BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
Dec. 14 2016 Acosta, M.
TITLE III-
BOARD OF DIRECTORS/TRUSTEES AND OFFICERS
Section 23. The board of directors or trustees. –
Unless otherwise provided in this Code, the
corporate powers of all corporations formed under
this Code shall be exercised, all business
conducted and all property of such corporations
controlled and held by the board of directors or
trustees to be elected from among the holders of
stocks, or where there is no stock, from among the
members of the corporation, who shall hold office
for one (1) year until their successors are elected
and qualified. (28a)
Every director must own at least one (1) share of the
capital stock of the corporation of which he is a
director, which share shall stand in his name on the
books of the corporation. Any director who ceases
to be the owner of at least one (1) share of the
capital stock of the corporation of which he is a
director shall thereby cease to be a director.
Trustees of non-stock corporations must be
members thereof. A majority of the directors or
trustees of all corporations organized under this
Code must be residents of the Philippines.
Section 23 is that the powers of a corporation,
the ownership of property of a corporation are vested in
the board of directors. The board of directors is
considered the body politic that which is vested the
exercise of the powers of the corporation and the holding
of the property of such corporation and this form is
constituted by the stockholders or members of a
corporation.
For stocks and profit corporation, the general
rule is that the term of the board of directors, those
selected to the board is 1 year but there is an automatic
holdover clause in section 23, if a successor is not
elected then they continue with their position as director
because section 23 says they shall hold office for one (1)
year and until their successors are elected and qualified.
Question, you are not yet a stockholder of a
corporation, the board elects you as a member of the
board, Can you then be granted xx for the secretary of
the corporation one share because what is needed is
every director must own at least one share of the capital
stock of the corporation of which he is a director you‟ll be
granted one share so that you will qualify.
 The issue is when should you be a stockholder
holder of the corporation? At the time of election
or at the time of qualification?
From you constitutional law, you know that to
qualify to a position is a technical term. For government
1
office you qualify to a position when? To qualify for office
means you accept the burden of office, so take an oath,
so you make it your own. Mamili ka man, kung di ka
maapoint, mao gihapon di ka kalingkod.
What is the age qualification of a senator? The
qualifications are in the Constitution; they cannot be
increased or decreased. It is determined by the
Constitution, we are talking about qualifications. To
qualify needs to take oath. When do you have to that age
when you are president? You have to meet the
requirements when you qualify, when you run you may
not yet be of that age but when you take oath you must
be that is the case of Benigno Aquino vs COMELEC
that is when the Supreme Court says the qualifications
must be met when they take oath.
 So if you are elected and you are not yet a
shareholder then after you are elcted you are
granyted the privilege of buying one share so that
yo can sit, is that alright?
Yes that’s alright. You satisfy section 23
because when you are elected as director you do not
become director right away you first accept the position,
you do not take an oath but you attend a meeting now
you are director.
Remember the board of directors is a body
politic. When you sit as director then you are a director, a
member of a body politic known as the board of directors.
So disabuse yourself of the pedestrian idea na pag
director na tag iya na siya sa corporation- kana ligas lang
na sa dila-pero mahulog na sa pagka-ignorante, ayaw
mug suod ana.ayaw. abogado ka, technical imong
panghuna-huna, di gani ni na mapakita sa Bar, hagbong
ka do. Hagbong ka. You should know what section 23
says.
Nay director musud sa opisina muingon na nga
kini kinahanglan ni nya wa may authority wa may
resolution, kuyaw na kay kanang nisulod ug nisulti niana
dili mana siya director, director na siya kung nilingkod na
siya in the body politic during a regular or special meeting
and there is a quorum that is. And the one who first
certifies to that is the secretary of the corporation, bisag
gani pag-abli ug account sa bangko, the bank will require
you a resolution of the board. Unya ng resolution di mana
ma xx didto sa bangko- so therefor is a secretary‟s
certification.
So there is a resolution and it is attested by the
secretary. This resolution shall be considered as directive
to the depositary bank to act in accordance with the
resolution of the corporation. So it‟s the secretary who
attests and then it is submitted.
Now, that‟s not enough, the bank will require the
article of incorporation and the by-laws of the corporation.
Why? To inform the bank that it is a real corporation.
Pangayuon pa na nila copy of certificate of incorporation.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
Ug wana dinha patay and bangko tulisukon sa internal
auditor, musipyat gani ang internal auditor ana,
madakpan gani ka sa BSP, tulion ka sa BSP. Mao ng
ginatawag na essentials of AYC, unsa manang ayc, bag-
o na chicken unsa na kompetensya na sa KFC? What is
the rule now is know your client, AYC, ang banko dapat
nakaila sa iyang client. Unsa ng kwartaha, din na gikan?
So part of its obligation is to know. So that‟s important.
 How does the corporation act through the board
of directors?
Always the resolutions.
Now there are certain things that the board can
delegate which binds the corporation. For example hiring
and firing. That can be delegated to lower officers,
department heads, and that is presumed as authority.
Now, the requirement is a majority of the
directors or trustees of corporations organized under this
code must be residents of the Philippines. Why
residents? So that you will be within the reach of court
processes. Serving of summons, serving you a copy of
the information. How can you be served if you‟re not in
the Philippines. You have to be resident of the
Philippines. So majority must be within reach of the
leagal processes.
Now it says here any director who ceases to be
an owner of at least one share of the capital stock of the
corporation of which he is a director. Di na siya director.
One share ran a ang gikinahanglan to be a director but,
if you should use that one share-wa najud kay share ipso
facto you cease to be a director andif you continue to sit
down there, it is as if your presence is not counted as
part of quorum and your vote, with more reason is not
valid vote. Because you have ceased to be a director.
 Now, can the by-laws of the corporation put
addition qualifications?
The answer is yes, you can put additional
qualifications for director, especially when you come to
close corporations, its with special qualifications because
it‟s a close corporation with not more than 20
stockholders. That‟s the rule in close corporation, there
are special qualifications.
 Now, can you put additional disqualification
because disqualification by law is found in
section 27?
Section 27. Disqualification of directors, trustees
and officers. No person convicted by final judgment
of an offense punishable by imprisonment for a
period exceeding six years, or a violation of this
Code committed within 5 years prior to the date of
his election or appointment , shall qualify as a
director, trustee or officer of any corporation.
Now, can the bylaws add disqualifications? That was
answered in the decided case of Gokongwei vs. SEC.
(G.R. No. L-45911 April 11, 1979)
2
Mr John Gokongwei for many years was
accumulating stocks of San Miguel Corp. How did he
accumulate? Naa manay mga extra kwarta iyang
corporation, papalition na niyag shares sa san Miguel.
Papaliton na niys nga papalitioon til finally he had
sufficient number to be elected. Why is that possible?
Because of cumulative voting. Remember, I told you,
the corporation that is stock and profit cannot deny
cumulative voting.
Cumulative voting has two tenets:
1. First tenet is you have as many votes as
the number of shares multiplied by the
number of directors.
So if there are 9 directors to be elected and you have ten
shares what is your total number of votes? 90 di ba. 9
mana x 10 shares so naa kay 90.
2. Now, the Second tenet says you can cast
those ballots, those votes- divide it equally
among the candidates or put more in one
candidate than the other or cumulate the
entire amount of the votes and put it in just
lone candidate.
That is cumulative voting, that cannot be denied,
why? Because if it were not for that the minority would
have no representation at all.
So Gokongwei accumulated and announced
that he was running for director of San Miguel. You know
in some corporation, especially with very wide ownership
base, they have a cutoff date (PLDT, Meralco). Their
cutoff date is normally 2 to 3 months before the annual
meeting. So di ka mahimo nga pag sulod nimo sa annual
meeting na dira pa ka muabiso nga mudagan ka, too late
na. Because it must be 3 months before you have to
announce your candidacy with the secretary of the
corporation and then you have to qualify your votes
because from that date the stock and transfer book is
close. So you buy shares of that corporation beyond that
date, you can no longer exercise your vote during the
annual meeting because the transfer of ownership of the
shares will no longer be recorded in the book. Cut-off
date that is allowed.
Now, when Gokongwei announced he was
informed by the secretary of the board of San Miguel that
you are disqualified from running. Why? Because of an
amendment of the bylaws; it says no stockholder who is
engaged in a business similar to, in competition with or in
contrary any of the businesses of San Miguel Corporation
is qualified to be director of San Miguel.
Now, at that time unsa may business ni
Gokongwei? Gokongwei had Presto Ice cream, unya na
pa siyay Robina feeds. And San Miguel had what? What
is the similar business of San Miguel? B-meg feeds. And
then Gokongwei had Robina chicken and San Miguel had
Magnolia. So very antagonistic businesses. So he was
informed that he was disqualified. He then raises it with
the SEC, and the SEC upheld the stand of the board of
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
directors so Gokongwei had to go question of law to the
Supreme Court.
And the Supreme Court said: There is a
presumption in the Corporation Code that once you
are a stockholder of a corporation you are qualified
to be a director because all that is needed by way of
qualification is that you are an owner of at least one
share. So you are presumed to be qualified.
Now, if the board says that you are not
qualified, then the burden of proof falls on the board
to prove that you are disqualified. So there must be a
hearing, an internal investigation.
What are these business engagements that is
qualifying? Presto ice cream , unsa mana iyaha, is it
really your business because you can begin to argue.ang
mga tag-iya, let us say Robinsons Land that holds title to
the shares of stocks xx is a real property. Now, San
Miguel had San Miguel Properties but its not moving
stock xx. So you have to prove that he is disqualified.
Now, the Supreme Court ask was there an
opportunity for Mr. Gokongwei to present his side? Was
he given an opportunity? The board could not respond
that is why the decision of the Supreme Court in
Gokongwei vs. SEC is to remand the case to the SEC
and to conduct hearing to show that what the board
of San Miguel claim is proven by substantial
evidence.
Now Gokongwei did not fight it anymore, at that
point they arrived at a compromise that Gokongwei must
first made a director of San Miguel International, so
HongKong corporation. San Miguel has sold so many of
its arms. It sold CocaCola, it used to be that CocaCola is
under San Miguel then it was sold to CocaCola Australia
then when Cojuangco came back, he bought it back and
the 3 or 4 years ago San Miguel sold it to CocaCola
Mexico Femsa. Now the owner is Mexico, lain na dili na
na San Miguel and CocaCola. When Cojuangco took
over, he wanted to raise money to convert the coco levy
shares into paper shares, so he sold Magnolia ice cream
to Nestle but he did not sell the name, he retained the
name and they just sign a non-competition clause for 5
years, which is already valid according to the Supreme
Court. So he waited and after 5 years he revived the
Magnolia ice cream. They said Cojuangco was wise
because what he sold was old equipment already.
 Can a corporation provide for this qualification?
Yes. Why? Because just like any person
according to the Supreme Court, a corporation has a
right to self-defense; defend yourself against
competitors especially when they make undue
advantage. If you find somebody there, you‟re
competitor, sitting right in the board, then your first move
is already known by your competitor.
3
So the real controlling interest in corporation never goes
into discussion in the board Buang-buang ka kung mag
sige ka pag dicuss dira, the board meeting is not for
discussion. The board meeting is for voting for the
corporation to pay action. If you want a discussion then
you call the corporate directors, mag-inom mu,
magdiscuss mu. Pero ayaw paghuna-huna nga
magmeeting ka nya magkumbinsihay mu, samuk-samuk
ra naa.
Remember, the record breaking products came
into existence not by discussion but by the risk-taking
individuals. Kana sila ang musugod ana. Mao ng
makatawa ko anang mga magkuhag marketing, survey,
unsa pa na. gisurvey ban a ni Bill Gates iyang mga unsa
ni, Microsoft, wa mana siyay survey2x ana. Way
survey2x. kanang mga survey tinonto na.
(Story of why Gokongwei was not allowed, was
an enemy of existing corporation)
Ayala was already before an antagonistic
business, the same as San Miguel. Ang Ayala niadto
mao man ang tag-iya sa Purefoods. Xx Ayala had many
businesses that are in competition with San Miguel and
yet he was not disqualified, why? Because Ayala first
cousin of the Zobels, because they say Gokongwei failed
the Hispanic test. How do you say in Spanish “why oh
why my love” and then say that with a Chinese accent,
you will know why Gokongwei was disqualified. In
Spanish it is “porque mi amor? “ Gokongwei was
disqualified because he cannot pronounce it.
Now I would just like to point out the formula for knowing
how many votes how many shares you need to elect that
is found in almost all commentaries:
Formula for knowing how many votes how many
shares you need to elect :
(ab/c + 1) + 1 = the shares that you need or the
votes that you need to elect the director.
a = total of standing shares
b = for the desired number of directors to be
elected
c = the total number of directors to be voted
You have to know that, if you have in-house
secretary, the controlling interest will tell you, do we have
enough votes, we need this number of votes, and we
only have this number of shares we have to make up the
difference by getting proxies. Then you go to the list,
panawgan na nimo sa cellphone kuhaon na nimo ilang
proxy. Very important.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
If you want to see a hotly contested election, you read
the case
GSIS by President General Manager Winston Garcia
vs. Anthony Rosete et al. (GR 183905 April 16, 2009)
basaha na kay grabe kaayung away ana.
Anthony Rosete was the secretary of the corporation the
board of directors of Meralco and Winston Garcia was
the surrogate of Danding Cojuangco and Ramon Ang
because they want to take over Meralco.They wanted
the votes, voting to be postponed because they wanted
to examine the proxies of the Lopez. Xx so finally the
Lopez could not sustain anymore, Danding Cojuangco
was favored by Gloria Arroyo who ordered GSIS and
SSS to sell the shares of GSIS that they had in Meralco
to Danding Cojuangco.
Cojuangco got it at 50, niadto Meralco was already at
40, patubuan lang niya gamay aron acceptable to the
public so GSIS sold to him Pag-Ibig sold to him SSS
LandBank sold to him. Kaingon jud ka makakuha na
sila, wa man mubaligya si Lopez, ingon siya over my
dead body. There was already Lopez Corporation which
used to be BenPres Corp; Benjamin Lopez and
Preciosa Lopez. BenPres was the holding company of
Lopez.
Nganong di naman sila mukuha ug dugang kwarta to
put up for Meralco ? Because the Lopez are now in the
business more profitable than distributing electricity,
they are now in power generation, they generate
something like 15 thousand megawatts 1/3 of that
geothermal, EDC they bought that during Estrada‟s
time. Then the 10 thousand is liquefied natural gas in
Batangas from Malampaya then under water pipe (that‟s
the single biggest enterprise investment, that is 10B US
dollar) so the Lopez are there, they put money there.
Niya labad sa ulo pa ni niya nga sige kag distribute ug
xx, sige lang kag singgit, daghan kaayog kalaban nimo.
Why did Pangilinan go into that business? Nga gamay
ra man ka ha ang margin, if your total sales is 300B
only 30M of that is yours the rest you pay to the power
producers, the owners of the xx that you secure. So why
did Pangilinan go into that? Because of the new EPIRA
law. The new EPIRA law says if you are a power
distributor you can now produce up to ½ of the power
that you distribute, that is why appointees did not grant
this coal plant. Dinha sila musapi, dinha mudistribute
.That‟s the new EPIRA law.
So read that case, so that you‟ll know what
happens when there is a “proxy fight”, sa ato pa, naay
away sa election. The secretary of Meralco used to be
my classmate xx
4
The Lopez only has 21%. Lopez already go to
Pangilinan, I will sell it to you. Why? It‟s a question of
profit. This guy Cojuangco very lax during Martial law
with Marcos I can never sell it to you. So he had the word
of Lopez that he is going to sell, but the thing is you not
are secure in the control of the corporation just by 21%
so Pangilinan had to buy in the open market slowly.
Pas2x kag palit, musirit tug saka ang presyo sa shares.
In fact it was tiing already because he was buying and
buying. And that is why they did not get wanted in the.
They wanted a meeting right away before Cojuangco
would position himself because the GSIS and SSS
shares that he bought were already 18% of outstanding
hapit na sila mapareho. Fight sila. Fight. Read that case,
very interesting. Mura lag sine.
December 15 2016, Tongo K
Remember in these four kinds of corporations there is an
additional requirement of an independent director.
 What are the kinds of corporations that must have
an independent director?
That is found in Securities and Commission.Code and
which is now embodied in Sec memorandum circular no.
06
SEC MEMORANDUM CIRCULAR NO.6
It shall apply to registered corporations and to
branches or subsidiaries of foreign corporations
operating in the Philippines that
(a) sell equity and/or debt securities to the public that
are required to be registered with the Commission, or
(b) have assets in excess of Fifty Million Pesos and
at least two hundred (200) stockholders who own at
least (100) shares each of equity securities, or
(c) whose equity securities are listed on an
Exchange; or
(d)are grantees of secondary licenses from the
Commission
1. Shall apply to listed corporations..
So you are a corporation in the Philippines and
you list your shares of stock in the Philippine stock
exchange. You buy and sell. Your stocks are sold and
bought through the Philippine Stock exchange, then you
must comply with the independent director.
The requirement is, atleast 20% of your
directors must be independent or 2 directors whichever is
less. 20% or two whichever is the lesser. So normally it is
two. Some corporation increase their number to give
them more credibility.
So you are listed.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
2. Have assets in excess of Fifty Million Pesos and at
least two hundred (200) stockholders who own at least
(100) shares each of equity securities,
Then you must have an independent director.
That is what happened to ONB. ONB had more than 200
stockholders before. It was not listed in the stockmarket
but it had more than 50 million assets. So there has to be
an independent director. I was one of the Independent
Director.
So we went through 3 mergers. ONB in its 15
year life went through 3 mergers. So at least I have some
idea of how complicated the process is on merging.
The beauty about merging if you are a rural
bank is that, it has a very good tax benefit. The tax
benefit is you are exempt from Gross Sales Tax (GST) if
you merge with troubled bank. Because the whole idea of
legislation in exempting (the corporation from GST when
there is) merging is to reduce the number of troubled
banks. And believe it or not 90% of the rural banks in the
Philippines are in trouble. And you know when the rural
banks was… to open a rural bank at that time during
Marcos time, all you needed was P100 000 pesos.
Because the government would put up a counterpart of
another 100,000 and now you are a bank 200, 000. That
was the time Marcos unleashed country side
development.
(Father talks about Masagana 99 and its downfall.
Reasons: agricultural technicians doing two roles, the
weather affecting crops, masakit imong anak ipa ospital
kay sa mubayad)
So we have seen three corporations who needs/must
comply with independent director.
1. Listed;
2 Those who sell securities that must
be registered;
3. Those that have 50 million in assets;
4, Banks
Because of Securities and Commission Code,
the general banking law, required by the general banking
law to have independent director; and then the fifth are
those
5. Grantees of secondary licenses.
Sa ato pa, public utilities. You are a public utility
you are a grantee of secondary franchise.
What is the primary franchise? Kalimot namo.
Secondary franchise is to franchise where you are
granted to conduct a particular business, transportation,
electricity distribution, power generation. That is a public
utility, secondary franchise.
5
 What is the primary franchise?
The primary franchise is to exist as a corporation. That is
the primary franchise.
 What is the difference between the two? Secondary
and primary?
The secondary is still subject to commerce. You
can sell it with the permission of the seeing oversight
bodies. But a primary franchise cannot be sold. It is not
subject to commerce. You just comply with the general
enabling act and you have the primary franchise.
Precisely it is put that way because the evils of selling the
right to be a corporation can be based on the xx,.
So you cannot execute on your franchise to be a
corporation. But you can execute on franchise of being a
utility such as bachelor bus, yellow bus, you can execute.
 What is the definition of an independent director?
Par (e), Article 1, Sec Memorandum Circular No. 6
Independent Director- a person who, apart from his
fees and other shareholdings, is independent of
management and free from any business or other
relationship which could, or could reasonably be
perceived to, materially interfere with his exercise of
independent judgment in carrying out his
responsibilities as a director;
I would like to point out to you that there are two
competing theories in corporation law.
1. If you have more shares of stock out of the outstanding
capital stock of the corporation the chances of your
taking advantage of the corporation is practically nill
because you have so much at stake with the corporation.
It is like you will be hurting yourself because you
have so much investment in the corporation. The more
you have the less chances are you will seek to harm the
corporation, you will cheat the corporation. Where do you
find that presupposition, where do you find that
underlying theory?. You find that in section 32- Dealings
of the directors, trustees or officers with the corporation.
Section 32. Dealings of directors, trustees or officers
with the corporation. – A contract of the corporation
with one or more of its directors or trustees or
officers is voidable, at the option of such
corporation, unless all the following conditions are
present:
1. That the presence of such director or trustee in
the board meeting in which the contract was
approved was not necessary to constitute a
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under
the circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set forth in
the preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract
may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds
(2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees
involved is made at such meeting: Provided,
however, That the contract is fair and reasonable
under the circumstances. (n)
If the corporation enters into a contract with a director of
the corporation, there are certain formalities that you
have to follow:
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;
So you are not counted in the determination of the
quorum
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
so you do not take part in the voting to approve the
contract because you are part of the contract.
3. That the contract is fair and reasonable under the
circumstances; and
4. That in case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a contract
with a director or trustee, such contract may be ratified by
the vote of the stockholders representing at least two-
thirds (2/3) of the outstanding capital stock or of at least
twothirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse
interest of the directors or trustees involved is made at
6
such meeting: Provided, however, That the contract is
fair and reasonable under the circumstances. (n)
Where any of the first two conditions set forth in
the preceding paragraph is absent, in other words
nakalimot mo na bisag siya ang gi contrata sa
corporation apil siya sa meeting sa pag tungha sa
quorum, ning vote gihapon siya sa to approve the
resolution, then what is to be done?
Such contract may be ratified by the vote of by the vote
of the stockholders representing at least two-thirds (2/3)
of the outstanding capital stock or of at least twothirds
(2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of
the directors or trustees involved is made at such
meeting: Provided, however, That the contract is fair and
reasonable under the circumstances. (n)
So if you are the director who is dealing with the
corporation and you have 2/3 of the outstanding capital
stock, sigurado kang ma-approve. You can ratify it even if
the first two requirements are not present. What is the
underlying assumption here? The underlying assumption
here is that you are not going to cheat the corporation
because you have so much riding with the corporation.
You have at least 2/3 vote. You own atleast 2/3 of the
voting stock of the corporation. So dili na nimo yaga yaga
an ang corporation kay murag ga dunggab ka sa imong
kaugalingon kay naa naman kay dako kaayo nga... So
that is the rule.Traditional corporation.
 Now in the independent director what is the rule?
The less connection you have with the
corporation, the chances are you cannot and you will not
do harm to the corporation.
Independent kuno ka, you will be thinking of the good of
the corporation because you are independent. Tan awa
ra gud na.
If you are an independent director you cannot own more
than 5 % of the outstanding capital stock of the
corporation. You cannot have any employment
relationship with the corporation. You cannot have an
employment relationship with the holding company of the
corporation. . You cannot be related to the directors of
the holding corporation if you want to be an independent
director in the subsidiary corporation.
If you are a director of a subsidiary and you are a director
of the corporation that is the subsidiary of the same
holding company as that corporation you are
independent director, you are also disqualified. You are
not independent.. There are many rules, so baga baga
ini, basaha ni. Gitaga-an gani kag case. You should
know whether it is qualifying you as independent or
disqualifying you as independent director.
Now, why did this come up? This came about because of
Sarbanes-oxley law. Sarabanes Oxley law requires an
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
independent director. What happened why is there a
Sarbanes Oxley law? There is Sarbanes Oxley law
because of what happened to so many corporations in
the United States. Almost of which is Enron Corporation.
(Father talks about the anomalies of Enron dili muregister
ug loss kay ihapak sa partner, inflated ang sales among
others)
So it finally happened, mao dayon to, nisulod na si
Mr.Sarbanes and Mr. Oxley, Senador and congressman,
xx this bill in congress to overhaul corporate governance.
Karon daghag nag requirements, sa corporate
governance. One of it is independent director.
2. Reportorial requirement.
Daghan kaayo kag ireport. Isulod na ng mga risk
assesments. Daghag ra baya kaayog klaseg risk.
Reputational risk. Just because of your reputation you
are risking a loss. Ingon ka binu ang man na. Ibutang
nato rural bank ka, 3 ka lungsod imong branches sa rural
bank, unya president ka sa rural bank, niya pirmi ka
makit an sa sports club. Unsa man ng sports club sa
lungsod? Matina Gallera Sports Club. Sunday
University. Pirmi ka makit an didto, president ka sa
bangko na rural ban. That is a reputational risk. Ang mga
tawo makakita nimo, “Uy! Ang akong deposit man kaha
to iyang gipamusta.”
We will learn later on that the BSP can act immediately
because the BSP has the power to prescribe not only
additional qualification for board of directors for bank but
also to pronounce whether or not a specific board of
director of bank is fit and proper. That is called the fit and
proper rule.
So .. ang board of directors, „this guy is not prim and
proper, you continue to make him stay in the board and
you are fined.‟ What is the fine? P50,000 daily. Kusog
pas kilat wa n aka dinha. kinsa man na kumpanya
magbayad ug 50k daily. Tangtang ka na.
Niya mu-ingon tawon ang president „wa man ko nanugal‟
niya ngano naa man ka dinha? “Ang akong asawa
caterer sa mga manugal. Tabang tabang gud kog alsa
sa mga niluto dinha, pamaligya.” What will be the
reponse of the BSP? “Too bad! You should have worn a
big placard „sulugu-on ko sa caterer‟ aron mahibaw ang
kadaghanan. Wa man! Sige man kag kit-ag hinukbo
hinukbo, usahay magduko ka muingon ka „pildiro na
siya‟. Kana ganig manakay ug jeepney, pild man na.
katong musakay ug taxi w aka kabalo kung pildi bana o
nakadaog man na, tingali kung nakakotse na didto, deed
of sale na tingali (haha) daot na sila sa logis. (father,
invites us to enter a cockpit to see the tenor Philippine
life. Ug kanang gasinggit singgit, wala nay kwarta!)
We talk about reputation risk, that is not present (in
corporation code?) It is present also in the guidelines of
the Philippine Stock Exchange. If you are a director and
your reputation is shady, what do you mean by shady?
7
You have been under investigation in another stock
exchange. Let us say in Hongkong, or Singapore or
Penang stock exchange. You cannot be a director of a
listed corporation in Philippine Stock exchange. You are
a reputational risk.
Now it is understandble if you are already convicted for
violation of stock exchange rules, that is understandable.
But if you have only been investigated then you cannot
be (a director), that is based on reputational risk.
In other words, the idea of stock exchange is, ngano
mangita man kag labad sa ulo, ug problemado naka
didto, munganhi ka, tingali dad-on imong problema dinhi.
Mu ingon ka „Is the law that judges before it hears?‟
Wala na!
Now those are the operative underlying principles which
you must be conscious about because it has its own
implementation rules. It comes up. And lastly it is a
product of experience.
We talked about the liabilities of a director, trustee or
officer. In section 31, there are three instances where a
director is held liable.
Section 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 acquire, 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)
1. If he wilfully and knowingly votes for, assents to
vote patently unlawful acts.
That is very clear
2. When he is guilty of gross negligence or bad faith
in directing the affairs of the corporation.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
That is misfeasance. The first is malfeasance. Even if
you are not a director,if you wilfully and knowingly agreed
to a patently unlawful act liable man gihapon ka.
Para nako, surplusage ni. Mu-ingon ka „kanang directora
ning vote siya‟ „ngano man?‟ „tanom silag marijuana‟
bisag di pa ka director ug mu ingon ka „hala tanom tag
marijuana‟ priso man gihapon ka! Comprehensive
dangerous drugs act. So that to me is surplusage.
Ining misfeasance, gross negligence or bad faith in
directing the affairs of corporation,.. When do you know
that it is gross negligence?
There is a time where Warren Buffet in the beginning of
Berkshire Hathaway when this American express credit
card was still in its beginning, it suddenly went on a dive.
Pa ubos ang presyo. Ngano man? Because it was found
to have extended credit to a particular vegetable oil plant
that was discovered to be a mafia run enterprise. ..
adulterated vegetable oil, kay gapahuwam man sila, di,
nagkagidlay ang price, nagka ubos. Everybody was
trying to get out of American Express. What did warren
buffet do? The news reached him when he was in a
supermarket. Nagtan aw siya sa cashiers, , sige mag
gamit ang mga tao sa American expresss, di nikuha siya
sa iyang telepono ug niingon siya, palita na tanang
baligya. And sure 6 months later it went back to its
regular price but he bought it at close to 40, 30%
discount. Is that gross negligence? Ang tanan nag huna
huna nagkagidlay na ning kompanya ato ng ibaligya,
would it be negligent if he did the opposite? 99 think this
is prudent and you think this is not and you did not
accent? If you win, „ahh wise ka.‟ Pildi gani ka „negligent,
gross negligent‟ kani mao ni lisod tan awon.
Is Bill Gates grossly negligent when he entered to an
agreement with IBM to provide operating system of the
PC when he did not have a system at that time. Wa gud
siya system and gipalit niya ning system from an
unknown guy somewhere in texas sige siyag pangita
unsa ning mabuhat, nipalit pa man na niya ng OS anang
PC. Two days before the deadline na maproduce na
niya, dira pa siya nakakita ug OS, is that gross
negligence? Ah lisod na.
Daug gani ka, dili na gross negligence. Pildi gani ka
gross negligence, Pareha ra nag giyera. Pildi ka, war
criminal ka. Daog ka, national hero ka, (father talks about
Hassad in Syria and the proxy wars which is supposed to
be war between US and Russia pero lain gipa away)
3. Acquiring any personal or pecuniary interest in conflict
with the duty as director or trustee, shall be liable jointly
and severally.
This is the same liability if you are a partner or you are a
trustee. If you prefer your personal interest and put
second the interest of the principal over which you have
fiduciary interest, patay ka. Because the law are stricter
in the trustee than the owner.
8
For example, the contract of deposit, not bank deposit
ha! but the Civil law nominate contract of deposit. Naay
amigo nimo muingon „Naa koy conference sa Manila bai!,
I-parking nako ining kotse nako nimo, nara ang yabe o,
ikaw bahala. Balik ko nimo, isa ka semana ra ko.‟
Gidawat nimo ang responsibilidad. Nagsunog, ordinary
common sense ang unang I atras nimo ang imong
sakyanan. Pagbalik nimo di naman nimo maatras ang
sakyanan. Will you be liable to the one who deposited the
car to you? YES! Under civil law. You are liable because
you preferred your own interest to that whom you have a
fiduciary duty. That is the same when you are the
director.
Pangutana baya na sa bar examination. Unya niingon
ang bar examiner na 2/3 could not answer that question
in other words they were still thinking as a pedestrian out
there, not as a lawyer. They did not have the principle of
deposit, nominate contract in the Civil Code. Gamay ra
man mubasa ana, makalimtan na na, wa na basaha.
st
December 16, 2016 (1 hour) Abad I
(FGN started the class by giving the list of cases for our
first exam.)
We are still in the Board of Directors, particularly the
Independent Directors.
INDEPENDENT DIRECTORS (ID) are now
demanded by the Securities Regulation Code for Publicly
Listed Corporations or Corporations that are at least 50
million in assets to handle more stockholders with at least
200 stockholders, owning at least 100 shares. ID are also
demanded for corporations that has sold securities in the
market which are required to be listed with the SEC.
Another are for, Banks, Quasi-banks, Financial
institutions business. And lastly for, Corporations that
acquired secondary franchises like Public utilities. If you
have to acquire a secondary franchise, then you must be
in search of an independent director.
SEC Memo Circular No.6
Series of 2009
Revised Code of Corporate Governance
Pursuant to its mandate under the Securities
Regulation Code and the Corporation Code, the SEC,
in meeting held on June 18, 2009, approved the
promulgation of this Revised Code of Corporate
Governance, which shall apply to registered
corporations and to branches or subsidiaries of
foreign corporations operating in the Philippines
that:
(a) sell equity and/or debt securities to the public that
are required to be registered with the Commission, or
(b) have assets in excess of Fifty Million Pesos and
at least two hundred (200) stockholders who own at
least one hundred (100) shares each of equity
securities, or
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
(c) whose equity securities are listed on an
exchange; or
(d) are grantees of secondary license from the
Commission
Article 1: Definition of Terms
Xxx
(e) Independent Director - a person who, apart from
his fees and shareholdings, is independent of
management and free from any business or other
relationship which could reasonably be perceived to,
materially interfere with his exercise of independent
judgement in carrying out his responsibilities as a
director.
Xxx
 Can the by-laws provide that if a director cannot
make it, for any reason, health, then he can appoint
a proxy?
The SC has said that a director is chosen for his personal
qualifications. There can be no substitution. That is
different from the monetary board, because as far as the
government members of the monetary board, it can ask
for a substitute. But, in a regular corporation, whether
stock or non-stock, you cannot have a proxy for a board
meeting.
Now, we know that a corporation cannot deny
proxy ------ . That is the essence of the corporation
according to the SC. So, while you cannot have a proxy
for director‟s meeting, you cannot also provide that stock
holders cannot look for proxy.
Now, there was one non- stock non-profit
corporation that its founder is the Ex-officio member of
the board for as long as he was alive, it was a Christian
high school. And the SC said, that is void.
So, I pointed out to you the case of GSIS by
PGM Winston Garcia vs. Anthony Rosete Et al. This is
a fine exemption.
Winston Garcia vs. Anthony Rosete Et al
This case was a fight for control of Meralco. It was
already the annual meeting of Meralco and the
background here is that the Lopez has decided not to sell
their shares to Cojuanco. And Cojuangco, through his
representative Ramon Ang, who is the Chief Operating
Officer of San Miguel, wanted to take control of Meralco.
They have succeeded in buying the government shares
of Meralco. The government shares were in the
possession and ownership of the government owned and
controlled corporations such as the GSIS, SSS, Land
Bank,and DBP had some shares. So, they were already
ordered to sell to Ramon Ang. And these GOCC sold, but
they were only something like 19% of Meralco.
In the meantime, the Lopez has already sent to
9
Pangilinan group that they are selling to them and to
them alone. And Lopez said, I can bring along with me
the power corporation of Madrid, Spain, which is a
partner of the Lopezes, between the 2 of them, they held
46% of Meralco. So the rest, they had proxies. Now, it
was these proxies that PGM Winston Garcia wanted to
examine. And he says, I lack material time to go over the
proxies, so we have to postpone the annual meeting so
that I can examine the proxies.
The corporate secretary of Meralco, did not accede
and said no, we will go ahead with the meeting because
you are making an intervention which is already beyond
the cut off. There is a cut-off date. Then in the midst of
the interpolation by Winston Garcia, his assistant came
and brought along a restraining order issued by the SEC.
Later, upon examination by the Secretary Antony Rosete,
he looked at the restraining order and observed that it
was only signed by 1 Commissioner. Garcia said, I have
a paper signed by the other commissioners who did not
sign there. That they delegated this 1 commissioner to
sign for and their behalf.
But Rosete says, it is not only that your restraining
order is formally defective, the SEC has no jurisdiction to
order the examination of the proxies. Garcia says,
according to the SEC Code, the SEC has the duty to
examine the adequacy of proxies, whether it is in
conformity with the by-laws of the corporation and
whether it has been executed properly by the corporate
secretary. That is the issue, who has jurisdiction over the
proxies.
The ruling in this case, the SC says, it is true, the
SEC has jurisdiction over proxies. But, the cases
mentioned by PD 902-A on election contests, have been
moved from the SEC to the courts, principally, the Intra-
corporate court. So the intra-corporate court has
jurisdiction over election controversies. The issues here
in Meralco are principally election controversies. Since
these are election controversies, with the proxies as sub-
issue, it is the Intra-corporate court that has jurisdiction
over the proxies and not the SEC.
That is the ruling, a very fine ruling. So what
happened? The election went on. You can google the
next events.
Now, in an election for the Board Of Directors
and, say, you have the PLDT, 2 million stock holders,
how do you run that election and you are the corporate
secretary, unsaon mana nimo pagpadagan? First of all,
where do you hold the meeting? We judge it by the
historical attendance of the stockholders, many of them
will not show up. They will just designate a proxy. If you
are tied to the controlling interest of the corporation, you
will of course attend. You will be pre-qualifying your
proxies and submit it even before cut off. Some have a
standing proxy – that will last for utmost 5 years. You
cannot have a proxy for more than 5 years. So, you
prequalify your proxies. You are controlling, such that in
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
election, they have already chosen their candidates, and
they say “we are putting our votes on these candidates,”
you are allowed to do that. Remember, this is not like an
election that you know (secret ballot). So you already
make known your choice.
Now if you have 50% plus 1 of the shares, and
nobody dare to consolidate his vote up to 10% and they
are all scattered, or for that matter, they have not
nominated within the deadline any director that they wish
to elect, then the election is done even before the
meeting of the stockholders. So of course, to forestall,
any controversy, the representative of the Controlling
interest will stand up in the meeting and will say, “I have
with me the votes and actual proxies of 51% of the
shares of the corporation, and they are all cast in favour
of the listed resolutions in the agenda, and they are all
cast with these group of candidates nominated before the
deadline, and registered with the committee of
nominations to be voted.” That means, there is no more
to be debated. Unsaon nimo na 50% plus 1 nakaboto
naman. Kinadaghanan ra man ni og boto. Everything has
been predetermined before the meeting. That is how you
conduct the meeting.
Remember the rule, if you are the secretary of
the corporation, you do not advise the chairman to call a
meeting if you do not know the results of the meeting.
You can ask postponement from the SEC that you
cannot hold the meeting of the stockholders for a valid
reason. If it is a legitimate reason, the SEC will allow you
to postpone.
 Can you provide in the by-laws a higher
percentage of the presence in person of the
meetings of board in order to constitute a quorum?
You can provide a higher percentage but not lower than
the default quorum required under the corporation code.
The corporation code says if you have 50% plus 1 of the
members of the board then that is a quorum for the
ordinary business of the corporation. But if it is anyone of
the instances mentioned in Section 6, the vote must be
unanimous.
Suppose there are 11 members, the regular quorum is 6.
Let us say if you are voting for a decrease or an increase
in the capital stock, how many should vote? All of them
should vote because it requires the majority of the votes
of all the members, and 6 is the majority.
nd
December 16 2 Hour Ching, K
It requires the majority of all the members of
board of directors and 6 is the majority of the all the
members of the board of directors.
Now if it were an ordinary business, let us say
we will open another bank account in New York. Bank
account for the Corporation. How many are in favor?
They say four. So two are not agreeing. That says
10
narelease nani , so we win even if it is not the majority of
all the members of the board of directors. But when it
comes to Sec 6 it must be majority of all the members of
the board of directors. That‟s why it is important you
memorize those 8 instances in Sec 6 because board
actions there must be approved by the majority of all the
members of Corporation.
Section 6. Classification of shares. xxx
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.
 Executive Committee
That is the last provision in the board of
directors. Sec 39. I just like to point out to you that many
corporations name it as “MANCOM- Management
Committee”. I would just like to point out that there is
such thing as MANCOM provided by PD 902-A.
Management Committee, according to PD 902-
A is appointed by the SEC to a distressed Corporation
that is paralyzed by deadlock. So you risk using
terminology that likely misunderstood. Magsulti ning
Corporation they used that. Why? Because they picked it
up from clinical textbooks in management. But the correct
term is “EXECOM – EXECUTIVE COMMITTEE”.
 What is Executive Committee?
Section 35. Executive committee. – The by-laws of a
corporation may create an executive committee,
composed of not less than three members of the
board, to be appointed by the board. Said
committee may act, by majority vote of all its
members, on such specific matters within the
competence of the board, as may be delegated to it
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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.
1.) Approval of any action for which
shareholders‟ approval is also required.
- So once again what is that? Again the 8
instances mentioned in Section 6.
2.) The filing of vacancies in the board
- The EXECOM, kana ivote daw na.
3.) The amendment or repeal of by-laws or the
adoption of new by-laws
- That is one of the 8 instances in Section 6
which requires the action of the board.
4.) The amendment or repeal of any resolution
of the board which by its express terms is
not so amendable or repealable.
5.) A distribution of cash dividends to the
shareholders.
The question is: Suppose there is NO PROVISION
in the by laws that the board can create an Executive
Committee, Sec 35 says “the by-laws of the Corporation
may create an Executive Committee”. So there is no
provision in the by-laws saying that the board can create
an Executive Committee.
 Is it required for the Corporation to amend first the
by-laws and provide for the powers to create an
Executive Committee before you can create an
executive committee?
The recent case last year, the Supreme Court
says, even if you do not have a provision in the by-
laws allowing the creation of the executive
committee the board of directors can create an
Executive Committee. Why? Because it is presumed
that Board of Directors has Plenary Powers to create
such committees as is necessary to it to perform its
functions.
11
 So what is the purpose why you put the provision
in the by-laws that it can create an executive
committee? What is the purpose?
The purpose is the Corporation may wish to
particularly demarcate the kind of executive committee
that is acceptable to it, a kind of executive committee that
is acceptable to all the precise and legit purpose of the
corporation.
I tell you a story: PCI BANK story.
The PCI Bank, 1972. At the time of Martial Law,
was taken over by the Romualdezes. It is in the control of
the Romualdezes. And after the EDSA revolution, 1986,
that is one of the corporation that was placed under SEC
sequestration. There was big chunk there of
questionable Romualdez‟s share which was actually
Marcos‟ shares. There was a small chunk of bona fide
Romualdez shares. Now when they took over the big part
or the controlling part which is Romualdez-Marcos
shares, PCI bank went under sequestration and the
management under PCGG. They put it up for a bid
because it was a big commercial bank at that time. The
original founders of PCI bank was the Montelebanos. So
they were under sequestration and they decided to
auction it. And the way you bought it is by using the so-
called Dollar Credits of biggest loans.
What do you mean by that?The Philippines was
under the deep shit hole because of the Dollar loans that
it borrowed from the US. So much dollars they borrow.
So they said, you pay those dollars debts and then you
get credits. When you get credits, you transposed the
credits into pesos if you want to buy the shares of stock
that were sequestered in the different corporations.
So, Many were interested parties. Two
interested parties were the: LOPEZes and
GOKONGWEI. They do not have enough money to buy
the sequestered shares of the Romualdez-Marcos chunk.
So they said, let us pool our resources together. 50-50.
You are 50% and I am 50%. Then we will get the
sequestered shares which is about 45%. So gamay
nalang atong paliton, open market, controlled na. And
they agreed. Eugenio Lopez Jr. and John Gokongwei.
50-50, they bought it , they now control PCI bank.
They amended the Articles of Incorporation and
by-laws. One of the amendments in the by-laws was the
creation of the Executive Committee. And in the
Executive Committee, it says that there are certain loans
that could be approved by the bank just from level of the
Executive Committee. Of course, the bigger denominated
loans must be approved by the board of directors. In the
haggling for control and position in the bank, they agreed
because they thought that Gokongwei was being
subservient to the Lopezes. Niingon man si Gokongwei
na ”ako, nganhi rko sa executive committee. Ikaw,
Eugenio Lopez, you‟ll be the president and Chairman,
ako ari lng ko sa Executive Committee”. So they revised
it, Eugenio Lopez Jr. Is the President and Chairman.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
John Gokongwei is just in Executive Committee. He is
the chair of the Executive Committee.
After 3 or 4 years, they found out that all the
loans were going to the Corporations of John Gokongwei.
Because he was approving all the loans in the Executive
Committee. The ExeCom would screen the applications
of the loans and it would never get anymore if John
Gokongwei did not approve it. It did not only approve his
loans, it screened the bigger loans. Unsaon man pag
abot sa board of directors if naapprovan sa. Hantod mag
away na ang duha.
Naa gani ka Corporation equal mo tanan, that is
the recipe for disaster. Hantod sa nag away na silang
duha. Sige naman silag away. Hantod sa nag-away na
sila, gusto na mubaligya si Eugenio Lopez. Gokongwei
said ”Nganong mubaligya man ka na ako may nagadala
aning bangkoha?” He was only the executive committee
but he was running the bank, he was meeting people
everyday. Si Lopez, igo lng naglingkod, and his control
was nominal. Unsa man si Lopez na ibaligya niya na dili
man musgot si Gokongwei? Unsaon man ni Lopez?
Finally, Lopez focus the unthinkable quarter of
the Romualdezes. Romualdez-Marcos na. Mao na ang
nagpapreso ni Eugenio Lopez Jr. Naa man xay 15% sa
banko, legitimate. “I want a coup de etat, I want
Gokongwei out. Who are willing to side with me? The
Romualdezes are so void up, Lopez himself is now
reconciling with me. I will now be back to the winning
team. Tangtangon na si Gokongwei. Sugot si
Romualdez. We will go with you. 15% ka, 25 % mo, pila
man? Gamay nalang atong pangitaon na proxies.
Makakuha nana. They shook hands, they look each other
in the eye and this is what will happen in the next annual
meeting of the stockholders.
So Lopez speaks at the phone and told John
Gokongwei “I would suggest that you would no longer
attend the stockholders meeting, Mapahiya ka lng.
Romualdez and I have agreed that we are voting
against”. What did John Gokongwei says “ I not beyond
agreement, I know, I lost. Ok let sell. You want it sell, lets
sell it together.”
Because if they sold together, there is a premium
because they be in control of the bank. If you sold a
portion, and the buyer is not in control, you cannot ask for
the premium of the price. So Gokongwei says Yes to
Lopez.
Before the annual meeting and the loans to the
Romualdez, the stabbing of the back happened. Lopez
calls the owner of equitable bank who wanted to buy PCI
bank, in fact they already bought the GSIS, SSS shares
of PCI bank because Joseph Estrada … Romualdez has
15% of the manage not worth anything. Then the bank
become PCI Equitable bank. That is how Lopez finally
got his revenge. .. The 5% is the Executive Committee.
The member of the Corporation is all about
control. Patawag gani kag meeting kasabot naka. There
12
must be somebody who has control. If you do not have,
its chaos. It is chaos. Somebody must be in control.
There is a running story now about control of a
corporation.
(Father talks about tata corporation)
INTERLOCKING DIRECTOR/DIRECTORS
One more, so called interlocking directors.
When a corporation with a common directorship with
another corporation when they enter into a transaction,
that is called self-dealing.
Section 32 is when a director has been used
with a corporation. That is rare. Personal mana, makig
deal ka sa corporation. That is what is envisioned in
Section 32. If you are one individual, Gusto ka mubaligya
sa corporation ug some good or commodity, you must
follow the formalities of Sec 32.
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 case of an officer, the contract has been
previously authorized by the board of directors.
Where any of the first two conditions set forth in the
preceding paragraph is absent, in the case of a
contract with a director or trustee, such contract may
be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the
outstanding capital stock or of at least two-thirds
(2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the
adverse interest of the directors or trustees involved
is made at such meeting: Provided, however, That
the contract is fair and reasonable under the
circumstances. (n)
But, if you are two corporations, and you have a
common director, not all the directors are the same
directors, there is one or two sets are common, you
follow section 33.
SEC 33 Contracts between corporations with
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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. (n)
So nominal na ta, less than 20% of outstanding
capital stock of ownership in a corporation B. And it
enters into a transaction with Corporation A where you
have 50% of the outstanding capital stock. Substantial ka
sa A, nominal ka sa B, kay nominal ka man sa B, gamay
ra man imong interest ana sa corporation, the
presumption is, you are likely to screw this corporation.
Because you will be using other people‟s money. That is
why you MUST comply with Sec 32 when B decides
about the transaction, your presence must not be
counted. You vote must not be counted for purposes of
approval. You leave the others free to decide. Once
again, it is the axiom that: “the more you own a
corporation‟s shares of stock, the less likely you are to do
harm to that corporation.” Because what is required of
you in the formalities is when you have nominal shares in
the corporation. You are not required of that in a
corporation where you have substantial shares. That‟s
old thinking.
The new thinking now is, you become a
responsible director if you have no connection at all in the
corporation, independent director ka. If you are an
independent director, you are most likely to keep the
good of the corporation. If you are not independent, then,
you are suspect especially if the corporation is involved in
some public welfare like public utilities.
TITLE IV- POWERS OF A CORPORATION
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
13
accordance with the provisions of this Code;
5. To adopt by-laws, not contrary to law, morals, or
public policy, and to amend or repeal the same in
accordance with this Code;
6. In case of stock corporations, to issue or sell
stocks to subscribers and to sell stocks to
subscribers and to sell treasury stocks in
accordance with the provisions of this Code; and to
admit members to the corporation if it be a non-stock
corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities
and bonds of other corporations, as the transaction
of the lawful business of the corporation may
reasonably and necessarily require, subject to the
limitations prescribed by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That
no corporation, domestic or foreign, shall give
donations in aid of any political party or candidate or
for purposes of partisan political activity;
10. To establish pension, retirement, and other plans
for the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be
essential or necessary to carry out its purpose or
purposes as stated in the articles of incorporation.
(13a)
Section 36, there‟s a listing here of the Powers
of the Corporation and you go through the list and you try
to identify:
a.) Is this express powers?
b.) Is this implied powers?
c.) Is this Incidental?
Another name for incidental is inherent powers.
Kanang gilista diha tanan, eh di Express!
Express nana tanan kay gilista naman. Naa naman
dinha.
1. The Power to Sue and be sued in its Corporate
name.
What used to be inherent powers, to sue and be
sued is now express because it is written there. Just
because it is express it does not ceased to be inherent.
Because if the Corporation Code should be amended,
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
and this is repealed by implication because it is not
repeated in the amended version of the Articles of
Incorporation, Does it mean that the Corporation can no
longer sue and be sued? It does not mean that because
that what defines a Corporation. It is inherent in the
Corporation to sue and be sued. Why? Because a
Corporation is a person. And the person according to
the Civil Code is one who is a subject of rights and
obligations. If you have rights, you can sue to assert
your rights. If you have obligations, you can be held
liable if you do not exercise due diligence in exercising
your rights and you injure others and you can be sued.
You can be sued because you are a person. It defines
you. You are not a person first then you have rights and
obligations. No. You cannot be a person unless you
have rights and obligations. That is the meaning of
inherent or incidental right. It is inherent for water to wet.
If it does not wet, it is not water. *Story about Isda ug
ice*
Identify the inherent powers.
2. To adopt and use a corporate seal is an express
power.
Niadto, hari ra ang dunay naay seal. In middle
ages, distances made communication difficult. How
would you know na ang sulat na imong nadawat ,King of
Spain ka, kanang gisuwat nganha na nadawat nimo
gipadala diay na sa king of England? Unsaon man nimo
pagkahibawo? Kahibawo ka kay naay dunay seal sa hari
kung asa gikan. Gitakluban na ug wax. Kanang sa
kandila gani, gibutangan xa ug seal. Usually sa iyang
singsing, naa dihay carve aron dili makawat niya.
Isingsing na niya. Ibutang na niya dinha. So, isuwat na
niya dinha… sealed with my seal… authenticated by my
indubitable sign that is this real and I am sending you is
real. Wala na ni. Nawagtang na ni ron.
Verification these days is very simple. *Chika
about seal magkuha ra daw si Fr. sa UM. LoL. And other
chika pa ni Fr.*
It has its uses. Seal, that is still used in the
Certificate of Stock. You still use certificate of stock xxx.
Now, Evidences of ownership is electronic. Because if it
is not electronic, you are the most expensive stock
exchange. Meaning to say you transfer evidence, ilisdan
napud ug lain, nadugay na ang clearing. If you do not
have electronic clearing, wa naka. (Not clear:
Clearing/Trading) is very expensive. Singapore,
Malaysia, Hongkong, electronic na.
You look at any Articles and By-laws. And it is
there that the corporation can hire employees. Wa gyud.
Naa rana kung ang imong lawyer, wala kahibalo sa
purpose. Unya gusto siya na tan-awon nimo na murag
naghagu gyud xa sa pagbuhat sa Articles and By-laws.
Unsa man iyang buhaton? Butangan niyag main
purpose. “ To open a general merchandising store selling
dry goods etc “ and ibutang niya “other purposes…”.
Pangopya na ni niya ang mga powers sa Corporation.
14
Ikaw, wala ka kahibalo sa purpose unsay diperensya sa
powers, wala ka kahibalo na naa ra diay na xa sa
Corporation code. Bisan wala na nabutang sa purpose,
mabuhat na nimo. Because they are power clauses,
they are not purpose clauses. Mao nang buhaton sa
abogado aron para daku-daku iyang attorney‟s fees.
I would like to touch on this number 9 of the
powers of the Corporation.
9. To make reasonable donations, including those for the
public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes; Provided, That no
corporation, domestic or foreign, shall give donations in
aid of any political party or candidate of for purposes of
partisan political activity.
So a corporation has the power to donate but it
cannot donate for political purpose. In most jurisdictions,
they can. US, you can. Japan, you can. The only
condition is that you must disclose. If you do not disclose
and you make a donation then it is presumed to be xxx
and that is a criminal. But if you disclose, ibroadcast na
tanan. Diri sa ato, wala, dili ka makadonate. How can you
donate to a candidate during an election? There are
some business interests that are so large that they
cannot afford not to donate. Very big conglomerates have
no choice but to donate. If dili sila mudonate ug kadto
ang makadaug, eh di makalulooy sila. You must do
something.How do you it when the law does not allow it?
Do you want to know how they will do it? Because the
commentaries will not tell you that.
You open an account for your beneficiary, let us
say in Singapore. And the Singapore bank they have
agency. Is this agent, your agent? And then he signs
there, He has his signature specimen. Now, he has that
account open by someone. Once he has that account in
Singapore, he borrows from the bank here. What is his
security of that borrowing? The same amount that has
deposited in his name.
So the security of that loan, that he transacts
with the bank here is now secured by that account that
is opened in Singapore. Of course, they will not pay the
loan anymore. The bank will foreclose on that loan on
that deposit. So the donation is perfected and executed.
What is the record? Nanghulam xa sa banko
dinhi. Unya naforeclose, wala xa kabayad. Wala man xa
kabayad, naforeclose iyang acoount didto. Then you
donate to the candidate and you are the corporation
here. You caused the opening of the account. You did
not donate because you did not do within the territorial
jurisdiction of this law. This law is municipal law. This is
not international law. Di ba? Criminal statutes in the
Philippines are enforeceable within the territory of the
Philippines.
Was there a violation? There was a violation
indirectly but the corporation did it outside the territorial
effectivity of this law because this law is municipal law. It
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ADDU-Law
is not international. In Singapore, Can you compel them
to produce the records? Legal processes like
Subpoena? Dili man sila magtuo nimo. Mawad an sila
xxx dili sila mutuo.
 Power to Extend or Shorten Corporate Term
SEC 37. Power to extend or shorten corporate term. –
A private corporation may extend or shorten its term
as stated in the articles of incorporation when
approved by a majority vote of the board of directors
or trustees and ratified at a meeting by the
stockholders representing at least two-thirds (2/3) of
the outstanding capital stock or by at least two-thirds
(2/3) of the members in case of non-stock
corporations. Written notice of the proposed action
and of the time and place of the meeting shall be
addressed to each stockholder or member at his
place of residence as shown on the books of the
corporation and deposited to the addressee in the
post office with postage prepaid, or served
personally: Provided, That in case of extension of
corporate term, any dissenting stockholder may
exercise his appraisal right under the conditions
provided in this code. (n)
I would just like to point to you that to extend or
shorten the corporate term, the last sentence of section
37 deems opposes it the appraisal right. An appraisal
right is a right when you go the corporation and buy me
out because I opposed to this corporate action. Now, you
have appraisal right only when the term is extended,
not when it is shortened. But in the provision here, it
seems that it is both to extend or to shorten. But it is
specific in the last sentence that “In case of extension of
corporate term, any dissenting stockholder may exercise
his appraisal right under the conditions provided in this
code. “
 Why is there no appraisal right when it to shorten
the term? Why is there no appraisal when the
corporate act is to shorten the term?
Because to shorten the term is to dissolve the
corporation. And when you dissolve the Corporation xxx
you will be paid of the value of your share if there is still
remaining of the assets of the corporation. It is just legal
debts. You are actually paid once the term will be
shortened. Shortening of the corporate term is another
form of dissolving the corporation.
Section 120. Dissolution by shortening corporate
term. – A voluntary dissolution may be effected by
amending the articles of incorporation to shorten the
corporate term pursuant to the provisions of this Code. A
copy of the amended articles of incorporation shall be
submitted to the Securities and Exchange Commission in
accordance with this Code. Upon approval of the
amended articles of incorporation of the expiration of the
shortened term, as the case may be, the corporation
shall be deemed dissolved without any further
15
proceedings, subject to the provisions of this Code on
liquidation.
Sec 120, Dissolution by shortening corporate
term. You amend the articles taas-taas pa ang imong
th
kinabuhi unta 50 year unya naa paka sa 25 year, unya
muapply ka na ishorten nimo ang term, mahuman na, 6
months from now. Unsa man pasabot ana?
Nagdissolve ka sa corporation. You are
dissolving the corporation. So when you apply, to shorten
the term, lain ang tinan-awan sa imo sa SEC. Muingon
sila na give the lists of your creditors, give me proof that
you have served notice to all your creditors, you must
publish in the newspaper that you are shortening the
term because it is equivalently dissolving the corporation.
When you dissolve, you are actually paying your shares,
actual working shares, so there is no appraisal.
Remember once a corporation is term has
expired even if there is still 3 years to wind up the affairs
of the corporation, those 3 years, you can already apply
for an extension. Those 3 years of winding up the
corporation is no longer functioning as a corporation.
There is no board. Who is incharge there? It is the
receiver in dissolution. There is one person who is
incharge.
Receiver. What is his job? To liquidate the properties
and to pay the creditors. To distribute what remains to
be the stockholders in proportion to the portion of the
outstanding capital stock. To do that, you need:
1.) Majority of vote of ALL the members of
the board. So absolute majority.
2.) You must inform the stockholders. Not
just written assent you need to inform
them, attend the meeting because what is
going to be discussed is extension of term
or shortening the term.
3.) You must give notice to all
stockholders, voting and non-voting.
Because this is one of the instances where the
non-voting shares cannot be prevented from voting.
Please do not say, may vote. Non-voting shares will vote,
No! They cannot be prevented from voting. They have
the right to vote Because it is one of the instances in
connection with Section 6.
Written assent? Not allowed. There must be
social congress. Meeting na, naa sila diha. And then,
they cast their ballot.
 Must it be a secret ballot?
The rule is in any meeting of stockholders, viva
voce is the rule. But when one stockholder requests
that the voting be by secret ballot, then the discipline
of the chair, has no more choice but to order secret
ballot. That is the rule.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
January 4 2017, Duco L
So alright, we are already in powers of the
corporation. Section 36 lists a total of 11 paragraphs,
powers and capacity 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 stocks to subscribers and to
sell treasury stocks in accordance with the provisions
of this Code; and to admit members to the corporation
if it be a non-stock corporation;
7. To purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and otherwise deal with
such real and personal property, including securities
and bonds of other corporations, as the transaction of
the lawful business of the corporation may reasonably
and necessarily require, subject to the limitations
prescribed by law and the Constitution;
8. To enter into merger or consolidation with other
corporations as provided in this Code;
9. To make reasonable donations, including those for
the public welfare or for hospital, charitable, cultural,
scientific, civic, or similar purposes: Provided, That no
corporation, domestic or foreign, shall give donations
in aid of any political party or candidate or for purposes
of partisan political activity;
10. To establish pension, retirement, and other plans for
the benefit of its directors, trustees, officers and
employees; and
11. To exercise such other powers as may be essential
or necessary to carry out its purpose or purposes as
stated in the articles of incorporation.
So you go down the list and you identify which is
a property power and which is a capacity of the
corporation. Then you have to identify which is inherent
power and which is an express power. In a sense, all the
powers are express because they are listed down. But,
be that as it may, there is still an inherent power, namely,
a power that defines the corporation, and without which,
there would be no corporation.
What is the significance of that power? The
significance of that power is even if it is legislated out of
existence, it still exists as a power. In other words, the
corporation cannot be deprived of that power, because to
do so, would render the disappearance of the
16
corporation. Just like you cannot imagine a State that has
no police power.
The police power of the State defines a State.
The Constitution merely recognizes that power. At the
same time that it is recognized in the Constitution, it is
also limited. And what are the limitations? The limitations
are the Bill of Rights. At the same time that the
Constitution limits it, it in fact defines it. But it does not
grant it to the State because the State has that power as
an inherent power.
Now, this hearkens back to section 6 of the
Corporation Code.
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
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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.
And there is a list there of 8 instances when
the Corporation exercises extraordinary powers.
What are those?
1. Amendment of the articles of incorporation;
It can amend its articles of incorporation. The
articles of incorporation define the corporation. For
instance, it defines its name.
2. Adoption and amendment of by-laws;
So the corporation is the one who creates its by-
laws. It can also change its by-laws. That is a power
which the corporation exercises.
Now, whenever a corporation exercises any of
its powers under section 6, then section 6 says even non-
voting shares are entitled to vote. So there is really no
such thing as shares of stock of the corporation that is
totally deprived of voting rights.
In the 8 instances, when the corporation
exercises these powers, non-voting shares are entitled to
vote. Do not say that they may vote, because if they are
entitled, they cannot be prevented from voting.
Now, should you, let‟s say, as an officer of a
corporation, prevent these non-voting shares from voting,
then it is an abuse of power.
Now, let me just bring to your attention the first
exercise of power: amendment of the articles of
incorporation. When you say amendment of the articles
of incorporation, you run into complications when you
relate par 1 section 6 amendment of the articles of
incorporation with sec 16 amendment of the articles of
incorporation. Why? Because sec 16 says „the vote or
17
written assent of the stockholders representing at least
2/3 of the outstanding capital stock‟. So the way the
stockholders participate in this exercise of extraordinary
powers is either by vote which requires a meeting, or a
written assent which need not have any meeting, in
which case, the stockholders are sent a notice and a
form to fill up whether they are in favor of this
amendment, whether they assent to the amendment or
they dissent from the amendment.
So, when do you know that the amendment of
the articles of incorporation requires voting or just a
written assent? That is why you must have familiarity with
Title 4 beginning with sec 37 all the way up to sec 45,
ultra vires acts of the corporation.
For instance, the corporation wants to change
its name. Is a stockholders‟ meeting required to obtain
the 2/3 vote of the stockholders voting and non-voting?
Its an amendment of the articles of incorporation because
that is where the name is. In fact, that is the first
provision. „The name of the corporation shall be‟, then
you put the name. You change it. You amend it.
Question: Does it require a meeting? If you take a look at
sec 6, and you find out it is not one of the instances
mentioned in sec 6. So, you can amend the name just by
written assent of 2/3. You do not need a meeting.
Now, on the other hand, if you increase the
capital stock of the corporation, that means you raise the
authorized capital stock. When you raise, that means you
amend the articles. Now, if you amend the articles, then it
is part of par 1 sec 6. You amend the articles of
incorporation. So you ask the question: does it require a
vote, or just a mere written assent? Then you go title 4
and you take a look at sec 38.
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
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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
18
with the Securities and Exchange Commission,
which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
Then you know that a meeting is required
because a vote is required by sec 38. So, that is why this
requires serious familiarity with the corporation code.
Kahibaw ka naay daghang resolution dinha ipapass.
Now, when you have several resolutions in a corporation
meeting, and there are resolutions which require the
participation of non-voting stockholders, and there are
resolutions that do not require the participation of non-
voting shares, you cannot just lump them together and
say „Okay for purposes of this meeting, we will declare a
quorum‟. You have to establish the quorum fit for the
resolution. Example: one of the resolutions is for the
election of directors. Now, do the non-voting shares
participate in the election? They do not. So for the
determination of the quorum for that particular resolution,
you should exclude the non-voting shares because with
the presence of voting and non-voting, there will be a
quorum for the meeting. But for purposes of election,
there may be not enough present for the quorum,
because the quorum is to be determined from the voting
shares.
So, the secretary of the corporation must attest
to the adequacy of the quorum for each possible
resolution or for each kind of resolution that just requires
a specific participation of the body politic of the
corporation. Di nimo mahimong iransada lang nimo.
Just like in the Constitution, when there is need
for ratification by Congress, certain provisions that
require ratification by Congress with the act of the
President, you cannot just make them vote as one body.
It has to be a separate body. Senate voting separately
and the Congress voting separately.
So alright, we have seen that the power to
extend or shorten the corporate term requires the
participation of non-voting shareholders. And then, there
must be a qualified notice sent to all in accordance with
the bylaws of the corporation.
 What is a qualified notice?
Qualified notice is not just a notice to the
stockholders of the date, time, and place of the meeting,
but also the specific item in the agenda of the meeting
which has to do with the extension or shortening of the
corporate term, because that is what is required by sec
37.
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
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
(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)
So the requirement, if there is no more stringent
requirement in the bylaws, it is this. You have to serve by
postal mail with return receipt. Dili na ordinary mail ba.
Now, how did bylaws provide for email? I have
not seen a SEC circular or order approving service
compliant with the qualified notice requirement by the
corporation code and equalizing it with email. Wa pa ko
kakita ana. It might come out! I don‟t know. Because the
SC has already ratified or gave its imprimatur to the
circular of the SEC with respect to meetings of the BOD
by conference call or video conference call, and it is not
provided in the Corporation Code. Will they allow notice
by email? So, if there is the case, there is limbo, and you
are the secretary of the corporation, how do you close
the door to possible controversies arising from this *, as
to the adequacy of the notice? How do you close the
door? This is what you do in order to close the door of
the controversy: If it is directors‟ meeting, you make sure
that you get the signature of the directors inside or
outside of the meeting as to the particular resolution that
is asked because one he signs, no more. He has waived
his right as to objections of the resolution.
Now, as to the stockholders, that is a problem
because you cannot go to the stockholders one by one.
Alangan pangitaon nimo ilang signature. Kadaghan kayo
nang resolution. Unya PLDT 2 million kabuok ang
stockholders. Bisan magpatubo pa kag bungot ana di ka
ka human ana.
So what do you do? In the annual meeting, you
make sure that the entire assembly which there is a
quorum, ratifies the passing of this resolution because
the Corporation Code does not say that qualified notice is
required to ratify defects of resolutions approved when
the qualified notice was lacking.
Corporation Code requires that when you
increase capital stock, there has to be qualified notice.
Suppose you failed to comply with this qualified notice,
and there could be possible obligation already, and then
in the annual stockholders‟ meeting, you put it back, and
you asked the stockholders: can you ratify this? That
does not require qualified notice to ratify a defect. So
make them ratify it. The only requirement for ratification
is? Unauthorized act, you can ratify it later on post
factum.
19
 What is required when you ratify an unauthorized
act?
The same requirement as a waiver: must be
intelligent, you understand its ramifications, second, it‟s
voluntary, and then you have capacity to ratify. Whether
you are a stockholder or you are a proxy or you are an
administrator or administratrix of an estate, you have the
capacity to ratify. So that is what you do top close the
door to any controversy.
Alright, you take a look at sec 38: Power to
increase or decrease capital stock; incur, create or
increase bonded indebtedness. And then it requires
qualified notice.
Sec. 38
XXX
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 XXX
What book of the corporation? If it is a stock and profit
corporation, it is the „stock and transfer book‟. If it is a
non-stock non-profit corporation, it is in the „book of
membership‟ of the corporation. That is the equivalent of
the „stock and transfer book‟. And the addresses of the
stockholders are recorded therein by the secretary of the
corporation. That is what determines the exact
compliance of this particular *. So again, qualified notice
is required.
The corporation has no corporeal referent. Did the
corporation increase or decrease its capital stock? How
do you determine that? By looking at the formalities.
Nangutang ba ang corporation with the bond?
How do you determine that? You go to the process
applied in sec 36 of incurring bonded indebtedness.
Because if it is not bonded indebtedness, it‟s only the
BOD who need determine the vote for increasing
indebtedness, not necessarily bonded indebtedness.
Now, you take a look at it in the natural person.
Nagutang ka ba ni Polano? Wala. What are the
formalities? Sign kag promissory note. Wa may
promissory note na gihatag ang creditor. Unsa man na
iyang gihatag? Naa ra siyay suwat nimo na pasayluha
lang ko day kay nauwahi ko sa pagbayad sa second
installment. Unsa man na? Or you admit in open court in
another proceeding that you were in fact indebted to the
creditor. That is the reality. That is not a formality. There
is no such thing in the corporation. You only have the
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
formality, because the corporation has no corporeal
referent. So once again, pay attention to the formalities.
Now, I explained to you why there is need for
stockholders‟ participation in the exercise of the
corporation to increase, the power to exercise for
purposes of increasing bonded indebtedness, and there
is no need for stockholders‟ participation if you increase
ordinary indebtedness. Why is that? Because bonded
indebtedness actually is indebtedness to the public. A
bond is not only issued once and for all. After its primary
issue, it can be traded in the bond market bought and
sold before maturity. And the quality of your
indebtedness is affected by whether or not it has the
backing of the entire corporation as mandated by sec 38.
Is the corporation willing to shoulder the
obligations of making it right with the lending public?
Kanang bonds gud, bought and sold man na in the open
market. Kanang original na nipahuwam sa corporation na
nag kupot sa bond, maka turn around sad na sya „sige,
gikapoy nakog kupot ani niya, gusto na nako irealize ang
cash niini, ibaligya ni nako‟. Nganung ang isa paliton
man? Kay makaginansya man syag palit niya. Presyuhan
man nimog ginansya. Mukimbra ka sa imong kuhaunon
ana, siya, kaginansya siya. So it is bought and sold in
what they call the „secondary market‟ for bonds. So the
public is involved. That is why it is more stringent for the
corporation to borrow by means of a bond.
And bonds now are becoming very
sophisticated. For instance, the SC has not yet come out
with a decision as to whether or not a corporation which
only has a maximum term in the articles of 50 years, can
it issue 100-year bond? In the US they can. In Europe
they issue 100-year bond. And it is still the rule there that
corporate existence by term in the articles is still 50
years. Muingun ka siguro pareho ra na sa US. Don‟t
assume because there is a decision in the Philippine SC
and it says that a corporation cannot enter into a usufruct
agreement that is over 50 years. If that is the basis, you
think the SC will agree that the corporation will issue a
100-year bond, if it cannot issue a usufruct agreement
more than 50 years?
Can you remember that decision that you took
up in property? Phil Banking v. Lui She G.R. No. L-
17587 September 12, 1967. Insik to si Lui She. Siyay
nag abang atong karaan na kaayong balay atong * living
with 20 cats and 10 dogs. Tiguwang na kayo unya nag
agreement sila. Pila to ka years ang ilang agreement? 99
years. Ingun ang SC 99 years that is equivalent to an act
of disposition. Tan-awa ra gud na. The mathematics of
the SC is elementary. Mao na na the SC nullified that
lease agreement.
So what do lawyers now do? Whenever you
enter a lease agreement, the lawyers will say 45 years
renewable for another 45 years. Mao na na ron ang mga
agreement. Then what happens when the Constitution
says that there is an exception as to the 50-year limit for
the development of the natural resources? What is that
20
exception? When it is water rights, it can be more than 50
years. Dinha na na mag bangga.
Does the SC really assume that the corporation
will die? And yet the commentaries are „a corporation,
one of its powers is perpetual existence‟? Because the
renewal of its articles is unlimited number of 50-year
terms.
Floating bonds
I explained to you already about the 3 parties in
a bond. When you have a bond, you always have 3
parties. The issuer. And then you have the .. Now, why is
this rubric required? It is required because the holders
are numerous. Kung nanghuwam pa ang corporation
from a bank, the creditor is only one, the bank. Who
holds the collateral? The bank. But if you borrow bonds
from the public, you float the bonds. This terminology
why is it called float? A corporation floats a bond. Palitun
gani sa public, that means your bond floats. Dili gani
palitun sa public, way salig ang public sa issuer. The
bond sinks.
Now, provided in the bond is a trustee. The
purpose of the trustee is no. 1: he holds the collateral that
secures the bond. No 2: he acts for and in behalf of the
beneficiary in case at the time of maturity, the issuer
does not come across. Di na man makabayad ang
issuer. Kinsa may mukiha niya? Pila man ang filing fee?
Dako kaayo ka yang bond 2 billion man. Unya akoy
mubayad ana? Paita. Wa nay mufile og kaso. Kay nganu
man? Mayukmok man tanan. Kinsa may mufile? Ang
trustee maoy mangubra. Now, kung din a gyud
makakubra, unsa may buhatun sa trustee? The trustee
forecloses and executes on the security. Unya siyay
mamayad sa beneficiary. So it‟s complicated. A bond is
not kiha ra ka sa imong migo kay na short ka, dili. It is
complicated.
Now, it is further complicated because bonds
sometimes are bought by institutions. There are
corporations that have very good credit rating that when
they issue bonds, institutions buy them. What institution?
Let‟s say a retirement fund buys a bond. Now, muingun
ka, unsa may nakacomplicate ana? Supposed a bank
has a mutual fund? Mga tawo muinvest ining mutual fund
kay mas dako kunog return kay kani sila mao maning
mutuon unsaun pag deploy sa kwarta. Suppose this
mutual fund is 30% equity pero 70% sovereign or class A
bonds. Sovereign bonds kanang IOU sa gobyerno. Class
A bonds, kanang mga bonds sa San Miguel, PLDT.
Muingun ka ok way problema. But this mutual fund is
also listed in the stock market. Mao nay gitawag nila og
ETF (Exchange-Traded Funds). Then they will be judged
„Unsa man mo? Kanang inyong gibutangan dinha class A
bonds ba gyud na?‟ Di tan-awun na sad nila ni.
Examinon na sad ni nila. So your scrutiny as to the
formality is twice, from the SEC, from the point of view of
issuing, and then to the point of view of being listed
secondarily.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
Somebody said today everything is equitized.
Everything is already in the stock market, directly or
indirectly. Bonds ka lang unta unya nganung naa naman
ka sa equity? Kay exchange-traded fund naman na nimo,
traded in the stock market. So that is why, this formality is
required. Ayaw mo tuo anang giingun anang mga
commentator „because you borrow the bonds in a much
bigger amount, therefore, it requires higher formality‟. Wa
na siya ka basa. Wa na siya kahibaw unsa ng bonds.
You can borrow a lot of money from the bank,
even higher from what you can borrow from the bank. But
the advantage of the fund is if you have very good credit
rating, you can borrow more cheaply from the bank.
Barato ang bonds. Labi na og foreign-denominated
bonds. Mao na pag increase sa exchange rate, mubo
tan-awun. Barato pa when you borrow in dollars because
the bond is in dollar, but when the exchange rate
changes, that is the risk, downside risk.
January 05, 2017, Montefolca Z
So we are still in the powers of a corporation.
The powers grid will be distributed to you. List of all the
powers in the first column. The succeeding column will
be all the requirements xxx so that is the codal summary
of title 4 of the corporation code. We discussed about the
power to increase incurr create increase bonded
indebtedness. It requires the 2/3 vote of the stockholders
of the corporation issuing the bond you might understand
that incurring bonded indebtedness requires 2/3
confirmatory vote of the stockholders voting and
nonvoting. But increasing bonded indebtedness. Pun-a
na nimo do you still have to get a 2/3 vote? Mind how
cumbersome that is? You are a corporation like PLDT
with over 2M stockholders you will hold a meeting with
the stockholders it becomes too cumbersome.
What do corporations do? I explained this already to you
what they do. They create a subsidiary corporation.
100% fully owned by PLDT let us say this corporation is
called PLDT capital corporation. What is the purpose?
The purpose of this corporation is to facilitate bond
issuances for the benefit of PLDT the mother corporation
so it is clear from its purpose. Then it issues bond for
PLDT. Why would the public buy the bonds of PLDT
capital bond corporation? Because it is 100% guaranteed
by PLDT. And in fact it is for the purpose of meeting the
capital financial needs of PLDT. Now, that corporation
has only about 10 stockholders. It is just a subsidiary.
Very easy to get 2/3 vote. They can comply because it‟s
the issuer but it is completely guaranteed by PLDT. So
the next time you get a press release about the bond
issuance you go carefully xxx and you will find out that it
is not the corporation that issues because it is too
cumbersome. It is not meralco that issues the bond for
meralco it is a subsidiary of meralco because of the
requirement of 2/3 confirmatory vote.
21
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
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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)
Section 38 says a certificate in duplicate must be signed
by a majority of the directors of a corporation. So this is a
particular resolution that requries signature of a majority
of the directors of the corporation.
 (Votes for certificate in duplicate) Is it a majority of
the quorum of the board of directors(BOD)? or is it
the majority of all the directors?
Absolute quorum in other words if there are 11 in the
board, to make it a valid board meeting the quorum is 11
now do you get the majority of the quorum if 11 are
present, is that sufficient to comply withthe requirement
here? Or must all 11 can constitute the quorum vote so
that you have the majority of the directors of a
corporation?
22
According to authorities what is required in each of the 8
instances mentioned in section 6 it must be the abosute
majority of the directors. Not just the quorum majority.
We are in the second paragraph of section 38
increase and decrease of capital stock incurr increase
bonded indebtedness. Board action by majority vote that
is a requirement. 2/3 vote of outstanding capital stock of
the membership, that is a requirement. Nonvoting shares
participation that is a requirement qualified notice, that is
a requirement. Appraisal right applicable? Yes. When it is
to extend shorten corporate term, but when it is bonded
indebtedness there is no provision in section 38 granting
the right of appraisal if you oppose.
So that is all you have to remember with respect
to bonded indebtedness but when it is an incease of
capital stock, then you apply for the increase of capital
stock, you must already have subscribed at least 25% of
the increase. It must already be subscribed and then at
least 25% of the subscribed must already be paid in
because that is required by section 38.
Sec 38.xxx
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:
Remember when you incorporate, when you
register a corporation, if you are using in the articles par
value shares, then at least 25% of the authorized must
be subscribed isnt it? And 25% of the subscribed must be
paid up so also when it comes to increase of capital
stock. Remember the referrent is the increase not the
entire increased capital. When you say 25% must be
subscribed, 25% of what? It must be 25% of the increase
must be subscribed. Why is that? That is important to
point out because when we say the original capital
authorized capital is 1M then when you file for
incorporation all you need is 250k for subscribed and
then 25% of the 250k must be paid up.
Let us say you have already fully issued all the 1M
authorized capital, it is already fully subscribed and paid
up. You want to double the capital so you apply for
increase of 2M so it becomes 1M authorized and you
want to increase it to 2Mbut the paid up is already 50% of
the new authorized capital subscribed and paid up
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
 Do you still get new subscription?
Yes. because the basis for the 25% subscribed and 25%
paid up is the increae, the 1M that you added to the
whole authorized capital stock.
And then it is not important that individual stockholder or
subscriber pays 25% of his subscription. Some
subscriber will pay only 10% depending on the
corporation officers or authority granted by the BOD. The
important thing is that the aggregate paid up must be
25% of the subscribed.
So if the increase is 1M you must subscribe at least 250k
of the 1M increase. Rememebr the original authorized
capital is 1M you increased it to 2M, the basis for
determining the 25-25 is the increase. So you must
subscribe at least 250k of the 1M increase. The paid up
must also be at least 25% 250k but it is not necessary
that each subscriber pays at least 25% of his subscribed
capital. It is does important that the entire paid up capital
is at least 25% of the subcribed.
“Bonds issued by the corporation shall be registered with
the SEC which shall have the authority to determine the
sufficiency of the terms thereof” so this is an entirely new
process not covered by the coporation code but covered
by SEC regulation code the process of registering a bond
because a bond is a security. You cannot issue a bond to
the public, sell a bond to the public without first
registering it with the SEC.
 How about if you issue a bond and the exclusive
buyers of the bond are also stockholders of the
corporation? Nothing is sold outside of the
corporaiton. Do you still register?
That is considered an exempt transaction but
you still have to apply for exemption from registration and
if you look at the xxx of the SEC regulation code, there is
a fee for being exempted from registration gamay lang
nuon. Its not like applying to register a regular bond that
is not exempt. You still pay an exemptionfee and is it
computed according to the face value of the bond. But
we will have time to take that up once we go to the SEC
regulation code.
Sec. 38.
Xxx
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.
There is no prohibition for a non-stock non-profit
corporation from issuing a bond. But then the
23
confirmatory vote is of the memebrs because there are
no stockholders.
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.
rd
Power to deny pre-emptive right. That is the 3 in the grid
here. Section 39.
 What is pre-emptive right?
It is the right to subscribe, to newly issued
shares in such number as to maintain your original
proporaiton of ownership of issued shares.
Let us say upon incorporation you are a
subscriber and you also made a downpayment now you
are a subscriber and you are now a whole stockholder
having paid the full value of your subscription. The full
value of your subscription in relation to the issued shares
of the corporation let us say 10%, the corporation has
issued 1M shares at 1 peso par value which is the
preferred par value of the philippine stock exchange
unless you are a banking or quasi banking corporation
where the par value is P10.
Normally P1 so you subscribed to 10% and then
pre-incorporation subscription the issued price is par
value wa pa man nag operate P1 sad. Let us say you put
100k shares in relation to the issued shares let us say
they issued 1/2 of that 500k. you are a 20% owner of the
outstanding capital stock. 10%. let us say the corporation
now decides to issue the remaining 500k. how many
shares are you entitled to purchase? You are entitled to
purchase another 100k shares to maintain your
proportionate share of the oustanding shares
 Where do you find out whether you have pre-
emptive right?
Section 39 says pre-emptive right is presumed if
the articles and by laws are silent as to WON you have
pre-emptive right, you have pre-emptive right. In other
words, the articles and/or by laws musy deny you pre-
emptive right in order that you do not have pre-emptive
right.
 But if there is no provision in the articles and or by
laws denying you pre-emptive right or if there is in
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
fact an explicit provision that you have pre-emptive
right can you still be denied of pre-emptive right?
The article says you can. Why? Because it says
“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".
Suppose the corporation is covered by a law
that requires it to sell shares to the public normally this is
requried of public utilities like PLDT meralco. Public
utilities or those engaged in the business that is
intimately related to the general life of the public. The
most recent one that issued this to the public is shell
petroleum corporation. Shell praticed overdue it is
already more than 10 years. What is the original name of
shell oil corporation? There are 2 corporations of shell.
Shell oil and shell petroleum. The original name of shell
oil the one with gas stations. You have not heard of this
corporation. ARABAY corporation that used to own all
shell stations. that stands for Araneta Aboitiz Ayala.
Why? Because shell is Anglo-Dutch it has no right to
engage in retail only the Americans, caltex, mobil they
can engage in retail because of parity. Rememebr the
parity provision in the constitution? Wa mo kaabot kay
pagkatao ninyo wa nay parity. But originally, the 1935
constitution granted americans 50 years same right as
Filipinos. They can own land, they can engage in retail.
That‟s why mobil caltex … is already a later development
they can open gas stations but shell, anglo-dutch, they
cannot open gas stations. That‟s retail so they put up this
corporation ARABAY. They chose these top families 60%
then shell is 40%.
… shell oil and and shell petroleum because they
merged. How did they merge? One of the shell
corporation acquired the refineries and xxx for this
acquisition. Capital gains tax. Tan-awa na. Kastigo siya
sa supreme court. This came out last year. The Sc says
whenever there is acquisition and you continue the
business there is no capital gains. There is no gain that is
realized.
Manghud rana gamay sa collection of taxes sa NPA
why? Because bisag pildi ang BIR, the BIR cannot be
commanded to repay. It will say just a tax credit. It will
charged to your future taxes di kanamo I cash-out ang
nakulekta namo. So it cannot stand to lose. Why?
Because it is a sovereign. Bati ng balaora. Sa states
bayad ka ug damages. If you make a wrongful colleciton
you pay damages in the US. When you go in excess of
your powers you pay. In the Philippines you don‟t. Mao
na way tax refund. Sa america one week after you file
your income tax you have tax refund ig you have
overpaid. Sa pinas wa. If you overpay mucomplain ka,
daog ka, ingnan ka, next year di ka kinahanglan
mubayad iipon na namo. That‟s tax credit. Mao na mga
abusado. Thats not the way to collect taxes. If you
believe colleciton of taxes is maximized by forcing
people, wa! Maguang ra na gamay sa NPA.
24
So now if the law forces you to issue shares,
you are a public utility you are required to sell at least
10% of your outstanding capital stock to the public in
general. The moment the corporation issues those
shares the stockholders cannot complain “I have pre-
emptive right” no you cannot exercise pre-emptive right
over those shares because those shares are required to
be issued for the public.
Again, for those shares issued in goodfaith with
the approval of the stockholders representing 2/3 of the
outsanding capital stock in exchange for property needed
for corporate purposes.
 Must the need be essential or merely convenient
in order to cancel out pre-emptive right?
General jurisprudence says mere convenient
need is enough to cancel pre-emptive right. It does not
have to be essential. Life or death need of the
corporation. If it is for the purpose of convenience you
have denied pre-emptive right.
Example: Philex mining silangan project in surigao. Who
is the neighbor of philex in silangan? It is mambinum
mining owned by felcris. Mr. Yap. Crispin yap and felino
yap made felcris. One of them is already dead so it
should be cris. Or fel. But its corporate name is felcris.
Actually it is the father that owns. Philex already made
actual determination of ore. There is possible ore there is
probable ore and there is actual ore. If your exploratory
drilling poles are just 10 meters apart that is considered
in mining at least in gold mining already as actual ore.
Half kilometer gani, naay ore diri, naay order didto,
probable ore ang naa dinha. Naa gani kay satellite data,
mu ingon ka naa nay ore dira kay nag siga siga xxx
topographical. There must be ore that‟s possible ore. You
do actual ore drillings. Only between your xxx and next to
you topographically almost identical similar to your claim
is this other claimant, you do not drill the ore that is not
yours. Unya gold mani dinhi ug copper chances are, dinhi
sad gold ug copper. Diba logic? (ambot lang jud pads)
unya mu ingon ka mudoble tingali akong actual ore if I
acquire this. How do I acquire this? Ibaligya ba niya iyang
claim? Nakakita nakag gold dinha nganu ibaligya mani
dinhi? Ingnan nimo kuyug ta ikaw, you do not have to put
up a plant etc. Because I will put up and I will issue you
shares. Can the stockholders say we have pre-emptive
right. Do not issue him shares he‟s not a stockholder of
philex. The corporation will say we need that. Yes it is a
need but it is not life or death. It is just convenient need.
Can you deny pre-emptive right on the basis of
convenient need not essential sine qua non need?
Need as determined by the board.
Jurisprudence says convenient need is sufficient
to deny pre-emptive right. That‟s what happened to
mayna mining. Mr yap says give me cash for 1/2 and
give me shares of stock for the other half. That is how
they built felcris centrale. It is presumptively pretending to
be french. And next to a depressed neighborhood. That‟s
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
why the walls are very high. you just lower the wall and it
will be the french revolution. LOL That‟s 2B thats how
much yap got.
And then it says for in payment of a previously
contracted debt. What is this? In civil code this is called
dacion en pago. Dacion en pago you give as a form of
payment. So from creditor you trasnform your credit into
ownership. The corporation owes the bank this much the
corporaiton can no longer pay the creditor. The creditor
takes a look at the corporation and is sees a promising
business. The corporaiton proposes to the creditor why
don‟t we erase the debt and we will give you shares of
stock in exchange for our debt, that is dacion en pago.
The creditor can no longer demand payment because he
is now a stockholder. He is paid shares of stock
according to the value of his credit.
 Now those shares of stock issued by the
corporation can the stockholders stop the
corporation and say we have pre-emptive right
you should sell that to us first.
No, because it is to save the corporation from
the payment of debt. But it requires 2/3 vote of the
stockholders. If the remaining 1/3 opposed, they cannot
successfully stop the transaction. 2/3 is what is required
to accomplish dacion en pago and exchange of property
needed for coporate purpose.
You should not confuse pre-emptive right with right of
first refusal.
 What is the right of first refusal?
It could be a tolerable restriction on the
disposition of shares. The articles of incorporation might
contain this restriction. Before any stockholder can
dispose of his shares, he must first offer the same to the
corporation or go to any of the stockholders. And he can
rd
only sell it to 3 parties after the corporation or the
stockholders have waived their right. That is right of first
refusal.
Or two stockholders xxx to an agreement none of us will
sell our shares unless we offer is first to the other. And
this agreement is registered in the stock and transfer
book and its also annotated on the certificate of stock. So
rd
a 3 party who is offered the shares is given notice that
there is this pre-emptive right he cannot later on say I am
an innocent purchaser for valu because it is anotated in
the certificate of stock and you need a certificate of stock
to conclude the transfer of shares. The secretary too is
notified so he cannot make it transfer he cannot cancel
his own shares without determining as to won the
annotation has been cleared. That is the right of first
refusal.
That‟s why I pointed out to you the case of JG SUMMIT,
the famous right of first refusal with mitsubishi on the
bataan shipyard. 40% foreign owned. 60% owned by
filipinos. They have a right of first refusal. 40% filipino
25
owned by taken over by NBC. NBC later on opened for
bidding the sale of its shares. JG summit won but then
mitsubishi says we have a right of first refusal we are
exercising it. JG summit says foul because if you do then
this corporation will be fully owned 100% foreign.
Therefore there is no pre-emptive right. Read that case
so you will know the romualdeses how they got their
biggest loan. Xxx owners of bataan shipyard kay wa na
sila kabayad kay gi imbargo. There is a lot of history
there.
January 6 2017 Sadsad, A.
So we are in this part of the Corporation Code
with so many formalities because the exercise of these
powers are fundamental powers with serious effects on
the life and operation of the corporation. Whether or not
you increase or decrease capital stock - that is a major
change in the corporation. So there has to be a good
deal of formalities to verify whether that is really the mind
of the corporation. That is why you will need the
participation of the stockholders. We saw in the past title
that the powers, properties, and the term of the
corporation are vested in the Board of Directors. That is
the seat of activity of the corporation. But when it comes
to fundamental powers as listed in Section 6, then the
Board of Directors or Board of Trustees requires
ratification from the stockholders or members of the
corporation.
 POWER TO DENY PRE-EMPTIVE RIGHT
We finished with power to deny pre-emptive right. We
said before that pre-emptive right must be distinguished
from the right of first refusal.
Pre-emptive right applies to unissued shares mainly but
commentators now say that it also applies to reissuance
of treasury shares. Why? Because the way Section 39 is
now worded:
Section 39. Power to deny pre-emptive right. – All
stockholders of a stock corporation shall enjoy pre-
emptive right to subscribe to all issues or
dispositions of shares of any class. xxx
So it just does not apply to all issuances but also to
disposition of shares. So treasury shares, if there is an
issuance, it is subject to pre-emptive right.
 Does pre-emptive right apply to issues waived by
stockholders
For instance the corporation issues new shares
and there are 100 stockholders. 50 of the stockholders
declined to exercise their pre-emptive rights. Now, as to
the issues which they declined, do the remaining 50 (who
exercised their pre-emptive right) have pre-emptive right
over those shares that have been declined by the other
stockholders? That is the issue.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
The SC has said there is no more pre-
emptive right over those shares. Why? Because if
there was, it just serves to increase your proportionate
share of the outstanding capital stock (OCS). It is not with
the effect of maintaining your proportionate share. Your
proportionate share will in fact increase if you exercise
your pre-emptive right and you still buy more shares from
those that are declined by other stockholders.
 So who has the right to purchase those declined
by existing stockholders?
That is for the board to determine. So the
Board will either offer it to other stockholders or to third
parties. That is not a violation of the pre-emptive right of
existing stockholders.
So we have seen the exceptions under Section 39:
1. When the articles and by-laws deny pre-
emptive right
That is allowed. In fact that is what the PSE
would like for all its corporations that are listed
in the stock market. If you have that proviso in
your articles and by laws you are actually open
to the public. That makes all your shares listed
shares.
2. When the law requires that you sell shares
other than to exisiting stockholders in order
to broaden the ownership base of the
corporation
Why is the ownership base ordered to be
broadened? That is the usual reasoning when a
corporation is engaged in services that affect
the general public like public utilities. They will
want a broader ownership base so that the
public in fact that stands to benefit will have a
say as to the policies of that corporation
because they will become part owners.
The rule is if you are engaged in a public utility,
th
before you reach the 10 year of your
operation, you must sell at least 10% of OSC to
the general public.
That just happened to Shell last year. Shell
finally began to sell their shares of stock to the
public to the extent of 10% because they finally
merged with different Shell Corporations. They
merged it. They used to divide the Shell
Corporations. The owners of the gas stations
(who are engaged in retail) were separate from
refineries. Refineries do not need to be Filipino-
owned. If you have a gas station, that is a retail
establishment is it not? A retail establishment is
26
an establishment which sells its products or
services directly to the end-user. If you sell to
someone who in turn sells it to the end-user,
you are not a retail establishment. You are a
wholesale establishment. A refinery that
processes crude oil into gasoline, diesel or
diesoline, does not sell to end-users. They sell it
to the gas stations and the gas stations sell it to
the end-user that‟s why Shell Refineries and
Shell Oil were separated.
 POWER TO SELL OR DISPOSE ASSETS
If you have your grid, right away you can see the
requirement.
Section 40. Sale or other disposition of
assets. – Subject to the provisions of
existing laws on illegal combinations and
monopolies, a corporation may, by a
majority vote of its board of directors or
trustees, sell, lease, exchange, mortgage,
pledge or otherwise dispose of all or
substantially all of its property and assets,
including its goodwill, upon such terms and
conditions and for such consideration,
which may be money, stocks, bonds or other
instruments for the payment of money or
other property or consideration, as its board
of directors or trustees may deem expedient,
when authorized by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock, or in
case of non-stock corporation, by the vote of
at least to two-thirds (2/3) of the members, in
a stockholder’s or member’s meeting duly
called for the purpose. Written notice of the
proposed action and of the time and place of
the meeting shall be addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation and deposited to the addressee
in the post office with postage prepaid, or
served personally: Provided, That any
dissenting stockholder may exercise his
appraisal right under the conditions
provided in this Code.
So right then and there, you know a meeting for the
purpose is needed. Qualified notice is necessary. And
then 2/3 vote must be counted from the combined base
of voting and non-voting shares.
 When is a corporation deemed to have sold all or
substantially all of its assets.
The law says:
If thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for
which it was incorporated.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
If you can no longer comply with your main
purpose clause after you have sold your assets, you are
considered to have sold “all or substantially all” of your
assets. Which means to say that if you have sold all or
substantially all of your assets and you can still continue
to do your business for which you are founded, you are
not covered by this. You do not need stockholders 2/3
approval.
Is that possible? Baligya nimo tanang asset sa
corporation and then you can still do the business of the
corporation? That is the example of Barti
Telecommunications of India. What did Barti do? The
Board approved the sale of all its cell sites, all its wiring,
all its physical assets back to the suppliers Nokia and
Siemens. But they did not ask the vote of the
stockholders. Are they violating the Corporation Code?
No. Because before they did that they made Nokia and
Siemens sign that they are leasing these equipment for
25 years renewable for another 25 years and that they
were obliged to enhance and increase these telecom
assets as their subscribers grew. They did not hold a
stockholders meeting. They just sold everything and they
made these people sign.
What was the purpose? So they will have extra
money to market their service to general public, to
provide incentives for people to subscribe to their service.
You know very well that in the cellular service many
times you have to buy the subscribers. You subsidize
their cellphones. You make it available to them at very
attractive prices and that will entice them. Mu-subscribe
ka unya muingon ka nila tagaan ka nilag iphone, apil na
sa imong subscription pero kuptan ka nila for 3 years
diba? So gibaligya nila ilang equipment unya karon nag-
abang nalang sila. Lowers their cost! So now they are the
biggest cellular telecom service in India.
There is another corporation who did the similar
thing. Kimberly Clark was originally the second biggest
forestry owner in the US. Its basic business was lumber
and logging. They owned forest concessions and they
had many lumber sawmills. Then there comes their
president who decided, “Let‟s give up this business, the
profit margin is very thin.” So they decided to sell all and
then they went further down the stream of business.
Nagbuhat na silag tissue ug diaper.
The trouble is they did not hold a stockholders meeting
so they were sued by some disgruntled stockholders.
What happened? By the time the case had advanced it
was very clear that the President made a good move
because he was giving dividends because Kimberly Clark
became very profitable. So those who were complaining
had to withdraw the case.
I would just like to point out that there are
misguided commentators who said that when you sell,
lease, exchange, mortgage all or substantially all of your
property then you are subjected to the Bulk Sales Law. In
other words you have to get a clearance from SEC and
the Department of Trade before you can sell, lease,
27
exchange, mortgage, pledge or otherwise dispose of all
or substantially all of your assets. That is wrong because
the Bulk Sales Law applies only to merchants. It is a
medieval law. Kinsa may covered ana? Kanang mga
ukay-ukay, dry goods, peddlers and they are the ones
covered because most of their goods are held on
consignment and it is very easy for them to escape their
responsibility as a debtor by just selling the whole thing
involved at a huge discount and disappear. That is what
is sought to be prevented by the Bulk Sales Law.
Also, sale of all or substantially all assets in the
ordinary course of business is not covered. Suppose you
are a real property developer. Palit kag raw land. Then
you subdivide it into several hundred units. Then you
have a financing agreement with SSS, GSIS or Pag-IBIG
for the home mortgage. Let us say you have one creative
salesman there who approaches one government office.
Na-convince niya ang employees mamalit tanan. Nahurot
ang imong assets as a real property developer in one
swoop. Now, to do that, do you need the stockholders‟
vote? No! Because it is in the ordinary course of
business. So be careful about these things. When a
problem is given to you, it might be ordinary course of
business, bulk sales. So that is not covered.
Remember that the appraisal right is available to
a dissenting stockholder. We will later on see how you
exercise appraisal right. You are a stockholder. 2/3
voted. You voted against it. Supak ka ato because it
means that the corporation will drastically change its
nature. Unsaon man na nimo? You register your
appraisal right. You are actually telling the corporation,
“Buy me out! Appraise how much is my stockholdings
worth and pay me.” That is appraisal right.
 POWER TO INVEST CORPORATE FUNDS IN
ANOTHER CORPORATION OR BUSINESS
Now, 2/3 vote of the stockholders is also required if the
corporation engages in business other than the
secondary or primary purpose of the corporation. That is
Section 42.
Section 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
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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)
Section 42 is the reason why the SEC wants
you to distinguish in your articles of incorporation which is
the primary purpose and which is the secondary purpose.
You must clearly state there. Because once you go to the
secondary purpose, you cannot go there unless you get
the 2/3 vote of the stockholders, voting and non-voting. Is
there an exception?
The exception is: 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 is
shall not be necessary.
If you invest in another corporation precisely to
further your primary purpose, you do not need the
stockholders‟ 2/3 vote.
For example your business is to produce muscovado
sugar or all other kinds of sugar and to refine sugar and
produce white sugar. Mao na imong business. Now the
corporation votes to invest in a jute sack manufacturing
company. Karon plastic na na ang sako na sudlan sa
asukal. Niadto mga 1950s it was jute sacks. So they
invested because many times they had to stop
production because they were short of sacks. So they
say, “In order to be sure that we have enough supply of
sack to contain the sugar that we produce, we made an
investment.” But then they did not obtain the
stockholders‟ vote.
Now it was well and good if nothing untoward
happened, but as history would have it the jute sack
factory went bankrupt and closed. So na-water ang ilang
investment. That is when the stockholders sued the
members of the Board. The defense of the Board is that it
falls within the implied powers. What is the express
power from which the implied power is derived? The
express power is to produce sugar. Now, when you
produce sugar you have to place it somewhere. So
according to the Board they have the implied power to
procure sacks where the manufactured sugar will be
placed. Is the Board correct? SC says yes! It‟s an implied
power. Not all investments in another corporation is
subjected to confirmatory vote of stockholders. If it is an
exercise of an implied power, if it is needed to
accomplish a primary purpose then it is not this kind of
action or exercise of ordinary power that requires
stockholders‟ vote.
Now again a dissenting stockholder should have
appraisal right as provided in this Code. Those who do
28
not agree that you are investing in another corporation,
you can dissent and ask the corporation to buy you out.
Power to invest in another business or in
another corporation – this is the difference between a
corporation and a partnership.
Sa partnership di man kinahanglan nga mag-voting.
Kutob sa mahuna-hunaan sa partner, with the consent
alone, diretso. There is no declaration of which purpose
is primary or secondary.
But in a corporation there is a distinction between
stockholders and Board of Directors. Stockholders
determine the purpose. The Board of Directors determine
the policy, how to pursue the purpose. The workers
execute the policy. Then the Board re-evaluates the
execution. Who will say whether the policy is correct or
not? If it is a very elaborate policy the Board cannot
decide because they will be judging themselves. That is
when they hire consultants nga musulti nila nga sayop ni
inyong policy.
 POWER TO ACQUIRE OWN SHARES
Section 41. Power to acquire own shares. – A stock
corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has
unrestricted retained earnings in its books to cover the
shares to be purchased or acquired:
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. (a)
When you acquire your own shares you do not need the
vote of the stockholders.
1. To eliminate fractional shares arising out
of stock dividends;
This is when you realize that when a corporation
issues a stock dividend, normally, they will also be
issuing some form of cash dividend to buy back fractional
shares unless they do rounding up.
Let us say the corporation declares 10% stock dividends.
You have 10 shares. So pila man imong dibidendo? You
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
have 1 share. Way problema na. But let us say your
shares are 11. Naay declaration, pila man ka shares
imong dawatunon? 1.1 di ba? Ah naa kay fractional
shares. Unsaon man na? Di man na mahimo nga tagaan
kag stock certificate nga 0.1. The corporation must
purchase the fractional shares aron didto na mag-tagbo
sa Treasury mabuo na na tanan. Many corporations just
don‟t bother to issue fractional shares. Ilaha nalang nang
gina-round off. 11 kabuok imong shares, pila man? Ah
usa nalang ka share. So remember what is the origin of
the fractional shares? Stock dividends. Normally a stock
dividend is declared as a percentage of your stock.
(5 min break)
January 6, 2016 Casan, J
Alright, let us resume.
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;
What are we talking about here? Par value shares or no
par value shares?
We are talking about par value shares. It cannot be no
par value shares because it cannot be bought in
installment. The moment it is issued, it must be fully paid
and non-assesble. So, par value gyud ni. Now, you make
a down payment, when is the balance to be paid?
There are two instances:
1.) The date stated in the subscription;
2.) If there is no subscription, the date of hold
made by the board of directors.
So the board of directors in the meeting where there is a
quorum set the date for the balances of the subscription
must be paid on or before January 30. So, come January
30, this particular subcriptor does not pay what happens?
Civil law pa na muiingun dayun ka Default! If you cannot
pay on the date of payment the obligation is due. What
happens to you? You are in default. Unya dili man ni Civil
law, so dili pa ka default.
The board of directors will give you another 30 days
th
because at the end of the 30 day, that is where the
board of directors can declare you DELINQUENT not in
default.
 What is the result if it is declared delinquent?
So the board of directors not earlier than 30 days and not
later than 60 days from the date of delinquency holds the
public auction. The entire subscription is up for sale.
29
Example: Kintahay and subscription kay 1000 shares at
1.00 peso par value ang gibayran lang nimu 300 pesos.
Ang balance nimu 700 pesos, 1000 shares at 1 peso par
value, delinquent naka, after 30 days wala pa man
gihapun ka nagbayad, declare ang corporation nga
delinquent, question:
 Are you automatically delinquent if after 30 days
from the date of call you have not paid?
The answer is no, it requires the declaration of
the board, Why? Why is there a need for a declaration?
Because for a delinquency sale to occur, the corporation
must be ready to buy those shares if there are no
bidders.
Suppose the corporation does not have unrestricted
retained earnings, unsaon man na siya? Paunsa siya
makapalit na it is prohibited by law to use capital stock to
buy shares of stocks, its own shares? So it is still within
the power of the board to declare delinquency.
So, delinquency na gani, delinquency sale not earlier
than 30 days not later than 60 days public auction na.
The bidding price is the same to all the bidders.
 What does the bidding price consists of?
The balance of the subscription so you begin
with 700 pesos (father is referring to the earlier
example),the interest that has to be paid on that 700 if
there is interests, penalties, if there are penalties. There
are penalties if there is also interest. Fourth, we also
have the expenses of the action sale because the
corporation has to rent a room and it has to hire an
auctioneer. So they will pro rate all those expenses and
charge to the delinquent subscriber,
So the balance of the subscription, plus interests,
plus penalties plus cost of the sale is the bid price
for the subscription.
Now, let us say the bid price for that
subscription, 1000 shares 1 peso par value, 300 pesos
ang downpayment, 700 ang balance, I add ang interest,
penalties, and the cost of sales, let us say it is 760 pesos,
that is what will be bidded by every single bidder.
There difference is bidder A will say 760 for 500 shares
of the 1000 let B say 760 for 550 shares, abd bidder c will
say 760 for 450 shares. Kinsa man makadasug sa bid?
Ang makadaug sa bid kini siya (referring to bidder C)
Same bidding price for a lower number of shares.
So the winning bidder will be given a certificate of stocks
for 550 but the entire subscription is 1000 naa pay 550,
asa man na paingun ang 550 shares?
Adto na sa original subscriber, o ngano man na?
manguna ka why is he rewarded na wala man siya
nakabayad?
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
He is being rewarded because he took the risks. Le t us
say that on the period of that subscription the company
will be bankrupt that subscriber will be pursued up until
his personal properties as to the balance of his
subscription. He took the risks. So iyaha ang 550 shares
maadto sa winning bidder ang 450 shares.
Now what happens if there is no bidder?If there is no
bidder, then the corporation will be the default winner.
 How does the corporation will get the entire 1000
shares covered by the subscription?
It goes to the treasury thereby becoming a treasury
share.
Now, the 760 price for the bid will be deducted from the
unrestricted retained earnings and transferred to the
common stock, capital accounts sa balance sheet. Now
there are additionally issued shares that are 1000 shares
but it will be put in the treasury. Alright, you get the
picture?
So unsaun man intawun sa corporation na walay
unrestricted retained earnings? Pagkobra sa mga dili
mabayad na subscriber unsaun man nila? Can they go
through this delinquency sale?
They cannot because if there are no bidders they
become the default winner. If they are the default winner
they will be forced to purchase and they cannot purchase
it because they have no unrestricted retained earnings.
So usa ka magsugod anang deleinquency, kinahanglan
naa kay unrestricted earnings.
 Kung wala ka unrestricted retained earnigns unsa
man imung buhatun?
You go to the regular courts. Muingun ka bayri ang
imung balance ug utang sa corporation, kanang 700
pesos, plus interest, plus penalties, ordinary money
claims na siya.
Alright that is the second way wherein the Corporation
can purchase its own shares.
3. Pay dissenting or withdrawing
stockholders entitled to payment for their
shares under the provisions of this Code.
(Section 42 number 3, paragraph 2)
So we have seen already the instances where
the stock owner can exercise his appraisal right if the
corporation wishes to invest in another corporation and it
is not implied power. Everybody up to 2/3 will approve.
Ikaw wala ka muaaprove, 1/3 lang man mo so pilde mo.
So you can exercise your appraisal right. To do so, you
must surrender your stock certificate to the secretary.
From thereon, you no longer have any right but to be
paid, lanatawa ng exercise of appraisal right, there is a
whole chapter.
30
Maghulat nalang kag mabayran ka. You can no
longer attend debates, you cannot vote, you have the
right no right over the dividends, hulat nalang ka ug
bayran.
The company will offer you a price, suppose you
do not agree what happens?
The company chooses a representative, you
choose a representative, and both of them will select a
third party and that is the committee who will determine
the proper appraised price.
So kana sila tulo, dili man na sila mag serve out
of the goodness of the heart, kinahanglan bayran man
an, so who will pay kanang appraisal committee?
You will pay for your own representative, the company
will pay its own representative, and the third one will be
paid by whoever is incorrect. If the price arrived at by the
committee is closer to the price arrive at by the
stockholder, then the company should pay. If the price
they arrived at is closer to the company‟s offer, and it is
the stockholder who is exercising the appraisal right, then
it is the stockholder who must pay the compensation of
the appraisal committee. Mao na ang rules. That is the
rule.
Remember these instances referred here are
the instances when the corporation must acquire its own
shares.
But the law says, a stock corporation shall have the
power to acquire or purchase its own shares for a
legitimate corporate purpose or purposes. So even if it is
not necessary, the corporation can purchase its own
shares.
 Why should a corporation purchase its own shares
when it is not necessary?
Example: Suppose you are a TWITTER. And presyo sa
twitter karun sigeg ka nubo sigeg kaubos despite the
number of its users. Wala man niingcrease ang number
sa ilang users but it is already in the millions and the
number 1 high profile user of twitter is no less than the
president elect of the United States, Mr. Donald Trump.
So ngano man na sigeg kaubos ug kaubos na sige man
unta ilang advertisement. Their advertisement revenue is
growing, but sige siya ug kaubos 30 % down na gud na
just last year alone, pero ginansyado pa man sila, they
are making money so the board of directors ordered that
let us purchase our own shares.
Palitun nato ang atong kaugalingung shares, nganu
man? The whole purpose is to make more money twice.
How do you do that if you purchase your own shares?
1. First you reduce the number of the shares
outstanding, if you reduce the number of shares
outstanding, your divisor as to the total net
profits becomes smaller.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
Let us say your net profit is 1000, before you could put
the shares 1000 shares outstabnding pero kung
pamalitun nimu until 800 nalang nahibilin its earning per
share increases. Musaka ang earning per share kay
gamay nalang man ang divisor.
2. Now if it happens the public notices that, the
public will say taas na man diay ang dividend so
mupalit na niini. Adto ta didto. So musaka napud
and price nimu sa stock market. Pagsaka sa
price sa stock market kana ka pa mubaligya sa
stocks. So makaduha ka maka earn ug kwarta.
Is that a legitimate purpose? Yes!!! It is.
Corporations do that always. That happens when you are
making profit and the market is oblivious of your
accomplishments and they recognize the market value of
your shares of stocks.
So you do that. You by your own shares because
you believe that your own investment is better that the
other shares. Naa kay kwarta na ikagasto, niya dili man
na imu kay unrestricted retained earnings, why is that
allowed? Because you are not cheating the public, you
are not using the capital stock; you are already using
money in excess of your capital stock that you received
your issue in the original shares.
That is the power to acquire one‟s own shares.
And then what is not listed here is what is called
redeemable shares, if these shares are already classified
in the articles of incorporation as redeemable.
In fact there is already a date as to when it is to
be redeemable because the articles of incorporation says
“Class C” redeemable shares and it is redeemable on or
before the fifth year of the issuance of the shares. So in
that period the corporation has the option to redeem the
shares, to buy back the shares.
Now, that is the exception to the general rule
that the corporation can only repurchase its own shares
through unrestricted retained earnings because if it is
redeemable, you can purchase even if you do not have
unrestricted retained earnings. That is the reason why
you are ordered to buy back those shares.
The reason is, the shares of stock has the
attribute of a loan, mestizo lang ang redeemable shares.
It has an aspect of proprietary ownership, it also has an
aspect that it is a loan. Sigurado gyud ka mapalit nimu
imung principal, that amount that you paid for to receive
those shares.
So they allow it, but the exception to the
exception is if those shares are shares of a bank,
because even if it is redeemable with an obligation
clearly established that a bank must redeem it a certain
period. If the Bangko Sentral does not allow it, the bank
is excused from redeeming those shares. That is
31
because of the nature of a banking transaction, so kana
ha.
As a general rule, a corporation is obligated to
redeem those shares if it is redeemable shares. So,
power to purchase once own shares.
General rule: There must be unrestricted
retained earnings.
 What is the definition of unrestricted retained
earnings?
The definition was given by Batas Pambansa
Representative Benedict Abello (?)
Unrestricted retained earnings refers to
accumulated profits realized out of the normal and
strenuous operations of the business after deducting
therefrom distribution to stockholders and transfer to
capital stock and other outcomes.
You do transfer to a capital stock if you declare
stock dividend.
Alright, Section 43, the power to declare
dividends.
Section 43. Power to declare dividends. - The board
of directors of a stock corporation may declare
dividends out of the unrestricted retained earnings
which shall be payable in cash, in property, or in
stock to all stockholders on the basis of outstanding
stock held by them: Provided, That any cash
dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription
plus costs and expenses, while stock dividends shall
be withheld from the delinquent stockholder until his
unpaid subscription is fully paid: Provided, further,
That no stock dividend shall be issued without the
approval of stockholders representing not less than
two-thirds (2/3) of the outstanding capital stock at a
regular or special meeting duly called for the
purpose. (16a)
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock, except: (1)
when justified by definite corporate expansion
projects or programs approved by the board of
directors; or (2) when the corporation is prohibited
under any loan agreement with any financial
institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such
consent has not yet been secured; or (3) when it can
be clearly shown that such retention is necessary
under special circumstances obtaining in the
corporation, such as when there is need for special
reserve for probable contingencies. (n)
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
 Why is it that when you declare cash dividends
there is no need for stockholder ratification? But
when you declare stock dividend dili cash dividend
you are required to 2/3 vote of the outstanding
capital stock at a regular or special meeting duly
called for that purpose?
The law reads
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)
Now question, is that 2/3 based on voting
shares alone or voting and non-voting? Tan aw dayun sa
section 6 because that is where the non-voting shares is
provided. Is it one of the instances provided? Dili man so,
2/3 is just based on voting it does not include non-voting
stock.Timan-e na.
Declaring stock dividends requires stockholders
ratification, but cash dividends does not require, only the
action of the board only the majority vote of the board.
The law reads:
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
 Are there delinquent subscribers when the
company is making a descent profit and declare
dividend?
Maghulam ka ug kwarta unya imung bayran and
subscription balance nga wala nimu bayre kay makakuha
pa man ug dividend. So kung wala ka kwarta ug walay
gyud kay mahimu nay lain stockholder na muiingun na
palitun ko nalang na, ako nalang bayad anang balance
nimu nga wala nimu bayri. Padaghanun naku ako shares
kay ginansyado man ning kompanyaha. Walay
deleinquency basta naay ganansya ang Corporation.
Naay tao na magpahulam nimun ug kwarta arun bayran
nimu imung shares arun mapalit niya kadtong para nimu.
Diba? Hunahunaa lang gyuid na. Theoretical ra kaayu
ning diskursuha dire. That‟s is theoretical.
Now, there is this debate often undertaken:
32
 Can a corporation take back or counter back its
decision to declare dividend? If so when can it take
back its declaration of dividend?
When can it revoke its declaration to declare
cash? If it has declared in public mabawi pa ba niya?
Muiingun siya “OPPPsss sorry dili diay me
kadeclare”. Then pangutan un nganun man? “Nasayop
diay among auditor to declare profit”. So nasayop ang
among pagdeclare ug unrestricted retained earnings. So,
pwedi ba na?
The rule is according to the Supreme Court, it is
easier to revoke stock dividend than cash dividend. The
moment the monies required to make the payment of
cash dividend has been segregated or earmarked; THE
CORPORATION CAN NO LONGER REVOKE THE
DECLARATION OF CASH DIVIDEND. It is already a
vested right of the stockholder.
Example: I-identify man na nimu, pila baa ng
unrestricted retained earnings ang ihatag nato karun?
You segregate it, then you declare, that you will receive
let us say 20 cents per share or 100 pesos per share.
Tan awa gud nang PLDT, par value 10 pesos
pila man ang market value, 1,400 plus? kay their yearly
dividend is about 100 pesos. Karun niubus na.
When it was still 100 niabot na ug close 3000
per share bought and sold into the public. That is par
value of 10 pesos. So the investor outside, muingun sya
ug 100.
Kana siya naa sa bangko, how much deposit do
you need to get 100? Na karun, pila na ang interest sa
bangko? Niabot na ug 1%? That is how they solve it, the
dividends, and unrestricted retained earnings.
Stock dividend on the other hand, they may be
countermanded at anytime before they are actually
released. Why?
It is because stock dividends does not really
give you anything. It just increase your number of shares.
It does not give you any increase. For purposes of
taxation, it is income unrealized. That is why it is not
subject to income tax. You really receive anything in
stock. Musaka lang imung number of shares.
But, that is really reflected in your present
holdings, because your present holdings the book value
of your present number of shares prior to the issuance of
the stock dividend is already counting the unrestricted
retained earnings.
Kana gud pagkuha nimu sa book value sa
balance sheet kuhaun nimu tanan numero sa capital
accounts unya common stock, unrestricted retained
earnings, I-divide na nimu sa number of shares
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
outstanding net of present shares. Then you have the
book value.
Ilista na, dugangan imung number of shares
mugamay imung book value pero pareha mo ug book
value sa aggregate before the issuance of stock
dividends or after.
The aggregate value of your total shares is still
the same before or after the issuance of stock dividend.
Kung maglisud man gani mo ana pangayo dayun uG
TABANG SA MGA ACCOUNTANTS kay gamitan ka ug
mathematics.
That is why it can be revoked at any time prior
to its actual issuance. Stock dividends.
Remember the Supreme Court has declared the
dividends whether stock or cash can only be issued to
stockholders, it cannot be issued to non-stockholders.
That is the case of
Nielsen vs. CA and Benguet Consolidating
Mining.
A geologist was enticed by the company to look
for gold and was promised 10% of the profit that the
company will make because of his findings and sure
enough after his geologic findings, they realized so much
profit and when the corporation declared dividend the
10% was given to him on the reason that he was the
person responsible for making profits and that the
corporation has already promised him the profits. The
stockholders then complained. Why is he given when he
is not a stockholder? He should not be given because he
has not shares. Now who is correct?
The Supreme Court said that yes, the
stockholders are correct. He is not to be given
dividends because he has no shares.
So what happens to the agreement that he be
given 10 % of the profit? The Supreme Court that is a
valid agreement, he must be given of that, that is the
measure as to how much he is going to be given and that
should be part of the expense of the corporation. The
agreement is valid but the form of payment is invalid.
Now here is the system of executive pay. There
is so much debate about the executive pay.
Muiingun sila, why is it that executive pay never
reflects the result of the executive obtains. Very seldom
that does not have a direct correlation, magreason ang
company, mangita sila ug bangiitan na executive. Na
maoy makasalbar sa kompanya. Hastang dakua sweldo
ang ihatag, nagka ngidlay na gani ang kompanya nganu
dako man kayo ang sweldo?
33
Halimbawa, signing bonus 5 million dollars.
Sugod palang. 1.5 million dollars basic salary. Nya
magconduct ug mga auction tagaan dayun siya. Musikol
ang ilang board ug muiingun na sige kamo ang pangita.
Kinsa may bangiitan na president ang mugive up sa
iyang tranaho arun dawatun ang barko na hapit na
matumba arung iyang banhawun ang pagtumba? Kinsa
man ang musokol ana kung dili nimu bayran sa sweldo
na tupong sa langit. May rason sad diba? Mao na you
really have to entice him.
How do you entice him? Kana dayung options.
Asa man na kuhaun ang options? Didto na sa mabahin
bahin na dividend sa mga stockholders because you
promise the executive. You can buy shares at par value,
1 million shares and it is exercisable for the next 10
years.
Par value is at 1 peso par value. Sa miyang
pagtrabaho dinha daghan dayun ug profits and
unrestricted retained earnings. The share of stocks is
now traded at 22 per share. Naa siya outstanding option
to buy shares at 1 million shares at 1 peso par value then
issuehan sa sa company ug shares then iya dayung
ibaligya sa stock market at 22 per share. Kinsay dili
ganahan ana?
Kinsa may naalaud ana? Ang naalaad kay ang
mga stockholders kay dugangan man ug 1 million shares
and outstanding shares then mudako ang divisor sa net
profit. In other words, the option that you give is not part
of the cost the corporation or expense of the company. It
is taken from the expense of the stockholder. That is how
the dividends is affected once the executive exercise the
options. The whole issue of dividends.
 Can you issue cash dividends out of capital gains?
NO.
 What is capital gains?
It is not realized on the ordinary and strenuous
operations of the business. Halimbawa, sa pamaligya
nimu ug tshirt naabot na imung profit ug 1 million kay
pirteng daghana tapos barato lang imung pagkuha sa
tshirt.
Then halimbawa gibaligya nimu inung pwesto,
ang kanang yuta na gipatindugan nimu. Barato lang
imung pagpalit ana. 20 years ago you only bought it 20
pesos per 100 square meter. Pagbaligya nimu 12
thousand na per square meter. Pirte nang dagkua.
Nilakra na sa libro. Can you declare dividends out of
that? That is capital gains. At the point of sale igo dayun
ka anang capital gains which is the sum of the sale price.
How much is capital gains? 6 % pero patungan naman
sad na ug 1.5 percent. Unsa man na siya? Documentary
Stamp tax. So 7.5 percent na ang kuhaun na tax.
Question: is that a final tax? Or do you still have
to report in at the end which is subject to 30 percent
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
corporate tax? It is a final tax. Let us continue next
meeting.
January 11, 2017 Lapu, A.
We are still in powers. Power to invest corporate
funds in another corporation for business or for any other
purpose. By the way I would just like to point out to you
that there is an important distinction between shares of
stocks and bonds. Shares of stock procedurally,
formalities an intrinsic provisions of the shares of stocks
are covered by corporation law. Bonds, only formalities
are covered by corporation law, the internal provisions of
bonds are covered by civil law. So when you are already
into the conditions of bonds, payment, the security of
bonds that is no longer in corporation law, because a
bond a contract of mutuum, and it is under the civil code.
So disabuse yourself from the notion that if it is a bond,
you just file it in the intra-corporate court, because it must
be covered by corporation law, the securities regulation
code, because it is a security, it is registered in the SEC.
The moment you deal with the internal
conditions of bonds, it is no longer an intra-corporate, it is
the regular courts.
Now we said that if you invest in another
corporation, not your own corporation, but it can be
understood as an exercise of an implied powers Section
42 is not applicable, when there is a need for a
confirmatory vote of the OCS voting and non-voting. And
this is the reason why there is an insistence on the part
on the SEC that if you are a stock and profit corporation,
you must specify in pleading what is the primary purpose
and what is the secondary purpose of the corporation.
Because the moment you engage in the business that is
secondary purpose, you will still require the confirmatory
vote of the stockholders 2/3 voting and non-voting.
Now, once again, there is the appraisal right. Any
dissenting stockholder shall have an appraisal right as
provided in this code.
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.
Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
34
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.
All right, power to declare dividends. It is easier
to declare cash dividends than stock dividends. Cash
dividends, only the board of directors decide. It must be
majority of all the members of the BOD. But if you
declare stock dividends, then you have to get the
approval of the stock holders representing not less than
2/3 of the OCS. But then it does not require any
qualifying duties, because it is an irregular or special
meeting duly called for that purpose.
Now, it is voting and non-voting, 2/3? It is only voting,
because this is not included in one of the 8 instances
mentioned in Sec. 6. Now the issue is always,
 Out of what can the corporation declare dividends?
The primary source of dividends according to
delegate Abello, the Batas Pambansa has discussed this
law, when it was passed in 1980… The main source is
net profits and in the (interpolation), they defined the
profits as the accumulated profits unrestricted retained
earnings as the accumulated profits realized out of the
normal and strenuous operation of the business after
deducting therefrom distribution to stock holders and
transfer to capital stocks or other accounts. So
technically speaking for him, CAPITAL GAINS is a part of
profits, it was subsequently corrected by the SEC.
SEC said, you can declare profits specially
dividends from capital gains. “Capital Gains” is the same
form of assets. Corporation sells land, and it realizes
profit, that is not from the normal strenuous operation of
the business, that is, you gain out of the original
purchase price, you deduct the original purchase price
plus the expenses of the sale, and then the amount in
excess of that from the sale will be the profit.
The SEC says you can declare. You can declare cash
dividends from the capital gains.
How about Appraisal Gains? If you will appraise
property, there is a gain, can you declare divideds? The
SEC is saying, there is no true gain.
How about premium of stocks, the amounts paid for the
issuance of new shares in the excess of the par value of
the shares, that has a separate capital accounts in the
balance sheet. Capital stock, premium stock, then you
have unrestricted premium earnings. Accumulated
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
urestricted earnings, that is what the law declares,
dividends, now premium man na. Once again the SEC
says, you can declare stock dividends, but you cannot
declare cash dividends on the premium of stock.
 Can a non-stock holder receive dividends?
That issue was answered in the NIELSEN case.
Nielsen vs Benguet Consolidated Mines. ( I cannot
find it online)
The story of the aced Geologist who can smell
gold. He was engaged by the mining company to look for
gold upon the promise of 10% of net profits due to his
findings, realized a (one engaged in mining) profit, and
sure enough they hit high grade gold and the company
made a lot of profits. When the company declared
dividends, they gave him cash dividends, 10% of the total
cash dividends, but the stock holders protested. Why is
he given a cash dividend when he is not a stock holder?
And the court said he is because the board
entered into a contract with him, and that binds the
corporation. So is that correct?
1. Is the contract between him and the corporation
(that he will be given 10%) is valid or is that
cheating the stock holder?
2. 2. Can he receive 10% of the cash dividend
declared out of the profits that was gained?
2 Issues
st
The SC says the 1 issue is valid. If the
corporation enters into a contract with him to give him
10% then that stands because the contract was entered
at arm‟s length, there was no any nullity in the contract.
nd
2 , can he get 10% of the cash dividends? The SC
says No, because he is not a stockholder. Only the
stockholders can receive dividends. So the 10% of
the net profits that was agreed upon is a measure
and a corporation must pay cash to him equivalent to
10% because the corporation is bound by this
agreement entered into by the Court of Appeals.
Declaration of dividends:
 If a dividend is declared, can the
corporation change its mind and
subsequently retract the declaration. Can
the corporation do that?
The rule is dependent on what kind of dividend it is.
SC says if it is cash dividend, the moment where the
cash is already segregated from the corpus of cash
of the corporation and it is already earmarked as
cash dividend, it can no longer be removed.
35
Declare na ang mga directors karon vote, gitawag
nila ang treasury, set aside 10% as cash dividend,
so wa na, set aside na sa libro, then you can no
longer retract the declaration basta cash dividend. If
it has been segregated and earmarked, but if it is
stock dividend, it can be revoked at any time as long
as it has not been disbursed, wa pa gani na issue,
then you can revoke it.
Then why is the rule different? Because in stock
dividend the stock holder has not taken yet anything
extra. Stock dividends, your number of shares increase,
but your aggregate share in the over-all capital of the
corporation remains the same. It remains the same.
Stock dividend. That is why you do not take income tax
from it, because it has not realized income yet.
After you issue stock dividend, the value per
share, which is the same par value of the original
number of shares, unya mao na ang bahin bahinon…
unya mao ra gihapon. So until it has been disbursed,
you can still countermand the order to declare stocks.
Now, stock corporations are prohibited receiving
surplus profits in excess of 100% of their paid capital
stocks. That is the rule, so therefore, in the Phils, up to a
certain point you can accumulate unrestricted retained
earnings, the moment it becomes 100%, double your
paid capital, you must declare dividends.
That is not the rule in the US. (Fr. talks about
Warren Buffet‟s corporation Berkshire Hathaway which
has not declared stock/cash dividend, and the story in NY
stock market and STOCK sharing).
Nag stock split na sila, padaghanun nila ug unit
ang ilang shares, maabot na sila ug 10, so ganahan na
mamalit ang mga investors. But you cannot buy 3 or 4
shares of PLDT because that is not the lowest number of
shares that you can but, to make it worthwhile for stocks
exchanges. (Talks about the charges/ commissions and
taxes).
Gi laliman ka ana, mangayo ug commission ang
sellers, ang buyer‟s broker naa sad commission, ang
stock exchange naa sad charges, naa sad ang BIR
capital gains, unya ug gusto pa jud kay stock certificate,
bayad nasad kag fee. Patong na sa imong cost. So pag
compute nimo sa imong break even, na muabot aning
presyoha, ibaligya na dayon na,para maka ginansya ka,
mas taas imong gi hurdle.
So, because Berkshire Hathaway never
declared dividends the value of shares just kept on
increasing. (Talks about the annual stock holders
meeting).
(Segue: Nebraska as the third strategic air defense of
the US. Bush after the 9/11 and Warren Buffet‟s reason
for not declaring dividends, because he doesn‟t want to
pay taxes. He also does not invest in high tech stuff, only
in Gillette.
 BUSINESS ORGANIZATION II TRANSCRIPT
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ADDU-Law
Segue: Warren Buffet‟s investment in the Sear‟s
Chocolate which earns a lot only once a year, Valentine‟s
day. )
Disabuse yourself from the pedestrian notion that
dividend is the sure and undisputed sign of profitability
and success. It is not.
(Segue: article in internet about Warren Buffet‟s secret
billionaires. Science teachers. They died, and donated
their billions to the school they were teaching.)
Now if you exceed in profits your paid in capital
by 100%, you must declare dividends. Does not have to
be cash dividends, could be stock dividend, but you have
to declare dividends. What are the exceptions of that
rule?
1. When justified by definite corporate expansion
projects/ programs approved by the BOD. So you
have to write position papers for that, and submit it
to SEC.
2. When the corporation is prohibited under any loan
agreement with any financial institution or creditor
whether local or abroad. So these are the
limitations of the loan agreements imposed on the
borrower that you cannot declare dividends until
you have paid the amount of the loan.
3. When it can be clearly shown that such retention
is necessary under special circumstances
impleading in the corporation, such as when there
is a need for special reserve for probable
contingencies.
Be sure to know all these exceptions because it is a great
source of questions, not the rule but the exception;
because when you know the exception then you really
know the rule.
(Segue: Talks about Mary Knoll‟s corporation. Advice:
Let the SEC close you. Section 22 will take effect.
Inactivity for 5 years. )
January 12, 2017- Calatrava, KL
*Fr. talks about the visit of PM Abe of Japan here in
Davao and the history between Japan and US. Then Fr.
talks about Taiwan and China.*
So we left Section 43:
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
36
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)
Now we are into Section 44:
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,
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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)
This is one way to circumvent Filipino
ownership. Because a corporation can enter into a
management contract with another corporation. Now, it is
clear. If you employ an individual, it is the Labor Code
that covers him. If you employ a Corporation, it is the
Corporation Code, Section 44 that covers it. You can
engage a corporation to work for another corporation.
It says here Management Contract, so you can have
technical support agreement, marketing agreement, you
can have all sorts of agreements. So much so that
probably that the owner of the core is Filipino but the rest
of the enterprise can be handled by foreign corporations.
Management contracts.
What are the requisites?
1. No corporation shall conclude a management
contract with another corporation unless such
contract shall have been approved by the board
of directors (majority of the board of directors,
absolute majority) 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.
2. Qualified notice is needed. The meeting must be
called just for that purpose. So you must let the
stockholders know. That is the general rule.
3. Exception: 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;
4. No management contract shall be entered into
for a period longer than five years for any one
term.
a. Notice that there is no prohibition
against the renewal of a management
contract. It just says that the contract at
any one time must not be longer than 5
37
years. It can be renewed hopefully with
good terms.
So 2 corporations, Managing and Managed. If the
Managing Corporation owns 1/3 of the managed or they
have the same majority board of directors then the
Managed Corporation must approve that this corporation
be the Managing Corporation in the Contract by 2/3 vote
of the stockholders.
Does it include Non-voting shares? It is only voting
shares because Section 6 does not include the entering
into management contracts.
Now, this is Standard. Yet this is new. This was just
recognized in 1980, but that is Standard. Look at Tadeco.
Tadeco has a Management Contract with ANFLOCOR.
What is ANFLOCOR? Antonio Floirendo Corporation.
Before Davao Fruits, Hijo Plantation, those banana
plantations, they had a management contract with JVA
Management Corporation. What is JVA? Jesus V. Ayala
Corporation. And so on. SM has a management
agreement with the managing corporation of Henry Sy.
Gokongwei has his own management corporation. So it
is standard.
There is a term in accounting which is derived from the
production of water. It is called skimming. Skimming in
ordinary sense is to take up the first froth of milk that is
made to butter, and that is the best part. They say
management corporation is the legal way to skim, to
regulate debt on your part. If you are a controlling
stockholders or controlling interest of the corporation.
Kuha ka na sa imong ginansya. Mao man to ang gi-
awayan ni Lucio Tan sa Philippine Airlines ug Ramon
Ang. Sugot na unta to si Lucio Tan pero Ramon Ang
installed this management corporation and the
management corporation obtained by agreement a
commission on the asset acquisition of Philippine
Airlines. So because it is the management corporation
who negotiates, the source of funds and the acquisition
of assets, then the management agreement says that the
managing corporation has a right to deduct 5% of the
cost of the assets that have ____. So it‟s an added cost.
Where does the 5% go? It goes to the managing
corporation.
In PLDT, the same. First Pacific has a 5%
commission of the acquisition of assets of PLDT. How do
you find out about that? It‟s in one of the footnotes of its
annual report. Gamay kaayo. Naan a dinha. Kanang
annual report ihatag nimo na, sigurado way mubasa. To
find out any significant figures, you have to read
everything. But it is there. Then they will say it‟s an arm‟s
length. We are doing you service and we are disclosing
it, we‟re not hiding it. Pero pag pangita nimo, the
disclosure, it‟s like looking for a needle in a haystack if
the annual report is over 400 pages. But it is there, it is
disclosed.
Now, management contract, second paragraph
says: The provisions of the next preceding paragraph
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ADDU-Law
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. Where do you find these contracts? You
find them in the exploration, exploitation of natural
resources. Filipino owns the claim or the right of the
franchise to develop the natural resource but since it has
wherewithal, it enters into a service agreement or a
cooperating agreement. It lets a foreigner do it. Bring in
all the money that is needed, the assets, but it is the
Filipino who owns the right to exploit natural resources.
That‟s _______, that‟s Malampaya. That is like Manila,
water. Greater Manila is divided into two, one part is
serviced by Manila Water controlled by Ayala
Corporation. Another part, the water is distributed by
Maynilad Water which is controlled by Metro Pacific.
Although they say, there‟s this big argument going on „we
are not engaged in public utilities. We are the contractor
of the one engaged in public utilities. Who is the one
engaged? NAWASA. NAWASA is still there and it‟s
incorporated. And the law creating NAWASA has not
been changed. That‟s the argument now, we are just the
contractor. We are like a managing corporation. Take
note the Supreme Court has not yet come out with a
decision settling that issue.
It‟s the same thing as the LRT. Operation-
maintenance agreement, it‟s a foreigner. The one who
owns the concession to run the LRT is a Filipino
Corporation. It‟s an operating agreement. Is there a
violation of Art. 15, Section 11 of the Constitution. No,
that is already held by the Supreme Court. They are just
the operators. They are helping the franchise holder.
That is how you enter, escaping (?) by entering into
operating agreements.
Alright, Section 45:
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)
Ultra means above, high. The opposite of ultra
is „ordinary cinema‟ (aw.) Ultra, the opposite is infra,
infrastructure. Ultra is beyond, above. Vires is power.
Vire is manpower. Ultra vires is beyond the power.
Utra vires acts of a corporation is to be
distinguished from illegal acts of the corporation. Ultra
vires acts are acts without authority for the corporation to
do. You are not talking about an officer of a corporation
doing an ultra vires act. You are talking about a
corporation doing something beyond its power to do.
So, ultra vires acts of a corporation may be
corrected post factum. They have already done it. It has
no authority, how do you correct it? The corporation
38
ratifies it. How does it ratify it? If it requires a stockholder
vote, they hold a stockholder‟s meeting. They vote 2/3,
knowing that it was already done and they ratify it.
 If the corporation enters into a business which is
not provided in the purposes of the corporation
whether primary or secondary, can the corporation
ratify it?
Yes! The corporation can ratify it. The corporation amend
the Articles to add the business which is not yet there
and which the corporation entered into beyond its power.
That‟s the difference between ultra vires acts and illegal
acts. Illegal acts, there is no cure. Ultra vires acts, there
is a cure. That cure is post factum necessarily. After the
fact.
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
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
such by-laws or amendments are in accordance with
law. (20a)
The by-laws must be produced within 1 month if
the by-laws has not been filed with the SEC together with
the Articles.
If the corporation does not have by-laws, and it
has been operative for 30 years, just like Loyola Grand
Villas, it is a de facto corporation. Can it be cured? Yes!
You cure it. You pass your by-laws. But if somebody gets
ahead of you and files a Quo Warranto proceeding
attacking your personality as a corporation because you
have no by-laws, wagtang ka. So dalia, file dayun. The
Supreme Court said in Loyola Grand Villas vs CA: that if
you do not have by-laws, you are a de facto corporation
and a de facto corporation cannot be attacked
collaterally. You can only attack it by a direct attack,
separate proceeding to cancel its certificate registration,
certificate of incorporation.
LOYOLA GRAND VILLAS VS CA, G.R. NO. 117188,
AUGUST 7, 1997
Moreover, the adoption and filing of by-laws is a condition
subsequent which does not affect the corporate
personality of a corporation like the LGVHAI. This is so
because Section 9 of the Corporation Code provides that
the corporate existence and juridical personality of a
corporation begins from the date the SEC issues a
certificate of incorporation under its official seal.
Consequently, even if the by-laws have not yet been
filed, a corporation may be considered a de facto
corporation.
Section 46 reveals the legislative intent to attach a
directory, and not mandatory, meaning for the word
"must" in the first sentence thereof. Note should be taken
of the second paragraph of the law which allows the filing
of the by-laws even prior to incorporation. This provision
in the same section of the Code rules out mandatory
compliance with the requirement of filing the by-laws
"within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the
Securities and Exchange Commission." It necessarily
follows that failure to file the by-laws within that period
does not imply the "demise" of the corporation. By-laws
may be necessary for the "government" of the
corporation but these are subordinate to the articles of
incorporation as well as to the Corporation Code and
related statutes.
So, Section 45 just reiterates the rule that the
powers of a corporation are conferred by law, by the
code, by its articles of incorporation and those implied or
incidental to the exercise of powers so conferred. Implied
powers or inherent powers which is denied by Justice
Leonen. Justice Leonen denies it. I used to have a very
high … of Leonen. Inherent powers that define a
corporation. Leonen says there are no inherent powers of
a corporation. Wa gyuy naka-correct niya. Tanawa ra gud
39
na. UP Law School. Naa man gyud na siyay kontra. UP
Law Center, kinontrahay man gyud na sila. Basic gud na.
We are finished with, as Manny
Pacquiao would say it „FOWER‟ (haha). Mao nay ingon ni
Pacquiao. Sentaor. Ang unggoy bisag sininaan nimo,
suportahan nimo, unggoy lang gihapon (HAHA!). Ang
tinuod na mga unggoy ang mga nagpili niya.
(Father talks about Post-Industrial Revolution and
continues the topic with service economy and the
economy of the US. Service economy‟s biggest part is
entertainment. Entertainment has an elastic demand.)
TITLE V: BY-LAWS
So, By-laws. You can submit the By-laws if
there are already Articles at the time of Incorporation or
subsequently after 1 month after the issuance of the
Certificate of Incorporation, you can have the by-laws
approved. Majority of the outstanding capital stock will
need the approval. Remember, it‟s not 2/3, just the
majority.
 Does it include non-voting shares? Voting and
non-voting?
Yes, because section 6 includes adoption of by-laws.
Now, there‟s another way of making the by-
laws, you can delegate the formulation of the by-laws to
the Board of Directors in which case you will need 2/3
vote, voting and non-voting. May be adopted or filed prior
or after.
The by-laws of these special corporations must
be endorsed by their own oversight agencies of
government, like banks, banking institutions, building and
loan associations, trust companies, insurance
companies, public utility, educational institutions and
other corporations.
Sec. 47. Contents of by-laws. - Subject to the
provisions of the Constitution, this Code, other
special laws, and the articles of incorporation, a
private corporation may provide in its by-laws for:
1. The time, place and manner of calling and
conducting regular or special meetings of the
directors or trustees;
2. The time and manner of calling and conducting
regular or special meetings of the stockholders or
members;
3. The required quorum in meetings of stockholders
or members and the manner of voting therein;
4. The form for proxies of stockholders and members
and the manner of voting them;
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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)
This is where you should be able to tell what the
corporation can provide in its by-laws.
Section 48. Amendments to by-laws. – The board of
directors or trustees, by a majority vote thereof, and
the owners of at least a majority of the outstanding
capital stock, or at least a majority of the members of
a non-stock corporation, at a regular or special
meeting duly called for the purpose, may amend or
repeal any by-laws or adopt new by-laws. The owners
of two-thirds (2/3) of the outstanding capital stock or
two-thirds (2/3) of the members in a non-stock
corporation may delegate to the board of directors or
trustees the power to amend or repeal any by-laws or
adopt new by-laws: Provided, That any power
delegated to the board of directors or trustees to
amend or repeal any by-laws or adopt new by-laws
shall be considered as revoked whenever
stockholders owning or representing a majority of
the outstanding capital stock or a majority of the
members in non-stock corporations, shall so vote at
a regular or special meeting.
Whenever any amendment or new by-laws are
adopted, such amendment or new by-laws shall be
attached to the original by-laws in the office of the
corporation, and a copy thereof, duly certified under
oath by the corporate secretary and a majority of the
directors or trustees, shall be filed with the Securities
and Exchange Commission the same to be attached
to the original articles of incorporation and original
by-laws.
The amended or new by-laws shall only be effective
upon the issuance by the Securities and Exchange
Commission of a certification that the same are not
inconsistent with this Code. (22a and 23a)
40
TITLE VI
MEETINGS
Section 49. Kinds of meetings. – Meetings of
directors, trustees, stockholders, or members may
be regular or special. (n)
Meetings: It may be provided in the by-laws
that the meeting of directors be held outside the
Philippines. That is allowed. For directors or trustees in a
non-stock corporation. But you cannot provide that the
meeting of stockholders or members of the corporation
will be held outside the Philippines, outside the territorial
jurisdiction of the Philippines.
1. It should be held in the principal office of the
corporation;
2. If it cannot be accommodated there, it should be
held in the city where the principal office is
located; and
3. It must at least be held within the territorial
jurisdiction of the Philippines.
Section 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 Securities and
Exchange Commission, upon petition of a
stockholder or member on a showing of good cause
therefor, may issue an order to the petitioning
stockholder or member directing him to call a
meeting of the corporation by giving proper notice
required by this Code or by the by-laws. The
petitioning stockholder or member shall preside
thereat until at least a majority of the stockholders
or members present have chosen one of their
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
number as presiding officer. (24, 26)
Section 51. Place and time of meetings of
stockholders of members. – Stockholder’s or
member’s meetings, whether regular or special,
shall be held in the city or municipality where the
principal office of the corporation is located, and if
practicable in the principal office of the corporation:
Provided, That Metro Manila shall, for purposes of
this section, be considered a city or municipality.
Notice of meetings shall be in writing, and the time
and place thereof stated therein.
All proceedings had and any business transacted at
any meeting of the stockholders or members, if
within the powers or authority of the corporation,
shall be valid even if the meeting be improperly held
or called, provided all the stockholders or members
of the corporation are present or duly represented
at the meeting. (24 and 25)
Section 52. Quorum in meetings. – Unless otherwise
provided for in this Code or in the by-laws, a quorum
shall consist of the stockholders representing a
majority of the outstanding capital stock or a
majority of the members in the case of non-stock
corporations. (n)
Quorum: Can the by-laws provide a higher ratio to
determine the quorum? In the absence of any provision
providing for the percentage of a quorum, the default is
quorum is that provided in the Corporation Code.
 What is the default quorum?
Default quorum is majority of the directors or
majority of the outstanding capital stock or the majority of
the members of the corporation.
Suppose you are asked a question, can you
have a meeting for stockholders duly called for the
purpose, and only 1 stockholder appears, is it possible to
have a valid meeting? Usa ra ka stockholder. Yes,
theoretically because presence in stockholders meeting
is either by person or by proxy.
Suppose this single stockholder is the proxy of
all the other stockholders, so he himself is the entirety of
the stockholders. You can have a meeting just with one
person there. Muingon kag, binuang man na Fr. Unsay
binuang? If you have a merger, daghan kaayo kag
approvan. 1. You have to approve the plan of merger. All
the constituent corporation must approve the plan of
merger. Plan pa lang na. Pag-abot sa plan, buhaton na
nimo ug contract language, Articles of Merger. Mag-
approve sad ka sa Articles of Merger. 2/3 plan to approve
the plan, 2/3 vote of the outstanding capital stock.
Paghuman ana mag-lalis pa mo. Any amendment to the
41
Articles here must be ratified by 2/3. Kinsay corporation
maka-agwanta ana. Magsige kag meeting ana, kadako
ug gasto ana.
So in a Plan of Merger, the merging entities,
those who push for merging entities they know when they
have won, the moment they have won the proxy war by
which the proponent of the merger is given a wholesale
proxy for both the Plan Vote, the Articles of Merger Vote
and Amendment Vote….. the President of the acquiring
corporation. Siya man juy nag-duso ana nga merger.
Makuha gani na niya ang irrevocable proxy sa 2/3 of both
the voting and non-voting, lusot na ng merger. Sigurado
na. Wa pa gani na, sayang lang iyang plano nga gwapo
kaayo na plan una pa niya mapresent, una pa niya ma-
abruban. Bukid kaayo na. Di na mulusot. Kuhaon na
niya, kanang proxy. So he just maintains, he can fulfill the
formalities of a merger or consolidation.
Pay attention to that because that is not in the
book. The book will tell you, you have to vote 2/3 for the
plan, 2/3 for the Articles, 2/3 for the Amendment. Ka-
bukid ana, that‟s very expensive. Kuhaon nimo ng proxy.
Irrevocable proxy.
Then you pre-qualify the votes. Wa pa gani
mag-meeting, niboto ka na. That‟s called pre-qualifying,
so that during the meeting already, the secretary will
stand and say „All of you stockholders present here have
read the resolutions that should be passed and ratified.
You are hereby informed that Mr. so and so has the vote
of 2/3 of the outstanding capital stock and it is exercised
in favor of the approval these resolutions.‟ Sa ato pa,
humana ang laban. Kay wa pa gani nagsugod ang
meeting, iya nang gipre-qualify, iya nang giingon „I am
the holder of these proxies. And I am voting for all the
resolutions.‟ Unya naa pay tao ga-singgit2 dinha, ga-
diskurso. Unsa may buhaton sa chairman? „Mr. So and
So, you are reminded that what the Secretary says that
2/3 of the vote have already been cast in favor of
approval. How much time will take for you to finish what
you have to say? You are hereby warned that if you
continue, you will be removed from these premises so
that we can continue the regular business of this
meeting.‟ Siyagit pa gani ka, Sgt. At Arms, you are
directed by the Chair seeking the assistance of the
security guards to remove this character from this place.
Wa na, tangtang ka na. Tubag pud kag „I thought this
was a meeting?‟ Naa pa gani kay gusto isulti, isulat na
unya ipublish, ihatag tagsa2 didto sa mga stockholders.
At your expense. Otherwise you are wasting the time of
the assembly.
Now, if you are the Secretary of the Corporation,
mao na imong siguraduhon, nakuha na ba nimo ang
proxy sa tanan? Irrevocable man ang proxy. Specifying
the meeting. Then know that you can vote the meeting
(?). Wa pa gani ka ana, .. mga damgo pa na nimo. Mga
pangandoy ra na nimo. Klaruha imong mga pangandoy.
*Ayaw padala dayun ug invitation, wa pa gani ka
kasiguro nga gisugot ka na (HAHA)*
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
If you‟re a secretary and you don‟t have the
votes, pareho ra ka sa nagpadala ug invitation na kaslon
na siya pero wa pa diay siya sugta.
Now, there is a distinction in the by-laws,
normally the officers are named in the by-laws and the
different duties and powers of the officers are also
enumerated there. My question is,
 Are third parties outside the corporation, are they
under obligation to know the contents of the by-
laws?
Let‟s say the by-laws says, it is the president of the
corporation who shall negotiate and enter into
agreements and sign the written contracts. Ikaw ang
presidente. Unya ang imo gikasulti vice-president man,
hantud sa nag-sign mo ug agreement, is that agreement
valid? That is the issue and there are many decided
cases on that matter.
Now, what do you have to look for? You have to
look for whether the Apparent Delegation Rule is
applicable? Whether it is effective. Even if in the by-laws,
he does not have the authority, but you visit the
corporation‟s principal office and the other officers around
they know of your negotiation, they know of your talks.
They even give you encouraging words. And then you
sign a contract and the officer who signs the contract is
no authorized, and later on the corporation by resolution
rescind the contract, is the corporation within its
prerogative by rescinding the contract? It cannot rescind
the contract because its officers misled the third party
into believing that this kenkoy here has authority when in
fact he does not have under the by-laws. Then you know
that the third person, an innocent third person does not
have any obligation to know the by-laws.
The by-laws are internal to the corporation. They are
internal rules of the corporation. And the general public is
not obliged to be familiar of the by-laws.
Now, you have the UM Case. The president did
not in fact have the authority of the corporation to make
the UM properties the security of another corporation. Did
the apparent delegation rule find effect in that case?
Supreme Court says it cannot be applied. Why? The
Board did not even know. It was just the president acting
alone and with BSP. It is BSP who committed an
egregious error. Accepting the property of another
corporation as a security for the loan of an entirely
distinct and different corporation. So, it does not bind the
corporation. Because the apparent delegation rule does
not apply.
UM vs BSP, G.R. No. 194964-65, January 11, 2016
From FT: The mortgage contracts executed in favor of
respondent do not bind petitioner. They were executed
without authority from petitioner.
42
Petitioner must exercise its powers and conduct its
business through its Board of Trustees. Being a juridical
person, petitioner cannot conduct its business, make
decisions, or act in any manner without action from its
Board of Trustees. The Board of Trustees must act as a
body in order to exercise corporate powers. Individual
trustees are not clothed with corporate powers just by
being a trustee. Hence, the individual trustee cannot bind
the corporation by himself or herself.
Kani ha, liability of the hospital. You know that
the doctors that are consultants in the hospital are not
employees of the hospital. They are termed as
consultants. Mu-opera gani ng consultant and he is
careless, naay nahabilin nga hanggus (?) unya namatay
ang pasyente. The issue is, there is no debate as to
whether or not the surgeon is liable. He is liable, kay siya
gud nag-atiman. The issue is, is the hospital liable?
Because so many times they sue the hospital. The
surgeon has limited assets, gawas ug dugay na siya.
Bilyonaryo na siya. Pero kasagaran ana, they do not
have enough assets to answer for the damage. So they
sue the hospital. The hospital‟s defense is always the
surgeon is a consultant, he‟s not an employee. What is
more, even if we admit that he is connected with the
hospital, at the time he makes the operation, the
employer-employee relationship with the hospital is
suspended because the hospital no longer has direct
access to examining the procedures in the operating
room. It is the surgeon who must be followed. He directs
the anesthesiologist, he directs all the nurses. Command
na siya. Ang tanan mu-assist ra niya. So the liability of
the hospital, this is the theory, is suspended because it is
the surgeon.
Now, that is the ruling in the old case. Now,
there is this new case Capitol Medical. They are now
applying the so-called apparent delegation agency rule.
Just an ordinary patient. Nangita siya ug surgeon,
nangita siya anang dako nga listahanan dinha. Gastro,
eyecare. Unya kakita siya dinha, uy kaila man namo ni.
Iya dayong gi-contact. Kani akong asawa kinahanglan ug
surgery bisag dili necessary. Elective surgery. Kana
laging dali-dalion. According to the Supreme Court,
because the hospital has put him there (list of
consultants) and the hospital has scheduled the
operation, the nature of the operation, the hospital knows
that the doctor is going to operate. This doctor therefore
has the apparent authority to act for and in behalf of the
hospital so, if that doctor-consultant is negligent, that
hospital is equally liable. The Doctrine of Apparent
Delegation of Apparent Authority. Dili na officer of the
corporation ha, katong director. Lain pa gyud kung officer
siya sa hospital. But apparent delegation or agency
works to make the surgeon liable in case of negligence in
medical practice like an operation.
NOGALES et al vs CAPITOL MEDICAL CENTER et al,
G.R. No. 142625, December 19, 2006
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
From FT: In general, a hospital is not liable for the
negligence of an independent contractor-physician.
There is, however, an exception to this principle. The
hospital may be liable if the physician is the "ostensible"
agent of the hospital. This exception is also known as the
"doctrine of apparent authority."
The doctrine of apparent authority essentially involves
two factors to determine the liability of an independent-
contractor physician.
The first factor focuses on the hospital's manifestations
and is sometimes described as an inquiry whether the
hospital acted in a manner which would lead a
reasonable person to conclude that the individual who
was alleged to be negligent was an employee or agent of
the hospital. In this regard, the hospital need not make
express representations to the patient that the
treating physician is an employee of the hospital;
rather a representation may be general and implied.
In the instant case, CMC impliedly held out Dr. Estrada
as a member of its medical staff. Through CMC's acts,
CMC clothed Dr. Estrada with apparent authority thereby
leading the Spouses Nogales to believe that Dr. Estrada
was an employee or agent of CMC. CMC cannot now
repudiate such authority.
The second factor focuses on the patient's reliance. It is
sometimes characterized as an inquiry on whether the
plaintiff acted in reliance upon the conduct of the hospital
or its agent, consistent with ordinary care and prudence.
The records show that the Spouses Nogales relied upon
a perceived employment relationship with CMC in
accepting Dr. Estrada's services. Rogelio testified that he
and his wife specifically chose Dr. Estrada to handle
Corazon's delivery not only because of their friend's
recommendation, but more importantly because of Dr.
Estrada's "connection with a reputable hospital, the
[CMC]." In other words, Dr. Estrada's relationship with
CMC played a significant role in the Spouses Nogales'
decision in accepting Dr. Estrada's services as the
obstetrician-gynecologist for Corazon's delivery.
Moreover, as earlier stated, there is no showing that
before and during Corazon's confinement at CMC, the
Spouses Nogales knew or should have known that Dr.
Estrada was not an employee of CMC.
Alright, amendments of by-laws, mao gihapon majority
confirmatory vote if its piecemeal, 2/3 vote if it is
delegated to the directors or trustees.
Section 53. Regular and special meetings of directors
or trustees. – Regular meetings of the board of
directors or trustees of every corporation shall be
held monthly, unless the by-laws provide otherwise.
Special meetings of the board of directors or trustees
may be held at any time upon the call of the
43
president or as provided in the by-laws.
Meetings of directors or trustees of corporations may
be held anywhere in or outside of the Philippines,
unless the by-laws provide otherwise. Notice of
regular or special meetings stating the date, time and
place of the meeting must be sent to every director
or trustee at least one (1) day prior to the scheduled
meeting, unless otherwise provided by the by-laws. A
director or trustee may waive this requirement, either
expressly or impliedly. (n)
Section 54. Who shall preside at meetings. – The
president shall preside at all meetings of the
directors or trustee as well as of the stockholders or
members, unless the by-laws provide otherwise. (n)
Section 55. Right to vote of pledgors, mortgagors,
and administrators. – In case of pledged or
mortgaged shares in stock corporations, the pledgor
or mortgagor shall have the right to attend and vote
at meetings of stockholders, unless the pledgee or
mortgagee is expressly given by the pledgor or
mortgagor such right in writing which is recorded on
the appropriate corporate books. (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. (27a)
Section 56. Voting in case of joint ownership of
stock. – In case of shares of stock owned jointly by
two or more persons, in order to vote the same, the
consent of all the co-owners shall be necessary,
unless there is a written proxy, signed by all the co-
owners, authorizing one or some of them or any
other person to vote such share or shares: Provided,
That when the shares are owned in an "and/or"
capacity by the holders thereof, any one of the joint
owners can vote said shares or appoint a proxy
therefor. (n)
Section 57. Voting right for treasury shares. –
Treasury shares shall have no voting right as long as
such shares remain in the Treasury. (n)
Jan. 13, 2017 Romero, K
Section 58. Proxies. – Stockholders and members
may vote in person or by proxy in all meetings of
stockholders or members. Proxies shall in writing,
signed by the stockholder or member and filed
before the scheduled meeting with the corporate
secretary. Unless otherwise provided in the proxy, it
shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a
period longer than five (5) years at any one time. (n)
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
The bylaws of a stock and profit corporation
cannot deny proxies. That‟s the #1 thing you must
remember. You cannot provide in the bylaws that the
stockholder cannot appoint proxies. You can do that in a
non stock non profit corporation. You can provide that
there are no proxies for members, but in a stock and
profit corporation, to deprive a stockholder of his proxy
rights is forbidden. Just like the stockholder cannot be
prevented voting cumulatively. He has a right to cumulate
his votes.
A proxy has a definite form:
 It must be in writing. There is no verbal
proxy.
 But the bylaws can provide that the proxy must
be notarized.
By the way, the word “proxy” can stand for an
instrument by which you appoint another person to attend
the meeting in your behalf, and it can also refer to a
person that you appointed.
Now a proxy can exercise the stockholder‟s
vote. So you can give a private instruction to the proxy to
vote according what you are choosing, if you are a
stockholder. So he carries out your will. He is present
there because you cannot be present.
But what if he violates your instruction? Now
that‟s between you and him. But his act or vote is valid
because the corporation is not minded about your
instructions. The corporation has no obligation to make
sure that your instructions are followed. So when he
votes, he is exercising your vote.
Double Proxy
 Now what happens if it is a double proxy?
The rule is different from double sale. In double
sale, the earliest is the one that is preferred. In proxy, the
latest that is preferred. Katong later date, because the
presumption of the law is that the stockholder changed
his mind. Now if the stock certificate is an .. joint
certificate, the voting parties there that are joint must sign
the proxy. It is not enough that, let‟s say Maria, Jose,
Edna, all 3 must sign. It‟s not enough na 2 lang, or
majority. ALL must sign.
 Is there a possibility that you are not a proxy and
you are not a stockholder and yet you can still walk
down the hall where the stockholders meeting are
held, and you can attend and vote your shares?
YES. That is possible. When? It happens when
you are appointed as administratix or administrator by the
court and the estate of the deceased has shares of stock.
What do you want to present there? You present the
44
court appointment that you are the administrator of the
estate of so and so who owns shares of stock. And then
they are forced to accept you.
 Can the court produce a proxy?
No, it cannot because the court is not named in
the stock certificate. In fact, the business of the court is to
find when the corpus of the estate is supposed to -----.
Now since you are appointed by the court, you are the
substitute of the stockholder, you can attend the
stockholder‟s meeting.
5 Year Limitation
No proxy will be effective for more than 5 years.
If you are stockholder, you can renew it. But supposed
there is no duration in the proxy, then the interpretation is
that the least number of meetings. (??) That is only good
for the particular meeting and it cannot be extended. If
you say 2 years, then it can be interpreted as 2 years and
nothing more.
 So is there such a thing as an implied revocation of
the proxy?
Yes. When does that happen? When the
stockholder himself shows up in the meeting. Katong
mga gi appoint niya na proxy, atras na to sila kay naa na
man ang stockholder dira.
 But when does the implied revocation not have
that effect even if the stockholder shows up?
The implied revocation does not happen if the
stockholder shows up in the actual meeting in cases of a
publicly listed corporation with a pre-meeting deadline for
submission of proxies. When there is a cut off date, all
proxies must be submitted to the secretary one month
before the meeting. The stock and transfer book will be
closed one month before the meeting. That is allowed ha
when we discussed Meetings. That is made necessary
because of the huge number of stockholders. So even if
the stockholder shows up in the meeting, it is not
interpreted as implied revocation of the proxy that has
been submitted.
Voting Trust Agreement
 What is a Voting Trust Agreement?
Section 59. Voting trusts. – One or more
stockholders of a stock corporation may create a
voting trust for the purpose of conferring upon a
trustee or trustees the right to vote and other rights
pertaining to the shares for a period not exceeding
five (5) years at any time: Provided, That in the case
of a voting trust specifically required as a condition
in a loan agreement, said voting trust may be for a
period exceeding five (5) years but shall
automatically expire upon full payment of the loan.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
A voting trust agreement must be in writing and
notarized, and shall specify the terms and conditions
thereof. A certified copy of such agreement shall be
filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is
ineffective and unenforceable. The certificate or
certificates of stock covered by the voting trust
agreement shall be cancelled and new ones shall be
issued in the name of the trustee or trustees stating
that they are issued pursuant to said agreement. In
the books of the corporation, it shall be noted that
the transfer in the name of the trustee or trustees is
made pursuant to said voting trust agreement.
One or more stockholders of a stock corporation
may create a voting trust for the purpose of conferring
upon the trustee or trustees the right to vote and other
rights pertaining to the shares for a period not exceeding
5 years at any one time, provided that in case of a voting
trust specifically required as a condition in a loan
agreement, said voting trust may be for a period
exceeding 5 years.
Proxy vs Voting Trust Agreement
The common denominator is: in both cases, the
one who exercises the vote is other than the main
stockholder. In a proxy, the appointed proxy, in the voting
trust agreement, it is the proxy.
Now the difference is, for a voting trust
agreement, the length can be longer than 5 years if it is
required of a loan agreement. A proxy cannot be
extended beyond 5 years but it can be renewed, but a
proxy cannot be entered longer than 5 years.
So if you write a voting trust agreement, it
cannot be secret. The voting trust agreement must be
registered with the secretary of the corporation and it is
open for anybody else to look at. Then you surrender
your certificate of stock and the voting trust agreement
must be in writing and notarized and shall specify the
terms and conditions thereof. A certified copy of such
agreement shall filed with the secretary of the corporation
and with the SEC, otherwise said agreement is
ineffective and unenforceable.
The certificate or certificates of stock covered by
the voting trust agreement shall be cancelled by the
secretary, and a new one 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 the said
voting trust agreement. Then a trustee or trustee shall
execute or deliver to the transferors voting trust
certificates which shall be transferable in the same
manner and in the same effect as certificates of stock.
So who votes now? The trustee.
45
 What is the difference between a proxy and a
voting trustee?
The proxy exercises the vote of the stockholder
named in the certificate. The voting trustee exercises
the vote that belongs to him and not the creator of
the voting trust agreement. The voting trustee can
appoint a proxy! Because it is his vote, and that is not the
named stockholders vote. That is his vote by virtue of the
voting trust agreement. The voting trustee may be
elected as a director in lieu of the named stockholder.
That is the difference between the voting trustee and a
proxy.
A Voting Trust Agreement as a Condition for a Loan
 How is a voting trust agreement a condition for a
loan?
I told you before that many banks, when a
corporation borrows money from a bank, they look at the
capital structure of the corporation. They ask for a copy
of the articles and bylaws and they will see that this
corporation that has outstanding capital stock of 70% is
owned by 1 person. So he is a dominant stockholder.
Now the bank will want to make the stockholder also a
co-signatory to the loan of the corporation. So this ties
the dominant stockholder because he if not a
cosignatory, he must just get the proceeds of the loan
and disappear. He is not liable because there is a
separate personality between the corporation and the
stockholder. So what the corporation does is that the
dominant controlling stockholder is also made a co-
signatory.
Now when a corporation borrows money and it
has no longer any collateral because all the assets are
already collateral with other banks because he other
loans, it‟s not enough to make the principal stockholder a
co-signatory. The bank will start to ask the principal to
execute a voting trust agreement, and for the duration of
this loan, the bank will exercise your votes. Or so much
of your votes will be exercised by the bank as to be the
majority to decide issues that are raised by the board.
Not only a co-principal but also a voting trust agreement
for the duration of the loan. That device is called a
DEBENTURE. The loan is not is secured not by a
physical asset but by negative covenant (Google:
Negative Covenant is a bond covenant
preventing certain activities unless agreed to by the
bondholders. They are written directly into the agreement
creating the bond issue, and are legally binding on the
issuer, and they exist to protect the best interests of the
bondholders.).
As a corporation, you cannot declare dividends
as long as the loan is outstanding. But why would the
bank still grant the loan even if there are no more assets
left? Because the bank knows that it is a viable business.
It knows and understands that this corporation is in
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
trouble not because of the business but because of the
managers behind this business.
*Chika about sa Christmas party sa ONB and about how
corporations that offer services such as water and
electricity never lose because these are necessities* 
So this is why there is this practice of
debentures. And because there is this practice this is why
a voting a trust agreement is allowed more than 5 years,
but it is restrictive of ownership.
If you read the case of San Miguel Corporation vs
Ernest Kahn et al, this is what happened:
San Miguel Corporation vs Ernest Kahn G.R. # 85339,
Aug 11, 1989
There was a voting trust agreement there because when
Andres Soriano II sold his shares to the Danding
Cojuangco, he did not have enough money to pay for his
shares, so they had an intermediate agreement: make
the downpayment and then the shares were transferred
to Cojuangco and Cojuangco executed a voting trust
agreement, and this voting trust agreement remained
effective until the balance was paid. So the transferor
continued to exercise the vote because the transferee
executed a voting trust agreement in favor of the
transferor.
How Others (non-named stockholders)
Can Vote:
1. Voting trust agreement
2. Proxy,
Those are the 2 ways by which someone other than the
named stockholder exercises the vote of the stockholder.
3.
rd
The 3 way, by way of exception is: if you are a
court appointed administrator of the estate of
the deceased or if you are a court appointed
receiver in the bankruptcy of a particular debtor
under the FRIA law (Financial Rehabilitation and
Insolvency Act of 2010). If the debtor owns
shares of stock, then you can also be the
designated person to vote.
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 be deemed cancelled and new
certificates of stock shall be issued or reissued in the
name of the transferors. The voting trustees may vote by
proxy unless the agreement provides otherwise.
46
A Stockholder Who Is a Minor
 Now supposed you are a minor and you are
stockholder. Can you be a stockholder if you are a
minor?
YES! Minority does not limit ownership. It is
when a minor disposes that he is limited in his capacity to
act. So the minor must have assistance in this case.
 Can a minor appoint a proxy?
YES! But in so appointing, he must be assisted
by his guardian because he cannot make the act of
appointing with legal effect because of his limitation by
reason of his age. Remember your Persons and Family
Relations. There is the personality and the capacity to
act. The personality is never diminished, but it is your
capacity to act that is diminished.
Something which the Corporation Code or the
SEC has not answered is a case like this: you are an
owner of shares of stock in San Miguel and then you
were convicted with plunder and you are now in jail
serving a term for life imprisonment. What happens if you
are serving maximum penalty? Diba there is also the
accessory penalty of civil interdiction. You can no longer
into contracts or act with legal effect. Can you still appoint
a proxy? YOU CANNOT! Because you cannot act with
legal effect.
So what happens to your San Miguel shares?
Wa pay nakatubag ana! Daghan na tag kaso ana. Ayaw
ko ingna na si Jinggoy Estrada wa nay shares of stock!
So what happens? (Father Gus does not answer this )
Subscription
Subscription – covers unissued shares. The first
transaction of the shares is the issuance of the shares.
So if it is not issued, it is a subscription. No matter what
the name is called.
 What is IPO?
That is the terminology used by a corporation
that initially makes a public offering of its shares. But the
shares that it offers does not necessarily mean that it is
unissued shares. It could be already issued shares and
yet it is being offered to the public.
Subscription always covers unissued shares or
the first transaction and when you talk about subscription,
you talk about issued value, whether its par value or no
par value, there is an issued value. If it is no par value,
then there is only an issued value. If it is par value
shares, there is par value and issued value. What is the
relation? The issued value can never be lower than the
par value. It can be higher than par value, but never
lower. If it is lower than par value, then you have water in
the stocks (watered stocks). When there is water in the
stock, there is liability on the part of the directors and/or
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
officers who concerted and did nothing when they knew
that the shares were issued for a consideration lower
than par value.
Issuing Shares At a Discount
 Now what does it mean when you issue shares at a
discount?
Is that lower than par value? A discount from
what? You are talking about shares that are traded in the
stock market. If you are offered shares at lower than the
price ---- in the stock markets, which can never be higher
than par value, then it is said that the shares are being
issued at a discount. Take note, if there is no par value,
no discount, nor is there a premium, there is just the
issued price.
If you sign a subscription agreement, the
general rule is you are bound by it. You cannot retreat
from it. The entire sum of shares covered by the
subscription, if it is par value then it allows for installment
payment of the shares (??). So you make a down
payment and then the balance is payable at the date
specified in the subscription or upon call of the board of
directors.
If it is no par value shares, then the subscription
is identical to the date of sale because the consideration
received is considered as ---- and those shares are non
assessable. So there is no balance in the subscription to
be paid of in no par value shares.
No Par Value Shares
In the beginning, the bylaws or the articles
specify the issued value. Let us say, it must not be issued
lower than 5 pesos. Can the Articles of Incorporation
determine the subsequent value of the later prices of no
par value shares that are issued? They cannot! The
articles and bylaws cannot determine the issued values
of the next trans (??) of shares. Why? It cannot because
the stockholders can impose if after the course of the
normal business, the corporation makes money.
Naturally the book value of the shares of stock
that are no par value will increase higher than the issued
value. The next issuance of shares will be in the very
least have an issued value the same if not higher than
the book value because if it is lower, then it will be unfair
to the existing stockholders. Mag rebelde ang existing
stockholders ana. That‟s why the issued value of no par
value shares cannot be predetermined.
Par Value Shares
That‟s the same in par value shares. Kung par value ang
pag palit nimo sa shares, and then the business of the
corporation is successful, the book value of your shares
will be higher than the par value. When you issue the
47
next trans of shares, the corporation will not peg the price
at par value. It will always be the same if not higher than
the book value of the shares, otherwise the stockholders
will rise up in arms.
 When does it happen that the shares of stock will
be issued at a price lower than the market value or
lower than the book value?
The exception is when a considerable amount of
investment, by let‟s say 1 business interest, and he can
add value to the corporation, when he comes in and he is
a considerable investment and the corporation issues to
this 1 particular person, then it can be at a discount of the
market value.
January 18, 2017 Banal, JMG
TITLE VII
STOCKS AND STOCKHOLDERS
We are now in stocks and stockholders.
Section 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.
And the subject matter of a contract of
subscription is an issued stock.
Quiet simply, if it is no par value shares then
you make a payment only once, no subscription by
installment, considered fully paid and non-assessable.
But if it is par value shares then you can have payment
more than once, by installment.
Now a pre-incorporation subscription is entered
into by the subscriber with the incorporators or with the
underwriter of the corporation still to be formed, but once
the corporation is already formed, the corporation takes
the place of the underwriter or the incorporators.
Now pre-corporation subscription said in Section 61 shall
be irrevocable for a period of at least 6months from the
date of subscription;
Section 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
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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.
Now, after the AOI have already been submitted
to the SEC then a pre-incorporation subscription may no
longer be revoke. If it has not been submitted to SEC,
and all the subscribers agreed to your withdrawal, it
means they have adjust the articles to reflect your
withdrawal because if they do not then they AOI are
telling a lie, it is making an untruthful statement. Because
your subscription is counted in the subscribed capital and
also the paid in capital, if you do not adjust the Article
then the Articles will be making an untruthful statement.
So you must add that to the requirement, so that
even if all the incorporator agrees to you revocation, that
must be reflected in the AOI. They must file, let us say, a
substitute, or they will adjust it, they will reduce the
capital and reduce the paid-up capital and that is still
within the requirements of the law, namely authorized
capital, 25% of subscribed capital and 25% of the
subscribed is paid up.
 What is the requirement of subscription? Must it be
a written contract?
Notice that there is no required form. Why?
If it is no par value shares, you just pay and then
it is fully paid and then you can demand a stock
certificate because you have fully paid it. Stock certificate
follow as a matter of course if you have fully paid your
subscription. So there is in fact execution already.
Now if it is par value shares and it is in installment then it
might require that it be in writing.
Now, unissued shares of a corporation; Section 62 says
this are the following that are allowed as a consideration
for the newly issued shares in a corporation.
Section 62. Consideration for stocks. – Stocks shall
not be issued for a consideration less than the par or
issued price thereof. Consideration for the issuance
of stock may be any or a combination of any two or
more of the following:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually
received by the corporation and necessary or
convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the
stock issued;
3. Labor performed for or services actually
rendered to the corporation;
48
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 bylaws, 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)
1. Actual cash paid to the corporation
Par value shares cannot be less than par value.
You pay in cash, the cash also has par value, stated
value. 1000 ba na o 500, di pareho ra sila, pag ingon ang
shares kay 1 piso ang par value then you just make
correspondence of 1-to1, if the issued price of the shares
of stock is par value.
Now, par-value shares may be issued at price
higher but not lower than par value. No-par value shares
cannot be lower than issued value.
nd
2 allowable consideration:
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;
So property can be the consideration; the
problem is, there is no par value, so there must be the
determination of the value of the property. If it is a real
property it will be a little easier to determine the value of
the real property. There is no problem if you under-value
the RP, the corporation will received more property that
the value of the shares of stock that it issued, but if you
over-value the property then the corporation will be
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defrauded because it will be receiving less than the par
or issued value that it gives in exchange.
Now, if the exchange for the property of the
newly issued shares is based on the assessed value of
the provincial or city assessors; is that alright?
Assessed value for property tax, they call that
tax declaration. Before you graduate from law school you
should see a tax declaration if you have not seen one.
Nalain na bia ron ang tax de kay nacomputerized na sila,
pag nakakita ka pa gani og tax dec na fill in the blanks,
dili nana mao; nausab na.
Normally the SEC will allow the initial valuation
to be handed over by subscriber; the subscriber makes
the initial valuation. So if the value presented by the
subscriber is the assessed value that is under-valuing his
property and that is alright. Because the corporation will
receive more value than the shares of stock it will issue.
Assessed value is one of the lowest valuation or real
property.
Second valuation: if you present as the value of your
property in exchange for the newly issued shares the
Zonal Valuation of the BIR.
Where do you find the zonal valuation?
- The BIR will give it to you (? if you fully paid, or
you get it in the internet (?).
The zonal valuation is the minimum value that
the BIR will accept if the property is sold, for purposes of
capital gains tax. It is higher than assessed-value. That is
still considered fair and reasonable value and I don‟t think
the SEC can oppose the valuation based on zonal listing
of the BIR.
Market value:
If you present a value, higher than assessed,
higher than zonal what happens?
Than is when the SEC will probably ask you to
produce an Appraiser‟s Certification. A real property
appraiser that is licensed will give an appraisal of the
market value and that will be considered fair and
reasonable.
How does the appraiser come up with the value of the
property?
it comes of the value normally by a comparative
transaction most recent in that area, similarly located that
will be turned over to the corporation. So Comparative
Price Method. That is normally what the appraiser uses
and you can still argue that, that is the value of the
property.
49
Now if you want a higher value of the real
property, then you will need so much more than just a
certification or justification because if the property that is
given in exchange for shares of the corporation is over
valued then there water in the stock. The corporation is
receiving less consideration than is just and reasonable
and everyone who approved and consented to the
transaction will be liable for the mockery of the stock.
Now, can you get an approval of the SEC
without the use of and paying for a regular real property
appraiser and it is higher than the Zonal valuation, higher
than the market value and it is approved by the SEC?
You can. Some people will do it this way, of
course some of them have on going business, and they
have regular relationship a bank. They will ask the bank
to have his property as a collateral as a loan. How much
by way of loan can they obtain? And the bank will inspect
the property and consult zonal valuation; appraiser and
then they will give you by writing a letter, the maximum
loan-able value of the property. So you have a valuation
of the bank and that is considered as a conservative
valuation.
What is the rule of thumb of the banks? What percentage
of the Market Value of the land is loan-able?
When it comes to agricultural land:
conservative loanable value is 30-40% of the value of the
land.
Residential: 40-50% of the market value of a
residential property
Commercial: 50-60% of the market value. But
that is conservative. So that is enough for the SEC.
Now, intangible properties; what kind of
intangible properties? Copyrights, patents, etc. Here you
will really need an appraiser. SEC the will require an
appraiser, and not just any appraiser but one that has
experience in valuing intangible property.
3. Labor performed for or services actually
rendered to the corporation;
BUT it is labor in the past tense that can be
consideration for certificate of stock.
Why is labor to be performed not allowed as
consideration?
1. Because it cannot be forced, if it is later
on revoke or withdrawn by the subscriber.
If it could be the subject of specific
performance then it would be a
violation on the prohibition against
involuntary servitude.
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2. Labor to be performed is actually speculative
because many things can happen.
Ex: the one who will perform the labor
could be incapacitated even they like to.
If he can no longer perform, what
happens to the corporation if it has
already issued the shares of stock? It
will not receive the consideration
therefore. Mamatay xa naigo siya‟g kilat
so dli xa kaperform so the corporation is
short-changed. So it as to be (1) labor
that has already been performed or (2)
services actually rendered to the
corporation that is allowed.
4. Previously incurred indebtedness of the
corporation;
That is dacion en pago. Let us say a bank has
loaned the corporation 1 million pesos and the
corporation can no longer pay and then the bank says we
are willing to receive instead of payment, shares of stock
if the corporation gets the OK from the stockholders.
Why? Because that will have to be exempted from the
preemptive rights.
Then the corporation will issue the shares of
stock and the consideration for that is the loan unpaid.
Do not say that it is cancelled; it is already not a loan but
is now become equity. It ceases to be a loan in the same
manner that the bank ceases to be a creditor, it is now a
stockholder. There is a very marked difference in the
expectation of the bank. As a creditor he can demand
payment of the loan whether or not the corporation
makes a profit. Once it is a stockholder, it goes with the
fortunes of the corporation. If the corporation makes
money, it has dividends; of not, then it loses. It is now a
proprietary relationship.
5. Amounts transferred from unrestricted
retained earnings to stated capital;
They are balance sheet terminologies.
When that happens, shares of stock are issued
and the consideration is the amounts transferred from
unrestricted retained earnings to stated capital.
That means that the corporation has declared
Stock Dividends.
6. Outstanding shares exchanged for stocks in
the event of reclassification or conversion
Reclassification or conversion, you issue
preferred shares that are convertible shares.
Now let us say that the option of converting is on the part
of the corporation, and it exercised the right to convert
the shares from preferred to common shares, what
happens?
50
There will be new common shares that are
issued to the stockholders, what will be the
consideration? The old certificate of stocks of the
preferred shares, the old certificate are surrendered to
the corporation and in exchange will be the new common
stock because the old preferred shares are now
classified as common shares.
That can happen also with bonds. When a
corporation issued convertible bonds, the bonds are
surrendered and in return, the corporations issues shares
of stocks. So, pulihan ang imong bond certificate of
stocks certificate. Normally the conversion rate is agreed
upon at the time of the issuance of those convertible
shares or there may be a formula or agreement by which
the conversion rate may be determined. So, the rate or
conversion of formula is already agreed upon at the time
of the issuance of the shares that are reclassified or
converted to new shares.
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 bylaws, 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)
So those are the three instances of the
determination of the price of no-par value shares.
First, the subscription contract, if it is a pre-
incorporation subscription and it is a no par value shares,
it must always be in the subscription contract because
there is still no board and no stockholders, and in fact
there is still no corporation. And if you put it in the
subscription contract you now that it is not lower than,
how much? It cannot be lower than 5 pesos according to
section 6, if you still remember.
Suppose the subscription says 5 pesos no par
value shares, after 5 years the corporation increases the
capital it wants to raise and it issues some more shares
from its unissued shares, who will determine the price?
It will be the board of directors if they have
authority in the articles of incorporation. If there is no
authority then it will be the stockholders. You can be sure
that the stockholders will vote that the value of the issued
price will not be lower than book value of the shares of
stocks, otherwise lugi sila.
Certificate of Stock
Now we are in certificate of stock. Certificate of stock and
shares of stock are not the same. Both are property, one
is intangible and the other one is tangible.
What is the connection between the two?
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ADDU-Law
The Certificate of Stock normally represents the
shares of stock.
 Is there one certificate for every shares of stock?
No. the certificate is based on subscription, that
is why a subscription is a indivisible contract. You cannot
say di nako kabayad sa balance, issue-hi na lang ko og
equivalent sa akong gibayad, issue-hi na lang ko og
certificate of stock unya kamo na bahala adto akong dili
mabayran. No, the laws says under section 64: No
certificate can be issued until the full payment of the
subscription is made.
So, certificate of stock stands for the shares of
stock included in the subscription. Dili na kay one-to-one,
50 shares, 100 shares, 1000 shares, 1M shares.
 Mabuak nang certificate of stock? 
Yes. You can break up the certificate of stock.
How? Suppose you have 1000 shares and
you sell only 500 shares, but you have 1 certificate for
the 1000 shares, how can you sell 500? That is when you
execute a deed of sale. (Talks about what is written in a
deed of sale).
Mao nana, dal-on nimo ng deed of sale, dal-on
nimo nang certificate of stock na 1000, ngadto ka sa
secretary sa corporation to issue two certificates. 500 for
the buyer and 500 for the seller, mabuok tong original na
certificate of stocks.
Now, in section 63 we find out that that there are
two additional officers in the corporation, the vice
president and assistant secretary.
SECTION 63. Certificate of Stock and Transfer of
Shares. — The capital stock of stock corporations
shall be divided into shares for which certificates
signed by the president or vice-president,
countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and
may be transferred by delivery of the certificate or
certificates indorsed by the owner or by 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 so as to show 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.
51
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in the
books of the corporation.
Until you have fully paid your subscription you
cannot sell your shares of stock. For as long as your
shares of stock, covered in your subscription, still not fully
paid, still not delinquent, you can vote for the shares, you
can receive dividends but you cannot sell it until you have
fully paid your subscription and a certificate of stock has
been issued.
Now there is this case of:
China Banking v. CA (270 SCRA 503)
Actually it is not shares of stock, but (ruling?) is the
same. This is a certificate of membership in a NSNF
corporation, Capitol Golf and Country Club. The
character here got a loan from China Bank; his security
for the loan is his membership certificate in Capital Golf,
(it is called shares loosely pero dili man na share, naa pa
bay share sa Apo Golf, dili man na share, certificate of
membership man na kay no stock non profit man na, but
the membership is transferable)
Now he failed to pay, so China Bank executed on his
pledge. Once they executed, there was an auction sale,
nobody bided on his certificate, so China Bank became
the default winner. China Bank consolidated ownership
after the auction sale and it went to Capitol Golf; we have
been awarded, give us a new certificate, and cancel the
certificate of Mr. So and so. Capitol says they cannot
cancel, why? Because this character has not paid his
club dues plus he has back accounts in the restaurant.
He has many unpaid claims according to Capitol; China
Bank says that is no registered in the Certificate so it
does not bind the certificate, you must issue us a new
certificate. Capitol says “NO”, we are relying on Section
63.
Issue now is: What the meaning of unpaid claim?
The CA in ignorance said it includes unpaid dues and
restaurant bills.
The Supreme Court said that unpaid claim is not just any
other claim, it must be a claim related to the subscription.
If the subscription is not fully paid, there is unpaid claim
but if the subscription has already been fully satisfied,
interest, penalty, etc., which is true in this case because
there is already a certificate, then you must issue a new
certificate of stock.
This particular section up to section 64, balik2x lang ang
question sa bar. It‟s always between one stockholders
who has made a double sale of his shares of stock, wa
kabalo ang iyang gibaligyaan gipadugay-dugay nya,
hangtod namatay siya mga heirs na lng toy nahibilin, all
they have is a receipt, that Mr. so and so has already
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
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paid his shares, he still holds on to his stocks certificate,
what is your remedy?
Or that he has sold it again to another buyer, how
do you determine who has a better right to the issuance
of the stocks certificate by the secretary of the
corporation?
Important to know, the first one to go to the
secretary and record his sale is the first between two
buyers and if you have sleep on your rights, you have
been negligent in asserting your rights, that is also
counted against you. If you have all the time and you did
not immediately, after full payment, asked for the
issuance of the certificate.
The secretary of course, cannot be forced to issue a
new certificate in favor of the buyer who has fully paid,
unless the certificate of stock is surrendered. So your
remedy is an order from the court to compel the seller to
surrender the certificate of stocks.
January 19, 2017, Casan, J
Stocks and stockholders.
We took up in relation to Section 63 the China
Bank vs. CA. We said that the Supreme Court has
pronounced that unpaid claims which bars the issuance
of the certificate of stock are exclusively claims that are
tied with the subscription. They cannot be any other
claims. So, once you have made payments subscribed in
the subscription. You have a right to the certificate of
stocks, it is your property. Separate and distinct from
your shares of stock? Different from your shares. Why do
I say that?
Naa kay shares of stock gibaligya nimu sa mag-
igsuon, gi endorse dayun nimu later on Hatag dayun niya
nihatag dayun ka sa bayad. Ingun dayun imu igsuon na
nawala niya. Magingun siya ang iyang bag nabilin sa taxi
then nakalimot siya atong taxiha. Nawala. Miadto dayun
siya sa secretary sa corporation then musulti siya na
gipalit man nako. Naa man dire ang resibo. The
stockholder recorded in your book has put it inside the
receipt. So issue me a stock certificate under my name
because this receipts is equivalent to my rights in the
stock certificate.
Under the rules of the corporation, it is still the
transferor who has the right over the shares of stock. So,
it is still the transferor even if he has acceded hall rights
in the transferee who must go through the rubrics of
section 73. Lost or destroyed certificate of stocks.
52
Section 73. Lost or destroyed certificates. – The
following procedure shall be followed for the
issuance by a corporation of new certificates of
stock in lieu of those which have been lost, stolen or
destroyed:
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth,
if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number
of shares represented by such certificate, the serial
number of the certificate and the name of the
corporation which issued the same. He shall also
submit such other information and evidence which
he may deem necessary;
2. After verifying the affidavit and other information
and evidence with the books of the corporation, said
corporation shall publish a notice in a newspaper of
general circulation published in the place where the
corporation has its principal office, once a week for
three (3) consecutive weeks at the expense of the
registered owner of the certificate of stock which has
been lost, stolen or destroyed. The notice shall state
the name of said corporation, the name of the
registered owner and the serial number of said
certificate, and the number of shares represented by
such certificate, and that after the expiration of one
(1) year from the date of the last publication, if no
contest has been presented to said corporation
regarding said certificate of stock, the right to make
such contest shall be barred and said corporation
shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and issue in
lieu thereof new certificate of stock, unless the
registered owner files a bond or other security in lieu
thereof as may be required, effective for a period of
one (1) year, for such amount and in such form and
with such sureties as may be satisfactory to the
board of directors, in which case a new certificate
may be issued even before the expiration of the one
(1) year period provided herein: Provided, That if a
contest has been presented to said corporation or if
an action is pending in court regarding the
ownership of said certificate of stock which has been
lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended
until the final decision by the court regarding the
ownership of said certificate of stock which has been
lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on
the part of the corporation and its officers, no action
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
may be brought against any corporation which shall
have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure
above-described. (R.A. 201a)
Once he has the certificate, he can endorse it
and give it back to the transferor. Because in the books
of the corporation for all purposes as to the whole world
the shares are still owned by the transferor.
So, there is a distinction. Between stock
certificate and shares of stock.
Now, I‟d like to point out to you section 71. I will
not discuss anymore the whole process of delinquency
sale in section 68. Section 71 the effect of delinquency.
Section 71. Effect of delinquency. – No delinquent
stock shall be voted for or 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)
So the moment you begin delinquent. Your right
is limited to dividends. But if you are given stock
dividends just like anyone else. It is withheld until you
have paid the balances in your subscription.
But if it is a cash given, the cash is withheld and
applied to the amounts still unpaid in your subscription.
So that is what happen if you are declared delinquent.
You cannot attend meetings, stockholders they cannot
vote, you cannot be voted for because you are
delinquent. Otherwise, if you are not delinquent but you
have not paid your subscription, you are entitled to vote
on your shares covered by the subscription, you are
entitled to be voted and vote in the election of the board
of directors, you are entitled to receive all kinds of
dividends stocks or cash, there is no problem. But the
moment you are declared delinquent, then that is the
consequence. Section 71.
Alright, section 72.
Section 72. Rights of unpaid shares. – Holders of
subscribed shares not fully paid which are not
delinquent shall have all the rights of a stockholder.
(n)
53
Before in the bar examinations, when legal
forms was still included in the bar exams. Write an
affidavit of loss of a lost or destroyed certificate of stock.
Section 73. Lost or destroyed certificates. – The
following procedure shall be followed for the
issuance by a corporation of new certificates of
stock in lieu of those which have been lost, stolen or
destroyed:
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth,
if possible, the circumstances as to how the
certificate was lost, stolen or destroyed, the number
of shares represented by such certificate, the serial
number of the certificate and the name of the
corporation which issued the same. He shall also
submit such other information and evidence which
he may deem necessary;
2. After verifying the affidavit and other information
and evidence with the books of the corporation, said
corporation shall publish a notice in a newspaper of
general circulation published in the place where the
corporation has its principal office, once a week for
three (3) consecutive weeks at the expense of the
registered owner of the certificate of stock which has
been lost, stolen or destroyed. The notice shall state
the name of said corporation, the name of the
registered owner and the serial number of said
certificate, and the number of shares represented by
such certificate, and that after the expiration of one
(1) year from the date of the last publication, if no
contest has been presented to said corporation
regarding said certificate of stock, the right to make
such contest shall be barred and said corporation
shall cancel in its books the certificate of stock
which has been lost, stolen or destroyed and issue in
lieu thereof new certificate of stock, unless the
registered owner files a bond or other security in lieu
thereof as may be required, effective for a period of
one (1) year, for such amount and in such form and
with such sureties as may be satisfactory to the
board of directors, in which case a new certificate
may be issued even before the expiration of the one
(1) year period provided herein: Provided, That if a
contest has been presented to said corporation or if
an action is pending in court regarding the
ownership of said certificate of stock which has been
lost, stolen or destroyed, the issuance of the new
certificate of stock in lieu thereof shall be suspended
until the final decision by the court regarding the
ownership of said certificate of stock which has been
lost, stolen or destroyed.
Except in case of fraud, bad faith, or negligence on
the part of the corporation and its officers, no action
may be brought against any corporation which shall
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have issued certificate of stock in lieu of those lost,
stolen or destroyed pursuant to the procedure
above-described. (R.A. 201a)
(Father then focused his discussion his discussion on
bond).
I hope nakasulay na mo ug kuha ug bond. The first thing
you do is look if the insurance company or the bonding
company is included in the list of approved bond issuers
of a particular office or court in which you are situated.
Lahi baya na ug lista sa Department of Labor, NLRC ug
sa court. Lahi lahi na sila. Tan-awa gud.
So many are so fond of circumventing the 1
year, they put up a bond. If you put up a bond, then the 1
year period is short circuited. Issue hay sila ni secretary
because it is bonded. If the real owner comes up, oh
niaya na. Oh na ( ?) na diay.
TITLE VII - CORPORATE BOOKS AND RECORDS
Section 74. Books to be kept; stock transfer agent. –
Every corporation shall keep and carefully preserve
at its principal office a record of all business
transactions and minutes of all meetings of
stockholders or members, or of the board of
directors or trustees, in which shall be set forth in
detail the time and place of holding the meeting, how
authorized, the notice given, whether the meeting
was regular or special, if special its object, those
present and absent, and every act done or ordered
done at the meeting. Upon the demand of any
director, trustee, stockholder or member, the time
when any director, trustee, stockholder or member
entered or left the meeting must be noted in the
minutes; and on a similar demand, the yeas and nays
must be taken on any motion or proposition, and a
record thereof carefully made. The protest of any
director, trustee, stockholder or member on any
action or proposed action must be recorded in full on
his demand.
The records of all business transactions of the
corporation and the minutes of any meetings shall be
open to inspection by any director, trustee,
stockholder or member of the corporation at
reasonable hours on business days and he may
demand, in writing, for a copy of excerpts from said
records or minutes, at his expense.
Any officer or agent of the corporation who shall
refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy
excerpts from its records or minutes, in accordance
with the provisions of this Code, shall be liable to
such director, trustee, stockholder or member for
damages, and in addition, shall be guilty of an
54
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; P.B. No. 268.)
Only three books where the corporation code makes it
mandatory or obligatory for the corporation; record of
business transactions, books of minutes of meeting of
stockholders, board of directors or trustees and the stock
and transfer book.
The two books that are directly the responsibility
of the corporate secretary is the stock and transfer book,
and the books of minutes of meetings, or the
stockholders or member of the corporation.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
Now for the purposes of the record of the
corporation either corporate board or stockholders or
members the book of minutes is considered as decisive
as to the final version of the transaction.
Nagdecide ba gyud ta ani? Asa man nato
makita? Adto na sa minutes sa book of minutes of board
of directors. The minutes ha. The list of the resolutions of
the board. So, how is the resolution numbered? It is year,
and then the series. Example 2007-01, 2017-02. All the
resolution must have that number. Kung mag away gani
mo, adto dayun didto sa minutes.
That is why it is important for the secretary to
sign the minutes. That is why usually in a meeting, the
minutes of the previous meeting is read. So that if you
have objections you say, ohh that is not what has been
agreed about. It will be corrected. After which, the
secretary sign. It is because the body to which the
content is attributable has already put its stamp in the
meetings. So it is the secretary who holds the books of
minutes of meetings.
We have come across several formalities, isn‟t
that? There are kinds of resolutions which require special
formalities for example the increase of capital of stock, it
requires qualified notice, suppose the resolution was
passed, but then you did not actually comply with the
qualified notice.
 What do you do to close the door that you will not
have a problem on that resolution?
You make the board, oh not only the board but
the entire stockholders in the annual meeting to ratify that
particular resolution because if it is not ratified then the
effect is it is cured. Because they are only very few defect
that are not curable in this book (referring to the
corporation code) that is the beauty of this code. Only if
you know this code. So, by making the stockholders ratify
all the resolution, then you close the door of any possible
order (?).
So have a list of all the resolutions, paghuman
sa stockholders meeting then ipapirma na tanan. Wala
pa gani mahuman ang meeting ibalik balik na sa screen
na dako, kana balik balik. So have given everyone the
chance to read the resolution and then somebody hopes
to ratify the resolution, and then ask are there any
objection? Mao na kay gipangkapoy man na sa meeting.
Wala na muobject. So if there is no objection, what will
the secretary put down? Unanimous! 100 percent
ratification.
Stock and transfer book
55
Now, stock and transfer book. That is where all
the subscribers are there, those that have not been fully
paid, then subscribers that are paid on the basis of which
stocks certificate are issued.
Now, it might be that the stock and transfer
book is in the jurisdiction of the assistant secretary. Then
the assistant secretary reports to the secretary. But if the
number of stockholders is of magnitude that it is already
impractical for the corporation to handle it then they give
it to a stock and transfer agent. I-hire na sila. They are
corporations who are licensed by SEC to handle the
stock and transfer book and shares of stock of publicly
listed corporations because they are so numerous that
are beyond the competence of the corporation itself to
handle. Kung secretary lang imung ipagunit ana unya
siya pa imung pahimuon sa tanan notices sa 2 million
stockholders then dili mana mahimo.
Now there is a right to financial statements
mentioned in section 75..
Section 75. Right to financial statements. – Within ten
(10) days from receipt of a written request of any
stockholder or member, the corporation shall furnish
to him its most recent financial statement, which
shall include a balance sheet as of the end of the last
taxable year and a profit or loss statement for said
taxable year, showing in reasonable detail its assets
and liabilities and the result of its operations.
At the regular meeting of stockholders or members,
the board of directors or trustees shall present to
such stockholders or members a financial report of
the operations of the corporation for the preceding
year, which shall include financial statements, duly
signed and certified by an independent certified
public accountant.
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)
So, the provisions says that the annual meeting
that is scheduled and fixed by the by-laws should be a
date such that by then the corporation is ready to present
to the stockholders or members of the corporation and be
given the financial statements. Which means it must be a
month or two after the end of the fiscal year. The
accounting period is the fiscal year. Human na ta. Mao
na ang I revise sa independent certified public
accountant, it will take them a month or two. PLDT, the
fiscal year of PLDT begins in January 1 and ends in
December 31. When is the annual meeting of the
stockholders? June. 6 months. San Miguel? When is the
annual meeting? July. Kadugay. Why because San
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
Miguel is not just one corporation. It has many subsidiary.
Its subsidiary, so I audit. Pagkahuman ana I consolidate
man na nimu.
 Why is it important to present to the stockholders?
Because the financial statement of the
corporation does not become the financial statement of
incorporator unless the stockholders or members vote to
approve it. If they do not approve it, then it does not
become the corporation‟s financial statement. The Board
of Directors only present it and they only answer
questions from the stockholders and member and the
majority must approve it.
When is it a majority? Is it a majority of the voting and
non-voting shares? Or just voting shares?
Go back to section 6 right away. It is only the
voting shares who can approve the financial
statements. It does not include non-voting.
Now who appoints the external auditor? It is
usually one of the agenda in the stockholders annual
meeting. Why is that? Because the board proposes kung
SGV or Cunanan ba, the Board will recommend but it is
the act of the stockholders or the members. They vote
and delegate the board to delegate the compensation of
the external independent auditor. Daghan ang musipyat
ana. The last paragraph of section 75 says.
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)
So if the paid up capital is less than 50,000 then
they do not need an external auditor however, I am afraid
that there still exists a corporation with 50,000 paid up
capital.
Please take note that the right to financial
statement is distinct and different from the right of
inspection. The right of inspection of the stockholder of
the books of the corporation. The right of inspection,
section 74 second paragraph.
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.
56
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:
Last year there was a decision by the Supreme
Court which I think is an obiter because it was not really
sound. The Supreme Court said that if you refuse
inspection, the officer will be held criminally liable. But
there was no case that makes you liable so it is an obiter.
But under 144 its punishment is criminal sanctions of the
code. So if you reduce, you can only regulate but not
reduce.
Pero kung illiterate ka, dili ka kabalo magbasa
can you bring along a CPA to understand the books of
the corporation? Yes. You can bring someone else to
assist you. Otherwise, if you do not bring your rights are
rendered nugatory.
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.
So kung ikaw stockholder ka, unya nagdala ka
ug dumot(?) kay last year very inspect ka. Kay minor ka,
naa sila defense. So unsa man imong buhatun? Mangita
sad ka ug stockholder na manikog. So ikaw na sad bai.
Mangayo ug inspection. Naa ko magpaluyo nimu. Dili na
man to siya magbalibad. Mao man ang pama agi ana
dire because the books are supposedly open to the
stockholders and he can bring along any qualified people
to at the books whether there has been any irregularity.
Kung mangopya sila it shall be at his own expense. He
cannot make the corporation pay for the reproduction.
Alright! We are through with the books of the corporation,
we will now be at merger and consolidation. The most
important in the merger and consolidation because
someday it will be asked in the bar examination,
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
What is a non-disclosure agreement? We will
continue next meeting.
January 20, 2017, Tongo K
TITLE IX
MERGER AND CONSOLIDATION
So today we take up mergers and consolidation. Title IX
of the Corporation code. Section 76 to section 80. It is
supposed to be just four sections but they are long
sections.
From section 6 you know that mergers and consolidation
require the affirmative ratification vote of the stockholders
both voting and non voting because it is a fundamental
action of the corporation. So under this title you will find
that the stockholders may vote three times.
The first time they will vote is to approve the plan of
merger and consolidation. Two or more corporations may
merge and then they shall approve a plan of merger.
What is to be contained in a plan (of merger)?
It is found in section 76 and then the action of the
stockholders or members.
Section 76. Plan or merger of consolidation. – Two or
more corporations may merge into a single
corporation which shall be one of the constituent
corporations or may consolidate into a new single
corporation which shall be the consolidated
corporation.
The board of directors or trustees of each
corporation, party to the merger or consolidation,
shall approve a plan of merger or consolidation
setting forth the following:
1. The names of the corporations proposing
to merge or consolidate, hereinafter referred
to as the constituent corporations;
2. The terms of the merger or consolidation
and the mode of carrying the same into
effect;
3. A statement of the changes, if any, in the
articles of incorporation of the surviving
corporation in case of merger; and, with
respect to the consolidated corporation in
case of consolidation, all the statements
required to be set forth in the articles of
incorporation for corporations organized
under this Code; and
57
4. Such other provisions with respect to the
proposed merger or consolidation as are
deemed necessary or desirable. (n)
Two thirds vote of the outstanding capital stock of each
corporation in the case of stock corporation. Or atleast
2/3 of the members in case of non-stock corporation shall
be necessary for the approval of such plan.
If a stockholder dissents then he has an appraisal right.
And then, after the plan of merger you have to, the two
constituent corporations, those who are involved in the
merger and consolidation, may draw up the articles of
merger or consolidation.
Once again the articles are approved not just by the
board of directors, but buy the stockholders .. again by
two thirds. And then you find out that any amendment to
the articles must also be approved two thirds vote by
stockholders.
So three things have to be voted for by the
stockholders
1. plan of mergers,
2.articles of merger or consolidation;
3. Any amendment of articles of merger
and consolidation
2/3 vote, If you have that then there is no
problem. You file it with the Securities and Exchange
commission and if you have the proper endorsement of
the relevant oversight government agency, for example if
you have two banks merging, the BSP must endorse it
and the articles of merger are approved, if the
appropriate government agency that has an oversight
jurisdiction endorses it. Very simple.
But that is if you have already reached an
agreement. The problem is what happens before this.
How do you reach an agreement.
There is no merger and consolidation that
happens from below. You might think that that can
happen from below, it is really the top management of the
constituent corporation that will initiate the merger or the
consolidation. They‟re reading industry, their needs, etc,
they decides xx merge.
Now, when a top executive of a corporation
approaches another executive it is never direct, they
always look for „go-betweens‟ . Because most of these
people, these corporations are rival, they belong to the
same industry, they are competitiors. So many times they
are not exactly in good terms. So they will ask something
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
from the investment banking community to act as a „go-
between‟.
Now, when they come together they will discuss
issues of control then they will discuss what is normally
called ball-park figures. „How much is your corporation
worth, how much is my corporation worth and then when
we come together what is the result, who will control
what.‟
Unlike marriage, the bigger the difference with
the constituent corporation the more successful the
merger or consolidation is. Di man na pareha sa
marriage as much as possible pareho mog status,
pareho mog economic background, magtagbo mo diba?
kay sa sine lang man ng dato (maminyo ug) pobre ana,
sa telenobela lang man na. lisud man na. (haha)
But in mergers and consolidation, pareho ra mo
ana, duha mo kabuok, gubot na na. Why? Because it is
always an issue as to who controls. Dako man nang fight
kanang who controls. You can see that in the basketball
field. Kay kinsa man ga control mao man ng gahupot sa
bola. Kung tie ang score niya three seconds nalang,
Kinsa man mu itsa? Si Stephen curry o Kevin Durant?
The accepted leader of the team, mao nay mukupot sa
bola. Kinsa man na? wa man sila kahibawo. Mao man na
ang issue.
There might come a point where somebody has
to decide. And if no one is clearly in control, what is the
result? Chaos, inaction, walay mahitabo. Nahuman lang
bagting ang timer, wa na, walay maka itsa kay walay
makadecide kung kinsa ang mu-take of the last three
second shot.
So, magtagbo gani ang top management naa na
silay homework na gibuhat. And the homework they have
gone through are the existing financial statements
available to them. Normally they will go back as far as ten
years, financial statements, balance sheet and profitable
statements and then they have a ballpark figure as to
what is the overall value of this corporation. Naa na silay
number na gi buhat. niya muingon ang pikas „kanang
naa ninyo, . pero dungagan na nimo kay naa may
daghang prospect, diba? Kung mag combine ta kita nay
number one, kita nay kina dak-an,‟ there is a premium to
that.
Let us say this particular industry has five big
corporation, number 2 is going to merge with number 5.
Gamay ra gud ng number 5 pero muingon siya
„magpapalit ko nimo, magpamerge ko nimo, di naman ka
number 2, mahimo ka naming number one, so you have
to pay me for that result, mao nay value nako. Ako
58
number 5, ang number one di ko gusto makipagmerge sa
number 1 kay number one naman siya. Ikaw number 2
ka, gusto ka makipagmerge nako kay number 5 ra man
ko aron ka ma number one. Ang number three ug
number four di man makipagmerge nako kay bisan
makipamerge sila nako di man sila ma number one
because the resulting or consolidated corporation is not
that big. Ikaw ra gyud ang nagkinahanglan nako. Ug
mumerge ka sa number three, mahal ra kaayo to be
number one, ug mu merge ka sa number four mahal ra
kaayo. Ako affordable mao ng naa koy premium na
imong paliton. (isuga ni number 5 oi)
Those are the intangibles and those they will
discuss. So those are beginning figures based on known
financial statements and then if they are serious, they are
already open in the principle to the merger and
consolidation then they will enter into an agreement.
What is that agreement? Normally it is called a due
diligence period.
Due diligence period
Naay time table. Let us say three months due
diligence period. What do you agree, you agree that for
the next three months in this merger or consolidation
phase that each constituent corporation will conduct its
business in such a manner as to stay as close as
possible to there financial statements.
In other words di ka mag sugod ug laing bag-
ong negosyo that is drastically making the corporation
depart from its financial statements. Mao ning ni –a an gi
dak on sa imong cash, dili ka magpasagad ug mag invest
ug maski unsa na mausab ng cash because that is one
of the basis for quoting the price. As close as possible to
the balance sheet that is presented, mao ni imong
buhatong when you .. and you will do it with due
diligence.
Now, nganong three months pa man? Because
it will take three months to verify whether the initial
valuation based on the known financial statement is
accurate. Tagsa tagsaon man na nilag himay kanang
mga assets, liability, each one will hire auditors to verify
financial statements.
Mu ingon ka, nganong kinahanglan man na I verify,
kinahanglan pa ba na? tan-awon na. kay usahay ang
auditor mu tan-aw (niya mu ingon) „pila ka mga
empleyado dinhi sa ningni a diri sa one of the constituent
corporation?‟ let us say they have ten thousand
employees. Then they look at the retirement fund. When
they look at the retirement fund it only covers fifty percent
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
of the labor force. In other words their retirement fund is
only half of the retirement, kulang ug fifty percent.
When is a retirement fund fully funded? You get
all the employees, you get their total service (the number
of years) you multiply it with the retirement fund they will
get per CBA or company practice or the law whichever is
prevailing and then you arrive at the aggregate number
and then you compare it to how much the retirement
fund is, does it come up to it? Alkanse! Oh, I deduct na
sa value sa corporation, kay ang musagubang anang
corporation will still have to meet the fifty percent that is
not funded. Maka pa ubos na sa presyo.
When you talk about international corporations
that are merging, let us say that the headquarters of the
company or the corporation is in Sweden and it has
branches of subsidiary corporation in 28 countries. And
then they list all the equipment and the factory facilities
according to the depreciation accumulated over .. assets
there. Now, adtuon na sa auditors, examinon man na.
„Kini it is just four years, from the acquisition price brand
new naa pay nahibilin na six years kung 10 years ni ..
So gawas sa ilang libro mao na, mao ng mga values.
Niya pag examine diay nimo, tan-aw sa auditor, pag
padala atong equipment, recondition, karaan na diay to
na linya sa mother corporation, gi re-fervish niya gipadala
na didto, pagsugod palang gibayran na ug brand new,
lakra sa libro. Mahibaw-an man na sa auditor, mu-ingon
siya „That is not the true value, paubsa na,; kabawi naka.‟
Di man na nimo makit-an sa financial statements. Ang
imong makit-an ran a brand new ang pagpadala didto, na
karon gi depreciate na as brand new pero diay
pagpadala ana, that is an old machine of the mother
company that has been fully depreciated and is
refervished and sent there as brand new. Kana man na,
you have to adjust the price and so on..
After a due diligence audit then there will be
discussion. May be they have to adjust the price, lower
or higher. When can it be adjusted higher? It can be
adjusted higher if the acquisition cost is the value of the
asset stated in the financial statement and then the asset
has already grown in value.
Let us say it is commercial property and what is recorded
in the books as of ten years ago and it is a downtown
property. .. Real property di man na I depreciate. Then
they would say you have to adjust the price higher
because that it is not the true value, what is in the books
is not the true value. This has a higher value. That is
what the give and take during the final adjustment.
Non-Disclosure agreement
59
Now, when you enter into a due diligence
agreement you also have a very essential feature called
non-disclosure clause. The constituent corporation that
participate in the merger and consolidation they agree
that they will not reveal to any third person whatever they
find out in the course of due diligence period. In fact
during the negotiations they don‟t say anything. They
maintain secrecy, they respect each other. Why? For the
sake of keeping the industrial secrets and the peculiar
strategy of the corporation to itself. They don‟t want to
reveal it to the whole world. So they bind each other to
secrecy.
Each constituent corporation will know more
secrets of the other and the other constituent will also
know your secret. So, if the negotiation does not pull
through then you part and you keep each other‟s secrets.
That is the idea of the non disclosure agreement.
Later on we will see the dilemma if you are
listed in the stock market because you are supposed to
reveal any material fact that has a bearing in the
investors to buy , hold or sell the shares of stock of your
company. That is why you have the obligation to
disclose. And yet by agreement within the parties you
have the obligation not to disclose. So how is that
resolved if you are listed in the stock market.
Mao nay problema. Naay mga news articles
that there is possible merger that is going to take place.
So right away they confront these top officials of the
company and the top officials normally will invoke the non
disclosure clause and the result they cannot talk about
it. The moment they deny any disclosure because of
other obligation that means there is something going on.
Isn‟t that? Mao man ng tuyo sa mga business reporters,
they want to find out, they bring you out in the open and
they will confront you. If you do not say anything that
means there is something going on, there is a negotiation
going on.
Their normal answer is „We are always looking
for opportunities to merge but the talks are still
preliminaries. There is no firm direction of our talk but we
are considering several options‟ kana nakalikay pa na
siya. Pero pag ang reporter mu ingon „are you in talks
with this company in a merger because we heard…‟
muingon na gani nag „I am very sorry I am covered by
non-disclosure clause‟ that means there is a merger of
this particular ..
When the company values itself, that is
equivalent to a self serving testimony. Mu ingon ka ,
„nganong financial statements, naa man nay external
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
auditor naghatag dihag certification that this reflects the
true numerical scoring of the corporation in accordance
with generally accepted‟ … isn‟t not that enough? In the
merger/consolidation world that is not enough. Because
non quantifiable start to come in and it ,, the price. So
you will need another kind of certification. That is why
each constituent will normally engage the service of
reputable investment bank to be its adviser.
So PLDT is going to buy SAM(?), SAM (?) will
have its own investment adviser, PLDT will have its own
investment adviser. Reputable inverstment banks who
will do the study of the industry, who will advise PLDT as
to what the reasonable price is, etc. Ofcourse PLDT will
not go to a price that he thinks is not reasonable. But
because there is this nverstment bank that is advising
you and it has already … then the investment community
is assure that the pricing is according to sound
investment principles because of the investment adviser.
Mao nay kuhaon nimo. They do not come cheap
because they go on a commission basis but you need
them to be able to say to the investment community that
this particular transaction is fair and reasonable.
Remember your shares of stock are traded daily and that
is why sometimes the stock exchange will order the
suspension of trading of shares of stock of the
constituent corporation, freeze them until there is definite
news as to whether or not the merger will go through and
the terms, the pricing of the merger are revealed.
So trading of their shares of stock are
suspended to give the investment community time to
evaluate this information which has a very strong
influence of the decision making of investors whether or
not to sell, hold, or buys the shares of stock of this
corporation. That is the investing ..
Now magakasabot na gani na, una pa
magsugod ang klarong merger, articles of merger,
amendment ..
 How do you make sure that you can get the two
thirds ratification vote?(in merger)
It is the first meeting of the stock holders that is
crucial. You tell the stock holders „we are already in the
road to merger you agree or you do not agree?‟ if you do
not agree appraisal right, but if it is publicly listed,
normally what would those who disagree will do is that
they will just sell their shares, nganong maghuwat pa
man kag appraisal right na the market has already
appraised you. That is the price of the shares of stock.
60
And then to measure the stockholders, you get
a proxy and you get an irrevocable proxy. Or sometime
they will just announce in the meeting we already have
the votes and the proxies to vote two-thirds. So this is a
pro forma announcement because the controlling stock
holders already have a two thirds vote.
If you do not have the two thirds vote, that
means you did not do your homework, you did not
convince people, you must hold cocuses. You go down
your stock and transfer book, you identify the big chunks
of shareholders and you convince them first. Once you
get the two thirds then the meeting is just a formality. You
announce, then you go out to the press and daog ka na.
You have the vote, the approval for the plan and then
after you finish the articles of merger it will be voted also
because you have votes, it is all just pro forma. And you
will know it if you have a two thirds vote if your man is
given the proxy.
Kasagaran mahitabo ana isa nalang ka tao. He
has all the votes. Kana man na siya imong tawgon sa
stock holders meeting and it is just a formality that he
signs because he carries the vote of two thirds or more of
the outstanding capital stock.
 What is the effect of merger and consolidation?
Take note of section 80
Section 80. Effects of merger or consolidation. – The
merger or consolidation shall have the following
effects:
1. The constituent corporations shall become a
single corporation which, in case of merger, shall
be the surviving corporation designated in the plan
of merger; and, in case of consolidation, shall be
the consolidated corporation designated in the
plan of consolidation;
2. The separate existence of the constituent
corporations shall cease, except that of the
surviving or the consolidated corporation;
3. The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and powers and shall be subject to
all the duties and liabilities of a corporation
organized under this Code;
4. The surviving or the consolidated corporation
shall thereupon and thereafter possess all the
rights, privileges, immunities and franchises of
each of the constituent corporations; and all
property, real or personal, and all receivables
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ADDU-Law
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)
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;
So mutambok na ana ang surviving corporation, iya
man tanan.
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
Here is a constituent corporation, he is not a
survivor, he owns shares of stock of SanMiguel and it
merges in the another corporation-- surviving corporation
what happens to the certificate of stock of San Miguel
under the name of the corporation? It says it now belong
to the surviving corporation without any act or deed. But
the certificate of stock is still under the name of the old
corporation that has already died, it no longer exist
because of the merger. What will happen? What do you
do to make that atleast outwardly belonging now to the
surviving corporation. You serve a notice to the secretary
61
of San Miguel that the following certificates must be
annotated with the articles of merger, or articles of
consolidation „ this is the new name now of the
corporation‟. So it is annotated in the books, the stock
and transfer books of San Miguel and in the certificate of
stocks. The certificate of stock is still under the name of
the old corporation but there is an annotation that that is
no longer obtaining there is a surviving and a
consolidated corporation.
Daghag trabaho ang abogado ini, so much that
they hire external counsel to do the work ofmaking these
various registrations. Real property, the titles are still in
the old name of the constituent corporation that does no
longer exist. What do you do? You file with the register of
deeds the originals of those title, that there is now a new
owner. You annotate it with the articles of merger or
consolidation. That is the new constitution and by laws of
the new corporation.
Franchises
 What happens If there is a specific provision in the
franchise that says that any transfer of the
franchise must be with the explicit prior
permission of the oversight governmental office?
What happens? Does it still belong to the
surviving corporation?
Tan awa ng bachelor bus, wala gyud na merge.
Daghan na silay franchises sa LTFRB with prior consent
of the LTFRB before there can be transfer. Gipalit na nila
ng rural transit, yellow bus , series (?) ug unsa pa na. Wa
jud na nila gimerge. They remain separate corporation.
They just bought the shares of stock. So it remains a
separate corporation because there is a problem with
franchise.
Why does it require prior consent on the part of
the oversight governmental office like the LTFRB.
Precisely to prevent monopolies on particular .. that it will
end up with only one owner of a public utility vehicle..
particular vehicle. So to prevent that, the law itself says it
cannot franchise, cannot be transferred.
So, they might buy all the shares of stock and
control that corporation anymore but they don‟t go to
explicit merger or consolidation.
So that is merger and consolidation. Please
read the provision of merger and consolidation
In my service with the BOD in ONB for fifteen
years, we went through 3 mergers. Why three? Because
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
there is an amendment of the rural banks law that if you
merge with a distressed rural bank you become tax
exempt for 5 years of gross receipt tax. So ONB merged
with several troubled banks. In other words it is an
incentive that you merge.
Now if you are in the review on audit committee,
ngadto labad sa ulo. Daghag yuta ning bangkuha, .... ila
nan a, repossessed. Tan-awon ta ni, examinon ta ni.
Niya muingon dayon ng bangko, kamo nalang adto, wa
pa man mi kakita ana. Kay naay mga di ingon ato kana
dinha. So how did the bank approve such security in the
bank load? Mu ingon ang bangko, “we did not approve
that. we also got that from a bank that we bought.
(father talks about the change of name of ONB to One
bank to ONB. Niya gasto daw mu-ilis ug pangalan kay
lisdan nimo ang sign kada branch. Niya suga suga
pagyud sa likod)
(second hour) Abad, IJ
TITLE X
APPRAISAL RIGHT
 When is appraisal right exercisable?
It is listed in Section 81.
Section 81. Instances of appraisal right. – Any
stockholder of a corporation shall have the right to
dissent and demand payment of the fair value of his
shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or restricting
the rights of any stockholder or class of shares, or of
authorizing preferences in any respect superior to
those of outstanding shares of any class, or of
extending or shortening the term of corporate
existence;
2. In case of sale, lease, exchange, transfer, mortgage,
pledge or other disposition of all or substantially all of
the corporate property and assets as provided in the
Code; and
3. In case of merger or consolidation. (n)
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
62
of any class, or of extending or shortening the
term of corporate existence;
Number 1 is when a corporation creates new
shares that gives superior advantages to existing stock
holders, then you can exercise your appraisal right if you
are the disadvantaged stockholder.
Also, when there is a Move to Extend the
corporate term, it is ground for exercise of your appraisal
right. But not the shortening, this is wrong. There should
be no appraisal right when you shorten the term. Why?
- Because if you take a look at dissolution, one of
the methods of dissolving a corporation is by
proposing an amendment to shorten the term.
Section 120, dissolution by shortening corporate
term.
Section 120. Dissolution by shortening
corporate term. - A voluntary dissolution may
be effected by amending the articles of
incorporation to shorten the corporate term
pursuant to the provisions of this Code. A copy
of the amended articles of incorporation shall be
submitted to the Securities and Exchange
Commission in accordance with this Code.
Upon approval of the amended articles of
incorporation of the expiration of the shortened
term, as the case may be, the corporation shall
be deemed dissolved without any further
proceedings, subject to the provisions of this
Code on liquidation. (n)
If you are opposed to that, and you exercise
your appraisal right, it is useless already because the
corporation will now be dissolved and then everybody
will be paid if there is some money left for payment to
the stockholders of their holdings after the payment of
just debts. So there is supposed to be no appraisal right
when you shorten the term.
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
Number 2 ground is in case of sale or lease etc.
You joined the corporation because you agreed with the
purpose, now, the corporation would be unable to carry
out that purpose because it sells all, or substantially all
of the property, that is why you are allowed to exercise
your appraisal right
3. In case of merger or consolidation. (n)
Number 3 is in case of merger or consolidation.
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
th
And there is a 4 , which is found in Section 42,
when a corporation invests in another corporation or
another business. You can exercise your appraisal right
according to Section 42.
Section 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)
Now, how do you exercise your appraisal right it?
- First, you oppose against the proposed
action. If you did not vote against it, you
do not have the right to exercise your
appraisal right. Of course, when you
voted, you did not win the majority.
- Then, you ask to be paid the value of your
shares. How do you do that? You demand
in writing the value of your shares
within 30 days from voting against the
measure.
Section 82. How right is exercised. - The appraisal
right may be exercised by any stockholder who shall
have voted against the proposed corporate action, by
making a written demand on the corporation within
thirty (30) days after the date on which the vote was
taken for payment of the fair value of his 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.
63
If within a period of sixty (60) days from the date the
corporate action was approved by the stockholders,
the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen. The findings of the
majority of the appraisers shall be final, and their
award shall be paid by the corporation within thirty
(30) days after such award is made: Provided, That
no payment shall be made to any dissenting
stockholder unless the corporation has unrestricted
retained earnings in its books to cover such
payment: and Provided, further, That upon payment
by the corporation of the agreed or awarded price,
the stockholder shall forthwith transfer his shares to
the corporation. (n)
 What is the effect if you did not submit the demand
in writing after 30 days of the date of the vote?
You are deemed to have waived your right of appraisal.
Now, in that demand to be paid the value, you
have your own estimate of the value of your shares. The
company, the corporation is given 60 days from the time
the corporate action was approved to pay you.
What happens if he does not pay?
Then, a committee will be formed. The
corporation will have to appoint one person, while yo,u
the one who exercised the appraisal right will appoint
rd
your representative, and the 2 of them will appoint a 3
person. There will be a committee to appraise your
property, your shares of stock.
Now, if the amount arrived at by the committee
is closer to the amount proposed by the stockholder,
then, it is the company who will pay the expenses of
forming the committee, if it is closer to the stockholder‟s
value, the corporation pays.
Section 85. Who bears costs of appraisal. - The costs
and expenses of appraisal shall be borne by the
corporation, unless the fair value ascertained by the
appraisers is approximately the same as the price
which the corporation may have offered to pay the
stockholder, in which case they shall be borne by the
latter. In the case of an action to recover such fair
value, all costs and expenses shall be assessed
against the corporation, unless the refusal of the
stockholder to receive payment was unjustified. (n)
Now, the demand to be paid the value of one‟s
share is terminated under several grounds.
Section 84. When right to payment ceases. - No
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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 status as a stockholder
shall thereupon be restored, and all dividend
distributions which would have accrued on his
shares shall be paid to him. (n)
1. First, if the company announces that it is
no longer going ahead with the action that
was approved because there are certain
factors that have arisen in between, after
the approval of the action.
2. Second, if the stockholder who first gave
notice, changes his mind and withdraws his
demand to be paid the value of the shares.
3. And finally, if the dissenting stockholder
is not paid the value of the shares within 30
days after the award, his voting and
dividend right shall immediately be
restored.
Section 83. Effect of demand and termination of right.
- From the time of demand for payment of the fair
value of a stockholder's shares until either the
abandonment of the corporate action involved or the
purchase of the said shares by the corporation, all
rights accruing to such shares, including voting and
dividend rights, shall be suspended in accordance
with the provisions of this Code, except the right of
such stockholder to receive payment of the fair value
thereof: Provided, That if the dissenting stockholder
is not paid the value of his shares within 30 days
after the award, his voting and dividend rights shall
immediately be restored. (n)
You know, the dissenting stockholder, once his
shares of stock is appraised, he must surrender his
certificate of stock. From then on, he cannot vote, and he
has no dividend rights. But if the corporation does not
carry out the action that was voted, that means the
corporation can change its mind also.
Let us say, if it says, we will enter into a merger
with this company, and the stockholder exercises its
appraisal right, then all of a sudden something happens
that the merger would be disastrous to the corporation
should it go ahead, so the corporation changes its mind.
So also, the appraisal right becomes ineffective. The
certificate of stock he surrendered must be returned to
64
him and his voting rights and his dividend rights are
exercisable again because the appraisal right is no
longer effective. The corporation has changed its mind
and there is no longer a ground for appraisal. So, you
surrender your stock certificate when you exercise
your appraisal right.
Now take note, normally, appraisal right is applicable
only to unlisted corporations. Why?
Because if it is listed in the stock market, it is
active in the stock market, it is being bought and sold, the
market determines the value of your shareholdings. You
just get your number of shares, multiply it with the last
closing price of the shares traded in the stock market,
that is the value of your shares. So, if you are against the
corporate action, ayaw na og hagu-hago og sulat pa ana,
andto nalang sa stock market and you get the value, you
get out of the corporation because you are against what
the corporation is doing. That is what you do. But if it is
not listed, then you have to go to Title 10, section 81.
TITLE XI
NON-STOCK CORPORATIONS
Alright, we are getting close, Section 87.
Section 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)
 What do you have to remember about non-stock?
The purpose of the corporation must be anyone
of those listed under Section 88, or a combination of
those. If the corporation is not anyone of these, then it
cannot be a non-stock non-profit corporation.
 What are those purposes?
Section 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
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ADDU-Law
provisions of this Title governing particular classes
of non-stock corporations. (n)
So, if it is not one of these then you cannot be a
non-stock corporation.
 What is the essence of a non-stock corporation?
The essence of a non-stock corporation is the
negative qualities. Why? Because you go back to
Section 3. Stock and non-stock is a classification of a
corporation of the corporation code.
Section 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)
So what is the essence? The essence is it is
not a Stock corporation.
So, the issue again is
 What is a stock corporation?
The essence of a stock corporation is that there
is a proviso in its articles and/or by-laws that permit the
distribution of allotments or dividends from accumulated
profits on the basis of your share holdings.
So you have a corporation, the capital stock of
which is divided into shares and there is a proviso which
allows distribution of accumulated net profits to the
shareholders from accumulated profits. If there is none of
that, there is no such proviso, then, it is a non-stock
corporation.
Now, we ask the question
 Can a non-stock corporation make profits? Is it
prohibited to register profits? If it has profits, is it
taxed on its net profits?
Time again, the SC has decided, there is a long
list of decided cases. Because, daghan kaayo na nga
mga kaso, ambakan kaayo na sa BIR. The BIR is
desperate of taxes, if the BIR sees a chance of taxability,
they jump on it.
The oldest case is San Juan de Dios Hospital
vs. CIR, after that there is Cebu Country Club vs. CIR,
and many others. Because these country clubs are
65
organized, remember one of the purposes is recreation,
recreational, they are non-stock, but they have
transferrable ownership for consideration.
So, if you, let us say, are a member of the
Manila Golf Club, a share in Manila Golf Club now is,
how much? It went as high as 55 Million, now it is down,
it is about 28 Million. Why is it very expensive? Because
the number of members remain the same, only 500. It
has not gone up or gone down, just 500. And it is the
closest golf club to the Makati business district.
Makakawat pa kag sayo mag golf ka pa. tabok lang ka sa
Edsa, tua na ka sa Makati. And its membership is
transferrable, but it is non-stock, non-profit corporation.
What does it do with its profits? It bounces back to the
golf course. So, a non-stock, non- profit corporation is
not prohibited from making profits.
 What is a non-stock, non-profit corporation
prohibited from doing?
Distributing of profits by way of dividends,
allotments, to the shareholders, the members of the
corporation that is prohibited.
Now, can you do that indirectly? Muingon ka dissolve the
corporation. Pagdissolve, bayran na tanang utang unya
naa pa may nahibilin na kwarta? Distribute it among the
members, can you do it?
You cannot, because that is prohibited by Section
94, the rules of distribution of the assets of the non-stock
corporation in case of dissolution.
Section 94. Rules of distribution. - In case
dissolution of a non-stock corporation in
accordance with the provisions of this Code, its
assets shall be applied and distributed as
follows:
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
 BUSINESS ORGANIZATION II TRANSCRIPT
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ADDU-Law
according to a plan of distribution adopted
pursuant to this Chapter;
4. Assets other than those mentioned in the
preceding paragraphs, if any, shall be distributed
in accordance with the provisions of the articles
of incorporation or the by-laws, to the extent that
the articles of incorporation or the by-laws,
determine the distributive rights of members, or
any class or classes of members, or provide for
distribution; and
5. In any other case, assets may be distributed to
such persons, societies, organizations or
corporations, whether or not organized for profit,
as may be specified in a plan of distribution
adopted pursuant to this Chapter. (n)
That is the rule. Katong gihuwaman, iuli.
Kadtong giassign lang, iuli ngadto sa ilang assignor, etc.
and then whatever is left behind, you give to another non-
stock non-profit corporation with a similar purpose. But it
does not go to the members, if it does, then that is an
indirect violation.
CHAPTER I- MEMBERS
Section 89. Right to vote. - The right of the members
of any class or classes to vote may be limited,
broadened or denied to the extent specified in the
articles of incorporation or the by-laws. Unless so
limited, broadened or denied, each member,
regardless of class, shall be entitled to one vote.
Unless otherwise provided in the articles of
incorporation or the by-laws, a member may vote by
proxy in accordance with the provisions of this Code.
(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.
Now, right to vote, unless it is specified, there is
no cumulative voting. There is also no voting by proxy
unless it is specified in the by-laws. 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. Loser. That is Non-stock
Corporation.
I will just tell you my experience ha why these
non-stock corporation create their own problem. Many of
them are NGOs. They hate the law. Many of them, they
do not like the law. So they say, pila may minimum aron
maka non-stock corporation. Well, only 5 incorporators.
66
So they have 5 members, dili ba mo mahadlok ana. Kana
ra sang 5 members mahimong directors. Unsa maning
inyong corporation? Gawasnong Pagbalay Sa Mga
Mayukmok sa Toril. Sige. Lima kabuok. Okay ra ng lima.
Mamatay ng tulo, duha nalang mabilin, wala na, goodbye
corporation, dissolved. You cannot create anymore
members, wala naman, there is no quorum for the
members meeting, no quorum for the directors meeting,
the corporation can no longer act.
Diha ka mukita na ang corporation is wholly and
completely dependent on natural persons. Wala gani
enough natural persons, wala na, patay na ang
corporation.
So, beware ha. Mga isog ra baya kaayo nang
mga non-stock corporation. Bilib nako nimo og
makasabot ka ani, they do not care about the law. Until
they begin fighting each other. Apil na na sila og basa sa
by-laws. Before that, they do not care. Then all of a
sudden, naa man diay questionable quest sa SEC kay
wala man silay file file, gikalimtan man nila. Mao na ang
problema.
And then there is a problem if you just get the
ready-made articles and by-laws of the SEC. Baligya
lang na sa SEC, tag 500. Imo dayon gixerox, magfile
dayon ka, unya dili dawaton sa SEC kay makabalo sila
na Xerox kay I4 man diay na ang size sa papel. Special
size na ilang articles and by-laws. It is a liitle bit smaller
than the regular 8.5 by 11. So, pagpaxerox nimo,
kinahanglan man kag 3 copies, so sakpan ka. Palit
nalang kag I4 unya anhan ka magpaxerox dinha.
Karon, kay kana ilang form na tag 500 pesos,
there is no provision towards ending membership. There
is a provision on how you become a member of a non-
stock corporation, but no provision of terminating
membership. Many non-stock corporations here in
Davao, the acts of the corporations are questionable,
because they do not have a quorum when they meet,
daghan man silag members. Kasagarang members nila,
they are free spirits. Unlike Stock Corporation, the
members have shares and they have money at stake
there, kini wala man.
Unsa may qualification anang Gawasnong
Pagbalay Sa Mga Mayukok Sa Toril, unsa may purpose
ana - The abstracted passion for housing for the poor.
Taas kaayo ang requirement. This is exultation; this
cannot be verified in law. No one can exceed this passion
for housing. Unsaon nimo pagkakita ana. These are not
demonstrable legally.
So, Membership as a General rule is non-
transferrable, unless the articles and by-laws of the
corporation otherwise provide.
Section 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
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otherwise provide. (n)
Now if they are transferrable, the SEC and the
BIR has a say. The BIR can slap capital gains, doc stamp
etc., and the SC has upheld the BIR in that case.
Transferrable gani ang shares, magbayad ka. Apo Gulf
and Country Club, mamaligya gani ka sa imong shares,
naa kay capital gains, etc., mamaligya ka sa imong
playing rights, naa gihapon, islap gihapon ka og capital
gains.
CHAPTER II - TRUSTEES AND OFFICES
Section 92. Election and term of trustees. - Unless
otherwise provided in the articles of incorporation or
the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in
number as may be fixed in their articles of
incorporation or by-laws, shall, as soon as
organized, so classify themselves that the term of
office of one-third (1/3) of their number shall expire
every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees
shall be held annually and trustees so elected shall
have a term of three (3) years. Trustees thereafter
elected to fill vacancies occurring before the
expiration of a particular term shall hold office only
for the unexpired period.
No person shall be elected as trustee unless he is a
member of the corporation.
Unless otherwise provided in the articles of
incorporation or the by-laws, officers of a non-stock
corporation may be directly elected by the members.
(n)
Now, the term of the members of the Board of
Trustees is 1/3 of them expires every year.
So their term is 3 years and they are staggered
so that 1/3 only expires in 1 year. Why is that?
So there would be Continuity. They foresee that if there is
no Continuity, then if all of them would decide that they
end their term in the same year, because the members
do not have a monetary stake in the corporation.
Section 93. Place of meetings. - The by-laws may
provide that the members of a non-stock corporation
may hold their regular or special meetings at any
place even outside the place where the principal
office of the corporation is located: Provided, That
proper notice is sent to all members indicating the
date, time and place of the meeting: and Provided,
further, That the place of meeting shall be within the
Philippines. (n)
67
So, Place of meetings, you cannot provide that
the meetings be outside the territorial jurisdiction. The
place of meetings should be within the Philippines, as
much as possible, it will be held in the principal office of
the non-stock corporation.
CHAPTER III - DISTRIBUTION OF ASSETS IN NON-
STOCK CORPORATIONS
Section 95. Plan of distribution of assets. - A plan
providing for the distribution of assets, not
inconsistent with the provisions of this Title, may be
adopted by a non-stock corporation in the process of
dissolution in the following manner:
The board of trustees shall, by majority vote, adopt a
resolution recommending a plan of distribution and
directing the submission thereof to a vote at a
regular or special meeting of members having voting
rights. Written notice setting forth the proposed plan
of distribution or a summary thereof and the date,
time and place of such meeting shall be given to
each member entitled to vote, within the time and in
the manner provided in this Code for the giving of
notice of meetings to members. Such plan of
distribution shall be adopted upon approval of at
least two-thirds (2/3) of the members having voting
rights present or represented by proxy at such
meeting. (n)
Now, dissolution, there is a provision here that a
plan of the distribution of the assets of the corporation
may be approved, by the SEC – a plan of distribution.
You know very well that Ateneo is non-stock
non-profit corporation; it has a lot of assets, suppose
Ateneo dissolves, you will say, transfer the remaining
assets to a similar institution with the same purpose –
education, so look for a non-stock corporation. But
Ateneo has a plan of distribution in its by-laws. The
transfer of its assets, equipment of the Ateneo, is
mediated by another non-stock corporation, which is the
corporation sole of the Jesuits in the Philippines and that
is Isabella Corporation, that is the corporation sole of the
Jesuit provincial superior who will assign the assets here
to another school ran by the Jesuits. That is allowed plan
of distribution.
So, we are through with non-stock corporations.
Remember: You can form a Non-Stock Non-Profit
Corporation just by amending the articles and by-
laws of a Stock corporation, but you cannot form a
stock corporation by just amending the articles and
by-laws of a non-stock corporation.
Why? That is an Opinion issued by the SEC. You cannot
form, transform a non-stock corporation in to a stock and
profit corporation, but you can transform the latter into a
former. Why? You look for the answer. You look for the
answer. You assume that you are a non-stock
corporation for 10 years, and then all of a sudden you
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ADDU-Law
changed into a stock corporation. What is the result?
Okay. We will meet again if we meet again Next Week.
January 25, 2017 Ching, K.
We are still in Corporation Code. We have
finished mergers and consolidation. Non-stock
Corporation.
TITLE XII-
CLOSE CORPORATION
So we are now in CLOSE CORPORATION.
Close without a “D” please. Nganong close mana na
walay D?
*Joke time ni Fr. like Color TV, SSS, Cokes,
Piece/Pieces etc*
Section 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.
3 ESSENTIAL ELEMENTS OF A CLOSE
CORPORATION:
These must be found in the Articles of
Incorporation.
1.) All the issued stock exclusive of
treasury shares shall be held of
record by not be more than 20 , it
68
can be less than 20 but cannot be
more than 20 stockholders.
So the limitation is on the stockholders.
2.) That all issued stock of all
process shall be subject to one or
more specified restrictions on
transfer permitted by this title.
So later you will find out that the limitation cannot
be more restrictive than affording to corporation or
fellow stockholders of the right to purchase any
rd
stockholder‟s share first into offering it to 3 parties. So,
that‟s the second feature.
3.) Negative Condition. And this
corporation shall not list in any stock
exchange or any public offerings of any
of its stock of any class.
So because of that feature, close corporations
are disqualified from entering the business of public
utilities. Public utility corporations are required by the
Public utilities law to offer atleast 10% of their
outstanding general stock to the general public.
So these three features constitute what is a
close corporation. Now, there can be additional features
of a close corporation.
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
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ADDU-Law
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.
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;
So, qualifications for the board, it might say that only
those who can trace their lineage to Ramirez and Santos
family can own shares of stock of this Close Corporation.
And they specify who the Santos is, and who the
Ramirez is. Husband and Wife. You must be able to trace
your lineage to either one of them, then you can you can
be qualified to own shares of stock.
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 when you do that, remember that feature in
Section 6, there must be class of shares that has
complete voting rights. So, if you classify directors, into
directors that can be only voted by Class A, there are
also directors that can be voted for only by Class B
shares, you must have shares of stock that can vote for
all directors because that is what the section provide for
a valid articles of incorporation and valid classification of
share. There must be a class of shares that has
complete voting rights.
3.) It may provide For a greater quorum or
voting requirements in meetings of
stockholders or directors than those
provided in this Code.
Default quorum under this code is Majority –
Absolute majority. The Absolute majority of
stockholders or of directors.
Formula:
69
Absolute Majority:
Total number of Directors divided by 2 plus 1.
That is absolute majority.
Stockholders: Sum total of shares
Non-stock Holders:
Outstanding shares net of treasury shares divided by
2 plus 1 that is the default quorum requirement in the
Corporation.
The Close Corporation may provide that the
quorum is 2/3 or ¾ of the outstanding capital stock. Let
me warn you, if you are going to do that, you are risking
failure of meetings every time you call stockholders
meeting. Very difficult for you to get absolute majority,
with all the more reason, it will be very difficult to get a
higher quorum.
Mao nay problema sa mga subdivisions, kanang
mga subdivision, pagdevelop niana, and developer
biyaan lang na. Ang magpadagan sa subdivision kay
mao na ang Homeowners Association. Maayo gani
mamayad na sila sa ilang fee, sigurado ka na naa moy
quorum. Di na gani mamayad sa ilang monthly fee ang
majority, wala jud moy quorum ana. Dili naman
manunga. Dili naman gani mukuha silag proxy sa ilang
name para mutunga didto. Mao nay problema sa mga
subdivision.
The higher end the subdivision, the higher the
fee. Normally, the fee in the subdivision is based on a
per-square meter basis. Kanang fee muingon sila, 30
pesos a month per square meter. Naa kay 500 square
meters, eh di 1500 nana. 1500 a month. Mubayad ka ana
para sa imong yuta? Para unsa mana?
 Bayad sa Guard.
 Bayad sa garbage collection.
 Bayad sa mamutol sa sagbot diha sa mga
empty lots kay naa naman mga bitin diha
muadto sa inyong balay kay bugnaw ang
inyong salog.
 Bayad sa Suga. Kanang suga diha sa
dalan. Naa mana dinha. Kinsa man
mubayad ana? Association ang mubayad
ana.
Daghan kaayo na. Ang pagbayad sa fee, dili
gani on time of the majority, wala jud kay quorum
makuha sa meeting. Unya non-stock non-profit manang
Subdivision Home Owners Association Incorporated.
Non-stock, non-profit mana.
Suwayig buhat na ang quorum kay 3/4, wala na,
mangamatay nalang mo tanan, dili jud mo makameeting.
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ADDU-Law
Naglisod man gani ug tagbo anang majority, Simple
Absolute Majority. Kini close corporation, why did they
put this particular feature?
4. Here is` another particular feature of a close
corporation
Sec 97 xxx
xxx
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; (Kay wala may directors)
2. Unless the context clearly requires
otherwise, the stockholders of the corporation shall
be deemed to be directors for the purposes of
applying the provisions of this Code; and
3. The stockholders of the corporation shall
be subject to all liabilities of directors.
So a close corporation, need not have directors.
Kung wala kay directors, wala kay meeting sa directors.
Not less than 20 man. So kamo tanan, mura mog
partners. Kamo man ang mumanage sa corporation.
Or again, 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.
So this is an EXCEPTION to the General Rule
that in a stock and profit corporation, it is the board of
directors who appoint the officers of the corporation, not
the stockholders. If there are no directors, then it is the
stockholders who will appoint the appoint the officers,
who will hire the employees.
Section 98: Validity of restrictions on transfer of
shares. – Restrictions on the right to transfer shares
must appear in the articles of incorporation and in
the by-laws as well as in the certificate of stock;
otherwise, the same shall not be binding on any
purchaser thereof in good faith. Said restrictions
shall not be more onerous than granting the existing
stockholders or the corporation the option to
purchase the shares of the transferring stockholder
with such reasonable terms, conditions or period
stated therein. If upon the expiration of said period,
the existing stockholders or the corporation fails to
exercise the option to purchase, the transferring
stockholder may sell his shares to any third person.
Sec 98: Validity of restrictions on transfer of shares.
70
Restrictions on the right to transfer shares
must appear:
1.) In the articles of incorporation and
2.) In the by-laws
3.) As well as in the certificate of stock;
otherwise, the same shall not be
binding on any purchaser thereof in
good faith.
Here are rules of evidence and the issuance or
transfer of stock in breach of qualifying conditions. These
are presumptions that obtained once the facts are
proven.
There are:
1.) Tentative Presumptions
2.) Conclusive Presumptions
Can you name one conclusive presumption from
the Rules of Court?
For the lessee, it is conclusive that he cannot
defeat the ownership of the lessor. You recognized kay
mao mana siya ang tag-iya. Dili gyud ka makadaug.
*chika about lessor and lessee and conclusive
presumption.*
The party who alone is in possession of the
evidence sought by the court refuses to submit or show
that evidence, what is the conclusion?
The conclusion is the evidence is inimical to his
cause. That is conclusive. Gitaguan nimo ang evidence,
ikaw may naa anang evidence, dili nimo ipagawas,
ngano dili nimo ipagawas? Ngano man? Makakaulaw.
Pildi ka. Because you do not show it, because it is
inimical to your cause. Daghan kaayo na.
Kini malingaw kag basa ni ini. Basaha ni 1-4. Dili
nalang nko ni basahon kay its so obvious.
Section 99. Effects of issuance or transfer of stock in
breach of qualifying conditions. -
1. If stock of a close corporation is issued or
transferred to any person who is not entitled under
any provision of the articles of incorporation to be a
holder of record of its stock, and if the certificate for
such stock conspicuously shows the qualifications
of the persons entitled to be holders of record
thereof, such person is conclusively presumed to
have notice of the fact of his ineligibility to be a
stockholder.
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ADDU-Law
2. If the articles of incorporation of a close
corporation states the number of persons, not
exceeding twenty (20), who are entitled to be holders
of record of its stock, and if the certificate for such
stock conspicuously states such number, and if the
issuance or transfer of stock to any person would
cause the stock to be held by more than such
number of persons, the person to whom such stock
is issued or transferred is conclusively presumed to
have notice of this fact.
3. If a stock certificate of any close corporation
conspicuously shows a restriction on transfer of
stock of the corporation, the transferee of the stock
is conclusively presumed to have notice of the fact
that he has acquired stock in violation of the
restriction, if such acquisition violates the restriction.
4. Whenever any person to whom stock of a close
corporation has been issued or transferred has, or is
conclusively presumed under this section to have,
notice either (a) that he is a person not eligible to be
a holder of stock of the corporation, or (b) that
transfer of stock to him would cause the stock of the
corporation to be held by more than the number of
persons permitted by its articles of incorporation to
hold stock of the corporation, or (c) that the transfer
of stock is in violation of a restriction on transfer of
stock, the corporation may, at its option, refuse to
register the transfer of stock in the name of the
transferee.
5. The provisions of subsection (4) shall not be
applicable if the transfer of stock, though contrary to
subsections (1), (2) or (3), has been consented to by
all the stockholders of the close corporation, or if the
close corporation has amended its articles of
incorporation in accordance with this Title.
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.
Tan-awa ning Number 3
3. If a stock certificate of any close
corporation conspicuously shows a business and affairs of a close corporation, the
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.
CONCLUSIVE NA HA. Unya buta man ko, wala man
ko kabasa ana, buta ko. TOOOO BAAAAD. Conclusively
presume. Mupalit ba diay ka kung wala ka kahibawo
71
unsay nakabutang dinha. kay Buta man ka, nanawag ka
ug tao na basaha na diha kung naa diha. Because that is
a conclusive presumption.
*Sabi ni Fr. masteron daw nato ang Evidence, Rules of
Court kay dili daw ta makaingon sa korte ug Time-out*
Section 99 is Rules of Evidence. Section 99 1-7.
Section 100. Agreements by stockholders. -
1. Agreements by and among stockholders executed
before the formation and organization of a close
corporation, signed by all stockholders, shall survive
the incorporation of such corporation and shall
continue to be valid and binding between and among
such stockholders, if such be their intent, to the
extent that such agreements are not inconsistent
with the articles of incorporation, irrespective of
where the provisions of such agreements are
contained, except those required by this Title to be
embodied in said articles of incorporation.
2. An agreement between two or more stockholders,
if in writing and signed by the parties thereto, may
provide that in exercising any voting rights, the
shares held by them shall be voted as therein
provided, or as they may agree, or as determined in
accordance with a procedure agreed upon by them.
3. No provision in any written agreement signed by
the stockholders, relating to any phase of the
corporate affairs, shall be invalidated as between the
parties on the ground that its effect is to make them
partners among themselves.
4. A written agreement among some or all of the
stockholders in a close corporation shall not be
invalidated on the ground that it so relates to the
conduct of the business and affairs of the
corporation as to restrict or interfere with the
discretion or powers of the board of directors:
Provided, That such agreement shall impose on the
stockholders who are parties thereto the liabilities for
managerial acts imposed by this Code on directors.
5. To the extent that the stockholders are actively
engaged in the management or operation of the
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.
Then Section 100 is another series of Rules
of evidence. WHY?
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
Because for a close corporation, agreements
between and among the stockholders, survive the
incorporation.
What does that mean?
If two stockholders of a close corporation enter
into an agreement, that agreement survives after the
incorporation. Nagsabot silang duha, ”We agree that
every year, only one of us will exercise the total number
of votes of the two of us. This year, it is A. Next year, it is
B.” Puli puli ta. Unya nag incorporate ning close
corporation, that agreement survives.
Is that not a circumvention of the Rule that “Proxies Do
Not Last for More than 5 Years” ?
The answer is NO. Because proxies is a
general rule. Survival of Agreements between
stockholders in close corporation is a specific rule.
Between the General and Specific, the Specific prevails.
And so on. So read Agreements of Stockholders.
Pre-emptive Rights of Close Corporations
Stockholders
Section 102. Pre-emptive right in close corporations.
– The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether for
money, property or personal services, or in payment
of corporate debts, unless the articles of
incorporation provide otherwise.
So Pre-emptive rights extend up to sale of
treasury shares. ALL issuance, to ALL stock to be
issued. Naa nay gi-issue, exercise na tanan, except one
who fails to exercise his pre-emptive right, do the others
who already exercised, do they have pre-emptive right
over the shares over which one stockholder did not opt to
subscribe?
YES, because it says ALL ISSUANCES. In
ordinary corporations, there is no pre-emptive right over
shares that the other stockholders have not exercised
their pre-emptive right.
But here, THERE IS, because it extends to ALL
stock to be issued including the issuance of treasury
shares.
Section 103. Amendment of Articles of Incorporation. –
Any amendment to the articles of incorporation which
seeks to delete or remove any provision required by this
Title to be contained in the articles of incorporation or to
72
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.
 Why is this 2/3 necessary?
Because this is fundamental. The amendment
might need that the close corporation ceases to be a
close corporation. So, if the corporation now chooses to
amend the particular proviso, xxx the corporation which
says the maximum number of stockholders is only 20 and
it will not list in any stock exchange.
Suppose there is an amendment to change, remove
those two requirements, then it is not only affirmative
consent, technically you have accomplices by consent.
But for a close corporation, it must be 5 affirmative votes.
Nakalimot namo, there are two ways to amend the
Articles of incorporation in terms of the participation of
the stockholders.
1.) Vote or
2.) Written Assent
Kini mahimo na ning written assent lang if it is
an ordinary corporation. Because the amendment is not
one of those included in the 8 instances in Section 6. But
here, when it is a close corporation, it must by SECRET
BALLOT/ AFFIRMATIVE VOTE.
Section 104. Deadlocks. – Notwithstanding any
contrary provision in the articles of incorporation or
by-laws or agreement of stockholders of a close
corporation, if the directors or stockholders are so
divided respecting the management of the
corporation’s business and affairs that the votes
required for any corporate action cannot be obtained,
with the consequence that the business and affairs
of the corporation can no longer be conducted to the
advantage of the stockholders generally, the
Securities and Exchange Commission, upon written
petition by any stockholder, shall have the power to
arbitrate the dispute. In the exercise of such power,
the Commission shall have authority to make such
order as it deems appropriate, including an order:
(1) Cancelling or altering any provision contained in
the articles of incorporation, by-laws, or any
stockholder’s agreement;
(2) Cancelling, altering or enjoining any resolution or
act of the corporation or its board of directors,
stockholders, or officers;
(3) Directing or prohibiting any act of the corporation
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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.
Section 104 is the reason why nobody is using a
Close Corporation. No one, wala pa gyud nagpabuhat sa
akoa ug articles of Close corporation. Wala pa. Ngano
man? Basaha ninyo ang Section 104.
―By ANY Stockholder”
Usa lang kabuok na stockholder musuwat, then
muadto sa SEC, then the SEC has the power to arbitrate.
What does the “Power to Arbitrate” mean?
104 continues, In the exercise of such power
(POWER TO ARBITRATE), the Commission shall have
authority to make such order as it deems appropriate,
including an order:
(1) Cancelling or altering any provision
contained in the articles of incorporation,
by-laws, or any stockholder‟s agreement;
Tan-awa ra na. Ang SEC na nuon magbuot. Wa
man gani magka agree ang mga stockholders, ang SEC
na nuoy magbuot. It will cancel or alter. Unsa ng naa diha
sa Articles of incorporation.
73
(2) The SEC can issue and order cancelling,
altering or enjoining any resolution or act of
the corporation or its board of directors,
stockholders, or officers;
It can countermand past resolutions of the
Board. Super board na ang SEC. It has more powers
than the stockholders.
(3) It can issue and order directing or
prohibiting any act of the corporation or its
board of directors, stockholders, officers, or
other persons party to the action;
(4) It can issue an order 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;
So it can order you to sell your shares
(5) It can issue an order appointing a
provisional director;
The SEC will appoint a director. Provisional. Dili
gani xa stockholder pero makaappoint xa ug provisional
director. Kung mgkasamot ang situation, is the SEC
liable? NO. IT IS NOT. Bahala namo diha magkaguliyang
mo. Ako ng naappoint ang provisional director.
(6) It can issue an order dissolving the
corporation; or
The SEC has the power of life and death of the
Close Corporation.
(7) It can issue an order granting such other
relief as the circumstances may warrant.
Mao ng kapait sa close corporation.
SECTION 105: (LAWPHIL VERSION)
Section 105. Withdrawal of stockholders 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
 BUSINESS ORGANIZATION II TRANSCRIPT
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ADDU-Law
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.
SECTION 105: FATHER‟S VERSION. (Iba ang nasa
lawphil at sa giread niya na provi sa book but I think
same lang ang thought guys ;)
Section 105. Withdrawal of stockholders or
dissolution of corporation. 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 the
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 dissipated or wasted.
It covers everything, Tyabaw ka lang, singgit ka
“gidaug2x ko” Wala na. Dissolve na ang Corporation.
You might think na maayo kay family, xxx walay
makasulod na lain taga gawas. 20 ra gud ang maximum.
Remember this: THE MOST BITTER
CORPORATE FIGHTS ARE BETWEEN PEOPLE WHO
ARE NATURALLY CLOSEST.
Mag away gani ng amahan ug anak sa diha sa
corporation, mas grabe pa na sa away sa dili nimo
igsoon. Some of the bitterest fights are between husband
and wife in a corporation. Mangutana ka why? Because,
just because you are in a corporate structure does
not exempt you from the loss of natural relations.
Why is it the most bitter fights are between the
closest people?
Because there can be no “go between” Asa pa
man closer between the wife and the husband? Who can
be closer than the husband and the wife? Unya kung
mag away mo, kinsa may magtunga tunga ninyo? Wala
man. Because you are the closest. That‟s why the fight
between the closest people is the most bitter fight. And
that happens in a corporation because corporate
structure does not take the place of natural law.
Mao ng Advise ha, maremember tingali ni ninyo
kung magkagidlay namo. You form a corporation sa
inyong family, ipamember or paapilon gani nimo sa
corporation ang family member na dili gani makaapil
ninyo as a family kay black sheep siya, daghan kaayo
siya kagubot na buhaton, that is a sure recipe of trouble
and probably break down of the family corporation.
74
The corporate structure can only build on
natural way. It cannot substitute it. Naa kay buang2x na
igsoon, walay trabaho, mao kinagastador sa tanan,
buhaton pa na nimo ug member sa corporation, nangita
ka ug hole in the head. Kay mao na magdala ug
problema. Minor mana xa, ay sus!, Masakyan na ug
abogadong buang buang wala moy pahuway. Exercise
right of inspection, exercise... mabuang mo sa kaso ana.
So the intentions behind close corporations may
have been noble but the effect is disastrous. Hopefully,
by the time they will amend the corporation code, they
will do away with this useless series of provisions. The
whole idea of this close corporation is to produce a
hybrid, an organization that has both the good points of
a partnership and good points of the corporate structure.
Mao unta na. It turns out that they created not a hybrid
but a monster. They have elated a runaway monster. A
Godzilla of a Corporate World. I do not advise anyone to
form a close corporation. So we are finished with close
corporation.
Special corporations, what follows is:
1.) Educational Corporation
2.) Religious Corporation
3.) Dissolution
4.) Foreign Corporations
5.) Miscellaneous Provision.
JAN 26- NO CLASS
January 27 2017, Montefolca Z
Its time to study corporation law. The most interesting
subject in commercial law (LOL) we are now in special
corporations.
The special corporations enumerated here:
1. Educational corporation, and
2. The religious corporation.
The educational corporations are divided
into two kinds:
1. Educational corporations that are
non-stock non-profit
2. Educational corporations that are
stock and profit
You will notice that so many of the tycoons have
entered into stock and profit educational corporations. Its
not the need the richest man in the world to enter, not the
world but the Philippines, to enter into education as as
business. Henry Sy has taken over national university.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
That is like now raising the profile in what is really
essential in education which is for.. (father continues to
talk about NU)
Yuchengco group owners of RCBC, Malayan
insurance, they put up a college here in Mcarthur
highway. (Father talks about traffic kay daghag itukod na
malls ug schools)
Yuchengco is in education. Philma(?) group is in
education. Lucio tan is in education. Lucio tan controls
university of the east. If you in are educational institution
and you are stock and profit then you are treated just like
any other stock and profit corporation. You will be treated
like non-stock non-profit corporation. Ordinary. But if you
are non-stock non-profit then you are treated by the
special provisions in the corporation code in section 106,
107 and 108.
TITLE XIII
SPECIAL CORPORATIONS
CHAPTER I - EDUCATIONAL CORPORATIONS
Section 106. Incorporation. – Educational
corporations shall be governed by special laws and
by the general provisions of this Code. (n)
Section 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)
Pre-requisites, endorsement by the ministry of
education and culture if you are dealing with primary and
secondary education. But if you are putting up a
university then you must also get the endorsement of
higher education oversight or supervising body which is
the CHED. Commission on higher education. And If you
put up a law school, you must also get the endorsement
of LEB it is the legal education board.
Section 108. Board of trustees. – Trustees of
educational institutions organized as non-stock
corporations shall not be less than five (5) nor more
than fifteen (15): Provided, however, That the number
of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of
incorporation on the by-laws, the board of trustees of
incorporated schools, colleges, or other institutions
of learning shall, as soon as organized, so classify
themselves that the term of office of one-fifth (1/5) of
their number shall expire every year. Trustees
thereafter elected to fill vacancies, occurring before
the expiration of a particular term, shall hold office
75
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)
Then your board of trustees shall not be less
than 5 nor more than 15 provided however, that the
number of trustees shall be in multiples of 5. so you
either have a board of 5, 10 or 15. or you do not have a
th
BOT at all because it says in multiples of 5 so that 1/5 of
the number of directors shall expire every year. So you
staggered the terms of the directors of the BOT so there
is a hold-over.
This is another provision in the constitution that
must be Filipino against national xxx very parochial.
Education is already international. Can you imagine in
the sciences only UP can offer a PhD program by itself.
The other university, Ateneo they have to undergo a
consortium they cannot offer by themselves. Ingon ka
gamay man ka you go to Hongkong pilay population sa
HK? It has 3 first class univeristy that offer this stem.
Science and technology, engineering and math.
Mathematics! Not even UP standing alone by itself can
offer a PhD in math. It has to be in consortium with la
salle and ateneo because it does not have enough PhDs
to run a program.
(Father talks about losing faith on Solita Monson right
after the edsa revolution when she said that she
repudiate all the deaths of marcos.. Notice the day that I
stand appearing in Tv my days in teaching are over. You
don‟t have time to read anymore. You begin to love the
sound of your voice. As well as Pia Cayetano )
(Father talks about Cornell university)
So if you are an educational institution that is
stock and profit you have no hope in being a place where
you study for knowledge‟s sake. You have first to study
something for learning itself not for any possible
application. All the top universities in Europe, US, South
America, Africa, they are not stock and profit university.
They are not. There are many profitable educational
institutions in the United States. What are they? They are
the review schools. Kanang nursing, medicine, law. Mao
na sila. Highly profitable. Mao na sila ang mga naa sa
lisod. Kanang anak ni kiniti kalima ka unom na nikuhag
bar wa gihapon kapasa. Mao na sila. Anha nag review
dinha. Anak ni kaplan. Nursing mao na! Many of those
but not the univeristy. A university should be knowing for
knowledge‟s sake.
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
CHAPTER II- RELIGIOUS CORPORATIONS
Section 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)
Section 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)
Religious corporation. Again, two kinds.
Corporation sole legal anomaly of the corporation
composed of only 1 natural person holding an office. It is
a legal anomaly because only by xxx is in the
corporation. Daghan mo unya nagkahi-usa mo. Unsaon
pagka corpo na usa ra man na?
Section 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
76
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)
So section 111 articles of incorporation of a
corporation sole is actually an affidavit because you
cannot have a contract like the articles of incorporation.
Articles of incorporation of XYZ corporation.
Who executes the contract? The incorporators “we noble
men by these presents, we the undersigned
incorporators have in this day bonded ourselves together
to form XYZ corp.” the undersigned incorporators. Then
you put down the terms of the corporation.
If you are a corporation sole you execute an
affidavit because you are the only one. In order to
become a corporation sole he 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. Affidavit diay ni. Kay usa ra
man siya.
I told you that AOI according to the SEC of a religious
corporation does not require a term because according to
the sec the presumption is that it has perpetual
existence. So even if you put a term and it has already
lapsed it is still not dissolved because it is supposed to
be perpetual existence. That‟s according to the sec. I
gave you the circular.
Section 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
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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)
Acquisition and alienation of property. It says
“Such corporation may sell or mortgage real property
held by it by obtaining an order for that purpose from the
Court of First Instance” which is now RTC.
“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”
Why? Because the corporation sole is supposed
to be the administrator. He is not the owner of the
properties of the church or denomination. He is the
administrator. Who is the owner? The owner is the
religious congregation. The faithful themselves. So before
the corp sole whose name app[ears in all the real
properties of the church, before he can sell the property,
alienate the property he must ask the concurrence and
approval of the congregation. The real owners.
Is that true in all cases? No there is an exception
because the law says:
“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.”
So what is the rule of the catholic church? The
rule is the bishop can dispose of property by his own
good self under canon law. The bishop can. So he does
not have to go to court.
Now you already taken the corporation sole now
the bishop is changed. When is the bishop retired? When
Rome says so. What is the rule of thumb? The rule of
thumb is when you are a bishop you retire at 75. But
because it takes ages for Rome to move, most of them
77
are extended to 76 to 77 usa mukuhag replacement. Mu
abot na kag 75 mu file naka daan ug letter requesting to
be relieved of your duty. Musuwat ka didto. Normally
what Rome does is okay we are going to look for your
successor but at the same time you are no longer the
bishop but you will still be the administrator. What is the
difference? You are administrator you cannot make acts
of disposition you cannot make changes . because you
are no longer a bishop. To that is the normal rule. The old
bishop becomes the administrator.
There is an old bishop here I will not tell you what
diocese. Pag file niya sa iyang resignation gidawat dayun
unya gi ingnan siya di ka administrator. Kanang assistant
nimo nga pari mao ng administrator. Nganu mana?
Alzheimer's disease na siya. Unya makalimot man siya,
ang gi appoint niya parish priest sa cathedral sunod
bulan naa napud siyay gi appoint, I nag away na nuon.
Kinsa man gyuy tinood? Kalimot naman siya. Alzheimers
naman. You know you may make rules based on
objective criteria such as age but each of us has his own
internal temporal clock. Naa may uban nga sayu pa gani
wa na pawung na ang suga. Thats the life the almighty
has granted you and yours is not the reason why yours is
just to accept and die.
So if you are a cardinal you can go up to 80 you
are sill a voting cardinal at 80 when the pope is elected
you can still go to rome up to 80 years old you can vote.
Can you imagine that? Can you trust an 80 year old to
vote? That‟s why they say that is proof that the church is
held together and run by the holy spirit. The holy spirit
works double time because its a recipe for abuse. The
bishops have no term, human science and political
science has found that a position with no term always
leads to abuse that is why most constitutions have terms.
Somebody who is just put there without the consent of
the governed there will be a problem but that is a church
it is not a democracy.
So make sure ha how to.. you look at bishop, prinda nato
ning kuan kay magtukod tag building and then a newbie
in the bank where they borrowed the money is a new
layer “kinahanglan diay na ma publication that is what
sec 112 says”. exception is the catholic church. Canon
law. Quiboloy tingali he has to go to court. I don‟t know
what rule he follows. He is not subject to rules because
he is a prophet a son of god. (father talks about pope
rd
john the 23 being the servant of the servants)). priests
have to have own xxx before, atung mga pari
kinahanglan pahakan. That was the old tradition of the
Roman empire to distinguish the free man from the
slaves, the slaves pahakan. That is the mark that you‟re
a slave. Karon wa na na. Wa nay pahak2. karon hair
grooming na. Hair transplant.
Section 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
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From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
presiding elder, as the case may be, and
accompanied by a copy of the commission,
certificate of election or letter of appointment of such
chief archbishop, bishop, priest, minister, rabbi or
presiding elder, duly certified to be correct by any
notary public.
From and after the filing with the Securities and
Exchange Commission of the said articles of
incorporation, verified by affidavit or affirmation, and
accompanied by the documents mentioned in the
preceding paragraph, such chief archbishop, bishop,
priest, minister, rabbi or presiding elder shall
become a corporation sole and all temporalities,
estate and properties of the religious denomination,
sect or church theretofore administered or managed
by him as such chief archbishop, bishop, priest,
minister, rabbi or presiding elder shall be held in
trust by him as a corporation sole, for the use,
purpose, behalf and sole benefit of his religious
denomination, sect or church, including hospitals,
schools, colleges, orphan asylums, parsonages and
cemeteries thereof. (n)
Religious societies are formed just like any other
non-stock non-profit corporations. At least 5 or 15
incorporators and then it is governed by non-stock non-
profit rules.
 Now what is the nationality of a religious society?
The nationality is the majority of the citizens of
the congregation. That is the nationality.
That‟s what happened to the contemplative Nenedictine
nuns in Digos. They came from Germany, head nila
German naa silay tulo ka koreans unya naa silay duha ka
buok japanese. Puro sila foreign. Unya magtukud silag
monastery in digos. Atung mga bishops maka ingon nga
di na sila maka own ug property. But they can make use
of a land. They put it under the title of the bishop. And if
they are afraid that the bishop might convert it to his own
use, they had it annotated that it shall be for the use of
the monastery. It was annotated so that they will have
peace of mind that it will not be taken away from them.
Religious societies.
We have an old American priest and before the
second world war in 1930‟s the big civil war in spain
occurred. The Society of Jesus had ..provinces in spain
but the big provinces Aragon and since the communist
were very strong already they began to confiscate church
properties. What the religious superior did was to transfer
all properties to him in his name. He was an American
Citizen. Walter highland from Massachusetts. so he said
at one time the whole aragon province was mine. Aron di
makuha sa communists. So it can happen. When he tied
down he gave it back to the province of Aragon. Thats an
interesting.. in Spain very religious supposed to be the
78
eldest daughter of the church became extreme and they
slaughtered so many priest the ones that made the
famous novelist, the birth of the modern government
written by hemingway(?). it used to be placed by the
vatican under the xxx list because that was the first time
that an act of intercourse was described in the novel.
nd
2 Hour, Sadsad A
Let us go to Dissolution.
TITLE XIV
DISSOLUTION
Section 117. Methods of dissolution. – A corporation
formed or organized under the provisions of this
Code may be dissolved voluntarily or involuntarily.
(n)
Under Title XIV there are two kinds of
dissolution – voluntary and involuntary.
Voluntary is when one goes to SEC, because
the SEC has original and exclusive jurisdiction on
dissolution. But once the proceedings flow to liquidation,
the SEC loses jurisdiction. The SEC asks the help of the
regular court and it the regular court that liquidates after
dissolution.
So voluntary and involuntary
Voluntary - it is the corporation that asks to be
dissolved. Involuntary, someone other than the
corporation asks that the corporation be dissolved. It
could be the creditors or it could be the government. If it
is the government it is either through a quo warranto
proceeding or it is by the prosecution arm of SEC under
PD 902-A.
Section 118. Voluntary dissolution where no
creditors are affected. – If dissolution of a
corporation does not prejudice the rights of any
creditor having a claim against it, the dissolution
may be effected by majority vote of the board of
directors or trustees, and by a resolution duly
adopted by the affirmative vote of the
stockholders owning at least two-thirds (2/3) of
the outstanding capital stock or of at least two-
thirds (2/3) of the members of a meeting to be
held upon call of the directors or trustees after
publication of the notice of time, place and object
of the meeting for three (3) consecutive weeks in
a newspaper published in the place where the
principal office of said corporation is located; and
if no newspaper is published in such place, then
in a newspaper of general circulation in the
Philippines, after sending such notice to each
stockholder or member either by registered mail
or by personal delivery at least thirty (30) days
prior to said meeting. A copy of the resolution
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
ADDU-Law
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)
You have to have the vote of the absolute
majority of the Board and then you have confirmatory
vote of 2/3 of the stockholders or members vote to
approve the voluntary dissolution and a meeting duly
called for the purpose. There must be qualified notice.
A variant of so-called voluntary dissolution is a
petition to amend the articles for the shortening of the
corporate term. Once you shorten the corporate term,
you are actually saying, “I would like to die sooner.” So
that is also a way of dissolution. The petition, before it is
entertained by the SEC, the SEC must make a judgment
as to whether or not the petition is sufficient in form and
substance.
The form that is required is:
 Vote of the Board;
 2/3 vote of stockholders of members.
You must show proof of those. If you cannot
show proof of that, the SEC will dismiss your petition.
You will also need to give a comprehensive list of your
creditors. The SC has said time and again even if this is
not an adversarial case, because you are not saying XYZ
Corp v SEC, the title is the case is In Re: Petition for
Dissolution of XYZ Corp. It is not adversarial but the SC
has said that all creditors are necessary parties in
interest. You cannot leave out one. There is a recent
case that was brought up last year. Their employees
have not been paid their salaries. The employees
registered the complaint that they should be included in
the dissolution proceedings. The corporation failed to
give notice to all employees. The SC nullified the order of
the SEC because the SC said that each one of the
employees are now creditors. The nonpayment of wages
has reduced their claim to money claims of creditors and
there are as many employee creditors as there are
employees. All of them are necessary parties even if the
proceeding is non-adversarial. So you have to give a
comprehensive list of your creditors. After that, you give
an explanation how you will meet the claims of your
creditors. If you have already settled, then you append
the settlement with the petition.
Then you have to secure tax clearance from the
BIR. The SEC will not approve the dissolution if you
cannot produce a tax clearance. Now the tax clearance
from the BIR also includes tax clearance from the Local
Government because the LGU collects property taxes.
Then you endorse you clearance from the City or
Provincial Treasurer to the BIR.
79
Then you have publication. Three consecutive weeks in a
newspaper of general circulation.
Then you have a plan of distribution.
So its not very easy to dissolve a corporation.
Section 119. Voluntary dissolution where creditors
are affected. – Where the dissolution of a corporation
may prejudice the rights of any creditor, the petition
for dissolution shall be filed with the Securities and
Exchange Commission. The petition shall be signed
by a majority of its board of directors or trustees or
other officers having the management of its affairs,
verified by its president or secretary or one of its
directors or trustees, and shall set forth all claims
and demands against it, and that its dissolution was
resolved upon by the 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)
Section 120. Dissolution by shortening corporate
term. – A voluntary dissolution may be effected by
amending the articles of incorporation to shorten
the corporate term pursuant to the provisions of
this Code.
A copy of the amended articles of incorporation
shall be submitted to the Securities and Exchange
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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)
Section 121. Involuntary dissolution. – A corporation
may be dissolved by the Securities and Exchange
Commission upon filing of a verified complaint and
after proper notice and hearing on the grounds
provided by existing laws, rules and regulations. (n)
 Now what happens in corporate liquidation?
Section 122. Corporate liquidation. – Every
corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes
is terminated in any other manner, shall
nevertheless be 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.
Now at any time during the three years, the
corporation is empowered or authorized to convey all its
property to trustees for the benefit of the stockholders,
members or creditors. W
What do you mean by “at any time the corporation
may convey its assets to trustees in liquidation”?
A corporation is dissolved and no longer doing business
so there is no more Board of Directors and yet the
properties are in the name of the corporation. What is the
mode of conveyance to the winner of the bid? It is still the
corporation. There must be a resolution by the Board that
you are now parting this property to the winner of the bid
which is named by the bidmaster. But there is no more
Board of Directors.
How can there be a valid deeding?
That is why there is need for the corporation to hold a
sale conveying the property to the trustee so that now it
is in the name of the trustee and the trustee can conduct
auction sales. It goes back to the fundamentals of
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property. To be an owner of property, to be a lawful
transferee, there must a mode of transfer. And the mode
of transfer must be executed by one who has the
capacity to transfer.
Remember pag liquidation na it is no longer with
the SEC, it is endorsed to the RTC because the
corporation has been transformed into multiple legal
contracts many of which are not covered by the
jurisdiction of SEC.
There are very few cases when there are strict
and simple liquidation. Why? Because our culture is that
we hate being labeled as having lost financially. So the
corporation that is submitted for liquidation will always
fight it out that it be rehabilitated financially. That is
covered by FRIA.
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)
So nahatag na tanan pero naa pay nahibilin na
wa ka kabalo kinsay angay hatagan ana, the only answer
is gobyerno ra na. And yet the government must have a
mode of acquisition. The government may “inherit”
corporate property in dissolution but it must have a mode
of acquisition known as escheat.
TITLE XV
FOREIGN CORPORATIONS
Section 123. Definition and rights of foreign
corporations. – For the purposes of this Code, a
foreign corporation is one formed, organized or
existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens
and corporations to do business in its own country
or state. It shall have the right to transact business in
the Philippines after it shall have obtained a license
to transact business in this country in accordance
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with this Code and a certificate of authority from the
appropriate government agency. (n)
Section 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)
Section 125. Application for a license. – A foreign
corporation applying for a license to transact
business in the Philippines shall submit to the
Securities and Exchange Commission a copy of its
articles of incorporation and by-laws, certified in
accordance with law, and their translation to an
official language of the Philippines, if necessary. The
application shall be under oath and, unless already
stated in its articles of incorporation, shall
specifically set forth the following:
1. The date and term of incorporation;
2. The address, including the street number,
of the principal office of the corporation in
the country or state of incorporation;
3. The name and address of its resident
agent authorized to accept summons and
process in all legal proceedings and,
pending the establishment of a local office,
all notices affecting the corporation;
4. The place in the Philippines where the
corporation intends to operate;
5. The specific purpose or purposes which
the corporation intends to pursue in the
transaction of its business in the
Philippines: Provided, That said purpose or
purposes are those specifically stated in the
certificate of authority issued by the
appropriate government agency;
6. The names and addresses of the present
directors and officers of the corporation;
7. A statement of its authorized capital stock
and the aggregate number of shares which
the corporation has authority to issue,
itemized by classes, par value of shares,
shares without par value, and series, if any;
8. A statement of its outstanding capital
stock and the aggregate number of shares
which the corporation has issued, itemized
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by classes, par value of shares, shares
without par value, and series, if any;
9. A statement of the amount actually paid
in; and
10. Such additional information as may be
necessary or appropriate in order to enable
the Securities and Exchange Commission to
determine whether such corporation is
entitled to a license to transact business in
the Philippines, and to determine and assess
the fees payable.
Attached to the application for license shall
be a duly executed certificate under oath by
the authorized official or officials of the
jurisdiction of its incorporation, attesting to
the fact that the laws of the country or state
of the applicant allow Filipino citizens and
corporations to do business therein, and
that the applicant is an existing corporation
in good standing. If such certificate is in a
foreign language, a translation thereof in
English under oath of the translator shall be
attached thereto.
The application for a license to transact
business in the Philippines shall likewise be
accompanied by a statement under oath of
the president or any other person authorized
by the corporation, showing to the
satisfaction of the Securities and Exchange
Commission and other governmental agency
in the 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.
Foreign banking, financial and insurance
corporations shall, in addition to the above
requirements, comply with the provisions of
existing laws applicable to them. In the case
of all other foreign corporations, no
application for license to transact business
in the Philippines shall be accepted by the
Securities and Exchange Commission
without previous authority from the
appropriate government agency, whenever
required by law. (68a)
Section 126. Issuance of a license. – If the Securities
and Exchange Commission is satisfied that the
applicant has complied with all the requirements of
this Code and other special laws, rules and
regulations, the Commission shall issue a license to
the applicant to transact business in the Philippines
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for the purpose or purposes specified in such
license. Upon issuance of the license, such foreign
corporation may commence to transact business in
the Philippines and 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
license, 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
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Philippines. (n)
Section 127. Who may be a resident agent. – A
resident agent may be either an individual residing in
the Philippines or a domestic corporation lawfully
transacting business in the Philippines: Provided,
That in the case of an individual, he must be of good
moral character and of sound financial standing. (n)
Section 128. Resident agent; service of process. –
The Securities and Exchange Commission shall
require as a condition precedent to the issuance of
the license to transact business in the Philippines by
any foreign corporation that such corporation file
with the Securities and Exchange Commission a
written power of attorney designating some person
who must be a resident of the Philippines, on whom
any summons and other legal processes may be
served in all actions or other legal proceedings
against such corporation, and consenting that
service upon such resident agent shall be admitted
and held as valid as if served upon the duly
authorized officers of the foreign corporation at its
home office. Any such foreign corporation shall
likewise execute and file with the Securities and
Exchange Commission an agreement or stipulation,
executed by the proper authorities of said
corporation, in form and substance as follows:
"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
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writing the Securities and Exchange Commission of
the new address. (72a; and n)
Section 129. Law applicable. – Any foreign
corporation lawfully doing business in the
Philippines shall be bound by all laws, rules and
regulations applicable to domestic corporations of
the same class, except such only as provide for the
creation, formation, organization or dissolution of
corporations or those which fix the relations,
liabilities, responsibilities, or duties of stockholders,
members, or officers of corporations to each other or
to the corporation. (73a)
Section 130. Amendments to articles of incorporation
or by-laws of foreign corporations. – Whenever the
articles of incorporation or by-laws of a foreign
corporation authorized to transact business in the
Philippines are amended, such foreign corporation
shall, within sixty (60) days after the amendment
becomes effective, file with the Securities and
Exchange Commission, and in the proper cases with
the appropriate government agency, a duly
authenticated copy of the articles of incorporation or
by-laws, as amended, indicating clearly in capital
letters or by underscoring the change or changes
made, duly certified by the authorized official or
officials of the country or state of incorporation. The
filing thereof shall not of itself enlarge or alter the
purpose or purposes for which such corporation is
authorized to transact business in the Philippines. (n)
Section 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)
Section 132. Merger or consolidation involving a
foreign corporation licensed in the Philippines. – One
or more foreign corporations authorized to transact
business in the Philippines may merge or
consolidate with any domestic corporation or
corporations if such is permitted under Philippine
laws and by the law of its incorporation: Provided,
That the requirements on merger or consolidation as
provided in this Code are followed.
Whenever a foreign corporation authorized to
transact business in the Philippines shall be a party
to a merger or consolidation in its home country or
state as permitted by the law of its incorporation,
such foreign corporation shall, within sixty (60) days
after such merger or consolidation becomes
effective, file with the Securities and Exchange
Commission, and in proper cases with the
83
appropriate government agency, a copy of the
articles of merger or consolidation duly
authenticated by the proper official or officials of the
country or state under the laws of which merger or
consolidation was effected: Provided, however, That
if the absorbed corporation is the foreign corporation
doing business in the Philippines, the latter shall at
the same time file a petition for withdrawal of its
license in accordance with this Title. (n)
Section 133. Doing business without a license. – No
foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
corporation may be sued or proceeded against
before Philippine courts or administrative tribunals
on any valid cause of action recognized under
Philippine laws. (69a)
Section 134. Revocation of license. – Without
prejudice to other grounds provided by special laws,
the license of a foreign corporation to transact
business in the Philippines may be revoked or
suspended by the Securities and Exchange
Commission upon any of the following grounds:
1. Failure to file its annual report or pay any
fees as required by this Code;
2. Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
3. Failure, after change of its resident agent
or of his address, to submit to the Securities
and Exchange Commission a statement of
such change as required by this Title;
4. Failure to submit to the Securities and
Exchange Commission an authenticated
copy of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
5. A misrepresentation of any material matter
in any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully
due to the Philippine Government or any of
its agencies or political subdivisions;
7. Transacting business in the Philippines
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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)
Section 135. Issuance of certificate of revocation. –
Upon the revocation of any such license to transact
business in the Philippines, the Securities and
Exchange Commission shall issue a corresponding
certificate of revocation, furnishing a copy thereof to
the appropriate government agency in the proper
cases.
The Securities and Exchange Commission shall also
mail to the corporation at its registered office in the
Philippines a notice of such revocation accompanied
by a copy of the certificate of revocation. (n)
Section 136. Withdrawal of foreign corporations. –
Subject to existing laws and regulations, a foreign
corporation licensed to transact business in the
Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of
license. No certificate of withdrawal shall be issued
by the Securities and Exchange Commission unless
all the following requirements are met;
1. All claims which have accrued in the
Philippines have been paid, compromised or
settled;
2. All taxes, imposts, assessments, and
penalties, if any, lawfully due to the
Philippine Government or any of its agencies
or political subdivisions have been paid; and
3. The petition for withdrawal of license has
been published once a week for three (3)
consecutive weeks in a newspaper of
general circulation in the Philippines.
Foreign because it is incorporated under laws
other than the Philippine corporation law. Close to 50% of
all corporations in the US are incorporated in the state of
Delaware. Caltex, IBM, Coca-Cola all those big
corporations are incorporated in Delaware.
84
If you are incorporated (not in the Phil) and you
want to do business here, the law here says you must
obtain a license to do business in the Philippines. And
there follows the application for a license. Take a look
because its more complicated than filing articles of
incorporation and by-laws, creating a corporation.
If your corporate papers, articles and by-laws or
its equivalent is in a foreign language then you must hire
a competent translator. After he has done his work, then
the translator must execute an affidavit that he has
transalated the articles in another language as accurate
as he could under their law. You have to prove that their
laws are still obtaining so you must get certifications from
their embassy. Then you must put up a bond. Because
you are a foreign corporation, you are not a resident of
the Philippines. You can fly anytime. To tie you down so
that your customers will not be left emptyhanded, there is
a bond that you post to answer for liabilities. The amount
of you bond increases as your business increases. This
surety is supposed to answer for the money claims of
Filipinos against this foreign corporation.
One of the most important requirement is that
you must have a resident agent.
 What is a resident agent?
He is the so called default agent for court
processes.
If you‟re a foreign corporation licensed to do
business here in the Philippines, and you have cases and
since you are not found here, what happens? The
resident agent is the one who is qualified to receive
summons.
Resident agents can be natural persons or
juridical persons. What is their common denominator?
They are all also licensed by the SEC. Service to them is
equivalent to service to a foreign corporation. So that if
the court issues judgment, it is binding on them. Over
and above the license, a foreign corporation must also
sign an undertaking that if its resident agent for some
reason goes away, then your default agent is the SEC
itself.
 What is “doing business”? Does one act constitute
doing business?
As a general principle, NO. But there are SC
decision that says this one single lone solitary act is
already doing business and so this corporation is already
against the law.
What is an example of one single act that is
considered as doing business? A corporation that has not
yet acquired a license to do business in the Philippines
enters into a lease agreement for a commercial space.
You cannot do that, you must have a license because
next to that lease are subsequent transactions because
you are now having an office.
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 Is more than one transaction an indicator that you
are already doing business?
The SC also says NO. Why? Here is a candy factory in
Paranaque, he tries to buy sweeteners from a California
corporation. Letter of credit unya wa sila kabayad. The
California corporation filed a case in the Philippines.
Moved to dismiss because the company who‟s filing has
already engaged in business without obtaining a license.
Unsa may ingon sa California Sweetener? I did not do
business in the Philippines. Did he do business or not?
The SC says he did business in the Philippines because
the goods were transported and they were made use of
in the Philippines. But is he penalized for that? The SC
says he is just engaged in an isolated transaction.
 If you are a foreign corporation, and you buy
stocks dinha sa PSE, are you already engaged in
business? Do you need a license?
Mere passive investment as opposed to direct
investment is not considered as doing business
.However when your investment is of such
nature and magnitude that you now play a part in the
business of the company in which you are investing, wa
na! You are engaged in business and you are required to
obtain a license.
Last year the SC came up with a decision: If he
makes and investment in a joint venture which is oil
exploration, passive, he was not involved in the running
or the exploration venture but in the agreement of the
consortium, there is a clause that says, “All participants
of this joint venture are ready to put in their share of
managerial duty if they are called.” The SC says that is
now doing business.
February 1, 2017 Duco, L.
I give you this 2014 Memorandum answering
the INC query. There is no term for a religious
corporation. Both the Corporation Law and * (section 109
I think) of the Corporation Code BP 68 do not provide for
a term of the existence of a religious corporation. This is
according to the SEC. We await the SC.
We discussed the other day about doing
business, and we said that mere passive investment or
owning stocks in a corporation is not considered doing
business. Therefore, a foreign corporation buys shares of
stocks and it does not require that they be licensed to do
business.
And there is this legal opinion then of SEC
dated February 21, 2014. If a foreign corporation enters
into an unregistered joint venture, so it is in effective
partnership according to the SEC, that does not follow
the same rule as if you bought just shares of stocks in a
corporation. Why? Because in a partnership, the partners
are participating management of a corporation. That is
why if it is an unincorporated venture, and the foreign
85
corporation buys an interest therein, the corporation is
deemed to be engaged in doing business because by
definition of the partnership, a partner can participate in
the management of the business.
Alright, this is still to get a SC nod, but this is the
advance opinion of the SEC. I give you a copy of this.
Now we are finished with the, what is this. I just
want to point out, by international law that even if you are
not registered to do business, you can still file a case in
the Philippines for infringement of patent, patent not
registered here in the Philippines ha, provided that the
country of that foreign corporation grants the similar
privilege to corporate or juristic citizens of the Philippines.
Patent infringement.
What is an example of that? There‟s a law firm
that was engaged by Disney Corporation to run after
those people in Quezon Boulevard making bags with
Mickey Mouse at low cost at the back of the backpacks of
these elementary kids. Naundang sila. Disney just
procured an agent to bring an action. Disney is not
registered in the Philippines. It is not registered as doing
business. But they can by virtue of international protocol *
respecting intellectual property.
Again:
1. Action for infringement,
2. Unfair competition, or
3. False designation of origin, and
4. False description of mark or trademark,
provided that the country of such foreign
corporation grants a similar privilege to
corporate or juristic persons of the
Philippines.
Republic Act No. 8293 June 6, 1997
AN ACT PRESCRIBING THE INTELLECTUAL
PROPERTY CODE AND ESTABLISHING THE
INTELLECTUAL PROPERTY OFFICE, PROVIDING
FOR ITS POWERS AND FUNCTIONS, AND FOR
OTHER PURPOSES
Section 3. International Conventions and Reciprocity.
- Any person who is a national or who is domiciled or
has a real and effective industrial establishment in a
country which is a party to any convention, treaty or
agreement relating to intellectual property rights or
the repression of unfair competition, to which the
Philippines is also a party, or extends reciprocal
rights to nationals of the Philippines by law, shall be
entitled to benefits to the extent necessary to give
effect to any provision of such convention, treaty or
reciprocal law, in addition to the rights to which any
owner of an intellectual property right is otherwise
entitled by this Act. (n)
Section 160. Right of Foreign Corporation to Sue in
Trademark or Service Mark Enforcement Action. -
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Any foreign national or juridical person who meets
the requirements of Section 3 of this Act and does
not engage in business in the Philippines may bring
a civil or administrative action hereunder for
opposition, cancellation, infringement, unfair
competition, or false designation of origin and false
description, whether or not it is licensed to do
business in the Philippines under existing laws. (Sec.
21-A, R.A. No. 166a)
You know that this has become a problem: false
designation of origin. You have the origin stated in the
product and it is a protected *. You say Kono (but I think
it‟s Kona) coffee. Kona coffee is the third most well-
known and most expensive coffee in the world. It comes
from the island of Ouahu, raised at an altitude facing the
sea, the sea breeze, and it grown there and it is known
as Kona coffee. That‟s the Kona District of Ouaho Island
in the state of Hawaii.
Ang imong coffee tua ra nimo gipadako sa Mt.
Apo, and then it grows a bit, it looks like the Kona coffee
and you mark it as Ouaho. Apo ra diay to dili diay Ouaho.
That is violation of false marketing of the origin. There
are many like that.
Again, a foreign corporation not licensed to do
business in the Philippines can file an action for tort that
occurred in the Philippines, and when the party sued is
barred by the principle of estoppel from questioning the
capacity of the foreign corporation to file the action.
Those are the instances when even if you do not have a
license to do business in the Philippines, you can still
sue.
So we are through already of Corporation Code.
Because after this is miscellaneous. I leave it to you to
read the miscellaneous provisions. Outstanding capital
stock defined, it is issued shares net of treasury shares.
TITLE XVI
MISCELLANEOUS PROVISIONS
Section 137. Outstanding capital stock defined. - The
term "outstanding capital stock", as used in this
Code, means the total shares of stock issued under
binding subscription agreements to subscribers or
stockholders, whether or not fully or partially paid,
except treasury shares. (n)
Designation of governing boards, I told you
disregard this provision.
Section 138. Designation of governing boards. - The
provisions of specific provisions of this Code to the
contrary notwithstanding, non-stock or special
86
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)
Incorporation and other fees, the SEC can
charge you.
Section 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)
Stock ownership in certain corporations, you
already know it requires public ownership.
Section 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 potential, as well as other factors which are
germane to the realization and promotion of
business and industry.
Annual reports of corporations, now they fine
corporations that fail to give annual reports, it is now
daily, because before, it was just a one-time fee and
there were those who deliberately delay the filing of their
annual reports.
 BUSINESS ORGANIZATION II TRANSCRIPT
From the lectures of Fr. Gus Nazareno| 3 Manresa2016-17
Section 141. Annual report or corporations. - Every
corporation, domestic or foreign, lawfully doing
business in the Philippines shall submit to the
Securities and Exchange Commission an annual
report of its operations, together with a financial
statement of its assets and liabilities, certified by any
independent certified public accountant
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)
Section 142. Confidential nature of examination
results. – All interrogatories propounded by the
Securities and Exchange Commission and the
answers thereto, as well as the results of any
examination made by the Commission or by any
other official authorized by law to make an
examination of the operations, books and records of
any corporation, shall be kept strictly confidential,
except insofar as the law may require the same to be
made public or where such interrogatories, answers
or results are necessary to be presented as evidence
before any court. (n)
Section 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)
Section 144. Violations of the Code. – Violations of
any of the provisions of this Code or its amendments
not otherwise specifically penalized therein shall be
punished by a fine of not less than one thousand
(P1,000.00) pesos but not more than ten thousand
(P10,000.00) pesos or by imprisonment for not less
than thirty (30) days but not more than five (5) years,
or both, in the discretion of the court. If the violation
is committed by a corporation, the same may, after
notice and hearing, be dissolved in appropriate
proceedings before the Securities and Exchange
Commission: Provided, That such dissolution shall
not preclude the institution of appropriate action
against the director, trustee or officer of the
corporation responsible for said violation: Provided,
further, That nothing in this section shall be
construed to repeal the other causes for dissolution
of a corporation provided in this Code. (190 1/2 a)
Section 145. Amendment or repeal. – No right or
ADDU-Law
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)
in
Section 146. Repealing clause. – Except as expressly
provided by this Code, all laws or parts thereof
inconsistent with any provision of this Code shall be
deemed repealed. (n)
Section 147. Separability of provisions. – Should any
provision of this Code or any part thereof be
declared invalid or unconstitutional, the other
provisions, so far as they are separable, shall remain
in force. (n)
Section 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)
Section 149. Effectivity. – This Code shall take effect
immediately upon its approval.
Approved, May 1, 1980
“Because the higher you go in studies it‟s all about
pain! Its like the marathon after 20 kilometers you
no longer train for it. (you) cannot train for it.
Suwayig dagan adlaw adlaw 20 kilometer. May‟g di
ka mamatay ana. You cannot train for it. After 20
kilometers its all about will power. Ass power.
Lingkod ka ba. Wa gani ka kalingkod ana wa kay
depth. …If you cannot read from sun to sun down
stay and do it as a habitual day. Layo paka.
Because there is more and more to read..” – Father
Augusto Nazareno
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