CORPORATION

 LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    

 
Section  43.  Power  to  declare  dividends.     be   continued   as   a   body   corporate   for   three   (3)   years   after   the   time  
The   board   of   directors   of   a   stock   corporation   may   declare   dividends   when  it  would  have  been  so  dissolved,  for  the  purpose  of  prosecuting  
out   of   the   unrestricted   retained   earnings   which   shall   be   payable   in   and  defending  suits  by  or  against  it  and  enabling  it  to  settle  and  close  
cash,   in   property,   or   in   stock   to   all   stockholders   on   the   basis   of   its   affairs,   to   dispose   of   and   convey   its   property   and   to   distribute   its  
outstanding   stock   held   by   them:   Provided,   That   any   cash   dividends   assets,  but  not  for  the  purpose  of  continuing  the  business  for  which  it  
due  on  delinquent  stock  shall  first  be  applied  to  the  unpaid  balance  on   was  established.  
the   subscription   plus   costs   and   expenses,   while   stock   dividends   shall    
be   withheld   from   the   delinquent   stockholder   until   his   unpaid   At  any  time  during  said  three  (3)  years,  the  corporation  is  authorized  
subscription   is   fully   paid:   Provided,   further,   That   no   stock   dividend   and  empowered  to  convey  all  of  its  property  to  trustees  for  the  benefit  
shall  be  issued  without  the  approval  of  stockholders  representing  not   of   stockholders,   members,   creditors,   and   other   persons   in   interest.  
less  than  two-­‐thirds  (2/3)  of  the  outstanding  capital  stock  at  a  regular   From  and  after  any  such  conveyance  by  the  corporation  of  its  property  
or  special  meeting  duly  called  for  the  purpose.  (16a)   in   trust   for   the   benefit   of   its   stockholders,   members,   creditors   and  
  others   in   interest,   all   interest   which   the   corporation   had   in   the  
Stock   corporations   are   prohibited   from   retaining   surplus   profits   in   property   terminates,   the   legal   interest   vests   in   the   trustees,   and   the  
excess   of   one   hundred   (100%)   percent   of   their   paid-­‐in   capital   stock,   beneficial   interest   in   the   stockholders,   members,   creditors   or   other  
except:  (1)  when  justified  by  definite  corporate  expansion  projects  or   persons  in  interest.  
programs   approved   by   the   board   of   directors;   or   (2)   when   the    
corporation   is   prohibited   under   any   loan   agreement   with   any   financial   Upon   the   winding   up   of   the   corporate   affairs,   any   asset   distributable  
institution   or   creditor,   whether   local   or   foreign,   from   declaring   to  any  creditor  or  stockholder  or  member  who  is  unknown  or  cannot  
dividends  without  its/his  consent,  and  such  consent  has  not  yet  been   be   found   shall   be   escheated   to   the   city   or   municipality   where   such  
secured;   or   (3)   when   it   can   be   clearly   shown   that   such   retention   is   assets  are  located.  
necessary   under   special   circumstances   obtaining   in   the   corporation,    
such   as   when   there   is   need   for   special   reserve   for   probable   Except   by   decrease   of   capital   stock   and   as   otherwise   allowed   by   this  
contingencies.  (n)   Code,   no   corporation   shall   distribute   any   of   its   assets   or   property  
  except  upon  lawful  dissolution  and  after  payment  of  all  its  debts  and  
Section  122.  Corporate  liquidation.   liabilities.  (77a,  89a,  16a)  
Every   corporation   whose   charter   expires   by   its   own   limitation   or   is    
annulled  by  forfeiture  or  otherwise,  or  whose  corporate  existence  for   • Under   common   law,   there   were   originally   conflicting   views   on  
other  purposes  is  terminated  in  any  other  manner,  shall  nevertheless   whether   a   corporation   had   the   power   to   purchase   its   own  

 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)  
CORPORATION  LAW  REVIEWER  (2013-­‐2014)            ATTY.  JOSE  MARIA  G.  HOFILEÑA    
 
stocks.   Only   a   few   American   jurisdictions   adopted   the   strict    
English   rule   forbidding   a   corporation   from   purchasing   its   own   Ong  Yong  v.  Tiu  
shares.  In  some  American  states  where  the  English  rule  used  to    
be   adopted,   statutes   granting   authority   to   purchase   out   of   Facts:   The   Tiu   family   members   are   the   owners   of   First   Landlink   Asia  
surplus   funds   were   enacted,   while   in   others,   shares   might   be   Development  Corporation  (FLADC).  One  of  the  corporation’s  projects  is  
purchased   even   out   of   capital   provided   the   rights   of   creditors   the   construction   of   Masagana   Citimall   in   Pasay   City.   However,   due   to  
were   not   prejudiced.   The   reason   underlying   the   limitation   of   financial   difficulties   (they   were   indebted   to   PNB   for   P190   million),   the  
share   purchases   sprang   from   the   necessity   of   imposing   Tius   feared   that   the   construction   would   not   be   finished.   So   to   prevent  
safeguards   against   the   depletion   by   a   corporation   of   its   assets   the   foreclosure   of   the   mortgage   on   the   two   lots   where   the   mall   was  
and   against   the   impairment   of   its   capital   needed   for   the   being   built,   they   invited   the   Ongs   to   invest   in   FLADC.   The   two   parties  
protection   of   creditors.   Turner   v.   Lorenzo   Shipping   Corp.,   636   entered   into   a   Presubscription   Agreement   whereby   each   of   them   would  
SCRA  13  (2010).   hold  1,000,000  shares  each  and  be  entitled  to  nominate  certain  officers.  
  The   Tiu’s   contributed   a   building   and   two   lots,   while   the   Ongs  
D.  Rescission  of  Subscription  Agreement   contributed  P100M.  
• The   violation   of   terms   embodied   in   a   subscription   agreement,    
with  are  personal  commitments,  do  not  constitute  legal  ground   Two   years   later,   the   Tui’s   filed   for   rescission   of   the   Presubscription  
to  rescind  the  subscription  agreement  since  such  would  violate   Agremement   because   the   Ongs   refused   to   issue   them   their   shares   of  
the   Trust   Fund   Doctrine   and   the   procedures   for   the   valid   stock   and   from   assuming   positions   of   VP   and   Treasurer   to   which   they  
distribution   of   assets   and   property   under   the   Corporation   Code.   were   entitled   to   nominate.   The   Ongs   contended   that   they   could   not  
“In   the   instant   case,   the   rescission   of   the   Pre-­‐Subscription   issue   the   new   shares   to   the   Tius   because   the   latter   did   not   pay   the  
Agreement   will   effectively   result   in   the   unauthorized   capital   gains   tax   and   the   documentary   stamp   tax   of   the   lots.   And  
distribution   of   the   capital   assets   and   property   of   the   because   of   this,   the   SEC   would   not   approve   the   valuation   of   the  
corporation,   thereby   violating   the   Trust   Fund   Doctrine   and   the   property   contribution   of   the   Tius.   The   Court   of   Appeals   ordered  
Corporation   Code,   since   the   rescission   of   a   subscription   liquidation  of  FLADC  to  enforce  rescission  of  the  contract.  
agreement   is   not   one   of   the   instances   when   distribution   of    
capital   assets   and   property   of   the   corporation   is   allowed.”   Issue:   Whether  or  not  the  liquidation  of  FLADC  violated  the  Trust  Fund  
Distribution  of  corporate  assets  among  the  stockholders  cannot   Doctrine  
even   be   resorted   to   achieve   “corporate   peace.”   Ong   Yong   v.    
Tiu,  401  SCRA  1  (2003).   Held:   YES.   In   this   case,   the   rescission   would   certainly   be   a   violation   of  

 
NOTES  BY  RACHELLE  ANNE  GUTIERREZ  (UPDATED  APRIL  3,  2014)