subscription is fully paid:
Provided, further, That no stock dividend shall be issued without the approval
of stockholders representing not less than two-thirds (2/3) of the outstanding
capital stock at a regular or special meeting duly called for the purpose. (16a)
Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet
been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies. (n)
SOURCE: Unrestricted retained earnings to all stockholders on the basis of
outstanding stock held by them
CORPORATION | PROF. G. DEE | CALLUENG
UNRESTRICTED RETAINED EARNINGS are undistributed earnings of the
corporation which have not been allocated for any managerial, contractual or legal
purposes and which are free for distribution to the stockholders as dividends
RETAINED EARNINGS / EARNED SURPLUS are net accumulated earnings of the
corporation out of transactions with individuals or firms outside of the corporation
- earnings from sales of goods or services of the corporation in the ordinary course
of its business, as well as earnings from sale of corporate property other than its
stock in trade, at a price higher than its cost.
- implicit from retained earnings is the limitation that a corporation has no power
to declare dividends unless its legal or stated capital is maintained.
RETAINED EARNINGS DO NOT INCLUDE:
- Premium on par stock (difference between the par value and the higher price for
which the stock is sold by the corporation, since this is regarded as paid in capital)
- transactions involving treasury stock, since the purchase and sale of such stock
are regarded as contractions and expansions of paid-in capital
- donations
- increase in value of existing assets due to reappraisal
- Should there be any capital deficit, subsequent profits, if any, during succeeding
periods must first be applied to cover up this deficit, and only the profits remaining
after eliminating the deficit, can be considered as UNRESTRICTED RETAINED
EARNINGS, from which dividends may be declared.
RESTRICTIONS:
1. Designated purposes
2. Agreements with creditors, bondholders and preferred stockholders
3. Law
4. SEC
Berks Broadcasting Co. v Craumer
Facts: Defendants in this case were incorporators and directors of Berks
Broadcasting who declared and paid out dividends in 1944 for a total amount of
$13,000. These dividends were declared on the basis of earning of the company
during, which, together with the ALLEGED surplus at the end of 1943, made a
surplus in earnings of $14,855.72. The existence of the surplus of assets
depended on the inclusion in the assets of the “write-ups” of $26,000 which still
remained in the balance sheet. If the “write-ups” account was eliminated, there is
NO SURPLUS, but a deficiency of $23,454.06. These “write-ups” represented
“increases in the valuations of fixed assets of the company.” The new directors of
the corporation sought to recover the dividends paid alleging that it was paid out
unlawfully since there really was no surplus. The SC agreed and held the
defendants liable to return the dividends paid. The write-ups of $26,000
represented an unrealized appreciation in the value of the company’s fixed assets
Thus, their inclusion in determining the existence of a surplus from which dividends
might be declared was UNLAWFUL
Held: Capital of a corporation must not be impaired in any manner, except, of
course, as such an impairment may involuntary occur through losses resulting from
the operation of company’s business. It is illegal to declare and pay dividends from
other than a surplus consisting of an excess in value of assets over the aggregate
of the liabilities and the issued capital stock.
Reason behind prohibition: (1) To afford a margin of protection for creditors in view
of the limited liability of the shareholders, and also (2) To protect the interest of the
shareholders themselves by preserving the capital so that the purposes of which
the corporation was formed may be carried out.
The difficulty lies in the computation of the surplus from which dividends may
properly be declared and paid. In this regard, one rule has been generally declared
and paid: Such a surplus must be a bona fide and not an artificial or fictitious one.
It must be founded upon ACTUAL earnings or profits and not dependent for its
existence upon a theoretical estimate of an appreciation in the value of the assets.
Lich v United States Rubber Co
Facts: US Rubber for the years 1935, 36, 37 was having net earnings but was still
in deficit. Eventually, the corporation bounced back and because of new stocks
issued, the deficit was cancelled. In 1941, the corporation gained profits and paid
dividends to preferred and common stocks. Lich, an owner of non-cumulative
preferred stocks filed this case to enjoin US Rubber from paying dividends to the
common stockholder until payment in arrears for the years 1935, 36, and 37 to
preferred stock holders were paid in full. The Court here ruled that the non-
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cumulative preferred stockholders are not entitled to dividends on said years
because while there were net earnings, there were no profits to be distributed. The
payment of dividends to common stockholders was proper.
Held: Cumulative preferred stock have at all times and for all years past and
present, until paid, priority in payment over any and all unpaid dividends upon
common stock, whether the net earnings for any particular past or present year
were or were not sufficient to pay the stipulated cumulative dividends upon
preferred stock for that year.
Noncumulative preferred stock (wholly or partially) is limited to the unpaid
dividends for those years when such net earnings were sufficient (wholly or in part)
to pay such dividends.
The payment of dividends on non‐ cumulative preferred stock are payable only out
of net profits and for the years in which said net profits are actually earned.
TEST (on whether there is cumulative dividends for non-cumulative preferred
stocks): WON there were, in the years in which dividends were not declared, net
profits available for the lawful declaration and payment of dividends, but withheld
from the non‐ cumulative preferred stockholder and retained in the business?
Dividend Declaration Discretionary with Boards; Limitations
Sec. 43. Par. 2. Power to declare dividends. -
Stock corporations are prohibited from retaining surplus profits in excess of
one hundred (100%) percent of their paid-in capital stock, except: (1) when
justified by definite corporate expansion projects or programs approved by the
board of directors; or (2) when the corporation is prohibited under any loan
agreement with any financial institution or creditor, whether local or foreign,
from declaring dividends without its/his consent, and such consent has not yet
been secured; or (3) when it can be clearly shown that such retention is
necessary under special circumstances obtaining in the corporation, such as
when there is need for special reserve for probable contingencies. (n)
Note: Retained earnings in excess of paid-in -> only paid-up, premium not included
/ APIC not included
- The amount which each stockholder receives as his share of the dividends is
based on the amount of stock held by him, regardless of WON he has paid his full
subscription.
- However, if his shares have become delinquent, any cash dividends due his shares
will first be applied to the amount of the delinquency plus costs and expenses.
- If dividends consist of stock, the stockholder will not get the same until he has
paid his full subscription.
- No par shares must be fully paid in order to be considered as issued
Keough v St. Paul Milk Co.
Facts: A suit was instituted by the stockholders of the St. Paul Milk Company
against the company. The suit was brought for the purpose of compelling the
declaration of a cash dividend. Petitioners argue that those in charge of corporate
affairs are wrongfully and needlessly withholding profits available and conspiring
to retain them for their benefit and to the prejudice of the majority. Court:
Considering that capital and surplus of the company amounted to $435,491.73
for the year 1936, as well as other factors (its lack of mortgages/liens or other
substantial indebtedness, no immediate expansion plans, etc.), the issuance of
cash dividends is proper.
Held: The determination of whether or not dividends should be declared is
essentially a matter of internal management. It is primarily for the corporate
directors in their sound discretion to decide. But their powers are not unlimited and
judicial review should be secured when abuses contravening shareholder rights
manifest themselves. Ordinarily, courts will not compel a dividend unless the
directors act fraudulently, unjustly, or unreasonably so as to impair the rights of
complaining stockholders to their just proportion of corporate profit. The mere fact
that a large corporate surplus exists is not enough to warrant equitable
intervention. Ultimately, the test resolves itself into an examination of the good
faith and reasonableness of the policy of retaining that which otherwise is available
for dividends.
Dodge v Ford Motor Co
Facts: Dodge et al wanted to compel Ford Motor Company to declare dividends
since there was a large amount of surplus. The Court ruled that based on the facts
of this case, Ford Motor’s Board of Directors should have declared dividends since
there was indeed a large amount of money coming in from the sales of its products.
Held: A business corporation is organized and carried on primarily for the profit of
the stockholders, and that the powers of the directors are to be employed for that
CORPORATION | PROF. G. DEE | CALLUENG
end. The discretion of the directors is to be exercised in the choice of the means to
attain that end and does not extend to change in the end itself, to the reduction of
profits or to non-distribution of profits among stockholders to devote them to other
purposes. It is not within the lawful powers of the board of directors to shape and
conduct the affairs of a corporation for the merely incidental benefit of
shareholders and for the purpose of benefiting others.
The fact that stockholders profited from the general business strategy of the
company does not estop them from demanding proper dividends.
Preference as to Dividends
- usually non-voting stocks
Burk v Otawa Gas & Electric Co.
Facts: Burk is among the preferred stockholders of Ottawa, they are demanding the
latter to declare dividends as it earned profits. Ottwa said that they are not entitled
to dividends because the funds for use for plant extensions. The trial court found
that the plant extensions were necessary.
Held: The SC ruled that, in general, preferred stockholders are entitled to dividends
whenever the company earns profits, however, this is subordinate to the obligation
of the corporation to the public. Hence, if the plant extension is demanded by
public necessity, dividends should not be declared, but if it is merely advisable for
benefit of the business, dividends should be declared. Case remanded to trial
court. Directors owed a positive duty to pay a dividend to the preferred stockholders
whenever in any year, there were net profits available. The holder of the preferred
stock, however, is not generally a creditor until a dividend is declared; but as equity
regards as done that which ought to be done, if under the facts of this case a
dividend or dividends ought to have been declared in a certain year or years to such
stockholders, they should be regarded as creditors to such extent from such time
or times. The obligation of the corporation to pay dividends on the preferred stock
out of the yearly net profits is subordinate to whatever obligation it owes to the
public.
When Right to Dividends Vests; Rights of Transferee
- as soon as the same have been lawfully declared by BOD
- From that time, it becomes a debt owing by the corporation to each stockholder
and no revocation of the dividends can be made, unless the declaration has not yet
been announced or communicated to the stockholders.
- A declaration of dividends expressly provides that it is payable to stockholders e
of record on a specified date, following the date of declaration. In such a case,
whoever is the registered owner on the specified record date is, as far as the
corporation is concerned, entitled to dividends
- As against his transferor, however, a transferee of stocks after the declaration but
before the specified date of payment, has presumably the right to such dividends
despite failure to record the transfer on the corporate books
Sir: Once dividends are declared, the company is a debtor of the shareholder. It
cannot revoke the dividend declaration without consent of the creditors /
shareholders.
McLaran v Crescent Planning Mill Co
Facts: Crescent declared dividends payable in four installments. It paid the first but
refused to pay the second, as a new resolution of Crescent’s BoD rescinded the
declaration of dividends upon finding out that the company’s financial condition
was slightly worse than what was known. The plaintiff, a stockholder, asked that
the second installment be paid. The court ruled in his favor.
Held: Mere declaration of the dividend, without more, by competent authority
under proper circumstances, creates a debt against the corporation in favor of the
stockholders the same as any other general creditor of the concern: whereas, the
setting apart of a fund after or concurrent with the declaration, out of which the
debt thus created is to be paid, passes one step further toward securing the
payment of the identical fund to the stockholder inasmuch as the law treats the
setting apart of such fund as a payment to the corporation as trustee for the use of
the stockholder, on which fund the stockholder has a lien, and to which funds he
has rights superior to the general creditor.
By mere declaration, the dividend becomes immediately fixed and absolute in the
stockholder and from henceforth the right of each individual stockholder is
changed by the act of declaration from that of partner and part owner of the
corporate property to a status absolutely adverse to every other stockholder and to
the corporation itself, in so far as his pro rata proportion of the dividend is
concerned.
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A cash dividend, properly declared, cannot be revoked by the subsequent action of
the corporation.
Turner v Lorenzo Shipping Corporation (2010)
Facts: When LSC decided to amend its AOI, the Turners did not agree to such
amendment. They decided to exercise their appraisal right. LSC argued that it
cannot pay the Turners due to lack of unrestricted retained earnings. The TURNERs
sued LSC for collection and damages. Subsequently, the TURNERs filed a motion
for partial summary judgment, claiming that LSC has an accumulated unrestricted
retained earning amounting to PHP11,975,490 as of the quarter ending Mar. 31,
2002, evidenced by its Financial Statement. They aver that since there is no
genuine issue of fact, they are entitled, as a matter of right, to a summary judgment.
Held: A stockholder who dissents from certain corporate actions has the right to
demand payment of the fair value of his or her shares. This is known as the right of
appraisal, expressly recognized in § 81 of the CORP. CODE. No payment shall be
made to any dissenting stockholder unless the corporation has unrestricted
retained earnings in its books to cover the payment. In case the corporation has no
available unrestricted retained earnings in its books, § 83 provides that if the
dissenting stockholder is not paid the value of his shares within 30 days after the
award, his voting and dividend rights shall immediately be restored.
Applying the above principles, the TURNERs’ cause of action was premature. LSC
had indisputably no unrestricted retained earnings in its books at the time the
TURNERs commenced its action on Jan. 22, 2001, proving that LSC’s legal
obligation to pay the value of the TURNERs’ share did not yet arise. The subsequent
existence of unrestricted retained earnings after the filing of the complaint does
not cure the lack of cause of action. The TURNERs’ right of action could only spring
from an existing cause of action.
Liability for illegal dividends
Sec. 31. Liability of directors, trustees or officers. - Directors or trustees who
willfully and knowingly vote for or assent to patently unlawful acts of the
corporation or who are guilty of gross negligence or bad faith in directing the
affairs of the corporation or acquire any personal or pecuniary interest in
conflict with their duty as such directors or trustees shall be liable jointly and
severally for all damages resulting therefrom suffered by the corporation, its
stockholders or members and other persons. When a director, trustee or officer
attempts to acquire or acquires, in violation of his duty, any interest adverse to
the corporation in respect of any matter which has been reposed in him in
confidence, as to which equity imposes a disability upon him to deal in his own
behalf, he shall be liable as a trustee for the corporation and must account for
the profits which otherwise would have accrued to the corporation.
PERSONS LIABLE LIABILITY
Directors - Not personally liable for unintentionally declaring
dividend in violation of law, unless they acted
willfully, or with negligence or in bad faith (Sec. 31)
Stockholders - Generally, in the absence of an express provision of
law, an innocent stockholder is not liable to return
the dividends received by him out of capital, unless
the corporation was insolvent at the time of payment
- If the right is recognized, the enforcement is based
on statutory policy of dividend restrictions
Sir: If, for example in Q1, the company earned profit and declared and released
dividends, but in Q2 and Q3, company suffered loss, and in Q4 made profit, the
corporation can actually ask the stockholders to return a portion of dividends
Purchase by Corporation of its own Shares
1. Limitations on power; proper purposes and existence of surplus
Sec. 41. Power to acquire own shares. - A stock corporation shall have the
power to purchase or acquire its own shares for a legitimate corporate purpose
or purposes, including but not limited to the following cases: Provided, That the
corporation has unrestricted retained earnings in its books to cover the shares
to be purchased or acquired:
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of
unpaid subscription, in a delinquency sale, and to purchase delinquent shares
sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their
shares under the provisions of this Code. (n)
CORPORATION | PROF. G. DEE | CALLUENG
SEC III. 1. No corporation shall redeem, repurchase, or reacquire its own
shares, of whatever class, unless it has an adequate amount of unrestricted
earnings to support the cost of the said shares, except:
a. When the shares are reacquired in the redemption of redeemable shares of
the corporation or pursuant to the conversion right of convertible shares of the
corporation, expressly provided for in its articles of incorporation and
certificates of stock representing said shares;
b. When the shares are reacquired to effect a decrease in the capital stock of
the corporation as approved by the SEC.
c. When the shares are reacquired by a close corporation pursuant to the order
of the SEC acting to arbitrate a deadlock as provided for under Section 104 of
the Corporation Code
The requirement that the corporation should have unrestricted retained earnings is
the same as the restriction imposed on declaration of dividends – PROTECTION OF
CREDITORS whose claims must first be repaid before any distribution of corporate
assets can be made to any stockholder.
- Shares reacquired by the corporation become TREASURY SHARES which may be
declared as property dividends to be issued out of retained earnings previously
used to support their acquisition, provided that the amount of said retained
earnings has not been subsequently impaired by losses.
- Par. 3 of Sec. 41 refers to the instances where the SH has the appraisal right under
Sec. 81 of the Code, as well as to the cases where the Code allows the SH in a close
corporation to withdraw therefrom
On close corporations:
- In case of a deadlock in a close corporation, the SEC may, if it deems proper,
require the close corporation to purchase the shares of any stockholder at fair
value, regardless of availability of unrestricted retained earnings.
- Sec. 105 also gives a stockholder of a close corporation the right, for any reason,
to compel said corporation to purchase his shares at a fair value, not less than their
par or issued value, provided the corporation has sufficient assets to cover its debts
and liabilities, exclusive of capital stock
SINKING FUND is a reserve fund set up by a corporation from its annual earnings
to gradually build up the resources needed to redeem the redeemable shares it
issued should the corporation decide to do so when the redemption date comes
Remedies in case of improper purchase:
PETITIONER DEFENDANT REMEDY
Creditor prejudiced Selling stockholders Recover consideration
by the repurchase paid
made by an
insolvent
corporation
Others, including Directors who are Sec. 31, Corporation
Receiver of negligent or guilty of bad Code
corporate assets faith
Shareholders Directors Sec. 31, Corporation
Code
Chapter XV Transfer of Shares
Sec. 63. Certificate of stock and transfer of shares. - The capital stock of stock
corporations shall be divided into shares for which certificates signed by the
president or vice president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation shall be issued in
accordance with the by-laws. Shares of stock so issued are personal property
and may be transferred by delivery of the certificate or certificates endorsed by
the owner or his attorney-in-fact or other person legally authorized to make the
transfer. No transfer, however, shall be valid, except as between the parties,
until the transfer is recorded in the books of the corporation showing the names
of the parties to the transaction, the date of the transfer, the number of the
certificate or certificates and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid claim shall
be transferable in the books of the corporation. (35)
1. Indorsement of Stock Certificate; Registration in Corporate Books
On the back of every stock certificate is printed a TRANSFER FORM, with blank
spaces for the transferee’s name and the person authorized by the transferor to
record the transfer on the corporate books
- A stockholder who wants to transfer his shares only needs to SIGN the form
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- The transferee can fill in the blanks. He/She, armed with the certificate and the
signed transfer form on the back, can go to the office of the corporation and ask
the secretary to record the transfer, cancel the certificate and issue a new one in
the transferee’s name.
- In case of a widely held corporation, a STOCK TRANSFER AGENT usually takes
charge of this matter
2. Effect of Lack of Registration
- The unrecorded transferee cannot enjoy the status of a stockholder; he cannot
vote nor be voted for, and he will not be entitled to dividends.
- Until challenged in a proper proceeding, a stockholder of record has a right to
participate in any meeting and, in the absence of fraud, any action at such meeting
cannot be collaterally attacked on account of such participation.
- If registration is refused, he can go to court to prove his right to have such transfer
recorded
- Until the transfer is registered, the transferee is not a stockholder but an outsider,
and any action he may wish to bring against the corporation must be brought before
the regular courts, and not before the SEC
Two-fold purpose of registration:
a. Enable the transferee to exercise all the rights of a stockholder and
b. Inform the corporation of any change in share ownership so that it can ascertain
the persons entitled to the rights and subject to the liabilities of a stockholder
Unson v Diosomito (1935)
Facts: Vicente Diosomito owns 75 shares of stock in the North Electric Company,
Inc. Plaintiff Toribia Uson is a judgment creditor of Diosomito and she claims
ownership over the shares by virtue of purchase at a sheriff’s sale as of March
1933. H.P. L. Jollye claims to be the owner of the shares and presents a certificate
of stock issued to him by the company on Feb. 13, 1933. Apparently, Diosomito
sold the shares having a par value of P7500 to Emeterio Barcelon and he delivered
the corresponding stock certificates. Barcelon did not present these certificatess
to the corporation for registration until Sept. 16. The certificatess were cancelled
and new ones were issued in his favor. Barcelon transferred these to H.P.L. Jollye
and a new stock cert was issued on Feb. 13, 1933.
Held: The law states that “no transfer, however, shall be valid, except as between
the parties, until the transfer is entered and noted upon the books of the
corporation so as to show the names of the parties to the transaction, the date of
the transfer, the number of the certificate, and the number of shares transferred.”
Thus, all transfers of shares not so entered are invalid as to attaching or execution
creditors of the assignors, as well as to the corporation and to subsequent
purchasers in good faith, and indeed, as to all persons interested, except the
parties to such transfers. All transfers not so entered on the books of the
corporation are absolutely void; not because they are without notice or fraudulent
in law or fact, but because they are made so void by statute.
Therefore, the transfer of the 75 shares in the North Electric Company, Inc., made
by Diosomito to Barcelon was not valid as to Toribia Uson, on January 18, 1932,
the date on which she obtained her attachment lien on said shares of stock which
still stood in the name of Diosomito on the books of the corporation.
Escano v Filipinas Mining Corporation (1944)
Facts: In the original case of Escaño v. Salvosa, the CFI of Manila ruled in favor of
Escaño, ordering Salvosa, among other things, to transfer shares held in escrow by
Filipinas Mining to Escaño. Subsequently, a writ of garnishment was served against
Filipinas Mining. There was failure to garnish the escrow shares because, after the
complaint in the original case had been instituted and before judgment was
rendered thereon, Salvosa sold to Bengzon the escrow shares, which was then
subsequently sold by Bengzon to Standard Investment. Neither of the sales were
notified to and recorded in the books of Filipinas Mining
Held: Under Sec. 35 of the Corporation Law, the transfer of duly issued shares of
stock is not valid as against third parties and the corporation until it is noted upon
the books. While the law does not specifically provide for unissued shares of stock
held in escrow, the requirement in Sec. 35 is still applicable in such cases. . In
ruling in favor of Escaño, the SC ruled that, contrary to the contention of Standard
Investment, Sec. 35 of the Corporation Law which requires that the transfer of duly
issued shares should be noted upon the books of the corporation is equally
applicable to unissued shares held in escrow.
3. No registration of Transfer of unpaid shares
CORPORATION | PROF. G. DEE | CALLUENG
GR: No stock certificate on which an indorsement may be made if there is any
unpaid balance on the stockholders’ subscription. Thus, shares are not
transferable on the corporate books
XPN: There is nothing to prevent the stockholder from transferring his interest in the
corporation by way of a deed of assignment
- UNPAID CLAIM does not necessarily mean that there is a previous call by the BOD
- The corporation may however agree to record a transfer although there still
remains an unpaid balance on the subscription, provided the transferee assumes
the obligation to pay the unpaid balance.
- Nevertheless, no certificate of stock can be issued to him, until such balance has
been fully paid.
4. Remedy if registration refused
- MANDAMUS to compel the corporation to do so. The writ will be granted provided
it is shown that:
a. the transferee has no other plain, speedy and adequate remedy and
b. that there are no unpaid claims against the stocks whose transfer is sought to
be recorded. (This fact must be alleged!!!)
- The right to have the transfer registered exists from the time of the transfer
- The action to enforce the right does not accrue until there has been a demand and
a refusal to record the transfer
Rivera v. Florendo (1986)
Facts: Rivera and four other incorporators each own 10,000 shares of Fujiyama
Hotel & Restaurant. This was increased to 4899 shares. Subsequently, Isamu
Akasako, a Japanese national and co-petitioner who is allegedly the real owner of
the shares of stock in the name of Rivera, sold 2550 shares to Milagros Tsuchiya
for a consideration of Php440,000.00 with the assurance that Milagros Tsuchiya
will be made the President and Lourdes Jureidini a director after the purchase.
Rivera also assured them that he will sign the stock certificates because Akasako
is the real owner. However, after the sale was consummated and the consideration
was paid with a receipt of payment therefor, Rivera refused to make the
indorsement unless he is also paid. Jureidini and Tsuchiya attempted several times
to register stock certificates transferred to them, but the corporation refused to
register the same. Thus, they filed a special civil action for mandamus and
damages with preliminary mandatory injunction and/or receivership.
Held: As the bone of contention in this case is the refusal of Rivera to indorse the
shares of stock in question and the refusal of the Corporation to register private
respondents’ shares in its books. This is not an intracorporate controversy; private
respondents are not yet stockholders; they are only seeking to be registered as
stockholders because of an alleged sale of shares of stock to them. Therefore the
jurisdiction properly belongs to the regular courts.
Mandamus will not lie in the instant case where the shares of stock in question are
not even indorsed by the registered owner Rivera who is specifically resisting the
registration thereof in the books of the corporation. A mandatory injunction is
granted only on the showing (a) that the invasion of the right is material and
substantial; (b) the right of complainant is clear and unmistakable; and (c) there is
an urgent and permanent necessity for the writ to prevent serious damage.
Respondent court in the instant case violated the fundamental rule of injunctions
that a mandatory injunction will not issue in favor of a party whose rights are not
clear and free of doubt or as yet undetermined. It will be recalled that the disputed
shares of stock were purchased not from the registered owner but from a Japanese
national who allegedly was the real owner thereof. It was also alleged that the
registered owner was only a dummy of Akasako. The lower court should first rule
on what private respondents seek; the registration of their shareholdings in the
books of the corporation and the issuance of new stock certificates. It is only
thereafter that the subsequent act of management may be ordered and the period
of finality of such a judgment should be in accordance with the Rules of Court,
giving the respondents the right to an appeal or review and not be immediately
executory as the Writ of Preliminary Mandatory Injunction would infer
Another fundamental principle which appears to be violated is that no advantage
may be given to one to the prejudice of the other; a court should not only by means
of preliminary injunction transfer the property in litigation from the possession of
one party to another where the legal title is in dispute and the party having
possession asserts ownership thereto. In the instant case, Rivera is the registered
majority and controlling stockholder of the corporation before the ensuing events
transpired. By the issuance of the writ he appears to have been deprive d of his
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rights as a stockholder thereof apart from his status as Chairman of the Board and
President of the corporation.
Nautica Canning Corp. v Yumul (2005)
Facts: NAUTICA was incorporated by 7 people, including Roberto YUMUL (who was
later appointed its COO/GM) and Alvin DEE, the Chairman of FIRST DOMINION
(NAUTICA’s parent company). YUMUL subscribed to 1 share, while Dee subscribed
to 89,991 of the 100,000 shares subscribed. In 1994, FIRST DOMINION granted
YUMUL an Option to Purchase up to 15% of FIRST DOMINION’s subscribed stock
in Nautica. FIRST DOMINION and YUMUL executed a Deed of Trust and Assignment,
whereby FIRST DOMINION assigned 14,999 of its shares in Nautica. The Deed
stated that the “shares were acquired and paid for in the name of [FIRST
DOMINION] only for convenience, but actually executed in behalf of and in trust for
[YUMUL]” When YUMUL resigned from Nautica, he (a) requested DEE to formalize
[DEE’s] offer to buy YUMUL’s 15% share in Nautica on or before Aug. 20 and,
alternatively (b) demanded the issuance of the corresponding certificate of shares
in his name. YUMUL also requested that (a) the Deed be recorded in the Stock and
Transfer Book and (b) that he be allowed to inspect its books and records. Above
requests were denied, with DEE claiming that YUMUL was not Nautica’s
stockholder. Hence, YUMUL filed in the SEC a petition for mandamus with damages
Held: YUMUL was a stockholder of at least one share. He is therefore entitled to the
rights of a stockholder, including the right of inspection. Even if there was an
agreement between YUMUL and DEE (that YUMUL would only be a nominal owner),
the agreement is valid only as between the incorporators privy to it and does not
bind the corporation, since from the corporation's vantage point, Yumul is its
stockholder with one share, considering that there is no showing that Yumul
transferred his subscription to Dee, the alleged real owner of the share, after
Nautica's incorporation. The corporation only looks to its books for the purpose of
determining who its shareholders are. “Any transfer not recorded in the stock and
transfer book is non-existent as far as the corporation is concerned. […] Only when
the transfer has been recorded in the stock and transfer book that a corporation
may rightfully regard the transferee as one of its stockholders.”
Also, the contents of the articles of incorporation bind the corporation and its
stockholders.
Razon v IAC (1992)
Facts: The main issue in these consolidated petitions centers on the ownership of
1,500 shares of stock in E. Razon, Inc. (CORPORATION) covered by Stock
Certificate No. 003 issued on April 23, 1966 and registered under the name of the
late Juan Chuidian (CHUIDIAN) in the books of the corporation. According to Razon,
some of the incorporators withdrew from the said corporation. He then distributed
the stocks previously placed in the names of the withdrawing nominal
incorporators to some friends, among them, the late Juan T. Chuidian. Stock
Certificate No. 003 for 1,500 shares of stock of the Corporation was issued in the
name of Chuidian. The shares of stock were registered in the name of Chuidian only
as a nominal stockholder and with the agreement that the said shares of stock were
owned by Razon. Chuidian, however, was given the option to buy the same. In view
of this arrangement, Chuidian delivered to Razon the stock certificate covering the
1,500 shares of stock of the Corporation. Since then, Razon had in his possession
the certificate of stock.
Held: Chuidian owns the stock. The Corporation Code states that shares of stock
may be transferred by delivery to the transferee of the certificate properly indorsed.
Title may be vested in the transferee by the delivery of the duly indorsed certificate
of stock. However, no transfer is valid, except as between parties until the transfer
is properly recorded in the books of the corporation.
In this case, there is no dispute that the 1,500 shares of stock of the Corporation
are in the name of the late Chuidan in the books of the corporation. Moreover, the
records show that during his lifetime, Chuidian was elected member of the Board
of Directors of the corporation which clearly shows that he was one of the
stockholders. From the point of view of the corporation, therefore, Chuidian was
the owner of the stocks. (Sec. 30, Corporation Code)
Rural Bank of Salinas v CA (1992)
Facts: Clemente Guerrero, President of Rural Bank, executed a Special Power of
Attorney in favor of his wife, Melania, giving and granting the latter full power and
authority to sell, dispose, and/or mortgage 473 shares of stock of the bank
registered in his name. Pursuant to the SPA, Melania executed a Deed of
Assignment for 472 shares in favor of several people. Melania presented to Rural
Bank the two Deeds of Assignment for registration with a request for the transfer in
CORPORATION | PROF. G. DEE | CALLUENG
the Bank’s stock and transfer book of the 473 shares of stock so assigned, the
cancellation of stock certificates in the name of Clemente, and the issuance of new
stock certificates covering the transferred shares of stocks in the name of the new
owners. When Rural Bank denied the request, Melania filed with SEC and action
for mandamus against Rural Bank. Rural Bank argues that upon the death of
Clemente, his 473 shares became the property of his estate, which should first be
settled and liquidated in accordance with law Held: Mandamus should be granted.
A corporation, either by its board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers because restrictions in the traffic of stock must have
their source in legislative enactment. The only limitation imposed by Sec 63 is
when the corporation holds any unpaid claim against the shares intended to be
transferred, which is absent in this case.
The right of a transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of stocks. Whenever a corporation refuses
to transfer and register stock, mandamus will lie to compel the officers of the
corporation to transfer said stock in the books of the corporation.
Restrictions on Transfer
GR: When a stockholder becomes dissatisfied with management, it is only fair that
he should be completely free, if he wishes, to get out of the business by selling his
share in the market, subject to no restraint or restriction whatsoever
XPN: Close corporations
Sec. 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: xxx
(2) all the issued stock of all classes shall be subject to one or more specified
restrictions on transfer permitted by this Title
xxx
Sec. 97. Articles of incorporation. - The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for
owning or holding the same and restrictions on their transfers as
may be stated therein, subject to the provisions of the following
section;
-- x X x --
Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on the right
to transfer shares must appear in the articles of incorporation and in the by-
laws as well as in the certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith. Said restrictions shall not be
more onerous than granting the existing stockholders or the corporation the
option to purchase the shares of the transferring stockholder with such
reasonable terms, conditions or period stated therein. If upon the expiration of
said period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to any third
person.
Sec. 99. Effects of issuance or transfer of stock in breach of qualifying
conditions. -
1. If stock of a close corporation is issued or transferred to any person who is
not entitled under any provision of the articles of incorporation to be a holder
of record of its stock, and if the certificate for such stock conspicuously shows
the qualifications of the persons entitled to be holders of record thereof, such
person is conclusively presumed to have notice of the fact of his ineligibility to
be a stockholder.
2. If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty (20), who are entitled to be holders of record of
its stock, and if the certificate for such stock conspicuously states such
number, and if the issuance or transfer of stock to any person would cause the
stock to be held by more than such number of persons, the person to whom
such stock is issued or transferred is conclusively presumed to have notice of
this fact.
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the stock is
conclusively presumed to have notice of the fact that he has acquired stock in
violation of the restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed under this section to
have, notice either (a) that he is a person not eligible to be a holder of stock of
the corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its
articles of incorporation to hold stock of the corporation, or (c) that the transfer
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 CORPORATION | PROF. G. DEE | CALLUENG

of stock is in violation of a restriction on transfer of stock, the corporation may, validity since by issuing such new certificate, it represents that the person named
at its option, refuse to register the transfer of stock in the name of the is a stockholder of the corporation
transferee. - If recognition of both stockholders would result in an overissue of shares, only the
5. The provisions of subsection (4) shall not applicable if the transfer of stock, original and true owner can be recognized as stockholder
though contrary to subsections (1), (2) of (3), has been consented to by all the - The bona fide purchaser of the new certificate will however have a right of
stockholders of the close corporation, or if the close corporation has amended damages against the corporation.
its articles of incorporation in accordance with this Title. - The corporation would have a right of action against the person who made false
6. The term "transfer", as used in this section, is not limited to a transfer for
representations and in whose favor it issued a new certificate
value.
7. The provisions of this section shall not impair any right which the transferee
may have to rescind the transfer or to recover under any applicable warranty, Santamaria v HSBC (1951)
express or implied. Facts: Santamaria bought 10,000 shares of the Batangas Minerals, Inc. thru a
stock brokerage firm. She received Stock Certificate No. 517 issued in the name of
3. Intrinsic Validity of Various Kinds of Restrictions Woo, Uy-Tioco & Naftaly and indorsed in blank by this firm. Santamaria later placed
- Restrictions must be reasonable under the circumstances to justify their an order for the purchase of 10,000 shares of the Crown Mines, Inc. with R.J.
exception to the fundamental rule of free alienability of property. CAMPOS & CO., another brokerage firm, and delivered Cert. No. 517 to the latter
RESTRICTION VALIDITY as security therefor with the understanding that said certificate would be returned
Consent restriction – one where the VOID because it is more onerous than to her upon payment of the 10,000 Crown Mines shares. When Santamaria went
consent of the directors or of other the option restriction allowed by the to RJ Campos & Co. to pay for her order of 10,000 Crown Mines shares and to get
stockholders before any transfer of Code back Cert. No. 517, the manager informed her that RJ Campos & Co. was no longer
stocks can be made allowed to transact business due to a prohibition order from the SEC. She was also
Option restriction – one which VALID, the length of time must be informed that her stock cert. was in the possession of HSBC. HSBC came into
requires a stockholder who wishes to reasonable. SEC policy is to limit the possession of the stock cert. when RJ Campos & Co. pledged to the said bank "all
sell or transfer his stock, to first offer option period to one month stocks, shares and securities which I/we may hereafter come into their possession
the same to the corporation or to of my/our account,,." Santamaria made a claim to the bank.
other stockholders and give the latter Held: HSBC is not liable; however, due to the willingness of HSBC to tender Stock
an opportunity to acquire the same Cert. No. 715 to Santamaria, the Court inclined to grant this formal tender.
should they wish to do so
Santamaria was negligent. Her negligence was the proximate cause of the damage
Prescribing qualifications of Sec. 97 par 1 and Sec 99 par. 1 and
she suffered. In making said deposit, Santamaria did not take any precaution to
stockholders, a transfer restriction 4 allow that the AOI of a close
corporation may provide that only protect herself against the possible misuse of the shares represented by the stock
persons meeting specified cert. She could have asked the corporation that had issued the said certificate to
qualifications may become cancel it and issue another in lieu thereof in her name to apprise the holder that
stockholders thereof. she was the owner of the said certificate. Instead, Santamaria delivered the said
Campos: Sec. 97 par 1 should be certificate to RJ Campos & Co., thereby clothing the latter with apparent title to the
interpreted to qualify on “restrictions shares represented by the said certificate including apparent authority to negotiate
on transfers” and not the it. Santamaria made the negotiation of the certificate of stock to other parties
“qualifications for owning or holding possible and the confidence she placed in RJ Campos & Co. made the wrong done
the same” possible. This was the proximate cause of the damage suffered by her. She is
4. Redeemable common stock VALID, A corporation, close or therefore, estopped from claiming further title to or interest therein as against a
otherwise, can issue redeemable bona fide pledgee or transferee thereof.
common stock under Sec. 8 HSBC had no knowledge of the circumstances under which the stock cert. was
5. Formal validity of restrictions Restrictions on transfer of shares delivered to RJ Campos & Co., and had the perfect right to assume that RJ Campos
appear in the AOI, in the by-laws, and
& Co. was lawfully in possession of the certificate in view of the fact that it was a
in the certificate of stock, otherwise
they cannot bind a purchaser in good street certificate, and was in such form was would entitle any possessor thereof to
faith a transfer of the stock on the books of the corporation concerned. (transferable by
- Restriction may be done away with mere delivery)
by amendment of AOI or by-laws, HSBC was not obligated to inquire who was the real owner of the shares
which needs vote of 2/3 of stocks represented by the certificate of stock. It should be noted that the certificate of
stock in question was issued in the name of Woo, Uy-Tioco & Naftaly and that it
Unauthorized Transfers was duly indorsed in blank by said firm, and that said indorsement was guaranteed
1. Certificates indorsed in blank; when quasi negotiable (Theory of quasi- by R.J. Campos & Co., Inc., which in turn indorsed it in blank. This certificate is what
negotiability) it is known as street certificate. Upon its face, the holder was entitled to demand
- If the stockholder so indorses his certificate in blank and places it in the hands of its transfer into his name from the issuing corporation.
another for purposes OTHER THAN TRANSFER, such possessor, although acting Even if said certificate had been in the name of Santamaria but indorsed in blank,
without authority, may transfer good title to a BONA FIDE purchaser who, relying on the Bank would still have been justified in believing that RJ Campos & Co., Inc. had
the indorsed certificate, believed him to be the owner thereof or to have authority title thereto for the reason that it is a well-known practice that a certificate of stock,
to effect a transfer. indorsed in blank, is deemed quasi negotiable, and as such the transferee thereof
- Real owner is estopped from claiming the shares as against such bona fide is justified in believing that it belongs to the holder and transferor.
purchaser since he has clothed the possessor with apparent authority to deal with
the shares as his own Delos Santos v McGrath (1955)
Facts: Plaintiffs challenge the government’s seizure of 1.6M shares of Lepanto
2. Forged Transfers Mining stock, which they had allegedly purchased during WWII. The government in
- If the corporation should issue a new certificate in pursuance of a forged transfer, turn argues that Lepanto record books show that a different person had purchased
the corporation incurs no liability to the person in whose favor it is issued and it the stocks in trust for a Japanese corporation, which had never disposed of it—
may demand its return for cancellation. The corporation in such case, has been hence the post-liberation seizure by the government.
guilty of no misrepresentation Held: The plaintiffs were unable to prove their ownership over the stocks. Stock
- It is the duty of the purchaser to determine that the indorsement of the owner is certificates are only quasi-negotiable in nature, and therefore do not produce the
genuine same effect as a negotiable instrument, i.e. even an innocent purchaser for value
- However if the new certificate issued to the purchaser comes into the hands of a cannot acquire a better right than his predecessor.
bona fide purchaser for value, the corporation will be estopped from denying
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A stock certificate is only quasi-negotiable, in that it can be transferred by
indorsement with delivery. However, the holder to whom it is indorsed and delivered
receives it without prejudice to the defenses or rights that a registered owner may
have.
Thus, the rule is that if the owner indorsed a certificate in blank and it is stolen from
him, an innocent purchaser for value of the stolen certificate does not acquire title
thereto. Neither shall title vest in a transferee if he receives the certificate under a
forgery.
The exception is when the owner of the certificate is negligent, such that he is
estopped from asserting his title, as when:
(a) The true owner has given the person who diverts the certificate the indicia of
ownership; or
(b) The true owner has given the person who diverts the certificate apparent title, or
authority to transfer title.
Further, the negligence must be the proximate cause for the purchaser to part with
his money; it must be that the negligence is in or immediately connected with the
transfer itself. So the true owner may still assert his title even when, as in this case,
he makes a blank indorsement, and the certificate is subsequently lost or stolen,
when such loss or theft is without his negligence.
In this case, neither Vicente Madrigal, for whom the certificates are named, nor the
Mitsuis, for whom they were held in trust, had ever alienated the shares of stock in
question. Negligence was not alleged against them, and neither could it be
attributed to them. Moreover, the plaintiffs should have inquired into the title of
Campos and Hess, the alleged vendors, since the latter were not the registered
owners of the Lepanto stock. It was Madrigal whose name appeared in Lepanto’s
books—the plaintiffs must thus have been conscious of the possible infirmities.
Collateral Transfers
As personal property, shares may be the subject matter of pledge and chattel
mortgage (CM)
- Collateral transfers are not covered by the registration requirement in Sec 63
(applies only to absolute transfers per SC in Monserrat v Ceron)
- If certificate is delivered as security for the performance of an obligation, it is a
pledge and governed by CC
- If not delivered, transaction must be registered in the CM registry of the province
- If SHs domicile is in a different province, registration must also be made in such
province
Chua Guan v Samahang Magsasaka (1935)
Facts: Gonzalo H. Co Toco, the owner of 5,894 shares of the capital stock of
Samahang Magsasaka Inc. mortgaged said shares to Chua Chiu to guarantee the
payment of a debt. Chua Chiu assigned all his right and interest in said mortgage
to Chua Guan. When Co Toco defaulted in the payment of said debt, Chua Guan
foreclosed said mortgage. The sheriff auctioned said shares and Chua Guan having
been the highest bidder, the sheriff executed in his favor a certificate of sale of said
shares. Chua Guan tendered the certificates of stock standing in the name of Co
Toco to the proper officers of the corporation for cancellation and demanded that
they issue new certificates in the name of Chua Guan. The officers (individual
defendants) refused and still refuse to issue said new shares in the name of Chua
Guan because prior to the date of the latter’s demand (4 February 1933), 9
attachments had been issued and served and noted on the books of the
corporation against Co Toco’s shares and Chua Guan objected to having these
attachments noted on the new certificates which he demanded. An action for writ
of mandamus was filed praying that the defendants transfer said 5,894 shares of
stock to the plaintiff by cancelling the old certificates and issuing new ones in their
stead.
Held: Section 4 of Act No. 1508 provides two ways for executing a valid chattel
mortgage which shall be effective against third persons. First, the possession of
the property mortgaged must be delivered to and retained by the mortgagee; and,
second, without such delivery the mortgage must be recorded in the proper office
or offices of the register or registers of deeds. If a chattel mortgage of shares of
stock of a corporation may validly be made without the delivery of possession of
the property to the mortgagee and the mere registration of the mortgage-is
sufficient to give constructive notice to third parties, we are confronted with the
question as to the proper place of registration of such a mortgage.
It is a general rule that for purposes of execution, attachment and garnishment, it
is not the domicile of the owner of a certificate but the domicile of the corporation
which is decisive. By analogy, the property in the shares maybe deemed to be
situated in the province in which the corporation has its principal office or place of
CORPORATION | PROF. G. DEE | CALLUENG
business. If this province is also the province of the owner's domicile, a single
registration is sufficient. If not, the chattel mortgage should be registered both at
the owner's domicile and in the province where the corporation has its principal
office or place of business. In this sense the property mortgaged is not the
certificate but the participation and share of the owner in the assets of the
corporation.
Section 35 of the Corporation Law (Act No. 1459) enacts that shares of stock "may
be transferred by delivery of the certificate endorsed by the owner or his attorney in
fact or other person legally authorized to make the transfer." The use of the verb
"may" does not exclude the possibility that a transfer may be made in a different
manner, thus leaving the creditor in an insecure position even though he has the
certificate in his possession. The transfer by endorsement and delivery of a
certificate with intention to pledge the shares covered thereby should be sufficient
to give legal effect to that intention and to consummate the juristic act without
necessity for registration.
In view of the premises, the attaching creditors are entitled to priority over the
defectively registered mortgage of the appellant and the judgment appealed from
must be affirmed without special pronouncement as to/costs in this instance.
Makati Sports Club v Cheng; McFoods Inc (2010)
Fact: Makati Sports Club’s (MSC) board of directors authorized the sale of 19
unissued shares at a floor price of 400,000 and 450,000 respectively for Class A
and B shares. McFood’s was successful in acquiring a share for 1.8M. While the
sale between McFood’s and MSC was under negotiation, McFoods and Hodreal
entered into an agreement wherein McFoods will sell the share to Hodreal. Hodreal
paid 1.4M to McFoods. Another payment of 1.4M was made by Hodreal on
December 27, 1995 for a total of 2.8M for the said share. When MSC was informed
of the sale to Hodreal for 2.8M, it issued a new certificate of stock in his favor.
However, an investigation was conducted and a committee held that there is prima
facie evidence to show that Cheng, the treasurer, profited from the said
transaction. MSC seeks to hold Cheng liable for 1M, representing the amount
allegedly defrauded from MSC. MSC alleged that Cheng provided insider’s
information to McFoods and tried to prove this through circumstantial evidence.
Held: MSC was not entitled to recover. Considering that McFoods tendered its
payment of P1,800,000.00 to MSCI on November 28, 1995, even assuming
arguendo that it was driven solely by the intent to speculate on the price of the
share of stock, it had all the right to negotiate and transact, at least on the
anticipated and expected ownership of the share, with Hodreal. There is nothing
wrong with the fact that the first installment paid by Hodreal preceded the payment
of Mc Foods for the same share of stock to MSCI because eventually Mc Foods
became the owner of the share covered by Certificate A 2243. Upon payment by
Mc Foods of P1,800,000.00 to MSCI and the execution of the Deed of Absolute
Sale on December 15, 1995, it then had the right to demand the delivery of the
stock certificate in its name. The right of a transferee to have stocks transferred to
its name is an inherent right flowing from its ownership of the stocks
MSC’s contention that the transfer violated its pre-emptive right also failed. Mc
Foods offered for sale the share of stock to MSC. McFoods had the right to do so
because it already became owner of the said share as early as November 28 (when
it paid MSC) and December 15, 1995 when the deed was executed,
notwithstanding the fact that the stock certificate was issued only on January 5,
1996. The certificate is not a stock in the corporation but is merely evidence of the
holder’s interest and status in the corporation, his ownership of the share
represented thereby. It is not in law the equivalent of such ownership.
It was only on January 29, 1996, or 32 days after, when McFoods executed the
deed of sale in favor of Hodreal, and MSC failed to exercise its pre-emptive rights
within the 30 day period.
Neither can MSCI argue that McFoods was not yet a registered owner of the share
of stock when the latter offered it for resale, in order to void the transfer from Mc
Foods to Hodreal. The corporation’s obligation to register is ministerial upon the
buyer’s acquisition of ownership of the share of stock. The corporation, either by
its board, its by-laws, or the act of its officers, cannot create restrictions in stock
transfers
Bitong v CA (1998)
Facts: Bitong claims that Eugenia (president of Publishing Co.) made several
advances to PDI on various occasions amounting to P3.27Million, with some of
PDI’s borrowings having no interest. Bitong also claims that Eugenia Eugenia,
along with two other persons subscribed to PDI shares, with the stock subscriptions
being paid for by the Publishing Co. The amount paid (150k) was treated as
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receivables by the Publishing Co. but payments were not made. Thus, the petition
sought to enjoin the Eugenia et al from acting as President-director and director of
the board, and disposing the PDI shares registered in their names. Bitong also
sought for the appointment of a management committee during the pendency of
the suit. Eugenia argues that Bitong is not a real party in interest as she was merely
a holder in trust of the shares of JAKA which was the real shareholder of Publishing
Co.
Held: Sec. 63 of the Corporation Code requires the compliance with certain
requisites:
1. The Stock Cert. must be signed by the Pres/VP, countersigned by the Sec, and
bear the seal of the Corp.
2. Delivery is an essential element of the issuance.
3. The par value must first be fully paid.
4. The original certificate must be surrendered where the person requesting the
issuance is a transferee from a stockholder.
The Cert. of stock is a continuing affirmation (and is prima facie evidence) that the
stock is valid and genuine. Similarly, the Stock & Transfer Book is ordinarily the
best evidence of corporate acts and proceedings. However, they are not conclusive
even against the corporation but are prima facie evidence only. Parol evidence may
be admitted to supply such omissions in the records.
There is overwhelming evidence that despite what appears on the Stock Cert. &
Stock & Transfer Book, Bitong was not a bona fide stockholder before March 1989.
Apart from her own admissions, corporate documents disclose that the true
stockholder was JAKA. The records are unclear on how Bitong acquired the shares
of stock of JAKA.
The rule is that the endorsement of a cert. of stock by the owner or his atty. In fact
shall be sufficient to effect the transfer only if the same is coupled with delivery.
Thus for a valid transfer of stocks, the following requisites must be present:
a. There must be delivery of the Stock Cert;
b. The cert. must be endorsed by the owner or his atty in fact or a person legally
authorized to make a transfer;
c. To be valid against third parties, the transfer must be recorded in the books of
the corp.
In this case, Bitong complied only with the third requisite.
Torres v CA (1957)
Facts: Judge Torres assigned to Tormil various real properties he owned and his
shares of stock in other corporation in exchange for 225, 972 Tormil shares. He
executed 10 deeds of assignment and the properties were duly recorded in the
inventory of assets of Tormil Realty. At the time of assignments, however, only 225,
000 Tormil shares remained unsubscribed, all of which were subsequently issued
to Judge Torres. Due to insufficient number of shares of stock, Judge Torres revoked
2 deeds of assignment covering the properties in Makati and Pasay City. Private
respondents filed the first SEC petition alleging that the disappearance of said
properties became Judge Torres’ contribution to a new corporation incorporated by
Judge Torres together with his legal counsels
Judge Torres also assigned from his own shares 1 “qualifying share” each to
petitioners Tobias, Jocson, Jurisprudencia, Azura, and Pabalan to elect them to the
Board of Directors as Torres’ nominees. This was done to remedy the inequitable
situation where in despite his controlling interest in the corporation, Judge Torres
only held a single seat in the board, putting him at the mercy of the minority. When
the Chairman called for the election of directors, the corporate secretary refused to
write down the names of the nominees. Judge Torres and his lawyers-stockholders
left the meeting and held it at another place. At the resumption of the meeting, the
lawyers-stockholders were nominated and elected as directors for 1987-1988.
Consequently, private respondents instituted a complaint before the SEC to annul
the election of petitioners as Board of Directors on the ground that the assignment
of shares to the petitioners violated the minority stockholders’ right of pre-emption
as provided in the corporation’s articles and by-laws.
Held: The assignment of qualifying shares to nominees of Judge Torres cannot be
considered as real transfer or conveyance of shares of stock because one of the
requirements for a valid transfer of stock has not been complied with.
The requirements for a transfer of stock to be binding against third persons are: (1)
delivery of the certificate, (2) endorsement of the owner or his attorney-in-fact or
other person legally authorized to make the transfer, and (3) recording in the books
of corporation showing the names of the parties to the transaction, the date of the
transfer, the number of certificate, and the number of shares transferred.
In the present case, the entries in the book of corporation of the alleged transfer of
nominal shares to Pabalan et al. cannot be given effect because they were made
CORPORATION | PROF. G. DEE | CALLUENG
by Judge Torres himself. Section 74 of the Corporation Code provides that the stock
and transfer book should be kept in the principal office of the corporation and the
corporate secretary shall be its custodian and shall be the in charge of making the
necessary entries therein. Contrary to Section 74 of the Corporation Code, the
stock and transfer book of Tormil was not kept by the corporate secretary but by
Judge Torres, who also entered the transfer of nominal shares to Pabalan et al.
Where the entries made are not valid, the purported transfer of shares cannot be
given effect; hence, Pabalan et al. cannot be considered as stockholders of Tormil.
Because they are not stockholders, they cannot be elected as directors of Tormil.
Moreover, the shortage of 972 shares was not a valid ground for unilateral
revocation of the deeds of assignment because there was already a substantial
compliance with the obligation on the part of Tormil Realty. The first two issuances
of the stock certificates were in consideration of the properties being revoked by
Judge Torres. Rescission of a contract will not be permitted for a slight breach, but
only for substantial and fundamental breach as would defeat the very object of the
parties making the agreement. (Universal Food Corp. v CA). The shortage of 972
shares was not a substantial breach that would have defeated the objectives of the
parties.
SME Bank, Inc. v de Guzman
Facts: Agustin and De Guzman, shareholders of SME Bank, sold 86.365% of the
shares of stock of SME Bank to spouses Abelardo and Olga Samson. Spouses
Samson then became the principal shareholders of SME Bank, while Aurelio
Villaflor, Jr. was appointed bank president. As it turned out, respondent employees,
except for Simeon, Jr., were not rehired. The employees filed for illegal dismissal.
Petitioner bank argues that, there being a transfer of the business establishment,
the innocent transferees no longer have any obligation to continue employing
respondent employees, and that the most that they can do is to give preference to
the qualified separated employees; hence, the employees were validly dismissed.
Held: Contrary to petitioner bank's argument, there was no transfer of the business
establishment to speak of, but merely a change in the new majority shareholders
of the corporation.
There are two types of corporate acquisitions: asset sales and stock sales. In asset
sales, the corporate entity sells all or substantially all of its assets to another entity.
In stock sales, the individual or corporate shareholders sell a controlling block of
stock to new or existing shareholders.
In asset sales, the rule is that the seller in good faith is authorized to dismiss the
affected employees, but is liable for the payment of separation pay under the law.
The buyer in good faith, on the other hand, is not obliged to absorb the employees
affected by the sale, nor is it liable for the payment of their claims. The most that it
may do, for reasons of public policy and social justice, is to give preference to the
qualified separated personnel of the selling firm.
In contrast with asset sales, in which the assets of the selling corporation are
transferred to another entity, the transaction in stock sales takes place at the
shareholder level. Because the corporation possesses a personality separate and
distinct from that of its shareholders, a shift in the composition of its shareholders
will not affect its existence and continuity. Thus, notwithstanding the stock sale,
the corporation continues to be the employer of its people and continues to be
liable for the payment of their just claims. Furthermore, the corporation or its new
majority shareholders are not entitled to lawfully dismiss corporate employees
absent a just or authorized cause.
In the case at bar, the Letter Agreements show that their main object is the
acquisition by the Samson Group of 86.365% of the shares of stock of SME Bank.
Hence, this case involves a stock sale, whereby the transferee acquires the
controlling shares of stock of the corporation. Thus, following the rule in stock
sales, respondent employees may not be dismissed except for just or authorized
causes under the Labor Code.
Non-transferability and Termination of Membership in Non-stock corporations
Membership in a non-stock corporation is considered personal to the member and
he cannot transfer his rights as such, unless the AOI or by-laws provide
Sec. 90. Non-transferability of membership. - Membership in a non-stock
corporation and all rights arising therefrom are personal and non-transferable,
unless the articles of incorporation or the by-laws otherwise provide. (n)
Sec. 91. Termination of membership. - Membership shall be terminated in the
manner and for the causes provided in the articles of incorporation or the by-
laws. Termination of membership shall have the effect of extinguishing all
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rights of a member in the corporation or in its property, unless otherwise
provided in the articles of incorporation or the by-laws. (n)
Sir (on transfer of shares and STB): STB does not only record the transfer, but also
that the shares’ beneficial owner is someone else, pledge, etc. Law only says that
director has to be in his name, so if you give one share to a person, and you might
want him to get out of the company in two years, it just means that his name is in
STB as the owner, but you hold it in trust – so you’re the beneficial owner
Sir: You can endorse your stock separately from stock certificate. You don’t have to
write it in the back of the certificate. You can use a form “Endorsement separate
from certificate”
Chapter XIV Amendments of Charter
Amendment by Legislature
Sec. 145. Amendment or repeal. No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any
liability incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of
this Code or of any part thereof. (n)
Subject to the limitation that no accrued rights or liabilities be impaired, the
legislature has the power to make changes in existing corporations through an
amendment to the Corporation Code
Amendment by Stockholders
Sec. 36. Corporate powers and capacity. - Every corporation incorporated
under this Code has the power and capacity:
xxx
4. To amend its articles of incorporation in accordance with the provisions of
this Code;
Sec. 16. Amendment of Articles of Incorporation. - Unless otherwise prescribed
by this Code or by special law, and for legitimate purposes, any provision or
matter stated in the articles of incorporation may be amended by a majority
vote of the board of directors or trustees and the vote or written assent of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, without prejudice to the appraisal right of dissenting stockholders in
accordance with the provisions of this Code, or the vote or written assent of at
least two-thirds (2/3) of the members if it be a non-stock corporation.
The original and amended articles together shall contain all provisions required
by law to be set out in the articles of incorporation. Such articles, as amended
shall be indicated by underscoring the change or changes made, and a copy
thereof duly certified under oath by the corporate secretary and a majority of
the directors or trustees stating the fact that said amendment or amendments
have been duly approved by the required vote of the stockholders or members,
shall be submitted to the Securities and Exchange Commission.
The amendments shall take effect upon their approval by the Securities and
Exchange Commission or from the date of filing with the said Commission if not
acted upon within six (6) months from the date of filing for a cause not
attributable to the corporation.
Note: law uses the words “vote or written assent” which implies that a stockholder’s
meeting is not necessary to effect an amendment of the AOI and a mere referendum
would be sufficient
- The 2/3 vote is based on the outstanding capital stock, including non-voting
stocks
1. Limitations on power
a. It must be for a legitimate purpose
b. It must be with the vote or written assent of 2/3 of the members in non-stock
corporations or 2/3 of the OCS in stock corporations. No meeting is required
c. The appraisal right must be recognized in case the amendment has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of
any class or extending or shortening the term of corporate existence
d. The extension of the corporation’s term cannot exceed 50 years in any one
instance
5. A copy of the articles as amended, duly certified, should be filed with the SEC;
in case of banks, quasi-banks, buildings, loan associations, trust companies, and
other financial intermediaries, etc., a certificate from the appropriate
governmental agency that the amendment is in accordance with law is required
before the same may be filed with the SEC
CORPORATION | PROF. G. DEE | CALLUENG
6. The original and amended articles together should contain all the matters
required by law to be set out in said articles
7. An amendment to increase or decrease capital stock as well as to extend or
shorten the corporate term cannot be made under Sec. 16 but under Sec. 38 and
37 of the Code, both of which require a meeting; and
8. The amendment must be in the form prescribed by the Code
- Sec. 16 taken with Sec. 42 implies a corporation’s power to add a purpose
entirely different from its original one. However, the amendment to the articles will
not automatically allow the corporation the right to invest in the new business.
- Approval of the stockholders to such investment must, in addition, be obtained in
accordance with Sec. 42, unless of course, the new purpose has, by the
amendment become the primary purpose of the corporation
2. Grounds for rejection of amendment
Sec. 17. Grounds when articles of incorporation or amendment may be rejected
or disapproved. The SEC may reject the AOI or disapprove any amendment
thereto if the same is not in compliance with the requirements of this Code:
Provided, that the Commission shall give the incorporators reasonable time
within which to correct or modify the objectionable portions of the articles or
amendment. The following are grounds for such rejection or disapproval:
1. That the articles of incorporation or any amendment thereto is not
substantially in accordance with the form prescribed herein;
2. That the purpose or purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to government rules and
regulations;
3. That the Treasurer’s Affidavit concerning the amount of capital stock
subscribed and/or paid is false;
4. That the required percentage of ownership of the capital stock to be owned
by citizens of the Philippines has not been complied with as required by existing
laws of the Constitution
No articles of incorporation or amendment to articles of incorporation of banks,
banking and quasi-banking institutions, building and loan associations, trust
companies, public utilities, educational institutions, and other corporations
governed by special laws shall be accepted or approved by the Commission
unless accompanied by a favorable recommendation of the appropriate
government agency to the effect that such articles or amendment is in
accordance with law. (n)
3. Amendment changing stockholder’s rights
Sec. 81. Instances of appraisal right. - Any stockholder of a corporation shall
have the right to dissent and demand payment of the fair value of his shares in
the following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares
of any class, or of extending or shortening the term of corporate existence;
xxx
The power of self-amendment must be exercised in good faith and not merely to
defraud or prejudice the minority.
- The amendment must be for a legitimate purpose, and the purpose of “freezing
out” the minority cannot be legitimate.
- An amendment by the 2/3 majority which effect a change in the rights of SHs has
been attacked as an impairment of “vested rights”, but it has been justified by the
principle that one who becomes a stockholder in a corporation is presumed to have
accepted his contract with the corporation subject to the existing power of self-
amendment in Sec. 36. There is no vested right which is impaired by the
amendment. The remedy of the dissenting stockholder is to exercise his appraisal
right
3. Amendment changing stockholder’s rights
Sec. 81. Instances of appraisal right. - Any stockholder of a corporation shall have
the right to dissent and demand payment of the fair value of his shares in the
following instances:
1. In case any amendment to the articles of incorporation has the effect of
changing or restricting the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to those of outstanding shares of
any class, or of extending or shortening the term of corporate existence;
xxx
83

The power of self-amendment must be exercised in good faith and not merely to
and not merely to defraud or prejudice the minority. It must be for a legitimate
purpose. The burden of proving BF on the dissenting SH
Marcus v. RH Macy (1947)
Facts: Marcus owns 50 common stock of Macy’s. Macy’s gave formal notice to its
stockholders that one of the matters to be voted upon in their annual meeting is
the proposal of giving voting rights to PS, equal share for share, to those to which
the holders of the corporation's common stock are entitled. Marcus sent by
registered mail a written notice that she objected to the proposed amendment of
the certificate of incorporation, and to the adoption of such proposal. She also
demanded payment for the common stock then owned by her. During the meeting
she voted against the amendment. Marcus, as a nonconsenting common
stockholder, instituted the present proceeding to determine the value of her stock
as a basis for the enforcement of payment therefor.
Held: By paragraph (E) of section 36 of the Stock Corporation Law, Macy’s was
given the right to alter the "privileges or voting powers of any shares previously
authorized, or the restrictions or qualifications thereof…” But subject to the
condition that: “ If the certificate… (d) abolishes any voting right of the holders of
shares of any class or limits their voting rights, except as the same may be limited
by the voting rights given to new shares of any class authorized by the certificate;
any holder of any such shares not in favor of such action may at any time prior to
the vote authorizing such action… object to such action and demand payment for
his stock, and thereupon such stockholder or the corporation shall have the right,
subject to the conditions and provisions of section twenty-one, to have such stock
appraised and paid for as provided in said section. Such objection and demand
must be in writing and filed with the corporation. (This is equivalent to the appraisal
right in our Corporation Code)
Amendment limits the voting rights of the common stockholder to the effect that
the voting power of the common stock holders will be diluted. The case Matter of
Kinney is not applicable. That case involved a new and previously unauthorized
issue of preferred stock, while in the case at bar the charter amendment, to which
the appellant objects, granted new voting rights — equal to those of the common
shares — to previously authorized preferred stock of which 165,600 shares were
then issued and outstanding.
It doesn’t matter even if Marcus only holds a very small percentage of the common
stock, as long as the circumstances under which a right of appraisal can be
exercised is met, she can do so.
4. Effectivity of amendment
Only from the approval by the SEC
GR: Any approval or rejection by the SEC must be made within 6 months of the filing
of the amendment, otherwise it shall take effect even without such approval,
XPN: delay is due to a cause attributable to the corporation
In the absence of approval or rejection within said period, the amendment takes
effect as of the date of filing.
5. Special amendments
Increase or Decrease of capital stocks
Sec. 38. Power to increase or decrease capital stock; incur, create or increase
bonded indebtedness. - No corporation shall increase or decrease its capital
stock or incur, create or increase any bonded indebtedness unless approved by
a majority vote of the board of directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the outstanding capital stock shall
favor the increase or diminution of the capital stock, or the incurring, creating
or increasing of any bonded indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of the incurring, creating, or
increasing of any bonded indebtedness and of the time and place of the
stockholder's meeting at which the proposed increase or diminution of the
capital stock or the incurring or increasing of any bonded indebtedness is to be
considered, must be addressed to each stockholder at his place of residence
as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally. A certificate in
duplicate must be signed by a majority of the directors of the corporation and
countersigned by the chairman and the secretary of the stockholders' meeting,
setting forth:
(1) That the requirements of this section have been complied with;
(2) The amount of the increase or diminution of the capital stock;
CORPORATION | PROF. G. DEE | CALLUENG
(3) If an increase of the capital stock, the amount of capital stock or number of
shares of no-par stock thereof actually subscribed, the names, nationalities
and residences of the persons subscribing, the amount of capital stock or
number of no-par stock subscribed by each, and the amount paid by each on
his subscription in cash or property, or the amount of capital stock or number
of shares of no-par stock allotted to each stock-holder if such increase is for
the purpose of making effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred, created or increased;
(5) The actual indebtedness of the corporation on the day of the meeting;
(6) The amount of stock represented at the meeting; and
(7) The vote authorizing the increase or diminution of the capital stock, or the
incurring, creating or increasing of any bonded indebtedness.
Any increase or decrease in the capital stock or the incurring, creating or
increasing of any bonded indebtedness shall require prior approval of the
Securities and Exchange Commission.
One of the duplicate certificates shall be kept on file in the office of the
corporation and the other shall be filed with the Securities and Exchange
Commission and attached to the original articles of incorporation. From and
after approval by the Securities and Exchange Commission and the issuance by
the Commission of its certificate of filing, the capital stock shall stand
increased or decreased and the incurring, creating or increasing of any bonded
indebtedness authorized, as the certificate of filing may declare: Provided, That
the Securities and Exchange Commission shall not accept for filing any
certificate of increase of capital stock unless accompanied by the sworn
statement of the treasurer of the corporation lawfully holding office at the time
of the filing of the certificate, showing that at least twenty-five (25%) percent of
such increased capital stock has been subscribed and that at least twenty-five
(25%) percent of the amount subscribed has been paid either in actual cash to
the corporation or that there has been transferred to the corporation property
the valuation of which is equal to twenty-five (25%) percent of the subscription:
Provided, further, That no decrease of the capital stock shall be approved by
the Commission if its effect shall prejudice the rights of corporate creditors.
Non-stock corporations may incur or create bonded indebtedness, or increase
the same, with the approval by a majority vote of the board of trustees and of at
least two-thirds (2/3) of the members in a meeting duly called for the purpose.
Bonds issued by a corporation shall be registered with the Securities and
Exchange Commission, which shall have the authority to determine the
sufficiency of the terms thereof.
- approval is signified by the issuance of a certificate that the certificate of increase
or reduction of capital stock has been duly filed with the SEC
- Sec. 38 of the Code requires that at least 25% of the proposed increase must be
subscribed and 25% of such subscription must be paid
An increase of capital stock may be accomplished by:
1. Increase of par value without increasing number of shares
2. Number of shares may be increased without an increase in par value
3. Increase in both par value and number of shares
PRE-EMPTIVE RIGHT APPRAISAL RIGHT
- When increase of capital stocks - where the increase in capital stock
does not result in the creation of results in the creation of shares with
preferences superior to the existing preferences superior to existing ones
ones
- Exercised when there is: Two amendments involved:
1. Increase of par value without 1. Special amendment to increase
increasing number of shares capital stock (Sec. 38), AND
2. Number of shares may be 2. Another amendment to create a
increased without an increase in par new class of shares (Sec. 16)
value
3. Increase in both par value and
number of shares
In reduction of capital stock, it will not be approved by the SEC if it will prejudice
the rights of corporate creditors
Sec. 122 par. 4. Except by decrease of capital stock and as otherwise allowed
by this Code, no corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and liabilities.
Philippine Trust Co. v Rivera (1923)
Facts: Marciano Rivera subscribed for 450 shares representing a value of P45,000
of Cooperativa Naval Filipina. The company became insolvent and went into the
84

hands of the Philippine Trust Company (PTC), as assignee in bankruptcy. PTC
instituted this action before the CFI to recover one-half of the stock subscription of
Rivera, which admittedly has never been paid. Rivera claimed that at a meeting of
the stockholders, a resolution was adopted to the effect that the capital should be
reduced by 50% and the subscribers released from the obligation to pay any
unpaid balance of their subscription in excess of 50% of the same. As a result of
this resolution it seems that the subscriptions of the various shareholders had been
cancelled to the extent stated; and fully paid certificates were issued to each
shareholder for one-half of his subscription.
Held: Rivera is still liable. Subscriptions to the capital of a corporation constitute a
fund to which creditors have a right to look for satisfaction of their claims and that
the assignee in insolvency can maintain an action upon any unpaid stock
subscription in order to realize assets for the payment of its debts. A corporation
has no power to release an original subscriber to its capital stock from the
obligation of paying for his shares, without a valuable consideration for such
release; and as against creditors a reduction of the capital stock can take place
only in the manner and under the conditions prescribed by the statute or the charter
or the articles of incorporation. Moreover, strict compliance with the statutory
regulations is necessary
In this case, the resolution releasing the shareholders from their obligation to pay
50% of their respective subscriptions was an attempted withdrawal of so much
capital from the fund upon which the company's creditors were entitled ultimately
to rely. Having been effected without compliance with the statutory requirements,
the resolution was wholly ineffectual. Hence, Rivera is still liable for the unpaid
balance of his subscription.
Change in corporate term
Sec. 37. Power to extend or shorten corporate term. - A private corporation may
extend or shorten its term as stated in the articles of incorporation when
approved by a majority vote of the board of directors or trustees and ratified at
a meeting by the stockholders representing at least two-thirds (2/3) of the
outstanding capital stock or by at least two-thirds (2/3) of the members in case
of non-stock corporations. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to each stockholder or
member at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or served
personally: Provided, That in case of extension of corporate term, any
dissenting stockholder may exercise his appraisal right under the conditions
provided in this code. (n)
Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding
fifty (50) years from the date of incorporation unless sooner dissolved or unless
said period is extended. The corporate term as originally stated in the articles
of incorporation may be extended for periods not exceeding fifty (50) years in
any single instance by an amendment of the articles of incorporation, in
accordance with this Code; Provided, That no extension can be made earlier
than five (5) years prior to the original or subsequent expiry date(s) unless there
are justifiable reasons for an earlier extension as may be determined by the
Securities and Exchange Commission. (6)
- One way to accomplish dissolution prior to expiration of the term fixed by the AOI
is to shorten the term
- If the amendment is to extend the corporate term, it should be approved and filed
prior to the expiration of the original term since the corporation is ipso facto
dissolved as soon as such term expires
- Amendment cannot be made earlier than five years prior to expiration, unless the
SEC finds justifiable reasons for allowing it
- Unlimited number of extensions, as long as each extension does not exceed 50
years
Increase of Decrease of Extension of Shortening
capital Capital corporate of corporate
stock Stock term term
Meeting of , 2/3 of , 2/3 of
SHs the OCS the OCS
Prior
Approval of
SEC
CORPORATION | PROF. G. DEE | CALLUENG
Filing of No, mere No, mere
amendment attachment attachment
of articles of the of the
certificate of certificate of
increase or increase or
decrease by decrease by
the SEC to the SEC to
the original the original
AOI is AOI is
enough enough
Treasurer’s No No
affidavit
Appraisal , if Sec. 81 , if Sec. 81
Right applies applies
Amendments in close corporations
Sec. 103. Amendment of articles of incorporation. - Any amendment to the
articles of incorporation which seeks to delete or remove any provision required
by this Title to be contained in the articles of incorporation or to reduce a
quorum or voting requirement stated in said articles of incorporation shall not
be valid or effective unless approved by the affirmative vote of at least two-
thirds (2/3) of the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for the purpose.
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation,
if the directors or stockholders are so divided respecting the management of
the corporation's business and affairs that the votes required for any corporate
action cannot be obtained, with the consequence that the business and affairs
of the corporation can no longer be conducted to the advantage of the
stockholders generally, the Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to arbitrate the dispute. In the
exercise of such power, the Commission shall have authority to make such
order as it deems appropriate, including an order: (1) canceling or altering any
provision contained in the articles of incorporation, by-laws, or any
stockholder's agreement; (2) canceling, altering or enjoining any resolution or
act of the corporation or its board of directors, stockholders, or officers; (3)
directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action; (4) requiring the
purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its
books, or by the other stockholders; (5) appointing a provisional director; (6)
dissolving the corporation; or (7) granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder
nor a creditor of the corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any, may be determined by the
Commission. A provisional director is not a receiver of the corporation and does
not have the title and powers of a custodian or receiver. A provisional director
shall have all the rights and powers of a duly elected director of the corporation,
including the right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement between
him and the corporation subject to approval of the Commission, which may fix
his compensation in the absence of agreement or in the event of disagreement
between the provisional director and the corporation.
Chapter XVI Dissolution
DISSOLUTION – means that the corporation ceases to be a juridical person and
consequently can no longer continue transacting its business
- For the purpose of winding up its affairs and liquidating its assets, its corporate
existence continues for a period of three years from such dissolution
Ways to dissolve a corporation
1. Expiration of original, extended or shortened term
- Once the corporate term expires, the corporation is automatically dissolved
without any other proceeding,and it cannot be considered even a de facto
corporation
85

- If the corporation wishes to dissolve its term expires, the least cumbersome way
to do it is to amend its AOI to shorten its original term of existence
Sec. 120. Dissolution by shortening corporate term. - A voluntary dissolution
may be effected by amending the articles of incorporation to shorten the
corporate term pursuant to the provisions of this Code. A copy of the amended
articles of incorporation shall be submitted to the Securities and Exchange
Commission in accordance with this Code.
Upon approval of the amended articles of incorporation of the expiration of the
shortened term, as the case may be, the corporation shall be deemed dissolved
without any further proceedings, subject to the provisions of this Code on
liquidation. (n)
The corporation will be automatically dissolved upon the happening of either two
events:
(1) approval of the amended AOI or
(2) expiration of the shortened term
- there will be no need of any further proceedings, subject to the liquidation of
assets
2. Voluntary dissolution when no creditors affected
Sec. 118. Voluntary dissolution where no creditors are affected. - If dissolution
of a corporation does not prejudice the rights of any creditor having a claim
against it, the dissolution may be effected by majority vote of the board of
directors or trustees, and by a resolution duly adopted by the affirmative vote
of the stockholders owning at least two-thirds (2/3) of the outstanding capital
stock or of at least two-thirds (2/3) of the members of a meeting to be held
upon call of the directors or trustees after publication of the notice of time,
place and object of the meeting for three (3) consecutive weeks in a newspaper
published in the place where the principal office of said corporation is located;
and if no newspaper is published in such place, then in a newspaper of general
circulation in the Philippines, after sending such notice to each stockholder or
member either by registered mail or by personal delivery at least thirty (30) days
prior to said meeting. A copy of the resolution authorizing the dissolution shall
be certified by a majority of the board of directors or trustees and countersigned
by the secretary of the corporation. The Securities and Exchange Commission
shall thereupon issue the certificate of dissolution. (62a)
3. Voluntary dissolution where creditors are affected
Sec. 119. Voluntary dissolution where creditors are affected. - Where the
dissolution of a corporation may prejudice the rights of any creditor, the
petition for dissolution shall be filed with the Securities and Exchange
Commission. The petition shall be signed by a majority of its board of directors
or trustees or other officers having the management of its affairs, verified by its
president or secretary or one of its directors or trustees, and shall set forth all
claims and demands against it, and that its dissolution was resolved upon by
the affirmative vote of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or by at least two-thirds (2/3) of the members
at a meeting of its stockholders or members called for that purpose.
If the petition is sufficient in form and substance, the Commission shall, by an
order reciting the purpose of the petition, fix a date on or before which
objections thereto may be filed by any person, which date shall not be less than
thirty (30) days nor more than sixty (60) days after the entry of the order. Before
such date, a copy of the order shall be
published at least once a week for three (3) consecutive weeks in a newspaper
of general circulation published in the municipality or city where the principal
office of the corporation is situated, or if there be no such newspaper, then in a
newspaper of general circulation in the Philippines, and a similar copy shall be
posted for three (3) consecutive weeks in three (3) public places in such
municipality or city.
Upon five (5) day's notice, given after the date on which the right to file
objections as fixed in the order has expired, the Commission shall proceed to
hear the petition and try any issue made by the objections filed; and if no such
objection is sufficient, and the material allegations of the petition are true, it
shall render judgment dissolving the corporation and directing such disposition
of its assets as justice requires, and may appoint a receiver to collect such
assets and pay the debts of the corporation. (Rule 104, RCa)
Sec. 122 par. 4. Except by decrease of capital stock and as otherwise allowed
by this Code, no corporation shall distribute any of its assets or property except
upon lawful dissolution and after payment of all its debts and liabilities.
CORPORATION | PROF. G. DEE | CALLUENG
4. Dissolution by minority in close corporations
a. In case of deadlocks:
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation,
if the directors or stockholders are so divided respecting the management of
the corporation's business and affairs that the votes required for any corporate
action cannot be obtained, with the consequence that the business and affairs
of the corporation can no longer be conducted to the advantage of the
stockholders generally, the Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to arbitrate the dispute. In the
exercise of such power, the Commission shall have authority to make such
order as it deems appropriate, including an order: (1) canceling or altering any
provision contained in the articles of incorporation, by-laws, or any
stockholder's agreement; (2) canceling, altering or enjoining any resolution or
act of the corporation or its board of directors, stockholders, or officers; (3)
directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action; (4) requiring the
purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its
books, or by the other stockholders; (5) appointing a provisional director; (6)
dissolving the corporation; or (7) granting such other relief as the
circumstances may warrant.
xxx
b. Written petition of a stockholder to SEC to compel dissolution
Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition
and without prejudice to other rights and remedies available to a stockholder
under this Title, any stockholder of a close corporation may, for any reason,
compel the said corporation to purchase his shares at their fair value, which
shall not be less than their par or issued
value, when the corporation has sufficient assets in its books to cover its debts
and liabilities exclusive of capital stock: Provided, That any stockholder of a
close corporation may, by written petition to the Securities and Exchange
Commission, compel the dissolution of such corporation whenever any of acts
of the directors, officers or those
in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive
or unfairly prejudicial to the corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.
Financing Corporation of the Philippines v Teodoro (1953)
Sec. 117. Methods of dissolution. - A corporation formed or organized under
the provisions of this Code may be dissolved voluntarily or involuntarily. (n)
Facts: Lizares et al., in their own behalf and in behalf of the other minority
stockholders of the Financing Corporation of the Philippines sued the Corporation
and J Amado Araneta, its President and GM, alleging gross mismanagement and
fraudulent conduct of the corporate affairs by Araneta and asking that (1) the
corporation be dissolved, (2) Araneta be declared personally accountable for the
unauthorized and fraudulent disbursements of the corporate assets and violations
of the Corporation Law and the by-laws of the Corporation, and (3) the best means
to protect and preserve the assets of Corporation is the appointment of a receiver.
Held: Appointment of receiver is proper. As a general rule, minority shareholders of
a corporation cannot sue and demand dissolution in a private suit. The action
should be brought by the Government through its legal officer, via a quo warranto
proceeding.
An exception is in cases wherein the intervention of the State cannot be obtained
because the complaint is a matter strictly between the shareholders and the
corporation and does not involve issues which involve acts/omissions warranting
a quo warranto. When such action is brought, the trial court has jurisdiction and
has discretion to grant the prayer or not. Having such jurisdiction, the appointment
of a receiver pendente lite is left to the sound discretion of the trial court.
5. Failure to organize and commence business; cessation of business for 5 years
Sec. 22. Effects on non-use of corporate charter and continuous inoperation of
a corporation. - If a corporation does not formally organize and commence the
transaction of its business or the construction of its works within two (2) years
from the date of its incorporation, its corporate powers cease and the
corporation shall be deemed dissolved. However, if a corporation has
commenced the transaction of its business but subsequently becomes
continuously inoperative for a period of at least five (5) years, the same shall
86

be a ground for the suspension or revocation of its corporate franchise or
certificate of incorporation. (19a)
This provision shall not apply if the failure to organize, commence the
transaction of its businesses or the construction of its works, or to continuously
operate is due to causes beyond the control of the corporation as may be
determined by the Securities and Exchange Commission.
Transacting business implies a continuity of acts or dealings in the
accomplishment of the purpose for which the corporation was formed. However,
even a single act would be sufficient if it is intended to be the beginning of a series
of acts in pursuance of the corporate business.
As long as this first act takes place within two-year period, then the corporation will
be safe from the effects of Sec. 22
Art. 3. Code of Commerce. The legal presumption of habitually engaging in
commerce shall exist from the moment the person who intends to engage
therein announces through circulars, newspapers, handbills, posters exhibited
to the public, or in any other manner whatsoever, an establishment which has
for its object some commercial operation.
6. Involuntary dissolution
a. Revocation of certificate of registration by SEC
Sec. 121. Involuntary dissolution. – A corporation may be dissolved by the
Securities and Exchange Commission upon filing of a verified complaint and
after proper notice and hearing on grounds provided by existing laws, rules and
regulations.
Rule 66.2. Like actions against corporations. A like action may be brought
against a corporation
(a) when it has offended against a provision of an Act for its creation or renewal
(b) When it has forfeited its privileges and franchises by a nonuser
(c) When it has committed or omitted an act which amounts to a surrender of
its corporate rights, privileges, or franchises
(d) When it has misused a right, privilege or franchise conferred upon it by law,
or when it has exercised a right, privilege, or franchise in contravention of law.
2. Quo Warranto proceeding
Under the RoC, quo warranto proceeding questionng the right of the corporation to
continue existing as such is filed by the OSG or fiscal before the SEC (now RTC
sitting as a special court).
Republic v Bisaya Land Transportation Co. (1978)
Facts: SolGen filed a petition for quo warranto for BLTC’s dissolution based on
several violative acts allegedly committed by the corporation. In the course of the
proceedings, the BLTC filed a motion for judgment on consent to dissolve itself
because this litigation has prejudiced the corporation, its officers and
shareholders, that it’s better to just dissolve it. It asked that the liquidation be
carried out by its BoD. RP manifested its consent but said it should be
implemented by the court, while Miguel agreed on the condition that his cross
claim be resolved and that a receiver be appointed. Later, BLTC withdrew its motion
which was opposed by Miguel. Much later, SolGen filed a motion to dismiss the
petition for quo warranto. This was opposed by Miguel again.
Held: The lower court was correct in not dissolving BLTC on its own motion. A motion
for judgment on consent is one the provisions and terms of which are settled and
agreed upon by the parties to the action, and which is entered in the record by the
consent and sanction of the court. There must be an unqualified agreement among
the parties to be bound by the judgment on consent before said judgment may be
entered. The court does not have the power to supply terms, provisions, or essential
details not previously agreed to by the parties
On the other hand, a judgment by confession is not a plea but an affirmative and
voluntary act of the defendant himself. Here, the court exercises a certain amount
of supervision over the entry of judgment, as well as equitable jurisdiction over their
subsequent status.
The records would show that there was no meeting of the minds among the parties
hereto with respect to the motion for judgment on consent filed by corporation and
agreed to by petitioner-appellee. Before the parties could come to an unqualified
agreement as to the judgment requested to be entered by the corporation, the
latter decided to withdraw its motion for judgment on consent.
CORPORATION | PROF. G. DEE | CALLUENG
After a very careful and deliberate consideration of the evidence
adduced by petitioner, the lower court came to the conclusion that
the same did not really warrant a quo warranto by the State that
could truly justify to decapitate corporate life, and that the corporate
acts or omissions complained of had not resulted in substantial injury
to the public, nor were they wilful and clearly obdurate. The court
found that the several acts of misuse and misapplication of the funds
and/or assets of the Bisaya Land Transportation Co., Inc. were
committed more particularly by the respondent Dr. Manuel Cuenco
with the cooperation of Jose P. Velez, for the commission of which
they may be personally held liable.
The Solicitor General is vested with absolute and unlimited power to discontinue
the State's litigation and, accordingly, to have the quo warranto petition
dismissed, if and when in his opinion this should be done, subject to well defined
exceptions (such as, for example, (a) if the action which he commenced was
brought for purposes of enforcing a right or benefit and he discovers that the
advisability or necessity of which no longer exists; OR (b) the result of the action
would be different from what he intended.
Gonzales v Sugar Regulatory Administration (1989)
Facts: Sps. Gonzales filed a complaint against Republic Planters Bank (RPBank),
Philippine Sugar Commission (Philsucom), and the SRA for the cancellation of a
mortgage and recovery of a sum of money. They allege that while RPBank,
PhilSuCom and SRA are claiming that Gonzales’s loan remain unpaid, they had
already more than fully repaid their loan. Executive Order No. 18, promulgated on
28 May 1986, abolished the Philsucom, created the SRA and authorized the
transfer of assets from Philsucom to SRA. Gonzales filed an amended complaint
assailing the constitutionality of EO 18, asserting that they had been deprived of
property without due process of law and that the abolition of Philsucom and the
transfer of assets are unconstitutional
Held: One who asserts a claim against a juridical entity has no constitutional right
to the perpetual existence of such entity. Juridical persons, whether incorporated
or not, whether owned by the government or the private sector, may come to an end
at one time or another for a variety of reasons, e.g., the fulfillment or the
abandonment of the business purposes for which a corporation was set up. Thus,
the Corporation Code provides for termination of corporate life, the dissolution of
the corporation, the winding up of its operations, the liquidation of its assets, the
payment of its obligations and distribution of any residual assets to its
stockholders. The termination of the life of a juridical entity does not by itself imply
the diminution or extinction of rights demandable against such juridical entity
Pepsi-Cola Products v CA (2004)
Facts: Labor union (PCEWU) filed complaint against the corporation (PCDP) for the
payment of overtime services during Muslim holidays. LA ordered PCDP to pay the
claims. NLRC affirmed. Pending the resolution of their MRs, ownership of various
Pepsi-Cola bottling plants was transferred to petitioner Pepsi-Cola Products
Philippines, Inc. (PCPPI). PDCP subsequently alleged that it had already ceased
as a corporation, it has winded up its corporate affairs, and is now owned by
another corporation (PCPPI). NLRC then dismissed the complaint.
Held: The NLRC clearly erred in perceiving that, upon the petitioner’s acquisition of
the PCDP, the latter lost its corporate personality. Under Section 122 of the
Corporation Code, a corporation whose corporate existence is terminated in any
manner continues to be a body corporate for three (3) years after its dissolution for
purposes of prosecuting and defending suits by and against it and to enable it to
settle and close its affairs, culminating in the disposition and distribution of its
remaining assets. It may, during the three-year term, appoint a trustee or a receiver
who may act beyond that period. The termination of the life of a corporate entity
does not by itself cause the extinction or diminution of the rights and liabilities of
such entity. If the three-year extended life has expired without a trustee or receiver
having been expressly designated by the corporation, within that period, the board
of directors (or trustees) itself, may be permitted to so continue as "trustees" by
legal implication to complete the corporate liquidation
Effects of Dissolution; Winding up
Sec. 122. Corporate liquidation. - Every corporation whose charter expires by
its own limitation or is annulled by forfeiture or otherwise, or whose corporate
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existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three (3) years after the time
when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle and close its affairs, to
dispose of and convey its property and to distribute its assets, but not for the
purpose of continuing the business for which it was established.
At any time during said three (3) years, the corporation is authorized and
empowered to convey all of its property to trustees for the benefit of
stockholders, members, creditors, and other persons in interest. From and after
any such conveyance by the corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in interest, all interest which
the corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the stockholders, members, creditors or
other persons in interest.
Upon the winding up of the corporate affairs, any asset distributable to any
creditor or stockholder or member who is unknown or cannot be found shall be
escheated to the city or municipality where such assets are located.
Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities. (77a, 89a, 16a)
1. Loss of Juridical Personality
Upon dissolution, a corporation loses its juridical personality and can no longer
lawfully continue its business, except merely for the purpose of winding up its
affairs. It cannot even be a de facto corporation, and its existence may thus be
subject to collateral attack.
- It cannot enter into new contracts which would have the effect of continuing the
business of the corporation.
- During the three year period allowed, it must collect all debts owing to it, and pay
all its creditors. For its purpose, it may sue and be sued, although upon the
expiration of three years, all pending actions by or against the dissolved
corporation abate
- After payment of all its creditors, the remaining assets should be distributed to
the stockholders in proportion to their interests in the corporation.
National Abaca and other Fibers v. Pore (1961)
Facts: National Abaca sought to recover an amount from Pore for the unaccounted
cash advance. MTC decided in National Abaca’s favor but not for the entire
amount. It appealed the case to the CFI to secure the full amount. Pore filed MTD
since the corporation should have been deemed abolished because the 3-year
period to file claims against others already lapsed. Corporation countered this by
saying that the case was brought within the 3-year period and is allowed to
continue through its trustee: the Board of Liquidators.
Held: Section 77 of the Corporation Law provides that the corporation shall "be
continued as a body corporate for three (3) years after the time when it would have
been *** dissolved, for the purpose of prosecuting and defending suits by or
against it ***, so that, thereafter, it shall no longer enjoy corporate existence for
such purpose. For this reason, section 78 of the same law authorizes the
corporation, "at any time during said three years… to convey all of its property to
trustees for the benefit of members, stockholders, creditors and other interested"
evidently for the purpose, among others, of enabling said trustees to prosecute and
defend suits by or against the corporation begun before the expiration of said
period.
Sec. 78 provides that the conveyance to the trustees must be made within the three
year period. It may be found impossible to complete the work of liquidation within
the three year period or to reduce disputed claims to judgment. The authorities are
to the effect that suits by or against a corporation abate when it ceases to be an
entity capable of suing or being sued; but trustees to whom the corporate assets
have been conveyed pursuant to the authority of Section 78 may sue and be sued
as such in all matters connected with liquidation. By the terms of the statute the
effect of the conveyance is to make the trustees the legal owners of the property
conveyed, subject to the beneficial interest therein of creditors and stockholders
2. Executory Contracts
Executory contracts are not extinguished by dissolution
Sec. 145. Amendment or repeal. No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any
liability incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the subsequent
CORPORATION | PROF. G. DEE | CALLUENG
dissolution of said corporation or by any subsequent amendment or repeal of
this Code or of any part thereof. (n)
3. Methods of liquidation
WINDING UP means the collection of all assets, the payment of all its creditors and
the distribution of the remaining assets, if any, among the stockholders in
accordance with their contracts, or if there be no special contract, on the basis of
their respective interests
- may be provided by the by-laws
a. Liquidation by the corporation’s BOD
- basis: authority of the BOD to manage the corporate affairs
- BOD only has three years within which to finish its work of liquidation
b. Convey all the corporate assets to trustees who will take charge of liquidation
- three year limitation will not apply provided the designation of the trustees is
made within the said period
c. Liquidation is conducted by the receiver who may have been appointed by the
SEC upon its decreeing the dissolution of the corporation
- three year period does not apply because the corporation is substituted by the
receiver, who may sue and be sued even after such period
Although the three year period may have expired, it does not necessarily follow that
a creditor who was unable to collect his claim before three years would lose his
right. It is possible for him to sue the trustee, if there be one, or the court may allow
him, if the circumstances so warrant, to follow the corporate assets in the hands of
the stockholders who may have received the same as liquidating dividends
4. Distribution of assets after payment of debts
LIQUIDATING DIVIDEND – share of each stockholder in the assets upon liquidation
- A corporation cannot distribute any of its assets or property except upon lawful
dissolution and only after payment of all its debts and liabilities.
- GR: A stockholder cannot get back any part of his invested capital until dissolution
and liquidation.
XPN:
a. decrease of capital stock (due to a reduction of capital stock, a surplus results),
and
b. otherwise allowed by the Code
- when the stockholder has the appraisal right (Sec. 81 and 42(
- Where in case of deadlock in a close corporation, the SEC should find it proper to
order the corporation to pay the fair value of the shares of any stockholder (Sec.
104)
- Where a stockholder of a close corporation may, for any reason, compel the
corporation to buy his shares at fair value (Sec. 105)
- Where the corporation repurchases the shares of any stockholder for any
legitimate corporate purpose (Sec. 41)
- Where the corporation validly distribute dividends (Sec. 43)
China Banking Corporation v Michelin (1933)
Facts: George, O’Farrell & Cie., Inc. had been acting as the representative of the
appellee, M. Michelin & Cie., a foreign sociedad anonima organized under the laws
of France and domiciled in said country, for the sale and distribution in the
Philippines of rubber tires (“Michelin tires”) for motor cars produced by the
appellee. These business relations lasted until May 1930 when the appellee
discontinued them. Upon the settlement of the accounts between both, it was
found that the corporation failed to account for P23,268.83, the sale price of a
number of rubber tires sold by the corporation. When the Board of Directors filed
the petition for its dissolution and for the appointment of Gaston O’Farrell
(president and general manager) as receiver and liquidator to wind up the affairs
of the corporation, M. Michelin & Cie., filed its claim against the corporation with
a prayer that the claim be allowed as a preferred one against the corporation. Jesus
O. Serrano, the attorney for the corporation, gave his conformity to the petition. The
trial court allowed the petition. Later, China Banking Corp. then filed a motion
praying that Michelin’s claim be allowed as an ordinary claim and that the P5,000
paid by the receiver be refunded to the funds of the corporation in liquidation for
the benefit other creditors.
Held: Michelin’s claim should not be allowed. Claims against a corporation in the
hands of a receiver should not be approved and paid without some formal and
regular proceeding whereby their justice and correctness may be inquired into after
a reasonable opportunity has been given to all the parties in interest to present
88

objections and submit evidence in support of such objections. The records failed
to disclose the reasons which led the corporation to resort to the court for a decree
of voluntary dissolution.
Sec. 176 of the Code of Civil Procedure provides that the court may appoint a
receiver to take charge of the estate and effects of the corporation, and pay the
outstanding debts thereof, and divide the remaining money and property among
the stockholders or members. This is consistent with Sec. 66 of the Corporation
Law which provides that with respect to decrees of dissolution rendered upon
voluntary application, the court may appoint receivers to collect and take charge of
the assets of the corporation. Such is permissive rather than mandatory and
recognizes that in voluntary dissolution, there is no occasion for the appointment
of a receiver under special circumstances and upon proper showing.
The normal method is for the directors and executive officers to have charge of the
winding up operations, though there is an alternative method of assigning the
property of the corporation to trustees for the benefit of creditors and shareholders.
Further, Sec. 77 of the Corporation Law provides that every corporation whose
charter expires by its own limitation or whose corporate existence terminates in any
other manner shall nevertheless be continued as a body corporate for three years
after the time when it should have been dissolved for winding up operations. Sec.
78 provides that said corporations at any time during the three years term may
convey its property to trustees for the benefit of creditors, stockholders and others
concerned.
The appointment of a receiver by the court to wind up the corporation’s affairs upon
petition of voluntary dissolution DOES NOT empower the court to hear and pass on
the claims of the creditors of the corporation at first hand. In such cases the
receiver does not act as a receiver of an insolvent corporation.
Republic of the Philippines v Marsman Development Company (1972)
Facts: An investigation was conducted on Marsman Development Company on its
operations and activities leading to the discovery that certain taxes were due from
logs produced from its concession. The CIR made extrajudicial demand for
payment and since the corporation still failed to pay, the present action was filed.
The CFI ruled in favor of the CIR and ordered the company and/or its liquidator to
pay the amount claimed. Marsman contends that the present action is already
barred under section 77 of the Corporation Law, Act No. 1459, as amended, which
allows the corporate existence of a corpora-tion to continue only for three years
after its dissolution, for the purpose of presenting or defending suits by or against
it, and to settle and close its affairs. They point out that inasmuch as the Marsman
Development Co. was extrajudicially dissolved on April 23, 1954, a fact admitted
in the amended complaint, the filing of both the original complaint on September
8, 1958 and the amended complaint on August 26, 1956 was beyond the
aforesaid three-year period.
Held: The record shows that the filing of the amended complaint was intended,
among others, to include as a party defendant, in an alternative capacity, Mr. F.H.
Burgess, who is the liquidator of the Marsman Development Co. Although it is an
admitted fact that the defendant corporation was extra-judicially dissolved on April
23, 1954, there is no claim that the affairs of said corporation had already been
finally liquidated or settled. Evident-ly, Mr. F.H. Burgess is still continuing in his
aforesaid capacity as liquidator of the Marsman Development Co. While section
77 of the Corporation Law provides for a three-year period for the continuation of
the corporate existence of the corporation for purposes of liquidation, there is
nothing in said provision which bars an action for the recovery of the debts of the
corporation against the liquidator thereof, after the lapse of the said three-year
period.
The Government became the creditor of the corporation before the completion of
its dissolution by the liquidation of its assets. Appellant F.H. Burgess, whom it
chose as liquidator, became in law the trustee of all its assets for the benefit of all
persons enumerated in Section 78, including its creditors, among whom is the
Government, for the taxes herein involved. To assume otherwise would render the
extra--judicial dissolution illegal and void, since, according to Section 62 of the
Corporation Law, such kind of dissolution is permitted only when it "does not affect
the rights of any creditor having a claim against the corporation.
Tan Tiong Bio v CIR (1962)
Facts: The corporation was assessed payment of deficiency sales taxes
and surcharge. Its defense was that the petitioners as successors-in-
interest could not be held liable for the same because the corporation
was dissolved already.
CORPORATION | PROF. G. DEE | CALLUENG
Held: It has been stated, with reference to the effect of dissolution
upon taxes due from a corporation, "that the hands of the
government cannot, of course, collect taxes from a defunct
corporation, it loses thereby none of its rights to assess taxes which
had been due from the corporation, and to collect them from
persons, who by reason of transactions with the corporation, hold
property against which the tax can be enforced and that the legal
death of the corporation no more prevents such action than would
the physical death of an individual prevent the government from
assessing taxes against him and collecting them from his
administrator, who holds the property which the decedent had
formerly possessed"
Aguirre II v FQB+7 (2013)
Facts: Vitaliano filed, in his individual capacity and on behalf of FQB+7, Inc.
(FQB+7), a Complaint for intra-corporate dispute, injunction, inspection of
corporate books and records, and damages, against respondents Nathaniel D.
Bocobo (Nathaniel), Priscila D. Bocobo (Priscila), and Antonio De Villa (Antonio),
alleged usurpers and corporation’s atty-in-fact. The CA characterized relief sought
by Petitioners as a continuance of the dissolved corporation’s business, prohibited
under Corp. Code 122.
Held: The complaint does not seek to continue the business, but to determine and
vindicate an alleged stockholder’s right to the return of his stockholdings and to
participate in the election of directors, and a corporation’s right to remove usurpers
and strangers from its affairs. The Complaint does not seek to enter into contracts,
issue new stocks, acquire properties, execute business transactions, etc. Its aim is
not to continue the corporate business, but to determine and vindicate an alleged
stockholder’s right to the return of his stockholdings and to participate in the
election of directors, and a corporation’s right to remove usurpers and strangers
from its affairs. Neither are these issues mooted by the dissolution of the
corporation. A corporation’s board is not rendered functus officio by its dissolution.
Since Section 122 allows a corporation to continue its existence for a limited
purpose, necessarily there must be a board that will continue acting for and on
behalf of the dissolved corporation for that purpose. In fact, Section 122
authorizes the dissolved corporation’s board of directors to conduct its liquidation
within three years from its dissolution. The same is true with regard to Vitaliano’s
shareholdings in the dissolved corporation. A party’s stockholdings in a
corporation, whether existing or dissolved, is a property right, which he may
vindicate against another party who has deprived him thereof. The corporation’s
dissolution does not extinguish such property right. Section 145 of the Corporation
Code ensures the protection of this right.
The dissolution of the corporation simply prohibits it from continuing its business.
However, despite such dissolution, the parties involved in the litigation are still
corporate actors. The dissolution does not automatically convert the parties into
total strangers or change their intra-corporate relationships. Neither does it
change or terminate existing causes of action, which arose because of the
corporate ties between the parties. Thus, a cause of action involving an intra-
corporate controversy remains and must be filed as an intra-corporate dispute
despite the subsequent dissolution of the corporation.
Distribution of Assets of Non-Stock Corporation
Sec. 94. Rules of distribution. - In case dissolution of a non-stock corporation
in accordance with the provisions of this Code, its assets shall be applied and
distributed as follows:
1. All liabilities and obligations of the corporation shall be paid, satisfied and
discharged, or adequate provision shall be made therefore;
2. Assets held by the corporation upon a condition requiring return,
transfer or conveyance, and which condition occurs by reason of the
dissolution, shall be returned, transferred or conveyed in accordance with such
requirements;
3. Assets received and held by the corporation subject to limitations
permitting their use only for charitable, religious, benevolent, educational or
similar purposes, but not held upon a condition requiring return, transfer or
conveyance by reason of the dissolution, shall be transferred or conveyed to
one or more corporations, societies or organizations engaged in activities in the
Philippines substantially similar to those of the dissolving corporation
according to a plan of distribution adopted pursuant to this Chapter;
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4. Assets other than those mentioned in the preceding paragraphs, if any, shall - Since merger and consolidation involve fundamental changes in the corporation,
be distributed in accordance with the provisions of the articles of incorporation as well as the rights of stockholders and creditors, there must be an express
or the by-laws, to the extent that the articles of incorporation or the by-laws, provision of law authorizing them, otherwise ultra vires
determine the distributive rights of members, or any class or classes of
members, or provide for distribution; and 2. Express Authority to merge granted by Code
5. In any other case, assets may be distributed to such persons, societies, Sec. 76. Plan or merger of consolidation. - Two or more corporations may merge
organizations or corporations, whether or not organized for profit, as may be into a single corporation which shall be one of the constituent corporations or
specified in a plan of distribution adopted pursuant to this Chapter. (n) may consolidate into a new single corporation which shall be the consolidated
corporation.
Sec. 95. Plan of distribution of assets. - A plan providing for the distribution of The board of directors or trustees of each corporation, party to the merger or
assets, not inconsistent with the provisions of this Title, may be adopted by a consolidation, shall approve a plan of merger or consolidation setting forth the
non-stock corporation in the process of dissolution in the following manner: following:
The board of trustees shall, by majority vote, adopt a resolution recommending 1. The names of the corporations proposing to merge or consolidate,
a plan of distribution and directing the submission thereof to a vote at a regular hereinafter referred to as the constituent corporations;
or special meeting of members having voting rights. Written notice setting forth 2. The terms of the merger or consolidation and the mode of carrying the same
the proposed plan of distribution or a summary thereof and the date, time and into effect;
place of such meeting shall be given to each member entitled to vote, within 3. A statement of the changes, if any, in the articles of incorporation of the
the time and in the manner provided in this Code for the giving of notice of surviving corporation in case of merger; and, with respect to the
meetings to members. Such plan of distribution shall be adopted upon consolidated corporation in case of consolidation, all the statements
approval of at least two-thirds (2/3) of the members having voting rights required to be set forth in the articles of incorporation for corporations
present or represented by proxy at such meeting. (n) organized under this Code; and
Note: Any provision in the AOI governing the distribution of assets of non-stock 4. Such other provisions with respect to the proposed merger or consolidation
corporation must be subject to the provisions of Sec. 94. In case of inconsistency, as are deemed necessary or desirable. (n)
the latter will have to prevail
- Any plan of distribution of its assets must be inconsistent with the special Sec. 77. Stockholder's or member's approval. - Upon approval by majority vote
provisions of this Code governing non-stock corporations of each of the board of directors or trustees of the constituent corporations of
the plan of merger or consolidation, the same shall be submitted for approval
Chapter XVII. Corporate Combinations by the stockholders or members of each of such corporations at separate
- otherwise known as corporate reorganization or amalgamation corporate meetings duly called for the purpose. Notice of such meetings shall
- whichever method is chosen, the resulting combination and its effects must pass be given to all stockholders or members of the respective corporations, at least
the test of FAIRNESS, particularly to the minority stockholders two (2) weeks prior to the date of the meeting, either personally or by registered
mail. Said notice shall state the purpose of the meeting and
shall include a copy or a summary of the plan of merger or consolidation. The
Sec. 20. Act. 3518. No corporation engaged in commerce may acquire directly affirmative vote of stockholders representing at least two-thirds (2/3) of the
or indirectly, the whole or any part of the stock or other share capital of another outstanding capital stock of each corporation in the case of stock corporations
corporation or corporations engaged in commerce, where the effect of such or at least two-thirds (2/3) of the members in the case of non-stock
acquisition may be to substantially lessen competition between the corporations shall be necessary for the approval of such plan. Any dissenting
corporation or corporations whose stock is so acquired and the corporation stockholder in stock corporations may exercise his appraisal right in
making the acquisition, or between any of them, or to restrain such commerce accordance with the Code: Provided, That if after the approval by the
in any section or community, or tend to create a monopoly of any line of stockholders of such plan, the board of directors decides to abandon the plan,
commerce. the appraisal right shall be extinguished.
Any amendment to the plan of merger or consolidation may be made, provided
A. Merger and Consolidation such amendment is approved by majority vote of the respective boards of
1. Nature; distinction directors or trustees of all the constituent corporations and ratified by the
affirmative vote of stockholders representing at least two-thirds (2/3) of the
MERGER CONSOLIDATION outstanding capital stock or of two-thirds (2/3) of the members of each of the
- union whereby one or more existing - Union of two or more existing constituent corporations. Such plan, together with any amendment, shall be
corporations are absorbed by another corporations to form a new considered as the agreement of merger or consolidation. (n)
corporation which survives and corporation called the consolidated
continues the combined business corporation Sec. 78. Articles of merger or consolidation. - After the approval by the
- one constituent corporation - neither constituent corporation stockholders or members as required by the preceding section, articles of
survives, the others are dissolved survives, a new corporation is born merger or articles of consolidation shall be executed by each of the constituent
- no liquidation of assets of the - no liquidation of assets of the corporations, to be signed by the president or vice-president and certified by
dissolved corporation dissolved corporation the secretary or assistant secretary of each
- surviving corporation assumes - consolidated corporation assumes corporation setting forth:
automatically the liabilities of the automatically the liabilities of the 1. The plan of the merger or the plan of consolidation;
dissolved corporation dissolved corporation 2. As to stock corporations, the number of shares outstanding, or in the
- may be horizontal, vertical or case of non-stock corporations, the number of members; and
conglomerate 3. As to each corporation, the number of shares or members voting for and
horizontal – between competing against such plan, respectively. (n)
firms
vertical merger – corporation Sec. 79. Effectivity of merger or consolidation. - The articles of merger or of
acquired another corporation which consolidation, signed and certified as herein above required, shall be
uses or distributes the former’s submitted to the Securities and Exchange Commission in quadruplicate for its
products approval: Provided, That in the case of merger or consolidation of banks or
conglomerate – merger involves banking institutions, building and loan associations, trust companies,
corporations which are neither insurance companies, public utilities, educational institutions and other
competing nor otherwise related in special corporations governed by special laws, the favorable recommendation
the chain of production or distribution of the appropriate government agency shall first be obtained. If the
Commission is satisfied that the merger or consolidation of the corporations
- CONSTITUENT CORPORATIONS – parties to a merger or consolidation concerned is not inconsistent with the provisions of this Code and existing laws,
it shall issue a certificate of merger or of consolidation, at which time the
merger or consolidation shall be effective.

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If, upon investigation, the Securities and Exchange Commission has reason to
believe that the proposed merger or consolidation is contrary to or inconsistent
with the provisions of this Code or existing laws, it shall set a hearing to give the
corporations concerned the opportunity to be heard. Written notice of the date,
time and place of hearing shall be given to each constituent corporation at least
two (2) weeks before said hearing. The Commission shall thereafter proceed as
provided in this Code. (n)
Sec. 80. Effects or merger or consolidation. - The merger or consolidation shall
have the following effects:
1. The constituent corporations shall become a single corporation which, in
case of merger, shall be the surviving corporation designated in the plan of
merger; and, in case of consolidation, shall be the consolidated corporation
designated in the plan of consolidation;
2. The separate existence of the constituent corporations shall cease,
except that of the surviving or the consolidated corporation;
3. The surviving or the consolidated corporation shall possess all the
rights, privileges, immunities and powers and shall be subject to all the
duties and liabilities of a corporation organized under this Code;
4. The surviving or the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges, immunities and franchises of each
of the constituent corporations; and all property, real or personal, and all
receivables due on whatever account, including subscriptions to shares and
other choses in action, and all and every other interest of, or belonging to, or
due to each constituent corporation, shall be deemed transferred to and vested
in such surviving or consolidated corporation without further act or deed; and
5. The surviving or consolidated corporation shall be responsible and
liable for all the liabilities and obligations of each of the constituent
corporations in the same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or obligations; and any pending
claim, action or proceeding brought by or against any of such constituent
corporations may be prosecuted by or against the surviving or consolidated
corporation. The rights of creditors or liens upon the property of any of such
constituent corporations shall not be impaired by such merger or
consolidation. (n)
Once all the requirements specified above are complied with, the combination
gains legal recognition
The steps necessary to accomplish a merger or consolidation would be:
1. The board of each corporation draws up a plan of merger or consolidation. Such
plan must include any amendment, if necessary, to the articles of incorporation of
the surviving corporation, or in case of consolidation, all the statements required
in the AOI of a corporation
2. Submission of plan to stockholders or members of each corporation for
approval. A meeting must be called and at least two weeks’ notice must be sent to
all stockholders or members, personally or by registered mail. A summary of the
plan must be attached to the notice. Vote of 2/3 of the members or of stockholders
representing 2/3 of the outstanding capital stock will be needed. Appraisal rights
must be respected.
3. Execution of the formal agreement, referred to as the articles of merger or
consolidation, by the corporate officers of each constituent corporation. These take
the place of the AOI of the consolidated corporation or amend the AOI of the
surviving corporation
4. Submission of said articles of merger or consolidation to the SEC for approval
5. If necessary, the SEC shall set a hearing, notifying all corporations concerned at
least two weeks before
6. Issuance of certificate of merger or consolidation
Only upon the issuance of such certificate shall the merger or consolidation
become effective.
Although there is dissolution of the absorbed corporations, there is no winding up
of their affairs or liquidation of their assets, because the surviving or consolidated
corporation shall acquire automatically all the rights, privileges and powers, as
well as all liabilities of such constituents, and would usually continue the combined
business.
Rights of creditors and dissenting stockholders; appraisal rights
CREDITORS STOCKHOLDERS
Can they prevent the M No No
or C?
CORPORATION | PROF. G. DEE | CALLUENG
XPN: If they can prove
fraud or gross
unfairness, they may
enjoin the attempted
merger if they act
promptly, or if it is
already executed, they
may sue for the value of
their interests
Remedy Enforce claims against Appraisal right
the surviving or
consolidated
corporation or if there
had been a fraudulent
conveyance, to follow
the assets of the
dissolved constituents
in the hands of the
surviving or
consolidated
corporation
- if the absorbing corporation issues new stocks to the stockholders of the
absorbed corporation in pursuance to the merger agreement, the stockholders of
the former will have no preemptive right to such stocks
B. Sale of All or Substantially All Corporate Assets
- one which will render the corporation incapable of continuing the business or
accomplishing the purpose for which it was incorporated
Sec 40. Sale or other disposition of assets. - Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by a
majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon such terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for the
payment of money or other property or consideration, as its board of directors
or trustees may deem expedient, when authorized by the vote of the
stockholders representing at least two-thirds (2/3) of the outstanding capital
stock, or in case of non-stock corporation, by the vote of at least to two-thirds
(2/3) of the members, in a stockholder's or member's meeting duly called for
the purpose. Written notice of the proposed action and of the time and place of
the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally:
Provided, That any dissenting stockholder may exercise his appraisal right
under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be rendered
incapable of continuing the business or accomplishing the purpose for which it
was incorporated.
After such authorization or approval by the stockholders or members, the board
of directors or trustees may, nevertheless, in its discretion, abandon such sale,
lease, exchange, mortgage, pledge or other disposition of property and assets,
subject to the rights of third parties under any contract relating thereto, without
further action or approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation,
without the authorization by the stockholders or members, to sell, lease,
exchange, mortgage, pledge or otherwise dispose of any of its property and
assets if the same is necessary in the usual and regular course of business of
said corporation or if the proceeds of the sale or other disposition of such
property and assets be appropriated for the conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the
vote of at least a majority of the trustees in office will be sufficient authorization
for the corporation to enter into any transaction authorized by this section.
- When the intent of the parties is to effect a corporate combination, the
consideration for the sale will be stocks of the purchasing corporation.
- Unless the creditors have agreed to the sale and have accepted the purchasing
corporation as the new debtor, sufficient assets should be reserved to pay their
claims.
No assumption of liabilities; exceptions
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 CORPORATION | PROF. G. DEE | CALLUENG

GR: The purchasing corporation will usually not be liable for the debts of the selling A merger or consolidation necessarily implies the termination or cessation of the
corporation if it has acted in good faith and has paid adequate consideration for merged corporations, not merely a merger of their properties and assets. Here,
the assets LTBC and BTC will not lose their corporate existence or personality, but will
XPN: continue to exist even after the consolidation.
1. where the purchaser expressly or impliedly agrees to assume such debts;
2. Where the transaction amounts to a consolidation or merger of the corporations Nell v Pacific Farms (1965)
3. Where the purchasing corporation is merely a continuation of the selling Facts: Edward J. NELL, Co. secured a judgment in the Muncipal Court of Manila
corporation; and against INSULAR Farms, Inc. for P1,853.80, the balance of the price of a pump
4. Where the transaction is entered into fraudulently in order to escape liability for sold to the latter. Writ of execution was returned unsatisfied, as INSULAR had no
such debts leviable property. NELL sued PACIFIC Farms, Inc., for collection of the 1958
judgment. NELL alleged that PACIFIC was the mere alter ego of INSULAR. It
Remedies of dissenting stockholders; appraisal right appears that on Mar. 21, 1958, INSULAR (1) sold to PACIFIC 1,000 shares of stock
1. Exercise their appraisal right, but they can only get paid if the corporation has for P285,126.99, and (2) after INSULAR underwent reorganization and a new BOD
unrestricted retained earnings to cover such payments for the company was elected, also sold to PACIFIC its assets for P10,000.
Note: Only dissenting stockholders of SELLING corporation can exercise this, and Held: Pacific is not a mere alter ego of Insular. Generally, where one corporation
not the dissenting SHs of the BUYING corporation sells/transfers its assets to another corporation, the transferee is not liable for the
2. Where the minority stockholders prove that the sale is fraudulent and is entered debts and liabilities of the transferor.
into for the purpose of freezing them out and excluding them from a fair The exceptions are:
participation in the fruits of the same, they may sue to enjoin the same a. The transferee expressly or impliedly agrees to assume such debts;
3, If it had already been executed, they may recover their proportionate interest and b. The transaction amounts to consolidation or merger of the corporations;
hold the fraudulent directors and shareholders liable for damages c. The transferee corporation is merely a continuation of the transferor; [or]
Note: d. The transaction is entered into in fraud of the creditors.
GR: stockholders of the purchasing corporation cannot insist on their preemptive Here, the facts do not support the contention. PACIFIC purchased the stock as the
right should new or even treasury shares be issued to the selling corporation as a highest bidder in an auction sale, conducted at the instance of a bank to which said
consideration for the sale of all its assets, since the issuance is not for cash shares had been pledged as security.
XPN: purchaser is a close corporation NELL’s theory necessarily negates consolidation or merger, since a corporation
cannot be its own alter ego.
Compared with merger and consolidation
M&C Sale of all or Bank of Commerce v Radio Philippines Network (2014)
Substantially All Facts: The Traders Royal Bank (TRB) proposed to sell to petitioner Bank of
Advantage - shortcut to the - More practical when Commerce (Bancommerce) for P10.4 billion its banking business consisting of
accomplishment of the absorbing specified assets and liabilities. Bancommerce entered into a P & A Agreement with
various transactions corporation foresees TRB and acquired its specified assets and liabilities, excluding liabilities arising
and may avoid the problems in securing from judicial actions which were to be covered by the BSP-mandated escrow of P50
difficulty, delay and stockholders’ approval million. In Traders Royal Bank v. Radio Philippines Network (RPN), Inc., this Court
expense which usually and in granting the
ordered TRB to pay respondents RPN, Intercontinental Broadcasting Corporation,
accompany appraisal right of
and Banahaw Broadcasting Corporation (collectively, RPN, et al.) actual damages
dissolution, winding up dissenters
and distribution of plus 12% legal interest and some amounts. Based on this decision, RPN, et al. filed
assets to its SHs by a a motion for execution against TRB and later filed a Supplemental Motion for
selling corporation Execution where they described TRB as “now Bank of Commerce” based on the
Assumption of Liability Automatic assumption There must be sufficient assumption that TRB had been merged into Bancommerce.
of liabilities of the funds reserved by the Held: Indubitably, it is clear that no merger took place between Bancommerce and
absorbed corporation absorbed corporation TRB as the requirements and procedures for a merger were absent. A merger does
to pay its liabilities not become effective upon the mere agreement of the constituent corporations. All
the requirements specified in the law must be complied with in order for merger to
Reyes v Blouse (1952) take effect. Section 79 of the Corporation Code further provides that the merger
Facts: PLAINTIFFS, minority stockholders of Laguna Tayabas Bus Co. (“LTBC”) shall be effective only upon the issuance by the Securities and Exchange
brought suit to restrain the LTBC Board of Directors (“DEFENDANTS”) from carrying Commission (SEC) of a certificate of merger.
out a resolution approved by approximately 92.5% of LTBC stockholders at a Here, Bancommerce and TRB remained separate corporations with distinct
special meeting held on July 20, 1947. Said resolution authorized the corporate personalities. What happened is that TRB sold and Bancommerce
DEFENDANTS to take the necessary steps to consolidate the properties and purchased identified recorded assets of TRB in consideration of Bancommerce’s
franchises of LTBC with those of the Batangas Transportation Co. (“BTC”). assumption of identified recorded liabilities of TRB including booked contingent
According to PLAINTIFFS, the proposed merger or consolidation would be accounts. There is no law that prohibits this kind of transaction especially when it
prejudicial to LTBC, given the increasing dividends declared by LTBC, high share is done openly and with appropriate government approval
price, and profits – all greater than BTC’s. A de facto merger can be pursued by one corporation acquiring all or substantially
Held: The subject resolution contemplates a mere exchange of properties, not a all of the properties of another corporation in exchange of shares of stock of the
real merger or consolidation. The disputed resolution must be read in connection acquiring corporation. The acquiring corporation would end up with the business
with the BLOUSE affidavit, which states in substance that: enterprise of the target corporation; whereas, the target corporation would end up
a. The LTBC Board of Directors had decided to transfer its assets, franchises, and with basically its only remaining assets being the shares of stock of the acquiring
other properties to a new corporation to be formed with BTC; corporation.
b. LTBC will not transfer any of its liabilities to the new corporation; and
c. LTBC will not be dissolved but will continue existing, although not operating, until No de facto merger took place in the present case simply because the TRB owners
the stockholders decide to dissolve the same. did not get in exchange for the bank’s assets and liabilities an equivalent value in
The purpose of the resolution is not to dissolve LTBC, but merely to transfer its Bancommerce shares of stock. Bancommerce and TRB agreed with BSP approval
assets to a new corporation in exchange for stock – clearly deducible from (c) to exclude from the sale the TRB’s contingent judicial liabilities, including those
above. This comes squarely within the purview of Sec. 28 ½ of the Corporation Law owing to RPN, et al
authorizing the sale, exchange, lease, or disposition of all of a corporation’s
property and assets. C. Exchange of Stocks

92
 CORPORATION | PROF. G. DEE | CALLUENG

- Acquisition of all or substantially all of the stocks of one corporation from its Sec. 123. Definition and rights of foreign corporations. – For the purpose of this
stockholders, in exchange for the stocks of the acquiring corporation, thus making Code, a foreign corporation is one formed, organized or existing under any laws
all or substantially all the stockholders of the acquired corporation stockholders of other than those of the Philippines and whose laws allow Filipino citizens and
the acquiring corporation corporations to do business in its own country or state. It shall have the right to
- While the exchange has not been consummated, the acquired corporation is not transact business in the Philippines after it shall have obtained a license to
directly involved in the transaction – purely between its individual stockholders and transact business in this country in accordance with this Code and a certificate
the acquiring corporation of authority from the appropriate government agency
- Both the license and certificate must be obtained prior to transacting business in
- Once the exchange is completed, it becomes a subsidiary of the acquiring (parent)
the Philippines. Once the foreign corporation has complied with these
corporation.
requirements, it can commence doing business and becomes subject to the
absolute jurisdiction, supervision and control of the SEC in accordance with
Remedy of the dissenting stockholder
existing laws
- Depends on whether the parent decides to retain the acquired corporation as a
subsidiary, merges with it or buys all of its assets
SEC License to do business
1. Retain the acquired corporation – no appraisal right, but can sell stocks to other
corporation Sec. 125. Application for a license. - A foreign corporation applying for a
license to transact business in the Philippines shall submit to the Securities
2. Merger – may exercise appraisal right
and Exchange Commission a copy of its articles of incorporation and by-laws,
3. Buys all of its assets - exercise appraisal right certified in accordance with law, and their translation to an official language of
the Philippines, if necessary. The
Chapter XVIII Foreign Corporations application shall be under oath and, unless already stated in its articles of
Definition, Status incorporation, shall specifically set forth the following:
Sec. 123. Definition and rights of foreign corporations. – For the purpose of this 1. The date and term of incorporation;
Code, a foreign corporation is one formed, organized or existing under any laws 2. The address, including the street number, of the principal office of the
other than those of the Philippines and whose laws allow Filipino citizens and corporation in the country or state of incorporation;
corporations to do business in its own country or state. It shall have the right to 3. The name and address of its resident agent authorized to accept
transact business in the Philippines after it shall have obtained a license to summons and process in all legal proceedings and, pending the
transact business in this country in accordance with this Code and a certificate establishment of a local office, all notices affecting the corporation;
of authority from the appropriate government agency 4. The place in the Philippines where the corporation intends to operate;
5. The specific purpose or purposes which the corporation intends to
FOREIGN CORPORATION is defined as one formed and organized under laws other pursue in the transaction of its business in the Philippines: Provided, That said
than those of the Philippines, regardless of the citizenship of the incorporators and purpose or purposes are those specifically stated in the certificate of authority
stockholders issued by the appropriate government agency;
For licensing purposes, the Corporation Code adds one essential element: the laws 6. The names and addresses of the present directors and officers of the
of the country where the corporation was organized and operates allow Filipino corporation;
7. A statement of its authorized capital stock and the aggregate number of
citizens and corporations to do business in that country
shares which the corporation has authority to issue, itemized by classes, par
- Phiippine law requires that the foreign corporation must obtain a license to do
value of shares, shares without par value, and series, if any;
business in the Philippines 8. A statement of its outstanding capital stock and the aggregate number of
shares which the corporation has issued, itemized by classes, par value of
GR: The citizenship of the incorporators and stockholders is immaterial in shares, shares without par value, and series, if any;
establishing whether or not a corporation is foreign 9. A statement of the amount actually paid in; and
XPN: In times of war, for purposes of security of the state, the citizenship of the 10. Such additional information as may be necessary or appropriate in order to
controlling stockholders determines the corporation’s nationality enable the Securities and Exchange Commission to determine whether such
corporation is entitled to a license to transact business in the Philippines, and
Methods of Entry of Investment to determine and assess the fees payable.
METHOD REQUIREMENTS Attached to the application for license shall be a duly executed certificate
Incorporate a The subsidiary would be a legally independent unity under oath by the authorized official or officials of the jurisdiction of its
subsidiary as a and will be governed exclusively by PH laws incorporation, attesting to the fact that the laws of the country or state of the
domestic - Parent foreign company may need a license to do applicant allow Filipino citizens and corporations to do business therein, and
corporation business in the Philippines if it participates in the that the applicant is an existing corporation in good standing. If such certificate
control of the subsidiary is in a foreign language, a translation thereof in English under oath of the
Open a branch or - license to do business in the PH will be translator shall be attached thereto.
agency in PH, indispensable The application for a license to transact business in the Philippines shall
bringing in technical likewise be accompanied by a statement under oath of the president or any
know-how, without other person authorized by the corporation, showing to the satisfaction of the
organizing a legally Securities and Exchange Commission and other governmental agency in the
independent unity proper cases that the applicant is solvent and in sound financial condition, and
setting forth the assets and liabilities of the corporation as of the date not
exceeding one (1) year immediately prior to the filing of the application.
JV where the foreign - often resorted to where business concerned is
Foreign banking, financial and insurance corporations shall, in addition to the
corporation may partially nationalized
above requirements, comply with the provisions of existing laws applicable to
merely invest in - foreign corporation would need authority from the
them. In the case of all other foreign corporations, no application for license to
either a new or an BOI if its investment exceeds 40% of the capital of the
transact business in the
existing domestic business enterprises it invests in, unless the latter is
Philippines shall be accepted by the Securities and Exchange Commission
concern already registered with BOI
without previous authority from the appropriate government agency, whenever
- SEC license not required unless it participates in the
required by law. (68a)
management, supervision or control of the domestic
corporation
Service contracts - license to do business is required Sec. 126. Issuance of a license. - If the Securities and Exchange Commission
with domestic is satisfied that the applicant has complied with all the requirements of this
companies Code and other special laws, rules and regulations, the Commission shall issue
a license to the applicant to transact business in the Philippines for the purpose
or purposes specified in such license. Upon issuance of the license, such
Legal Requirements Prior to Transaction of Business
foreign corporation may commence to transact business in the Philippines and

93

continue to do so for as long as it retains its authority to act as a corporation
under the laws of the country or state of its incorporation, unless such license
is sooner surrendered, revoked, suspended or annulled in accordance with this
Code or other special laws.
Within sixty (60) days after the issuance of the license to transact business in
the Philippines, the licensee, except foreign banking or insurance corporation,
shall deposit with the Securities and Exchange Commission for the benefit of
present and future creditors of the licensee in the Philippines, securities
satisfactory to the Securities and
Exchange Commission, consisting of bonds or other evidence of indebtedness
of the Government of the Philippines, its political subdivisions and
instrumentalities, or of government-owned or controlled corporations and
entities, shares of stock in "registered enterprises" as this term is defined in
Republic Act No. 5186, shares of stock in domestic corporations registered in
the stock exchange, or shares of stock in domestic insurance companies and
banks, or any combination of these kinds of securities, with an actual market
value of at least one hundred thousand (P100,000.) pesos; Provided, however,
That within six (6) months after each fiscal year of the licensee, the Securities
and Exchange Commission shall require the licensee to deposit additional
securities equivalent in actual market value to two (2%) percent of the amount
by which the licensee's gross income for that fiscal year exceeds five million
(P5,000,000.00) pesos. The Securities and Exchange Commission shall also
require deposit of additional securities if the actual market value of the
securities on deposit has decreased by at least ten (10%) percent of their
actual market value at the time they were deposited. The Securities and
Exchange Commission may at its discretion release part of the additional
securities deposited with it if the gross income of the licensee has decreased,
or if the actual market value of the total securities on deposit has increased, by
more than ten (10%) percent of the actual market value of the securities at the
time they were deposited. The Securities and Exchange Commission may, from
time to time, allow the licensee to substitute other securities for those already
on deposit as long as the licensee is solvent. Such licensee shall be entitled to
collect the interest or dividends on the securities deposited. In the event the
licensee ceases to do business in the Philippines, the securities deposited as
aforesaid shall be returned, upon the licensee's application therefor and upon
proof to the satisfaction of the Securities and Exchange Commission that the
licensee has no liability to Philippine residents, including the Government of
the Republic of the Philippines. (n)
Should the foreign corporation wish to engage in a business other than that for
which it was licensed, it must obtain an amended license from the SEC, first by
filing a copy of its amended articles of incorporation and then applying for an
amended license, with the favorable indorsement of the appropriate government
agency in proper cases
- The appointment of a resident agent is an indispensable requirement to the
issuance of the SEC license.
Effects of Failure to Secure SEC License
Sec. 129. Law applicable. - Any foreign corporation lawfully doing business in
the Philippines shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only as provide for the
creation, formation, organization or dissolution of corporations or those which
fix the relations, liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other or to the corporation. (73a)
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. (69a)
1. Its officers or agent in the Philippines is responsible for the violation of the
Corporation Code and will be criminally liable. They are subject to fine and/or
imprisonment
2. An unlicensed foreign corporation doing business in the Philippines cannot
maintain any action or proceeding even before an administrative agency, and is not
allowed to intervene in any court or administrative proceeding.
3. A foreign corporation doing business in the Philippines whether with or without
a license, can be sued before Philippine courts. Since a counterclaim partakes of
the nature of a complaint against the plaintiff, even if the latter is a foreign
corporation doing business without a license, the defendant who has questioned
CORPORATION | PROF. G. DEE | CALLUENG
the plaintiff’s capacity to sue will not, by filing the counterclaim, be deemed to have
admitted such legal capacity.
4. If a foreign corporation is not doing business in the Philippines, it cannot be sued
here because Philippine courts cannot acquire jurisdiction over it.
- It needs no license to sue before Philippine courts on an isolated transaction
5. Contracts entered into by a foreign corporation doing business here without a
license are not necessarily null and void, and the lack of capacity to sue at the time
of the execution of contracts is cured by the subsequent registration and licensing
of the corporation (Home Insurance Co. v. Eastern Shipping Lines
Marshall-Wells v Elser (1924)
Facts: MARSHALL-WELLS, an Oregon corporation, sued ELSER, a domestic
corporation, for unpaid balance on goods sold of P2,660.74, for which
MARSHALL-WELLS held accepted drafts. ELSER demurred to the complaint on the
ground that plaintiff does not have legal capacity to sue.
Held: A license is not a requisite for filing a complaint in the Philippines. The object
of Sec. 133 (before Sec. 69) was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a domicile for the purpose
of business, without taking the steps necessary to render it amenable to suit in the
local courts.
It was never the intent of the Legislature to exclude a foreign corporation, which
received an isolated order for business from the Philippines, from securing redress
in its courts, and thus permit persons to avoid their contracts made with such
foreign corporations.
Columbia Pictures v CA (1996)
Facts: Columbia Pictures thru counsel lodged a formal complaint with the National
Bureau of Investigation for violation of PD No. 49, as amended, and sought its
assistance in their anti-film piracy drive. NBI Senior Agent Lauro C. Reyes applied
for a search warrant with the court a quo against Sunshine seeking the seizure,
among others, of pirated video tapes of copyrighted films all of which were
enumerated in a list attached to the application. Private respondents aver that
being foreign corporations, petitioners should have such license to be able to
maintain an action in Philippine courts. Consequently, Columbia Pictures also
does not have a right to ask for search warrant.
Held: Any foreign corporation not doing business in the Philippines may maintain
an action in our courts upon any cause of action, provided that the subject matter
and the defendant are within the jurisdiction of the court. It is not the absence of
the prescribed license but "doing business" in the Philippines without such
license which debars the foreign corporation from access to our courts. In other
words, although a foreign corporation is without license to transact business in the
Philippines, it does not follow that it has no capacity to bring an action. Such
license is not necessary if it is not engaged in business in the Philippines.
No general rule or governing principles can be laid down as to what constitutes
"doing" or "engaging in" or "transacting" business. Each case must be judged in
the light of its own peculiar environmental circumstances. The true tests, however,
seem to be whether the foreign corporation is continuing the body or substance of
the business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another.
As a general proposition upon which many authorities agree in principle, subject
to such modifications as may be necessary in view of the particular issue or of the
terms of the statute involved, it is recognized that a foreign corporation is "doing,"
"transacting," "engaging in," or "carrying on" business in the State when, and
ordinarily only when, it has entered the State by its agents and is there engaged in
carrying on and transacting through them some substantial part of its ordinary or
customary business, usually continuous in the sense that it may be distinguished
from merely casual, sporadic, or occasional transactions and isolated acts.
Based on Article 133 of the Corporation Code and gauged by such statutory
standards, petitioners are not barred from maintaining the present action. There is
no showing that, under our statutory or case law, petitioners are doing, transacting,
engaging in or carrying on business in the Philippines as would require obtention
of a license before they can seek redress from our courts. No evidence has been
offered to show that petitioners have performed any of the enumerated acts or any
other specific act indicative of an intention to conduct or transact business in the
Philippines.
As a general rule, a foreign corporation will not be regarded as doing business in
the State simply because it enters into contracts with residents of the State, where
such contracts are consummated outside the State.
94

General Garments v Director of Patents (1971)
Facts: General Garments Corp (“GGC”) [organized in the PH] is the owner of the
trademark “Puritan” issued by the Philippine patent office for assorted men’s wear.
Puritan Sports Corporation, organized under the laws of Pennsylvania USA, filed a
petition for the cancellation of the trademark “Puritan” alleging that it [foreign
corp] had ownership and prior use of said trademark, which the foreign corp. has
not abandoned. GGC filed a motion to dismiss, claiming that a foreign corporation
not licensed to do business in the Philippines cannot file the petition before the
Patent Office.
Held: That Puritan Sportswear is a juridical person should be beyond serious
dispute. The fact that it may not transact business in the Philippines unless it has
obtained a license, nor maintain a suit for recovery of a debt, or demand without
such license [§§68-69] does not make Puritan any less a juridical person. An
exception to the license requirement recognized in this jurisdiction is when a
foreign corporation sues on an isolated transaction.
However, to recognize Puritan Sportswear as a juridical person does not resolve the
issue in this case. It is important to note that Puritan Sportswear is not suing “for
the recovery of any debt, claim or demand” rather, the foreign corp. went to the
patent office for the cancellation of a trademark registered by Gen. Garments. The
right to use a trade name is a property right, a right in re, which may be asserted
and protected in any of the courts of the world—even in jurisdictions where it does
not transact business—just the same as it may protect its real or personal property
from trespass or conversion. The trademark law was also amended, inserting §21-
A which allows a foreign corporation to bring action in Philippine courts for
infringement of a mark or trade-name, for unfair competition, or for false
designation of origin and false description.
Le Chemise Lacoste v Fernandez (1984)
Facts: Lacoste brought a criminal case against respondent for unfair competition
under the revised penal code. Respondent challenged the former’s standing
because it was a foreign corporation not doing business in the PH.
Held: The marketing of petitioner’s products is done through an exclusive
distributor, Rustans. Rustans is an independent entity which buys and then
markets products not only of the petitioner but also of some other products bearing
well-established trademarks. Hence, Rustans is not a mere agent of petitioner. The
Omnibus Investment Code considers the middlemen acting in their own name as
the ones deemed to be doing in the business
Moreover, it was part of the PH’s rights and obligations under the Paris Convention
for Protection of Industrial Property to afford Lacoste the right to bring an action for
unfair competition. It’s part of our compliance in good faith with the Treaty which
is part of the laws of our land. It’s not that Paris is enforcing its right by applying its
laws extraterritorially but it’s more of the Philippines making available to citizens
of signatory countries the same right it affords to Filipinos
Litton Mills v CA (1996)
Facts: Litton Mills Inc. entered into an agreement with Empire Sales Philippines
Corporation, as local agent of Gelhaar Uniform Company, a corporation organized
under the laws of the US. Litton agreed to supply Gelhaar 7,770 dozens of soccer
jerseys.
The agreement stipulated that before it could collect from the bank on the letter of
credit, Litton must present an inspection certificate that the goods were in
satisfactory condition issued by Gelhaar’s agent in the PH, Empire Sales. On the
5th shipment consisting of 2,110 dozens of jerseys, Empire refused to issue the
certificate of inspection. Litton filed a complaint for specific performance with the
RTC alleging that the refusal to issue a certificate was without valid reason. Gelhaar
alleged that it was a foreign corporation not doing business in the PH and was
beyond the reach of local courts. It contended that Litton failed to allege and prove
that Gelhaar was doing business in the PH, which was required before summons
could be served under Rule 14.14
Held: According to Rule 14.14 ROC – service upon Gelhaar could be made in 3
ways: (1) by serving upon the agent designated in accordance with law to accept
service of summons; (2) if there is no resident agent, by service on the government
official designated by law to that effect; and (3) by serving on any officer or agent
of said corporation within the Philippines.
A court need not go beyond the allegations in the complaint to determine whether
or not a defendant foreign corporation is doing business for the purpose of Rule
14.14. In the case at bar, the allegation that Empire, for and in behalf of Gelhaar,
ordered 7,770 dozens of soccer jerseys from Litton and for this purpose Gelhaar
CORPORATION | PROF. G. DEE | CALLUENG
caused the opening of an irrevocable letter of credit in favor of Litton is a sufficient
allegation that Gelhaar was doing business in the Philippines.
In order that service of summons may be effected, the foreign corporation must be
doing business in the PH. This is a sine qua non requirement. This fact must first be
established in order that summons can made and jurisdiction acquired. The fact of
doing business must be established by appropriate allegations in the complaint.
It is not really the fact that there is only a single act done that is material. The other
circumstances of the case must be considered. Where a single act or transaction
of a foreign corporation is not merely incidental or casual but is of such character
as distinctly to indicate a purpose on the part of the foreign corporation to do other
business in the state, such act will be considered as constituting doing business.
In this case, Gelhaar’s act in purchasing soccer jerseys is within the ordinary course
of business of the company considering that it was engaged in the manufacture of
uniforms. The acts are of such a character as to indicate a purpose to do business.
What Constitutes Doing Business in the Philippines
Sec. 3 D, RA 7042 (FIA)
• Soliciting orders, service contracts, or opening offices;
• Appointing representatives, distributors domiciled in the Philippines or
who stay for a period or periods totaling 180 days or more;
• Participating in the management, supervision, or control of any domestic
business, firm, entity, or corporation in the Philippines;
• Any act or acts that imply a continuity of commercial dealings or
arrangements, and contemplate to some extent the performance of acts
or works or the exercise of some functions, normally incident to and in
progressive prosecution of the purpose and object of its organization.
What Constitutes Not Doing Business in the Philippines
A. Sec. 3(d) FIA and Sec. 1 FIA IRR
• Mere investment as shareholder and exercise of rights as investor;
• Having a nominee director or officer to represent its interest in the
corporation;
• Appointing a representative or distributor which transacts business in its
own name and for its own account;
• The publication of a general advertisement through any print or broadcast
media
• Maintaining a stock of goods in the PH solely for the purpose of having the
same processed by another entity in the PH
• Consignment by a foreign entity of equipment with a local company to be
used in the processing of products for export
• Collecting information in the Philippines
• 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
Mentholatum v Mangaliman Test:
WON there is continuity of transactions which are in pursuance of the normal
business of the corporation
GR: An isolated transaction, even if in pursuance of such business, cannot
constitute doing business
XPN: When the isolated transaction is intended to be the beginning of the series of
transactions
Principles regarding the right of a foreign corporation to bring suit in the Philippine
courts (Agilent Technologies v Integrated Silicon)
i. If a foreign corporation does business in the Philippines without a license, it
cannot sue before the Philippine courts
ii. If a foreign corporation is NOT DOING business in the Philippines, it needs no
license to sue on an isolated transaction or on a cause of action independent of
any business transaction
iii. If a foreign corporation does business in the Philippines without a license, a
Philippine citizen or entity which has contracted with such corporation cannot deny
the corporation’s corporate personality in a suit before the Philippine courts
iv. If a foreign corporation does business in the Philippines with the required
license, it can sue before Philippine courts on any transaction.
Mentholatum v Mangaliman (1941)
Facts: Mentholatum Co., Inc., is a Kansas corporation which manufactures
Mentholatum," a medicament and salve adapted for the treatment of colds, nasal
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irritations, chapped skin, insect bites, rectal irritation and other external ailments
of the body. The Philippine-American Drug co., Inc., is its exclusive distributing
agent in the Philippines authorized by it to look after and protect its interests.
Mentholatum Co., Inc., registered with the Bureau of Commerce and Industry the
word, "Mentholatum," as trade mark for its products. However, the Mangaliman
brothers prepared a medicament and salve named "Mentholiman" which they
sold to the public packed in a container of the same size, color and shape as
"Mentholatum.” Mentholatum Co., Inc. suffered damages from the diminution of
their sales and the loss of goodwill and reputation of their product in the market.
HELD: The true test seems to be whether the foreign corporation is continuing the
body or substance of the business or enterprise for which it was organized or
whether it has substantially retired from it and turned it over to another. The term
implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of, the purpose and
object of its organization.
The complaint clearly stated that the Philippine-American Drug Co., Inc., is the
exclusive distributing agent in the Philippine Islands of the Mentholatum Co., Inc.,
in the sale and distribution of its product known as the Mentholatum." It follows
that whatever transactions the Philippine-American Drug Co., Inc., had executed in
view of the law, the Mentholatum Co., Inc., being a foreign corporation doing
business in the Philippines without the license required by section 68 of the
Corporation Law, it may not prosecute this action for violation of trade mark and
unfair competition. Neither may the Philippine-American Drug Co., Inc., maintain
the action here for the reason that the distinguishing features of the agent being
his representative character and derivative authority
Agilent Technologies Singapore v Integrated Silicon Technology Philippines (2004)
Facts: Integrated Silicon Technology Philippines Corporation (“Integrated
Silicon”), a 100% foreign-owned domestic corporation engaged in the
manufacture and assembly of electronic components, entered into a 5-year Value
Added Assembly Services Agreement (“VAASA”) with Hewlett-Packard Singapore
(Pte.) Ltd., Singapore Components Operation (“HP Singapore”). With the consent
of Integrated Silicon, HP Singapore assigned all its rights and obligations in the
VAASA to petitioner Agilent Technologies Singapore (Pte) Ltd. (“Agilent”), a foreign
corporation not licensed to do business in the Philippines.
Integrated Silicon filed a complaint for specific performance and damages against
Agilent and its officers (Case 1 by Integrated Silicon), alleging that Agilent
breached the parties’ oral agreement to extend the VAASA. Agilent filed a separate
complaint for specific performance, recovery of possession, and sum of money with
replevin, preliminary mandatory injunction, and damages (Case 2 by Agilent),
against Integrated Silicon. Integrated Silicon filed a motion to dismiss the second
case filed against it by Agilent, on the grounds of lack of Agilent’s legal capacity to
sue,
Held: A foreign corporation without a license is not ipso facto incapacitated from
initiating suit in the Philippine courts. A license is necessary only when the foreign
corporation is “transacting” or “doing business” in the Philippines.
Section 133 of the Corporation Code provides the general rule that a foreign
corporation doing business in the Philippines without a license cannot maintain or
intervene in any action, suit or proceeding in any court or administrative agency in
the Philippines but such corporation may be sued and proceeded against in any
valid cause of action recognized under Philippine laws.
The exception to the general rule is the doctrine of estoppel. A party is estopped
from challenging the personality of a corporation after having acknowledged its
corporate entity by entering into a contract with it. The application of this doctrine
prevents 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.
What constitutes “doing”, “engaging in”, or “transacting” business in the
Philippines has been defined in jurisprudence on a case-to-case basis, and this
jurisprudential definition has been adopted in the Foreign Investment Act of 1991
give “doing business” a statutory definition.
Tests to determine whether or not a foreign corporation can be considered as
“doing business” in the Philippines (Mentholatum)
a. Substance Test: Whether the foreign corporation is continuing the body of the
business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another
b. Continuity Test: The term “doing business” implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of
CORPORATION | PROF. G. DEE | CALLUENG
acts or works or the exercise of some of the functions normally incident to, and in
the progressive prosecution of, the purpose and object of its organization.
The acts enumerated in the VAASA do not constitute “doing business” in the
Philippines. Agilent’s activities in the Philippines were confined to (1) maintaining
a stock of goods in the Philippines solely for the purpose of having the same
processed by Integrated Silicon, and (2) consignment of equipment with Integrated
Silicon to be used in the processing of products for export.
Merry Lynch Futures v CA (1992)
Facts: ML Futures (non-resident foreign corp) transacted with the Sps Lara through
MLPI (no license to operate as a commodity trading advisor). The Sps refused to
pay their debt to ML Futures, and so the latter filed a case for recovery of the debt.
The Sps filed a MTD, alleging that ML Futures had no legal capacity to sue and that
it was not the real party in interest.
Held: A party is estopped from challenging the personality of a corp after having
acknowledged the same by entering into a contract with it. This is to prevent a
person contracting with a foreign corp from later taking advantage of its
noncompliance with the statutes, when such person had already received the
benefits of the contract. The Laras received the benefits generated by their
business relations with ML Futures, such relations spanning a period of 7 yrs. They
wouldn’t have maintained it for such a length of time if they didn’t find the relations
profitable. Given these facts, and assuming that they knew from the outset that ML
Futures had no license to do business in the Phils and that MLPI had not authority
to act as a broker for it, it would be inequitable for the Laras to evade payment of
an otherwise legitimate debt despite suck knowledge.
Top Weld Manufacturing v ECED, SA (1985)
Facts: Top-Weld entered into separate licensing and distributorship agreements
with IRTI and ECED. It learned that the respondents were negotiating the transfer
of those agreements to another group, so Top-Weld brought suit to restrain them
from terminating the contracts. It alleged that under RA 5455, foreign firms can
only do business in the PH upon securing a written certificate from the Board of
Investments. Then, upon the grant of the certificate, a foreign firm cannot terminate
a license or agreement granted to a PH firm, unless for violation of the
license/agreement or for other just cause. Respondents allege, however, that Top-
Weld had in fact violated the contracts.
Held: There is no general rule or governing principle laid down as to what
constitutes the above, but they should be distinguished from a single or isolated
business transaction, or occasional, incidental, and casual transactions. If a single
act or transaction, however, is not merely incidental or casual, but indicates the
foreign corporation’s intention to do other business in the PH, then that act or
transaction constitutes “doing, engaging in, or transacting business in the PH.”
Mentholatum Co. v. Mangaliman test: whether the foreign corporation is
continuing the body or substance of the business or enterprise for which it was
organized or whether it has substantially retired from it and turned it over to
another. This implies continuity of commercial dealings and arrangements, and
contemplates the performance of acts or works normally incident to and in pursuit
of the purpose and object of its organization.
The respondents are “doing business” in the PH. When the respondents entered
into the disputed contracts with Top-Weld, they were carrying out the purposes for
which they were created, i.e. the manufacture and marketing of welding products
and equipment. The terms and conditions of the contracts also indicated that they
established a continuous business, not merely a temporary one. Moreover, they
admitted to negotiating with another group to transfer distributorship and
franchising rights, indicating intent to continue business, albeit without Top-Weld.
RA 5455 did in fact apply to the foreign firms in this case, since they are doing
business in the PH—hence, they should have first secured a written certificate as
required by the law. However, since Top-Weld was obligated to know that
requirement before entering into contracts with them, it is held in pari delicto with
respondents, and is ruled not entitled to the injunction asked for.
Antam Consolidated v CA (1986)
Facts: Because of a deal which Comphil defaulted on, Stokely (a foreign
corporation which has never done business in the PH) sued the petitioners who
were alleged to be disposing of Comphil’s assets to evade liability. The petitioners
filed a MtoD stating that Stokely has no capacity to sue because it has no license
to do business in the PH. They argue that by entering into the 3 contracts, they were
in fact engaging in business in the PH hence the requirement for a license.
Held: There is no general rule laid down as to what constitute as doing business.
Each case must be judged in the light of it peculiar circumstance. The true test,
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however, seems to be whether the foreign corporation is continuing the body or
substance of the business or enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of some of the functions
normally incident to, and in progressive prosecution of, the purpose and object of
its organization.
In the case at bar, the transactions entered into by the respondent with the
petitioners are not a series of commercial dealings which signify an intent on the
part of the respondent to do business in the Philippines but constitute an isolated
one which does not fall under the category or "doing business." The only reason
why the respondent entered into the second and third transactions with the
petitioners was because it wanted to recover the loss it sustained from the failure
of the petitioners to deliver the crude coconut oil under the first transaction and in
order to give the latter a chance to make good on their obligation.
The doctrine of lack of capacity to sue based on failure to first acquire a local
license is based on considerations of sound public policy. It was never intended to
favor domestic corporations who enter into solitary transactions with unwary
foreign firms and then repudiate their obligations simply because the latter are not
licensed to do business in the PH.
Cargill, Inc. v Intra Strata Assurance Corporation (2010)
Facts: Cargill, Inc. (petitioner) is a corporation organized and existing under the
laws of the State of Delaware. Petitioner and Northern Mindanao Corporation
(NMC) executed a contract dated whereby NMC agreed to sell to petitioner 20,000
to 24,000 metric tons of molasses. NMC was only able to deliver 219.551 metric
tons of molasses out of the agreed 10,500 metric tons. Thus, petitioner sent
demand letters to respondent claiming payment under the performance and surety
bonds. When respondent refused to pay, petitioner filed a complaint for sum of
money against NMC and respondent.
Held: Since respondent is relying on Sec. 133 of the Corporation Code to bar
petitioner from maintaining an action in Philippine courts, respondent bears the
burden of proving that petitioner’s business activities in the Philippines were not
just casual or occasional, but so systematic and regular as to manifest continuity
and permanence of activity to constitute doing business in the Philippines. Here,
respondent failed to prove that petitioner’s activities in the Philippines constitute
doing business as would prevent it from bringing an action.
Moreover, the IRR of RA 7042 provide under Sec. 1(f), Rule 1 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.
Most of the activities enumerated do not bring any direct receipts or profits to the
foreign corporation. Here, 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, not petitioner. To
constitute “doing business,” the activity undertaken in the Philippines should
involve profit-making.
Amendments to AOI or By-laws of Foreign Corporation
Sec. 130. Amendments to articles of incorporation or by-laws of foreign
corporations. -
CORPORATION | PROF. G. DEE | CALLUENG
Whenever the articles of incorporation or by-laws of a foreign corporation
authorized to transact business in the Philippines are amended, such foreign
corporation shall, within sixty (60) days after the amendment becomes
effective, file with the Securities and Exchange Commission, and in the proper
cases with the appropriate government agency, a duly authenticated copy of
the articles of incorporation or by-laws, as amended, indicating clearly in
capital letters or by underscoring the change or changes made, duly certified
by the authorized official or officials of the country or state of incorporation.
The filing thereof shall not of itself enlarge or alter the purpose or purposes for
which such corporation is authorized to transact business in the Philippines. (n)
Amended License
Sec. 131. Amended license. - A foreign corporation authorized to transact
business in the Philippines shall obtain an amended license in the event it
changes its corporate name, or desires to pursue in the Philippines other or
additional purposes, by submitting an application therefor to the Securities
and Exchange Commission, favorably endorsed by the appropriate government
agency in the proper cases. (n)
How Courts Acquire Jurisdiction over Foreign Corporation
Sec. 128. Resident agent; service of process. - The Securities and Exchange
Commission shall require as a condition precedent to the issuance of the
license to transact business in the Philippines by any foreign corporation that
such corporation file with the Securities and Exchange Commission a written
power of attorney designating some person who must be a resident of the
Philippines, on whom any summons and other legal processes may be served
in all actions or other legal proceedings against such corporation, and
consenting that service upon such resident agent shall be admitted and held
as valid as if served upon the duly authorized officers of the foreign corporation
at its home office. Any such foreign corporation shall likewise execute and file
with the Securities and Exchange Commission an agreement or stipulation,
executed by the proper authorities of said corporation, in form and substance
as follows:
"The (name of foreign corporation) does hereby stipulate and agree, in
consideration of its being granted by the Securities and Exchange Commission
a license to transact business in the Philippines, that if at any time said
corporation shall cease to transact business in the Philippines, or shall be
without any resident agent in the Philippines on whom any summons or other
legal processes may be served, then in any action or proceeding arising out of
any business or transaction which occurred in the Philippines, service of any
summons or other legal process may be made upon the Securities and
Exchange Commission and that such service shall have the same force and
effect as if made upon the duly-authorized officers of the corporation at its
home office."
Whenever such service of summons or other process shall be made upon the
Securities and Exchange Commission, the Commission shall, within ten (10)
days thereafter, transmit by mail a copy of such summons or other legal process
to the corporation at its home or principal office. The sending of such copy by
the Commission shall be necessary part of and shall complete such service. All
expenses incurred by the Commission for such service shall be paid in advance
by the party at whose instance the service is made.
In case of a change of address of the resident agent, it shall be his or its duty to
immediately notify in writing the Securities and Exchange Commission of the
new address. (72a; and n)
Sec. 127. Who may be a resident agent. - A resident agent may be either an
individual residing in the Philippines or a domestic corporation lawfully
transacting business in the Philippines: Provided, That in the case of an
individual, he must be of good moral character and of sound financial standing.
Rule 14.14. Service upon private foreign corporations. – If the defendant is a
foreign corporation, or a non-resident joint stock company or association,
doing business in the Philippines, service may be made on its resident agent
designated in accordance with law for that purpose, or, if there is no such
agent, on the government official designated by law to that effect, or any of its
officers or agents within the Philippines.
Laws Governing Licensed Foreign Corporations
Sec. 129. Law applicable. - Any foreign corporation lawfully doing business in
the Philippines shall be bound by all laws, rules and regulations applicable to
domestic corporations of the same class, except such only as provide for the
creation, formation, organization or dissolution of corporations or those which
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fix the relations, liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other or to the corporation. (73a)
Internal matters, such as the election and removal of directors and the right to
inspect corporate books are governed by the law under which the foreign
corporation was formed.
Prohibitions, limitations, and regulations imposed by law on domestic
corporations, such as those referring to the power of supervision of the SEC and
any other government agency, would likewise be applicable to all foreign
corporations licensed to do business in the Philippines
Income Tax Liability of Foreign Corporations
Doing Business in the Not Doing Business in
Philippines the Philippines
INCOME From all sources within All its gross receipts,
the Philippines without any qualifications
or exceptions
Deductions To the extent connected None
with income from the
Philippines
Tax Basis Net income Gross receipts
Merger of Licensed Foreign Corporation
Sec. 132. Merger or consolidation involving a foreign corporation licensed in
the Philippines. - One or more foreign corporations authorized to transact
business in the Philippines may merge or consolidate with any domestic
corporation or corporations if such is permitted under Philippine laws and by
the law of its incorporation: Provided, That the requirements on merger or
consolidation as provided in this Code are followed.
Whenever a foreign corporation authorized to transact business in the
Philippines shall be a party to a merger or consolidation in its home country or
state as permitted by the law of its incorporation, such foreign corporation
shall, within sixty (60) days after such merger or consolidation becomes
effective, file with the Securities and Exchange
Commission, and in proper cases with the appropriate government agency, a
copy of the articles of merger or consolidation duly authenticated by the proper
official or officials of the country or state under the laws of which merger or
consolidation was effected: Provided, however, That if the absorbed
corporation is the foreign corporation doing business in the Philippines, the
latter shall at the same time file a petition for withdrawal of it license in
accordance with this Title. (n)
Withdrawal of Foreign Corporation
Sec. 136. Withdrawal of foreign corporations. - Subject to existing laws and
regulations, a foreign corporation licensed to transact business in the
Philippines may be allowed to withdraw from the Philippines by filing a petition
for withdrawal of license. No certificate of withdrawal shall be issued by the
Securities and Exchange Commission unless all the following requirements are
met;
1. All claims which have accrued in the Philippines have been paid,
compromised or settled;
2. All taxes, imposts, assessments, and penalties, if any, lawfully due to the
Philippine Government or any of its agencies or political subdivisions have
been paid; and
3. The petition for withdrawal of license has been published once a week for
three (3) consecutive weeks in a newspaper of general circulation in the
Philippines.
Revocation and Suspension of License
Sec. 134. Revocation of license. - Without prejudice to other grounds provided
by special laws, the license of a foreign corporation to transact business in the
Philippines may be revoked or suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any fees as required by this Code;
2. Failure to appoint and maintain a resident agent in the Philippines as
required by this Title;
3. Failure, after change of its resident agent or of his address, to submit to the
Securities and Exchange Commission a statement of such change as required
by this Title;
4. Failure to submit to the Securities and Exchange Commission an
authenticated copy of any amendment to its articles of incorporation or bylaws
or of any articles of merger or consolidation within the time
prescribed by this Title;
CORPORATION | PROF. G. DEE | CALLUENG
5. A misrepresentation of any material matter in any application, report,
affidavit or other document submitted by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes, imposts, assessments or penalties, if any,
lawfully due to the Philippine Government or any of its agencies or political
subdivisions;
7. Transacting business in the Philippines outside of the purpose or
purposes for which such corporation is authorized under its license;
8. Transacting business in the Philippines as agent of or acting for and in behalf
of any foreign corporation or entity not duly licensed to do business in the
Philippines; or
9. Any other ground as would render it unfit to transact business in the
Philippines. (n)
Sec. 135. Issuance of certificate of revocation. - Upon the revocation of any
such license to transact business in the Philippines, the Securities and
Exchange Commission shall issue a corresponding certificate of revocation,
furnishing a copy thereof to the appropriate government agency in the proper
cases.
The Securities and Exchange Commission shall also mail to the corporation at
its registered office in the Philippines a notice of such revocation accompanied
by a copy of the certificate of revocation. (n)
Existing Licensed Foreign Corporation
Sec. 124. Application to existing foreign corporations. - Every foreign
corporation which on the date of the effectivity of this Code is authorized to do
business in the Philippines under a license therefore issued to it, shall continue
to have such authority under the terms and condition of its license, subject to
the provisions of this Code and other special laws. (n)
Chapter XIX Special and Miscellaneous Provisions
Special Corporations
1. Educational Corporations
a. Stock or non stock
- The Code recognizes both stock and non-stock educational corporations.
Art. XIV, Sec. 4 (2). Educational institutions, other than those established by
religious groups and mission boards, shall be owned solely by citizens of the
Philippines or corporations or associations at least sixty per centum of the
capital of which is owned by such citizens. The Congress may, however, require
increased Filipino equity participation in all educational institutions.
The control and administration of educational institutions shall be vested in
citizens of the Philippines.
No educational institution shall be established exclusively for aliens and no
group of aliens shall comprise more than one-third of the enrollment in any
school. The provisions of this subsection shall not apply to schools established
for foreign diplomatic personnel and their dependents and, unless otherwise
provided by law, for other foreign temporary residents.
If it incorporates as a non-stock corporation, the organization of its board of
trustees will be subject to the following special provisions
Sec. 108. Board of trustees. - Trustees of educational institutions organized as
non-stock corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation on the by-laws, the
board of trustees of incorporated schools, colleges, or other institutions of
learning shall, as soon as organized, so classify themselves that the term of
office of one-fifth (1/5) of their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before the expiration of a
particular term, shall hold office only for the unexpired period. Trustees elected
thereafter to fill vacancies caused by expiration of term shall hold office for five
(5) years. A majority of the trustees shall constitute a quorum for the transaction
of business. The powers and authority of trustees shall be defined in the by-
laws.
For institutions organized as stock corporations, the number and term of
directors shall be governed by the provisions on stock corporations. (169a)
From Sir: Generally, you can only change the term of the directors, here, you can
change BOT seats and the term
GR: Trustees elected to fill vacancies caused by expiration of term shall hold office
for five (5) years.
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XPN: AOI or by-laws shall provide
- 1/5 of their number of BOT shall expire every year.
- Trustees of an educational non-stock corporation must always be in multiples of
five
b. Incorporation under the Code
Sec. 106. Incorporation. - Educational corporations shall be governed by
special laws and by the general provisions of this Code. (n)
Sec. 107. Pre-requisites to incorporation. - Except upon favorable
recommendation of the Ministry of Education and Culture, the Securities and
Exchange Commission shall not accept or approve the articles of incorporation
and by-laws of any educational institution. (168a)
- The school, college or university must be granted government recognition.
- it must incorporate within ninety days from date of such recognition, unless it is
expressly exempted by the Secretary of Education for special reasons
- It must, in addition, file a copy of its AOI and by-laws with the DepEd
- Without the favorable recommendation of the DepEd Secretary, the SEC will not
accept or approve such articles
2. Religious Corporations
Sec. 109. Classes of religious corporations. - Religious corporations may be
incorporated by one or more persons. Such corporations may be classified into
corporations sole and religious societies.
Religious corporations shall be governed by this Chapter and by the general
provisions on non-stock corporations insofar as they may be applicable. (n)
a. Corporation Sole
Sec. 110. Corporation sole. - For the purpose of administering and managing,
as trustee, the affairs, property and temporalities of any religious
denomination, sect or church, a corporation sole may be formed by the chief
archbishop, bishop, priest, minister, rabbi or other presiding elder of such
religious denomination, sect or church. (154a)
A CORPORATION SOLE is an incorporated office, composed of a single individual
who may be a bishop, priest, minister, or presiding elder of a religious sect,
denomination or church
Its purpose is to administer and manage as trustee the property and affairs of such
religious sect, denomination or church
Sec. 111. Articles of incorporation. - In order to become a corporation sole, the
chief archbishop, bishop, priest, minister, rabbi or presiding elder of any
religious denomination, sect or church must file with the Securities and
Exchange Commission articles of incorporation setting forth the following:
1. That he is the chief archbishop, bishop, priest, minister, rabbi or
presiding elder of his religious denomination, sect or church and that he
desires to become a corporation sole;
2. That the rules, regulations and discipline of his religious denomination, sect
or church are not inconsistent with his becoming a corporation sole and do not
forbid it;
3. That as such chief archbishop, bishop, priest, minister, rabbi or
presiding elder, he is charged with the administration of the temporalities and
the management of the affairs, estate and properties of his religious
denomination, sect or church within his territorial jurisdiction, describing such
territorial jurisdiction;
4. The manner in which any vacancy occurring in the office of chief
archbishop, bishop, priest, minister, rabbi of presiding elder is required to be
filled, according to the rules, regulations or discipline of the religious
denomination, sect or church to which he belongs; and
5. The place where the principal office of the corporation sole is to be
established and located, which place must be within the Philippines.
The articles of incorporation may include any other provision not contrary to law
for the regulation of the affairs of the corporation. (n)
Sec. 112. Submission of the articles of incorporation. - The articles of
incorporation must be verified, before filing, by affidavit or affirmation of the
chief archbishop, bishop, priest, minister, rabbi or presiding elder, as the case
may be, and accompanied by a copy of the commission, certificate of election
or letter of appointment of such chief archbishop, bishop, priest, minister,
rabbi or presiding elder, duly certified to be correct by any notary public.
CORPORATION | PROF. G. DEE | CALLUENG
From and after the filing with the Securities and Exchange Commission of the
said articles of incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the preceding paragraph, such
chief archbishop, bishop, priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities, estate and properties of the
religious denomination, sect or church theretofore administered or managed
by him as such chief archbishop, bishop, priest, minister, rabbi or presiding
elder shall be held in trust by him as a corporation sole, for the use, purpose,
behalf and sole benefit of his religious denomination, sect or church, including
hospitals, schools, colleges, orphan asylums, parsonages and cemeteries
thereof. (n)
Sec. 113. Acquisition and alienation of property. - Any corporation sole may
purchase and hold real estate and personal property for its church, charitable,
benevolent or educational purposes, and may receive bequests or gifts for such
purposes. Such corporation may sell or mortgage real property held by it by
obtaining an order for that purpose from the Court of First Instance of the
province where the property is situated upon proof made to the satisfaction of
the court that notice of the application for leave to sell or mortgage has been
given by publication or otherwise in such manner and for such time as said
court may have directed, and that it is to the interest of the corporation that
leave to sell or mortgage should be granted. The application for leave to sell or
mortgage must be made by petition, duly verified, by the chief archbishop,
bishop, priest, minister, rabbi or presiding elder acting as corporation sole, and
may be opposed by any member of the religious denomination, sect or church
represented by the corporation sole: Provided, That in cases where the rules,
regulations and discipline of the religious denomination, sect or church,
religious society or order concerned represented by such corporation sole
regulate the method of acquiring, holding, selling and mortgaging real estate
and personal property, such rules, regulations and discipline shall control, and
the intervention of the courts shall not be necessary. (159a)
Sec. 114. Filling of vacancies. - The successors in office of any chief
archbishop, bishop, priest, minister, rabbi or presiding elder in a corporation
sole shall become the corporation sole on their accession to office and shall be
permitted to transact business as such on the filing with the Securities and
Exchange Commission of a copy of their commission, certificate of election, or
letters of appointment, duly certified by any notary public.
During any vacancy in the office of chief archbishop, bishop, priest, minister,
rabbi or presiding elder of any religious denomination, sect or church
incorporated as a corporation sole, the person or persons authorized and
empowered by the rules, regulations or discipline of the religious
denomination, sect or church represented by the corporation sole to administer
the temporalities and manage the affairs, estate and properties of the
corporation sole during the vacancy shall exercise all the powers and authority
of the corporation sole during such vacancy. (158a)
Sec. 115. Dissolution. - A corporation sole may be dissolved and its affairs
settled voluntarily by submitting to the Securities and Exchange Commission a
verified declaration of dissolution.
The declaration of dissolution shall set forth:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the corporation by the particular
religious denomination, sect or church;
4. The names and addresses of the persons who are to supervise the winding
up of the affairs of the corporation.
Upon approval of such declaration of dissolution by the Securities and
Exchange Commission, the corporation shall cease to carry on its operations
except for the purpose of winding up its affairs. (n)
2. Religious Societies
- Unlike corporation sole, religious societies are composed of more than one
person, Sec 116 authorizes the incorporation of such societies, which would thus
become corporations aggregate
Sec. 116. Religious societies. - Any religious society or religious order, or any
diocese, synod, or district organization of any religious denomination, sect or
church, unless forbidden by the constitution, rules, regulations, or discipline of
the religious denomination, sect or church of which it is a part, or by competent
authority, may, upon
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written consent and/or by an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its membership, incorporate for the
administration of its temporalities or for the management of its affairs,
properties and estate by filing with the Securities and Exchange Commission,
articles of incorporation verified by the affidavit of the presiding elder,
secretary, or clerk or other member of such religious society or religious order,
or diocese, synod, or district organization of the religious denomination, sect
or church, setting forth the following:
1. That the religious society or religious order, or diocese, synod, or
district organization is a religious organization of a religious
denomination, sect or church;
2. That at least two-thirds (2/3) of its membership have given their written
consent or have voted to incorporate, at a duly convened meeting of the body;
3. That the incorporation of the religious society or religious order, or
diocese, synod, or district organization desiring to incorporate is not
forbidden by competent authority or by the constitution, rules, regulations or
discipline of the religious denomination, sect, or church of which it forms a part;
4. That the religious society or religious order, or diocese, synod, or
district organization desires to incorporate for the administration of its
affairs, properties and estate;
5. The place where the principal office of the corporation is to be
established and located, which place must be within the Philippines; and
6. The names, nationalities, and residences of the trustees elected by the
religious society or religious order, or the diocese, synod, or district
organization to serve for the first year or such other period as may be prescribed
by the laws of the religious society or religious order, or of the diocese, synod,
or district organization, the board of trustees to be not less than five (5) nor
more than fifteen (15). (160a)
Barlin v Ramirez (1906)
Facts: Barlin appointed Ramirez as the parish priest in Camarines. Barlin refused
to surrender the Church, convent, cemetery and the sacred ornaments, and other
property of the Church. He filed a suit against Ramirez and the Municipality of
Lagonoy. Barlin also invoked that the RCC does not have a legal personality.
Held: The Roman Catholic Church is a juridical entity in the Philippines. The RCC
owns the questioned properties.
Close Corporations
Sec. 96. Definition and applicability of Title. - A close corporation, within the
meaning of this Code, is one whose articles of incorporation provide that: (1)
All the corporation's issued stock of all classes, exclusive of treasury shares,
shall be held of record by not more than a specified number of persons, not
exceeding twenty (20); (2) all the issued stock of all classes shall be subject to
one or more specified restrictions on transfer permitted by this Title; and (3) The
corporation shall not list in any stock exchange or make any public offering of
any of its stock of any class. Notwithstanding the foregoing, a corporation shall
not be deemed a close corporation when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled by another corporation which is not
a close corporation within the meaning of this Code.
Any corporation may be incorporated as a close corporation, except mining or
oil companies, stock exchanges, banks, insurance companies, public utilities,
educational institutions and corporations declared to be vested with public
interest in accordance with the provisions of this Code.
The provisions of this Title shall primarily govern close corporations: Provided,
That the provisions of other Titles of this Code shall apply suppletorily except
insofar as this Title otherwise provides.
Summary:
Sec. 97. Articles of Incorporation. The articles of incorporation of a close
corporation may provide:
1. For a classification of shares or rights and the qualifications for owning or
holding the same and restrictions on their transfers as may be stated therein,
subject to the provisions of the following section;
2. For a classification of directors into one or more classes, each of whom may
be voted for and elected solely by a particular class of stock; and
3. For a greater quorum or voting requirements in meetings of stockholders or
directors than those provided in this Code.
The articles of incorporation of a close corporation may provide that the
business of the corporation shall be managed by the stockholders of the
corporation rather than by a board of directors. So long as this provision
continues in effect:
1. No meeting of stockholders need be called to elect directors;
CORPORATION | PROF. G. DEE | CALLUENG
2. Unless the context clearly requires otherwise, the stockholders of the
corporation shall be deemed to be directors for the purpose of applying the
provisions of this Code; and
3. The stockholders of the corporation shall be subject to all liabilities of
directors.
The articles of incorporation may likewise provide that all officers or employees
or that specified officers or employees shall be elected or appointed by the
stockholders, instead of by the board of directors.
1. The AOI may provide for qualifications for owning or holding shares and for
reasonable restrictions on their transfer
2. They need not have a board of directors and the corporate business and affairs
may be managed directly by the stockholders, if the AOI so provide. In such a case,
the stockholders shall be deemed directors and shall have all the powers and be
subject to all the liabilities of directors. Those stockholders actively engaged in the
management and operation of the corporate business and affairs are held to strict
fiduciary duties to each other and are personally liable for torts
Sec. 100. Agreements by stockholders. –
1. Agreements by and among stockholders executed before the formation and
organization of a close corporation, signed by all stockholders, shall survive the
incorporation of such corporation and shall continue to be valid and binding
between and among such stockholders, if such be their intent, to the extent that
such agreements are not inconsistent with the articles of incorporation,
irrespective of where the provisions of such agreements are contained, except
those required by this Title to be embodied in said articles of incorporation.
2. An agreement between two or more stockholders, if in writing and signed by
the parties thereto, may provide that in exercising any voting rights, the shares
held by them shall be voted as therein provided, or as they may agree, or as
determined in accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by the stockholders, relating to
any phase of the corporate affairs, shall be invalidated as between the parties
on the ground that its effect is to make them partners among themselves.
4. A written agreement among some or all of the stockholders in a close
corporation shall not be invalidated on the ground that it so relates to the
conduct of the business and affairs of the corporation as to restrict or interfere
with the discretion or powers of the board of directors: Provided, That such
agreement shall impose on the stockholders who are parties thereto the
liabilities for managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively engaged in the management
or operation of the business and affairs of a close corporation, the stockholders
shall be held to strict fiduciary duties to each other and among themselves.
Said stockholders shall be personally liable for corporate torts unless the
corporation has obtained reasonably adequate liability insurance.
3. Stockholders may validly enter into voting and other agreements which may have
the effect of making them partners among themselves, or which tend to restrict or
interfere with the discretion or powers of the BOD.
Sec. 101. When board meeting is unnecessary or improperly held. - Unless the
by-laws provide otherwise, any action by the directors of a close corporation
without a meeting shall nevertheless be deemed valid if:
1. Before or after such action is taken, written consent thereto is signed by all
the directors; or
2. All the stockholders have actual or implied knowledge of the action and
make no prompt objection thereto in writing; or
3. The directors are accustomed to take informal action with the express or
implied acquiescence of all the stockholders; or
4. All the directors have express or implied knowledge of the action in question
and none of them makes prompt objection thereto in writing.
If a director's meeting is held without proper call or notice, an action taken
therein within the corporate powers is deemed ratified by a director who failed
to attend, unless he promptly files his written objection with the secretary of the
corporation after having knowledge thereof.
4. Directors of a close corporation may validly act even without a meeting if all of
them consent to it in writing, or all the stockholders know of the action and make
no written objection thereto, or such directors have been accustomed to do so with
the acquiescence of all stockholders, or all directors have express or implied
knowledge of the action and none of them promptly objects in writing
Sec. 102. Pre-emptive right in close corporations. – The pre-emptive
right of stockholders in close corporations shall extend to all stock to
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be issued, including reissuance of treasury shares, whether for money,
property or personal services, or in payment of corporate debts, unless
the articles of incorporation provide otherwise.
5. The pre-emptive right of the stockholders in close corporations is strengthened
and broadened to include all stocks issued or disposed of by the corporation,
whether in exchange for money, property or personal services or corporate debts.
The only limitations possible are those provided for in the AOI
Sec. 105. Withdrawal of stockholder or dissolution of corporation. - In addition
and without prejudice to other rights and remedies available to a stockholder
under this Title, any stockholder of a close corporation may, for any reason,
compel the said corporation to purchase his shares at their fair value, which
shall not be less than their par or issued value, when the corporation has
sufficient assets in its books to cover its debts and liabilities exclusive of capital
stock: Provided, That any stockholder of a close corporation may, by written
petition to the Securities and Exchange Commission, compel the dissolution of
such corporation whenever any of acts of the directors, officers or those in
control of the corporation is illegal, or fraudulent, or dishonest, or oppressive
or unfairly prejudicial to the corporation or any stockholder, or whenever
corporate assets are being misapplied or wasted.
6. In addition to all his other rights, any stockholder of a close corporation may, for
any reason, compel said corporation, to buy his shares at their fair value, not less
than par, provided only that the corporation has sufficient assets to cover its debts
and liabilities exclusive of capital stock
Sec. 104. Deadlocks. - Notwithstanding any contrary provision in the articles of
incorporation or by-laws or agreement of stockholders of a close corporation,
if the directors or stockholders are so divided respecting the management of
the corporation's business and affairs that the votes required for any corporate
action cannot be obtained, with the consequence that the business and affairs
of the corporation can no longer be conducted to the advantage of the
stockholders generally, the Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to arbitrate the dispute. In the
exercise of such power, the Commission shall have authority to make such
order as it deems appropriate, including an order: (1) canceling or altering any
provision contained in the articles of incorporation, by-laws, or any
stockholder's agreement; (2) canceling, altering or enjoining any resolution or
act of the corporation or its board of directors, stockholders, or officers; (3)
directing or prohibiting any act of the corporation or its board of directors,
stockholders, officers, or other persons party to the action; (4) requiring the
purchase at their fair value of shares of any stockholder, either by the
corporation regardless of the availability of unrestricted retained earnings in its
books, or by the other stockholders; (5) appointing a provisional director; (6)
dissolving the corporation; or (7) granting such other relief as the
circumstances may warrant.
A provisional director shall be an impartial person who is neither a stockholder
nor a creditor of the corporation or of any subsidiary or affiliate of the
corporation, and whose further qualifications, if any, may be determined by the
Commission. A provisional director is not a receiver of the corporation and does
not have the title and powers of a custodian or receiver. A provisional director
shall have all the rights and powers of a duly elected director of the corporation,
including the right to notice of and to vote at meetings of directors, until such
time as he shall be removed by order of the Commission or by all the
stockholders. His compensation shall be determined by agreement between
him and the corporation subject to approval of the Commission, which may fix
his compensation in the absence of agreement or in the event of disagreement
between the provisional director and the corporation.
7. In case of deadlocks, the SEC, in arbitrating the dispute, has wide powers in
settling the dispute, including the power to order the amendment of the articles of
incorporation, to appoint a provisional director, or even to dissolve the corporation
Amendments in close corporations
Sec. 103. Amendment of articles of incorporation. - Any amendment to the
articles of incorporation which seeks to delete or remove any provision required
by this Title to be contained in the articles of incorporation or to reduce a
quorum or voting requirement stated in said articles of incorporation shall not
be valid or effective unless approved by the affirmative vote of at least two-
thirds (2/3) of the outstanding capital stock, whether with or without voting
rights, or of such greater proportion of shares as may be specifically provided
in the articles of incorporation for amending, deleting or removing any of the
aforesaid provisions, at a meeting duly called for the purpose.
CORPORATION | PROF. G. DEE | CALLUENG
Transfer of shares in close corporations
Sec. 98. Validity of restrictions on transfer of shares. - Restrictions on the right
to transfer shares must appear in the articles of incorporation and in the by-
laws as well as in the certificate of stock; otherwise, the same shall not be
binding on any purchaser thereof in good faith. Said restrictions shall not be
more onerous than granting the existing stockholders or the corporation the
option to purchase the shares of the transferring stockholder with such
reasonable terms, conditions or period stated therein. If upon the expiration of
said period, the existing stockholders or the corporation fails to exercise the
option to purchase, the transferring stockholder may sell his shares to any third
person.
Sec. 99. Effects of issuance or transfer of stock in breach of qualifying
conditions. -
1. If stock of a close corporation is issued or transferred to any person who is
not entitled under any provision of the articles of incorporation to be a holder
of record of its stock, and if the certificate for such stock conspicuously shows
the qualifications of the persons entitled to be holders of record thereof, such
person is conclusively presumed to have notice of the fact of his ineligibility to
be a stockholder.
2. If the articles of incorporation of a close corporation states the number of
persons, not exceeding twenty (20), who are entitled to be holders of record of
its stock, and if the certificate for such stock conspicuously states such
number, and if the issuance or transfer of stock to any person would cause the
stock to be held by more than such number of persons, the person to whom
such stock is issued or transferred is conclusively presumed to have notice of
this fact.
3. If a stock certificate of any close corporation conspicuously shows a
restriction on transfer of stock of the corporation, the transferee of the stock is
conclusively presumed to have notice of the fact that he has acquired stock in
violation of the restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close corporation has been
issued or transferred has, or is conclusively presumed under this section to
have, notice either (a) that he is a person not eligible to be a holder of stock of
the corporation, or (b) that transfer of stock to him would cause the stock of the
corporation to be held by more than the number of persons permitted by its
articles of incorporation to hold stock of the corporation, or (c) that the transfer
of stock is in violation of a restriction on transfer of stock, the corporation may,
at its option, refuse to register the transfer of stock in the name of the
transferee.
5. The provisions of subsection (4) shall not applicable if the transfer of stock,
though contrary to subsections (1), (2) of (3), has been consented to by all the
stockholders of the close corporation, or if the close corporation has amended
its articles of incorporation in accordance with this Title.
6. The term "transfer", as used in this section, is not limited to a transfer for
value.
7. The provisions of this section shall not impair any right which the transferee
may have to rescind the transfer or to recover under any applicable warranty,
express or implied.
Miscellaneous Provisions
Sec. 137. Outstanding capital stock defined. - The term "outstanding capital
stock", as used in this Code, means the total shares of stock issued under
binding subscription agreements to subscribers or stockholders, whether or not
fully or partially paid, except treasury shares. (n)
Sec. 138. Designation of governing boards. - The provisions of specific
provisions of this Code to the contrary notwithstanding, non-stock or special
corporations may, through their articles of incorporation or their by-laws,
designate their governing boards by any name other than as board of trustees.
(n)
Sec. 139. Incorporation and other fees. - The Securities and Exchange
Commission is hereby authorized to collect and receive fees as authorized by
law or by rules and regulations promulgated by the Commission. (n)
Sec. 140. Stock ownership in certain corporations. - Pursuant to the duties
specified by Article XIV of the Constitution, the National Economic and
Development Authority shall, from time to time, make a determination of
whether the corporate vehicle has been used by any corporation or by business
or industry to frustrate the provisions thereof or of applicable laws, and shall
submit to the Batasang Pambansa, whenever deemed necessary, a report of its
findings, including recommendations for their prevention or correction.
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Maximum limits may be set by the Batasang Pambansa for stockholdings in
corporations declared by it to be vested with a public interest pursuant to the
provisions of this section, belonging to individuals or groups of individuals
related to each other by consanguinity or affinity or by close business interests,
or whenever it is necessary to achieve national objectives, prevent illegal
monopolies or combinations in restraint or trade, or to implement national
economic policies declared in laws, rules and regulations designed to promote
the general welfare and foster economic development.
In recommending to the Batasang Pambansa corporations, business or
industries to be declared vested with a public interest and in formulating
proposals for limitations on stock ownership, the National Economic and
Development Authority shall consider the type and nature of the industry, the
size of the enterprise, the economies of scale, the geographic location, the
extent of Filipino ownership, the labor intensity of the activity, the export
potential, as well as other factors which are germane to the realization and
promotion of business and industry.
Sec. 141. Annual report or corporations. - Every corporation, domestic or
foreign, lawfully doing business in the Philippines shall submit to the Securities
and Exchange Commission an annual report of its operations, together with a
financial statement of its assets and liabilities, certified by any independent
certified public accountant in appropriate cases, covering the preceding fiscal
year and such other requirements as the Securities and Exchange Commission
may require. Such report shall be submitted within such period as may be
prescribed by the Securities and Exchange Commission. (n)
Sec. 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. (n)
Sec. 143. Rule-making power of the Securities and Exchange Commission. –
The Securities and Exchange Commission shall have the power and authority to
implement the provisions of this Code, and to promulgate rules and regulations
reasonably necessary to enable it to perform its duties hereunder, particularly
in the prevention of fraud and abuses on the part of the controlling
stockholders, members, directors, trustees or officers. (n)
Sec. 144. Violations of the Code. - Violations of any of the provisions of this
Code or its amendments not otherwise specifically penalized therein shall be
punished by a fine of not less than one thousand (P1,000.00) pesos but not
more than ten thousand (P10,000.00) pesos or by imprisonment for not less
than thirty (30) days but not more than five (5) years, or both, in the discretion
of the court. If the violation is committed by a corporation, the same may, after
notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall not
preclude the institution of appropriate action against the director, trustee or
officer of the corporation responsible for said violation: Provided, further, That
nothing in this section shall be construed to repeal the other causes for
dissolution of a corporation provided in this Code. (190 1/2 a)
Sec. 145. Amendment or repeal. - No right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any
liability incurred by any such corporation, stockholders, members, directors,
trustees, or officers, shall be removed or impaired either by the subsequent
dissolution of said corporation or by any subsequent amendment or repeal of
this Code or of any part thereof. (n)
The Securities Regulation Code (RA No. 8799) (SEE BOC Reviewer)
1. Powers and Functions of SEC
a. Regulatory
b. Adjudicative
Section 5. Powers and Functions of the Commission.– 5.1. The commission
shall act with transparency and shall have the powers and functions provided
by this code, Presidential Decree No. 902-A, the Corporation Code, the
Investment Houses law, the Financing Company Act and other existing laws.
Pursuant thereto the Commission shall have, among others, the following
powers and functions:
(a) Have jurisdiction and supervision over all corporations, partnership
or associations who are the grantees of primary franchises and/or a
license or a permit issued by the Government;
CORPORATION | PROF. G. DEE | CALLUENG
(b) Formulate policies and recommendations on issues concerning the
securities market, advise Congress and other government agencies on
all aspect of the securities market and propose legislation and
amendments thereto;
(c) Approve, reject, suspend, revoke or require amendments to
registration statements, and registration and licensing applications;
(d) Regulate, investigate or supervise the activities of persons to ensure
compliance;
(e) Supervise, monitor, suspend or take over the activities of exchanges,
clearing agencies and other SROs;
(f) Impose sanctions for the violation of laws and rules, regulations and
orders, and issued pursuant thereto;
(g) Prepare, approve, amend or repeal rules, regulations and orders,
and issue opinions and provide guidance on and supervise compliance
with such rules, regulation and orders;
(h) Enlist the aid and support of and/or deputized any and all
enforcement agencies of the Government, civil or military as well as any private
institution, corporation, firm, association or person in the
implementation of its powers and function under its Code;
(i) Issue cease and desist orders to prevent fraud or injury to the
investing public;
(j) Punish for the contempt of the Commission, both direct and indirect,
in accordance with the pertinent provisions of and penalties prescribed
by the Rules of Court;
(k) Compel the officers of any registered corporation or association to
call meetings of stockholders or members thereof under its supervision;
(l) Issue subpoena duces tecum and summon witnesses to appear in
any proceedings of the Commission and in appropriate cases, order the
examination, search and seizure of all documents, papers, files and
records, tax returns and books of accounts of any entity or person under
investigation as may be necessary for the proper disposition of the cases before
it, subject to the provisions of existing laws;
(m) Suspend, or revoke, after proper notice and hearing the franchise or
certificate of registration of corporations, partnership or associations, upon
any of the grounds provided by law; and
(n) Exercise such other powers as may be provided by law as well as
those which may be implied from, or which are necessary or incidental
to the carrying out of, the express powers granted the Commission to achieve
the objectives and purposes of these laws.
5.2. The Commission’s jurisdiction over all cases enumerated under section 5
of Presidential Decree No. 902-A is hereby transferred to the Courts of
general jurisdiction or the appropriate Regional Trial Court: Provided, That the
Supreme Court in the exercise of its authority may designate the Regional Trial
Court branches that shall exercise jurisdiction over the cases. The Commission
shall retain jurisdiction over pending cases involving intracorporate disputes
submitted for final resolution which should be resolved within one (1) year from
the enactment of this Code. The Commission shall retain jurisdiction over
pending suspension of payment/rehabilitation cases filed as of 30 June 2000
until finally disposed.
2. Securities
a. Definition
Sec. 3.1. "Securities" are shares, participation or interests in a corporation or
in a commercial enterprise or profit-making venture and evidenced by a
certificate, contract, instruments, whether written or electronic in character. It
includes:
(a) Shares of stocks, bonds, debentures, notes evidences of indebtedness,
asset-backed securities;
(b) Investment contracts, certificates of interest or participation in a profit
sharing agreement, certifies of deposit for a future subscription;
(c) Fractional undivided interests in oil, gas or other mineral rights;
(d) Derivatives like option and warrants;
(e) Certificates of assignments, certificates of participation, trust certificates,
voting trust certificates or similar instruments
(f) Proprietary or nonproprietary membership certificates in corporations; and
(g) Other instruments as may in the future be determined by the
Commission.
b. Registration
Section 8. Requirement of Registration of Securities.–
8.1. Securities shall not be sold or offered for sale or distribution within the
Philippines, without a registration statement duly filed with and approved by
the Commission. Prior to such sale, information on the securities, in such form
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and with such substance as the Commission may prescribe, shall be made
available to each prospective purchaser.
8.2. The Commission may conditionally approve the registration statement
under such terms as it may deem necessary.
8.3. The Commission may specify the terms and conditions under which any
written communication, including any summary prospectus, shall be deemed
not to constitute an offer for sale under this Section.
8.4. A record of the registration of securities shall be kept in Register
Securities in which shall be recorded orders entered by the Commission with
respect such securities. Such register and all documents or information with
the respect to the securities registered therein shall be open to public
inspection at reasonable hours on business days.
8.5. The Commission may audit the financial statements, assets and other
information of firm applying for registration of its securities whenever it deems
the same necessary to insure full disclosure or to protect the interest of the
investors and the public in general.
c. Exempt Securities
Section 9. Exempt Securities. –
9.1. The requirement of registration under Subsection 8.1 shall not as a general
rule apply to any of the following classes of securities:
(a) Any security issued or guaranteed by the Government of the Philippines, or
by any political subdivision or agency thereof, or by any person controlled or
supervised by, and acting as an instrumentality of said Government.
(b) Any security issued or guaranteed by the government of any country with
which the Philippines maintains diplomatic relations, or by any state, province
or political subdivision thereof on the basis of reciprocity: Provided, That the
Commission may require compliance with the form and content for disclosures
the Commission may prescribe.
(c) Certificates issued by a receiver or by a trustee in bankruptcy duly approved
by the proper adjudicatory body.
(d) Any security or its derivatives the sale or transfer of which, by law, is under
the supervision and regulation of the Office of the Insurance
Commission, Housing and Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
(e) Any security issued by a bank except its own shares of stock.
9.2. The Commission may, by rule or regulation after public hearing, add to the
foregoing any class of securities if it finds that the enforcement of this Code
with respect to such securities is not necessary in the public interest and for the
protection of investors.
d. Exempt Transactions
Section 10. Exempt Transactions. –
10.1. The requirement of registration under Subsection 8.1 shall not apply to
the sale of any security in any of the following transactions:
(a) At any judicial sale, or sale by an executor, administrator, guardian or
receiver or trustee in insolvency or bankruptcy.
(b) By or for the account of a pledge holder, or mortgagee or any of a pledge lien
holder selling of offering for sale or delivery in the ordinary course of business
and not for the purpose of avoiding the provision of this Code, to liquidate a
bonafide debt, a security pledged in good faith as security for such debt.
(c) An isolated transaction in which any security is sold, offered for sale,
subscription or delivery by the owner therefore, or by his representative for the
owner’s account, such sale or offer for sale or offer for sale, subscription or
delivery not being made in the course of repeated and successive transaction
of a like character by such owner, or on his account by such representative and
such owner or representative not being the underwriter of such security.
(d) 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.
(e) The sale of capital stock of a corporation to its own stockholders exclusively,
where no commission or other remuneration is paid or given directly or
indirectly in connection with the sale of such capital stock.
(f) The issuance of bonds or notes secured by mortgage upon real estate or
tangible personal property, when the entire mortgage together with all the
bonds or notes secured thereby are sold to a single purchaser at a single sale.
(g) The issue and delivery of any security in exchange for any other
security of the same issuer pursuant to a right of conversion entitling the holder
of the security surrendered in exchange to make such conversion: Provided,
That the security so surrendered has been registered under this Code or was,
when sold, exempt from the provision of this Code, and that the security issued
and delivered in exchange, if sold at the conversion price, would at the time of
such conversion fall within the class of securities entitled to registration under
this Code. Upon such conversion the par value of the security surrendered in
CORPORATION | PROF. G. DEE | CALLUENG
such exchange shall be deemed the price at which the securities issued and
delivered in such exchange are sold.
(h) Broker’s transaction, executed upon customer’s orders, on any registered
Exchange or other trading market.
(i) Subscriptions for shares of the capitals stocks of a corporation prior to the
incorporation thereof or in pursuance of an increase in its authorized capital
stocks under the Corporation Code, when no expense is incurred, or no
commission, compensation or remuneration
is paid or given in connection with the sale or disposition of such securities, and
only when the purpose for soliciting, giving or taking of such subscription is to
comply with the requirements of such law as to the percentage of the capital
stock of a corporation which should be subscribed before it can be registered
and duly incorporated, or its authorized, capital increase.
(j) The exchange of securities by the issuer with the existing security holders
exclusively, where no commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange.
(k) The sale of securities by an issuer to fewer than twenty (20) persons in the
Philippines during any twelve-month period.
(l) The sale of securities to any number of the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan maintained by the Government of the
Philippines or any political subdivision thereof or manage by a bank or
other persons authorized by the Bangko Sentral to engage in trust
functions;
(v) Investment company or;
(vi) Such other person as the Commission may rule by determine
as qualified buyers, on the basis of such factors as financial
sophistication, net worth, knowledge, and experience in financial and
business matters, or amount of assets under management.
10.2. The Commission may exempt other transactions, if it finds that the
requirements of registration under this Code is not necessary in the public
interest or for the protection of the investors such as by the reason of the small
amount involved or the limited character of the public offering.
10.3. Any person applying for an exemption under this Section, shall file with
the Commission a notice identifying the exemption relied upon on such form
and at such time as the Commission by the rule may prescribe and with such
notice shall pay to the Commission fee equivalent to one-tenth (1/10) of one
percent (1%) of the maximum value aggregate price or issued value of the
securities.
(SEE BOC REVIEWER on SRC)
APPENDIX
I. Nationality Requirement: EO 184. Negative List
103
 NO FOREIGN EQUITY
1. Mass media except recording (Art. XVI, Sec. 11 of the
Constitution; Presidential Memorandum dated 05 May
1994)
2. Practice of professions 1 (Art. XII, Sec. 14 of the
Constitution, Sec. 1 of RA 5181, Sec. 7.j of RA 8981)
a. Pharmacy (RA 5921)
b. Radiologic and x-ray technology (RA 7431)
c. Criminology (RA 6506)
d. Forestry (RA 6239)
e. Law (Art. VIII, Section 5 of the Constitution; Rule
138, Sec. 2 of the Rules of Court of the Philippines)
3. Retail trade enterprises with paid-up capital of less
than US$2,500,000 (Sec. 5 of RA 8762) 2
4. Cooperatives (Ch. III, Art. 26 of RA 6938)
5. Private security agencies (Sec. 4 of RA 5487)
6. Small-scale training (Sec. 3 of RA 7076)
7. Utilization of marine resources in archipelagic
waters, territorial sea, and exclusive economic zone as
well as small-scale utilization of natural resources in
rivers, lakes, bays, and lagoons (Art. XII, Sec. 2 of the
Constitution)
8. Ownership, operation and management of cockpits
(Sec. 5 of PD 449)
9. Manufacture, repair, stockpiling and/or distribution
of nuclear weapons (Art. II, Sec. 8 of the Constitution) 3
10. Manufacture, repair, stockpiling and/or
distribution of biological, chemical and radiological
weapons and anti-personnel mines (various treaties to
which the Philippines is a signatory and conventions
supported by the Philippines) 3
11. Manufacture of firecrackers and other pyrotechnic
devices (Sec. 5 of RA 7183)
UP TO 20% FOREIGN EQUITY
12. Private radio communications network (RA 3846)
UP TO 25% FOREIGN EQUITY
13. Private recruitment, whether for local or overseas
employment (Art. 27 of PD 442)
14. Contracts for the construction and repair of locally-
funded public works (Sec. 1 of Commonwealth Act No.
541, Letter of Instruction No. 630) except:
a. Infrastructure/development projects covered in RA
7718; and
b. Projects which are foreign funded or assisted and
required to undergo international competitive bidding
(Sec. 2 (a) of RA 7718)
15. Contracts for the construction of defense-related
structures (Sec. 1 of CA 541)
UP TO 30% FOREIGN EQUITY
Advertising (Art. XVI, Sec. 11 of the Constitution)
UP TO 40% FOREIGN EQUITY
From List A: Foreign Ownership is Limited by Mandate
of the Constitution and Specific Laws
17. Exploration, development and utilization of natural
resources (Art. XII, Sec. 2 of the Constitution) 5
18. Ownership of private lands (Art. XII, Sec. 7 of the
Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA
9182)
19. Operation of public utilities (Art. XII, Sec. 11 of the
Constitution; Sec. 16 of CA 146) 6 7
20. Educational institutions other than those
established by religious groups and mission boards
(Art. XIV, Sec. 4 of the Constitution) 8
21. Culture, production, milling, processing, trading
except retailing, of rice and corn and acquiring, by
barter, purchase or otherwise, rice and corn and the by-
products thereof (Sec. 5 of PD 194) 9
22. Contracts for the supply of materials, goods and
commodities to government-owned or controlled
corporation, company, agency or municipal corporation
(Sec. 1 of RA 5183)
23. Facility operator of an infrastructure or a
development facility requiring a public utility franchise
(Art. XII, Sec. 11 of the Constitution; Sec. 2 (a) of RA
7718)
24. Operation of deep sea commercial fishing vessels
(Sec. 27 of RA 8550)
25. Adjustment companies (Sec. 332 of RA 10607
amending PD 612)
26. Ownership of condominium units (Sec. 5 of RA
4726)
From List B: Foreign Ownership is Limited for Reasons
of Security, Defense, Risk to Health and Morals and
Protection of Small- and Medium-Scale Enterprises
1. Manufacture, repair, storage, and/or distribution of
products and/or ingredients requiring Philippine
National Police (PNP) clearance:
a. Firearms (handguns to shotguns), parts of firearms
and ammunition therefore, instruments or
implements used or intended to be used in the
manufacture of firearms
b. Gunpowder
c. Dynamite
d. Blasting supplies
e. Ingredients used in making explosives
i. Chlorates of potassium and sodium
ii. Nitrates of ammonium, potassium, sodium
barium, copper (11), lead (11), calcium and
cuprite
iii. Nitric acid
iv. Nitrocellulose
v. Perchlorates of ammonium, potassium and
sodium
vi. Dinitrocellulose
vii. Glycerol
viii. Amorphous phosphorus
ix. Hydrogen peroxide
x. Strontium nitrate powder
xi. Toluene
f. Telescopic sights, sniper scope and other similar
devices
However, the manufacture or repair of these items may
be authorized by the Chief of the PNP to non-Philippine
nationals; Provided that a substantial percentage of
output, as determined by the said agency, is exported.
Provided further that the extent of foreign equity
ownership allowed shall be specified in the said
authority/clearance (RA 7042 as amended by RA
8179).
2. Manufacture, repair, storage and/or distribution of
products requiring Department of National Defense
(DND) clearance:
 CORPORATION | PROF. G. DEE | CALLUENG

a. Guns and ammunition for warfare

b. Military ordnance and parts thereof (e.g.,
torpedoes, depth charges, bombs, grenades,
missiles)
c. Gunnery, bombing and fire control systems and
components
d. Guided missiles/missile systems and components
e. Tactical aircraft (fixed and rotary-winged), parts
and components thereof
f. Space vehicles and component systems
g. Combat vessels (air, land and naval) and
auxiliaries
h. Weapons repair and maintenance equipment
i. Military communications equipment
j. Night vision equipment
k. Stimulated coherent radiation devices,
components and accessories
l. Armament training devices
m. Others as may be determined by the Secretary of
the DND
However, the manufacture or repair of these items may
be authorized by the Secretary of National Defense to
non-Philippine nationals; Provided that a substantial
percentage of output, as determined by the said
agency, is exported. Provided further that the extent of
foreign equity ownership allowed shall be specified in
the said authority/clearance (RA 7042 as amended by
RA 8179).
3. Manufacture and distribution of dangerous drugs (RA
7042 as amended by RA 8179)
4. Sauna and steam bathhouses, massage clinics and
other like activities regulated by law because of risks
posed to public health and morals (RA 7042 as
amended by RA 8179)
5. All forms of gambling (RA 7042 as amended by RA
8179) except those covered by investment agreements
with PAGCOR (PD 1869 as amended by RA 9487)
6. Domestic market enterprises with paid-in equity
capital of less than the equivalent of US$200,000 (RA
7042 as amended by RA 8179)
7. Domestic market enterprises which involve advanced
technology or employ at least fifty (50) direct
employees with paid-in equity capital of less than the
equivalent of US$100,000 (RA 7042 as amended by
RA 8179)

105